Legg Mason Reports Results for Second Fiscal Quarter 2011

- Second Quarter Net Income of $75 Million, or $0.50 per Diluted Share -

- Second Quarter Adjusted Income of $115 Million, or $0.76 per Diluted Share -

- Assets Under Management of $674 Billion -

- Board Increases Quarterly Dividend to $0.06 per Share -

Oct 27, 2010, 07:00 ET from Legg Mason, Inc.

BALTIMORE, Oct. 27 /PRNewswire-FirstCall/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2010.  The Company reported net income(1) of $75.3 million, or $0.50 per diluted share, as compared with $47.9 million, or $0.30 per diluted share, in the previous quarter.  Included in this quarter’s results was a special U.K.- tax benefit of $8.9 million, or $0.06 per diluted share.  Adjusted income(2) for the second quarter was $115.0 million, or $0.76 per diluted share, as compared to $96.3 million, or $0.60 per diluted share, in the first quarter of fiscal 2011. For the second quarter, revenues were $674.8 million, up slightly from $674.2 million in the prior quarter.  Operating expenses of $586.9 million were up 3% from $571.4 million in the first quarter for fiscal year 2011.

Assets Under Management (“AUM”) were $673.5 billion, up 4% as compared with $645.4 billion as of June 30, 2010 but down 4% from $702.7 billion as of September 30, 2009.

Legg Mason also announced today that its Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.06 per share.

(Amounts in millions, except per share amounts)

Quarters Ended

Six Months Ended

Sept

June

Sept

Sept

Sept

2010

2010

2009

2010

2009

Total Operating Revenues

$     674.8

$     674.2

$     659.9

$ 1,349.0

$  1,273.0

Total Operating Expenses

586.9

571.4

582.0

1,158.3

1,136.8

Operating Income

87.9

102.8

77.9

190.7

136.2

Net Income(1)

75.3

47.9

45.8

123.3

95.8

Adjusted Income(2)

115.0

96.3

90.0

211.3

176.8

Net Income Per Share -- Diluted(1)

0.50

0.30

0.30

0.79

0.64

Adjusted Income Per Share(2)

0.76

0.60

0.59

1.35

1.19

(1)  Net income represents Net income attributable to Legg Mason, Inc.

(2)  Please see Supplemental Data below for non-GAAP performance measures.

Comments on Second Fiscal Quarter 2011 Results

Mark R. Fetting, Chairman and CEO, said, "We are pleased with our earnings improvement, particularly as we execute against our strategic initiatives for longer term enhancements.  Importantly, our operating margin, as adjusted, is the highest since September of 2008.  Across many of our affiliates, performance has continued to be strong, which should positively impact longer term numbers as it offsets more challenged performance during the credit crisis.  Collectively, we have made important progress at key affiliates in building our pipeline of new business to be funded in coming quarters as we work toward positive flows.  Our distribution teams continue to expand our penetration into new channels globally.  We are optimistic that our continuing hard work should put us in a solid position for further improvements.

“Furthermore, our plans to streamline our business are well underway and we are on track to achieve the cost savings we outlined in May.  We continue to work closely with our affiliates on new initiatives to serve our clients, investing in new capabilities and product innovation, and maintaining  effective management of our expenses.  All of us at Legg Mason remain determined to further improve our results to clients and shareholders and grow our global franchise," concluded Mr. Fetting.

Assets Under Management Increased to $674 Billion

AUM increased 4% to $673.5 billion from $645.4 billion at June 30, 2010 driven by market appreciation of $40.8 billion which more than offset net outflows of $12.7 billion.  

  • Fixed income outflows were $8.0 billion, equity outflows were $4.4 billion and liquidity outflows were $0.3 billion for the quarter ended September 30th.  
  • At September 30, 2010, fixed income represented 55% of AUM, while equity represented 25% and liquidity represented 20% of AUM.  
  • By business division, 70% of AUM was in the Americas Division and 30% of AUM was in the International Division.  
  • Average AUM during the quarter was $658.6 billion compared to $668.3 billion in the first quarter of fiscal 2011 and $684.0 billion in the second quarter of fiscal 2010.

Comparison to the First Quarter of Fiscal Year 2011

Net income was $75.3 million, or $0.50 per diluted share, as compared with $47.9 million, or $0.30 per diluted share, in the first quarter of fiscal year 2011. This quarter’s results included a United Kingdom tax benefit of $8.9 million or $0.06 per diluted share.

  • Revenues of $674.8 million were up from $674.2 million in the prior quarter, primarily due to an additional day in the quarter and a decrease in fee waivers of $3.9 million that more than offset lower performance fees of $3.3 million and lower average AUM.
  • Operating expenses of $586.9 million increased 3% from $571.4 million in the first quarter of fiscal 2011.  The current quarter’s expenses included $22.1 million in expenses from funded deferred compensation and seed investments which are recorded in compensation and benefits with an offset in other non-operating income, compared to a reduction in expenses of $4.6 million in the prior quarter.  Last quarter’s results included $17.6 million of costs related to the launch of the closed-end fund in the quarter.  The current quarter’s expenses also included $11.6 million in transition costs related to the previously announced streamlining initiative, compared with $3.2 million of such costs in the prior quarter.
  • Other non-operating income was $15.4 million, as compared to an expense of $30.7 million in the first quarter of fiscal 2011. The current quarter included gains on funded deferred compensation plan and seed investments that are offset in compensation and benefits as described above. Gains on corporate investments, primarily seed investments, not offset by compensation were $12.9 million as compared with a loss of $3.4 million in the previous quarter.  
  • Operating margin was 13.0%, as compared to 15.2% in the first quarter of fiscal 2011.  Operating margin, as adjusted(2), was 24.1% as compared with 20.9% in the first quarter.
  • Adjusted income was $115.0 million, or $0.76 per diluted share, compared to adjusted income of $96.3 million, or $0.60 per diluted share, in the prior quarter.

Comparison to the Second Quarter of Fiscal Year 2010

Net income was $75.3 million, or $0.50 per diluted share, as compared with net income of $45.8 million, or $0.30 per diluted share, in the second quarter of fiscal year 2010.

  • Revenues of $674.8 million were up 2% from revenues of $659.9 million in the prior year quarter despite a 4% decrease in average AUM, reflecting higher performance fees and increased revenue yields due to a more favorable asset mix.
  • Operating expenses of $586.9 million were up from operating expenses of $582.0 million in the prior year quarter. The current quarter’s expenses included $11.6 million in transition costs related to the previously announced streamlining initiative.
  • Other non-operating income was $15.4 million compared to a $2.9 million expense in the prior year quarter, which included $22.0 million in transaction costs from the exchange of equity units in August of 2009, partially offset by a reversal of unrealized losses on capital support agreements of $5.6 million.
  • Operating margin was 13.0% as compared to 11.8% in the prior year quarter.  Operating margin, as adjusted, was 24.1% as compared with 21.0% in the same period a year ago.  
  • Adjusted income was $115.0 million, or $0.76 per diluted share, compared to adjusted income of $90.0 million, or $0.59 per diluted share, for the second fiscal quarter 2010.

Quarterly Business Developments

Performance

At September 30, 2010:

  • Of Legg Mason’s long-term U.S. mutual fund assets, 44% were beating their Lipper category averages for the 1-year period; 73% for the 3-year period; 70% for the 5-year period and 80% for the 10-year period.
  • Of Legg Mason’s long-term U.S. mutual fund assets, 53% were rated 4 or 5 stars by Morningstar, including 82% of funds managed by Royce and 59% of funds managed by Western.
  • All 9 of the Western Asset Funds outperformed their benchmarks for the 1-year period; 4 out of 9 outperformed their benchmarks for the 3-year period; 4 out of 8 outperformed for the 5-year period and all 4 funds outperformed for the 10-year period.
  • Twelve out of 25 funds managed by Royce outperformed their benchmarks for the 1-year period; 19 out of 21 for the 3-year period; all 17 outperformed for the 5-year period and all 9 outperformed for the 10-year period.
  • One out of six funds managed by Legg Mason Capital Management outperformed their benchmarks for the 1-year period; none outperformed for the 3- and 5-year periods and 1 out of 6 outperformed for the 10-year period.
  • Of the 13 funds managed by ClearBridge Advisors, 3 outperformed in the 1-year period; 6 outperformed for the 3-year and 5-year periods; and 9 outperformed for the 10-year period.

Balance Sheet

At September 30, 2010, Legg Mason’s cash position was $1.3 billion.  Total debt was $1.4 billion and stockholders' equity was $5.7 billion.  The ratio of total debt to total capital (total equity plus total debt) was 20%. In the quarter, the Company completed the $300 million accelerated share repurchase arrangement which resulted in an additional 990 thousand shares being retired.  There were also additional open market purchases of 736 thousand shares.  As of September 30, Legg Mason has repurchased and retired 11.4 million shares of common stock over the last two quarters.    

The Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.06 per share. The dividend is payable on January 10, 2011 to shareholders of record at the close of business on December 15, 2010.

Conference Call to Discuss Results

A conference call to discuss the Company's results, hosted by Mr. Fetting, will be held at 8:30 a.m. E.D.T. today. The call will be open to the general public. Interested participants should access the call by dialing 1-866-843-0890 (or for international calls 1-412-317-9250) enter elite number 2878175 when prompted. Please dial in at least 10 minutes prior to the scheduled start to ensure connection.

The presentation slides that will be reviewed during the conference call will be available on the investor relations section of the Legg Mason website (http://ir.leggmason.com/CorporateProfile.aspx?iid=102761) shortly after the release of the financial results.

A replay or transcript of the live broadcast will be available on the Legg Mason website, in the investor relations section, or by dialing 1-877-344-7529 (or for international calls 1-412-317-0088) conference number 444905.  Please note that the replay will be available beginning at 5:00 p.m., E.D.T. on Wednesday October 27, 2010 and ending on November 11, 2010.

About Legg Mason

Legg Mason is a global asset management firm, with $674 billion in assets under management as of September 30, 2010.  The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

This release contains forward-looking statements subject to risks, uncertainties and other factors that may cause actual results to differ materially. For a discussion of these risks and uncertainties, see "Risk Factors" and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Legg Mason's Annual Report on Form 10-K for the fiscal year ended March 31, 2010 and the Company’s quarterly reports on form 10-Q.

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

Quarters Ended

For the Six Months Ended

September 2010

June 2010

September 2009

September 2010

September 2009

Operating Revenues:

Investment advisory fees:

Separate accounts

$          204,214

$ 200,972

$          206,972

$          405,186

$          397,860

Funds

357,491

352,699

347,371

710,190

675,395

Performance fees

19,505

22,774

9,566

42,279

15,250

Distribution and service fees

92,314

96,314

94,619

188,628

181,320

Other

1,270

1,406

1,368

2,676

3,155

Total operating revenues

674,794

674,165

659,896

1,348,959

1,272,980

Operating Expenses(1):

Compensation and benefits

284,909

266,074

287,559

550,983

556,371

Transition-related compensation

10,974

2,713

-

13,687

-

Total compensation and benefits

295,883

268,787

287,559

564,670

556,371

Distribution and servicing

165,832

184,702

174,388

350,534

346,852

Communications and technology

39,314

39,976

40,538

79,290

81,028

Occupancy

33,492

33,675

35,689

67,167

68,273

Amortization of intangible assets

5,749

5,728

5,664

11,477

11,292

Other

46,625

38,520

38,174

85,145

72,965

Total operating expenses

586,895

571,388

582,012

1,158,283

1,136,781

Operating Income

87,899

102,777

77,884

190,676

136,199

Other Non-Operating Income (Expense)

Interest income

2,170

1,815

1,728

3,985

3,549

Interest expense

(24,449)

(22,801)

(28,540)

(47,250)

(71,930)

Fund support

-

-

5,613

-

23,171

Other income (expense)

33,189

(7,291)

14,547

25,898

55,858

Other non-operating income (expense) of

consolidated investment vehicles

4,499

(2,393)

3,761

2,106

8,850

Total other non-operating income (expense)

15,409

(30,670)

(2,891)

(15,261)

19,498

Income Before Income Tax Provision

103,308

72,107

74,993

175,415

155,697

Income tax provision

26,720

27,064

27,671

53,784

56,051

Net Income

76,588

45,043

47,322

121,631

99,646

Less: Net income (loss) attributable

to noncontrolling interests

1,253

(2,888)

1,548

(1,635)

3,818

Net Income Attributable to

Legg Mason, Inc.

$            75,335

$   47,931

$            45,774

$          123,266

$            95,828

Net Income per share

Attributable to Legg Mason, Inc.

Common Shareholders:

Basic

$                0.50

$       0.30

$                0.30

$                0.79

$                0.65

Diluted

$                0.50

$       0.30

$                0.30

$                0.79

$                0.64

Weighted Average Number of Shares

Outstanding:

Basic

151,416

160,123

151,267

155,746

146,696

Diluted

151,940

160,762

153,224

156,327

148,708

(1) Operating expenses include transition costs related to streamlining our business model.  See Supplemental Data - Operating

 margin, as adjusted for additional details.  

LEGG MASON, INC. AND SUBSIDIARIES

SUPPLEMENTAL DATA

RECONCILIATION OF NET INCOME ATTRIBUTABLE TO LEGG MASON, INC.

TO ADJUSTED INCOME (1)

(Amounts in thousands, except per share amounts)

(Unaudited)

Quarters Ended

For the Six Months Ended

September 2010

June 2010

September 2009

September 2010

September 2009

Net Income Attributable to Legg Mason, Inc.

$               75,335

$     47,931

$               45,774

$             123,266

$               95,828

Plus (Less):

Amortization of intangible assets

5,749

5,728

5,664

11,477

11,292

Deferred income taxes on intangible assets:

Tax amortization benefit

33,681

33,687

34,023

67,368

69,320

UK tax rate adjustment

(8,878)

-

-

(8,878)

-

Imputed interest on convertible debt

9,146

8,909

8,587

18,055

16,951

Net money market fund support gains (2)

-

-

(4,041)

-

(16,565)

Adjusted Income

$             115,033

$     96,255

$               90,007

$             211,288

$             176,826

Net Income per Diluted Share Attributable

to Legg Mason, Inc. Common Shareholders

$                   0.50

$         0.30

$                   0.30

$                   0.79

$                   0.64

Plus (Less):

Amortization of intangible assets

0.04

0.04

0.04

0.07

0.08

Deferred income taxes on intangible assets:

Tax amortization benefit

0.22

0.21

0.22

0.43

0.47

UK tax rate adjustment

(0.06)

-

-

(0.06)

-

Imputed interest on convertible debt

0.06

0.05

0.05

0.12

0.11

Net money market fund support gains (2)

-

-

(0.02)

-

(0.11)

Adjusted Income per Diluted Share

$                   0.76

$         0.60

$                   0.59

$                   1.35

$                   1.19

(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.

(2)  Net of income taxes.  

LEGG MASON, INC. AND SUBSIDIARIES

SUPPLEMENTAL DATA

RECONCILIATION OF OPERATING MARGIN, AS ADJUSTED(1)

(Amounts in thousands)

(Unaudited)

Quarters Ended

For the Six Months Ended

September 2010

June 2010

September 2009

September 2010

September 2009

Operating Revenues, GAAP basis

$          674,794

$          674,165

$          659,896

$       1,348,959

$       1,272,980

Plus (Less):

Operating revenues eliminated upon consolidation of investment vehicles

959

779

611

1,738

1,395

Distribution and servicing expense excluding consolidated investment vehicles

(165,845)

(184,689)

(174,376)

(350,534)

(346,822)

Operating Revenues, as Adjusted

$          509,908

$          490,255

$          486,131

$       1,000,163

$          927,553

Operating Income

$            87,899

$          102,777

$            77,884

$          190,676

$          136,199

Plus (Less):

Gains (losses) on deferred compensation and seed investments

22,122

(4,621)

24,132

17,501

55,519

Transition-related costs(2)

11,587

3,155

-

14,742

-

Operating income and expenses of consolidated investment vehicles

1,461

1,243

222

2,704

561

Operating Income, as Adjusted

$          123,069

$          102,554

$          102,238

$          225,623

$          192,279

Operating margin, GAAP basis

13.0

%

15.2

%

11.8

%

14.1

%

10.7

%

Operating margin, as adjusted

24.1

20.9

21.0

22.6

20.7

(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.

(2) Transition-related costs:

Compensation

$            10,974

$              2,713

$            13,687

Communications and technology

472

-

472

Occupancy

63

-

63

Other

78

442

520

    Total

$            11,587

$              3,155

$            14,742

LEGG MASON, INC. AND SUBSIDIARIES

(Amounts in billions)

(Unaudited)

Assets Under Management

Quarters Ended

September 2010

June 2010

March 2010

December 2009

September 2009

By asset class:

Equity

$              169.6

$      155.8

$      173.8

$             168.7

$              165.6

Fixed Income

371.6

357.9

364.3

365.8

385.7

Liquidity

132.3

131.7

146.4

147.1

151.4

Total

$              673.5

$      645.4

$      684.5

$             681.6

$              702.7

By asset class (average):

Equity

$              162.0

$      167.6

$      167.4

$             164.6

$              155.7

Fixed Income

365.0

362.0

365.6

378.8

377.5

Liquidity

131.6

138.7

148.2

149.9

150.8

Total

$              658.6

$      668.3

$      681.2

$             693.3

$              684.0

By division:

Americas

$              468.3

$      450.3

$      475.8

$             472.9

$              484.3

International

205.2

195.1

208.7

208.7

218.4

Total

$              673.5

$      645.4

$      684.5

$             681.6

$              702.7

Component Changes in Assets Under Management

Quarters Ended

September 2010

June 2010

March 2010

December 2009

September 2009

Beginning of period

$              645.4

$      684.5

$      681.6

$             702.7

$              656.9

Net client cash flows

(12.7)

(23.1)

(10.9)

(32.7)

(8.1)

Market performance and other

40.8

(16.0)

13.8

11.6

53.9

End of period

$              673.5

$      645.4

$      684.5

$             681.6

$              702.7

By Division

Americas

Beginning of period

$              450.3

$      475.8

$      472.9

$             484.3

$              457.1

Net client cash flows

(7.6)

(17.6)

(10.9)

(21.4)

(11.8)

Market performance and other

25.6

(7.9)

13.8

10.0

39.0

End of period

$              468.3

$      450.3

$      475.8

$             472.9

$              484.3

International

Beginning of period

$              195.1

$      208.7

$      208.7

$             218.4

$              199.8

Net client cash flows

(5.1)

(5.5)

-

(11.3)

3.7

Market performance and other

15.2

(8.1)

-

1.6

14.9

End of period

$              205.2

$      195.1

$      208.7

$             208.7

$              218.4

LEGG MASON, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME

TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)

(Amounts in thousands, except per share amounts)

(Unaudited)

Quarter Ended September 30, 2010

GAAP Basis

Consolidated Investment Vehicles

Non-GAAP Basis  - Excluding Investment Vehicles

Operating Revenues:

Investment advisory fees

$   581,210

$                       914

$                 582,124

Distribution and service fees

92,314

45

92,359

Other

1,270

-

1,270

Total operating revenues

674,794

959

675,753

Operating Expenses:

Compensation and benefits

295,883

-

295,883

Distribution and servicing

165,832

13

165,845

Other

125,180

(515)

124,665

Total operating expenses

586,895

(502)

586,393

Operating Income

87,899

1,461

89,360

Other Non-Operating Income (Expense)

Net interest income (expense)

(22,279)

-

(22,279)

Other income (expense)

37,688

(2,663)

35,025

Other non-operating income (expense)

15,409

(2,663)

12,746

Income (Loss) Before Income Tax Provision

103,308

(1,202)

102,106

Income tax provision

26,720

-

26,720

Net Income (Loss)

76,588

(1,202)

75,386

Less: Net income (loss) attributable

to noncontrolling interests

1,253

(1,202)

51

Net Income Attributable to Legg Mason, Inc.

$     75,335

$                          -

$                   75,335

Effective Income Tax Rate

25.9%

Effective Income Tax Rate Excluding

Consolidated Investment Vehicles

26.2%

(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.

LEGG MASON, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME

TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)

(Amounts in thousands, except per share amounts)

(Unaudited)

Quarter Ended June 30, 2010

GAAP Basis

Consolidated Investment Vehicles

Non-GAAP Basis  - Excluding Investment Vehicles

Operating Revenues:

Investment advisory fees

$   576,445

$                       767

$                 577,212

Distribution and service fees

96,314

12

96,326

Other

1,406

-

1,406

Total operating revenues  

674,165

779

674,944

Operating Expenses:

Compensation and benefits

268,787

-

268,787

Distribution and servicing

184,702

(13)

184,689

Other

117,899

(451)

117,448

Total operating expenses

571,388

(464)

570,924

Operating Income

102,777

1,243

104,020

Other Non-Operating Income (Expense)

Net interest income (expense)

(20,986)

-

(20,986)

Other income (expense)

(9,684)

1,699

(7,985)

Other non-operating income (expense)

(30,670)

1,699

(28,971)

Income Before Income Tax Provision

72,107

2,942

75,049

Income tax provision

27,064

-

27,064

Net Income

45,043

2,942

47,985

Less: Net income (loss) attributable

to noncontrolling interests

(2,888)

2,942

54

Net Income Attributable to Legg Mason, Inc.

$     47,931

$                          -

$                   47,931

Effective Income Tax Rate

37.5%

Effective Income Tax Rate Excluding

Consolidated Investment Vehicles

36.1%

(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.

LEGG MASON, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME

TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)

(Amounts in thousands, except per share amounts)

(Unaudited)

Quarter Ended September 30, 2009

GAAP Basis

Consolidated Investment Vehicles

Non-GAAP Basis  - Excluding Investment Vehicles

Operating Revenues:

Investment advisory fees

$   563,909

$                       573

$                 564,482

Distribution and service fees

94,619

38

94,657

Other

1,368

-

1,368

Total operating revenues

659,896

611

660,507

Operating Expenses:

Compensation and benefits

287,559

-

287,559

Distribution and servicing

174,388

(12)

174,376

Other

120,065

401

120,466

Total operating expenses

582,012

389

582,401

Operating Income

77,884

222

78,106

Other Non-Operating Income (Expense)

Net interest income (expense)

(26,812)

-

(26,812)

Fund support

5,613

-

5,613

Other income (expense)

18,308

(1,723)

16,585

Other non-operating income (expense)

(2,891)

(1,723)

(4,614)

Income (Loss) Before Income Tax Provision

74,993

(1,501)

73,492

Income tax provision

27,671

-

27,671

Net Income (Loss)

47,322

(1,501)

45,821

Less: Net income (loss) attributable

to noncontrolling interests

1,548

(1,501)

47

Net Income Attributable to Legg Mason, Inc.

$     45,774

$                          -

$                   45,774

Effective Income Tax Rate

36.9%

Effective Income Tax Rate Excluding

Consolidated Investment Vehicles

37.7%

(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.

LEGG MASON, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME

TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)

(Amounts in thousands, except per share amounts)

(Unaudited)

Six Months Ended September 30, 2010

GAAP Basis

Consolidated Investment Vehicles

Non-GAAP Basis  - Excluding Investment Vehicles

Operating Revenues:

Investment advisory fees

$ 1,157,655

$                    1,681

$              1,159,336

Distribution and service fees

188,628

57

188,685

Other

2,676

-

2,676

Total operating revenues

1,348,959

1,738

1,350,697

Operating Expenses:

Compensation and benefits

564,670

-

564,670

Distribution and servicing

350,534

-

350,534

Other

243,079

(966)

242,113

Total operating expenses

1,158,283

(966)

1,157,317

Operating Income

190,676

2,704

193,380

Other Non-Operating Income (Expense)

Net interest income (expense)

(43,265)

-

(43,265)

Other income (expense)

28,004

(964)

27,040

Other non-operating income (expense)

(15,261)

(964)

(16,225)

Income Before Income Tax Provision

175,415

1,740

177,155

Income tax provision

53,784

-

53,784

Net Income

121,631

1,740

123,371

Less: Net income (loss) attributable

to noncontrolling interests

(1,635)

1,740

105

Net Income Attributable to Legg Mason, Inc.

$    123,266

$                          -

$                 123,266

Effective Income Tax Rate

30.7%

Effective Income Tax Rate Excluding

Consolidated Investment Vehicles

30.4%

(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.

LEGG MASON, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME

TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)

(Amounts in thousands, except per share amounts)

(Unaudited)

Six Months Ended September 30, 2009

GAAP Basis

Consolidated Investment Vehicles

Non-GAAP Basis  - Excluding Investment Vehicles

Operating Revenues:

Investment advisory fees

$ 1,088,505

$                    1,357

$              1,089,862

Distribution and service fees

181,320

38

181,358

Other

3,155

-

3,155

Total operating revenues

1,272,980

1,395

1,274,375

Operating Expenses:

Compensation and benefits

556,371

-

556,371

Distribution and servicing

346,852

(30)

346,822

Other

233,558

864

234,422

Total operating expenses

1,136,781

834

1,137,615

Operating Income

136,199

561

136,760

Other Non-Operating Income (Expense)

Net interest income (expense)

(68,381)

-

(68,381)

Fund support

23,171

-

23,171

Other income (expense)

64,708

(4,296)

60,412

Other non-operating income (expense)

19,498

(4,296)

15,202

Income (Loss) Before Income Tax Provision

155,697

(3,735)

151,962

Income tax provision

56,051

-

56,051

Net Income (Loss)

99,646

(3,735)

95,911

Less: Net income (loss) attributable

to noncontrolling interests

3,818

(3,735)

83

Net Income Attributable to Legg Mason, Inc.

$      95,828

$                          -

$                   95,828

Effective Income Tax Rate

36.0%

Effective Income Tax Rate Excluding

Consolidated Investment Vehicles

36.9%

(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.

Use of Supplemental Data as Non-GAAP Performance Measures

As supplemental information, we are providing performance measures that are based on methodologies other than generally accepted accounting principles (“non-GAAP”) for “adjusted income", “consolidated statements of income, excluding consolidated investment vehicles”, and “operating margin, as adjusted” that management uses as benchmarks in evaluating and comparing the period-to-period operating performance of Legg Mason, Inc. and its subsidiaries.

Adjusted Income

Adjusted Income was formerly reported as “Cash Income, as Adjusted”. We define “adjusted income” as Net income (loss) attributable to Legg Mason, Inc. plus amortization and deferred taxes related to intangible assets and goodwill, and imputed interest and tax benefits on contingent convertible debt less deferred income taxes on goodwill and intangible asset impairment, if any.  We also adjust for non-core items that are not reflective of our economic performance, such as impairment charges and the impact of tax rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets and goodwill, and net money market fund support losses (gains).

We believe that adjusted income provides a good representation of our operating performance adjusted for non-cash acquisition related items and other items that facilitate comparison of our results to the results of other asset management firms that have not issued contingent convertible debt, made significant acquisitions, or engaged in money market fund support transactions.  We also believe that adjusted income is an important metric in estimating the value of an asset management business.  

Adjusted income only considers adjustments for certain items that relate to operating performance and comparability, and therefore, is most readily reconcilable to Net income attributable to Legg Mason, Inc. determined under GAAP.  This measure is provided in addition to net income, but is not a substitute for net income and may not be comparable to non-GAAP performance measures, including measures of adjusted earnings or adjusted income, of other companies. Further, adjusted income is not a liquidity measure and should not be used in place of cash flow measures determined under GAAP.  Legg Mason considers adjusted income to be useful to investors because it is an important metric in measuring the economic performance of asset management companies, as an indicator of value, and because it facilitates comparison of Legg Mason’s operating results with the results of other asset management firms that have not engaged in significant acquisitions, issued contingent convertible debt, or engaged in money market fund support transactions.

In calculating adjusted income we add the impact of the amortization of intangible assets from acquisitions, such as management contracts, to Net Income attributable to Legg Mason, Inc. to reflect the fact that these non-cash expenses distort comparisons of Legg Mason’s operating results with the results of other asset management firms that have not engaged in significant acquisitions.  Deferred taxes on indefinite-life intangible assets and goodwill includes actual tax benefits from amortization deductions that are not realized under GAAP absent an impairment charge or the disposition of the related business.  Because we actually receive these tax benefits on indefinite-life intangibles and goodwill over time, we add them to net income in the calculation of adjusted income.  Conversely, we subtract the non-cash income tax benefits on goodwill and indefinite-life intangible asset impairment charges and United Kingdom tax rate adjustments on excess book basis on certain acquired indefinite-life intangible assets that have been recognized under GAAP.  We also add back imputed interest on contingent convertible debt, which is a non-cash expense, as well as the actual tax benefits on the related contingent convertible debt that are not realized under GAAP.  We also add (subtract) other non-core items, such as net money market fund support losses (gains) (net of losses on the sale of the underlying SIV securities, if applicable). These adjustments reflect that these items distort comparisons of Legg Mason’s operating results to prior periods and the results of other asset management firms that have not engaged in money market fund support transactions or significant acquisitions, including any related impairments. 

Should a disposition, impairment charge or other non-core item occur, its impact on adjusted income may distort actual changes in the operating performance or value of our firm. Also, realized losses on money market fund support transactions are reflective of changes in the operating performance and value of our firm. Accordingly, we monitor these items and their related impact, including taxes, on adjusted income to ensure that appropriate adjustments and explanations accompany such disclosures.

Although depreciation and amortization of fixed assets are non-cash expenses, we do not add these charges in calculating adjusted income because these charges are related to assets that will ultimately require replacement.

Consolidated Statements of Income, Excluding Consolidated Investment Vehicles

Effective with the April 1, 2010 adoption of a new financial accounting standard on consolidation, Legg Mason now consolidates and separately identifies certain sponsored investment vehicles, the most significant of which is a collateralized loan obligation entity.  In presenting our “Consolidated Statements of Income, Excluding Consolidated Investment Vehicles”, we add back the investment advisory and distribution and servicing fees that are eliminated upon the consolidation of investment vehicles and exclude the operating expenses and the impact on non-operating income (expense) and noncontrolling interests of consolidated investment vehicles.  

We believe it is important to provide the Consolidated Statements of Income, Excluding Consolidated Investment Vehicles to present the underlying economic performance of our core asset management operations, which does not include the results of the investment funds that we manage but may not own all of the equity invested.    By deconsolidating the consolidated investment vehicles from the Consolidated Statements of Income, the investment advisory and distribution fees earned by Legg Mason from consolidated investment vehicles are added back to reflect our actual revenues.  Similarly the operating expenses and the impact on non-operating income (expense) and noncontrolling interests of consolidated investment vehicles are removed from the GAAP basis Statements of Income since this activity does not actually belong to Legg Mason.  The deconsolidation of the investment vehicles does not have any impact on Net Income Attributable to Legg Mason, Inc. in any period presented.  The Consolidated Statements of Income, Excluding Consolidated Investment Vehicles are presented in addition to our GAAP basis Consolidated Statements of Income, but are not substitutes for the GAAP basis Consolidated Statements of Income and may not be comparable to Statements of Income presented on a non-GAAP basis of other companies.

Operating Margin, as Adjusted  

We  calculate “operating margin, as adjusted,” by dividing (i) operating income, adjusted to exclude the impact on compensation expense of gains or losses on investments made to fund deferred compensation plans, the impact on compensation expense of gains or losses on seed capital investments by our affiliates under revenue sharing agreements, transition-related costs of streamlining our business model, income (loss) of consolidated investment vehicles and, impairment charges by (ii) our operating revenues, adjusted to add back net investment advisory fees eliminated upon consolidation of investment vehicles, less distribution and servicing expenses which we use as an approximate measure of revenues that are passed through to third parties, which we refer to as “adjusted operating revenues”.  The compensation items, other than transition-related costs, are removed from operating income in the calculation because they are offset by an equal amount in Other non-operating income (expense), and thus have no impact on Net Income attributable to Legg Mason, Inc.  Transition-related costs and income (loss) of consolidated investment vehicles are removed from operating income in the calculation because these items are not reflective of our core asset management operations.  We use adjusted operating revenues in the calculation to show the operating margin without distribution and servicing expenses, which we use to approximate our distribution revenues that are passed through to third parties as a direct cost of selling our products, although distribution and servicing expenses may include commissions paid in connection with the launching of closed-end funds for which there is no corresponding revenue in the period.  Adjusted operating revenues also include our advisory revenues we receive from consolidated investment vehicles that are eliminated in consolidation under GAAP.  Legg Mason believes that operating margin, as adjusted, is a useful measure of our performance because it provides a measure of our core business activities excluding items that have no impact on net income and because it indicates what Legg Mason’s operating margin would have been without the distribution revenues that are passed through to third parties as a direct cost of selling our products, transition-related costs, and the impact of the consolidation of certain investment vehicles described above.  The consolidation of these investment vehicles does not have an impact to Net income attributable to Legg Mason, Inc.  This measure is provided in addition to the Company’s operating margin calculated under GAAP, but is not a substitute for calculations of margins under GAAP and may not be comparable to non-GAAP performance measures, including measures of adjusted margins, of other companies.

SOURCE Legg Mason, Inc.



RELATED LINKS

http://www.leggmason.com