OREANDA-NEWS. Legg Mason, Inc. (NYSE: LM) today reported its operating results for the third fiscal quarter ended December 31, 2015.  The Company reported a net loss1 of $138.6 million, or $1.31 per diluted share, as compared to net income of $64.3 million, or $0.58 per diluted share, in the previous quarter, and net income of $77.0 million, or $0.67 per diluted share, in the third quarter of fiscal 2015. 

This quarter's results were driven by the following:

Negative items:

  • $371.0 million, $296.8 million after-tax, or $2.79 per diluted share, in non-cash impairment charges related to intangible assets at Permal resulting from a reduction in their AUM related to co-mingled vehicle assets due to their business shifting more to institutional investors. 
  • A charge of $9.4 million, or $0.06 per diluted share, related to real estate write-offs resulting from reduced space requirements. 

Positive items:

  • A cumulative tax benefit of $55.9 million, or $0.53 per diluted share, primarily related to annualized tax benefits attributable to prior quarters due to the current quarter impairment charges in a lower tax rate jurisdiction.
  • A further tax benefit for a reduction in tax interest expense of $5.3 million, or $0.03 per diluted share.
  • A $26.4 million, or $0.25 per diluted share, credit related to contingent consideration fair value adjustments.
  • A tax benefit largely due to a United Kingdom tax rate adjustment resulting in a credit of $8.4 million, or $0.08 per diluted share.  
  • A gain of $6.6 million, or $0.04 per diluted share, on an Australian dollar hedge related to the RARE Infrastructure Limited acquisition.

(Amounts in millions, except per share amounts)

      
 

Quarters Ended

  

Nine Months Ended
 

Dec

  

Sep

  

Dec

  

Dec

  

Dec
 

2015

  

2015

  

2014

  

2015

  

2014

Operating Revenues

$

659.6

    

$

673.1

    

$

719.0

    

$

2,041.3

    

$

2,116.8

  

Operating Expenses

900.2

    

540.1

    

599.6

    

2,024.4

    

1,747.5

  

Operating Income (Loss)

(240.6)

    

133.0

    

119.4

    

16.9

    

369.3

  

Net Income (Loss)1

(138.6)

    

64.3

    

77.0

    

20.2

    

154.1

  

Adjusted Income2

158.5

    

99.1

    

113.1

    

387.0

    

260.9

  

Net Income (Loss) Per Share - Diluted1

(1.31)

    

0.58

    

0.67

    

0.17

    

1.32

  

Adjusted Income Per Share - Diluted2

1.45

    

0.89

    

0.98

    

3.47

    

2.23

  
                   

(1)    Net Income (Loss) Attributable to Legg Mason, Inc.

      

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

      

Included in last quarter's results were $11.1 million of losses on the Australian dollar hedge related to the RARE Infrastructure acquisition, or $0.06 per diluted share, and a tax benefit largely due to reserve adjustments related to the successful conclusion of certain tax examinations of $5.0 million, or $0.05 per diluted share.

Adjusted income2 for the third fiscal quarter was $158.5 million, or $1.45 per diluted share, as compared to $99.1 million, or $0.89 per diluted share, in the previous quarter and $113.1 million, or $0.98 per diluted share, in the third quarter of fiscal 2015.  For the current quarter, operating revenues were $659.6 million, down 2% from $673.1 million in the prior quarter, and down 8% compared to $719.0 million in the third quarter of fiscal 2015.  Operating expenses excluding the non-cash impairment charges were $529.2, down 2% from $540.1 million in the prior quarter, and down 12% compared to $599.6 million in the third quarter of fiscal 2015.

Assets Under Management ("AUM") were $671.5 billion as of December 31, 2015, compared to $672.1 billion as of September 30, 2015, and down 5% from $709.1 billion as of December 31, 2014. 

Legg Mason also announced today, that its Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.20 per share.

Comments on the Third Quarter of Fiscal Year 2016 Results

Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "Our operating results for the quarter reflected a challenging period for asset management firms, and included a negative impact from a significant non-cash impairment charge.   While quarterly long-term flows were negative in the aggregate, we generated another quarter of positive fixed income flows despite industry net outflows in active taxable fixed income.  Equity flows remained challenged, consistent with industry trends, exacerbated by capital gains distributions and year-end tax selling.  In the quarter, we continued our work to commercialize new equity investment capabilities, launched four outcome-oriented index ETFs in the US, closed our acquisition of RARE Infrastructure and added their funds to our European fund ranges.   While pleased with our strategic progress during the quarter, we continue to manage our business very thoughtfully in light of the current challenging environment. 

"The uncertain outlook for markets, and our client's needs for a broad suite of investment solutions, makes it clear that we cannot risk standing still.  Consequently, we have taken important steps to execute upon our strategy of becoming an increasingly diversified asset management firm in terms of investment expertise, products, vehicles and distribution channels to service evolving and diverse client needs.  With the acquisition of Clarion Partners, we have added a private real estate capability with strong performance through market cycles, differentiated and diverse product offerings and broad growth opportunities in new geographies and products.  By bringing EnTrust together with Permal, we create one of the largest alternative asset managers with complementary investment capabilities, global client relationships and business mix.  Our investment in Precidian Investments gives us access to a proven innovator that will help us continue to drive product and vehicle diversification.  Precidian Investments' ActiveShares process for active ETFs is, in our opinion, the best ETF solution for the active management industry, with strong interest in the process within the industry and confirmation from key early adopters.   We still have a great deal of work ahead, but are energized by the significant opportunity before us."

Assets Under Management of $671.5 Billion

AUM was $671.5 billion at December 31, 2015 compared with $672.1 billion at September 30, 2015, driven by $6.8 billion from the RARE Infrastructure acquisition and $6.4 billion in positive market performance.   This was more than offset by liquidity outflows of $10.9 billion, long-term outflows of $2.4 billion and $0.5 billion in negative foreign exchange.  AUM was down 5% from $709.1 billion at December 31, 2014.

  • Long-term net outflows of $2.4 billion included equity outflows of $4.6 billion, partially offset by fixed income inflows of $2.2 billion.
  • At December 31, 2015, fixed income represented 55% of AUM, while equity represented 28%, and liquidity represented 17%.
  • By geography, 63% of AUM was from clients domiciled in the United States and 37% from non-US domiciled clients.
  • Average AUM during the quarter was $683.0 billion compared to $687.2 billion in the prior quarter and $710.9 billion in the third quarter of fiscal year 2015.  Average long-term AUM was $559.8 billion compared to $560.4 billion in the prior quarter and $565.8 billion in the third quarter of fiscal year 2015.

Comparison to the Second Quarter of Fiscal Year 2016

Net loss was $138.6 million, or $1.31 per diluted share, as compared with net income of $64.3 million, or $0.58 per diluted share, in the second quarter of fiscal year 2016. Included in this quarter's results were items highlighted on page 1 which totaled $204.7 million after taxes, or $1.92 per diluted share.  Included in the prior quarter's results were losses on corporate investments not offset in compensation and a loss on an Australian dollar hedge related to the RARE Infrastructure acquisition, which combined to total $22.6 million or $0.13 per diluted share.  In addition, the prior quarter included a tax benefit largely due to reserve adjustments related to the successful conclusion of certain tax examinations of $5.0 million, or $0.05 per diluted share.

  • Operating revenues of $659.6 million were down 2% from $673.1 million in the prior quarter, principally reflecting a lower operating revenue yield.
  • Operating expenses of $900.2 million were up 67% from $540.1 million in the prior quarter primarily due to $371.0 million in non-cash impairment charges related to intangible assets.   In addition, the current quarter included a $26.4 million credit related to contingent consideration fair value adjustments and a charge of $9.4 million related to real estate write-offs resulting from reduced space requirements.  The current quarter expenses included a $2.7 million gain in the market value of deferred compensation and seed investments, which is recorded as a decrease in compensation and benefits with an offset in other non-operating income, compared to a loss of $5.5 million in the prior quarter.  
  • Other non-operating expense was $1.6 million compared to $42.5 million in the prior quarter.  Other non-operating expense included a gain of $6.6 million on an Australian dollar hedge related to the RARE Infrastructure acquisition compared with an $11.1 million loss in the prior quarter.  Losses on corporate investments, not offset in compensation, were $2.8 million compared with losses of $11.5 million last quarter.  Both quarters included gains and losses on funded deferred compensation and seed investments, as described above.  In addition, the current quarter included $1.5 million in losses associated with consolidated investment vehicles compared to $2.3 million of losses in the prior quarter.  The consolidation of investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.
  • Operating margin was negative, as compared to 19.8% in the prior quarter as a result of the non-cash impairment charges this quarter.  Operating margin, as adjusted2, was 20.6%, as compared to 24.0% in the prior quarter.
  • Adjusted income was $158.5 million, or $1.45 per diluted share, as compared to adjusted income of $99.1 million, or $0.89 per diluted share, in the prior quarter.

Comparison to the Third Quarter of Fiscal Year 2015

Net loss was $138.6 million, or $1.31 per diluted share, as compared with $77.0 million, or $0.67 per diluted share, in the third quarter of fiscal year 2015.  Included in this quarter's results were items highlighted on page 1 which totaled $204.7 million, or $1.92 per diluted share.

  • Operating revenues of $659.6 million were down 8% compared with $719.0 million in the third quarter of fiscal year 2015, reflecting a less favorable AUM mix, a 4% decline in average AUM and lower performance fees. 
  • Operating expenses of $900.2 million were up 50% compared with $599.6 million in the third quarter of fiscal year 2015 primarily due to $371.0 million in non-cash impairment charges related to intangible assets.  In addition, the current quarter included a $26.4 million credit related to contingent consideration fair value adjustments and a charge of $9.4 million related to real estate write-offs resulting from reduced space requirements.  The prior year quarter included $12.8 million in costs related to the QS Investors integration and other corporate initiatives.  In addition, the prior year quarter expenses included costs of $5.7 million related to the sale of LMIC and the acquisition of Martin Currie.  The current quarter expenses included a $2.7 million gain in the market value of deferred compensation and seed investments, which is recorded as a decrease in compensation and benefits with an offset in other non-operating income, compared to a gain of $2.2 million in the prior year quarter.  
  • Other non-operating expense was $1.6 million, as compared to $1.3 million in the third quarter of fiscal year 2015.  Other non-operating expense included a gain of $6.6 million on an Australian dollar hedge related to the RARE Infrastructure acquisition.  Losses on corporate investments, not offset in compensation, were $2.8 million compared with gains on corporate investments of $3.4 million in the third quarter of fiscal year 2015.  Both quarters included gains on funded deferred compensation and seed investments, as described above.  In addition, the current quarter also included $1.5 million in losses associated with consolidated investment vehicles, as compared to $3.1 million in gains in the prior year quarter.  The consolidation of investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.
  • Operating margin was negative as compared to 16.6% in the third quarter of fiscal year 2015 as a result of the non-cash impairment charges related to intangible assets.  Operating margin, as adjusted, was 20.6%, as compared to 21.4% in the third quarter of fiscal year 2015.
  • Adjusted income was $158.5 million, or $1.45 per diluted share, as compared to adjusted income of $113.1 million, or $0.98 per diluted share, in the third quarter of fiscal year 2015.

Quarterly Business Developments and Recent Announcements

  • Legg Mason closed the acquisition of RARE Infrastructure, a pioneer in global listed infrastructure investing headquartered in Sydney, Australia on October 21, 2015.
  • On December 29, 2015 Legg Mason began trading four new ETF products on the NASDAQ Stock Exchange. These outcome-oriented index-based ETF funds were created in partnership with QS Investors.
  • Legg Mason announced today the agreement to acquire Clarion Partners, a leading diversified real estate firm based in New York.
  • Legg Mason announced today the agreement to acquire EnTrust, a leading hedge fund solutions provider based in New York which will be combined with Permal to create one of the world's largest hedge fund solutions providers.
  • Legg Mason announced today the agreement to acquire a minority interest in Precidian Investments, a leading creator of innovative ETF intellectual property.
  • Morningstar Inc. announced that Ken Leech, Carl Eichstaedt, Mark Lindbloom, Mike Buchanan and team are nominees for Morningstar 2015 U.S. Fixed Income Manager of the Year, United States of America for Western Asset Core Bond Fund (WACSX) and Western Asset Core Plus Bond Fund (WAPSX).

Quarterly Performance

 

At December 31, 2015:
   

1-Year

3-Year

5-Year

10-Year

% of Strategy AUM beating Benchmark3

60%

80%

83%

88%
           

% of Long-Term US Fund Assets Beating Lipper Category Average3

        
 

Equity

33%

61%

66%

48%
 

Fixed Income

58%

67%

80%

78%
 

Total US Fund Assets

43%

63%

72%

60%

Of Legg Mason's long-term U.S. mutual fund assets, 48.3% were in funds rated 4 or 5 stars by Morningstar.

Balance Sheet

At December 31, 2015, Legg Mason's cash position was $563 million.  Total debt was $1.1 billion and stockholders' equity was $4.3 billion.  The ratio of total debt to total capital was 20%. In the third fiscal quarter, the Company completed additional open market purchases of 572 thousand shares which reduced the weighted average shares by 457 thousand.

The Board of Directors has declared a quarterly cash dividend on the Company's common stock in the amount of $0.20 per share.  The dividend is payable April 11, 2016 to shareholders of record at the close of business on February 10, 2016.

(3) See "Supplemental Data Regarding Quarterly Performance."

Conference Call to Discuss Results

A webcast to discuss the Company's results, hosted by Joseph A. Sullivan, Chairman and CEO of Legg Mason, Inc., will be held at 8:30 a.m. EST on Friday, January 22, 2016, and will be immediately followed by the Company's 2016 Investor Day presentation. The discussion of operating results and the Investor Day presentation will be open to the general public.  Interested participants should access the webcast at: http://ir.leggmason.com. Participants may also access the presentation via telephone by dialing 1 (888) 771-4371 (or for international calls 1 (847) 585-4405), confirmation number 41011532, at least 10 minutes prior to the scheduled start to ensure connection.

The presentation slides and additional supporting materials that will be reviewed during the discussion of the Company's operating results and the webcast of Investor Day will be accessible on our Investor Relations page shortly after the release of the financial results: http://ir.leggmason.com. Pre-registration is available by clicking "attend" from our webcast link. Pre-registrants will receive communication reminders leading up to the event.

A replay of the webcast 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), enter pass code 41011532# when prompted.

Please note that the replay will be available beginning at 4:00 p.m. EST on Friday, January 22, 2016, and ending at 11:59 p.m. EST on Friday, February 5, 2016.