Legg Mason Reports Results For Second Fiscal Quarter

BALTIMORE, Oct. 24, 2018 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2018. 

Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "We are pleased to have delivered a solid quarter, even as the industry continued to navigate significant challenges.  Executing our strategy of expanding client choice has diversified our platform across investment strategies, clients and geographies, making our business more resilient. 

"Flows in the month of September were strong, our unfunded pipeline remains near record levels, and our business mix, with alternative and institutional inflows partially offsetting softness in retail and traditional strategies, demonstrates this business resilience.

"We look forward to continuing to deliver more of the platform's potential to our clients and the related financial results for our stakeholders."

Assets Under Management of $755.4 Billion

Assets Under Management ("AUM") were $755.4 billion at September 30, 2018 compared with $744.6 billion at June 30, 2018 resulting from positive market performance of $11.0 billion and liquidity inflows of $3.0 billion.  These more than offset negative foreign exchange of $2.0 billion, long-term outflows of $1.0 billion and realizations of $0.2 billion. 

At September 30, 2018, fixed income represented 55% of AUM, while equity represented 28%, alternatives represented 9% and liquidity represented 8%. 

By geography, 70% of AUM was from clients domiciled in the United States and 30% from non-US domiciled clients.

Average AUM during the quarter was $750.2 billion compared to $749.5 billion in the prior quarter and $750.3 billion in the second quarter of fiscal year 2018.  Average long-term AUM was $690.0 billion compared to $687.7 billion in the prior quarter and $675.1 billion in the second quarter of fiscal year 2018.

Of Legg Mason's long-term U.S. mutual fund assets, 50% were in funds rated 4 or 5 stars by Morningstar.

Operating Results - Comparison to the First Quarter of Fiscal Year 2019

Net income was $72.8 million, or $0.82 per diluted share, compared to net income of $66.1 million, or $0.75 per diluted share, in the first quarter of fiscal year 2019.  The increase was driven by lower seasonal compensation costs and a discrete tax benefit.  

This quarter's results included:

• Discrete tax benefit related to the completion of a prior year audit of $2.8 million, or $0.03 per diluted share.
• Real estate charge associated with the sublease of office space in the Company's Baltimore headquarters of $2.4 million, or $0.02 per diluted share.

The prior quarter results included:

• Regulatory charge of $4.0 million, or $0.04 per diluted share.
• EnTrustPermal acquisition and transition-related costs of $1.5 million, or $0.01 per diluted share.

Operating revenues of $758.4 million were up 1% compared with $747.9 million in the prior quarter reflecting:

• An increase in pass through performance fees of $11.4 million.
• Higher advisory fee revenues of $2.0 million reflecting one additional day in the quarter.

Operating expenses were $622.7 million compared with $622.2 million in the prior quarter reflecting:

• Higher compensation and benefits of $3.3 million reflecting increased pass through performance fees, partially offset by seasonal compensation factors in the prior quarter.
• Occupancy expense increased by $2.4 million reflecting the real estate charge.
• A $4.0 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 $1.3 million gain in the prior quarter.
• Other expenses decreased by $3.6 million as the prior quarter included a regulatory charge of $4.0 million.

Non-operating expense was $24.8 million, as compared to $16.6 million in the prior quarter reflecting:  

• Gains on corporate investments, not offset in compensation, were $2.9 million compared with gains of $5.8 million in the prior quarter.
• Gains on funded deferred compensation and seed investments, as described above.
• A $4.3 million loss associated with the consolidation of sponsored investment vehicles compared to a $3.7 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 17.9% compared to 16.8% in the prior quarter.  Operating margin, as adjusted4, was 23.6%, as compared to 22.3% in the prior quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $11.3 million compared to $9.7 million in the prior quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

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

Net income was $72.8 million, or $0.82 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.

This quarter's results included:

• Discrete tax benefit of $2.8 million, or $0.03 per diluted share.
• Real estate charge of $2.4 million, or $0.02 per diluted share.

The prior year quarter 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 $758.4 million were down 1% compared with $768.3 million in the prior year quarter reflecting:

• Lower non-pass through performance fees of $13.1 million.

Operating expenses were $622.7 million compared with $623.9 million in the second quarter of fiscal year 2018 reflecting:

• Lower compensation and benefits of $3.1 million, due to the decrease in non-pass through performance fees.
• Lower distribution and servicing expenses of $9.1 million. 
• A $6.2 million increase in communications and technology expenses reflecting incremental spending.
• An increase in occupancy expenses of $2.2 million reflecting the real estate charge.
• A $4.0 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 $4.8 million in the prior year quarter.

Non-operating expense was $24.8 million, compared to $18.1 million in the second quarter of fiscal year 2018 reflecting:

• Gains on corporate investments, not offset in compensation, were $2.9 million compared with gains of $2.4 million in the prior year quarter.
• Gains on funded deferred compensation and seed investments, as described above.
• $4.3 million in losses associated with the consolidation of sponsored investment vehicles, as compared to $2.1 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 17.9% as compared to 18.8% in the second quarter of fiscal year 2018.  Operating margin, as adjusted, was 23.6%, as compared to 24.9% in the second quarter of fiscal year 2018.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $11.3 million, compared to $10.4 million in the prior year quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

Quarterly Business Developments and Recent Announcements

• Legg Mason paid-off the $125.5 million that was outstanding on the Company's revolver during FQ2.

• On October 4, 2018, Legg Mason announced it had launched its first actively managed taxable fixed-income ETF, sub-advised by Western Asset Management Company, LLC, a Legg Mason affiliate and globally integrated fixed-income manager, the Western Asset Total Return ETF [Nasdaq: WBND].

Balance Sheet

At September 30, 2018, Legg Mason's cash position was $611.2 million.  Total debt, net was $2.2 billion, and stockholders' equity was $3.9 billion.  The ratio of total debt to total capital was 37%, compared to 38% in the prior quarter.  Seed investments totaled $250.2 million.

Conference Call to Discuss Results

A conference call to discuss the Company's results, hosted by Joseph A. Sullivan, Chairman and CEO of Legg Mason, Inc., 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 47604534, at least 10 minutes prior to the scheduled start to ensure a 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 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, in the investor relations section, or by dialing 1-888-843-7419 (or for international calls 1-630-652-3042) and entering pass code 47604534# when prompted. Please note that the replay will be available beginning at 8:00 p.m. EDT on Wednesday, October 24, 2018, and ending at 11:59 p.m. EST on Wednesday, November 7, 2018

About Legg MasonGuided 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 $755.4 billion as of September 30, 2018.  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, 2018 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 89% of total AUM is included in strategy AUM as of September 30, 2018, 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 AverageLong-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.

 

 

 

 

 

 

 

 

Use of Supplemental Non-GAAP Financial InformationAs 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 AdjustedWe 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 arrangements, amortization related to intangible assets, income (loss) of consolidated investment vehicles, the impact of fair value adjustments of contingent consideration liabilities, if any, unusual and other non-core charges (including the previously disclosed regulatory charge), 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 expense or net income (loss) attributable to noncontrolling 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), net, and thus have no impact on Net Income (Loss) Attributable to Legg Mason, Inc. We adjust for the impact of the 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 the results of other asset management firms that have not engaged in significant acquisitions. Impairment charges, unusual and other non-core charges (including the previously disclosed regulatory charge), 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 performances fees which are passed through as compensation expense or net income (loss) attributable to noncontrolling 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 (Loss) Attributable to Legg Mason, Inc. and indicates what our operating margin would have been without 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 noncontrolling 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, unusual and other non-core charges (including the previously disclosed regulatory charge), 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 (Loss) 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 EBITDAWe define Adjusted EBITDA as cash provided by (used in) operating activities plus (minus) interest expense, net of accretion and amortization of debt discounts and premiums, current income tax expense (benefit), the net change in assets and liabilities, net (income) loss attributable to noncontrolling interests, net gains (losses) and earnings on investments, net gains (losses) on consolidated investment vehicles, and other.  The net change in assets and liabilities adjustment aligns with the Consolidated Statements of Cash Flows.  Adjusted EBITDA is not reduced by equity-based compensation expense, including management equity plan non-cash issuance-related charges.  Most management equity plan units may be put to or called by Legg Mason for cash payment, although their terms do not require this to occur.

We believe that this measure is useful to investors and us as it provides additional information with regard to our ability to meet working capital requirements, service our debt, and return capital to our shareholders.  This measure is provided in addition to Cash provided by operating activities and may not be comparable to non-GAAP performance measures or liquidity measures of other companies, including their measures of EBITDA or Adjusted EBITDA.  Further, this measure is not to be confused with Net Income, Cash provided by operating activities, or other measures of earnings or cash flows under GAAP, and are provided as a supplement to, and not in replacement of, GAAP measures.

 

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SOURCE Legg Mason, Inc.