2011 Annual Report
Investment{Driven}
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Our vision is to be a proven leader in global
asset management, by delivering specialized
investment solutions that meet our clients’
objectives, and by rewarding our shareholders
and employees.
Front cover: Investment professionals, Legg Mason Global
Asset Allocation and Legg Mason Investment Counsel
Pictured above: Western Asset investment strategy meeting
At Legg Mason, we share a common vision and a set of core values—guiding
principles that define who we are and how we approach our business.
A shared passion for results. Empowerment. A commitment to our profession.
Collaboration. Integrity in all aspects of our business. These values are grounded
in our proud heritage and reflect not only long held beliefs of Legg Mason, but
also the unique cultures of our affiliates. They define how we do business day in
and day out, year after year. This vision and these values—that's what motivates
us as we deliver our Investment {Driven} expertise to clients around the world.
The foundation of our core values is a passion for results. We
are relentless in pursuing performance that benefits our clients,
rewards our employees and builds value for our shareholders.
We are enthusiastic about our business and are united by a passion for results and a spirit of
determination. We strive to deliver strong investment results through customized solutions with
an unwavering focus on the client. With an emphasis on service excellence, we commit to the
continuous improvement of our global distribution capabilities and corporate center. We also
recognize our responsibility to be active participants in our local communities and the value that
comes from being a responsible corporate citizen.
Investment professionals, Royce & Associates
2 LEGG MASON 2011 ANNuAL R EPORT
LEGG MASON 2011 ANNuAL R EPORT 3
We have a culture that embraces innovation and empowerment
—to drive new ideas, new products and new investment
opportunities. That’s what drives our growth.
We believe that fostering a culture that embraces ownership and personal responsibility creates an
environment in which people can be their best. We embrace an entrepreneurial spirit rooted in a
clear and shared understanding of our underlying goals and empower our employees to move our
business forward through greater innovation and new ideas and opportunities.
Investment and sales professionals, Permal
4 LEGG MASON 2011 ANNuAL R EPORT
We are committed to our profession—to advancing our knowledge of
investment management through continuous learning. And to leading
the industry forward.
We encourage our employees to pursue continuous investment management learning and embrace curiosity and
the discovery of new information. We take pride in our work and constantly strive to develop, adapt and improve
ourselves through collaboration and the sharing of ideas. Every day, we are committed to fostering innovation and
leading the industry forward.
LEGG MASON 2011 ANNuAL R EPORT 5
We value collaboration and partnership within and
across our multi-manager business, and foster a diverse,
supportive environment.
We promote inclusion and participation in a team-focused environment. We seek and listen
to diverse inputs and respectfully challenge one another in order to attain the best overall
outcomes. We seek to leverage the capabilities of our affiliates, global distribution network
and corporate center by engaging in the process of strategic decision-making. Importantly, we
recognize that success often requires setting aside personal views or desires for the greater
good of the company and that through collaboration, we are able to achieve creative solutions.
Investment and compliance professionals,
ClearBridge and Legg Mason
6 LEGG MASON 2011 ANNuAL R EPORT
Our company was founded on certain fundamental values.
We operate from a position of integrity—and with a “no
chalk” principle. that means doing the right thing for our
clients and each other.
Our dedication to integrity and “no chalk” standard is a foundation of our past, current and future
success. Like an athlete competing on a playing field, our employees are expected to stay well
within the boundary lines of ethical behavior so that we never have “chalk on our shoes.” We
believe that sound corporate governance is essential and we are committed to holding ourselves
to high standards of conduct, including honesty and fairness in all aspects of our work.
LEGG MASON 2011 ANNuAL R EpORt 7
Mark R. Fetting
Chairman and Chief Executive Officer
Legg Mason, Inc.
Dear Fellow Stockholders: I am pleased to report that we made
marked progress in repositioning Legg Mason for future growth
this past fiscal year.
Legg Mason delivered strong results year over year,
with increases in revenues, net income, and
operating margin. Additionally, we experienced
notable improvements in investment performance,
significantly reduced our rate of long-term outflows
and repurchased 9% of shares outstanding since our
prior fiscal year ended March 31, 2010. When I wrote
to you last year, we had recently announced our
streamlined business model to significantly reduce
our cost structure and drive margin improvement
and profitability. Our streamlining efforts are well
underway and we enter fiscal 2012 with confidence
that, as projected, we will deliver between $130 and
$150 million in run rate cost savings to our
shareholders by March 31, 2012.
The u.S. and most major global stock markets
continued their rebound over the last year, with the
u.S. stock market rising to its highest level since
the middle of 2008 on improved earnings in the
corporate sector and rising investor confidence. We
see clear signs of stability and growth returning to
the global economy while continued fallout from
European sovereign debt exposures, geopolitical
risks, particularly in the Middle East, and concerns
about financial regulation continue to weigh on the
markets. As the Federal Reserve ends its bond
repurchase program in the u.S. this month, it will be
important for the private sector to begin investing
and hiring in earnest to support the jobs and
housing recoveries that have weighed on our
economy. While we believe that the global
economic recovery should pick up during the
remainder of 2011, more recent trends are indicating
that any recovery will remain gradual.
8 LEGG MASON 2011 ANNuAL R EPORT
Financial Highlights
(dollars in thousands, except per share amounts)
Years Ended March 31,
OPERATING RESuLTS
Operating revenues
Operating income (loss)
2011
2010
2009
2008
2007
$2,784,317
$2,634,879
$ 3,357,367 $ 4,634,086
$4,343,675
386,808
321,183
(669,180)
1,050,176
1,028,298
Income (loss) from continuing operations before income
tax provision (benefit) and noncontrolling interest
Net income (loss) attributable to Legg Mason, Inc.1
365,197
253,923
329,656
(3,188,197)
437,327
1,043,854
204,357
(1,967,918)
263,565
646,818
PER COMMON SHARE
Diluted income1
Adjusted income (loss) per diluted share2
Dividends declared
Book Value
FINANCIAL CONDITION
Total assets
Total stockholders’ equity
$
1.63
$
1.32 $
(13.99) $
1.83
$
4.48
2.83
0.20
38.41
2.45
0.12
35.94
(8.47)
0.96
31.87
6.11
0.96
48.15
5.86
0.81
45.99
$8,707,756
$8,622,632
$ 9,232,299 $11,830,352
$9,604,488
5,770,384
5,841,724
4,598,625
6,784,641
6,541,490
Fiscal Year Results and Highlights
Our Strategic Priorities and Progress
As of March 31, 2011, Legg Mason’s assets under
management were $677.6 billion, a decrease of
1% from $684.5 billion as of March 31, 2010. For
the fiscal year ended March 31, 2011, we recorded
operating revenues of $2.8 billion, up 6% from
$2.6 billion in fiscal 2010. Net income increased
24% to $253.9 million, or $1.63 per diluted share
for the same period, compared to $204.4 million,
or $1.32 per diluted share for the prior year. Our
adjusted income2 was $439.2 million, or $2.83 per
diluted share for fiscal year 2011, compared to
$381.3 million, or $2.45 per diluted share for the
prior year. The total return on Legg Mason’s shares
was 26.6% versus 17.0% for the SNL Asset Manager
Index for the fiscal year ended March 31, 2011.
Our operating margin, as adjusted2, increased to
23.2% for the twelve months ending March 31, 2011,
versus 20.7% for the same period a year ago.
Importantly, our advisory fee yield ended the fiscal
year at 36 basis points, up from 33 basis points a
year ago, reflective of a higher percentage of assets
in equities and alternatives and our success in
attracting higher fee-yielding mandates, particularly
in specialized fixed income mandates.
These results reflect clear progress and
improvements in our business and refined multi-
manager strategy. As we continue to deliver value
and solidify our position as a leading global asset
manager, we are guided by three strategic drivers of
growth that we believe will most effectively position
our franchise:
• First and foremost, delivering sustained investment
excellence over the long term. Each of our
independent investment managers strives to deliver
investment excellence, while meeting their clients’
objectives through continuous innovation and risk
management, and creating superb franchise
businesses of their own.
• Second, a corporate center that adds strategic value
including excellence in global retail distribution
focused on leveraging the unique capabilities of our
investment affiliates and market opportunities
where we have distribution relationships, across key
channels, markets and products.
• And third, achieving a growth-oriented portfolio
of affiliates. We seek to invest in strategic growth
areas to enhance our products and distribution
through lift-outs and bolt-ons or acquisition
1 Fiscal 2009 includes losses related to the elimination of exposure to Structured Investment Vehicles, net of income tax benefits and compensation
related adjustments, of $1,376,579 or $9.79 per share and impairment charges related to goodwill and intangible assets, net of income tax benefits, of
$863,352 or $6.14 per share.
2 Adjusted income, adjusted income (loss) per diluted share and operating margin, as adjusted represent performance measures that are based on a
methodology other than generally accepted accounting principles (“non-GAAP”). For more information regarding these non-GAAP financial measures,
see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report and the corporate website at
www.leggmason.com under the “Investor Relations—Annual Reports” section.
LEGG MASON 2011 ANNuAL R EPORT 9
Legg Mason raised a total of $4.1 billion in new
product launches during the fiscal year which helped
drive a 43% reduction in long-term net outflows.
We experienced positive flows in alternative assets
during each quarter this fiscal year. Our equity
outflows declined by 47% from the prior fiscal year
and our fixed income outflows declined by 42% for
the same period, but we know that we must do
better. Our affiliates must now work to maintain their
improved investment results and improve in areas in
which they are underperforming.
Our Americas and International retail distribution
platform is now centralized under the global
leadership of Joe Sullivan. Gross sales generated
by our Americas distribution group increased
by 7% to $36 billion during fiscal year 2011. In
our International business, we continue to build
momentum across our key markets and product
areas, with gross sales up 74% and net flows up
140% from the prior fiscal year. Our International
distribution group has posted nine consecutive
quarters of long-term net inflows through March
2011. With meaningful sales improvements in both
Americas and International, we are focusing on
better positioning our teams to capture the
unique capabilities of our affiliates, our extensive
intermediary relationships, and an integrated
approach to product development. We remain
hard at work and, importantly, believe that the
infrastructure we have in place is capable of
supporting substantially greater distribution volume.
Legg Mason Japan hosted a seminar in Tokyo for fund distributors
and local asset management companies in September 2010 and
in collaboration with the Brazilian National Treasury. Additionally,
Legg Mason Japan received an award for “Best Sales, Client
Service and Marketing Support for fiscal year 2010—Special
Award” from Ma-Do, an industry publication focused on the
marketing and retail distribution of mutual funds in Japan.
In February 2011, Western Asset celebrated the one year anniversary
of the launch of the Western Asset Mortgage Defined Opportunity
Fund (NYSE: DMO). During calendar year 2010, Legg Mason was the
number one issuer of closed-end funds with $1.9 billion in assets
raised, according to the Closed-End Fund Association and SEC filings.
opportunities. As we focus on ways to drive
growth, we remain committed to maintaining a
strong balance sheet and returning capital to our
shareholders, as appropriate.
In December 2010, we completed the realignment of
our senior management team which includes Ron
Dewhurst, Head of Global Investment Managers,
Tom Lemke, General Counsel, Pete Nachtwey, Chief
Financial Officer, Jeff Nattans, Head of M&A and
Business Development, and Joe Sullivan, Head of
Global Distribution. I believe that this proven and
experienced team best positions us as we take
advantage of opportunities in 2011 and beyond.
Importantly, we are committed to the continuous
improvement of our corporate center and a key
element of our strategic priorities is to remain
disciplined in monitoring our corporate efficiency
and effectiveness.
Our Affiliates and Distribution Platform at Work
We remain highly encouraged by the improving
trends in long-term flows, reflecting continued
improved investment performance. The percentage of
our long-term u.S. mutual fund assets outperforming
their Lipper category average was 56% for the 1-year,
74% for the 3-year, 70% for the 5-year and 67% for the
10-year periods ending March 31, 2011. Investment
performance, particularly at Western Asset, our
largest affiliate, improved meaningfully during the
fiscal year. Over 75% of Western Asset’s marketed
composite assets and over 70% of our firmwide
marketed composite assets, including liquidity,
outperformed their respective benchmarks for the
1-, 3-, 5-, and 10-year periods through March 2011.
Additionally, Permal, Royce & Associates, and
Brandywine Global experienced continued strong
long-term performance.
10 LEGG MASON 2011 ANNuAL R EPORT
• Legg Mason Japan received an award for “Best
Sales, Client Service and Marketing Support for
fiscal year 2010—Special Award” from Ma-Do, an
industry publication focused on the marketing and
retail distribution of mutual funds in Japan.
Balance Sheet Strength and Flexibility
From a balance sheet perspective, we continue
to execute our capital management strategy
outlined at the beginning of last year. During
fiscal year 2011, we repurchased 9% or 14.6 million
of shares outstanding at March 31, 2010, while
maintaining a strong balance sheet with stable and
continued cash generation. We ended the fiscal
year with $1.4 billion in cash and approximately
$1 billion in available cash. We recently announced
a 33% increase in our quarterly cash dividend to
$0.08, which is now double the level of a year ago
and we expect to repurchase up to $400 million in
shares during this fiscal year, subject to market
conditions. We will continue to take a conservative
approach to capital management, with a strategic
desire to maintain flexibility to invest in top line
growth opportunities.
David Hoffman
Steve Smith
Brandywine Global was named Bond Manager of the Year for 2010
by Money Management Letter for its global fixed income strategies
as part of the 10th annual Public Pension Fund Awards for
Excellence. The firm’s global fixed income team is led by portfolio
managers David Hoffman and Steve Smith.
Among the individual accolades received and
achievements by our firm during the year are
the following:
• Western Asset was named “KIC Best Long-Term
Manager 2010” by the Korea Investment Corporation
(KIC) in its inaugural KIC External Fund Manager Award.
Western Asset was chosen by the sovereign wealth
fund for its “exceptional performance, consistency and
dedicated client service over a three-year period”;
• A Permal diversified multi-manager fixed income
Positioning Ourselves for Growth
Having solidified our strategic growth objectives
and demonstrated good progress during fiscal 2011,
we are focused in fiscal 2012 on positioning
ourselves for future growth across asset classes,
geographies, channels, and products.
fund won InvestHedge’s 10-year performance award
for funds with assets greater than $1 billion for the
period ended December 31, 2010. Funds managed
by Permal were also shortlisted in five InvestHedge
award categories;
• Brandywine Global was named Bond Manager of
the Year for 2010 by Money Management Letter for
its global fixed income strategies;
• Three Royce & Associates funds and three Western
Asset funds received 2011 Lipper Awards based on
consistently strong risk-adjusted performance
relative to their peers;
• In the annual Barron’s ranking of best mutual fund
families, Legg Mason ranked #8 out of 57 overall,
#4 in the mixed equity category and #2 in the
taxable bond category for the one-year ending
December 31, 2010;
• Legg Mason was the number one issuer of closed-
end funds for 2010 with $1.9 billion in assets raised,
a 22% market share3; and
- Legg Mason and ClearBridge Advisors raised
$1.3 billion for the ClearBridge Energy MLP
Fund Inc.
- Legg Mason launched the Western Asset High
Yield Defined Opportunity Closed-End Fund, with
a total raise of $444 million—the second highest
raise to date for Legg Mason.
Permal, led by Isaac Souede, is one of the world’s largest and oldest
fund-of-hedge-fund managers, providing investment opportunities in
directional and absolute return strategies across global financial
markets. The company was recently profiled in InvestHedge for its
specialized services and product innovation.
3 Source: Closed-End Fund Association and SEC filings.
LEGG MASON 2011 ANNuAL R EPORT 11
Hersh Cohen
Bill Miller
Chuck Royce
Steve Walsh
Earlier this year, our global distribution team hosted an exclusive webcast for over 675 clients with the theme “Striking the Right
Balance.” The webcast featured the chief investment officers from four of our key affiliates who shared their market perspectives
and insights: ClearBridge Advisors, Legg Mason Capital Management, Royce & Associates and Western Asset.
We intend to co-invest in our affiliates in organic
growth; our seed capital balance as of March 31, 2011
stands at nearly $430 million with $100 million of seed
capital invested for future growth during this fiscal
year. We currently have in development additional
closed-end fund launches across multiple affiliates
including an energy master limited partnership fund
that, subject to regulatory approvals, we believe will
likely launch in the June 2011 quarter. Longer-term
initiatives include further developing a pipeline of
product ideas in the fixed income, equity and
alternative asset classes. Our dedicated distribution
team is also gaining momentum towards diversifying
our distribution partners and channels, adding to our
growth expectations.
An important element of our business model is the
addition of investment capabilities through lift-out
and bolt-on or acquisition opportunities. To date, we
have made additions to our investment teams at
several affiliates and anticipate these types of
additive transactions to continue. We are committed
to achieving a growth-oriented portfolio of quality
affiliates, with an emphasis on bottom line earnings,
and with products and in markets where we see the
strongest long-term growth opportunities.
Our priorities in fiscal year 2012 are clear: supporting
our affiliates in delivering on our fundamental goal of
sustained investment excellence; completing our
streamlining on time and realizing the projected
cost savings; and exploiting growth opportunities for
our managers through our global distribution platform,
while deploying capital smartly for our shareholders.
contributions to our firm: Ernest Kiehne and Kenneth
Battye. Ernie joined Legg & Co, a predecessor to
Legg Mason, as director of research in 1967 and
went on to become a founding manager of Legg
Mason’s first equity mutual fund. He worked for
Legg Mason until his passing and will be most
remembered for his eternal optimism. Ken joined
Legg & Co. in 1947, beginning a career with our
firm that spanned 55 years, during which his
compassion and commitment were unwavering.
The contributions of both gentlemen left an indelible
mark on Legg Mason and continue to guide us in
the pursuit of our vision and values.
As Legg Mason continues to evolve and build upon
its leading position in global asset management, our
focus on the long term remains the same. We enter
our new fiscal year energized and encouraged by
the progress we have made and our opportunity to
capture market share. Our firm has undergone many
changes over the last three years that have affected
our staff personally, but the constant that remains is
their dedication and commitment to getting the job
done. The road ahead will undoubtedly bring a new
set of challenges as the global economy continues
on its path towards recovery, but we believe in our
ability to create value over the long term. And all
of us at Legg Mason remain determined to further
improve our results to clients and shareholders and
grow our global franchise.
Appreciation and Closing
In 2010, we were saddened by the loss of two
inspirational leaders who made significant
Mark R. Fetting
Chairman and Chief Executive Officer
June 8, 2011
12 LEGG MASON 2011 ANNuAL R EPORT
London
Frankfurt
Warsaw
Luxembourg
paris
Madrid
Milan
Boston
Stamford
New York
philadelphia
Wilmington
toronto
Kitchener
Montreal
San Francisco
Cincinnati
pasadena
Naples
Miami
Nassau
Easton
Baltimore
São paulo
Santiago
tokyo
Dubai
taipei
Hong Kong
Singapore
Sydney
Melbourne
Legg Mason unites some of the industry’s leading asset managers
under a single banner. With 485 investment professionals and
recognized local, regional and global portfolio management
expertise, we leverage our dedicated global distribution teams to
deliver investment solutions to our clients on the ground, around the
world. As of March 2011, Legg Mason managed over $234 billion or
35% in assets from clients domiciled outside of the united States.
Our Global Office Locations:
Bartlett & Co.
Cincinnati
Batterymarch Financial
Management
Boston
Brandywine Global
Investment Management
Philadelphia, London,
San Francisco, Singapore
ClearBridge Advisors
New York, San Francisco,
Wilmington
Legg Mason
Capital Management
Baltimore
Legg Mason Global
Equities Group
Hong Kong, London, Melbourne,
New York, Warsaw
Legg Mason Investment
Counsel & Trust
Baltimore, Cincinnati, Easton,
New York, Philadelphia
Legg Mason Global
Asset Allocation
New York, Stamford
Legg Mason
Global Distribution
Baltimore, Frankfurt,
Hong Kong, Kitchener,
London, Luxembourg,
Madrid, Melbourne, Miami,
Milan, Montreal, New York,
Paris, Santiago, Singapore,
Stamford, Sydney, Taipei,
Tokyo, Toronto, Warsaw
Legg Mason
Investor Services
Baltimore, New York,
Stamford
Permal Group
London, New York, Boston,
Dubai, Hong Kong, Nassau,
Paris, Singapore, Tokyo
Private Capital
Management
Naples, FL
Royce & Associates
New York
Western Asset
Management
Pasadena, Hong Kong,
London, Melbourne, New York,
São Paulo, Singapore, Tokyo
LEGG MASON 2011 ANNuAL R EPORT 13
“ Our mission…To remain a leader in diversified fixed income investment management
with integrated global operations, exercising uncompromising standards of
excellence and ethics in all aspects of our business.”
Western Asset is one of the world’s largest
and leading managers of fixed income
investments, with over $455 billion of assets
under management. With a combined staff of
910 employees, Western Asset offers a broad
range of fixed income investment services
representing a global array of currencies,
investment strategies and markets. Western
Asset has 155 products, managed globally, in
16 currencies. Clients domiciled outside of the
united States represented 39% of Western Asset’s
total assets under management at year end.
Over the past 13 years, under the leadership of CEO
Jim Hirschmann, Western Asset has successfully
executed its strategic plan that has guided the
company for many years and remains the model
for growth today:
• Be global, with a global platform and operations;
• Be seamlessly integrated in the way it operates
its business;
• Continue diversifying its product line, with the
ultimate aim of providing any fixed income solution
that its clients may require, in any currency; and
• Achieve operational leverage within its
organization through sizable, ongoing investments
in technology and key support functions, as a way
to support and protect the ability of its investment
professionals to focus on their jobs of managing
their clients’ money.
New York
Investment Professionals: 25
Products: 22
London
Investment Professionals: 16
Products: 37
Tokyo
Investment Professionals: 8
Products: 10
Pasadena
Investment Professionals: 54
Products: 35
Hong Kong
Singapore
Investment Professionals: 4
Products: 13
Melbourne
Investment Professionals: 4
Products: 6
São Paulo
Investment Professionals: 15
Products: 32
14 LEGG MASON 2011 ANNuAL R EPORT
The Permal Group is one of the oldest and largest
fund-of-hedge-fund managers in the world, with
over $20 billion in assets under management. The
company offers a variety of investment programs
covering different geographic regions, investment
strategies and risk/return objectives. Permal’s
products also include both directional and
absolute return strategies.
Permal’s principal asset management offices are in
London and New York, with offices in Dubai, Hong
Kong, Nassau, Paris, Singapore, and Tokyo
providing client service and investment research
support, and an office in Boston housing its private
equity group. Through its worldwide network of
distributors, which includes many of the world’s
largest banks and securities firms, Permal has
developed an increasingly institutional and global
client base.
Permal is well recognized for its strong, and well-
established record of performance. Permal’s more
than 35 years of experience with hedge funds, its
strong capabilities in fundamental analysis and its
highly sophisticated analytic and risk management
tools have enabled it to structure and manage highly
diversified portfolios of specialized managers and
distinct investment styles that have achieved a solid
record of performance. Permal’s assets under
management increased by 19% during the year due
to continuing strong performance and net client
inflows. Ten of Permal’s 14 multimanager fund
offerings are rated by Standard & Poor’s, of which
one is AAA-rated, 7 are AA-rated and 2 are A-rated.
Multi-Manager Funds' Assets by Strategy
Relative Value Arbitrage—2%
Equity Long—3%
Event Driven—11%
Global Long/Short—12%
Cash/Other—7%
Natural Resources—6%
Global Macro—39%
Fixed Income—20%
LEGG MASON 2011 ANNuAL R EPORT 15
For more than 35 years, Royce & Associates has
utilized a disciplined value approach to investing in
smaller-cap companies. The company, which was
founded by president and co-chief investment officer
Chuck Royce, is particularly well-known for its family
of mutual funds, The Royce Funds. unlike many
mutual fund groups with broad product offerings,
Royce has chosen to concentrate on smaller company
investing and provides investors with a range of
options to take full advantage of this large and
diverse sector.
Royce’s investment strategy focuses on achieving
above-average, long-term results. The investment
team uses a bottom-up, value-oriented approach to
investing, seeking companies with strong balance
sheets and above-average returns on invested capital
that are trading at substantial discounts to their intrinsic
value. Although actual stock selection approaches
employed by individual fund managers may vary,
portfolio companies are selected primarily from the
smaller stock universe, defined as those with market
caps up to $5 billion. Royce pays close attention to
risk and strives to maintain consistency and discipline,
regardless of market movements and trends.
Royce & Associates, headquartered in New York,
has an investment staff of 34 professionals that
includes 17 portfolio managers, each with over
15 years of experience. The firm manages
approximately $44 billion of assets through
30 open-end mutual funds, two variable annuity
funds and three closed-end funds, as well as
institutional accounts and limited partnerships.
In addition, Royce manages Legg Mason-sponsored
funds offered outside the united States, utilizing
our global fund distribution platform to expand their
presence in targeted markets.
Current Portfolio Characteristics
Portfolio Composition*
CATeGOrY
Fund
Market Cap
Breakdown
Non-u.S.
Securitites
Portfolio
Approach
Volatility
COre
Royce Pennsylvania Mutual Fund
Royce Heritage Fund
COre + DiviDeND
Royce Total Return Fund
Royce Dividend Value Fund
FOCuSeD
Royce Premier Fund
Royce Special Equity Fund
Royce Value Fund
Royce 100 Fund
OPPOrTuNiSTiC THeMeS
Royce Low-Priced Stock Fund
Royce Opportunity Fund
Royce Value Plus Fund
MiCrO-CAP
Royce Micro-Cap Fund
Royce Discovery Fund
MiD-CAP
Royce SMid-Cap Value Fund
Royce Mid-Cap Fund**
GLObAL/iNTerNATiONAL
Royce Global Value Fund
Royce International Smaller-Companies Fund**
Royce European Smaller-Companies Fund
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
35%
35%
35%
35%
35%
35%
35%
35%
35%
35%
35%
35%
35%
35%
35%
100%
100%
100%
Diversified
Diversified
Diversified
Diversified
Limited
Limited
Limited
Limited
Diversified
Diversified
Diversified
Diversified
Diversified
Limited
Limited
Limited
Diversified
Limited
Low
High
Low
Low
Low
Low
High
Moderate
High
High
High
Moderate
Moderate
High
—
High
—
High
* Source: FactSet
** The Fund does not have the three years of history required for calculating a volatility score.
Market Cap Breakdown:
Micro-Cap (up to $500 million)
Small-Cap (between $500 million and $2.5 billion)
Mid-Cap (between $2.5 billion and $15 billion)
Large-Cap (above $15 billion)
16 LEGG MASON 2011 ANNuAL R EPORT
ClearBridge, our largest equity manager and our
second-largest manager overall, manages nearly
$58 billion in assets. ClearBridge’s strategies are
offered through a number of investment vehicles
including mutual funds, separately managed
accounts, commingled funds and limited
partnerships. Its diversified portfolio of products is
focused on four relevant themes: income solutions,
high alpha, low volatility and global equities.
The ClearBridge platform offers a variety of
investment styles, from small-cap value to
large-cap growth, all utilizing a bottom-up,
fundamental approach to security selection that
is primarily research driven with a focus on
companies with solid economic returns relative
to their risk-adjusted valuations. In order to
promote cross-fertilization, a collaborative
approach exists between style-based portfolio
managers and the research team. The distinct
investment philosophies and approaches of
ClearBridge’s portfolio managers is united by
a common, fundamentally-focused research
platform with an emphasis on business models
that they favor and can define, strong balance
sheets and valuation.
The firm’s portfolio managers have strong track
records in equity investing, with an average of
23 years of investment industry experience.
ClearBridge currently has 130 employees,
including 51 investment professionals, all of
whom are based in the united States, in New
York and San Francisco.
Global Currents, a Wilmington-based manager of
international and global equity portfolios with
assets under management of over $3 billion,
operates as a division of ClearBridge.
Assets by Strategy
Mid Cap Core—2%
All Cap Value—15%
Multi Cap Growth—25%
International/Global—7%
Specialty/Other—4%
Small Cap Value—1%
Large Cap Core—25%
Large Cap Growth—11%
Large Cap Value—8%
Small Cap Growth—2%
LEGG MASON 2011 ANNuAL R EPORT 17
“ Batterymarch's mission is to provide consistent long-term value by exceeding
client expectations in both performance and service. Our goal is to foster a culture
that rewards creative, collaborative thinking and to leverage new technology to
maximize the effectiveness of our entire organization.”
Batterymarch, a pioneer in quantitative equity
management, was one of the first u.S.-based
managers to invest in international and emerging
markets. Established in 1969, the Boston-based
firm utilizes an adaptive, bottom-up process that
combines the wisdom and experience of
fundamental investors with the power and
efficiency of quantitative tools.
As a global equity manager of both institutional
separate accounts and subadvised funds,
Batterymarch invests in approximately 50
countries, with products that span the full range
of equity asset classes. The company customizes
its investment strategies to capture the intricacies
of individual regions, countries and sectors.
All of Batterymarch’s investment strategies are
collaborative and team driven, and incorporate
rigorous stock selection, effective risk control
and cost-efficient trading. Batterymarch has
91 employees, including 27 investment
professionals. Its clients represent a broad
spectrum of investors, including corporate
pension plans, public funds, foundations and
endowments, Taft-Hartley plans and investment
companies. More than half of Batterymarch’s
nearly $24 billion in assets under management
represent global, international or emerging
markets accounts, and over 35% is managed for
clients domiciled outside the united States.
Range of Investment Strategies
Developed Markets equities
• Global
• Regional
• US Small Cap
• Global Unconstrained
• Global ex-US Market Neutral
• US Style-Based
• International
• US Large Cap
• US Market Neutral
• International Small Cap
• US MidCap
emerging Markets equities
• Global
• Asia ex-Japan
• Global Smaller Companies
18 LEGG MASON 2011 ANNuAL R EPORT
Legg Mason Capital Management (“LMCM”) was
established in 1982 with the launch of its first
equity mutual fund, Legg Mason Value Trust. Since
then, LMCM has added additional mandates, as
well as mutual fund and institutional separate
account clients from around the globe. With over
$15 billion in assets under management, 22% is
managed on behalf of non-u.S. domiciled clients.
The firm specializes in long-term, valuation-based
investing with a focus on investment process,
first and foremost. While LMCM’s intrinsic value
investment philosophy has remained constant,
the team continuously evaluates and improves the
investment process to adapt to changing markets
and gain a competitive advantage. This focus on
process, rather than short-term outcomes, has led
LMCM to take a multi-disciplinary approach to
understanding businesses and markets.
Independence and diversity of thought are critical
inputs to LMCM’s investment process. In order to
gain a competitive advantage, LMCM embraces
innovative and conceptual models that lie beyond
the world of finance in areas like complex systems,
science, technology and psychology, and apply
them to its analysis of investment opportunities
and risks. Additionally, LMCM strives to foster a
culture that is conducive to rational, long-term,
evidence-based decision-making. At the heart of
LMCM is a cohesive team of nearly 30 investment
professionals with diverse talents and
perspectives, who apply the same investment
philosophy and disciplined investment process
across its multiple equity mandates.
Retail and
Institutional Assets
Components of
Institutional Assets
Institutional—62%
Retail—38%
Sub-Advised
Accounts—45%
Separate
Accounts—33%
Institutional
Shares—22%
LEGG MASON 2011 ANNuAL R EPORT 19
Since its founding in 1986, Brandywine Global
has pursued a singular investment approach—
value investing. Its assets under management
today include an array of fixed income, equity,
and balanced portfolios that invest in u.S.,
international, and global markets on behalf of
over 375 institutional clients.
With approximately $32 billion in assets under
management, Brandywine Global’s growth has
primarily been fueled by an increasing presence
in international markets, with 36% of assets
managed on behalf of non-u.S. domiciled clients.
Its institutional client base includes public funds,
corporations, educational institutions, Taft-
Hartley plans, health care organizations, and
high-net-worth individuals.
Brandywine Global has approximately
150 employees, including over 40 investment
professionals, located in Philadelphia,
San Francisco, London, and Singapore.
Brandywine Global works consistently to
strengthen its fundamental and quantitative
research capabilities and broaden their application
to new securities and new markets. The company’s
mission is to deliver superior investment solutions
and performance to its clients by listening to its
clients, hiring, supporting and retaining the
industry’s best people, encouraging independent
thinking by sponsoring an open marketplace for
ideas, promoting a culture of integrity and
partnership, and finding value, throughout the
world, which others have not yet recognized.
Assets by Strategy
Assets by Client Type
Diversified
Equity—10%
Large Cap
Equity—15%
Absolute Value—4%
Taft-Hartley—7%
Individual Investors—2%
Subadvisory —28%
Balanced—1%
Fixed Income—70%
Corporate/
Operating—7%
Endowment/
Foundation
—8%
Government
—11%
Employee
Benefit—25%
Public Retirement—12%
20 LEGG MASON 2011 ANNuAL R EPORT
the Legg Mason Global Equities Group is a collection of specialty firms dedicated to the global equities
asset class. the group includes Esemplia Emerging Markets, Legg Mason Australian Equities, and
Legg Mason managers largely dedicated to local equities based in Hong Kong and poland. As with all
of our managers, each affiliate operates with investment autonomy, pursuing its own unique investment
philosophy and process and maintaining its own investment culture in order to create sustainable value
for their clients. And collectively, they benefit from the global scale of Legg Mason to expand their reach
and access to new client opportunities.
Legg Mason Investment Counsel provides highly tailored investment and trust strategies for affluent
individuals, family groups and institutions. through an iterative and collaborative approach with its
clients, the firm focuses on understanding goals and needs before building highly individualized
strategies. Integral to its core investment capabilities, the firm has specializations in trust services, socially
responsive investing, family office services, estate and tax planning and philanthropy to help clients
achieve their financial goals. the firm operates from offices in Baltimore, where it is headquartered, as
well as Cincinnati, Easton, New York and philadelphia. Legg Mason Investment Counsel's dedicated team
of 18 portfolio managers average 26 years of experience and its trust team 18 years of experience. the
firm also employs 14 proprietary analysts whose work is for the benefit of the firm's clients only. Overall,
the average client relationship approaches 20 years.
The foregoing information about Legg Mason, Inc. is designed to enhance stockholders' understanding of the company, which offers investment management
products and services only through its various subsidiaries. Any information about these products and services is not intended to be an offer or solicitation to
investors. All investment products or services are only offered and managed by one or more of the company's subsidiaries, and only such subsidiaries, or
persons authorized by such subsidiaries, may make offers or solicitations to investors regarding such products or services in accordance with applicable policies
and requirements, including eligibility and other criteria.
LEGG MASON 2011 ANNuAL R EpORt 21
Board of Directors
Standing, left to right:
Robert E. Angelica
Private Investor; Former Chairman and CEO,
AT&T Investment Management Corporation
Nicholas J. St. George
Private Investor
Kurt L. Schmoke
Dean, School of Law at Howard university;
Former Mayor of Baltimore
Cheryl Gordon Krongard
Private Investor; Former CEO, Rothschild Asset Management
Barry W. Huff
Retired Vice Chairman, Deloitte
(Chairman of Risk Committee)
Seated, left to right:
John E. Koerner III
Managing Member, Koerner Capital, LLC
John T. Cahill
Industrial Partner, Ripplewood Holdings, LLC
(Chairman of Finance Committee)
Dennis R. Beresford
Professor, university of Georgia; Former Chairman of Financial
Accounting Standards Board (Chairman of Audit Committee)
Harold L. Adams
Chairman Emeritus, RTKL Associates, Inc.
(Chairman of Compensation Committee)
Mark R. Fetting
Chairman and Chief Executive Officer, Legg Mason, Inc.
W. Allen Reed
Private Investor; Retired CEO, GM Asset Management
Corporation (Lead Independent Director and Chairman
of Nominating & Corporate Governance Committee)
Nelson Peltz
Chief Executive Officer and Founding Partner,
Trian Fund Management, L.P.
Margaret Milner Richardson
Private Consultant and Investor; Former u.S.
Commissioner of Internal Revenue
Scott C. Nuttall
Member, Kohlberg Kravis Roberts & Co.
22 LEGG MASON 2011 ANNuAL R EPORT
Selected Financial Data
(Dollars in thousands, except per share amounts or unless otherwise noted)
OPERATING RESULTS
Operating revenues
Operating expenses, excluding impairment
Impairment of goodwill and intangible assets
Operating income (loss)
Other non-operating income (expense)
Other income (expense) of consolidated
investment vehicles
Fund support
Income (loss) from continuing operations before
income tax provision (benefit)
Income tax provision (benefit)
Income (loss) from continuing operations
Gain on sale of discontinued operations, net of tax(1)
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interests
Net income (loss) attributable to Legg Mason, Inc.
Net income (loss) from continuing operations
2011
2010
2009
2008
2007
Years Ended March 31,
$2,784,317
2,397,509
—
386,808
(23,315)
$2,634,879
2,313,696
—
321,183
(32,027)
$ 3,357,367
2,718,577
1,307,970
(669,180)
(243,577)
$ 4,634,086
3,432,910
151,000
1,050,176
(5,573)
$4,343,675
3,315,377
—
1,028,298
15,556
1,704
—
17,329
23,171
7,796
(2,283,236)
—
(607,276)
—
—
365,197
119,434
245,763
—
245,763
329,656
118,676
210,980
—
210,980
(3,188,197)
(1,223,203)
(1,964,994)
—
(1,964,994)
437,327
173,496
263,831
—
263,831
1,043,854
397,612
646,242
572
646,814
(8,160)
$ 253,923
6,623
$ 204,357
2,924
$(1,967,918)
266
263,565
$
(4)
$ 646,818
attributable to Legg Mason, Inc.
$ 253,923
$ 204,357
$(1,967,918)
$
263,565
$ 646,246
PER SHARE
Net income (loss) per share attributable to
Legg Mason, Inc. common shareholders:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted(2)
Dividends declared
BALANCE SHEET
total assets
Long-term debt
total stockholders’ equity
FINANCIAL RATIOS AND OTHER DATA
Adjusted income (loss) per diluted share(3)
Operating margin
Operating margin, as adjusted(4)
total debt to total capital(5)
Assets under management (in millions)
Full-time employees
$
$
$
1.63
1.63
155,321
155,484
.20
$
$
$
1.33
1.32
153,715
155,362
.12
$
$
$
(13.99)
(13.99)
$
$
1.86
1.83
$
$
4.58
4.48
140,669
140,669
.96
142,018
143,976
.96
141,112
144,386
.81
$
$
$8,707,756
1,201,868
5,770,384
$8,622,632
1,170,334
5,841,724
$ 9,232,299
2,740,190
4,598,625
$11,830,352
1,992,231
6,784,641
$9,604,488
1,112,624
6,541,490
$
$
2.83
13.9%
23.2%
20.1%
$
2.45
12.2%
20.7%
19.6%
(8.47)
(19.9)%
23.9%
39.4%
$
6.11
$
5.86
22.7%
35.5%
26.9%
23.7%
33.1%
14.5%
$ 677,646
3,395
$ 684,549
3,550
$
632,404
3,890
$
950,122
4,220
$ 968,510
4,030
(1) All attributable to Legg Mason, Inc.
(2) Basic shares and diluted shares are the same for periods with a net loss.
(3) Adjusted Income (Loss) (formerly “Cash Income, As Adjusted”) is a non-GAAp performance measure. We define Adjusted Income (Loss) as Net Income (Loss) from Continuing
Operations Attributable to Legg Mason, Inc., plus amortization and deferred taxes related to intangible assets and goodwill, and imputed interest and tax benefits on contingent con-
vertible 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). See Supplemental Non-GAAp Information in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(4) Operating margin, as adjusted, is a non-GAAp performance measure we calculate 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.” See Supplemental Non-GAAp Information in
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(5) Calculated based on total debt as a percentage of total capital (total stockholders’ equity plus total debt) as of March 31.
LEGG MASON 2011 ANNuAL R EpORt 23
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
EXECUTIVE OVERVIEW
Legg Mason, Inc., a holding company, with its subsid-
iaries (which collectively comprise “Legg Mason”) is
a global asset management firm. Acting through our
subsidiaries, we provide investment management and
related services to institutional and individual clients,
company-sponsored mutual funds and other invest-
ment vehicles. We offer these products and services
directly and through various financial intermediaries.
We have operations principally in the united States of
America and the united Kingdom and also have offices
in Australia, Bahamas, Brazil, Canada, Chile, China,
Dubai, France, Germany, Italy, Japan, Luxembourg,
poland, Singapore, Spain and taiwan.
We currently operate in one reportable business seg-
ment, Asset Management, and manage our business
in two divisions or operating segments, Americas and
International, which are primarily based on the geo-
graphic location of the advisor or the domicile of fund
families we manage. the Americas division consists of
our u.S.-domiciled fund families, the separate account
businesses of our u.S.-based investment affiliates and
the domestic distribution organization. Similarly, the
International Division consists of our fund complexes,
distribution teams and investment affiliates located
outside the u.S. In December 2010, we announced
a realignment of our executive management team
which, among other things, will eliminate the previous
separation of the Americas and International divisions
into one Global Asset Management business during
fiscal 2012. We believe this new structure will allow us
to function as a global organization with a single pur-
pose and allow us to focus on future growth opportu-
nities. As of March 31, 2011, there has been no change
to the internal executive management reporting and
we continued to operate in one reportable business
segment, Asset Management, with two divisions,
Americas and International.
Our operating revenues primarily consist of invest-
ment advisory fees, from separate accounts and funds,
and distribution and service fees. Investment advisory
fees are generally calculated as a percentage of the
assets of the investment portfolios that we manage.
In addition, performance fees may be earned under
certain investment advisory contracts for exceeding
performance benchmarks. Distribution and service
fees are fees received for distributing investment
products and services or for providing other support
services to investment portfolios, and are gener-
ally calculated as a percentage of the assets in an
investment portfolio or as a percentage of new assets
added to an investment portfolio. Our revenues, there-
fore, are dependent upon the level of our assets under
management, and thus are affected by factors such as
securities market conditions, our ability to attract and
maintain assets under management and key invest-
ment personnel, and investment performance. Our
assets under management primarily vary from period
to period due to inflows and outflows of client assets
and market performance. Client decisions to increase
or decrease their assets under our management, and
decisions by potential clients to utilize our services,
may be based on one or more of a number of factors.
these factors include our reputation in the market-
place, the investment performance, both absolute and
relative to benchmarks or competitive products, of
our products and services, the fees we charge for our
investment services, the client or potential client’s situ-
ation, including investment objectives, liquidity needs,
investment horizon and amount of assets managed,
our relationships with distributors and the external
economic environment, including market conditions.
the fees that we charge for our investment services
vary based upon factors such as the type of underly-
ing investment product, the amount of assets under
management, and the type of services (and invest-
ment objectives) that are provided. Fees charged
for equity asset management services are generally
higher than fees charged for fixed income and liquid-
ity asset management services. Accordingly, our reve-
nues will be affected by the composition of our assets
under management. In addition, in the ordinary course
of our business, we may reduce or waive investment
management fees, or limit total expenses, on certain
products or services for particular time periods to
manage fund expenses, or for other reasons, and to
help retain or increase managed assets. under reve-
nue sharing agreements, certain of our affiliates retain
different percentages of revenues to cover their costs,
including compensation. As such, our Net income
attributable to Legg Mason, Inc., operating margin and
compensation as a percentage of operating revenues
are impacted based on which affiliates generate our
revenues, and a change in assets under management
at one subsidiary can have a dramatically different
effect on our revenues and earnings than an equal
change at another subsidiary. In addition, from time
to time we may agree to changes in revenue sharing
agreements and other arrangements with our asset
management personnel, which may impact our com-
pensation expenses and profitability.
24 LEGG MASON 2011 ANNuAL R EpORt
the most significant component of our cost structure
is employee compensation and benefits, of which a
majority is variable in nature and includes incentive
compensation that is primarily based upon revenue
levels and profits. the next largest component of our
cost structure is distribution and servicing fees, which
are primarily fees paid to third-party distributors for
selling our asset management products and services
and are largely variable in nature. Certain other oper-
ating costs are fixed in nature, such as occupancy,
depreciation and amortization, and fixed contract
commitments for market data, communication and
technology services, and usually do not decline with
reduced levels of business activity or, conversely, usu-
ally do not rise proportionately with increased busi-
ness activity.
Our financial position and results of operations are
materially affected by the overall trends and condi-
tions of the financial markets, particularly in the
united States, but increasingly in the other countries
in which we operate. Results of any individual period
should not be considered representative of future
results. Our profitability is sensitive to a variety of
factors, including the amount and composition of
our assets under management, and the volatility and
general level of securities prices and interest rates,
among other things. Sustained periods of unfavorable
market conditions are likely to affect our profitability
adversely. In addition, the diversification of services
and products offered, investment performance,
access to distribution channels, reputation in the
market, attracting and retaining key employees and
client relations are significant factors in determining
whether we are successful in attracting and retaining
clients. the economic downturn of fiscal years 2008
and 2009 contributed to a significant contraction in
our business. We have experienced improvement over
the past two years, although we have not recovered to
pre-downturn levels.
the financial services business in which we are
engaged is extremely competitive. Our competition
includes numerous global, national, regional and local
asset management firms, broker-dealers and commer-
cial banks. the industry has been impacted by contin-
ued economic uncertainty, and in prior years by the
consolidation of financial services firms through merg-
ers and acquisitions.
the industry in which we operate is also subject to
extensive regulation under federal, state, and foreign
laws. Like most firms, we have been impacted by the
regulatory and legislative changes. Responding to these
changes has required, and will continue to require, us to
incur costs that continue to impact our profitability.
All references to fiscal 2011, 2010 or 2009 refer to our
fiscal year ended March 31 of that year. terms such as
“we,” “us,” “our,” and “Company” refer to Legg Mason.
BUSINESS ENVIRONMENT AND
RESULTS OF OPERATIONS
the financial environment globally and in the united
States continued to rebound during fiscal 2011, but
challenging conditions persisted throughout most of
our fiscal year due to uncertainties surrounding the
strength of the economic recovery, continued concerns
over budget deficits, and high levels of unemployment.
the impact of the earthquake that occurred in Japan
in March 2011, along with political unrest in the Middle
East, have created new uncertainties.
In spite of these global concerns, the markets con-
tinued to increase due to steady improvement in
consumer confidence, stabilization of still elevated
unemployment rates, and improved performance in
corporate earnings across many sectors. During fiscal
2011, the Federal Reserve Board held the discount rate
at 0.25%, the lowest in history. the financial environ-
ment in which we operate continues to be challenging
moving into fiscal 2012.
All three major u.S. equity market indices, as well
as the Barclays Capital u.S. Aggregate Bond Index
and Barclays Capital Global Aggregate Bond Index,
increased significantly during the past two fiscal years
as illustrated in the table below:
Indices(1)
Dow Jones Industrial Average
S&p 500
NASDAQ Composite Index
Barclays Capital u.S.
Aggregate Bond Index
Barclays Capital Global
Aggregate Bond Index
% Change for the year
ended March 31,
2011
13.48%
13.37%
15.98%
2010
42.68%
46.57%
56.87%
5.12%
7.69%
7.15%
10.23%
(1)
Indices are trademarks of Dow Jones & Company, McGraw-Hill Companies, Inc.,
NASDAQ Stock Market, Inc., and Barclays Capital, respectively, which are not affiliated
with Legg Mason.
LEGG MASON 2011 ANNuAL R EpORt 25
the following table sets forth, for the periods indicated, amounts in the Consolidated Statements of Income as a
percentage of operating revenues and the increase (decrease) by item as a percentage of the amount for the pre-
vious period:
percentage of Operating Revenues
period to period Change(1)
Operating Revenues
Investment advisory fees
Separate accounts
Funds
performance fees
Distribution and service fees
Other
total operating revenues
Operating Expenses
Compensation and benefits
transition-related compensation
total compensation and benefits
Distribution and servicing
Communications and technology
Occupancy
Amortization of intangible assets
Impairment of goodwill and intangible assets
Other
total operating expenses
Operating Income (Loss)
Other Income (Expense)
Interest income
Interest expense
Fund support
Other
Other non-operating income (expense) of
consolidated investment vehicles
total other income (expense)
Income (Loss) before Income Tax
Provision (Benefit)
Income tax provision (benefit)
Net Income (Loss)
Less: Net income (loss) attributable to
noncontrolling interest
Net Income (Loss) Attributable
to Legg Mason, Inc.
Years Ended
March 31,
2010
30.9%
51.9
2.7
14.3
0.2
100.0
2011
29.3%
53.4
3.5
13.6
0.2
100.0
41.0
1.6
42.6
25.6
5.8
5.0
0.8
—
6.3
86.1
13.9
0.3
(3.3)
—
2.1
0.1
(0.8)
13.1
4.3
8.8
(0.3)
42.2
—
42.2
26.3
6.2
6.0
0.8
—
6.3
87.8
12.2
0.3
(4.8)
0.9
3.2
0.7
0.3
12.5
4.5
8.0
0.2
2009
30.3%
54.7
0.5
14.2
0.3
100.0
33.7
—
33.7
28.9
5.6
6.2
1.1
39.0
5.4
119.9
(19.9)
1.7
(5.5)
(68.0)
(3.5)
0.2
(75.1)
(95.0)
(36.5)
(58.5)
0.1
9.1%
7.8%
(58.6)%
2011
Compared
to 2010
2010
Compared
to 2009
0.1%
8.7
35.3
1.0
4.6
5.7
(19.9)%
(25.5)
310.0
(21.0)
(47.6)
(21.5)
2.6
n/m
6.7
3.0
(0.7)
(12.2)
0.6
n/m
5.3
3.6
20.4
25.7
(27.0)
n/m
(31.4)
(90.2)
n/m
10.8
0.6
16.5
n/m
24.3
(1.8)
n/m
(1.8)
(28.7)
(13.4)
(25.1)
(37.6)
n/m
(7.9)
(42.5)
n/m
(86.9)
(30.9)
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m—not meaningful
(1) Calculated based on the change in actual amounts between fiscal years as a percentage of the prior year amount.
26 LEGG MASON 2011 ANNuAL R EpORt
FISCAL 2011 COMPARED WITH FISCAL 2010
Financial Overview
Net income attributable to Legg Mason, Inc. for the year
ended March 31, 2011 totaled $253.9 million, or $1.63
per diluted share, compared to $204.4 million, or $1.32
per diluted share, in the prior year. the increase in Net
Income was primarily due to the net impact of increased
operating revenues, reflecting a more favorable asset
mix and increased performance fees, reduced inter-
est expense, and a change in the u.K. tax rate. these
increases were offset in part by the impact of transition-
related compensation, the impact of gains on fund
support recognized in the prior year, and an increase in
costs associated with closed-end fund launches. these
items are further discussed in “Results of Operations”
below. Adjusted Income (see Supplemental Non-GAAp
Financial Information) was $439.2 million, or $2.83 per
diluted share, compared to $381.3 million, or $2.45
per diluted share, in the prior year. this increase was
primarily due to the increase in Net Income, as previ-
ously discussed, excluding the impact of the current
year u.K. tax rate change and fund support gains in the
prior year. Operating margin increased to 13.9% from
12.2% in the prior year. Operating margin, as adjusted
(see Supplemental Non-GAAp Financial Information)
increased to 23.2% from 20.7% in the prior year.
Assets Under Management
the components of the changes in our assets under
management (“AuM”) (in billions) for the years ended
March 31 were as follows:
Beginning of period
Investment funds, excluding
liquidity funds(1)
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other(2)
Dispositions
End of period
2011
$684.5
2010
$632.4
49.5
(44.3)
(52.1)
(14.2)
(61.1)
56.3
(2.1)
$677.6
38.8
(40.2)
(76.5)
(4.1)
(82.0)
134.1
—
$684.5
(1) Subscriptions and redemptions reflect the gross activity in the funds and include
assets transferred between funds and between share classes.
Includes impact of foreign exchange.
(2)
AuM at March 31, 2011 was $678 billion, a decrease of
$7 billion or 1% from March 31, 2010. the decrease in
AuM was attributable to net client outflows of $61 bil-
lion, which were partially offset by market appreciation
of $56 billion, of which approximately 17% resulted
from the impact of foreign currency exchange fluctua-
tion, and dispositions of $2 billion, relating to the sale of
a Singapore-based Asian equity manager. the major-
ity of outflows were in fixed income with $37 billion,
or 61% of the outflows, followed by liquidity outflows
and equity outflows of $16 billion and $8 billion, respec-
tively. the majority of fixed income outflows were in
products managed by Western Asset Management
Company (“Western Asset”). We have experienced out-
flows in our fixed income asset class since fiscal 2008.
Equity outflows were primarily experienced by products
managed at ClearBridge Advisors LLC (“ClearBridge”)
and Legg Mason Capital Management, Inc. (“LMCM”),
while the permal Group, Ltd. (“permal”) and Royce
& Associates (“Royce) had net inflows. Due in part to
investment performance issues, we have experienced
net annual equity outflows since fiscal 2007. However,
the rate of outflows in this asset class was lower year
over year. We generally earn higher fees and profits on
equity AuM, and outflows in this asset class will more
negatively impact our revenues and net income than
would outflows in other asset classes.
During the first quarter of fiscal 2012, Morgan Stanley
Smith Barney amended certain historical Smith Barney
brokerage programs providing for investment in liquidity
funds that our asset managers manage, that resulted in
a reduction of approximately $16 billion in liquidity AuM.
We are currently waiving much of the management fees
generated by these assets, so a loss of this AuM this
year would have reduced net advisory revenue by only
$8 million and not had a material impact on Net Income
due to the impact of revenue sharing arrangements and
income taxes. In addition, we expect further amend-
ments to result in an additional $7 billion in liquidity
assets being transferred over the next 15 months.
Our investment advisory and administrative contracts
are generally terminable at will or upon relatively
short notice, and investors in the mutual funds that we
manage may redeem their investments in the funds
at any time without prior notice. Institutional and indi-
vidual clients can terminate their relationships with us,
reduce the aggregate amount of assets under manage-
ment, or shift their funds to other types of accounts
with different rate structures for any number of rea-
sons, including investment performance, changes in
prevailing interest rates, changes in our reputation in
the marketplace, changes in management or control of
clients or third-party distributors with whom we have
relationships, loss of key investment management per-
sonnel or financial market performance.
LEGG MASON 2011 ANNuAL R EpORt 27
AUM by Asset Class
AuM by asset class (in billions) as of March 31 were as follows:
Equity
Fixed income
Liquidity
total
2011
$189.6
356.6
131.4
$677.6
% of Total
28.0
52.6
19.4
100.0
2010
$173.8
364.3
146.4
$684.5
% of total % Change
25.4
53.2
21.4
100.0
9.1
(2.1)
(10.2)
(1.0)
the component changes in our AuM by asset class (in billions) for the fiscal year ended March 31, 2011 were
as follows:
March 31, 2010
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
March 31, 2011
Equity
$173.8
23.4
(24.7)
(6.9)
—
(8.2)
24.0
$189.6
Fixed Income
$364.3
Liquidity
$146.4
26.1
(19.6)
(43.5)
—
(37.0)
29.3
$356.6
—
—
(1.7)
(14.2)
(15.9)
0.9
$131.4
total
$684.5
49.5
(44.3)
(52.1)
(14.2)
(61.1)
54.2
$677.6
Average AuM by asset class (in billions) for the year ended March 31 were as follows:
Equity
Fixed income
Liquidity
total
2011
$173.8
361.6
133.8
$669.2
% of Total
26.0
54.0
20.0
100.0
2010
$155.7
370.7
149.1
$675.5
% of total % Change
23.0
54.9
22.1
100.0
11.6
(2.5)
(10.3)
(0.9)
AUM by Division
AuM by division (in billions) as of March 31 were as follows:
Americas
International
total
2011
$476.8
200.8
$677.6
% of Total
70.4
29.6
100.0
2010
$475.8
208.7
$684.5
% of total % Change
69.5
30.5
100.0
0.2
(3.8)
(1.0)
the component changes in our AuM by division (in billions) for the year ended March 31, 2011 were as follows:
March 31, 2010
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
March 31, 2011
Americas
$475.8
28.7
(32.6)
(32.0)
(8.1)
(44.0)
45.0
$476.8
International
$208.7
20.8
(11.7)
(20.1)
(6.1)
(17.1)
9.2
$200.8
total
$684.5
49.5
(44.3)
(52.1)
(14.2)
(61.1)
54.2
$677.6
28 LEGG MASON 2011 ANNuAL R EpORt
Investment Performance(1)
Investment performance of our assets under manage-
ment in the year ended March 31, 2011 was mixed com-
pared to relevant benchmarks from the prior year.
the equity markets worked through a difficult year
with more recent political upheaval in the Middle
East driving a significant increase in oil prices and
the earthquake in Japan and subsequent nuclear cri-
sis raising questions about the future of the nuclear
power industry. Despite these global concerns,
most u.S. indices produced positive returns for our
fourth fiscal quarter and our full fiscal year driven by
corporate earnings growth resulting in increases in
dividends, share buybacks, and mergers and acquisi-
tions activity.
In the fixed income markets, relatively strong eco-
nomic data, combined with continued accommodative
monetary and fiscal policy, continued to alleviate fears
of a double-dip recession and caused u.S treasury
yields to rise across the yield curve.
the yield curve slightly flattened over the quarter and the
year as the Federal Reserve kept its funds rate at 0.25%
and reiterated that rates would be kept low for an extended
period. the worst performing fixed income sector for
the year was Government bonds as measured by the
Barclays u.S. Government Bond Index returning 4.28%,
in contrast to High Yield Bonds, as measured by the
Barclays High Yield Bond Index, which returned 14.31%
followed by u.S. tIpS, as measured by the Barclays
u.S. tIpS Index, which returned 7.91% for the year.
the following table presents a summary of the percentage of our marketed composite assets(2) that outpaced their
benchmarks as of March 31, 2011 and 2010, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
Equity
Fixed income
1-year
42%
82%
As of March 31, 2011
5-year
3-year
61%
57%
70%
80%
As of March 31, 2010
10-year
77%
81%
1-year
49%
88%
3-year
61%
40%
5-year
72%
50%
10-year
86%
88%
the following table presents a summary of the percentage of our u.S. mutual fund assets(3) that outpaced their
Lipper category averages as of March 31, 2011 and 2010, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
total long-term
Equity
Fixed income
1-year
56%
58%
52%
As of March 31, 2011
5-year
3-year
70%
74%
68%
70%
78%
83%
10-year
67%
60%
85%
1-year
62%
51%
81%
As of March 31, 2010
3-year
68%
63%
78%
5-year
70%
65%
83%
10-year
80%
78%
87%
Revenue by Division
Operating revenues by division (in millions) for the years ended March 31 were as follows:
Americas
International
total
2011
$1,917.9
866.4
$2,784.3
% of Total
68.9
31.1
100.0
2010
$1,864.2
770.7
$2,634.9
% of total
70.8
29.2
100.0
% Change
2.9
12.4
5.7
the increase in operating revenues in the Americas division was primarily due to increased mutual fund advisory
fees on assets managed by Royce. the increase in operating revenues in the International division was primarily
due to increased mutual fund advisory fees and performance fees on assets managed by the international opera-
tions of Western Asset and increased fund revenues at permal.
Index performance in this section includes reinvestment of dividends and capital gains.
(1)
(2) A composite is an aggregation of discretionary portfolios (separate accounts and investment funds) into a single group that represents a particular investment objective or strategy.
Each of our asset managers has its own specific guidelines for including portfolios in its marketed composites. Assets under management that are not managed in accordance with
the guidelines are not included in a composite. As of March 31, 2011 and 2010, 89% and 87% of our equity assets under management, respectively, in each period, and 89% and 82%,
of our fixed income assets under management, respectively, were in marketed composites.
(3) Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of March 31, 2011 and 2010, the u.S. long-term mutual fund assets represented in the data
accounted for 17% and 16%, respectively, of our total assets under management. the performance of our u.S. long-term mutual fund assets is included in the marketed composites.
LEGG MASON 2011 ANNuAL R EpORt 29
Business Model Streamlining Initiative
In May 2010, we announced an initiative to streamline
our business model to drive increased profitability
and growth that includes: (i) transitioning certain
shared services to our investment affiliates which are
closer to the actual client relationships; and (ii) shar-
ing in affiliate revenue with our Americas distribution
group. We project that the initiative will result in
$130 million to $150 million in expense reductions
that will be fully realized on an annualized basis by
the fourth quarter of fiscal 2012. these expense sav-
ings consist of (i) approximately $75 million in com-
pensation and benefits cost reductions from elimi-
nating positions in certain corporate shared services
functions as a result of transitioning such functions to
the affiliates, and charging affiliates for other central-
ized services that will continue to be provided to them
without any corresponding adjustment in revenue
sharing or other compensation arrangements; (ii)
approximately $50 million in non-compensation costs
from eliminating and streamlining activities in our
corporate and distribution business units, including
savings associated with consolidating office space;
and (iii) approximately $15 million from our Americas
distribution group sharing in affiliate revenues from
retail assets under management without any cor-
responding adjustment in revenue sharing or other
compensation arrangements.
the initiative involves approximately $115 million to
$135 million in transition-related costs that primarily
include charges for employee termination benefits
and incentives to retain employees during the tran-
sition period. the transition-related costs will also
include charges for consolidating leased office space,
early contract terminations, asset disposals and pro-
fessional fees. During fiscal 2011, transition-related
costs totaled $54.4 million, which, net of related cost-
savings, reduced our operating income by $42 million.
Substantially all of the remaining costs will be accrued
in fiscal 2012.
the nature and amount of transition costs and savings
are based on estimates. While management expects
the total costs and savings to be within the ranges
disclosed, actual results may differ in amount and
nature from these estimates. the achievement of all
projected cost savings and margin improvements, as
well as the amount and nature of transition-related
costs, will be subject to many factors, including mar-
ket conditions and other factors affecting our financial
results, and those of our affiliates, and the rate of
AuM growth. In addition, our business is dynamic and
may require us to incur incremental expenses from
time-to-time to grow and better support our busi-
ness. See Note 16 of Notes to Consolidated Financial
Statements for additional information on our business
streamlining initiative.
RESULTS OF OPERATIONS
Effective with the April 1, 2010 adoption of a new
accounting standard on consolidation, we consolidate
and separately identify certain sponsored investment
vehicles, the most significant of which is a collateral-
ized loan obligation entity (“CLO”). the consolidation
of these investment vehicles has no impact on Net
Income Attributable to Legg Mason, Inc. and does
not have a material impact on our consolidated oper-
ating results. We also hold investments in certain
consolidated sponsored investment funds and the
change in the value of these investments, which is
recorded in Other non-operating income (expense),
is reflected in our Net Income, net of amounts allo-
cated to noncontrolling interests. the impact of the
consolidation of investment vehicles is presented in
our “Consolidated Statements of Income, Excluding
Consolidated Investment Vehicles” (See Supplemental
Non-GAAp Financial Information). Also, see Notes 1
and 18 of Notes to Consolidated Financial Statements
for additional information regarding the consolidation
of investment vehicles.
Operating Revenues
total operating revenues for the year ended March 31,
2011 were $2.8 billion, an increase of 6% from $2.6 bil-
lion in the prior year, despite a 1% decrease in aver-
age AuM, reflecting increased revenue yields due to a
more favorable asset mix and higher performance fees.
these increases were offset in part by an increase in
fee waivers on certain liquidity funds in order to main-
tain certain yields to investors.
Investment advisory fees from separate accounts
were relatively flat at $815.6 million, as a decrease
of $25.4 million, resulting from lower average fixed
income assets at Western Asset, was offset by
an $18.6 million increase due to higher average
equity assets managed by Batterymarch Financial
Management, Inc. (“Batterymarch”) and Royce, a
$5.1 million increase due to higher average fixed
income assets managed by Brandywine Global
Management, LLC (“Brandywine”), and a $2.2 million
increase due to subordinate fees received from certain
CLOs managed by Western Asset.
30 LEGG MASON 2011 ANNuAL R EpORt
Investment advisory fees from funds increased
$119.3 million, or 9%, to $1.5 billion. Of this increase,
$111.5 million was the result of higher average equity
assets managed at Royce, permal, and ClearBridge,
and $84.4 million was the result of higher average
fixed income assets managed at Western Asset.
these increases were offset in part by a $45.7 million
decrease due to lower average liquidity assets man-
aged at Western Asset and a $36.0 million decrease
as a result of fee waivers on liquidity funds managed
by Western Asset, primarily to maintain certain yields
to investors.
performance fees increased 35%, or $25.2 million,
to $96.7 million during fiscal 2011, driven by fees
earned on assets managed at Western Asset, permal
and Brandywine.
Distribution and service fees increased 1% to $379.2 mil-
lion, primarily as a result of an increase in average
mutual fund AuM subject to distribution and servicing
fees offset in part by the impact of increased fee waivers
related to liquidity funds managed by Western Asset.
Operating Expenses
total compensation and benefits increased $74.1 mil-
lion to $1.2 billion. Compensation and benefits, exclud-
ing transition-related compensation of $45.0 million,
which represents severance and retention incentive
costs, increased $29.0 million, or 3%, to $1.14 billion.
this increase was driven by a $68.6 million increase
in revenue share-based compensation resulting from
higher revenues and a reduction in operating expenses
at revenue share-based affiliates in fiscal 2011 and a
$7.5 million increase in incentive compensation for
non-revenue share-based affiliates and administrative
and sales personnel. these increases were offset in
part by a $45.7 million reduction in deferred compen-
sation obligations due to the impact of reduced market
gains on assets invested for deferred compensation
plans, which are recorded in Other non-operating
income (expense), as well as, a $6.1 million reduction
in deferred compensation expense at non-revenue
share-based affiliates. the impact of reduced head-
count, primarily related to our business streamlining
initiatives, also reduced compensation and benefits by
$6.0 million.
percentage of revenues as compensation, and tran-
sition-related compensation. these increases were
substantially offset by the impact of compensation
decreases related to reduced market gains on assets
invested for deferred compensation plans and seed
capital investments and the impact of lower corporate
compensation on increased revenues.
We have an arrangement with an affiliate under which
the affiliate’s incentive compensation pool under a
revenue sharing agreement has been reduced over
the last two years to reimburse the parent company
for certain expenses, while at the same time the par-
ent company has provided an equivalent amount of
deferred compensation to the affiliate’s employees. A
portion of the deferred compensation was granted in
the form of restricted stock awards and the remainder
in cash awards granted under a non-qualified plan, both
of which will vest over periods of three to four years.
the amount by which the affiliate’s incentive compen-
sation will be reduced in fiscal 2012 under the arrange-
ment will be significantly less than the reduction in
fiscal 2011. In addition, there will be an increase in the
amount of non-cash amortization expense associated
with the vesting of the deferred compensation awards
from prior years. the combined impact will result in a
$74 million increase in compensation and benefits in fis-
cal 2012, which will be recognized ratably over the year.
this arrangement will continue for the subsequent five
years, however, the incremental effect on compensation
expense from year to year will be far less significant.
Distribution and servicing expenses increased 3%
to $712.8 million, primarily as a result of an increase
in average AuM in certain products for which we
pay fees to third-party distributors and an increase
of $14.5 million in structuring fees related to closed-
end fund launches offset in part by the impact of
liquidity fund fee waivers that reduce the amounts
paid to our distributors.
Communications and technology expense decreased
1% to $162.0 million, of which $9.2 million resulted from
the full depreciation of certain assets prior to or during
the current year, offset in part by a $6.6 million increase
in technology consulting and outsourcing fees, primar-
ily related to our business streamlining initiatives.
Compensation as a percentage of operating revenues
increased to 42.6% from 42.2% in the prior fiscal year
primarily due to the impact of increased revenues at
revenue share-based affiliates that retain a higher
Occupancy expense decreased 12% to $137.9 million,
primarily due to the impact of a $19.3 million charge
in the prior year as a result of subleasing space in our
corporate headquarters in fiscal 2010.
LEGG MASON 2011 ANNuAL R EpORt 31
Amortization of intangibles remained relatively flat at
$22.9 million.
Other expenses increased $8.9 million to $176.6 mil-
lion, primarily as a result of a $10.3 million increase
in travel and entertainment and advertising costs, a
$5.6 million increase in state franchise taxes, a $4.2 mil-
lion increase in professional fees, and a $5.4 mil-
lion increase in charges related to trading errors and
expense reimbursements paid to certain mutual funds.
these increases were offset in part by the impact of a
$19.0 million investor settlement in the prior year.
Non-Operating Income (Expense)
Interest income increased 26% to $9.2 million driven
by higher average interest rates, offset in part by a
$0.9 million decrease due to lower average invest-
ment balances.
Interest expense decreased 27% to $92.2 million, pri-
marily as a result of the exchange of our Equity units
in August 2009 and the repayment of the $550 million
outstanding term loan balance in January 2010, which
reduced interest expense by $14.8 million and $12.2 mil-
lion, respectively.
As of March 31, 2010, all fund support arrangements
had expired or were terminated in accordance with
their terms. Fund support gains were $23.2 million in
the prior year. the gains primarily represent the rever-
sal of unrealized, non-cash losses recorded in fiscal
2009 on liquidity fund support arrangements for our
offshore funds.
Other non-operating income (expense) decreased
$27.3 million, primarily as a result of a $46.7 mil-
lion reduction in unrealized market gains on assets
invested for deferred compensation plans, which were
substantially offset by corresponding compensation
decreases discussed above, and a $4.3 million reduc-
tion in unrealized market gains on investments in pro-
prietary fund products. these decreases were offset in
part by the impact of $22.0 million in charges related to
the exchange of our Equity units in the prior year.
Other non-operating income (expense) of CIVs
decreased $15.6 million, to a gain of $1.7 million, due
to losses associated with an increase in fair value of
the debt related to a CIV.
Income Tax Provision
the provision for income taxes was $119.4 million com-
pared to $118.7 million in the prior year. During fiscal
2011, the u.K. Finance Bill of 2010 was enacted, which
reduced the corporate tax rate from 28% to 27% for peri-
ods beginning after April 1, 2011. the impact of the tax
rate change on certain existing deferred tax liabilities
resulted in a tax benefit of approximately $8.9 million.
the effective tax rate was 32.7% compared to 36.0%
in the prior year. the effective tax rate, excluding the
impact of CIVs, was 32.0% and 36.7% as of March 31,
2011 and 2010, respectively. this decrease was primar-
ily driven by the revaluation of certain deferred tax
assets and liabilities as a result of the enactment of the
u.K. tax rate reduction and adjustments to state tax
rates impacted by apportionment changes. In addition,
the current period benefited from adjustments result-
ing from the finalization of prior period tax positions.
Although not yet enacted, additional proposed reduc-
tions in the u.K. corporate tax rate to 26% in fiscal 2012
and 25% in fiscal 2013 are expected. Each one percent-
age point reduction in the u.K. corporate tax rate will
result in a tax benefit of approximately $8.9 million
at the time of enactment, based on the amount of
deferred tax assets and liabilities as of March 31, 2011,
that have to be revalued at the new rate.
Supplemental Non-GAAP Financial Information
Consolidated Statements of Income, Excluding
Consolidated Investment Vehicles
Effective with the April 1, 2010 adoption of a new finan-
cial accounting standard on consolidation, we now
consolidate and separately identify certain sponsored
investment vehicles, the most significant of which is
a CLO. 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 consol-
idation of investment vehicles and exclude the operat-
ing expenses and the impact on non-operating income
(expense) and noncontrolling interests of CIVs.
We believe it is important to provide the Consolidated
Statements of Income, Excluding Consolidated
Investment Vehicles to present the underlying eco-
nomic 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 CIVs
from the Consolidated Statements of Income, the
investment advisory and distribution fees earned by
Legg Mason from CIVs are added back to reflect our
actual revenues. Similarly the operating expenses and
32 LEGG MASON 2011 ANNuAL R EpORt
the impact on non-operating income (expense) and
noncontrolling interests of CIVs are removed from the
GAAp basis Statements of Income since this activity
does not actually belong to us. 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 sub-
stitutes for the GAAp basis Consolidated Statements
of Income and may not be comparable to Consolidated
Statements of Income presented on a non-GAAp basis
of other companies.
the following tables present a reconciliation of our Consolidated Statements of Income presented on a GAAp
basis to our Consolidated Statements of Income, Excluding Consolidated Investment Vehicles for the years
ended March 31, 2011 and 2010:
total operating revenues
total operating expenses
Operating Income
Other non-operating income (expense)
Income (Loss) before Income tax provision
Income tax provision
Net Income (Loss)
Less: Net income (loss) attributable to
GAAP Basis
$2,784,317
2,397,509
386,808
(21,611)
365,197
119,434
245,763
For the Years Ended March 31,
2010
Non-GAAP
Basis—
Excluding
CIVs
$2,788,450
2,396,938
391,512
(17,931)
373,581
119,434
254,147
GAAp Basis
$2,634,879
2,313,696
321,183
8,473
329,656
118,676
210,980
CIVs
$ 2,779
680
2,099
(8,520)
(6,421)
—
(6,421)
Non-GAAp
Basis—
Excluding
CIVs
$2,637,658
2,314,376
323,282
(47)
323,235
118,676
204,559
2011
CIVs
$4,133
(571)
4,704
3,680
8,384
—
8,384
noncontrolling interests
(8,160)
Net Income Attributable to Legg Mason, Inc. $ 253,923
8,384
—
$
224
$ 253,923
6,623
$ 204,357
(6,421)
—
$
202
$ 204,357
Adjusted Income
As supplemental information, we are providing a per-
formance measure that is based on a methodology
other than generally accepted accounting principles
(“non-GAAp”) for “Adjusted Income” that manage-
ment uses as a benchmark in evaluating and compar-
ing the period-to-period operating performance of
Legg Mason, Inc. and its subsidiaries.
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 indefinite-life intangible
asset impairment, if any. We also adjust for non-core
items that are not reflective of our economic perfor-
mance, 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 useful
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 acqui-
sitions, 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 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
LEGG MASON 2011 ANNuAL R EpORt 33
under GAAp. We consider 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 our operating
results with the results of other asset management
firms that have not engaged in significant acquisi-
tions, 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 acquisi-
tions, such as management contracts, to Net Income
to reflect the fact that these non-cash expenses dis-
tort comparisons of our 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
include actual tax benefits from amortization deduc-
tions that are not realized under GAAp absent an
impairment charge or the disposition of the related
business. Because we fully expect to realize the eco-
nomic benefit of the current period tax amortization,
we add this benefit to Net Income in the calcula-
tion of Adjusted Income. However, because of our
net operating loss carryforward, we will receive the
benefit of the current tax amortization over time.
Conversely, we subtract the non-cash income tax
benefits on goodwill and indefinite-life intangible
asset impairment charges and u.K. tax rate adjust-
ments on excess book basis on certain acquired
indefinite-life intangible assets that have been rec-
ognized 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 structured investment vehicle (“SIV”)
securities, if applicable). these adjustments reflect
that these items distort comparisons of our 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 mar-
ket 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 accom-
pany 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.
34 LEGG MASON 2011 ANNuAL R EpORt
A reconciliation of Net Income Attributable to Legg Mason, Inc. to Adjusted Income (in thousands except per
share amounts) is as follows:
For the Years Ended March 31,
Net Income Attributable to Legg Mason, Inc.
plus (less):
Amortization of intangible assets
Deferred income taxes on intangible assets:
tax amortization benefit
u.K. tax rate adjustment
Imputed interest on convertible debt
Net money market fund support gains(1)
Adjusted Income
Net Income per diluted share Attributable to
Legg Mason, Inc. common shareholders
plus (less):
Amortization of intangible assets
Deferred income taxes on intangible assets:
tax amortization benefit
u.K. tax rate adjustment
Imputed interest on convertible debt
Net money market fund support gains(1)
Adjusted Income per diluted share
(1) Net of income taxes.
2011
$253,923
22,913
134,602
(8,878)
36,688
—
$439,248
$
1.63
0.15
0.87
(0.06)
0.24
—
2.83
$
2010
$204,357
22,769
136,252
—
34,445
(16,565)
$381,258
$
1.32
0.14
0.88
—
0.22
(0.11)
2.45
$
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 CIVs, and impairment charges by (ii) our
operating revenues, adjusted to add back net invest-
ment 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 cal-
culation because they are offset by an equal amount
in Other non-operating income (expense), and thus
have no impact on Net Income. transition-related
costs and income (loss) of CIVs 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 operat-
ing revenues also include our advisory revenues we
receive from CIVs 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
excluding items that have no impact on Net Income
and because it indicates what our 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 on Net
Income Attributable to Legg Mason, Inc. this measure
is provided in addition to our operating margin calcu-
lated under GAAp, but is not a substitute for calcula-
tions of margins under GAAp and may not be compa-
rable to non-GAAp performance measures, including
measures of adjusted margins, of other companies.
LEGG MASON 2011 ANNuAL R EpORt 35
the calculation of operating margin and operating margin, as adjusted, is as follows:
For the Years Ended March 31,
Operating Revenues, GAAp basis
plus (less):
Operating revenues eliminated upon consolidation
of investment vehicles
Distribution and servicing expense excluding
consolidated investment vehicles
Operating Revenues, as adjusted
Operating Income
plus (less):
Gains (losses) on deferred compensation
and seed investments
transition-related costs
Operating income and expenses of consolidated
investment vehicles
Operating Income, as Adjusted
Operating margin, GAAp basis
Operating margin, as adjusted
2011
$2,784,317
4,133
(712,779)
$2,075,671
$ 386,808
36,274
54,434
4,704
$ 482,220
13.9%
23.2
2010
$2,634,879
2,779
(691,868)
$1,945,790
$ 321,183
79,316
—
2,099
$ 402,598
12.2%
20.7
FISCAL 2010 COMPARED WITH FISCAL 2009
Financial Overview
Net income attributable to Legg Mason, Inc. for the year
ended March 31, 2010 totaled $204.4 million, or $1.32
per diluted share, compared to Net loss attributable to
Legg Mason, Inc. of $1.97 billion, or $13.99 per diluted
share, in the prior year. this increase was primarily due
to the impact of $1.4 billion of losses, net of income
tax benefits and compensation related adjustments,
related to the elimination of the exposure to SIVs in
liquidity funds managed by a subsidiary in the prior fis-
cal year. the impact of impairment charges related to
goodwill and intangible assets, primarily in our former
Wealth Management division (see Note 5 of Notes to
Consolidated Financial Statements), $863.4 million, net
of income tax benefits, recorded in the prior fiscal year
also contributed to the increase. Adjusted income (see
Supplemental Non-GAAp Financial Information) was
$381.3 million, or $2.45 per diluted share, compared
to an adjusted loss of $1.2 billion, or $8.47 per diluted
share, in the prior year. this increase was primarily due
to the impact of $1.7 billion of net realized losses on the
sale of SIV securities in the prior fiscal year. Operating
margin increased to 12.2% from (19.9)% in the prior
year, primarily due to the impact of impairment charges
related to goodwill and intangible assets recorded in
the prior fiscal year. Operating margin, as adjusted
(see Supplemental Non-GAAp Financial Information)
decreased to 20.7% from 23.9% in the prior year.
Assets Under Management
the components of the changes in our AuM (in bil-
lions) for the years ended March 31 were as follows:
Beginning of period
Investment funds, excluding
liquidity funds(1)
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other(2)
Dispositions
End of period
2010
$632.4
2009
$ 950.1
38.8
(40.2)
(76.5)
(4.1)
(82.0)
134.1
—
$684.5
43.7
(78.6)
(109.0)
(15.0)
(158.9)
(157.7)
(1.1)
$ 632.4
(1) Subscriptions and redemptions reflect the gross activity in the funds and include
assets transferred between funds and between share classes.
Includes impact of foreign exchange.
(2)
AuM at March 31, 2010 were $685 billion, an
increase of $52 billion or 8% from March 31, 2009.
the increase in AuM was attributable to market
appreciation of $134 billion, of which approximately
6% resulted from the impact of foreign currency
exchange fluctuation, which was partially offset by
net client outflows of $82 billion. the majority of
outflows were in fixed income with $64 billion, or
78% of the outflows, followed by equity outflows
and liquidity outflows of $15 billion and $3 billion,
respectively. the majority of fixed income outflows
were in products managed by Western Asset and
36 LEGG MASON 2011 ANNuAL R EpORt
Brandywine that had experienced past investment
underperformance, although their performance
improved significantly during fiscal 2010. Equity
outflows were primarily experienced by products
managed at ClearBridge, Batterymarch, permal
and LMCM.
AUM by Asset Class
AuM by asset class (in billions) as of March 31 were as follows:
Equity
Fixed income
Liquidity
total
2010
$173.8
364.3
146.4
$684.5
% of total
25.4
53.2
21.4
100.0
2009
$126.9
357.6
147.9
$632.4
% of total % Change
20.1
56.5
23.4
100.0
37.0
1.9
(1.0)
8.2
the component changes in our AuM by asset class (in billions) for the fiscal year ended March 31, 2010 were
as follows:
March 31, 2009
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
March 31, 2010
Equity
$126.9
18.7
(23.4)
(10.7)
—
(15.4)
62.3
$173.8
Fixed Income
$357.6
Liquidity
$147.9
20.1
(16.8)
(67.3)
—
(64.0)
70.7
$364.3
—
—
1.5
(4.1)
(2.6)
1.1
$146.4
total
$632.4
38.8
(40.2)
(76.5)
(4.1)
(82.0)
134.1
$684.5
Average AuM by asset class (in billions) for the year ended March 31 were as follows:
Equity
Fixed income
Liquidity
total
2010
$155.7
370.7
149.1
$675.5
% of total
23.0
54.9
22.1
100.0
2009
$203.2
438.0
169.2
$810.4
% of total % Change
25.1
54.0
20.9
100.0
(23.4)
(15.4)
(11.9)
(16.6)
AUM by Division
AuM by division (in billions) as of March 31 were as follows:
Americas
International
total
2010
$475.8
208.7
$684.5
% of total
69.5
30.5
100.0
2009
$446.7
185.7
$632.4
% of total % Change
70.6
29.4
100.0
6.5
12.4
8.2
the component changes in our AuM by division (in billions) for the year ended March 31, 2010 were as follows:
March 31, 2009
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
March 31, 2010
Americas
$446.7
24.4
(26.2)
(50.7)
(18.6)
(71.1)
100.2
$475.8
International
$185.7
14.4
(14.0)
(25.8)
14.5
(10.9)
33.9
$208.7
total
$632.4
38.8
(40.2)
(76.5)
(4.1)
(82.0)
134.1
$684.5
LEGG MASON 2011 ANNuAL R EpORt 37
Investment Performance(1)
Investment performance of our assets under manage-
ment in the year ended March 31, 2010 improved com-
pared to relevant benchmarks from the prior year.
Although the unemployment rate remains high, the
u.S. economy continued to slowly show signs of
recovery. A strong rebound in corporate earnings,
improvements in existing home sales and con-
sumer spending, and stabilization in the financial
services industry helped to restore some level of
investor confidence. However, uncertainty in the
markets remained, as best evidenced by the May
6, 2010 intraday sell-off and subsequent rebound.
With concerns regarding the credit quality of certain
European nations, and as government stimulus ini-
tiatives continued globally, debates about inflation
and deflation loomed.
In the fixed income markets, government yields contin-
ued to rise as investors grew concerned about the need
to finance the growing federal deficit and demand for
government bonds decreased due to investors’ return-
ing appetite for risk. Most sector spreads declined in
2009 as investors returned to riskier securities such
as high-yield bonds and emerging market debt secur-
ities. Investment grade corporate bonds delivered
their strongest performance on record with 2000 basis
points in excess returns over treasuries in 2009.
For the 1-year period, the treasury yield curve was
historically steep as the Federal Reserve continued
to keep federal funds at close to 0%. the worst per-
forming fixed income sector was Government bonds
as measured by the Barclays u.S. Government Bond
returning (3.70)%, in contrast to High Yield Bonds
which returned 58.21% for 2009.
the following table presents a summary of the percentage of our marketed composite assets(2) that outpaced
their benchmarks as of March 31, 2010 and 2009, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
As of March 31, 2010
As of March 31, 2009
Equity
Fixed income
1-year
49%
88%
3-year
61%
40%
5-year
72%
50%
10-year
86%
88%
1-year
49%
31%
3-year
53%
12%
5-year
58%
32%
10-year
88%
17%
the following table presents a summary of the percentage of our u.S. mutual fund assets(3) that outpaced their
Lipper category as of March 31, 2010 and 2009, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
As of March 31, 2010
As of March 31, 2009
total long-term
Equity
Fixed income
1-year
62%
51%
81%
3-year
68%
63%
78%
5-year
70%
65%
83%
10-year
80%
78%
87%
1-year
43%
47%
38%
3-year
52%
60%
41%
5-year
47%
49%
45%
10-year
75%
76%
72%
Revenue by Division
Operating revenues by division (in millions) for the years ended March 31 were as follows:
Americas
International
total
2010
$1,864.2
770.7
$2,634.9
% of total
70.8
29.2
100.0
2009
$2,290.5
1,066.9
$3,357.4
% of total % Change
68.2
31.8
100.0
(18.6)
(27.8)
(21.5)
the decrease in operating revenues in the Americas division was primarily due to decreased mutual fund advi-
sory fees on assets managed by Western Asset, LMCM, and ClearBridge, decreased separate account advisory
fees on assets managed by Western Asset and ClearBridge and decreased distribution and service fee revenues
from u.S. retail equity funds. the decrease in operating revenues in the International division was primarily due
to decreased fund revenues at permal.
Index performance in this section includes reinvestment of dividends and capital gains.
(1)
(2) As of March 31, 2010 and 2009, 87% and 85% of our equity assets under management, respectively, in each period, and 82% and 84%, of our fixed income assets under management,
respectively, were in marketed composites.
(3) Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of March 31, 2010 and 2009, the u.S. long-term mutual fund assets represented in the data accounted
for 16% and 12%, respectively, of our total assets under management. the performance of our u.S. long-term mutual fund assets is included in the marketed composites.
38 LEGG MASON 2011 ANNuAL R EpORt
RESULTS OF OPERATIONS
Operating Revenues
total operating revenues for the year ended March 31,
2010 were $2.6 billion, down 22% from $3.4 billion in
the prior year primarily as a result of a 17% decrease
in average AuM. the shift in the mix of average AuM
from higher fee equity assets to a greater percentage
of liquidity and fixed income assets also contributed to
the revenue decline.
Investment advisory fees from separate accounts
decreased $202.4 million, or 20%, to $814.8 million. Of
this decrease, $104.3 million was the result of lower
average equity assets at ClearBridge, private Capital
Management, Lp (“pCM”), LMCM and Brandywine,
and $95.5 million was the result of lower average fixed
income assets managed at Western Asset.
Investment advisory fees from funds decreased
$469.1 million, or 26%, to $1.4 billion. Of this
decrease, $309.2 million was the result of lower
average equity assets managed primarily at permal,
LMCM, and ClearBridge, $73.1 million was the result
of fee waivers related to liquidity funds managed by
Western Asset primarily to maintain certain yields to
investors, and $66.9 million was the result of lower
average liquidity assets managed at Western Asset.
performance fees increased 310%, or $54.0 million, to
$71.5 million during fiscal 2010, driven by fees earned
on assets managed at Western Asset and permal.
Distribution and service fees decreased 21% to
$375.3 million, primarily as a result of a decline in
average mutual fund AuM and the impact of increased
fee waivers related to liquidity funds managed by
Western Asset.
Operating Expenses
As a result of substantial declines in revenues dur-
ing fiscal 2009 due to challenging market conditions,
actions were taken to reduce our corporate cost struc-
ture. these cost-saving measures primarily included
reductions in full-time employees and discretionary
incentive compensation in business support functions,
significant reductions in the utilization of consultants
for technology projects, and substantial curtailment of
promotional costs.
Operating expenses in fiscal 2010 continued to benefit
from the cost reduction initiatives implemented in fis-
cal 2009, with many of the more significant actions
implemented in the December 2008 quarter. the
discussion below for each of our operating expenses
identifies the amount of variance attributable to cost
savings achieved in fiscal 2010, where applicable.
Compensation and benefits decreased 2% to $1.1 bil-
lion. this decrease was driven by a $139.1 million
decrease in revenue share-based compensation, pri-
marily resulting from lower revenues in fiscal 2010,
the impact of which was offset in part by reductions in
other operating expenses at revenue share-based affil-
iates. the net impact of workforce reductions lowered
compensation by approximately $27.5 million. these
reductions were substantially offset by an increase
in deferred compensation and revenue share-based
incentive obligations of $150.3 million resulting from
market gains on assets invested for deferred com-
pensation plans and seed capital investments, which
are offset by gains in other non-operating income
(expense). Compensation as a percentage of operat-
ing revenues increased to 42.2% from 33.7% in the
prior fiscal year primarily as a result of compensation
increases related to unrealized market gains on assets
invested for deferred compensation plans and invest-
ments in proprietary fund products and the impact of
fixed compensation costs which do not directly vary
with revenues.
Distribution and servicing expenses decreased 29%
to $691.9 million, primarily as a result of a decrease
in average AuM in certain products for which we
pay fees to third-party distributors and the impact of
liquidity fund fee waivers that reduce amounts paid
to our distributors.
Communications and technology expense decreased
13% to $163.1 million, primarily as a result of cost
savings initiatives that contributed to a $13.6 million
reduction in technology consulting fees, telecom-
munications and market data services. Reductions
in printing costs and lower technology depreciation
expense, which resulted from the full depreciation of
certain assets prior to or during fiscal 2010, of $7.7 mil-
lion and $4.5 million, respectively, also contributed to
the decrease.
Occupancy expense decreased 25% to $157.0 million,
primarily due to the recognition of $70.1 million of
lease charges related to office vacancies recorded in
the prior year, offset in part by a $19.3 million charge
primarily resulting from the subleasing of space in our
corporate headquarters in fiscal 2010.
LEGG MASON 2011 ANNuAL R EpORt 39
Amortization of intangible assets decreased 38% to
$22.8 million, primarily due to the impact of intangible
asset impairments during fiscal 2009, which reduced
amortization expense by $13.5 million.
Impairment charges were $1.3 billion in fiscal 2009.
Approximately $1.2 billion of the total impairment
charges related to goodwill and intangible assets in
our former Wealth Management division as a result
of significant declines in the AuM and projected cash
flows within that division. the remaining $146 million
related to certain acquired management contracts, as
a result of a more accelerated rate of client attrition,
and the impairment of a trade name.
Other expenses decreased $14.4 million to $167.6 mil-
lion, primarily as a result of cost savings initiatives
that contributed to reductions in travel and entertain-
ment costs of $15.6 million, and advertising costs of
$7.7 million. these decreases were partially offset by
an increase of $11.5 million in charges related to the
impact of an investor settlement and trading errors.
Non-Operating Income (Expense)
Interest income decreased 87% to $7.4 million, pri-
marily as a result of a decline in average interest
rates and lower average investment balances, which
reduced interest income by $36.2 million and
$12.9 million, respectively.
Interest expense decreased 31% to $126.3 million, pri-
marily as a result of the exchange of our Equity units
in August 2009, which reduced interest expense by
$36.5 million, and a $24.6 million decrease due to the
repayment of $250 million of the outstanding borrow-
ings under our revolving credit facility in March 2009,
the repayment of our 6.75% senior notes in July 2008,
the repayment of the $550 million outstanding bal-
ance on our $700 million term loan in January 2010, as
well as lower interest rates paid on this term loan dur-
ing fiscal 2010. these decreases were partially offset
by an increase of $5.0 million in amortization of debt
issuance costs, primarily related to the early repay-
ment of our $700 million term loan.
Due to increases in the net asset values of previously
supported liquidity funds, in fiscal 2010 we reversed
unrealized, non-cash losses recorded in fiscal 2009 of
$20.6 million related to liquidity fund support arrange-
ments for our offshore funds that did not involve SIVs.
During fiscal 2009, fund support losses were $1.7 bil-
lion, primarily as a result of SIV price deterioration and
our elimination of SIV exposure. See Note 19 of Notes
to Consolidated Financial Statements for additional
information on fund support.
Other non-operating income (expense) increased
$203.9 million to income of $86.9 million, primarily as
a result of an increase of $133.7 million in unrealized
market gains on assets invested for deferred compen-
sation plans, which are substantially offset by corre-
sponding compensation increases discussed above,
and $86.9 million in unrealized market gains on invest-
ments in proprietary fund products, which are partially
offset by corresponding compensation increases dis-
cussed above. these increases were offset in part by
the impact of $22.0 million in charges related to the
exchange of substantially all of our Equity units in fis-
cal 2010.
Income Tax Provision (Benefit)
the provision for income taxes was $118.7 million
compared to a benefit of $1.2 billion in the prior year,
primarily as a result of increased earnings due to the
absence of losses related to liquidity fund support and
goodwill impairment charges. the effective tax rate was
36.0% compared to a benefit rate of 38.4% in the prior
year. the current year rate was beneficially impacted
by lower effective tax rates in foreign jurisdictions. the
prior year’s benefit rate was driven by the impact of the
SIV-related charges with lower state tax benefits and
the impact of a non-deductible portion of the goodwill
impairment charge, offset by tax benefits associated
with the restructuring of a foreign subsidiary.
40 LEGG MASON 2011 ANNuAL R EpORt
Supplemental Non-GAAP Financial Information
Consolidated Statements of Income, excluding Consolidated Investment Vehicles
the following tables present a reconciliation of our Consolidated Statements of Income presented on a GAAp
basis to our Consolidated Statements of Income, Excluding Consolidated Investment Vehicles for the years
ended March 31, 2010 and 2009:
For the Years Ended March 31,
2010
2009
total operating revenues
total operating expenses
Operating Income
Other non-operating income (expense)
Income (Loss) before Income tax provision
Income tax provision
Net Income (Loss)
Less: Net income (loss) attributable to
GAAp Basis
$2,634,879
2,313,696
321,183
8,473
329,656
118,676
210,980
CIVs
$ 2,779
680
2,099
(8,520)
(6,421)
—
(6,421)
Non-GAAp
Basis—
Excluding
CIVs
$2,637,658
2,314,376
323,282
(47)
323,235
118,676
204,559
GAAp Basis
$ 3,357,367
4,026,547
(669,180)
(2,519,017)
(3,188,197)
(1,223,203)
(1,964,994)
CIVs
$ 1,232
(705)
1,937
(4,705)
(2,768)
—
(2,768)
Non-GAAp
Basis—
Excluding
CIVs
$ 3,358,599
4,025,842
(667,243)
(2,523,722)
(3,190,965)
(1,223,203)
(1,967,762)
noncontrolling interests
6,623
Net Income Attributable to Legg Mason, Inc. $ 204,357
(6,421)
—
$
202
$ 204,357
2,924
$(1,967,918)
(2,768)
—
$
156
$(1,967,918)
Adjusted Income
A reconciliation of Net Income Attributable to Legg Mason, Inc. to Adjusted Income (in thousands except per
share amounts) is as follows:
For the Years Ended March 31,
Net Income Attributable to Legg Mason, Inc.
plus (less):
Amortization of intangible assets
Deferred income taxes on intangible assets:
tax amortization benefit
Deferred income taxes on impairment charges
Imputed interest on convertible debt
Net money market fund support (gains) losses(1)
Impairment charges
Net loss on sale of SIV securities(1)
Adjusted Income
Net Income per diluted share attributable to
Legg Mason, Inc. common shareholders
plus (less):
Amortization of intangible assets
Deferred income taxes on intangible assets:
tax amortization benefit
Deferred income taxes on impairment charges
Imputed interest on convertible debt
Net money market fund support (gains) losses(1)
Impairment charges
Net loss on sale of SIV securities(1)
Adjusted income per diluted share
(1)
Includes related adjustments to operating expenses, if applicable, and income tax provision (benefit).
2010
$204,357
22,769
136,252
—
34,445
(16,565)
—
—
$381,258
$
1.32
0.14
0.88
—
0.22
(0.11)
—
—
2.45
$
2009
$(1,967,918)
36,488
142,494
(444,618)
32,340
1,376,579
1,307,970
(1,674,724)
$(1,191,389)
$
(13.99)
0.26
1.01
(3.16)
0.23
9.79
9.30
(11.91)
(8.47)
$
LEGG MASON 2011 ANNuAL R EpORt 41
the increase in Adjusted Income was primarily due to the impact of net realized losses of $1.7 billion on the sale
of SIV securities in the prior fiscal year.
Operating Margin, as Adjusted
Operating Revenues, GAAp basis
plus (less):
Operating revenues eliminated upon consolidation
of investment vehicles
Distribution and servicing expense excluding
consolidated investment vehicles
Operating Revenues, as adjusted
Operating Income
plus (less):
Gains (losses) on deferred compensation and
seed investments
Impairment charges
Operating income and expenses of consolidated
investment vehicles
Operating Income, as Adjusted
Operating margin, GAAp basis
Operating margin, as adjusted
For the Years Ended March 31,
2010
$2,634,879
2,779
(691,868)
$1,945,790
$ 321,183
79,316
—
2,099
$ 402,598
12.2%
20.7
2009
$3,357,367
1,232
(969,952)
$2,388,647
$ (669,180)
(70,950)
1,307,970
1,937
$ 569,777
(19.9)%
23.9
LIQUIDITY AND CAPITAL RESOURCES
the primary objective of our capital structure is to
appropriately support our business strategies and
to provide needed liquidity at all times, including
maintaining required capital in certain subsidiaries.
Liquidity and the access to liquidity is important to the
success of our ongoing operations. Our overall fund-
ing needs and capital base are continually reviewed to
determine if the capital base meets the expected needs
of our businesses. We intend to continue to explore
potential acquisition opportunities as a means of
diversifying and strengthening our asset management
business. these opportunities may from time-to-time
involve acquisitions that are material in size and may
require, among other things, and, subject to existing
covenants, the raising of additional equity capital and/
or the issuance of additional debt.
the consolidation of variable interest entities as of
April 1, 2010 under new accounting guidance, as fur-
ther discussed in Critical Accounting policies, did not
impact our liquidity and capital resources. We have no
rights to the benefits from, nor do we bear the risks
associated with, the assets and liabilities of the CIVs,
beyond our investments in and investment advisory
fees generated from these vehicles, which are elimi-
nated in consolidation. Additionally, creditors of the
CIVs have no recourse to our general credit beyond the
level of our investment, if any, so we do not consider
these liabilities to be our obligations.
Our assets consist primarily of intangible assets, cash
and cash equivalents, goodwill, investment securities,
and investment advisory and related fee receivables.
Our assets have been principally funded by equity
capital, long-term debt and the results of operations.
At March 31, 2011, our cash and cash equivalents, total
assets, long-term debt and stockholders’ equity were
$1.4 billion, $8.3 billion, $1.2 billion and $5.8 billion,
respectively. total assets and total liabilities of the
CIVs at March 31, 2011 were $437 million and $337 mil-
lion, respectively.
42 LEGG MASON 2011 ANNuAL R EpORt
the following table summarizes our consolidated statements of cash flows for the years ended March 31 (in millions):
Cash flows from operating activities
Cash flows used for investing activities
Cash flows (used for) from financing activities
Effect of exchange rate changes
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2011
$ 412.1
(44.4)
(468.5)
10.8
(90.0)
1,465.9
$1,375.9
2010
$1,413.1
(276.7)
(746.7)
19.5
409.2
1,056.7
$1,465.9
2009
$ 382.0
(1,090.9)
329.2
(27.2)
(406.9)
1,463.6
$ 1,056.7
During fiscal 2011, our cash flows from operating
activities were $412.1 million, primarily attributable
to our current year net income adjusted for non-cash
items. Cash outflows for investing activities during
fiscal 2011 were $44.4 million, primarily attributable
to payments made for fixed assets. Cash outflows for
financing activities of $468.5 million, were driven by
the repurchase of 14.6 million of our common shares
for $445 million. See Note 13 of Notes to Consolidated
Financial Statements for additional information.
During fiscal 2010, cash flows from operating activi-
ties were $1,413.1 million, of which $1.0 billion reflects
the receipt of income tax refunds resulting from net
operating loss carrybacks. the remainder was attrib-
utable to net income adjusted for non-cash items.
Cash outflows for investing activities during fiscal
2010 were $276.7 million, primarily attributable to cash
payments of $180 million made in connection with the
acquisition of permal, and payments for fixed assets
of $84.1 million, principally associated with the reloca-
tion of our corporate headquarters, partially offset by
fund support collateral received of $38.9 million due
to the amendment, termination and expiration of cer-
tain capital support arrangements. Cash outflows for
financing activities were $746.7 million, primarily due
to the repayment in January 2010 of the remaining
$550 million outstanding balance on our $700 million
five-year term loan, $135.0 million of cash consider-
ation paid in the Equity units exchange offer and the
payment of cash dividends.
During fiscal 2009, cash flows from operations were
$382.0 million, primarily attributable to revenue
declines. Cash outflows for investing activities were
$1.1 billion during fiscal 2009, primarily attributable
to the purchase of SIV securities from our liquidity
funds, which used $2.9 billion. these outflows were
offset in part by proceeds from the sale of securities
purchased under agreements to resell and SIV securi-
ties of $1.1 billion, cash proceeds received for the sale
of the implementation and overlay business of Legg
Mason private portfolio Group (“LMppG”) of $181 mil-
lion, and the return of a portion of a contingent earn-
out payment from the acquisition of pCM of $120 mil-
lion that was previously funded into escrow. Cash
flows from financing activities provided $329.2 mil-
lion during fiscal 2009, primarily due to $1.1 billion in
net proceeds from the offering of Equity units, offset
in part by the repayment of $425 million of 6.75%
senior notes and a $250 million repayment on our
$500 million unsecured revolving credit facility.
Financing Transactions
the table below reflects our primary sources of financing (in thousands) as of March 31, 2011:
type
2.5% Convertible Senior Notes
5.6% Senior Notes from Equity units
Revolving Credit Agreement
total at
March 31,
2011
$1,250,000
103,039
500,000
Amount Outstanding
at March 31,
2011
$1,087,932
103,039
250,000
2010
$1,051,243
103,039
250,000
Interest Rate
2.50%
5.60%
LIBOR + 2.625%
Maturity
January 2015
June 2021
February 2013
LEGG MASON 2011 ANNuAL R EpORt 43
During January 2008, we increased our capital base
by $1.25 billion through the sale of 2.5% convertible
senior notes. the proceeds strengthened our balance
sheet and provided additional liquidity that has been
used for general corporate purposes, including the
purchase of SIV securities from our liquidity funds.
the senior notes bear interest at 2.5%, payable semi-
annually in cash. We are accreting the carrying value
to the principal amount at maturity using an imputed
interest rate of 6.5% (the effective borrowing rate for
non-convertible debt at the time of issuance) over its
expected life of seven years, resulting in additional
interest expense for fiscal 2011 and 2010 of approxi-
mately $36.7 million and $34.4 million, respectively.
In connection with this financing, we entered into eco-
nomic hedging transactions that increase the effec-
tive conversion price of the notes. these hedging
transactions had a net cost to us of $83 million, which
we paid from the proceeds of the notes. these trans-
actions closed on January 31, 2008.
In May 2008, we issued 23 million Equity units for
$1.15 billion, of which $50 million was used to pay
issuance costs. Each unit consists of a 5% interest
in $1,000 principal amount of 5.6% Senior Notes
due June 30, 2021 and a purchase contract to pur-
chase a varying number of shares of our common
stock by June 30, 2011. the notes and purchase
contracts are separate and distinct instruments, but
their terms are structured to simulate a conversion
of debt to equity and potentially remarketed debt
approximately three years after issuance. During the
September 2009 quarter, we completed an exchange
offer for our Equity units in the form of Corporate
units in order to increase our equity capital levels
and reduce the amount of our outstanding debt
and related interest expense. We exchanged 91% of
our outstanding Corporate units, each for 0.8881
of a share of our common stock and $6.25 in cash
per Corporate unit, equating to 18.6 million shares
of Legg Mason common stock and $135.0 million
of cash, including cash paid in lieu of fractional
shares and transaction costs. In connection with
this transaction, we incurred transaction costs of
approximately $22 million, of which $15.7 million
was in cash. Approximately 2.1 million Equity units
with $103 million of 5.6% Senior Notes remain out-
standing. We are in the process of evaluating our
options for remarketing the Senior Notes by June 30,
2011. See Note 7 of Notes to Consolidated Financial
Statements for additional information.
During November 2007, we borrowed an aggregate
of $500 million under our unsecured revolving credit
facility for general corporate purposes. In March
2009, we repaid $250 million of the outstanding bor-
rowings under this credit facility. the facility may be
prepaid at any time and contains customary covenants
and default provisions. the facility was scheduled to
mature on October 14, 2010; however, in fiscal 2010,
the credit agreement was amended to extend the
maturity date to February 11, 2013 and modify cov-
enants, as discussed below.
In October 2005, we borrowed $700 million through
a syndicated five-year unsecured floating-rate term
loan agreement to primarily fund the cash portion of
the purchase price of the Citigroup transaction. During
fiscal 2010, we repaid the remaining $550 million out-
standing balance of the debt.
the agreements entered into as part of our January
2008 issuance of $1.25 billion in 2.5% convertible
senior notes prevent us from incurring additional debt,
with a few exceptions, if our debt to EBItDA ratio (as
defined in the documents) exceeds 2.5. In order to
complete the May 2008 issuance of the Equity units,
we received a waiver of the covenant under which we
are prevented from issuing more than $250 million in
additional debt at any time when our debt to EBItDA
ratio exceeds 2.5. upon expiration of this waiver on
June 30, 2011, we will be unable to incur any additional
debt if our debt to EBItDA ratio exceeds 2.5. As of
March 31, 2011, our debt to EBItDA ratio was 2.6 and
thus the only new debt we could have incurred would
be allowed by the covenant exceptions.
At March 31, 2011, our financial covenants under
our bank agreements include: maximum net debt to
EBItDA ratio of 2.5 and minimum EBItDA to inter-
est expense ratio of 4.0. Debt is defined to include all
obligations for borrowed money, excluding the debt
incurred in the equity units offering and non-recourse
debt, and under capital leases. under these net debt
covenants, our debt is reduced by the amount of our
unrestricted cash in excess of the greater of subsidiary
cash or $375 million. EBItDA is defined as consolidated
net income plus/minus tax expense, interest expense,
depreciation and amortization, amortization of intan-
gibles, any extraordinary expenses or losses, and any
non-cash charges, as defined. As of March 31, 2011, our
net debt to EBItDA ratio was 1.1 and EBItDA to interest
expense ratio was 12.9. We have maintained compli-
ance with our covenants at all times during fiscal 2011.
44 LEGG MASON 2011 ANNuAL R EpORt
If our net income significantly declines, or if we spend
our available cash, it may impact our ability to main-
tain compliance with these covenants. If we deter-
mine that our compliance with these covenants may
be under pressure, we may elect to take a number of
actions, including reducing our expenses in order to
increase our EBItDA, using available cash to repay
all or a portion of our $250 million outstanding debt
subject to these covenants or seeking to negotiate
with our lenders to modify the terms or to restructure
our debt. We anticipate that we will have available
cash to repay our bank debt, should it be necessary.
using available cash to repay indebtedness would
make the cash unavailable for other uses and might
affect the liquidity discussions and conclusions
above. Entering into any modification or restructuring
of our debt would likely result in additional fees or
interest payments.
Our outstanding debt is currently impacted by the
ratings of two rating agencies. In the event of a down-
grade by both rating agencies, the interest rate on our
revolving line of credit may increase.
Other Transactions
During fiscal 2010, in connection with the acquisition
of permal, we paid an aggregate of $171 million in
cash to acquire the remaining 62.5% of the outstand-
ing preference shares. We also elected to purchase,
for $9 million, the rights of the sellers of the prefer-
ence shares to receive an earnout payment of up to
$149 million in two years. As a result of this transac-
tion, there will be no further payments for the permal
acquisition. In addition, during fiscal 2010 and 2009,
we paid an aggregate amount of $15.0 million in divi-
dends on the preference shares. All payments for pref-
erence shares, including dividends, were recognized
as additional goodwill.
During fiscal 2010, we announced a plan to terminate
the exchangeable share arrangement related to the
acquisition of Legg Mason Canada Inc., in accordance
with its terms. In May 2010, 1.1 million shares, repre-
senting all remaining outstanding exchangeable shares,
were exchanged for shares of our common stock.
was released from escrow to the sellers and $120 mil-
lion was returned to us and recorded as a reduction
of goodwill.
In April 2008, we completed a sale in which Citigroup
Global Markets Inc., an affiliate of Citigroup, acquired
a majority of the overlay and implementation business
of LMppG, including its managed account trading and
technology platform. the sale produced cash proceeds
of approximately $181 million.
Certain of our asset management affiliates maintain
various credit facilities for general operating purposes.
See Notes 6 and 7 of Notes to Consolidated Financial
Statements for additional information. Certain affili-
ates are also subject to the capital requirements of var-
ious regulatory agencies. All such affiliates met their
respective capital adequacy requirements.
Liquidity Fund Support
During fiscal 2009, we had arrangements to provide
financial support to certain liquidity funds. During
fiscal 2009, we purchased and subsequently sold,
or reimbursed the funds for a portion of their losses
incurred in selling, all outstanding securities issued
by SIVs held in various liquidity funds managed by
one of our affiliates, the majority of which were previ-
ously supported under these arrangements. During
fiscal 2009, we also sold Canadian conduit securities
purchased from one of our liquidity funds during fiscal
2008. In fiscal 2009, we provided additional support to
liquidity funds that was not related to SIV securities.
As of March 31, 2010 all support arrangements were
terminated or expired.
During fiscal 2009, we paid $2.9 billion for an aggre-
gate $3.0 billion in principal amount (plus $24 million
of accrued interest) of non-bank sponsored SIV securi-
ties from certain liquidity funds that were previously
supported under various capital support agreements
(“CSAs”) and letters of credit (“LOCs”). upon the pur-
chase of these securities, the CSAs and LOCs were
terminated in accordance with their terms. Collateral of
$2.0 billion was returned, which included the return of
$1.3 billion of collateral provided during fiscal 2009 to
support new or amended CSAs and LOCs.
During fiscal 2007, in connection with the acquisition
of pCM, we paid into escrow the maximum fifth anni-
versary payment of $300 million of which $150 million
remained in escrow subject to certain limited claw-
back provisions until July 2009. During fiscal 2009, the
contingency was settled at which time $30 million
During fiscal 2009, the $3.0 billion of purchased secu-
rities were sold along with $355 million of securities
previously supported by a total return swap (“tRS”)
and $76 million of Canadian conduit securities held
on our balance sheet, to third parties for $627.3 mil-
lion, net of transaction costs. the tRS terminated in
LEGG MASON 2011 ANNuAL R EpORt 45
accordance with its terms upon the sale of the securi-
ties and $209 million of collateral was returned.
During fiscal 2009, we also paid $181.2 million to reim-
burse two funds for a portion of losses they incurred in
selling SIV securities.
During fiscal 2010, the four remaining CSAs to provide
up to $42 million in support to two liquidity funds were
terminated or expired in accordance with their terms.
No amounts were drawn thereunder and $42 million of
collateral was returned.
Future Outlook
We expect that over the next 12 months our operating
activities will be adequate to support our operating
cash needs. In addition to our ordinary operating cash
needs, as described above, we anticipate other cash
needs during the next 12 months. In connection with
the announced plan to streamline our business model,
we expect to incur transition-related costs in the range
of $115 million to $135 million through March 2012,
of which approximately 15% are non-cash charges.
During fiscal 2011, $54.4 million of these costs were
accrued and substantially all of the remaining costs
will be accrued in fiscal 2012. A significant portion of
the accrued costs will be paid in fiscal 2012. We project
that the initiative will result in annual cost savings of
approximately $130 million to $150 million, excluding
costs to achieve these savings, and expect to achieve
these savings on a run rate basis by the fourth quarter
of fiscal 2012. See Note 16 of Notes to Consolidated
Financial Statements for information regarding transi-
tion-related costs recorded in fiscal 2011.
We currently intend to utilize our other available
resources for any number of potential activities,
including seed capital investments in new products,
repurchase of shares of our common stock, as further
discussed below, repayment of outstanding debt, pay-
ment of increased dividends, or acquisitions.
As described above, we currently project that our avail-
able cash and cash flows from operating activities will
be sufficient to fund our liquidity needs. We also cur-
rently have approximately $1.0 billion in cash in excess
of our working capital requirements, a portion of which
we intend to utilize to repurchase up to $400 million of
our common stock by the end of fiscal 2012, subject to
market conditions and our performance, actual cash
flows, and other capital needs. these repurchases will
be made under the current Board of Directors author-
ization to repurchase up to $1 billion of our common
stock, announced in May 2010, of which $555 million
remains unused as of March 31, 2011. Accordingly,
we do not currently expect to raise additional debt or
equity financing over the next 12 months. However,
there can be no assurances of these expectations as
our projections could prove to be incorrect, unexpected
events may occur that require additional liquidity, such
as an acquisition opportunity or an opportunity to refi-
nance indebtedness, or market conditions might signifi-
cantly worsen, affecting our results of operations and
generation of available cash. If these events resulted in
our operations and available cash being insufficient to
fund liquidity needs, we would likely seek to manage
our available resources by taking actions such as reduc-
ing future share repurchases, additional cost-cutting,
reducing our expected expenditures on investments,
selling assets (such as investment securities), repa-
triating earnings from foreign affiliates, or modifying
arrangements with our affiliates and/or employees.
Should these types of actions prove insufficient, or
should a large acquisition or refinancing opportunity
arise, we may seek to raise additional equity or debt.
Credit and Liquidity Risk
Cash and cash equivalent deposits involve certain
credit and liquidity risks. We maintain our cash and
cash equivalents with a limited number of high quality
financial institutions and from time to time may have
concentrations with one or more of these institutions.
the balances with these financial institutions and their
credit quality are monitored on an ongoing basis.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements, as defined by the
Securities and Exchange Commission (“SEC”), include
certain contractual arrangements pursuant to which a
company has an obligation, such as certain contingent
obligations, certain guarantee contracts, retained or
contingent interest in assets transferred to an unconsol-
idated entity, certain derivative instruments classified as
equity or material variable interests in unconsolidated
entities that provide financing, liquidity, market risk or
credit risk support. Disclosure is required for any off-
balance sheet arrangements that have, or are reason-
ably likely to have, a material current or future effect on
our financial condition, results of operations, liquidity or
capital resources. We generally do not enter into off-bal-
ance sheet arrangements, as defined, other than those
described in the Contractual Obligations section that
follows and Consolidation and Liquidity Fund Support
discussed in Critical Accounting policies and Notes 1, 18
and 19 of Notes to Consolidated Financial Statements.
46 LEGG MASON 2011 ANNuAL R EpORt
As previously discussed, during fiscal 2009 we had vari-
ous off-balance sheet arrangements to provide support
to certain of our liquidity funds. these arrangements, all
of which were terminated or expired prior to March 31,
2010, included letters of credit, capital support agree-
ments and a tRS.
In January 2008, we entered into hedge and warrant
transactions on the convertible notes with certain finan-
cial institution counterparties to increase the effective
conversion price of the convertible senior notes. See
Note 6 of Notes to Consolidated Financial Statements.
Contractual and Contingent Obligations
We have contractual obligations to make future pay-
ments, principally in connection with our long-term
debt and non-cancelable lease agreements. See
Notes 6, 7, and 9 of Notes to Consolidated Financial
Statements for additional disclosures related to
our commitments.
the following table sets forth these contractual obligations (in millions) by fiscal year:
2012
2013
2014
2015
2016 thereafter
total
Contractual Obligations
Short-term borrowings(1)
Long-term borrowings by contract maturity(2)
Interest on short-term and long-term borrowings(2)(3)
Minimum rental and service commitments
total Contractual Obligations(4)(5)(6)(7)
$250.0
1.0
46.3
142.3
$439.6
$
—
1.2
39.0
124.0
$164.2
$
—
1.3
38.9
100.1
$140.3
$
—
1,251.3
38.9
90.0
$1,380.2
$ —
6.1
7.5
83.1
$96.7
$
—
103.0
37.9
522.1
$663.0
$ 250.0
1,363.9
208.5
1,061.6
$2,884.0
(1) Represents borrowing under our revolving line of credit which does not expire until February 2013. However, we may elect to repay this debt sooner if management elects to utilize a
portion of our available cash for this purpose.
(2) Excludes long-term borrowings of the consolidated CLO of $278.3 million and interest on these long-term borrowings, as applicable. the amount in thereafter is contractually due
(3)
(4)
fiscal 2022, subject to potential remarketing as further described in Note 7 of Notes to Consolidated Financial Statements.
Interest on floating rate short-term debt is based on rates at March 31, 2011.
In connection with our restructuring plans, we no longer intend to exercise a put/purchase option on land and a building that was treated as a capital lease. the remaining rental com-
mitment for this facility is included in minimum rental and service commitments above.
(5) the table above does not include approximately $23.4 million in capital commitments to investment partnerships in which Legg Mason is a limited partner. these obligations will be
funded, as required, through the end of the commitment periods through fiscal 2018.
(6) the table above does not include amounts for uncertain tax positions of $60.2 million (net of the federal benefit for state tax liabilities) because the timing of any related cash outflows
cannot be reliably estimated.
(7) the table above does not include amounts related to our business streamlining initiatives.
MARKET RISK
the Company maintains an enterprise risk management
program to oversee and coordinate risk management
activities of Legg Mason and its subsidiaries. under the
program, certain risk activities are managed at the sub-
sidiary level. the following describes certain aspects of
our business that are sensitive to market risk.
Revenues and Net Income
the majority of our revenue is calculated from the
market value of our AuM. Accordingly, a decline in the
value of securities will cause our AuM to decrease. In
addition, our fixed income and liquidity AuM are sub-
ject to the impact of interest rate fluctuations, as rising
interest rates may tend to reduce the market value of
bonds held in various mutual fund portfolios or separ-
ately managed accounts. In the ordinary course of our
business we may also reduce or waive investment
management fees, or limit total expenses, on certain
products or services for particular time periods to
manage fund expenses, or for other reasons, and to
help retain or increase managed assets. performance
fees may be earned on certain investment advisory
contracts for exceeding performance benchmarks.
Declines in market values of AuM will result in reduced
fee revenues and net income. We generally earn higher
fees on equity assets than fees charged for fixed
income and liquidity assets. Declines in market val-
ues of AuM in this asset class will disproportionately
impact our revenues. In addition, under revenue shar-
ing agreements, certain of our affiliates retain different
percentages of revenues to cover their costs, including
compensation. Our net income, profit margin and com-
pensation as a percentage of operating revenues are
impacted based on which affiliates generate our reve-
nues, and a change in AuM at one subsidiary can have
a dramatically different effect on our revenues and
earnings than an equal change at another subsidiary.
Trading and Non-Trading Assets
Our trading and non-trading assets are comprised of
investment securities, including seed capital in sponsored
mutual funds and products, limited partnerships, limited
liability companies and certain other investment products.
LEGG MASON 2011 ANNuAL R EpORt 47
trading and other current investments, excluding CIVs, at March 31, 2011 and 2010 subject to risk of security
price fluctuations are summarized (in thousands) below.
Investment securities, excluding CIVs:
trading investments relating to long-term incentive compensation plans
trading proprietary fund products and other investments
Equity method investments relating to long-term incentive compensation
plans, proprietary fund products and other investments
total trading and other current investments, excluding CIVs
2011
$120,107
204,063
76,340
$400,510
2010
$118,096
142,497
74,280
$334,873
Approximately $96.0 million and $149.8 million of
trading and other current investments related to
long-term incentive compensation plans as of
March 31, 2011 and 2010, respectively, have offset-
ting liabilities such that fluctuation in the market
value of these assets and the related liabilities will
not have a material effect on our net income or
liquidity. However, it will have an impact on our
compensation expense with a corresponding offset
in other non-operating income (expense). trading
and other current investments of $72.6 million and
$17.3 million at March 31, 2011 and 2010, respec-
tively, relate to other long-term incentive plans for
which the related liabilities do not completely offset
due to vesting provisions. therefore, fluctuations in
the market value of these trading investments will
impact our compensation expense, non-operating
income and net income.
Approximately $231.9 million and $167.7 million of trad-
ing and other current investments at March 31, 2011
and 2010, respectively, are investments in proprietary
fund products and other investments for which fluctua-
tions in market value will impact our non-operating
income. Of these amounts, the fluctuations in market
value of approximately $30.9 million and $33.0 mil-
lion of proprietary fund products as of March 31, 2011
and 2010, respectively, have offsetting compensation
expense under revenue share agreements. the fluc-
tuations in market value of approximately $39.8 and
$19.3 million in proprietary fund products as of March 31,
2011 and 2010, respectively, are substantially offset
by gains (losses) on market hedges and therefore do
not materially impact Net Income attributable to Legg
Mason, Inc. Investments in proprietary fund products
are not liquidated until the related fund establishes a
track record, has other investors, or a decision is made
to no longer pursue the strategy.
Non-trading assets, excluding CIVs, at March 31, 2011 and 2010 subject to risk of security price fluctuations are
summarized (in thousands) below.
Investment securities, excluding CIVs:
Available-for-sale
Investments in partnerships and LLCs
Equity method investments in partnerships, LLCs, and other
Other investments
total non-trading assets, excluding CIVs
2011
$ 11,300
22,167
155,351
270
$189,088
2010
$ 6,957
23,049
100,160
1,452
$131,618
Equity method investments in partnerships and LLCs
at March 31, 2011 and 2010 includes approximately
$91.9 million and $55.7 million, respectively, of
investments related to our involvement with the u.S.
treasury’s public private Investment program (“ppIp”).
Investment securities of CIVs totaled $82.8 million and
$37.2 million as of March 31, 2011 and 2010, respec-
tively, and investments of CIVs totaled $312.8 mil-
lion and $13.7 million as of March 31, 2011 and 2010,
respectively. As of March 31, 2011 and 2010, we held
equity investments in the CIVs of $53.7 million and
$61.9 million, respectively. Fluctuations in the market
value of investments of CIVs in excess of our equity
investment will not impact Net Income Attributable to
Legg Mason, Inc. However, it may have an impact on
other non-operating income (expense) of CIVs with a
corresponding offset in net income (loss) attributable
to non-controlling interests.
48 LEGG MASON 2011 ANNuAL R EpORt
Valuation of trading and non-trading investments
is described below within Critical Accounting
policies under the heading “Valuation of Financial
Instruments.” See Notes 1 and 15 of Notes to
Consolidated Financial Statements for further dis-
cussion of derivatives.
the following is a summary of the effect of a 20% increase or decrease in the market values of our financial
instruments subject to market valuation risks at March 31, 2011:
Investment securities, excluding CIVs:
trading investments related to deferred compensation plans
trading proprietary fund products and other
Equity method investments relating to deferred compensation
plans, proprietary fund products and other investments
total current investments, excluding CIVs
Net investments in CIVs
Available-for-sale investments
Investments in partnerships and LLCs
Equity method investments in partnerships, LLCs, and other
Other investments
total investments subject to market risk
Carrying Value
Fair Value
Assuming a
20% Increase(1)
Fair Value
Assuming a
20% Decrease(1)
$120,107
204,063
76,340
400,510
53,708
11,300
22,167
155,351
270
$643,306
$144,128
244,876
91,608
480,612
64,450
13,560
26,600
186,421
324
$771,967
$ 96,086
163,250
61,072
320,408
42,966
9,040
17,734
124,281
216
$514,645
(1) Gains and losses related to certain investments in deferred compensation plans and proprietary fund products are directly offset by a corresponding adjustment to compensation
expense and related liability. In addition, investments in proprietary fund products of approximately $39.8 million have been hedged to limit market risk. As a result, a 20% increase or
decrease in the unrealized market value of our financial instruments subject to market valuation risks would result in a $70.3 million increase or decrease in our pre-tax earnings as of
March 31, 2011.
Foreign Exchange Sensitivity
We operate primarily in the united States, but provide
services, earn revenues and incur expenses outside
the united States. Accordingly, fluctuations in foreign
exchange rates for currencies, principally in Brazil,
Japan, the united Kingdom, Singapore, and Australia,
may impact our comprehensive income and net
income. Certain of our affiliates have entered into for-
ward contracts to manage the impact of fluctuations in
foreign exchange rates on their results of operations.
We do not expect foreign currency fluctuations to have
a material effect on our net income or liquidity.
Interest Rate Risk
Exposure to interest rate changes on our outstand-
ing debt is mitigated as a substantial portion of our
debt is at fixed interest rates. At March 31, 2011 and
2010, approximately $250.0 million and $253.6 million,
respectively, of our outstanding floating rate debt is
subject to fluctuations in interest rates and will have an
impact on our non-operating income and net income.
As of March 31, 2011, we estimate that a 1% change in
interest rates would result in a net annual change to
interest expense of $2.5 million. See Notes 6 and 7 of
Notes to Consolidated Financial Statements for addi-
tional disclosures regarding debt.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting policies are an integral part of the prepar-
ation of our financial statements in accordance with
accounting principles generally accepted in the united
States of America. understanding these policies,
therefore, is a key factor in understanding our reported
results of operations and financial position. See Note 1
of Notes to Consolidated Financial Statements for a
discussion of our significant accounting policies and
other information. Certain critical accounting policies
require us to make estimates and assumptions that
affect the amounts of assets, liabilities, revenues and
expenses reported in the financial statements. Due to
their nature, estimates involve judgment based upon
available information. therefore, actual results or
amounts could differ from estimates and the differ-
ence could have a material impact on the consolidated
financial statements.
We consider the following to be our critical accounting
policies that involve significant estimates or judgments.
Consolidation
Effective April 1, 2010, we adopted new accounting
guidance, Accounting Standards Codification (“ASC”)
topic 810, “Consolidation,” (Statement of Financial
Accounting Standards No. 167, “Amendments to
LEGG MASON 2011 ANNuAL R EpORt 49
Financial Accounting Standards Board Interpretation
No. 46(R)”) (“SFAS No. 167”), relating to the con-
solidation of variable interest entities (“VIEs”) which
includes a new approach for determining who should
consolidate a VIE, changes to when it is necessary to
reassess who should consolidate a VIE, and changes in
the assessment of which entities are VIEs. the applica-
tion of the new accounting guidance has been deferred
for certain investment funds, including money market
funds. Investment funds that qualify for the defer-
ral continue to be assessed for consolidation under
prior guidance, Financial Accounting Standards Board
Interpretation No. 46(R), “Consolidation of Variable
Interest Entities—an interpretation of ARB No. 51”
(“FIN 46(R)”).
In the normal course of our business, we sponsor
and are the manager of various types of investment
vehicles. Certain of these investment vehicles are con-
sidered to be VIEs while others are considered to be
voting rights entities (“VREs”) subject to traditional
consolidation concepts based on ownership rights. For
our services, we are entitled to receive management
fees and may be eligible, under certain circumstances,
to receive additional subordinate management fees
or other incentive fees. Our exposure to risk in these
entities is generally limited to any equity investment
we have made or are required to make and any earned
but uncollected management fees. uncollected manage-
ment fees from these VIEs were not material at March 31,
2011. We have not issued any investment performance
guarantees to these VIEs, VREs or their investors.
Investment vehicles that are considered VREs are con-
solidated if we have a controlling financial interest in
the investment vehicle.
FIN 46(R)
For sponsored investment funds, including money mar-
ket funds, which qualify for the deferral of new account-
ing guidance, we determine whether we are the pri-
mary beneficiary of a VIE if we absorb a majority of the
VIE’s expected losses, or receive a majority of the VIE’s
expected residual returns, if any. Our determination of
expected residual returns excludes gross fees paid to
a decision maker. It is unlikely that we will be the pri-
mary beneficiary for VIEs created to manage assets for
clients which qualify for the deferral unless our own-
ership interest, including interests of related parties,
is substantial, unless we may earn significant perfor-
mance fees from the VIE or unless we are considered to
have a material implied variable interest in the VIE. In
determining whether we are the primary beneficiary of
a VIE which qualifies for the deferral, we consider both
qualitative and quantitative factors such as the voting
rights of the equity holders, economic participation of
all parties, including how fees are earned and paid to
us, related party ownership, guarantees and implied
relationships. In determining the primary beneficiary,
we must make assumptions and estimates about,
among other things, the future performance of the
underlying assets held by the VIE, including investment
returns, cash flows, and credit and interest rate risks. In
determining whether a VIE is significant for disclosure
purposes, we consider the same factors used for deter-
mination of the primary beneficiary.
SFAS No. 167
We sponsor and are the manager for collateralized
debt obligation entities (“CDOs”) and CLOs that do not
qualify for the deferral, and are assessed under the
new accounting guidance, as follows. We determine
whether we have a variable interest in a VIE by con-
sidering if, among other things, we have the obliga-
tion to absorb losses, or the right to receive benefits,
that are expected to be significant to the VIE. We
consider the management fee structure, including the
seniority level of our fees, the current and expected
economic performance of the entity, as well as other
provisions included in the governing documents
that might restrict or guarantee an expected loss or
residual return. If we have a significant variable inter-
est, we determine whether we are the primary ben-
eficiary of the VIE if we have both the power to direct
the activities of the VIE that most significantly impact
the entity’s economic performance and the obligation
to absorb losses, or the right to receive benefits, that
could potentially be significant to the VIE.
In evaluating whether we have the obligation to absorb
losses, or the right to receive benefits, that could
potentially be significant to the VIE, we consider fac-
tors regarding the design, terms, and characteristics of
the investment vehicles, including the following quali-
tative factors: if we have involvement with the invest-
ment vehicle beyond providing management services;
if we hold equity or debt interests in the investment
vehicle; if we have transferred any assets to the invest-
ment vehicle; if the potential aggregate fees in future
periods are insignificant relative to the potential cash
flows of the investment vehicle; and if the variability of
the expected fees in relation to the potential cash flows
of the investment vehicle is insignificant.
50 LEGG MASON 2011 ANNuAL R EpORt
under both the new accounting guidance and prior
guidance, Legg Mason must consolidate VIEs for
which it is deemed to be the primary beneficiary.
See Note 18 of Notes to Consolidated Financial
Statements for additional discussion of CIVs and
other VIEs.
Revenue Recognition
the vast majority of our revenues are calculated as a
percentage of the fair value of our AuM. the underly-
ing securities within the portfolios we manage, which
are not reflected within our consolidated financial
statements, are generally valued as follows: (i) with
respect to securities for which market quotations are
readily available, the market value of such securities;
and (ii) with respect to other securities and assets, fair
value as determined in good faith.
For most of our mutual funds and other pooled prod-
ucts, the boards of directors or similar bodies are
responsible for establishing policies and procedures
related to the pricing of securities. Each board of direc-
tors generally delegates the execution of the various
functions related to pricing to a fund valuation commit-
tee which, in turn, may rely on information from vari-
ous parties in pricing securities such as independent
pricing services, the fund accounting agent, the fund
manager, broker-dealers, and others (or a combination
thereof). the funds have controls reasonably designed
to ensure that the prices assigned to securities they
hold are accurate. Management has established poli-
cies to ensure consistency in the application of rev-
enue recognition.
As manager and advisor for separate accounts, we are
generally responsible for the pricing of securities held
in client accounts (or may share this responsibility with
others) and have established policies to govern valu-
ation processes similar to those discussed above for
mutual funds that are reasonably designed to ensure
consistency in the application of revenue recognition.
Management relies extensively on the data provided
by independent pricing services and the custodians in
the pricing of separate account AuM. Separate account
customers typically select the custodian.
Valuation processes for AuM are dependent on the
nature of the assets and any contractual provisions
with our clients. Equity securities under management
for which market quotations are available are usually
valued at the last reported sales price or official clos-
ing price on the primary market or exchange on which
they trade. Debt securities under management are
usually valued at bid, or the mean between the last
quoted bid and asked prices, provided by independent
pricing services that are based on transactions in debt
obligations, quotations from bond dealers, market
transactions in comparable securities and various
other relationships between securities. Short-term
debt obligations are generally valued at amortized
cost, which is designed to approximate fair value.
the vast majority of our AuM is valued based on
data from third parties such as independent pricing
services, fund accounting agents, custodians and bro-
kers. this varies slightly from time to time based upon
the underlying composition of the asset class (equity,
fixed income and liquidity) as well as the actual under-
lying securities in the portfolio within each asset class.
Regardless of the valuation process or pricing source,
we have established controls reasonably designed
to assess the reasonableness of the prices provided.
Where market prices are not readily available, or are
determined not to reflect fair value, value may be
determined in accordance with established valuation
procedures based on, among other things, unobserv-
able inputs. Management fees on AuM where fair val-
ues are based on unobservable inputs are not mater-
ial. As of March 31, 2011, equity, fixed income and
liquidity AuM values aggregated $189.6 billion,
$356.6 billion, and $131.4 billion, respectively.
As the vast majority of our AuM is valued by inde-
pendent pricing services based upon observable
market prices or inputs, we believe market risk is the
most significant risk underlying valuation of our AuM.
Economic events and financial market turmoil have
increased market price volatility; however, the valua-
tion of the vast majority of the securities held by our
funds and in separate accounts continues to be derived
from readily available market price quotations. As of
March 31, 2011, less than 1% of total AuM is valued
based on unobservable inputs.
Valuation of Financial Instruments
Substantially all financial instruments are reflected in
the financial statements at fair value or amounts that
approximate fair value, except Legg Mason’s long-
term debt. trading investments, Investment securities
and derivative assets and liabilities included in the
Consolidated Balance Sheets include forms of financial
instruments. unrealized gains and losses related to
these financial instruments are reflected in net income
or other comprehensive income, depending on the
underlying purpose of the instrument.
LEGG MASON 2011 ANNuAL R EpORt 51
For equity investments where we do not control the
investee, and where we are not the primary beneficiary
of a variable interest entity, but can exert significant
influence over the financial and operating policies of
the investee, we follow the equity method of account-
ing. the evaluation of whether we exert control or
significant influence over the financial and operational
policies of its investees requires significant judgment
based on the facts and circumstances surrounding
each individual investment. Factors considered in
these evaluations may include investor voting or other
rights, any influence we may have on the governing
board of the investee, the legal rights of other inves-
tors in the entity pursuant to the fund’s operating
documents and the relationship between us and other
investors in the entity. Substantially all of our equity
method investees are investment companies which
record their underlying investments at fair value.
therefore, under the equity method of accounting, our
share of the investee’s underlying net income or loss
predominantly represents fair value adjustments in the
investments held by the equity method investee. Our
share of the investee’s net income or loss is based on
the most current information available and is recorded
as a net gain (loss) on investments within non-operating
income (expense).
For investments, we value equity and fixed income
securities using closing market prices for listed instru-
ments or broker or dealer price quotations, when avail-
able. Fixed income securities may also be valued using
valuation models and estimates based on spreads to
actively traded benchmark debt instruments with read-
ily available market prices. We evaluate our non-trad-
ing Investment securities for “other than temporary”
impairment. Impairment may exist when the fair value
of an investment security has been below the adjusted
cost for an extended period of time. If an “other than
temporary” impairment is determined to exist, the dif-
ference between the adjusted cost of the investment
security and its current fair value is recognized as a
charge to earnings in the period in which the impair-
ment is determined.
In fiscal 2009, we had in place various credit support
arrangements for certain liquidity funds managed by
a subsidiary that qualified as derivative transactions.
the fair values of these derivative instruments were
based on management’s estimates of expected out-
comes derived from pricing data for the underlying
securities and/or detailed collateral analyses. During
fiscal 2009, we purchased and subsequently sold all
supported securities issued by SIVs held in our liquid-
ity funds, effectively eliminating our exposure to SIVs,
and the various support arrangements terminated in
accordance with their terms upon the purchase. As of
March 31, 2009, four capital support arrangements,
which supported investments in non-asset backed
securities, remained outstanding. During fiscal 2010,
these four remaining capital support arrangements
were terminated or expired in accordance with their
terms and previously recorded unrealized losses of
$20.6 million were recovered. None of these deriva-
tive transactions were designated for hedge account-
ing as defined in accounting guidance for derivative
instruments and hedging activities, and the related
gains and losses are included in Fund support in the
Consolidated Statement of Operations in fiscal 2010
and 2009.
For investments in illiquid or privately-held securities
for which market prices or quotations are not readily
available, the determination of fair value requires us
to estimate the value of the securities using a variety
of methods and resources, including the most current
available financial information for the investment and
the industry. As of March 31, 2011 and 2010, excluding
investments in CIVs, we owned approximately $23.8 mil-
lion and $36.0 million, respectively, of financial invest-
ments that were valued on our assumptions or estimates
and unobservable inputs.
At March 31, 2011 and 2010, we also have approxi-
mately $177.5 million and $123.2 million, respectively,
of other investments, such as investment partnerships,
that are included in Other noncurrent assets on the
Consolidated Balance Sheets, of which approximately
$155.4 million and $100.2 million, respectively, are
accounted for under the equity method. the remainder
is accounted for under the cost method. In addition, as
of March 31, 2011 and 2010, we had $76.3 million and
$74.3 million, respectively, of equity method invest-
ments that are included in Investment securities on the
Consolidated Balance Sheets.
the accounting guidance for fair value measurements
and disclosures defines fair value and establishes a
framework for measuring fair value. the accounting
guidance defines fair value as the exchange price that
would be received for an asset or paid to transfer a
liability in the principal or most advantageous mar-
ket for the asset or liability in an orderly transaction
between market participants on the measurement
date. A fair value measurement should reflect all of
52 LEGG MASON 2011 ANNuAL R EpORt
the assumptions that market participants would use
in pricing the asset or liability, including assumptions
about the risk inherent in a particular valuation tech-
nique, the effect of a restriction on the sale or use of an
asset, and the risk of non-performance.
the accounting guidance for fair value measurements
establishes a hierarchy that prioritizes the inputs for
valuation techniques used to measure fair value. the
fair value hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs.
Our financial instruments measured and reported at
fair value are classified and disclosed in one of the fol-
lowing categories:
Level 1—Financial instruments for which prices
are quoted in active markets, which, for us, include
investments in publicly traded mutual funds with
quoted market prices and equities listed in active
markets.
Level 2—Financial instruments for which prices
are quoted for similar assets and liabilities in active
markets; prices are quoted for identical or similar
assets in inactive markets; or prices are based on
observable inputs, other than quoted prices, such
as models or other valuation methodologies. For
us, this category may include repurchase agree-
ments, fixed income securities and certain propri-
etary fund products. this category also includes
CLO loans and liabilities of a CIV.
Level 3—Financial instruments for which values
are based on unobservable inputs, including those
for which there is little or no market activity. this
category includes derivative assets and liabilities
related to investments in partnerships, limited
liability companies, and private equity funds.
previously, this category included derivative
assets related to fund support agreements and
certain owned securities issued by SIVs. this cat-
egory may also include certain proprietary fund
products with redemption restrictions and CLO
debt of a CIV.
the valuation of an asset or liability may involve inputs
from more than one level of the hierarchy. the level in
the fair value hierarchy within which a fair value mea-
surement in its entirety falls is determined based on
the lowest level input that is significant to the fair value
measurement in its entirety.
proprietary fund products and certain investments
held by CIVs are valued at NAV determined by the
fund administrator. these funds are typically invested
in exchange traded investments with observable
market prices. their valuations may be classified as
Level 1, Level 2 or Level 3 based on whether the fund
is exchange traded, the frequency of the related NAV
determinations and the impact of redemption restric-
tions. For investments in illiquid and privately-held
securities (private equity and investment partnerships)
for which market prices or quotations may not be
readily available, including certain investments held
by CIVs, management must estimate the value of the
securities using a variety of methods and resources,
including the most current available financial informa-
tion for the investment and the industry to which it
applies in order to determine fair value. these valua-
tion processes for illiquid and privately-held securities
inherently require management’s judgment and are
therefore classified in Level 3.
the fair values of CLO loans and bonds are determined
based on prices from well-recognized third-party pric-
ing services that utilize available market data and are
therefore classified as Level 2. Legg Mason has estab-
lished controls designed to assess the reasonableness
of the prices provided. the fair value of CLO debt is
valued using a discounted cash flow methodology.
Inputs used to determine the expected cash flows
include assumptions about forecasted default and
recovery rates that a market participant would use in
determining the fair value of the CLO’s underlying col-
lateral assets. Given the significance of the unobserv-
able inputs to the fair value measurement, the CLO
debt valuation is classified as Level 3.
Exchange traded options are valued using the last
sale price or in the absence of a sale, the last offering
price. Options traded over the counter are valued using
dealer supplied valuations. Options are classified as
Level 1. Futures contracts are valued at the last settle-
ment price at the end of each day on the exchange upon
which they are traded and are classified as Level 1.
Index and single name credit default swaps and inter-
est rate swaps are valued based on valuations fur-
nished by pricing services and are classified as Level 2.
As a practical expedient, we rely on the NAVs of cer-
tain investments as their fair value. the NAVs that have
been provided by investees are derived from the fair
values of the underlying investments as of the report-
ing date.
LEGG MASON 2011 ANNuAL R EpORt 53
As of March 31, 2011, approximately 3% of total assets
(13% of financial assets measured at fair value) and 10%
of total liabilities meet the definition of Level 3. Excluding
the assets and liabilities of CIVs, approximately 2% of
total assets (13% of financial assets measured at fair
value) and no liabilities meet the definition of Level 3.
Any transfers between categories are measured at the
beginning of the period.
See Note 3 of Notes to Consolidated Financial
Statements for additional information.
Intangible Assets and Goodwill
Balances as of March 31, 2011 are as follows:
Asset management contracts
Indefinite-life intangible assets
trade names
Goodwill
Americas
$
48,692
2,601,551
7,700
907,079
$3,565,022
International
$
4,626
1,152,106
62,100
404,573
$1,623,405
total
$
53,318
3,753,657
69,800
1,311,652
$5,188,427
Our identifiable intangible assets consist primarily of
asset management contracts, contracts to manage
proprietary mutual funds or funds-of-hedge funds and
trade names resulting from acquisitions. Asset man-
agement contracts are amortizable intangible assets
that are capitalized at acquisition and amortized over
the expected life of the contract. Contracts to manage
proprietary mutual funds or funds-of-hedge funds are
indefinite-life intangible assets because we assume
that there is no foreseeable limit on the contract period
due to the likelihood of continued renewal at little or
no cost. Similarly, trade names are considered indefi-
nite-life intangible assets because they are expected to
generate cash flows indefinitely.
In allocating the purchase price of an acquisition to
intangible assets, we must determine the fair value of
the assets acquired. We determine fair values of intan-
gible assets acquired based upon projected future cash
flows, which take into consideration estimates and
assumptions including profit margins, growth or attri-
tion rates for acquired contracts based upon historical
experience, estimated contract lives, discount rates,
projected net client flows and market performance.
the determination of estimated contract lives requires
judgment based upon historical client turnover and
attrition rates and the probability that contracts with
termination provisions will be renewed. the discount
rate employed is a weighted-average cost of capital
that takes into consideration a premium representing
the degree of risk inherent in the asset as more fully
described below.
For indefinite-life intangible assets and goodwill, we
project the impact of both net client flows and market
appreciation/depreciation on cash flows for the near-
term (generally the first five years) based on a year-
by-year assessment that considers current market
conditions, our past experience, relevant publicly
available statistics and projections, internal budgets,
and discussions with our own market experts. Beyond
five years, our projections for net client flows and mar-
ket performance migrate towards relevant long-term
rates in line with our own results and industry growth
statistics. We believe our growth assumptions are
reasonable given our consideration of multiple inputs,
including internal and external sources described
above. However, there continues to be uncertainty
in the markets, and our assumptions are subject to
change based on fluctuations in our actual results and
market conditions.
Goodwill represents the residual amount of acquisi-
tion cost in excess of identified tangible and intangible
assets and assumed liabilities.
Given the relative significance of our intangible assets
and goodwill to our consolidated financial state-
ments, on a quarterly basis we consider if triggering
events have occurred that may indicate a significant
change in fair values. triggering events may include
significant adverse changes in our business, legal or
regulatory environment, loss of key personnel, signifi-
cant business dispositions, or other events. If a trig-
gering event has occurred, we perform tests, which
include critical reviews of all significant assumptions,
to determine if any intangible assets or goodwill are
impaired. At a minimum, we perform these tests for
indefinite-life intangible assets and goodwill annually
at December 31.
54 LEGG MASON 2011 ANNuAL R EpORt
We completed our annual impairment tests of goodwill
and indefinite-life intangible assets as of December 31,
2010, and determined that there was no impairment
in the value of these assets as of December 31, 2010.
Further, no impairment in the value of amortizable
intangible assets was recognized during the year ended
March 31, 2011, as our estimates of the related future
cash flows exceeded the asset carrying values. We
have also determined that no triggering events have
occurred as of March 31, 2011, therefore, no additional
indefinite-life intangible asset and goodwill impairment
testing was necessary.
Amortizable Intangible Assets
Intangible assets subject to amortization are consid-
ered for impairment at each reporting period using an
undiscounted cash flow analysis. Significant assump-
tions used in assessing the recoverability of manage-
ment contract intangible assets include projected cash
flows generated by the contracts and the remaining
lives of the contracts. projected cash flows are based
on fees generated by current AuM for the applicable
contracts. Contracts are generally assumed to turnover
evenly throughout the life of the intangible asset. the
remaining life of the asset is based upon factors such
as average client retention and client turnover rates.
If the amortization periods are not appropriate, the
expected lives are adjusted and the impact on the fair
value is assessed. Actual cash flows in any one period
may vary from the projected cash flows without result-
ing in an impairment charge because a variance in any
one period must be considered in conjunction with
other assumptions that impact projected cash flows.
the estimated useful lives of amortizable intan-
gible assets currently range from 1 to 7 years with a
weighted-average life of approximately 3.6 years.
Indefinite-Life Intangible Assets
For intangible assets with lives that are indetermin-
able or indefinite, fair value is determined from a
market participant’s perspective based on projected
discounted cash flows. We have two primary types of
indefinite-life intangible assets: proprietary fund con-
tracts and, to a lesser extent, trade names.
We determine the fair value of our intangible assets
based upon discounted projected cash flows, which
take into consideration estimates of profit margins,
growth rates and discount rates. An asset is deter-
mined to be impaired if the current implied fair value is
less than the recorded carrying value of the asset. If an
asset is impaired, the difference between the current
implied fair value and the carrying value of the asset
reflected on the financial statements is recognized as
an expense in the period in which the impairment is
determined to be other than temporary.
projected cash flows are based on annualized cash
flows for the applicable contracts projected forward
40 years, assuming annual cash flow growth from
estimated net client flows and projected market perfor-
mance. Contracts that are managed and operated as
a single unit, such as contracts within the same family
of funds, are reviewed in aggregate and are consid-
ered interchangeable because investors can transfer
between funds with limited restrictions. Similarly, cash
flows generated by new funds added to the fund group
are included when determining the fair value of the
intangible asset. Actual cash flows in any one period
may vary from the projected cash flows without result-
ing in an impairment charge because a variance in any
one period must be considered in conjunction with
other assumptions that impact projected cash flows.
the domestic mutual fund contracts acquired in the
Citigroup Asset Management (“CAM”) acquisition of
$2,502 million and the permal funds-of-hedge funds
contracts of $947 million account for approximately
65% and 25%, respectively, of our indefinite-life
intangible assets. For our December 31, 2010 annual
impairment test, cash flows from the domestic mutual
fund contracts were assumed to have annual growth
rates that average approximately 8%. Cash flows on
the permal contracts were assumed to have annual
growth rates that average approximately 9%. the pro-
jected cash flows from the domestic mutual fund and
permal funds were discounted at 13.2% and 14.5%,
respectively. Assuming all other factors remain the
same, actual results and changes in assumptions for
the domestic mutual fund and permal fund-of-hedge
funds contracts would have to cause our cash flow
projections over the long-term to deviate more than
20% and 25%, respectively, from previous projections
or the discount rate would have to be raised to 15.0%
and 17.0%, respectively, for the asset to be deemed
impaired. the approximate fair values of these assets
exceed their carrying values by $628 million and
$321 million, respectively.
trade names account for 2% of indefinite-life intangible
assets and are primarily related to permal. We tested
these intangible assets using assumptions similar to
those described above for indefinite-life contracts.
LEGG MASON 2011 ANNuAL R EpORt 55
Goodwill
Goodwill is evaluated at the reporting unit level and is
considered for impairment when the carrying amount
of the reporting unit exceeds the implied fair value of
the reporting unit. In estimating the implied fair value
of the reporting unit, we use valuation techniques
based on discounted projected cash flows, similar to
techniques employed in analyzing the purchase price
of an acquisition target. We have defined the report-
ing units to be the Americas and International divi-
sions, which are the same as our operating segments.
Allocations of goodwill to our divisions for any changes
in our management structure, acquisitions and disposi-
tions are based on relative fair values of the businesses
added to or sold from the divisions. See Note 17 of
Notes to Consolidated Financial Statements for addi-
tional information related to business segments.
Significant assumptions used in assessing the implied
fair value of the reporting unit under the discounted
cash flow method include the projected cash flows
generated by the reporting unit, including profit mar-
gins, expected cash flow growth rates, and the dis-
count rate used to determine the present value of the
cash flows. Cash flow growth rates consider estimates
of both AuM flows and market expectations by asset
class (equity, fixed income and liquidity), by invest-
ment manager and by reporting unit based upon,
among other things, historical experience and expecta-
tions of future market performance from internal and
external sources. the impact of both net client flows
and market performance on cash flows are projected
for the near-term (generally the first five years) based
on a year-by-year assessment that considers current
market conditions, our experience, our internal finan-
cial projections, relevant publicly available statistics
and projections, and discussions with our own market
experts. Actual cash flows in any one period may vary
from the projected cash flows without resulting in
an impairment charge because a variance in any one
period must be considered in conjunction with other
assumptions that impact projected cash flows.
Discount rates are based on appropriately weighted
estimated costs of debt and capital using a market
participant perspective. We estimate the cost of debt
based on published debt rates. We estimate the cost
of capital based on the Capital Asset pricing Model,
which considers the risk-free interest rate, market risk
and size premiums, peer-group betas and unsystematic
risk. the discount rates are also calibrated based on an
assessment of relevant market values.
Goodwill in the Americas reporting unit principally
originated from the acquisitions of CAM and Royce.
the value of this reporting unit is based on projected
net cash flows of assets managed in our u.S. mutual
funds, closed end funds and other proprietary funds,
in addition to separate account assets of our u.S.
managers. Goodwill in the International reporting
unit principally originated from the acquisitions of
permal and the international CAM businesses. For
our December 31, 2010 annual impairment test, the
projected cash flows were discounted at 13.2% and
14.0%, respectively, for the Americas and International
divisions to determine the present value of cash
flows. As of December 31, 2010, the implied fair values
materially exceeded the carrying values for both the
Americas and International divisions. projected cash
flows, on an aggregate basis across all asset classes
in the Americas division, were assumed to have a
five-year average annual growth rate of approximately
10%, with a long-term annual growth rate of approxi-
mately 8%. projected cash flows, on an aggregate
basis across all asset classes in the International divi-
sion were assumed to have a five-year average annual
growth rate of approximately 8%, with a long-term
annual growth rate of approximately 9%. Cash flow
growth for the Americas and International divisions
over the next five years was based on separate fac-
tors for equity, fixed income, and liquidity products.
Equity product growth projections were based on
historical trends, in context with our long-term growth
experience, budgets, and current market conditions.
Fixed income product growth projections were based
on the past experience of our primary fixed income
manager, budgets, and market influences relevant
to their business. Long-term growth is based on our
historical experience, available historic market statis-
tics, and estimates of future expectations. We believe
our growth assumptions are reasonable given our
consideration of multiple inputs, including internal
and external sources described above. However, our
assumptions are subject to change based on fluctua-
tions in our actual results and market conditions.
Assuming all other factors remain the same, actual
results and changes in assumptions for the Americas
and International reporting units would have to cause
our cash flow projections for both reporting units over
the long-term to deviate approximately 47% and 50%,
respectively, from previous projections or the discount
rate would have to increase approximately 5.9 and
7.0 percentage points, respectively, for goodwill to be
considered for impairment.
56 LEGG MASON 2011 ANNuAL R EpORt
As of December 31, 2010, considering relevant prices
of our common shares, our market capitalization, along
with a reasonable control premium, exceeds the aggre-
gate carrying values of our reporting units.
In December 2010, we announced a realignment of
our executive management team, which, among
other things, will eliminate the previous separation
of the Americas and International divisions into one
Global Asset Management business during fiscal
2012. However, as of March 31, 2011, our internal man-
agement reporting has not changed. As a result, the
Americas and International operating segments contin-
ued to be our reporting units.
Stock-Based Compensation
Our stock-based compensation plans include stock
options, employee stock purchase plans, market-based
performance share awards, restricted stock awards
and deferred compensation payable in stock. under
our stock compensation plans, we issue equity awards
to directors, officers, and key employees.
In accordance with the applicable accounting guidance,
compensation expense for the years ended March 31,
2011, 2010 and 2009 includes compensation cost for all
non-vested share-based awards at their grant date fair
value amortized over the respective vesting periods on
the straight-line method. unamortized deferred com-
pensation is recognized as a reduction of additional
paid-in capital. Also under the accounting guidance,
cash flows related to income tax deductions in excess
of or less than the stock-based compensation expense
are classified as financing cash flows.
We granted 0.7 million, 1.5 million, and 1.5 million
stock options in fiscal 2011, 2010 and 2009, respec-
tively. For additional information on share-based
compensation, see Note 12 of Notes to Consolidated
Financial Statements.
We determine the fair value of each option grant using
the Black-Scholes option-pricing model, except for
market-based grants, for which we use a Monte Carlo
option-pricing model. Both models require manage-
ment to develop estimates regarding certain input
variables. the inputs for the Black-Scholes model
include: stock price on the date of grant, exercise price
of the option, dividend yield, volatility, expected life
and the risk-free interest rate, all of which except the
grant date stock price and the exercise price require
estimates or assumptions. We calculate the dividend
yield based upon the average of the historical quarterly
dividend payments over a term equal to the vesting
period of the options. We estimate volatility equally
weighted between the historical prices of our stock
over a period equal to the expected life of the option
and the implied volatility of market listed options at the
date of grant. the expected life is the estimated length
of time an option will be held before it is either exer-
cised or canceled, based upon our historical option
exercise experience. the risk-free interest rate is the
rate available for zero-coupon u.S. Government issues
with a remaining term equal to the expected life of the
options being valued. If we used different methods to
estimate our variables for the Black-Scholes and Monte
Carlo models, or if we used a different type of option-
pricing model, the fair value of our option grants might
be different.
Income Taxes
We are subject to the income tax laws of the federal,
state and local jurisdictions of the u.S. and numer-
ous foreign jurisdictions in which we operate. We file
income tax returns representing our filing positions
with each jurisdiction. Due to the inherent complexities
arising from conducting business and being taxed in
a substantial number of jurisdictions, we must make
certain estimates and judgments in determining our
income tax provision for financial statement purposes.
these estimates and judgments are used in determin-
ing the tax basis of assets and liabilities and in the
calculation of certain tax assets and liabilities that arise
from differences in the timing of revenue and expense
recognition for tax and financial statement purposes.
Management assesses the likelihood that we will be
able to realize our deferred tax assets. If it is more
likely than not that the deferred tax asset will not be
realized, then a valuation allowance is established with
a corresponding increase to deferred tax provision.
Substantially all of our deferred tax assets relate to
u.S. and united Kingdom (“u.K.”) taxing jurisdic-
tions. As of March 31, 2011, u.S. federal deferred tax
assets aggregated $683 million, realization of which
is expected to require $4.6 billion of future u.S. earn-
ings, approximately $129 million of which must be
in the form of foreign sourced income. Deferred tax
assets generated in u.S. jurisdictions resulting from
net operating losses generally expire 20 years after
they are generated and those resulting from foreign
tax credits generally expire 10 years after they are gen-
erated. Based on estimates of future taxable income,
using assumptions consistent with those used in our
LEGG MASON 2011 ANNuAL R EpORt 57
goodwill impairment testing, it is more likely than not
that current federal tax benefits relating to net operat-
ing losses are realizable and no valuation allowance is
necessary at this time. With respect to those resulting
from foreign tax credits, it is more likely than not that
tax benefits relating to $3.1 million foreign tax credits
will not be realizable and a valuation allowance has
been established with respect thereto. As of March 31,
2011, u.S. state deferred tax assets aggregated $222 mil-
lion. Due to limitations on net operating loss and capi-
tal loss carryforwards and, taking into consideration
certain state tax planning strategies, a valuation allow-
ance has been established for the state capital loss
and net operating loss benefits in certain jurisdictions
in the amount of $0.7 million for fiscal 2011. Due to the
uncertainty of future state apportionment factors and
future effective state tax rates, the value of state net
operating loss benefits ultimately realized may vary.
As of March 31, 2011, u.K. deferred tax assets, net of
valuation allowances, are not material. An additional
valuation allowance was recorded on $3.0 million of
foreign deferred tax assets relating to various jurisdic-
tions, principally relating to foreign currency transla-
tion adjustments recorded in equity. to the extent
our analysis of the realization of deferred tax assets
relies on deferred tax liabilities, we have considered
the timing, nature and jurisdiction of reversals, as well
as, future increases relating to the tax amortization of
goodwill and indefinite-life intangible assets. While tax
planning may enhance our positions, the realization of
current tax benefits is not dependent on any significant
tax strategies.
In the event we determine all or any portion of our
deferred tax assets that are not already subject to a val-
uation allowance are not realizable, we will be required
to establish a valuation allowance by a charge to the
income tax provision in the period in which that deter-
mination is made. Depending on the facts and circum-
stances, the charge could be material to our earnings.
the calculation of our tax liabilities involves uncertain-
ties in the application of complex tax regulations. We
recognize liabilities for anticipated tax uncertainties in
the u.S. and other tax jurisdictions based on our esti-
mate of whether, and the extent to which, additional
taxes will be due.
RECENT ACCOUNTING DEVELOPMENTS
See discussion of Recent Accounting Developments in
Note 1 of Notes to Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
We have made in this 2011 Annual Report, and from
time to time may otherwise make in our public filings,
press releases and statements by our management,
“forward-looking statements” within the meaning of
the private Securities Litigation Reform Act of 1995,
including information relating to anticipated growth
in revenues, margins or earnings per share, antici-
pated changes in our business or in the amount of
our client AuM, anticipated future performance of our
business, including expected earnings per share in
future periods, anticipated future investment perfor-
mance of our affiliates, our expected future net client
cash flows, anticipated expense levels, changes in
expenses, the expected effects of acquisitions and
expectations regarding financial market conditions.
the words or phrases “can be,” “may be,” “expects,”
“may affect,” “may depend,” “believes,” “estimate,”
“project,” “anticipate” and similar words and phrases
are intended to identify such forward-looking state-
ments. Such forward-looking statements are subject
to various known and unknown risks and uncertainties
and we caution readers that any forward-looking infor-
mation provided by or on behalf of Legg Mason is not
a guarantee of future performance.
Actual results may differ materially from those in
forward-looking information as a result of various fac-
tors, some of which are beyond our control, including
but not limited to those discussed below and those
discussed under the heading “Risk Factors” and else-
where in our Annual Report on Form 10-K and our
other public filings, press releases and statements
by our management. Due to such risks, uncertainties
and other factors, we caution each person receiving
such forward-looking information not to place undue
reliance on such statements. Further, such forward-
looking statements speak only as of the date on which
such statements are made, and we undertake no obli-
gations to update any forward-looking statement to
reflect events or circumstances after the date on which
such statement is made or to reflect the occurrence of
unanticipated events.
Our future revenues may fluctuate due to numerous
factors, such as: the total value and composition of
AuM; the mix of our AuM among our affiliates; the
volatility and general level of securities prices and
interest rates; the relative investment performance of
company-sponsored investment funds and other asset
58 LEGG MASON 2011 ANNuAL R EpORt
management products compared with competing
offerings and market indices; investor sentiment and
confidence; general economic conditions; our ability
to maintain investment management and adminis-
trative fees at current levels; competitive conditions
in our business; the ability to attract and retain key
personnel and the effects of acquisitions, including
prior acquisitions. Our future operating results are
also dependent upon the level of operating expenses,
which are subject to fluctuation for the following or
other reasons: variations in the level of compensation
expense incurred as a result of changes in the number
of total employees, competitive factors, changes in
the percentages of revenues paid as compensation
or other reasons; variations in expenses and capi-
tal costs, including depreciation, amortization and
other non-cash charges incurred by us to maintain
our administrative infrastructure; unanticipated costs
that may be incurred by Legg Mason from time to
time to protect client goodwill, to otherwise support
investment products or in connection with litigation or
regulatory proceedings; and the effects of acquisitions
and dispositions.
Our business is also subject to substantial governmental
regulation and changes in legal, regulatory, accounting,
tax and compliance requirements that may have a sub-
stantial effect on our business and results of operations.
EFFECTS OF INFLATION
the rate of inflation can directly affect various
expenses, including employee compensation, commu-
nications and technology and occupancy, which may
not be readily recoverable in charges for services pro-
vided by us. Further, to the extent inflation adversely
affects the securities markets, it may impact revenues
and recorded intangible asset and goodwill values.
See discussion of “Market Risks—Revenues and Net
Income” and “Critical Accounting policies—Intangible
Assets and Goodwill” previously discussed.
LEGG MASON 2011 ANNuAL R EpORt 59
Report of Management on Internal Control over Financial Reporting
the management of Legg Mason, Inc. is responsible for establishing and maintaining adequate internal control
over financial reporting.
Legg Mason’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the united States of America. Legg Mason’s inter-
nal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
Legg Mason; (ii) provide reasonable assurance that transactions are recorded as necessary to permit prepara-
tion of financial statements in accordance with accounting principles generally accepted in the united States of
America, and that receipts and expenditures of Legg Mason are being made only in accordance with authoriza-
tions of management and directors of Legg Mason; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of Legg Mason’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of Legg Mason’s internal control over financial reporting as of March 31,
2011, based on the framework set forth by the Committee of Sponsoring Organizations of the treadway Commission
(“COSO”) in Internal Control—Integrated Framework. Based on that assessment, management concluded that, as
of March 31, 2011, Legg Mason’s internal control over financial reporting is effective based on the criteria estab-
lished in the COSO framework.
the effectiveness of Legg Mason’s internal control over financial reporting as of March 31, 2011, has been
audited by pricewaterhouseCoopers LLp, an independent registered public accounting firm, as stated in their
report appearing herein, which expresses an unqualified opinion on the effectiveness of Legg Mason’s internal
control over financial reporting as of March 31, 2011.
Mark R. Fetting
Chairman, president and Chief Executive Officer
peter H. Nachtwey
Chief Financial Officer and Senior Executive Vice president
60 LEGG MASON 2011 ANNuAL R EpORt
Report of Independent Registered public Accounting Firm
to the Board of Directors
and Stockholders of Legg Mason, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income
(loss), comprehensive income (loss), changes in stockholders’ equity and cash flows present fairly, in all material
respects, the financial position of Legg Mason, Inc. and its subsidiaries at March 31, 2011 and March 31, 2010,
and the results of their operations and their cash flows for each of the three years in the period ended March 31,
2011 in conformity with accounting principles generally accepted in the united States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
March 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the treadway Commission (COSO). the Company’s management is responsible
for these financial statements, for maintaining effective internal control over financial reporting and for its assess-
ment of the effectiveness of internal control over financial reporting, included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these
financial statements and on the Company’s internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the public Company Accounting Oversight
Board (united States). those standards require that we plan and perform the audits to obtain reasonable assur-
ance about whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, in 2011 the Company adopted new accounting
guidance related to the consolidation of variable interest entities.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial report-
ing includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or dis-
position of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Baltimore, Maryland
May 27, 2011
LEGG MASON 2011 ANNuAL R EpORt 61
Consolidated Balance Sheets
(Dollars in thousands)
ASSETS
Current Assets
Cash and cash equivalents
Cash and cash equivalents of consolidated investment vehicles
Restricted cash
Receivables:
Investment advisory and related fees
Other
Investment securities
Investment securities of consolidated investment vehicles
Deferred income taxes
Other
total current assets
Fixed assets, net
Intangible assets, net
Goodwill
Investments of consolidated investment vehicles
Deferred income taxes
Other
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current Liabilities
Accrued compensation
Accounts payable and accrued expenses
Short-term borrowings
Current portion of long-term debt
Other
Other current liabilities of consolidated investment vehicles
total current liabilities
Deferred compensation
Deferred income taxes
Other
Long-term debt
Long-term debt of consolidated investment vehicles
Total Liabilities
Commitments and Contingencies (Note 9)
Redeemable Noncontrolling Interests
Stockholders’ Equity
Common stock, par value $.10; authorized 500,000,000 shares;
issued 150,218,810 shares in 2011 and 161,438,993 shares in 2010
Shares exchangeable into common stock
Additional paid-in capital
Employee stock trust
Deferred compensation employee stock trust
Retained earnings
Appropriated retained earnings of consolidated investment vehicles
Accumulated other comprehensive income, net
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
62 LEGG MASON 2011 ANNuAL R EpORt
March 31,
2011
2010
$1,375,918
37,153
9,253
366,571
29,466
400,510
82,829
82,174
62,682
2,446,556
286,705
3,876,775
1,311,652
312,765
232,394
240,909
$8,707,756
$ 368,164
207,870
250,000
792
87,393
54,753
968,972
92,487
266,193
93,612
1,201,076
278,320
2,900,660
$1,465,888
42,387
2,185
349,245
211,453
334,873
37,187
58,037
57,891
2,559,146
361,819
3,902,222
1,315,296
13,692
280,474
189,983
$8,622,632
$ 288,856
399,613
250,000
5,154
109,692
961
1,054,276
137,312
270,578
123,985
1,165,180
—
2,751,331
36,712
29,577
15,022
—
4,111,095
(34,466)
34,466
1,539,984
10,922
93,361
5,770,384
$8,707,756
16,144
2,760
4,447,612
(33,095)
33,095
1,316,981
—
58,227
5,841,724
$8,622,632
Consolidated Statements of Income (Loss)
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Investment advisory fees
Separate accounts
Funds
performance fees
Distribution and service fees
Other
total operating revenues
OPERATING EXPENSES
Compensation and benefits
transition-related compensation
total compensation and benefits
Distribution and servicing
Communications and technology
Occupancy
Amortization of intangible assets
Impairment of goodwill and intangible assets
Other
total operating expenses
OPERATING INCOME (LOSS)
OTHER NON-OPERATING INCOME (EXPENSE)
Interest income
Interest expense
Fund support
Other
Other non-operating income of consolidated investment vehicles, net
total other non-operating income (expense)
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit)
NET INCOME (LOSS)
Less: Net income (loss) attributable to noncontrolling interests
NET INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO
LEGG MASON, INC. COMMON SHAREHOLDERS
Basic
Diluted
See notes to consolidated financial statements.
Years Ended March 31,
2010
2011
2009
$ 815,633
1,486,615
96,661
379,161
6,247
2,784,317
1,140,305
45,048
1,185,353
712,839
161,969
137,861
22,913
—
176,574
2,397,509
386,808
9,246
(92,157)
—
59,596
1,704
(21,611)
365,197
119,434
245,763
(8,160)
$ 253,923
$ 814,824
1,367,297
71,452
375,333
5,973
2,634,879
1,111,298
—
1,111,298
691,931
163,098
156,967
22,769
—
167,633
2,313,696
321,183
7,354
(126,273)
23,171
86,892
17,329
8,473
329,656
118,676
210,980
6,623
$ 204,357
$ 1,017,195
1,836,350
17,429
475,003
11,390
3,357,367
1,132,216
—
1,132,216
969,964
188,312
209,537
36,488
1,307,970
182,060
4,026,547
(669,180)
56,272
(182,805)
(2,283,236)
(117,044)
7,796
(2,519,017)
(3,188,197)
(1,223,203)
(1,964,994)
2,924
$(1,967,918)
$
$
1.63
1.63
$
$
1.33
1.32
$
$
(13.99)
(13.99)
LEGG MASON 2011 ANNuAL R EpORt 63
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
COMMON STOCK
Beginning balance
Stock options and other stock-based compensation
Deferred compensation employee stock trust
Deferred compensation, net
Exchangeable shares
Equity units exchanged
Shares repurchased and retired
preferred share conversions
Ending balance
SHARES EXCHANGEABLE INTO COMMON STOCK
Beginning balance
Exchanges
Ending balance
ADDITIONAL PAID-IN CAPITAL
Beginning balance
Stock options and other stock-based compensation
Deferred compensation employee stock trust
Deferred compensation, net
Convertible debt
Exchangeable shares
Equity units exchanged
Shares repurchased and retired
preferred share conversions
Ending balance
EMPLOYEE STOCK TRUST
Beginning balance
Shares issued to plans
Distributions and forfeitures
Ending balance
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
Beginning balance
Shares issued to plans
Distributions and forfeitures
Ending balance
RETAINED EARNINGS
Beginning balance
Net income (loss) attributable to Legg Mason, Inc.
Dividends declared
Ending balance
APPROPRIATED RETAINED EARNINGS OF CONSOLIDATED INVESTMENT VEHICLES
Beginning balance
Cumulative effect of change in accounting principle
Net loss reclassified to Appropriated retained earnings
Ending balance
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
Beginning balance
Realized and unrealized holding gains (losses) on investment securities, net of tax
unrealized and realized gains on cash flow hedge, net of tax
Foreign currency translation adjustment
Ending balance
TOTAL STOCKHOLDERS’ EQUITY
See notes to consolidated financial statements.
64 LEGG MASON 2011 ANNuAL R EpORt
Years Ended March 31,
2011
2010
2009
$
16,144
64
7
152
110
—
(1,455)
—
15,022
2,760
(2,760)
—
$
14,185
8
13
66
12
1,860
—
—
16,144
$
13,856
109
16
92
76
—
—
36
14,185
3,069
(309)
2,760
4,982
(1,913)
3,069
4,447,612
31,674
2,673
34,619
—
2,650
35,877
(444,010)
—
4,111,095
3,452,530
18,758
3,156
29,056
—
297
943,815
—
—
4,447,612
(33,095)
(2,136)
765
(34,466)
33,095
2,136
(765)
34,466
(35,094)
(2,938)
4,937
(33,095)
35,094
2,938
(4,937)
33,095
3,446,559
37,988
6,505
33,107
(73,430)
1,837
—
—
(36)
3,452,530
(29,307)
(5,787)
—
(35,094)
29,307
5,787
—
35,094
1,316,981
253,923
(30,920)
1,539,984
1,131,625
204,357
(19,001)
1,316,981
3,236,314
(1,967,918)
(136,771)
1,131,625
—
24,666
(13,744)
10,922
—
—
—
—
—
—
—
—
58,227
(25)
—
35,159
93,361
$5,770,384
(2,784)
(18)
—
61,029
58,227
$5,841,724
82,930
61
938
(86,713)
(2,784)
$4,598,625
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
NET INCOME (LOSS)
Other comprehensive income:
Foreign currency translation adjustment
unrealized gains (losses) on investment securities:
unrealized holding gains (losses) net of tax provision (benefit)
of $(22), $(9) and $9, respectively
Reclassification adjustment for (gains) losses included in net income
Net unrealized gains (losses) on investment securities
unrealized and realized gains (losses) on cash flow hedge,
net of tax provision of $666
total other comprehensive income (loss)
COMPREHENSIVE INCOME (LOSS)
Less: Comprehensive income attributable to noncontrolling interests
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
See notes to consolidated financial statements.
Years Ended March 31,
2010
$210,980
2011
$245,763
2009
$(1,964,994)
35,159
61,029
(86,713)
(33)
8
(25)
(13)
(5)
(18)
13
48
61
—
35,134
280,897
(8,160)
$289,057
—
61,011
271,991
6,623
$265,368
938
(85,714)
(2,050,708)
2,924
$(2,053,632)
LEGG MASON 2011 ANNuAL R EpORt 65
Consolidated Statements of Cash Flows
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Loss on Equity unit exchange
Realized loss on sale of SIV securities
Adjustments to reconcile Net Income to net cash
provided by operations:
Depreciation and amortization
Imputed interest for 2.5% convertible senior notes
Accretion and amortization of securities discounts
and premiums, net
Stock-based compensation
Net (gains) losses on investments
Net (gains) losses of consolidated investment vehicles
unrealized (gains) losses on fund support
Deferred income taxes
Impairment of goodwill and intangible assets
Other
Decrease (increase) in assets excluding acquisitions:
Investment advisory and related fees receivable
Net (purchases) sales of trading and other
current investments
Refundable income taxes
Other receivables
Other assets
Increase (decrease) in liabilities excluding acquisitions:
Accrued compensation
Deferred compensation
Accounts payable and accrued expenses
Other liabilities
Net increase in operating assets and liabilities of
consolidated investment vehicles, including cash
CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
payments for fixed assets
payments for business acquisitions-related costs
Contractual acquisition earnout settlements (payments)
proceeds from sale of assets
Fund Support:
Restricted cash, net (principally collateral)
payments under liquidity fund support arrangements
proceeds from sale of SIV securities
purchases of SIV securities, net of distributions
Net (increase) decrease in securities purchased under
agreements to resell
purchases of investment securities
proceeds from sales and maturities of investment securities
purchases of investments by consolidated investment vehicles
proceeds from sales and maturities of investments by
consolidated investment vehicles
CASH USED FOR INVESTING ACTIVITIES
66 LEGG MASON 2011 ANNuAL R EpORt
Years Ended March 31,
2010
2009
2011
$ 245,763
—
—
$ 210,980
22,040
—
$(1,964,994)
—
2,257,217
102,748
36,688
114,078
34,445
138,445
32,340
4,539
56,245
(58,851)
3,959
—
80,272
—
5,393
13,387
46,578
(103,457)
(17,359)
(22,115)
113,947
—
2,808
7,177
56,993
114,412
(7,615)
25,996
(817,477)
1,307,970
17,918
(13,794)
(53,402)
227,137
(55,540)
—
1,962
(20,923)
75,970
(44,825)
(251)
(49,954)
52,288
992,548
177,667
(50,082)
(89,800)
32,197
2,686
(86,484)
42,739
412,140
20,213
1,413,163
(32,904)
—
—
—
—
—
—
—
—
(8,430)
9,077
(173,261)
(84,117)
(11,092)
(179,804)
150
38,890
—
—
—
—
(55,507)
14,792
—
(58,867)
—
(626,392)
492,597
(234,817)
(44,838)
(93,214)
(362,349)
(85,579)
382,060
(130,950)
(7,524)
120,000
181,147
801,793
(305,933)
513,855
(2,868,815)
604,642
(1,293)
2,172
—
161,047
$ (44,471)
—
$ (276,688)
—
$(1,090,906)
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in short-term borrowings
proceeds from issuance of long-term debt, net
Debt issue costs
third-party distribution financing, net
Repayment of principal on long-term debt
payment on Equity unit exchange
Issuance of common stock
Repurchase of common stock
Dividends paid
Net repayment by consolidated investment vehicles
Net (redemptions/distributions paid)/subscriptions received
from noncontrolling interest holders
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTARY DISCLOSURE
Cash paid (received) for:
Years Ended March 31,
2010
2009
2011
$
—
—
—
(1,639)
(3,515)
—
14,440
(445,465)
(26,813)
(7,025)
1,551
(468,466)
10,827
(89,970)
1,465,888
$1,375,918
$
—
—
(3,056)
(2,428)
(554,913)
(135,015)
4,999
—
(48,241)
—
(8,066)
(746,720)
19,481
409,236
1,056,652
$1,465,888
$ (250,000)
1,089,463
—
(4,814)
(429,608)
—
31,983
—
(135,878)
—
28,004
329,150
(27,206)
(406,902)
1,463,554
$1,056,652
Income taxes (net of payments in 2010 of $60,747)
Interest
$
39,524
46,620
$ (994,823)
73,909
$ 156,129
158,499
See notes to consolidated financial statements.
LEGG MASON 2011 ANNuAL R EpORt 67
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts or unless otherwise noted)
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
Legg Mason, Inc. (“parent”) and its subsidiaries (col-
lectively, “Legg Mason”) are principally engaged in
providing asset management and related financial
services to individuals, institutions, corporations
and municipalities.
the consolidated financial statements include the
accounts of the parent and its subsidiaries in which it
has a controlling financial interest. Generally, an entity
is considered to have a controlling financial interest
when it owns a majority of the voting interest in an
entity. Legg Mason is also required to consolidate any
variable interest entity (“VIE”) in which it is considered
to be the primary beneficiary. See Note 18 for a further
discussion of VIEs. All material intercompany balances
and transactions have been eliminated.
Certain amounts in prior period financial statements
have been reclassified to conform to the current period
presentation, including amounts associated with cer-
tain consolidated investment vehicles (“CIVs”). See
Consolidation below and Note 18 for additional infor-
mation related to CIVs.
unless otherwise noted, all per share amounts include
common shares of Legg Mason, shares issued in con-
nection with the acquisition of Legg Mason Canada
Inc., which were exchangeable into common shares
of Legg Mason on a one-for-one basis at any time. In
May 2010, all outstanding exchangeable shares were
exchanged for shares of Legg Mason common stock.
All references to fiscal 2011, 2010 or 2009 refer to Legg
Mason’s fiscal year ended March 31 of that year.
Use of Estimates
the consolidated financial statements are prepared
in accordance with accounting principles generally
accepted in the united States of America, which
require management to make assumptions and esti-
mates that affect the amounts reported in the finan-
cial statements and accompanying notes, including
revenue recognition, valuation of financial instru-
ments, intangible assets and goodwill, stock-based
compensation, income taxes, and consolidation.
Management believes that the estimates used are rea-
sonable, although actual amounts could differ from
the estimates and the differences could have a mater-
ial impact on the consolidated financial statements.
Consolidation
Effective April 1, 2010, Legg Mason adopted new
accounting guidance, Accounting Standards
Codification (“ASC”) topic 810, “Consolidation,”
(Statement of Financial Accounting Standards No. 167,
“Amendments to Financial Accounting Standards
Board Interpretation No. 46(R)”) (“SFAS No. 167”),
relating to the consolidation of VIEs, which includes a
new approach for determining who should consolidate
a VIE, changes to when it is necessary to reassess who
should consolidate a VIE, and changes in the assess-
ment of which entities are VIEs. the application of
the new accounting guidance has been deferred for
certain investment funds, including money market
funds. Investment funds that qualify for the deferral
continue to be assessed for consolidation under prior
guidance, ASC topic 810, “Consolidation,” (Financial
Accounting Standards Board Interpretation No. 46(R),
“Consolidation of Variable Interest Entities—an inter-
pretation of ARB No. 51”) (“FIN 46(R)”).
In the normal course of its business, Legg Mason
sponsors and is the manager of various types of
investment vehicles. Certain of these investment
vehicles are considered to be VIEs while others are
considered to be voting rights entities (“VREs”) subject
to traditional consolidation concepts based on owner-
ship rights. For its services, Legg Mason is entitled to
receive management fees and may be eligible, under
certain circumstances, to receive additional subordi-
nate management fees or other incentive fees. Legg
Mason did not sell or transfer assets to any of the VIEs
or VREs. Legg Mason’s exposure to risk in these enti-
ties is generally limited to any equity investment it has
made or is required to make and any earned but uncol-
lected management fees. uncollected management
fees from these VIEs were not material at March 31,
2011 and 2010. Legg Mason has not issued any invest-
ment performance guarantees to these VIEs, VREs or
their investors. Investment vehicles that are consid-
ered VREs are consolidated if Legg Mason has a con-
trolling financial interest in the investment vehicle.
FIN 46(R)
For sponsored investment funds, including money
market funds, which qualify for the deferral of the new
accounting guidance, Legg Mason determines it is the
primary beneficiary of a VIE if it absorbs a majority of
the VIE’s expected losses, or receives a majority of the
VIE’s expected residual returns, if any. Legg Mason’s
determination of expected residual returns excludes
gross fees paid to a decision maker. It is unlikely that
68 LEGG MASON 2011 ANNuAL R EpORt
Legg Mason will be the primary beneficiary for VIEs
created to manage assets for clients which qualify for
the deferral unless Legg Mason’s ownership inter-
est in the VIE, including interests of related parties, is
substantial, unless Legg Mason may earn significant
performance fees from the VIE or unless Legg Mason
is considered to have a material implied variable inter-
est. In determining whether it is the primary benefi-
ciary of a VIE which qualifies for the deferral, Legg
Mason considers both qualitative and quantitative
factors such as the voting rights of the equity holders,
economic participation of all parties, including how
fees are earned and paid to Legg Mason, related party
ownership, guarantees and implied relationships. In
determining the primary beneficiary, Legg Mason must
make assumptions and estimates about, among other
things, the future performance of the underlying assets
held by the VIE, including investment returns, cash
flows, and credit and interest rate risks. In determining
whether a VIE is significant for disclosure purposes,
Legg Mason considers the same factors used for deter-
mination of the primary beneficiary.
SFAS No. 167
Legg Mason sponsors and is the manager for collater-
alized debt obligation entities (“CDOs”) and collateral-
ized loan obligations (“CLOs”) that do not qualify for
the deferral, and are assessed under the new account-
ing guidance, as follows. Legg Mason determines
whether it has a variable interest in a VIE by consid-
ering if, among other things, it has the obligation to
absorb losses, or the right to receive benefits, that are
expected to be significant to the VIE. Legg Mason also
considers the management fee structure, including
the seniority level of its fees, the current and expected
economic performance of the entity, as well as other
provisions included in the governing documents that
might restrict or guarantee an expected loss or resid-
ual return. If Legg Mason has a significant variable
interest, it determines it is the primary beneficiary of
the VIE if it has both the power to direct the activities
of the VIE that most significantly impact the entity’s
economic performance and the obligation to absorb
losses, or the right to receive benefits, that potentially
could be significant to the VIE.
In evaluating whether it has the obligation to absorb
losses, or the right to receive benefits, that potentially
could be significant to the VIE, Legg Mason considers
factors regarding the design, terms, and characteristics
of the investment vehicles, including, but not limited
to, the following qualitative factors: if Legg Mason
has involvement with the investment vehicle beyond
providing management services; if Legg Mason holds
equity or debt interests in the investment vehicle; if
Legg Mason has transferred any assets to the invest-
ment vehicle; if the potential aggregate fees in future
periods are insignificant relative to the potential cash
flows of the investment vehicle; and if the variability of
the expected fees in relation to the potential cash flows
of the investment vehicle is insignificant.
under both the new accounting guidance and prior
guidance, Legg Mason must consolidate VIEs for which
it is deemed to be the primary beneficiary. under the
new accounting guidance, Legg Mason consolidated
a CLO that was not previously consolidated. As of
March 31, 2011, Legg Mason’s Consolidated Balance
Sheet reflects $314,617 in assets and $278,320 in debt
issued by the CLO, despite the fact that the assets
cannot be used by Legg Mason, nor is Legg Mason
obligated for the debt. the adoption had no impact on
Net Income Attributable to Legg Mason, Inc.’s common
shareholders. In addition, Legg Mason’s Consolidated
Cash Flow Statement for the year ended March 31,
2011 reflects the cash flows of this CLO. In accordance
with the new accounting guidance, prior periods have
not been restated. See Note 18 for additional informa-
tion related to the application of the amended VIE con-
solidation model and the required disclosures.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with
original maturities of 90 days or less.
Restricted Cash
Restricted cash primarily represents cash collateral
required for market hedge arrangements. this cash is
not available to Legg Mason for general corporate use.
Financial Instruments
Substantially all financial instruments are reflected in
the financial statements at fair value or amounts that
approximate fair value, except Legg Mason’s long-
term debt.
For equity investments where Legg Mason does not
control the investee, and where it is not the primary
beneficiary of a variable interest entity, but can exert
significant influence over the financial and operat-
ing policies of the investee, Legg Mason follows
the equity method of accounting. the evaluation of
whether Legg Mason can exert control or significant
influence over the financial and operational policies
of its investees requires significant judgment based
LEGG MASON 2011 ANNuAL R EpORt 69
on the facts and circumstances surrounding each
individual investment. Factors considered in these
evaluations may include investor voting or other
rights, any influence we may have on the governing
board of the investee, the legal rights of other inves-
tors in the entity pursuant to the fund’s operating
documents and the relationship between Legg Mason
and other investors in the entity. Substantially all of
Legg Mason’s equity method investees are investment
companies which record their underlying investments
at fair value. therefore, under the equity method of
accounting, Legg Mason’s share of the investee’s
underlying net income or loss predominantly repre-
sents fair value adjustments in the investments held
by the equity method investee. Legg Mason’s share
of the investee’s net income or loss is based on the
most current information available and is recorded as
a net gain (loss) on investments within non-operating
income (expense). A significant portion of earnings
(losses) attributable to Legg Mason’s equity method
investments have offsetting compensation expense
adjustments under revenue sharing agreements,
therefore, fluctuations in the market value of these
investments will not have a material impact on Net
Income Attributable to Legg Mason, Inc.
Legg Mason also holds debt and marketable equity
investments which are classified as available-for-sale,
held-to-maturity or trading. Debt and marketable
equity securities classified as available-for-sale are
reported at fair value and resulting unrealized gains
and losses are reflected in stockholders’ equity, non-
controlling interests, and comprehensive income, net
of applicable income taxes. Debt securities, for which
there is positive intent and ability to hold to maturity,
are classified as held-to-maturity and are recorded at
amortized cost. Amortization of discount or premium
is recorded under the interest method and is included
in interest income. Certain investment securities,
including those held by CIVs, are classified as trad-
ing securities. these investments are recorded at fair
value and unrealized gains and losses are included in
current period earnings. Realized gains and losses for
all investments are included in current period earnings.
Equity and fixed income securities classified as trading
or available-for-sale are valued using closing market
prices for listed instruments or broker or dealer price
quotations, when available. Fixed income securities
may also be valued using valuation models and esti-
mates based on spreads to actively traded benchmark
debt instruments with readily available market prices.
Legg Mason evaluates its non-trading investment
securities for “other than temporary” impairment.
Impairment may exist when the fair value of an invest-
ment security has been below the adjusted cost for an
extended period of time. If an “other than temporary”
impairment is determined to exist, the amount of
impairment that relates to credit losses is recognized
as a charge to income. As of March 31, 2011, 2010 and
2009, the amount of temporary unrealized losses for
investment securities not recognized in income was
not material.
For investments in illiquid or privately-held securities
for which market prices or quotations may not be read-
ily available, including certain investments held by
CIVs, management estimates the value of the securi-
ties using a variety of methods and resources, includ-
ing the most current available financial information for
the investment and the industry.
In addition to the financial instruments described
above and the derivative instruments and CLO loans,
bonds and debt, described below, other financial
instruments that are carried at fair value or amounts
that approximate fair value include Cash and cash
equivalents and Short-term borrowings. the fair value
of Long-term debt at March 31, 2011 and 2010 was
$1,322,960 and $1,265,418, respectively. these fair val-
ues were estimated using current market prices.
Derivative Instruments
the fair values of derivative instruments are recorded
as assets or liabilities on the Consolidated Balance
Sheets. Legg Mason has used foreign exchange for-
wards and interest rate swaps to hedge the risk of
movement in exchange rates or interest rates on finan-
cial assets on a limited basis. Also, Legg Mason has
used futures contracts on index funds to hedge the
market risk of certain seed capital investments. In addi-
tion, certain CIVs use derivative instruments. However,
there is no risk to Legg Mason in relation to the deriva-
tive assets and liabilities of the CIVs in excess of its
investment in the funds, if any.
Legg Mason applied hedge accounting as defined in
the accounting literature to a debt interest rate risk
hedge, which matured in fiscal 2009. Adjustment of
this cash flow hedge was recorded in Other compre-
hensive income (loss) until it matured, at which time it
was realized in Other non-operating income (expense).
the gains or losses on other derivative instruments not
designated for hedge accounting are included as Other
70 LEGG MASON 2011 ANNuAL R EpORt
income (expense) or Other non-operating income
(expense) in the Consolidated Statements of Income
except as described below.
Gains and losses on derivative instruments of CIVs are
recorded as Other non-operating income (expense)
of consolidated investment vehicles, net, in the
Consolidated Statements of Income.
In fiscal 2009, Legg Mason had various credit support
arrangements for certain liquidity funds managed by
a subsidiary. these arrangements included letters of
credit (“LOCs”), capital support agreements (“CSAs”)
and a total return swap (“tRS”) that qualified as
derivative transactions. the fair values of these deriva-
tive instruments were based on expected outcomes
derived from pricing data for the underlying securities
and/or detailed collateral analyses based on the most
recent available information. there were no related
derivative assets or liabilities as of March 31, 2011
and 2010. None of these derivative transactions were
designated for hedge accounting as defined in the
accounting guidance and the related gains and losses
are included in Fund support in the Consolidated
Statement of Operations.
Fair Value Measurements
Accounting guidance for fair value measurements
defines fair value and establishes a framework for
measuring fair value. Fair value is defined as the
exchange price that would be received for an asset
or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an
orderly transaction between market participants on
the measurement date. under the accounting guid-
ance, a fair value measurement should reflect all of
the assumptions that market participants would use
in pricing the asset or liability, including assumptions
about the risk inherent in a particular valuation tech-
nique, the effect of a restriction on the sale or use of an
asset, and the risk of non-performance.
the fair value accounting guidance reaffirms that the
objective of fair value measurements is to reflect at the
date of the financial statements how much an asset
would be sold in an orderly transaction (as opposed to
a distressed or forced transaction) under current mar-
ket conditions. Specifically, it reaffirms the need to use
judgment to ascertain if a formerly active market has
become inactive and in determining fair values when
markets have become inactive. this accounting guid-
ance also relates to other-than temporary impairments
and is intended to bring greater consistency to the
timing of impairment recognition. It is also intended
to provide greater clarity to investors about the credit
and noncredit components of impaired debt securities
that are not expected to be sold. the guidance also
requires increased and more timely disclosures regard-
ing expected cash flows, credit losses, and an aging of
securities with unrealized losses.
the fair value accounting guidance also establishes
a hierarchy that prioritizes the inputs for valuation
techniques used to measure fair value. the fair value
hierarchy gives the highest priority to quoted prices in
active markets for identical assets or liabilities and the
lowest priority to unobservable inputs.
Legg Mason’s financial instruments measured and
reported at fair value are classified and disclosed in
one of the following categories:
Level 1—Financial instruments for which prices are
quoted in active markets, which, for Legg Mason,
include investments in publicly traded mutual
funds with quoted market prices and equities listed
in active markets.
Level 2—Financial instruments for which: prices
are quoted for similar assets and liabilities in active
markets; prices are quoted for identical or similar
assets in inactive markets; or prices are based on
observable inputs, other than quoted prices, such
as models or other valuation methodologies. For
Legg Mason, this category may include repurchase
agreements, fixed income securities, and certain
proprietary fund products. this category also
includes CLO loans and liabilities of a CIV.
Level 3—Financial instruments for which values
are based on unobservable inputs, including those
for which there is little or no market activity. this
category includes derivative liabilities related to
fund support arrangements, investments in part-
nerships, limited liability companies, and private
equity funds, and previously included derivative
assets related to fund support arrangements and
certain owned securities issued by structured
investment vehicles (“SIVs”). this category may
also include certain proprietary fund products with
redemption restrictions and CLO debt of a CIV.
the valuation of an asset or liability may involve
inputs from more than one level of the hierarchy.
the level in the fair value hierarchy which a fair value
LEGG MASON 2011 ANNuAL R EpORt 71
measurement in its entirety falls is determined based
on the lowest level input that is significant to the fair
value measurement in its entirety.
proprietary fund products and certain investments
held by CIVs are valued at net asset value (“NAV”)
determined by the applicable fund administra-
tor. these funds are typically invested in exchange
traded investments with observable market prices.
their valuations may be classified as Level 1, Level 2
or Level 3 based on whether the fund is exchange
traded, the frequency of the related NAV determina-
tions and the impact of redemption restrictions. For
investments in illiquid and privately-held securities
(private equity and investment partnerships) for
which market prices or quotations may not be read-
ily available, including certain investments held by
CIVs, management must estimate the value of the
securities using a variety of methods and resources,
including the most current available financial infor-
mation for the investment and the industry to which
it applies in order to determine fair value. these valu-
ation processes for illiquid and privately-held securi-
ties inherently require management’s judgment and
are therefore classified in Level 3.
the fair values of CLO loans and bonds are determined
based on prices from well-recognized third-party pric-
ing services that utilize available market data and are
therefore classified as Level 2. Legg Mason has estab-
lished controls designed to assess the reasonableness
of the prices provided. the fair value of CLO debt is
valued using a discounted cash flow methodology.
Inputs used to determine the expected cash flows
include assumptions about forecasted default and
recovery rates that a market participant would use in
determining the fair value of the CLO’s underlying col-
lateral assets. Given the significance of the unobserv-
able inputs to the fair value measurement, the CLO
debt valuation is classified as Level 3.
Exchange traded options are valued using the last
sale price or in the absence of a sale, the last offer-
ing price. Options traded over the counter are valued
using dealer supplied valuations. Options are class-
ified as Level 1. Futures contracts are valued at the
last settlement price at the end of each day on the
exchange upon which they are traded and are class-
ified as Level 1. Index and single name credit default
swaps and interest rate swaps are valued based on
valuations furnished by pricing services and are clas-
sified as Level 2.
As a practical expedient, Legg Mason relies on the
NAV of certain investments as their fair value. the
NAVs that have been provided by investees are derived
from the fair values of the underlying investments as
of the reporting date.
Any transfers between categories are measured at the
beginning of the period.
See Note 3 for additional information regarding fair
value measurements.
Fair Value Option
Legg Mason has elected the fair value option for
certain eligible assets and liabilities, including cor-
porate loans and debt, of a CLO it is consolidating
(see Note 18). Management believes that the use of
the fair value option eliminates certain timing differ-
ences and better matches the changes in fair value
of assets and liabilities related to the CLO. unrealized
gains and losses on assets and liabilities for which
the fair value option has been elected are reported in
earnings. the decision to elect the fair value option
is determined on an instrument by instrument basis,
must be applied to an entire instrument and is irre-
vocable once elected. Assets and liabilities which
are measured at fair value pursuant to the fair value
option are included in the assets and liabilities of
consolidated investment vehicles in the Consolidated
Balance Sheets. At this time, the Company has not
elected to apply the fair value option to any of its
other financial instruments.
Appropriated Retained Earnings
upon the adoption of new consolidation guidance and
the related election of the fair value option for eligible
assets and liabilities of the CLO described above,
Legg Mason recorded a cumulative effect adjustment
to Appropriated retained earnings of consolidated
investment vehicles on the Consolidated Balance
Sheets equal to the difference between the fair val-
ues of the CLO’s assets and liabilities. this difference
is recorded as “Appropriated retained earnings”
because the investors in the CLO, not Legg Mason
shareholders, will ultimately realize any benefits or
losses associated with the CLO. Beginning April 1,
2010, changes in the fair values of the CLO assets and
liabilities are recorded as Net income (loss) attribut-
able to noncontrolling interests in the Consolidated
Statements of Income and Appropriated retained
earnings of consolidated investment vehicles in the
Consolidated Balance Sheets.
72 LEGG MASON 2011 ANNuAL R EpORt
Fixed Assets
Fixed assets consist of equipment, software and lease-
hold improvements and capital lease assets. Equipment
consists primarily of communications and technology
hardware and furniture and fixtures. Software includes
both purchased software and internally developed
software. Fixed assets are reported at cost, net of accu-
mulated depreciation and amortization. Capital lease
assets are initially reported at the lesser of the present
value of the related future minimum lease payments
or the asset’s then current fair value, subsequently
reduced by accumulated depreciation. Depreciation
and amortization are determined by use of the straight-
line method. Equipment is depreciated over the esti-
mated useful lives of the assets, generally ranging from
three to eight years. Software is amortized over the
estimated useful lives of the assets, which are generally
three years. Leasehold improvements and capital lease
assets are amortized or depreciated over the initial term
of the lease unless options to extend are likely to be
exercised. Maintenance and repair costs are expensed
as incurred. Internally developed software is reviewed
periodically to determine if there is a change in the use-
ful life, or if an impairment in value may exist. If impair-
ment is deemed to exist, the asset is written down to its
fair value or is written off if the asset is determined to
no longer have any value.
Intangible Assets and Goodwill
Intangible assets consist principally of asset man-
agement contracts, contracts to manage proprietary
funds and trade names resulting from acquisitions.
Intangible assets are amortized over their estimated
useful lives, using the straight-line method, unless the
asset is determined to have an indefinite useful life.
Asset management contracts are amortizable intangi-
ble assets that are capitalized at acquisition and amor-
tized over the expected life of the contract. the value
of contracts to manage assets in proprietary funds and
the value of trade names are classified as indefinite-
life intangible assets. the assignment of indefinite
lives to proprietary fund contracts is based upon the
assumption that there is no foreseeable limit on the
contract period to manage proprietary funds due to the
likelihood of continued renewal at little or no cost. the
assignment of indefinite lives to trade names is based
on the assumption that they are expected to generate
cash flows indefinitely.
Goodwill represents the excess cost of a business
acquisition over the fair value of the net assets acquired.
Indefinite-life intangible assets and goodwill are not
amortized for book purposes. Given the relative sig-
nificance of intangible assets and goodwill to the
Company’s consolidated financial statements, on a quar-
terly basis Legg Mason considers if triggering events
have occurred that may indicate that the fair values
have declined below their respective carrying amounts.
triggering events may include significant adverse
changes in the Company’s business, legal or regulatory
environment, loss of key personnel, significant business
dispositions, or other events. If a triggering event has
occurred, the Company will perform tests, which include
critical reviews of all significant assumptions, to deter-
mine if any intangible assets or goodwill are impaired.
At a minimum, the Company performs these tests annu-
ally at December 31, for indefinite-life intangible assets
and goodwill, considering factors such as projected cash
flows and revenue multiples, to determine whether the
value of the assets is impaired and the indefinite-life
assumptions are appropriate. If an asset is impaired, the
difference between the value of the asset reflected on
the financial statements and its current fair value is rec-
ognized as an expense in the period in which the impair-
ment is determined. the fair values of intangible assets
subject to amortization are reviewed at each reporting
period using an undiscounted cash flow analysis. For
intangible assets with indefinite lives, fair value is deter-
mined based on anticipated discounted cash flows.
Goodwill is evaluated at the reporting unit level, and is
deemed to be impaired if the carrying amount of the
reporting unit exceeds its implied fair value. In estimat-
ing the fair value of the reporting unit, Legg Mason uses
valuation techniques principally based on discounted
cash flows similar to models employed in analyzing
the purchase price of an acquisition target. Goodwill is
deemed to be recoverable at the reporting unit level,
which is also the operating segment level that Legg
Mason defines as the Americas and International divi-
sions. this results from the fact that operating segment
management reports to the Chief Executive Officer,
manages the business at the division level and does not
regularly receive discrete financial information, such as
operating results, at any lower level, such as the asset
management affiliate level. Allocations of goodwill to
Legg Mason’s divisions for management restructures,
acquisitions and dispositions are based on relative fair
values of the respective businesses restructured, added
to or sold from the divisions.
In December 2010, Legg Mason announced a realign-
ment of its executive management team which, among
other things, will eliminate the previous separation
of the Americas and International divisions into one
LEGG MASON 2011 ANNuAL R EpORt 73
Global Asset Management business during fiscal 2012.
Although the Company announced the realignment
of its executive management during the year, as of
March 31, 2011, no changes had been made to the
internal reporting practices and Legg Mason continued
to operate in one reportable Asset Management seg-
ment, with two divisions, Americas and International.
See Note 5 for additional information regarding intan-
gible assets and goodwill and Note 17 for additional
business segment information.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries that are
denominated in non-u.S. dollar functional currencies
are translated at exchange rates as of the Consolidated
Balance Sheet dates. Revenues and expenses are
translated at average exchange rates during the period.
the gains or losses resulting from translating foreign
currency financial statements into u.S. dollars are
included in stockholders’ equity and comprehensive
income. Gains or losses resulting from foreign cur-
rency transactions are included in net income.
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.
these fees are primarily based on predetermined
percentages of the market value of the assets under
management (“AuM”), are recognized over the period
in which services are performed and may be billed in
advance of the period earned based on AuM at the
beginning of the billing period in accordance with the
related advisory contracts. Revenue associated with
advance billings is deferred and included in Other (cur-
rent) liabilities in the Consolidated Balance Sheets and
is recognized over the period earned. performance
fees may be earned on certain investment advisory
contracts for exceeding performance benchmarks and
are recognized at the end of the performance measure-
ment period. Accordingly, neither advanced billings or
performance fees are subject to reversal.
Legg Mason has responsibility for the valuation of
AuM, substantially all of which is based on observable
market data from independent pricing services, fund
accounting agents, custodians or brokers.
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 servicing
proprietary funds and are generally determined as a
percentage of client assets. Reported amounts also
include fees earned from providing client or share-
holder servicing, including record keeping or admin-
istrative services to proprietary funds. Distribution
fees earned on company-sponsored investment funds
are reported as revenue. When Legg Mason enters
into arrangements with broker-dealers or other third
parties to sell or market proprietary fund shares, dis-
tribution and service fee expense is accrued for the
amounts owed to third parties, including finders’ fees
and referral fees paid to unaffiliated broker-dealers or
introducing parties. Distribution and servicing expense
also includes payments to third parties for certain
shareholder administrative services and sub-advisory
fees paid to unaffiliated asset managers.
Deferred Sales Commissions
Commissions paid to financial intermediaries in con-
nection with sales of certain classes of company-spon-
sored mutual funds are capitalized as deferred sales
commissions. the asset is amortized over periods not
exceeding six years, which represent the periods dur-
ing which commissions are generally recovered from
distribution and service fee revenues and from contin-
gent deferred sales charges (“CDSC”) received from
shareholders of those funds upon redemption of their
shares. CDSC receipts are recorded as distribution and
servicing revenue when received and a reduction of
the unamortized balance of deferred sales commis-
sions, 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 circum-
stances 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 years
ended March 31, 2011, 2010, and 2009, no impair-
ment charges were recorded. Deferred sales com-
missions, included in Other non-current assets in
the Consolidated Balance Sheets, were $11,339 and
$15,271 at March 31, 2011 and 2010, respectively.
74 LEGG MASON 2011 ANNuAL R EpORt
Income Taxes
Deferred income taxes are provided for the effects
of temporary differences between the tax basis of an
asset or liability and its reported amount in the financial
statements. Deferred income tax assets are subject to
a valuation allowance if, in management’s opinion, it is
more likely than not that these benefits will not be real-
ized. Legg Mason’s deferred income taxes principally
relate to net operating loss carryforwards, business
combinations, amortization and accrued compensation.
In accordance with the applicable accounting guid-
ance, compensation expense includes costs for all non-
vested share-based awards at their grant date fair value
amortized over the respective vesting periods on the
straight-line method. Legg Mason determines the fair
value of stock options using the Black-Scholes option-
pricing model, with the exception of market-based per-
formance grants, which are valued with a Monte Carlo
option-pricing model. See Note 12 for additional infor-
mation regarding stock-based compensation.
under applicable accounting guidance, a tax benefit
should only be recognized if it is more likely than not
that the position will be sustained based on its techni-
cal merits. A tax position that meets this threshold is
measured as the largest amount of benefit that has
a greater than 50% likelihood of being realized upon
settlement by the appropriate taxing authority having
full knowledge of all relevant information.
the Company’s accounting policy is to classify interest
related to tax matters as interest expense and related
penalties, if any, as other operating expense.
See Note 8 for additional information regarding
income taxes.
Loss Contingencies
Legg Mason accrues estimates for loss contingencies
related to legal actions, investigations, and proceed-
ings, exclusive of legal fees, when it is probable that a
liability has been incurred and the amount of loss can
be reasonably estimated.
Stock-based Compensation
Legg Mason’s stock-based compensation includes
stock options, employee stock purchase plans,
restricted stock awards, market-based performance
shares payable in common stock and deferred com-
pensation payable in stock. under its stock compensa-
tion plans, Legg Mason issues equity awards to direc-
tors, officers, and other key employees.
Earnings Per Share
Basic earnings per share attributable to Legg Mason,
Inc. common shareholders (“EpS”) is calculated by
dividing Net income attributable to Legg Mason, Inc.
by the weighted-average number of shares outstand-
ing. the calculation of weighted-average shares
includes common shares, shares exchangeable into
common stock and unvested share-based payment
awards that are considered participating securities
because they contain nonforfeitable rights to divi-
dends. Diluted EpS is similar to basic EpS, but adjusts
for the effect of potential common shares unless they
are antidilutive. For periods with a net loss, potential
common shares are considered antidilutive. See Note 13
for additional discussion of EpS.
Restructuring Costs
In May 2010, Legg Mason’s management committed
to a plan to streamline its business model as further
described in Note 16. the costs anticipated in connec-
tion with this plan primarily relate to employee termi-
nation benefits, incentives to retain employees during
the transition period, and contract termination costs.
termination benefits, including severance, and reten-
tion incentives are recorded as transition-related com-
pensation in the Consolidated Statements of Income.
these compensation items require employees to pro-
vide future service and are therefore expensed ratably
over the required service period. Contract termination
and other costs are expensed when incurred.
LEGG MASON 2011 ANNuAL R EpORt 75
Noncontrolling interests
Noncontrolling interests related to CIVs are classified as redeemable noncontrolling interests if investors in these
funds may request withdrawals at any time. Redeemable noncontrolling interests as of and for the years ended
March 31, 2011 and 2010, were as follows:
Balance, beginning of period
Net income attributable to redeemable noncontrolling interests
Net (redemptions/distributions)/subscriptions received from noncontrolling interest holders
Balance, end of period
2011
$29,577
5,584
1,551
$36,712
2010
$31,020
6,623
(8,066)
$29,577
2009
$
92
2,924
28,004
$31,020
Other Recent Accounting Developments
the following relevant accounting pronouncements
were recently issued.
On May 12, 2011, the FASB issued an update which
clarifies and modifies existing fair value measurement
and disclosure requirements. this update includes
required qualitative disclosures for the sensitivity of
fair value measurements to changes in unobservable
inputs (Level 3) and the categorization by Level of the
fair value hierarchy for items that are not measured
at fair value in the balance sheet but for which the fair
value is required to be disclosed (such as for debt). the
update is effective for Legg Mason in fiscal 2013 and
is not currently expected to have a material impact on
Legg Mason’s consolidated financial statements.
In December 2010, the FASB issued an update that clar-
ifies goodwill impairment testing requirements. this
update will be effective for Legg Mason’s fiscal 2012.
Legg Mason does not currently expect this guidance to
have a material effect on its recorded goodwill.
In January 2010, the FASB issued an update that
requires new disclosures about recurring and nonre-
curring fair value measurements. the new disclosures
include significant transfers into and out of Level 1 and
2 measurements and will change the current disclo-
sure requirement of Level 3 measurement activity from
a net basis to a gross basis. the amendment also clari-
fies existing disclosure guidance about the level of dis-
aggregation, inputs and valuation techniques. the new
and revised disclosures were effective for Legg Mason
in fiscal 2011, except for the revised disclosures about
Level 3 measurement activity, which are effective for
Legg Mason in fiscal 2012. the disclosures are not
expected to have a material impact on Legg Mason’s
consolidated financial statements.
2. ACQUISITIONS AND DISPOSITIONS
Effective November 1, 2005, Legg Mason acquired
80% of the outstanding equity of permal, a leading
global funds-of-hedge funds manager. Concurrent
with the acquisition, permal completed a reorganiza-
tion in which the residual 20% of outstanding equity
was converted to preference shares, with Legg Mason
owning 100% of the outstanding voting common stock
of permal. During fiscal 2010, Legg Mason paid an
aggregate of $170,804 in cash to acquire the remain-
ing 62.5% of the outstanding preference shares. the
Company also elected to purchase, for $9,000, the
rights of the sellers of the preference shares to receive
an earnout payment of up to $149,200 in two years. As
a result of this transaction, there will be no further pay-
ments for the permal acquisition. In addition, during
fiscal 2010 and 2009, Legg Mason paid an aggregate
amount of $15,048 in dividends on the preference
shares. All payments for preference shares, including
dividends, were recognized as additional goodwill.
In April 2008, Legg Mason completed a sale in which
Citigroup Global Markets, Inc., an affiliate of Citigroup,
acquired a majority of the overlay and implementa-
tion business of Legg Mason private portfolio Group,
including its managed account trading and technology
platform. the sale produced cash proceeds of approxi-
mately $181,147. After transaction costs, the gain on
the sale of this business was approximately $5,540
($3,435 after tax), which was recognized in Other non-
operating income (expense) in fiscal 2009.
In connection with the purchase of private Capital
Management, during fiscal 2007 Legg Mason paid
from available cash the maximum fifth anniversary
payment of $300,000, of which $150,000 remained in
escrow subject to certain limited clawback provisions
76 LEGG MASON 2011 ANNuAL R EpORt
through fiscal 2010. During fiscal 2009, the remaining
contingency was settled by releasing approximately
$30,000 to the sellers and returning approximately
$120,000 to Legg Mason, which was recorded as a
reduction of goodwill.
3. INVESTMENTS AND FAIR VALUES
OF ASSETS AND LIABILITIES
the disclosures below include details of Legg Mason’s
assets and liabilities that are measured at fair value,
excluding the assets and liabilities of CIVs. See Note 18,
Variable Interest Entities and Consolidation of Investment
Vehicles, for information related to the assets and
liabilities of CIVs that are measured at fair value.
Legg Mason has investments in debt and equity secu-
rities that are generally classified as available-for-sale
and trading as described in Note 1. Investments as of
March 31, 2011 and 2010, are as follows:
Investment securities:
Current investments(1)
Available-for-sale
Other(2)
total
2011
2010
$400,510
11,300
270
$412,080
$334,873
6,957
1,452
$343,282
(1)
(2)
Includes trading investments of deferred compensation plans of $120,107 and
$118,096, respectively, and equity method investments of deferred compensation
plans of $48,528 and $49,031, respectively. the remainder represents seed invest-
ments in proprietary fund products.
Includes investments in private equity securities that do not have readily determinable
fair values.
the net unrealized and realized gain (loss) for invest-
ment securities classified as trading was $28,355,
$125,395, and ($2,003,043) for fiscal 2011, 2010 and
2009, respectively. the realized and unrealized losses
for fiscal 2009 primarily relate to losses on SIV-issued
securities purchased from certain liquidity funds.
Legg Mason’s available-for-sale investments consist
of mortgage backed securities, u.S. government and
agency securities and equity securities. Gross unreal-
ized gains (losses) for investments classified as avail-
able-for-sale were $157 and ($186), respectively, as of
March 31, 2011, and $172 and ($33), respectively, as of
March 31, 2010.
Legg Mason uses the specific identification method to
determine the cost of a security sold and the amount
reclassified from accumulated other comprehensive
income into earnings. the proceeds and gross realized
gains and losses from sales and maturities of available-
for-sale investments are as follows:
Years Ended March 31,
2011
2010
2009
Available-for-sale:
proceeds
Gross realized gains
Gross realized losses
$4,012
7
(19)
$1,279
1
(4)
$2,173
5
(84)
Legg Mason had no investments classified as held-to-
maturity as of March 31, 2011 and 2010.
LEGG MASON 2011 ANNuAL R EpORt 77
the fair values of financial assets and (liabilities) of the Company were determined using the following categories
of inputs at March 31, 2011 and 2010:
Quoted
prices in
active markets
(Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Value as of
March 31, 2011
ASSETS:
Cash equivalents(1)
Money market funds
time deposits
total cash equivalents
Investment securities:
trading investments relating to long-
term incentive compensation plans(2)
trading proprietary fund products and
other investments(3)
Equity method investments relating to
long-term incentive compensation
plans, proprietary fund products and
other investments(4)
total current investments
Available-for-sale investment securities
Investments in partnerships, LLCs,
and other
Equity method investments in
partnerships and LLCs
Derivative assets:
Currency and market hedge
Other investments
LIABILITIES:
Derivative liabilities:
$ 912,951
—
912,951
$
—
92,877
92,877
120,107
—
$
—
—
—
—
90,123
102,562
11,378
15,645
225,875
2,666
—
1,420
1,169
—
$1,144,081
48,528
151,090
8,622
—
—
—
—
$252,589
12,167
23,545
12
22,167
153,931
155,351
—
270
$199,925
1,169
270
$1,596,595
$ 912,951
92,877
1,005,828
120,107
204,063
76,340
400,510
11,300
22,167
Currency and market hedge
$
(3,120)
$
—
$
—
$
(3,120)
78 LEGG MASON 2011 ANNuAL R EpORt
ASSETS:
Cash equivalents(1)
Money market funds
time deposits
total cash equivalents
Investment securities:
trading investments relating to long-
term incentive compensation plans(2)
trading proprietary fund products and
other investments(3)
Equity method investments relating to
long-term incentive compensation
plans, proprietary fund products and
other investments(4)
total current investments
Available-for-sale investment securities
Investments in partnerships, LLCs,
and other
Equity method investments in
partnerships and LLCs
Derivative assets:
Currency and market hedge
Other investments
LIABILITIES:
Derivative liabilities:
Quoted
prices in
active markets
(Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Value as of
March 31, 2010
$ 930,015
—
930,015
$
—
249,352
249,352
118,096
—
$
—
—
—
—
52,375
67,663
22,459
13,159
183,630
2,533
—
1,192
697
—
$1,118,067
49,031
116,694
4,412
—
—
—
—
$370,458
12,090
34,549
12
23,049
98,968
—
1,452
$158,030
$ 930,015
249,352
1,179,367
118,096
142,497
74,280
334,873
6,957
23,049
100,160
697
1,452
$1,646,555
Currency and market hedge
$
(485)
$
—
$
—
$
(485)
(1) Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at NAV and are
classified as Level 1. Cash investments in time deposits are measured at amortized cost, which approximates fair value because of the short time between the purchase of the instru-
ment and its expected realization, and are classified as Level 2.
(2) primarily mutual funds where there is minimal market risk to the Company as any change in value is offset by an adjustment to compensation expense and related liability.
(3) total proprietary fund products and other investments represent primarily mutual funds that are invested approximately 60% and 40% in equity and debt securities as of March 31,
(4)
2011, respectively, and were invested approximately 63% and 37% in equity and debt securities as of March 31, 2010, respectively.
Includes investments under the equity method (which approximates fair value) relating to long-term incentive compensation plans of $48,528 and $49,031 as of March 31, 2011 and
2010, respectively, and proprietary fund products and other investments of $27,812 and $25,249 as of March 31, 2011 and 2010, respectively, which are classified as Investment securi-
ties on the Consolidated Balance Sheets.
LEGG MASON 2011 ANNuAL R EpORt 79
the table below presents a summary of changes in financial assets and (liabilities) measured at fair value using
significant unobservable inputs (Level 3) for the periods from March 31, 2010 to March 31, 2011 and March 31,
2009 to March 31, 2010:
ASSETS:
proprietary fund products and
other investments
Equity method investments in
proprietary fund products
Investments in partnerships,
LLCs, and other
Equity method investments in
partnerships and LLCs
Other investments
ASSETS:
proprietary fund products and
other investments
Equity method investments in
proprietary fund products
Investments in partnerships,
LLCs, and other
Equity method investments in
partnerships and LLCs
Other investments
LIABILITIES:
Fund support
total realized and unrealized gains, net
Value as of
March 31,
2010
purchases, sales, Net transfer Realized and
issuances and
settlements, net
in (out) of
unrealized
Level 3 gains/(losses), net
Value as of
March 31,
2011
$ 22,459
$(13,429)
$350
$ 1,998
$ 11,378
12,090
23,049
98,968
1,464
$158,030
—
831
29,335
(4,065)
$ 12,672
—
—
—
—
$350
77
(1,713)
25,628
2,883
$28,873
12,167
22,167
153,931
282
$199,925
Value as of
March 31,
2009
purchases, sales, Net transfer Realized and
issuances and
settlements, net
in (out) of
unrealized
Level 3 gains/(losses), net
Value as of
March 31,
2010
$ 26,937
$(11,013)
$ —
$ 6,535
$ 22,459
9,531
20,630
33,584
1,881
$ 92,563
—
2,745
61,042
(779)
$ 51,995
—
—
—
—
$ —
$ (20,631)
$
—
$ —
2,559
(326)
4,342
362
$13,472
$20,631
$34,103
12,090
23,049
98,968
1,464
$158,030
$
—
Realized and unrealized gains and losses recorded for Level 3 investments are included in Fund support and
Other income (expense) on the Consolidated Statements of Income. the change in unrealized gains (losses) relat-
ing to Level 3 assets and liabilities still held at the reporting date was $11,472 and $35,026 for the years ended
March 31, 2011 and 2010, respectively.
there were no significant transfers between Levels 1 and 2 during the year ended March 31, 2011.
80 LEGG MASON 2011 ANNuAL R EpORt
As a practical expedient, Legg Mason relies on the net asset value of certain investments as their fair value. the
net asset values that have been provided by the investees have been derived from the fair values of the underly-
ing investments as of the reporting date. the following table summarizes, as of March 31, 2011, the nature of these
investments and any related liquidation restrictions or other factors which may impact the ultimate value realized.
Category of Investment
Funds-of-hedge funds
private funds
private fund
Other
total
Investment Strategy
Global, fixed income, macro, long/
short equity, natural resources,
systematic, emerging market,
European hedge
Long/short equity
Fixed income, residential and com-
mercial mortgage-backed securities
Various
n/a—not applicable
(1) 73% monthly redemption; 27% quarterly redemption, 34% of which is subject to two-year lock-up.
(2) Liquidations are expected during the remaining term.
(3) 82% two-year remaining term; 18% 20-year remaining term.
Fair Value
Determined
using NAV
$ 69,997(1)
unfunded
Commitments
n/a
Remaining term
n/a
22,372(2)
91,866(2)
13,652(2)
$197,887
7,882
n/a
n/a
$7,882
6 to 9 years
7 years, subject to two
one-year extensions
Various(3)
there are no current plans to sell any of these investments.
4. FIXED ASSETS
the following table reflects the components of fixed
assets as of March 31:
Equipment
Software
Leasehold improvements
total cost
Less: accumulated depreciation
and amortization
Fixed assets, net
2011
$ 200,696
224,026
280,277
704,999
2010
$ 196,624
212,835
306,435
715,894
(418,294)
$ 286,705
(354,075)
$ 361,819
In connection with its restructuring plans discussed
in Note 16, Legg Mason concluded during the year
ended March 31, 2011 that it no longer intends to
exercise a put/purchase option on land and a build-
ing that serves as its operations and technology
facility that was accounted for as a capital lease
in fiscal 2010. As a result of the decision, a $4,134
escrow deposit was charged to occupancy expense as
a transition-related cost and, effective December 31,
2010, the lease is being accounted for as an operat-
ing lease.
Depreciation and amortization expense related to fixed
assets was $79,835, $91,309, and $101,957 for fiscal
2011, 2010, and 2009, respectively.
5. INTANGIBLE ASSETS AND GOODWILL
Goodwill and indefinite-life intangible assets are not
amortized and the values of identifiable intangible
assets are amortized over their useful lives, unless
the assets are determined to have indefinite useful
lives. Goodwill and indefinite-life intangible assets are
analyzed to determine if the fair value of the assets
exceeds the book value. Intangible assets subject to
amortization are considered for impairment at each
reporting period. If the fair value is less than the book
value, Legg Mason will record an impairment charge.
the following tables reflect the components of intan-
gible assets as of March 31:
Amortizable asset
management contracts
Cost
Accumulated amortization
Net
Indefinite-life intangible assets
Fund management contracts
trade names
Intangible assets, net
2011
2010
$ 207,113
(153,795)
53,318
$ 212,333
(133,210)
79,123
3,753,657
69,800
3,823,457
$3,876,775
3,753,299
69,800
3,823,099
$3,902,222
As of March 31, 2011, management contracts are being
amortized over a weighted-average life of 3.6 years.
LEGG MASON 2011 ANNuAL R EpORt 81
Estimated amortization expense for each of the next
five fiscal years is as follows:
2012
2013
2014
2015
2016
thereafter
total
$19,584
14,085
11,902
2,987
2,731
2,029
$53,318
the change in indefinite-life intangible assets is attrib-
utable to the impact of foreign currency translation.
Legg Mason completed its most recent annual impair-
ment tests of indefinite-life intangible assets as of
December 31, 2010, and determined that there was no
impairment in the value of these assets during fiscal
2011 and also determined that no triggering events
occurred as of March 31, 2011 that would require fur-
ther impairment testing.
the change in the carrying value of goodwill is summarized below:
Balance as of March 31, 2009
Business acquisitions and related costs (see Note 2)
Contractual acquisition earnout payments (see Note 2)
Impact of excess tax basis amortization
Other, including changes in foreign exchange rates
Balance as of March 31, 2010
Impact of excess tax basis amortization
Other, including changes in foreign exchange rates
Balance as of March 31, 2011
Gross Book
Value
$2,348,647
11,968
98,804
(18,920)
36,697
2,477,196
(22,735)
19,091
$2,473,552
Accumulated
Impairment
$(1,161,900)
—
—
—
—
(1,161,900)
—
—
$(1,161,900)
Net Book
Value
$1,186,747
11,968
98,804
(18,920)
36,697
1,315,296
(22,735)
19,091
$1,311,652
Legg Mason completed its most recent annual impair-
ment test of goodwill as of December 31, 2010, and
determined that there was no impairment in the value of
these assets during fiscal 2011. Legg Mason also deter-
mined that no triggering events occurred as of March 31,
2011 that would require further impairment testing.
Based on the earnings of permal, in November 2009,
Legg Mason paid $170,804, of which $81,000 was
accrued in fiscal 2008, in a fourth anniversary payment
under the purchase contract for the acquisition of the
remaining preference shares issued by permal, which
was recognized with a corresponding increase in
goodwill. In addition, in December 2009, Legg Mason
elected to purchase, for $9,000, the rights of the sellers
of the preference shares to receive an earnout pay-
ment on the sixth anniversary in November 2011 of up
to $149,200. the $9,000 purchase amount represents
the fair value of the obligation and also resulted in an
increase in goodwill.
Legg Mason also recognizes the tax benefit of the
amortization of excess tax basis related to the CAM
acquisition. In accordance with accounting guidance
for income taxes, the tax benefit is recorded as a
reduction of goodwill and deferred tax liabilities as
the benefit is realized.
6. SHORT-TERM BORROWINGS
In March 2009, Legg Mason repaid $250,000 of the
$500,000 outstanding borrowings under a $1,000,000
revolving credit facility which was also amended
to decrease the maximum amount of the facility to
$500,000. On February 11, 2010, the revolving credit
agreement was amended to extend the expiration of
the commitments and the maturity date of the loans
outstanding to February 2013. As of March 31, 2011
and 2010, the revolving credit facility rate was LIBOR
plus 262.5 basis points and the effective interest rate
was 2.9%. the facility rate may change in the future
based on changes in Legg Mason’s credit ratings or
LIBOR rates. As of March 31, 2011 and 2010, there was
$250,000 outstanding under this facility.
the Company’s revolving credit facility is substan-
tially with the same lenders as the $550,000 five-year
term loan, which was repaid in full during fiscal 2010,
described in Note 7 below. this facility has standard
financial covenants that were revised during fiscal
2010, including a maximum net debt to EBItDA ratio
of 2.5 (previously 3.0 on gross debt) and minimum
EBItDA to interest ratio of 4.0. As of March 31, 2011,
Legg Mason’s net debt to EBItDA ratio was 1.1 and
EBItDA to interest expense ratio was 12.9. Legg
Mason has maintained compliance with the applicable
82 LEGG MASON 2011 ANNuAL R EpORt
covenants but if it is determined that compliance with
these covenants may be under pressure, a number of
actions may be taken, including reducing expenses to
increase EBItDA, using available cash to repay all or
a portion of the $250,000 outstanding debt subject to
these covenants or seeking to negotiate with lenders to
modify the terms or to restructure the debt.
A subsidiary of Legg Mason maintains a credit line for
general operating purposes. In May 2010, the maxi-
mum amount that may be borrowed on this credit line
was increased from $12,000 to $15,000. there were
no borrowings outstanding under this facility as of
March 31, 2011 and 2010.
Another subsidiary of Legg Mason had a $100,000,
one-year revolving credit agreement for general oper-
ating purposes that expired in September 2009 with no
borrowings outstanding.
7. LONG-TERM DEBT
the disclosures below include details of Legg Mason’s
debt, excluding the debt of CIVs. See Note 18, Variable
Interest Entities and Consolidation of Investment
Vehicles, for information related to the debt of CIVs.
the accreted value of long-term debt consists of the following:
2.5% convertible senior notes
5.6% senior notes from Equity units
third-party distribution financing
Other term loans
Subtotal
Less: current portion
total
Current
Accreted Value
$1,087,932
103,039
—
10,897
1,201,868
792
$1,201,076
2011
Unamortized
Discount
$162,068
—
—
—
162,068
—
$162,068
Maturity
Amount
$1,250,000
103,039
—
10,897
1,363,936
792
$1,363,144
2010
Current
Accreted Value
$1,051,243
103,039
1,639
14,413
1,170,334
5,154
$1,165,180
2.5% Convertible Senior Notes and
Related Hedge Transactions
On January 14, 2008, Legg Mason sold $1,250,000 of
2.5% convertible senior notes (the “Notes”). the Notes
bear interest at 2.5%, payable semi-annually in cash.
Legg Mason is accreting the carrying value to the prin-
cipal amount at maturity using an imputed interest rate
of 6.5% (the effective borrowing rate for nonconvert-
ible debt at the time of issuance) over its expected life
of seven years, resulting in additional interest expense
for fiscal 2011, 2010, and 2009 of $36,688, $34,445, and
$32,340 respectively. the Notes are convertible, if cer-
tain conditions are met, at an initial conversion rate of
11.3636 shares of Legg Mason common stock per one
thousand dollar principal amount of Notes (equivalent to
a conversion price of approximately $88.00 per share),
or a maximum of 14,205 shares, subject to adjustment.
unconverted notes mature at par in January 2015. upon
conversion of a one thousand dollar principal amount
note, the holder will receive cash in an amount equal
to one thousand dollars or, if less, the conversion value
of the note. If the conversion value exceeds the prin-
cipal amount of the Note at conversion, Legg Mason
will also deliver, at its election, cash or common stock
or a combination of cash and common stock for the
conversion value in excess of one thousand dollars.
the amount by which the accreted value of the Notes
exceeds their if-converted value as of March 31, 2011
(representing a potential loss) is approximately $121,690
using a current interest rate of 3.50%. the agreement
governing the issuance of the notes contains certain
covenants for the benefit of the initial purchaser of the
notes, including leverage and interest coverage ratio
requirements, that may result in the notes becoming
immediately due and payable if the covenants are not
met. the leverage covenant was waived to accommo-
date the Equity units issuance in May 2008. this waiver
will expire in June 2011. Otherwise, Legg Mason has
maintained compliance with the applicable covenants.
In connection with the sale of the Notes, on January 14,
2008, Legg Mason entered into convertible note hedge
transactions with respect to its common stock (the
“purchased Call Options”) with financial institution
counterparties (“Hedge providers”). the purchased
Call Options are exercisable solely in connection with
any conversions of the Notes in the event that the mar-
ket value per share of Legg Mason common stock at
the time of exercise is greater than the exercise price of
LEGG MASON 2011 ANNuAL R EpORt 83
the purchased Call Options, which is equal to the $88
conversion price of the Notes, subject to adjustment.
Simultaneously, in separate transactions Legg Mason
also sold to the Hedge providers warrants to purchase,
in the aggregate and subject to adjustment, 14,205
shares of common stock on a net share settled basis
at an exercise price of $107.46 per share of common
stock. the purchased Call Options and warrants are
not part of the terms of the Notes and will not affect
the holders’ rights under the Notes. these hedging
transactions had a net cost of approximately $83,000,
which was paid from the proceeds of the Notes and
recorded as a reduction of additional paid-in capital.
If, when the Notes are converted, the market price
per share of Legg Mason common stock exceeds the
$88 exercise price of the purchased Call Options,
the purchased Call Options entitle Legg Mason to
receive from the Hedge providers shares of Legg
Mason common stock, cash, or a combination of
shares of common stock and cash, that will match
the shares or cash Legg Mason must deliver under
terms of the Notes. Additionally, if at the same time
the market price per share of Legg Mason common
stock exceeds the $107.46 exercise price of the war-
rants, Legg Mason will be required to deliver to the
Hedge providers net shares of common stock, in an
amount based on the excess of such market price per
share of common stock over the exercise price of the
warrants. these transactions effectively increase the
conversion price of the Notes to $107.46 per share of
common stock. Legg Mason has contractual rights,
and, at execution of the related agreements, had the
ability to settle its obligations under the conversion
feature of the Notes, the purchased Call Options
and warrants, with Legg Mason common stock.
Accordingly, these transactions are accounted for as
equity, with no subsequent adjustment for changes
in the value of these obligations.
5.6% Senior Notes from Equity Units
In May 2008, Legg Mason issued 23,000 Equity units
for $1,150,000, of which approximately $50,000 was
used to pay issuance costs. Each unit consists of a
5% interest in one thousand dollar principal amount
of 5.6% senior notes due June 30, 2021 and a detach-
able contract to purchase a varying number of shares
of Legg Mason’s common stock for $50 by June 30,
2011. the notes and purchase contracts are separate
and distinct instruments, but their terms are struc-
tured to simulate a conversion of debt to equity and
potentially remarketed debt approximately three years
after issuance. the holders’ obligations to purchase
shares of Legg Mason’s common stock are collateral-
ized by their pledge of the notes or other prescribed
collateral. In connection with the issuance of the
Equity units, Legg Mason incurred issuance costs of
$36,200, of which $27,600 was allocated to the equity
component of the Equity units and recorded as a
reduction of Additional paid-in capital. the notes are
considered to be mandatorily convertible. For their
commitment to purchase shares of Legg Mason’s
common stock, holders also receive quarterly pay-
ments, referred to as Contract Adjustment payments
(“CAp”), at a fixed annual rate of 1.4% of the commit-
ment amount over the three-year contract term. upon
issuance of the Equity units, Legg Mason recognized
an approximately $45,800 liability for the fair value of
its obligation (based upon discounted cash flows) to
pay unitholders a quarterly contract adjustment pay-
ment. this amount also represented the fair value of
Legg Mason’s commitment under the contract to issue
shares of common stock in the future at designated
prices, and was recorded as a reduction to Additional
paid-in capital. the CAp obligation liability is being
accreted over the approximate three-year contract
term by charges to Interest expense based on a con-
stant rate calculation. Subsequent contract adjustment
payments reduce the CAp obligation liability, which
as of March 31, 2011 and 2010, was $168 and $1,610,
respectively, and is included in Other liabilities on the
Consolidated Balance Sheets. the decrease in the CAp
obligation liability was primarily due to the Equity unit
extinguishment discussed below.
Each purchase contract obligates Legg Mason to sell a
number of newly issued shares of common stock that
are based on a settlement rate determined by Legg
Mason’s stock price at the purchase date. the settle-
ment rate adjusts with the price of Legg Mason stock
in a way intended to maintain the original investment
value when Legg Mason’s common stock is priced
between $56.30 and $67.56 per share. the settlement
rate is 0.7401 shares of Legg Mason common stock,
subject to adjustment, for each Equity unit if the mar-
ket value of Legg Mason common stock is at or above
$67.56. the settlement rate is 0.8881 shares of Legg
Mason common stock, subject to adjustment, for each
Equity unit if the market value of Legg Mason com-
mon stock is at or below $56.30. If the market value
of Legg Mason common stock is between $56.30 and
$67.56, the settlement rate will be a number of shares
of Legg Mason common stock equal to $50 divided by
the market value.
84 LEGG MASON 2011 ANNuAL R EpORt
During the September 2009 quarter, Legg Mason com-
pleted a tender offer and retired 91% of its outstanding
Equity units (20,939 units) including the extinguish-
ment of $1,050,000 of its outstanding 5.6% Senior
notes and termination of the related purchase con-
tracts in exchange for the issuance of approximately
18,596 shares of Legg Mason common stock and a
payment of approximately $130,870 in cash. the cash
payment was allocated between the liability and equity
components of the Equity units based on relative fair
values, resulting in a loss on debt extinguishment of
approximately $22,040 (including a non-cash charge
of approximately $6,355 of accelerated expense of
deferred issue costs) and a decrease in additional paid-
in capital of approximately $115,186. the maximum
number of shares that may be issued for the remaining
Equity units, subject to adjustment, is approximately
1,830. As the purchase contracts were deemed to be
equity upon issuance, Legg Mason will not incur a gain
or loss on the outstanding Equity units, if settled in
accordance with their original terms.
Shares of Legg Mason’s common stock issuable under
the Equity unit purchase contracts are currently antidilu-
tive under the treasury stock method because the market
price of Legg Mason common stock is less than $67.56
per share. In the event the probability of a successful
remarketing of the Equity unit notes becomes remote,
the amount of shares issuable under the purchase con-
tracts that must be included in diluted earnings per share
would be determined under the if-converted method.
Legg Mason is required to attempt to remarket the
notes by June 30, 2011. upon a successful remarketing,
the interest rate and maturity date of the senior notes
will be reset such that the notes may remain outstand-
ing for some time after the exercise of the purchase
contracts and the related issuance of Legg Mason com-
mon shares. If such remarketing is not successful dur-
ing this period, the note holders can put their notes at
par to Legg Mason upon the settlement of the purchase
contracts. Further, notes not redeemed or remarketed
by June 30, 2013, can be called at par by Legg Mason.
Legg Mason is in the process of evaluating its options
for remarketing the Senior Notes by June 30, 2011.
Third-party Distribution Financing
On July 31, 2006, a subsidiary of Legg Mason entered
into a four-year agreement with a financial institution
to finance, on a non-recourse basis, up to $90,700 for
commissions paid to financial intermediaries in con-
nection with sales of certain share classes of propri-
etary funds. In April 2009, Legg Mason terminated the
agreement and there was no balance outstanding as of
March 31, 2011.
Five-Year Term Loan
On October 14, 2005, Legg Mason entered into an
unsecured term loan agreement for an amount not to
exceed $700,000. Legg Mason used this term loan to
pay a portion of the purchase price, including acquisi-
tion related costs, in the acquisition of CAM. During
fiscal 2008 and 2007, Legg Mason repaid an aggregate
of $150,000 of the outstanding borrowings on this term
loan, and did not make any payments during fiscal
2009. In January 2010, Legg Mason repaid in full the
$550,000 of remaining outstanding borrowings under
this term loan.
Other Term Loans
A subsidiary of Legg Mason entered into a loan in fiscal
2005 to finance leasehold improvements. the outstand-
ing balance at March 31, 2010 was $2,349, and was paid
in full on October 31, 2010. In fiscal 2006, a subsidiary
of Legg Mason entered into a $12,803 term loan agree-
ment to finance an aircraft. the loan bears interest at
5.9%, is secured by the aircraft, and has a maturity date
of January 1, 2016. the outstanding balance at March 31,
2011 was $9,363.
As of March 31, 2011, the aggregate maturities of
long-term debt, based on their contractual terms,
are as follows:
2012
2013
2014
2015
2016
thereafter
total
$
987
1,226
1,277
1,251,332
6,075
103,039
$1,363,936
LEGG MASON 2011 ANNuAL R EpORt 85
8. INCOME TAXES
the components of income (loss) before income tax provision (benefit) are as follows:
Domestic
Foreign
total
2011
$244,079
121,118
$365,197
the components of income tax expense (benefit) are as follows:
Federal
Foreign
State and local
total income tax provision (benefit)
Current
Deferred
total income tax provision (benefit)
2011
$ 75,290
18,788
25,356
$119,434
$39,162
80,272
$119,434
2010
$207,210
122,446
$329,656
2010
$ 78,224
14,066
26,386
$118,676
$4,729
113,947
$118,676
2009
$(3,053,327)
(134,870)
$(3,188,197)
2009
$(1,075,462)
32,845
(180,586)
$(1,223,203)
$(405,726)
(817,477)
$(1,223,203)
Legg Mason received approximately $580,000 in tax
refunds during the June 2009 quarter, primarily attrib-
utable to the utilization of $1,600,000 of realized losses
incurred in fiscal 2009 on the sale of securities issued
by SIVs. Federal legislation, enacted in November 2009
to temporarily extend the net operating loss carryback
period from two to five years enabled Legg Mason to
utilize an additional $1,300,000 of net operating loss
deductions and, as a result, an additional $459,000 in
tax refunds was received in January 2010.
A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate
is as follows:
tax provision (benefit) at statutory u.S. federal income tax rate
State income taxes, net of federal income tax benefit(2)
Effect of foreign tax rates(2)
Loss on Canadian restructuring
Changes in u.K. tax rates on deferred tax assets and liabilities
Non-deductible goodwill impairment
Other, net
Effective income tax (benefit) rate
2011
35.0%
4.9
(4.6)
—
(2.5)
—
(0.1)
32.7%
2010(1)
35.0%
2.5
(3.5)
—
—
—
2.0
36.0%
2009(1)
(35.0)%
(3.3)
0.1
(2.9)
—
2.5
0.2
(38.4)%
(1) Certain prior year amounts have been reclassified to conform with the current year presentation.
(2) State income taxes include changes in valuation allowances, net of the impact on deferred tax assets of changes in state apportionment factors and planning strategies. the effect of
foreign tax rates also includes changes in valuation allowances.
During the quarter ended September 30, 2010, the
united Kingdom (“u.K.”) enacted the Finance Act of
2010, which reduced the corporate tax rate from 28%
to 27% for tax periods commencing April 1, 2011 and
after. the impact on prior deferred tax assets and
liabilities at the time of the change in fiscal 2011 was a
one-time tax benefit approximating $8,900. Although
not yet enacted, additional proposed reductions in the
u.K. corporate tax rate to 26% in fiscal 2012 and 25%
in fiscal 2013 are expected. Each one percentage point
reduction in the u.K. corporate tax rate will result in
a tax benefit of approximately $8,900 at the time of
enactment, based on the amount of deferred tax assets
and liabilities as of March 31, 2011, that have to be
revalued at the new rate.
86 LEGG MASON 2011 ANNuAL R EpORt
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset
or liability and its reported amount in the Consolidated Balance Sheets. these temporary differences result in
taxable or deductible amounts in future years. A summary of Legg Mason’s deferred tax assets and liabilities
are as follows:
DEFERRED TAX ASSETS
Accrued compensation and benefits
Accrued expenses
Operating loss carryforwards
Capital loss carryforwards
Convertible debt obligations
Foreign tax credit carryforward
Federal benefit of uncertain tax positions
Other
Deferred tax assets
Valuation allowance
Deferred tax assets after valuation allowance
DEFERRED TAX LIABILITIES
Basis differences, principally for intangible assets and goodwill
Depreciation and amortization
Other
Deferred tax liabilities
Net deferred tax asset
2011
$129,320
46,650
375,703
44,475
4,609
45,119
17,451
6,947
670,274
(94,541)
$575,733
2011
$229,879
295,699
1,780
527,358
$ 48,375
2010
$129,389
55,252
270,672
42,404
6,579
40,617
8,921
17,691
571,525
(87,605)
$483,920
2010
$246,288
169,069
630
415,987
$ 67,933
Certain tax benefits associated with Legg Mason’s
employee stock plans are recorded directly in
Stockholders’ Equity. No tax benefit was recorded to
equity in 2009, 2010 or 2011 due to the net operating
loss position of the Company. As of March 31, 2011,
an additional $4,700 of net operating loss will be rec-
ognized as an increase in Stockholders’ Equity when
ultimately realized.
In connection with the completion and filing of its fis-
cal 2010 federal tax return in December 2010, Legg
Mason recorded a net additional tax benefit of approxi-
mately $36,000 with respect to the Equity unit extin-
guishment that occurred in fiscal 2010. the tax benefit
increases Additional paid-in capital in a manner con-
sistent with the fiscal 2010 allocation of the extinguish-
ment payment.
Legg Mason has various loss carryforwards that may
provide future tax benefits. Related valuation allow-
ances are established in accordance with accounting
guidance for income taxes, if it is management’s opin-
ion that it is more likely than not that these benefits
will not be realized. Substantially all of Legg Mason’s
deferred tax assets relate to u.S. and united Kingdom
(“u.K.”) taxing jurisdictions. As of March 31, 2011, u.S.
federal deferred tax assets aggregated $683,200, real-
ization of which is expected to require approximately
$4,600,000 of future u.S. earnings, approximately
$129,000 of which must be in the form of foreign
source income. Based on estimates of future taxable
income, using assumptions consistent with those used
in Legg Mason’s goodwill impairment testing, it is
more likely than not that current federal tax benefits
relating to net operating losses are realizable and no
valuation allowance is necessary at this time. With
respect to those resulting from foreign tax credits, it is
more likely than not that tax benefits relating to $4,800
foreign tax credits will not be realized and a valuation
allowance of $3,131 was established in fiscal 2011. As
of March 31, 2011, u.S. state deferred tax assets aggre-
gated $221,700. Due to limitations on net operating
loss and capital loss carryforwards and, taking into
consideration certain state tax planning strategies, a
valuation allowance was established for the state capi-
tal loss and net operating loss benefits in certain juris-
dictions. An additional valuation allowance of
$700 was recorded for fiscal 2011. Due to the uncer-
tainty of future state apportionment factors and future
LEGG MASON 2011 ANNuAL R EpORt 87
effective state tax rates, the value of state net operat-
ing loss benefits ultimately realized may vary. As of
March 31, 2011, u.K. deferred tax assets, net of valua-
tion allowances, are not material. An additional valu-
ation allowance of $3,024 was recorded on foreign
deferred tax assets relating to various jurisdictions,
principally relating to foreign currency translation
adjustments recognized in equity. to the extent the
analysis of the realization of deferred tax assets relies
on deferred tax liabilities, Legg Mason has considered
the timing, nature and jurisdiction of reversals, as well
as, future increases relating to the tax amortization of
goodwill and indefinite-life intangible assets. While tax
planning may enhance Legg Mason’s tax positions, the
realization of these current tax benefits is not depen-
dent on any significant tax strategies.
the following deferred tax assets and valuation allowances relating to carryforwards have been recorded at
March 31, 2011 and 2010, respectively.
Deferred tax assets
u.S. federal net operating losses
u.S. federal foreign tax credits
u.S. state net operating losses(1,2,3)
u.S. state capital losses
Non-u.S. net operating losses
Non-u.S. capital losses(1)
total deferred tax assets for carryforwards
Valuation allowances
u.S. federal foreign tax credits
u.S. state net operating losses
u.S. state capital losses
Non-u.S. net operating losses
Non-u.S. capital losses
Valuation allowances for carryforwards
Non-u.S. other deferred assets
total valuation allowances
2011
$203,971
45,119
143,542
36,749
28,190
7,726
$465,297
$ 3,131
14,206
36,749
28,190
7,726
90,002
4,539
$ 94,541
2010
$119,328
40,617
121,475
34,833
29,869
7,571
$353,693
$
—
15,341
34,833
29,860
7,571
87,605
—
$ 87,605
Expires Beginning
after Fiscal Year
2029
2015
2015
2015
2011
n/a
(1) Due to the permal acquisition structure, for periods prior to December 1, 2009, u.S. subsidiaries of permal filed separate federal income tax returns, apart from Legg Mason Inc.’s
consolidated federal income tax return, and separate state income tax returns.
(2) Substantially all of the u.S. state net operating losses carryforward through fiscal 2029.
(3) Due to potential for change in the factors relating to apportionment of income to various states, the Company’s effective state tax rates are subject to fluctuation which will impact the
value of the Company’s deferred tax assets, including net operating losses, and could have a material impact on the future effective tax rate of the Company.
Legg Mason had total gross unrecognized tax benefits
of approximately $77,653, $51,027 and $43,662 as of
March 31, 2011, 2010, and 2009, respectively. Of these
totals, approximately $53,500, $40,600 and $33,900,
respectively, (net of the federal benefit for state tax
liabilities) are the amounts of unrecognized benefits
which, if recognized, would favorably impact future
income tax provisions and effective tax rates.
88 LEGG MASON 2011 ANNuAL R EpORt
A reconciliation of the beginning and ending amount of unrecognized gross tax benefits for the years ended
March 31, 2011, 2010 and 2009 is as follows:
Balance, beginning of year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Decreases related to settlements with taxing authorities
Expiration of statute of limitations
Balance, end of year
2011
$51,027
1,361
34,959
(6,107)
(2,667)
(920)
$77,653
2010
$43,662
2,830
12,664
(5,846)
(515)
(1,768)
$51,027
2009
$ 29,287
15,756
14,366
(4,082)
(11,665)
—
$ 43,662
Although management cannot predict with any degree
of certainty the timing of ultimate resolution of mat-
ters under review by various taxing jurisdictions, it is
reasonably possible that the Company’s gross unrec-
ognized tax benefits balance may change within the
next twelve months by up to $33,500 as a result of the
expiration of statutes of limitation and the completion
of tax authorities’ exams.
the Company accrues interest related to unrecognized
tax benefits in interest expense and recognizes pen-
alties in other operating expense. During the years
ended March 31, 2011, 2010, and 2009, the Company
recognized approximately $3,000, $2,200, and $5,400,
respectively, which was substantially all interest.
At March 31, 2011, 2010, and 2009, Legg Mason had
approximately $9,000, $6,000, and $5,000, respec-
tively, accrued for interest and penalties on tax contin-
gencies in the Consolidated Balance Sheets.
Legg Mason is under examination by the Internal
Revenue Service and other tax authorities in various
states. the following tax years remain open to income
tax examination for each of the more significant juris-
dictions where Legg Mason is subject to income taxes:
after fiscal 2005 for u.S. federal; after fiscal 2005 for
the united Kingdom; after fiscal 2003 for the state of
California; after fiscal 2005 for the state of New York;
and after fiscal 2007 for the states of Connecticut,
Maryland and Massachusetts. the Company does not
anticipate making any significant cash payments with
the settlement of these audits.
In a prior year, Legg Mason initiated plans to repatri-
ate earnings from certain foreign subsidiaries for up to
$225,000, of which $189,000 has yet to be repatriated.
Legg Mason still intends to repatriate these earnings
to create foreign source income in order to utilize for-
eign tax credits that may otherwise expire unutilized.
No further repatriation beyond the original $225,000 of
foreign earnings is contemplated.
Except as noted above, Legg Mason intends to per-
manently reinvest cumulative undistributed earnings
of its non-u.S. subsidiaries in non-u.S. operations.
Accordingly, no u.S. federal income taxes have been
provided for the undistributed earnings to the extent
that they are permanently reinvested in Legg Mason’s
non-u.S. operations. It is not practical at this time to
determine the income tax liability that would result
upon repatriation of the earnings.
9. COMMITMENTS AND CONTINGENCIES
Legg Mason leases office facilities and equipment
under non-cancelable operating leases and also has
multi-year agreements for certain services. these
leases and service agreements expire on varying dates
through fiscal 2025. Certain leases provide for renewal
options and contain escalation clauses providing for
increased rentals based upon maintenance, utility and
tax increases.
As of March 31, 2011, the minimum annual aggregate
rentals under operating leases and servicing agree-
ments are as follows:
2012
2013
2014
2015
2016
thereafter
total
$ 142,259
123,992
100,072
89,963
83,135
522,145
$1,061,566
the minimum rental commitments in the table above
have not been reduced by $148,556 for minimum sub-
lease rentals to be received in the future under non-
cancelable subleases, of which approximately 55% is
due from one counterparty. If a sub-tenant defaults on
LEGG MASON 2011 ANNuAL R EpORt 89
a sublease, Legg Mason may have to incur operating
charges to reflect expected future sublease rentals at
reduced amounts, as a result of the current commer-
cial real estate market.
the above minimum rental commitments includes
$967,688 in real estate leases and equipment leases
and $93,878 in service and maintenance agreements.
As discussed in Note 4, in connection with its restruc-
turing plans, Legg Mason no longer intends to exer-
cise a put/purchase option on land and a building that
was treated as a capital lease. As of March 31, 2011,
the remaining rental commitment for this facility is
included in the table above.
Included in the table above is $13,337 in commitments
related to office space that has been vacated, but for
which subleases are being pursued. A lease liability
was adjusted in fiscal 2011 and 2010 to reflect the
present value of the excess existing lease obligations
over the estimated sublease income and related costs.
the lease liability takes into consideration various
assumptions, including the amount of time it will take
to secure a sublease agreement and prevailing rental
rates in the applicable real estate markets. these, and
other related costs incurred during fiscal 2011 and
2010, aggregated $2,587 and $19,331, respectively.
the following table reflects rental expense under all
operating leases and servicing agreements.
Rental expense
Less: sublease income
Net rent expense
2011
$137,072
10,848
$126,224
2010
$137,771
8,573
$129,198
2009
$127,949
15,488
$112,461
Legg Mason recognizes rent expense ratably over the
lease period based upon the aggregate lease pay-
ments. the lease period is determined as the original
lease term without renewals, unless and until the exer-
cise of lease renewal options is reasonably assured,
and also includes any period provided by the landlord
as a “free rent” period. Aggregate lease payments
include all rental payments specified in the contract,
including contractual rent increases, and are reduced
by any lease incentives received from the landlord,
including those used for tenant improvements.
As of March 31, 2011 and 2010, Legg Mason had com-
mitments to invest approximately $23,381 and $45,697,
respectively, in limited partnerships that make private
investments. these commitments will be funded as
required through the end of the respective investment
periods ranging through fiscal 2018.
In the normal course of business, Legg Mason enters
into contracts that contain a variety of representations
and warranties and which provide general indemnifica-
tions. Legg Mason’s maximum exposure under these
arrangements is unknown, as this would involve future
claims that may be made against Legg Mason that
have not yet occurred.
Legg Mason has been the subject of customer com-
plaints and has also been named as a defendant in
various legal actions arising primarily from securities
brokerage, asset management and investment bank-
ing activities, including certain class actions, which
primarily allege violations of securities laws and seek
unspecified damages, which could be substantial.
Legg Mason has also received subpoenas and is cur-
rently involved in governmental and self-regulatory
agency inquiries, investigations and proceedings
involving asset management activities. In accordance
with guidance for accounting for contingencies, Legg
Mason has established provisions for estimated
losses from pending complaints, legal actions, inves-
tigations and proceedings when it is probable that a
loss has been incurred and a reasonable estimate of
loss can be made.
In the Citigroup transaction, Legg Mason transferred
to Citigroup the subsidiaries that constituted its private
Client/Capital Markets (“pC/CM”) businesses, thus
transferring the entities that would have primary liabil-
ity for most of the customer complaint, litigation and
regulatory liabilities and proceedings arising from
those businesses. However, as part of that transaction,
Legg Mason agreed to indemnify Citigroup for most
customer complaint, litigation and regulatory liabilities
of Legg Mason’s former pC/CM businesses that result
from pre-closing events. While the ultimate resolu-
tion of these matters cannot be currently determined
based on current information, after consultation with
legal counsel, management believes that any accrual
or range of reasonably possible losses as of March
31, 2011 or 2010, is not material. Similarly, although
Citigroup transferred to Legg Mason the entities that
would be primarily liable for most customer complaint,
litigation and regulatory liabilities and proceedings of
the CAM business, Citigroup has agreed to indemnify
Legg Mason for most customer complaint, litigation
and regulatory liabilities of the CAM business that
result from pre-closing events.
90 LEGG MASON 2011 ANNuAL R EpORt
the ultimate resolution of other matters cannot be cur-
rently determined, and in the opinion of management,
after consultation with legal counsel, Legg Mason
believes that the resolution of these actions will not
have a material adverse effect on Legg Mason’s finan-
cial condition. Due in part to the preliminary nature
of certain of these matters, Legg Mason is currently
unable to estimate the amount or range of potential
losses from these matters and the results of operations
and cash flows could be materially affected during a
period in which a matter is ultimately resolved. In addi-
tion, the ultimate costs of litigation-related charges can
vary significantly from period to period, depending on
factors such as market conditions, the size and volume
of customer complaints and claims, including class
action suits, and recoveries from indemnification, con-
tribution or insurance reimbursement.
As of March 31, 2011 and 2010, Legg Mason’s liability
for losses and contingencies was $500 and $21,500,
respectively. During fiscal 2011, 2010 and 2009, Legg
Mason recorded litigation related charges of approxi-
mately $2,500, $21,200, and $600, respectively. the
charge in fiscal 2010 primarily represents a $19,000
accrual for an affiliate investor settlement, which was
settled during fiscal 2011. During fiscal 2011, 2010,
and 2009, the liability was reduced for settlement
payments of approximately $23,500, $1,500, and
$500, respectively.
10. EMPLOYEE BENEFITS
Legg Mason, through its subsidiaries, maintains vari-
ous defined contribution plans covering substantially
all employees. through its primary plan, Legg Mason
can make two types of discretionary contributions. One
is a profit sharing contribution to eligible plan partici-
pants based on a percentage of qualified compensation
and the other is a 50% match of employee 401(k) con-
tributions up to 6% of employee compensation with a
maximum of five thousand dollars per year. profit shar-
ing and matching contributions amounted to $22,739
and $18,199 in fiscal 2011 and 2010, respectively.
Matching contributions amounted to $14,366 in fiscal
2009. Legg Mason elected to not make a profit sharing
contribution in fiscal 2009. In addition, employees can
make voluntary contributions under certain plans.
11. CAPITAL STOCK
At March 31, 2011, the authorized numbers of com-
mon, preferred and exchangeable shares were
500,000, 4,000 and an unlimited number, respectively.
At March 31, 2011 and 2010, there were 14,557 and
16,377 shares of common stock, respectively, reserved
for issuance under Legg Mason’s equity plans. As of
March 31, 2010, 1,099 common shares were reserved
for exchangeable shares issued in connection with the
acquisition of Legg Mason Canada Inc. Exchangeable
shares were exchangeable at any time by the holder
on a one-for-one basis into shares of Legg Mason’s
common stock and were included in basic shares out-
standing. In May 2010, all outstanding exchangeable
shares were converted into shares of Legg Mason
common stock.
On May 10, 2010, Legg Mason announced that its
Board of Directors replaced its existing stock buyback
authority with the authority to purchase up to $1 bil-
lion worth of Legg Mason common stock. there is no
expiration date attached to this new authorization.
During fiscal 2011, Legg Mason entered into sepa-
rate accelerated share repurchase agreements (“ASR
Agreements”) with two financial institutions to repur-
chase, in the aggregate, $300,000 of Legg Mason com-
mon stock. under the ASR Agreements, Legg Mason
received 10,147 shares of its common stock. All shares
purchased under the ASR Agreements were retired
upon receipt. During fiscal 2011, Legg Mason also pur-
chased and retired 4,405 shares of its common stock
in the open market for $145,067. the remaining bal-
ance of the authorized stock buyback is $554,933.
As discussed in Note 7, in May 2008, Legg Mason
issued $1,150,000 of Equity units, each unit consist-
ing of a 5% interest in one thousand dollar principal
amount of senior notes due June 30, 2021, and a
purchase contract committing the holder to purchase
shares of Legg Mason’s common stock by June 30,
2011. During fiscal 2010, Legg Mason issued approxi-
mately 18,596 shares through the Equity unit tender
offer in exchange for 91% of the outstanding Equity
units. As of March 31, 2011, the maximum amount
of shares that could be issued, and are reserved for
issuance, is approximately 1,830, subject to adjust-
ment. Also discussed in Note 7, in January 2008, Legg
Mason issued $1,250,000 of 2.5% contingent convert-
ible senior notes, which, if certain conditions are met,
could result in the issuance of a maximum of approxi-
mately 14,205 shares of Legg Mason common stock,
subject to adjustment.
LEGG MASON 2011 ANNuAL R EpORt 91
Changes in common stock and shares exchangeable into common stock for the three years ended March 31,
2011, 2010 and 2009 are as follows:
COMMON STOCK
Beginning balance
Shares issued for:
Stock option exercises and other stock-based compensation
Deferred compensation trust
Deferred compensation
Exchangeable shares
Shares repurchased and retired
Conversion of non-voting preferred stock
Equity units exchange
Ending balance
SHARES EXCHANGEABLE INTO COMMON STOCK
Beginning balance
Exchanges
Ending balance
Years Ended March 31,
2011
2010
2009
161,439
638
75
1,520
1,099
(14,552)
—
—
150,219
1,099
(1,099)
—
141,853
72
133
662
123
—
—
18,596
161,439
1,222
(123)
1,099
138,556
1,094
155
922
761
—
365
—
141,853
1,983
(761)
1,222
Dividends declared per share were $0.20, $0.12, and
$0.96 for fiscal 2011, 2010 and 2009, respectively.
Dividends declared but not paid at March 31, 2011, 2010
and 2009 were $8,990, $4,844, and $34,043, respec-
tively, and are included in Other current liabilities.
12. STOCK-BASED COMPENSATION
Legg Mason’s stock-based compensation includes
stock options, employee stock purchase plans,
restricted stock awards and units, performance shares
payable in common stock, and deferred compensation
payable in stock. Effective July 28, 2009, the number
of shares authorized to be issued under Legg Mason’s
active equity incentive stock plan was increased by
6,000 to 35,000. Shares available for issuance as
of March 31, 2011 were 8,304. Options under Legg
Mason’s employee stock plans have been granted
at prices not less than 100% of the fair market value.
Options are generally exercisable in equal increments
over three to five years and expire within five to ten
years from the date of grant.
Compensation expense relating to stock options
for the years ended March 31, 2011, 2010, and 2009
was $19,926, $17,281, and $22,224, respectively.
the related income tax benefit for the years ended
March 31, 2011, 2010, and 2009 was $7,718, $6,221,
and $8,710, respectively.
92 LEGG MASON 2011 ANNuAL R EpORt
Stock option transactions under Legg Mason’s equity incentive plans during the years ended March 31, 2011,
2010, and 2009, respectively, are summarized below:
Options outstanding at March 31, 2008
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2009
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2010
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2011
Number
of Shares
5,847
1,496
(1,131)
(658)
5,554
1,457
(72)
(885)
6,054
729
(634)
(730)
5,419
Weighted-Average
Exercise price
per Share
$65.81
29.54
24.90
68.24
$64.09
26.82
25.40
49.24
$57.75
33.12
21.85
48.94
$59.82
the total intrinsic value of options exercised during the years ended March 31, 2011, 2010, and 2009 was $6,977,
$229, and $11,102, respectively. At March 31, 2011, the aggregate intrinsic value of options outstanding was $17,010.
the following information summarizes Legg Mason’s stock options outstanding at March 31, 2011:
Exercise price Range
$ 12.65–$ 25.00
25.01– 35.00
35.01– 94.00
94.01– 100.00
100.01– 134.97
Option Shares
Outstanding
114
2,792
482
583
1,448
5,419
Weighted-Average
Exercise price
per Share
$ 15.61
30.83
52.40
95.17
107.42
Weighted-Average
Remaining Life
(in years)
5.4
6.0
1.2
3.3
3.2
At March 31, 2011, 2010, and 2009, options were exercisable on 2,860, 2,810, and 2,811 shares, respectively, and
the weighted-average exercise prices were $77.20, $73.57, and $64.64, respectively. Stock options exercisable at
March 31, 2011 have a weighted-average remaining contractual life of 3.3 years. At March 31, 2011, the aggregate
intrinsic value of options exercisable was $4,207.
the following information summarizes Legg Mason’s stock options exercisable at March 31, 2011:
Exercise price Range
$ 12.65–$ 25.00
25.01– 35.00
35.01– 94.00
94.01– 100.00
100.01– 134.97
Option Shares
Exercisable
42
679
482
473
1,184
2,860
Weighted-Average
Exercise price
per Share
$ 15.69
31.16
52.40
95.16
108.72
LEGG MASON 2011 ANNuAL R EpORt 93
the following information summarizes unvested stock
options under Legg Mason’s equity incentive plans for
the year ended March 31, 2011:
Legg Mason uses an equally weighted combination of
both implied and historical volatility to measure expected
volatility for calculating Black-Scholes option values.
Shares unvested at
March 31, 2010
Granted
Vested(1)
Canceled/forfeited
Shares unvested at
March 31, 2011
Number
of Shares
Weighted-Average
Grant Date
Fair Value
3,245
729
(992)
(423)
$17.04
14.32
18.56
15.78
2,559
$15.89
(1) Stock options granted prior to fiscal 2011 vest in July each year; beginning in fiscal
2011, stock options granted vest in May each year.
unamortized compensation cost related to unvested
options at March 31, 2011 was $28,207 and is expected
to be recognized over a weighted-average period of
1.9 years.
Cash received from exercises of stock options under
Legg Mason’s equity incentive plans was $12,094,
$1,829, and $25,463 for the years ended March 31,
2011, 2010, and 2009, respectively. the tax benefit
expected to be realized for the tax deductions from
these option exercises totaled $2,645, $73, and
$3,889 for the years ended March 31, 2011, 2010,
and 2009, respectively.
the weighted-average fair value of stock options
granted in fiscal 2011, 2010, and 2009, using the Black-
Scholes option-pricing model, was $14.32, $12.09, and
$13.36 per share, respectively.
Legg Mason has a qualified Employee Stock purchase
plan covering substantially all u.S. employees. Shares
of common stock are purchased in the open market
on behalf of participating employees, subject to a
4,500 total share limit under the plan. purchases are
made through payroll deductions and Legg Mason
provides a 10% contribution towards purchases, which
is charged to earnings. During the fiscal years ended
March 31, 2011, 2010, and 2009, approximately 102, 147,
and 188 shares, respectively, have been purchased in
the open market on behalf of participating employees.
In fiscal 2011, 2010, and 2009, Legg Mason recognized
$286, $313, and $418, respectively, in compensation
expense related to the stock purchase plan.
On January 28, 2008, the Compensation Committee of
Legg Mason approved grants to senior officers of 120
market-based performance shares that upon vesting,
subject to certain conditions, are distributed as shares
of common stock. the grants will vest ratably on
January 28 of each of the five years following the grant
date, upon attaining the service criteria and the stock
price hurdles beginning at $77.97 in year one and end-
ing at $114.15 in year five.
the weighted-average fair value per share for these
awards of $11.81 was estimated as of the grant date
using a grant price of $70.88, and a Monte Carlo
option-pricing model with the following assumptions:
the following weighted-average assumptions were used
in the model for grants in fiscal 2011, 2010, and 2009:
Expected dividend yield
Risk-free interest rate
Expected volatility
1.33%
3.30%
36.02%
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected lives (in years)
2011
1.39%
2.37%
52.64%
5.18
2010
1.45%
2.86%
55.26%
5.17
2009
0.89%
3.46%
56.65%
5.28
In connection with the termination of a senior officer
in fiscal 2009, 20 performance shares were voluntarily
forfeited, resulting in a charge of $550 representing an
acceleration of expense associated with the unvested
portion of the award.
94 LEGG MASON 2011 ANNuAL R EpORt
Restricted stock and restricted stock unit transactions during the years ended March 31, 2011, 2010, and 2009,
respectively, are summarized below:
unvested Shares at March 31, 2008
Granted
Vested
Canceled/forfeited
unvested Shares at March 31, 2009
Granted
Vested
Canceled/forfeited
unvested Shares at March 31, 2010
Granted
Vested
Canceled/forfeited
Unvested Shares at March 31, 2011
Number
of Shares
642
997
(257)
(41)
1,341
786
(467)
(55)
1,605
1,867
(617)
(218)
2,637
Weighted-Average
Grant Date
Value
$ 98.30
34.69
100.76
78.82
51.26
22.35
58.83
53.37
34.80
33.02
38.62
30.42
$ 33.01
the restricted stock and restricted stock unit awards
were non-cash transactions. In fiscal 2011, 2010, and
2009, Legg Mason recognized $35,770, $27,233, and
$32,629, respectively, in compensation expense and
related tax benefits of $13,854, $9,804, and $12,787,
respectively, for restricted stock and restricted stock
unit awards. unamortized compensation cost related
to unvested restricted stock and restricted stock unit
awards for 2,637 shares not yet recognized at March 31,
2011 was $53,393 and is expected to be recognized
over a weighted-average period of 1.8 years.
Legg Mason also has an equity plan for non-employee
directors. under the equity plan, directors may elect to
receive shares of stock or restricted stock units. prior to
a July 19, 2007 amendment to the plan, directors could
also elect to receive stock options. Options granted
under the old plan are immediately exercisable at a
price equal to the market value of the shares on the date
of grant and have a term of not more than ten years.
In fiscal 2011, 2010, and 2009, Legg Mason recognized
expense of $1,425, $1,575, and $1,400, respectively, for
awards under this plan. Shares, options, and restricted
stock units issuable under the equity plan are limited
to 625 shares in aggregate, of which 232 shares were
issued under the plan as of March 31, 2011. At March 31,
2011, non-employee directors held 220 stock options,
which are included in the outstanding options presented
in the table above. As of March 31, 2011, non-employee
directors held 62 restricted stock units, which vest on
the grant date and are, therefore, not included in the
unvested shares of restricted stock and restricted stock
units in the table above. there were 9 stock options
exercised and 7 restricted stock units distributed dur-
ing fiscal 2011. there were 17 restricted stock units and
31 shares of common stock granted during fiscal 2011.
there were 59 stock options and no restricted stock
units cancelled or forfeited during fiscal 2011.
Deferred compensation payable in shares of Legg
Mason common stock has been granted to certain
employees in an elective plan. the vesting in the plan
is immediate and the plan provides for discounts of
up to 10% on contributions and dividends. there is no
limit on the number of shares authorized to be issued
under the plan. In fiscal 2011, 2010, and 2009, Legg
Mason recognized $263, $176, and $322, respectively,
in compensation expense related to this plan. During
fiscal 2011, 2010, and 2009, Legg Mason issued 77, 128,
and 125 shares, respectively, under the plan with a
weighted-average fair value per share at the grant date
of $28.38, $22.53, and $39.62, respectively.
Legg Mason has issued shares in connection with cer-
tain deferred compensation plans that are held in rabbi
trusts. Assets of rabbi trusts are consolidated with those
of the employer, and the value of the employer’s stock
held in the rabbi trusts is classified in stockholders’
equity and accounted for in a manner similar to treasury
stock. therefore, the shares Legg Mason has issued to
its rabbi trusts and the corresponding liability related
to the deferred compensation plans are presented as
components of stockholders’ equity as Employee stock
trust and Deferred compensation employee stock trust,
respectively. Shares held by the trusts at March 31, 2011,
and 2010 were 3,196 and 2,205, respectively.
LEGG MASON 2011 ANNuAL R EpORt 95
As part of the Company’s restructuring initiative fur-
ther discussed in Note 16, the employment of certain
recipients of stock option and restricted stock awards
will be terminated. the termination benefits extended
to these employees include accelerated vesting of any
portion of their equity incentive awards that would
not have vested by January 1, 2012 under the original
terms of the awards. During fiscal 2011, the portion
of the awards subject to accelerated vesting were
revalued and are being expensed over the new vesting
period, the impact of which is included above. Also in
connection with the restructuring initiative, the depar-
ture of an executive officer in December 2010 resulted
in the accelerated vesting of a portion of certain
equity incentive awards, the impact of which is also
included above.
13. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing Net
income or loss attributable to Legg Mason, Inc. by the
weighted-average number of shares outstanding. the
calculation of weighted-average shares includes com-
mon shares, shares exchangeable into common stock
and unvested restricted shares deemed to be partici-
pating securities. Diluted EpS is similar to basic EpS,
but adjusts for the effect of potential common shares
except when inclusion is antidilutive. In situations
where a net loss is reported, the inclusion of poten-
tially issuable common shares will decrease the net
loss per share. Since this would be antidilutive, such
shares are excluded from the calculation.
During fiscal 2011, Legg Mason purchased and retired
14,552 shares of its common stock through ASR agree-
ments and open market purchases, of which, 9,088
shares were excluded from weighted-average shares
outstanding for the year ended March 31, 2011.
In August 2009, Legg Mason issued 18,596 shares
of common stock through the Equity units tender
offer, such that 11,565 shares are included in the
weighted-average shares outstanding for the year
ended March 31, 2010.
the following table presents the computations of basic and diluted EpS:
Weighted-average basic shares outstanding
potential common shares:
Employee stock options
Shares related to deferred compensation
Shares issuable upon payment of contingent consideration
Weighted-average diluted shares
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Legg Mason, Inc.
Net income (loss) per share attributable to Legg Mason, Inc. common shareholders:
Basic
Diluted
Years Ended March 31
2011
155,321
2010
153,715
2009
140,669
163
—
—
155,484
$245,763
(8,160)
$253,923
56
455
1,136
155,362
$210,980
6,623
$204,357
—
—
—
140,669
$(1,964,994)
2,924
$(1,967,918)
$
$
1.63
1.63
$
$
1.33
1.32
$
$
(13.99)
(13.99)
the diluted EpS calculations for the years ended
March 31, 2011 and 2010, exclude any potential com-
mon shares issuable under the convertible 2.5% senior
notes or the convertible Equity units because the
market price of Legg Mason common stock has not
exceeded the price at which conversion under either
instrument would be dilutive using the treasury stock
method. Also, the diluted EpS calculation for the fiscal
year ended March 31, 2009 excludes 6,629 potential
common shares that are antidilutive due to the net loss
for the fiscal year.
Options to purchase 5,204 shares and 5,130 shares for
the fiscal years ended March 31, 2011 and 2010, respec-
tively, were not included in the computation of diluted
earnings per share because the presumed proceeds
from exercising such options, including related income
tax benefits, exceed the average price of the common
shares for the fiscal year and therefore the options are
deemed antidilutive. Also at March 31, 2011, 2010, and
2009, warrants issued in connection with the convert-
ible note hedge transactions described in Note 7 are
excluded from the calculation of diluted earnings per
96 LEGG MASON 2011 ANNuAL R EpORt
share because the effect would be antidilutive. As of
March 31, 2011, 2,061 of the 23,000 Equity units issued
in May 2008, that include purchase warrants providing
for the issuance of between 1,525 and 1,830 shares of
Legg Mason common stock by June 2011, remain out-
standing, as more fully described in Note 7.
14. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income includes
cumulative foreign currency translation adjust-
ments and net of tax gains and losses on investment
securities. the change in the accumulated translation
adjustments for fiscal 2011 and 2010 primarily resulted
from the impact of changes in the Brazilian real, the
Japanese yen, the British pound, Singapore dollar, and
the Australian dollar in relation to the u.S. dollar on
the net assets of Legg Mason’s subsidiaries in Brazil,
Japan, the united Kingdom, Singapore, and Australia,
for which the real, the yen, the pound, the Singapore
dollar and the Australian dollar are the functional cur-
rencies, respectively.
A summary of Legg Mason’s accumulated other comprehensive income as of March 31, 2011 and 2010 is as follows:
Foreign currency translation adjustments
unrealized gains on investment securities, net of tax provision of $39 and $56, respectively
total
2011
$93,302
59
$93,361
2010
$58,143
84
$58,227
15. DERIVATIVES AND HEDGING
the disclosures below detail Legg Mason’s derivatives
and hedging excluding the derivatives and hedging
of CIVs. See Note 18, Variable Interest Entities and
Consolidation of Investment Vehicles, for information
related to the derivatives and hedging of CIVs.
Legg Mason continues to use currency forwards
to economically hedge the risk of movements in
exchange rates, primarily between the u.S. dollar,
euro, Great Britain pound, Canadian dollar, Japanese
yen, Singapore dollar, and Brazilian real. In the
Consolidated Balance Sheets, Legg Mason nets the
fair value of certain foreign currency forwards exe-
cuted with the same counterparty where Legg Mason
has both the legal right and intent to settle the con-
tracts on a net basis.
Legg Mason also uses market hedges on certain seed
capital investments by entering into futures contracts
to sell index funds that benchmark the hedged seed
capital investments. Open futures contracts required
cash collateral of $7,099 and $2,185, as of March 31,
2011 and 2010, respectively.
the following table presents the fair value as of March 31, 2011 and 2010 of derivative instruments not designated
as hedging instruments, classified as Other assets and Other liabilities:
Currency forward contracts
Futures contracts
total
2011
2010
Assets
$1,112
57
$1,169
Liabilities
$1,633
1,487
$3,120
Assets
$671
26
$697
Liabilities
$255
230
$485
the following table presents gains (losses) recognized on derivative instruments for the years ended March 31,
2011 and 2010:
Income Statement Classification
Gains
Losses
Gains
Losses
2011
2010
Currency forward contracts for:
Operating activities
Seed capital investments
Futures contracts
total
Other expense
Other non-operating income (expense)
Other non-operating income (expense)
$4,943
123
1,652
$6,718
$ (6,094)
(355)
(7,146)
$(13,595)
$5,669
269
26
$5,964
$(11,092)
(19)
(1,081)
$(12,192)
LEGG MASON 2011 ANNuAL R EpORt 97
16. RESTRUCTURING
In May 2010, Legg Mason announced a plan to stream-
line its business model to drive increased profitabil-
ity and growth that includes: 1) transitioning certain
shared services to its investment affiliates which are
closer to the actual client relationships; and 2) shar-
ing in affiliate revenue with its Americas distribution
group. this plan involves headcount reductions in
operations, technology, and other administrative areas,
which may be partially offset by headcount increases
at the affiliates, and will ultimately enable Legg Mason
to eliminate a portion of its corporate office space that
was dedicated to operations and technology employ-
ees. Legg Mason expects the initiative to be substan-
tially complete in fiscal 2012.
this initiative involves transition-related costs primar-
ily comprised of charges for employee termination
benefits and retention incentives during the transition
period, recorded in transition-related compensation.
the transition-related costs also involve other costs,
including charges for consolidating leased office
space, early contract terminations, asset disposals,
and professional fees, recorded in the appropriate
operating expense classifications. total transition-
related costs are expected to be in the range of
$115,000 to $135,000. Charges for transition-related
costs were $54,434 for the year ended March 31, 2011,
which primarily represent costs for severance and
retention incentives. Substantially all of the remaining
costs will be accrued in fiscal 2012.
the table below presents a summary of changes in the transition-related liability from March 31, 2010 through
March 31, 2011 and cumulative charges incurred through March 31, 2011, including non-cash charges, such as
asset write-offs:
Severance and retention incentives
Other
Balance
as of
Accrued
March 31, 2010 charges
$35,487
6,160
$41,647
$—
—
$—
Balance
Other
as of
Non-cash
payments March 31, 2011 Charges(1)
$23,211
$ 9,561
$(12,276)
5,835
3,226
(325)
$29,046
$12,787
$(12,601)
Cumulative
Charges
$45,048
9,386
$54,434
(1)
Includes stock-based compensation expense, write-offs of capitalized costs, primarily for internally-developed software, that will no longer be utilized as a result of the initiative.
the estimates for remaining transition-related costs are as follows:
Severance and retention incentives
Other costs
total
Minimum
$32,000
29,000
$61,000
Maximum
$46,000
35,000
$81,000
While management expects the total estimated costs
to be within the range disclosed, the nature of the
costs may differ from those presented above.
17. BUSINESS SEGMENT INFORMATION
Legg Mason is a global asset management company
that provides investment management and related
services to a wide array of clients. the Company
operates in one reportable business segment, Asset
Management. Asset Management provides investment
advisory services to institutional and individual clients
and to company-sponsored investment funds. the
primary sources of revenue in Asset Management are
investment advisory, distribution and administrative
fees, which typically are calculated as a percentage of
the AuM and vary based upon factors such as the type
of underlying investment product and the type of ser-
vices that are provided. In addition, performance fees
may be earned on certain investment advisory con-
tracts for exceeding performance benchmarks.
Legg Mason operates through two operating segments
(divisions), Americas and International, which are pri-
marily based on the geographic location of the advi-
sor or the domicile of fund families we manage. the
Americas Division consists of our u.S.-domiciled fund
families, the separate account businesses of our u.S.-
based investment affiliates and the domestic distribu-
tion organization. Similarly, the International Division
consists of our fund complexes, distribution teams and
investment affiliates located outside the u.S., primarily
in the united Kingdom.
98 LEGG MASON 2011 ANNuAL R EpORt
In December 2010, Legg Mason announced a realign-
ment of its executive management team which,
among other things, will eliminate the previous sepa-
ration of the Americas and International divisions
into one Global Asset Management business during
fiscal 2012. Although the executive management
realignment was announced in fiscal 2011, as of
March 31, 2011, no changes had been made to the
internal reporting practices and Legg Mason contin-
ued to operate in one reportable business segment,
Asset Management, with two divisions, Americas
and International.
the table below reflects our revenues and long-lived assets by geographic region (in thousands) as of March 31:
OPERATING REVENUES
united States
united Kingdom
Other International
total
INTANGIBLE ASSETS, NET AND GOODWILL
united States
united Kingdom
Other International
total
2011
2010
2009
$1,919,680
512,313
352,324
$2,784,317
$3,565,019
1,136,386
487,022
$5,188,427
$1,866,909
478,510
289,460
$2,634,879
$3,590,283
1,139,065
488,170
$5,217,518
$2,290,474
747,257
319,636
$3,357,367
$3,606,678
1,052,007
450,863
$5,109,548
18. VARIABLE INTEREST ENTITIES AND
CONSOLIDATION OF INVESTMENT VEHICLES
Legg Mason is the investment manager for CDOs/CLOs
that are considered VIEs under new accounting guid-
ance, since investors in these structures lack unilateral
decision making authority. these investment vehicles
were created for the sole purpose of issuing collateral-
ized instruments that offer investors the opportunity
for returns that vary with the risk level of their invest-
ment. Legg Mason’s management fee structure for
these investment vehicles typically includes a senior
management fee, and may also include subordinated
and incentive management fees. Legg Mason holds
no equity interest in any of these investment vehicles
and did not sell or transfer any assets to any of these
investment vehicles. In accordance with the methodol-
ogy described in Note 1 above, Legg Mason concluded
that its collateral management agreements represent a
variable interest in only two of these investment vehi-
cles, which are CLOs, primarily due to the level of sub-
ordinated fees. After considering the factors described
in Note 1 above, Legg Mason concluded that it is the
primary beneficiary of one of the two CLOs, which
resulted in its consolidation into Legg Mason’s finan-
cial statements as of April 1, 2010. the collateral assets
of this VIE are primarily comprised of investments in
corporate loans and, to a lesser extent, bonds. the
assets of the CLO cannot be used by Legg Mason
and gains and losses related to these assets have no
impact on Net Income Attributable to Legg Mason, Inc.
the liabilities of this VIE are primarily comprised of
debt and the CLO’s debt holders have recourse only to
the assets of the CLO and have no recourse to the gen-
eral credit or assets of Legg Mason.
In addition, Legg Mason was the primary beneficiary of
one sponsored investment fund VIE and held a control-
ling financial interest in two sponsored investment fund
VREs, all of which were consolidated as of March 31,
2011. As of March 31, 2010, Legg Mason consolidated
the sponsored investment fund VIE and one of the
sponsored investment fund VREs. Legg Mason’s invest-
ment in the CIVs as of March 31, 2011 and March 31,
2010 was $53,708 and $61,864, respectively, which rep-
resents its maximum risk of loss, excluding uncollected
advisory fees. the assets of these CIVs are primarily
comprised of investment securities. Investors and
creditors of these CIVs have no recourse to the general
credit or assets of Legg Mason beyond its investment
in these funds.
LEGG MASON 2011 ANNuAL R EpORt 99
the following tables reflect the impact of CIVs on the Consolidated Balance Sheets as of March 31, 2011 and
March 31, 2010 and the Consolidated Statements of Income for the fiscal year ended March 31, 2011 and 2010,
respectively:
Consolidating Balance Sheets
Current assets
Non-current assets
total assets
Current liabilities
Long-term debt of CIVs
Other non-current liabilities
total liabilities
Redeemable non-controlling interests
total stockholders’ equity
total liabilities and equity
Current assets
Non-current assets
total assets
Current liabilities
Long-term debt of CIVs
Other non-current liabilities
total liabilities
Redeemable non-controlling interests
total stockholders’ equity
total liabilities and equity
Balance Before
Consolidation
of CIVs
$2,378,226
5,946,737
$8,324,963
$ 914,803
—
1,649,815
2,564,618
976
5,759,369
$8,324,963
Balance Before
Consolidation
of CIVs
$2,541,880
6,049,794
$8,591,674
$1,053,893
—
1,697,055
2,750,948
667
5,840,059
$8,591,674
March 31, 2011
CIVs
$122,963
314,463
$437,426
$ 55,094
278,320
3,553
336,967
—
100,459
$437,426
Eliminations
$(54,633)
—
$(54,633)
(925)
$
—
—
(925)
35,736
(89,444)
$(54,633)
March 31, 2010
CIVs
$ 79,692
13,692
$ 93,384
961
$
—
—
961
—
92,423
$ 93,384
Eliminations
$(62,426)
—
$(62,426)
(578)
$
—
—
(578)
28,910
(90,758)
$(62,426)
As
Reported
$2,446,556
6,261,200
$8,707,756
$ 968,972
278,320
1,653,368
2,900,660
36,712
5,770,384
$8,707,756
As
Reported
$2,559,146
6,063,486
$8,622,632
$1,054,276
—
1,697,055
2,751,331
29,577
5,841,724
$8,622,632
100 LEGG MASON 2011 ANNuAL R EpORt
Consolidating Statements of Income
total operating revenues
total operating expenses
Operating income (loss)
total other non-operating income (expense)
Income (loss) before income tax provision
Income tax provision
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Legg Mason, Inc.
total operating revenues
total operating expenses
Operating income (loss)
total other non-operating income (expense)
Income (loss) before income tax provision
Income tax provision
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Legg Mason, Inc.
total operating revenues
total operating expenses
Operating income (loss)
total other non-operating income (expense)
Income (loss) before income tax provision
Income tax benefit
Net income (loss)
Less: Net income attributable to noncontrolling interests
Net income (loss) attributable to Legg Mason, Inc.
Balance Before
Consolidation
of CIVs
$ 2,788,450
2,396,938
391,512
(17,931)
373,581
119,434
254,147
224
$ 253,923
Balance Before
Consolidation
of CIVs
$ 2,637,658
2,314,376
323,282
(47)
323,235
118,676
204,559
202
$ 204,357
Balance Before
Consolidation
of CIVs
$ 3,358,599
4,025,842
(667,243)
(2,523,722)
(3,190,965)
(1,223,203)
(1,967,762)
156
$(1,967,918)
Fiscal Year Ended
March 31, 2011
CIVs
$
—
4,704
(4,704)
1,704
(3,000)
—
(3,000)
—
$ (3,000)
Eliminations
$ (4,133)
(4,133)
—
(5,384)
(5,384)
—
(5,384)
(8,384)
$ 3,000
Fiscal Year Ended
March 31, 2010
CIVs
$
—
2,263
(2,263)
17,329
15,066
—
15,066
—
$15,066
Eliminations
$ (2,779)
(2,943)
164
(8,809)
(8,645)
—
(8,645)
6,421
$(15,066)
Fiscal Year Ended
March 31, 2009
CIVs
$
—
1,938
(1,938)
7,796
5,858
—
5,858
—
$ 5,858
Eliminations
$ (1,232)
(1,233)
1
(3,091)
(3,090)
—
(3,090)
2,768
$ (5,858)
As
Reported
$ 2,784,317
2,397,509
386,808
(21,611)
365,197
119,434
245,763
(8,160)
$ 253,923
As
Reported
$ 2,634,879
2,313,696
321,183
8,473
329,656
118,676
210,980
6,623
$ 204,357
As
Reported
$ 3,357,367
4,026,547
(669,180)
(2,519,017)
(3,188,197)
(1,223,203)
(1,964,994)
2,924
$(1,967,918)
Other non-operating income (expense) includes interest income, interest expense and net gains (losses) on
investments and long-term debt determined on an accrual basis.
LEGG MASON 2011 ANNuAL R EpORt 101
the consolidation of CIVs has no impact on Net Income Attributable to Legg Mason, Inc. the fair value of the
financial assets and (liabilities) of CIVs were determined using the following categories of inputs (as defined in
Note 1) as of March 31, 2011 and March 31, 2010:
Assets:
trading investments:
Hedge funds
Government and corporate securities
Repurchase agreements
total trading investment securities
Investments:
CLO loans
CLO bonds
private equity funds
total investments
Derivative assets
Liabilities:
CLO debt
Reverse repurchase agreements
Derivative liabilities
Assets:
trading investment securities:
Hedge funds
Investments:
private equity funds
Quoted prices
in active
markets
(Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Value as of
March 31, 2011
$ —
—
—
—
—
—
—
—
125
$ 125
$ —
—
(128)
$(128)
$ 14,087
22,139
12,331
48,557
275,948
18,813
—
294,761
45
$343,363
$
—
(18,310)
(14,169)
$ (32,479)
$ 34,272
—
—
34,272
—
—
17,879
17,879
—
$ 52,151
$(278,320)
—
—
$(278,320)
$ 48,359
22,139
12,331
82,829
275,948
18,813
17,879
312,640
170
$ 395,639
$(278,320)
(18,310)
(14,297)
$(310,927)
Quoted prices
in active
markets
(Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Value as of
March 31, 2010
$ —
—
$ —
$ 24,813
$ 12,374
$ 37,187
—
$ 24,813
13,692
$ 26,066
13,692
$ 50,879
102 LEGG MASON 2011 ANNuAL R EpORt
the table below presents a summary of changes in assets and (liabilities) of CIVs measured at fair value using
significant unobservable inputs (Level 3) for the periods from March 31, 2010 to March 31, 2011 and March 31,
2009 to March 31, 2010:
Assets:
Hedge funds
private equity funds
Liabilities:
CLO debt
total realized and unrealized
gains (losses), net
purchases,
sales,
issuances and
March 31, 2010 settlements, net
Value as of
Net
transfer
into/out of
Level 3(1)
Realized and
unrealized
gains/
(losses), net
Value as of
March 31, 2011
$12,374
13,692
$26,066
$ 8,340
4,906
$13,246
$
$
5,862
—
5,862
$ 7,696
(719)
$ 6,977
$ 34,272
17,879
$ 52,151
$
—
$
—
$(249,668)
$(28,652)
$(278,320)
$(21,675)
Assets:
Hedge funds
private equity funds
purchases,
sales,
issuances and
March 31, 2009 settlements, net
Value as of
Net
transfer
into/out of
Level 3(1)
Realized and
unrealized
gains/
(losses), net
Value as of
March 31, 2010
$ 4,250
4,976
$ 9,226
$ (3,670)
8,716
$ 5,046
$ 10,414
—
$ 10,414
$ 1,380
—
$ 1,380
$ 12,374
13,692
$ 26,066
(1) transfers into Level 3 for the fiscal years ended March 31, 2011 and 2010 primarily represent assets and liabilities recorded upon the initial consolidation of investment vehicles.
Realized and unrealized gains and losses recorded for Level 3 assets and liabilities of CIVs are included in Other
non-operating income (expense) of CIVs on the Consolidated Statements of Income. total unrealized gains
(losses) for Level 3 investments and liabilities of CIVs relating only to those assets and liabilities still held at the
reporting date were $(21,668) and $1,377 for the fiscal year ended March 31, 2011 and 2010, respectively.
there were no significant transfers between Levels 1 and 2 during the year ended March 31, 2011.
the NAV values used as a practical expedient by CIVs have been provided by the investees and have been
derived from the fair values of the underlying investments as of the reporting date. the following table summa-
rizes, as of March 31, 2011, the nature of these investments and any related liquidation restrictions or other fac-
tors which may impact the ultimate value realized.
Category of Investment
Hedge funds
Fund-of-hedge funds
private equity funds
total
Investment Strategy
Global, fixed income, macro, long/short equity,
systematic, emerging market, u.S. and Europe hedge
Fixed income-emerging market, and Europe hedge
Long/short equity
Fair Value
Determined
using NAV
$45,978(1)
unfunded
Commitments
Remaining
term
n/a
n/a
2,381(2)
17,879(3)
$66,238
n/a
$11,830
$11,830
n/a
8 years
n/a—not applicable
(1) 30% quarterly redemption; 1% annual redemption; and 69% subject to three to five year lock-up or side pocket provisions.
(2) Monthly redemption.
(3) Liquidations are expected during the remaining term.
there are no current plans to sell any of these investments.
LEGG MASON 2011 ANNuAL R EpORt 103
the following table presents the fair value and unpaid principal balance of CLO loans, bonds and debt carried at
fair value under the fair value option as of March 31, 2011:
CLO loans and bonds
unpaid principal balance
unpaid principal balance in excess of fair value
Fair value
unpaid principal balance of loans that are more than 90 days past due
and also in nonaccrual status
unpaid principal balance in excess of fair value for loans that are more
than 90 days past due and also in nonaccrual status
Fair value of loans more than 90 days past due and in nonaccrual status
Debt
principal amounts outstanding
Excess unpaid principal over fair value
Fair value
$299,044
(4,283)
$294,761
$ 4,963
(2,837)
$ 2,126
$300,959
(22,639)
$278,320
During the year ended March 31, 2011, total net losses
of $14,686 were recognized in Other non-operating
income (expense) of CIVs in the Consolidated
Statements of Income related to assets and liabilities
for which the fair value option was elected. For CLO
loans and CLO debt measured at fair value, substan-
tially all of the estimated gains and losses included
in earnings for the year ended March 31, 2011 were
attributable to instrument specific credit risk as rel-
evant interest rates were fairly static while the credit
spreads for these instruments widened during the
current period, particularly credit spreads for the CLO
debt with lower seniority in the capital structure.
the CLO debt bears interest at variable rates based on
LIBOR plus a pre-defined spread, which ranges from 25
basis points to 400 basis points. All outstanding debt
matures on July 15, 2018.
As of March 31, 2011, total derivative assets and liabilities
of CIVs of $170 and $14,297, respectively, are primarily
recorded in Other liabilities of CIVs. Gains and (losses)
of $15,364 and $(18,022), respectively, for the fiscal year
ended March 31, 2011 related to derivative assets and
liabilities of CIVs are included in Other non-operating
income (expense) of CIVs. there is no risk to Legg Mason
in relation to the derivative assets and liabilities of the
CIVs in excess of its investment in the funds, if any.
104 LEGG MASON 2011 ANNuAL R EpORt
As of March 31, 2011 and March 31, 2010, for VIEs in which Legg Mason holds a significant variable interest or is
the sponsor and holds a variable interest, but for which it was not the primary beneficiary, Legg Mason’s carry-
ing value, the related VIE assets and liabilities and maximum risk of loss were as follows:
CDOs/CLOs(1)
Public-Private Investment Program(3)
Other sponsored investment funds
Total
CDOs/CLOs(1)
public-private Investment program(3)
Other sponsored investment funds
total
VIE Assets
Not
Consolidated
$
382,692
692,488
20,241,752
$21,316,932
VIE Assets
Not
Consolidated
$ 3,508,290
411,489
16,564,227
$20,484,006
As of March 31, 2011
VIE Liabilities
Not
Consolidated
$ 354,692
2,002
16,771
$ 373,465
Equity Interests
on the
Consolidated
Balance Sheet
$
—
290
83,480
$ 83,770
As of March 31, 2010
VIE Liabilities
Not
Consolidated
$3,215,890
—
1,334
$3,217,224
Equity Interests
on the
Consolidated
Balance Sheet
$
—
55,526
47,484
$103,010
Maximum
Risk
of Loss(2)
196
$
290
121,899
$122,385
Maximum
Risk
of Loss(2)
—
$
72,245
71,383
$143,628
(1) Legg Mason manages certain CDOs/CLOs in which it is no longer considered to have a variable interest under new accounting guidance effective April 1, 2010. the aggregate cumula-
tive assets and liabilities of these CDOs/CLOs were $2,817,357 and $2,577,457, respectively, as of March 31, 2010.
Includes equity investments the Company has made or is required to make and any earned but uncollected management fees.
(2)
(3) the Company continues to manage funds under the public-private Investment program. As a result of restructuring its investment during the three months ended June 30, 2010, the
Company remains a sponsor but no longer has a variable interest in certain of the public-private Investment program funds.
the assets of these VIEs are primarily comprised of
cash and cash equivalents and investment securities,
and the liabilities are primarily comprised of debt and
various expense accruals.
19. LIQUIDITY FUND SUPPORT
Due to stress in the liquidity markets in prior years,
certain asset backed securities previously held by
liquidity funds that a Legg Mason subsidiary man-
ages were in default or had been restructured after a
default. Although the Company was not required to
provide support to the funds, Legg Mason elected to
do so to maintain the confidence of its clients, maintain
its reputation in the marketplace, and in certain cases,
support the AAA/Aaa credit ratings of funds. If clients
were to lose confidence in the Company, they could
potentially withdraw funds in favor of investments
offered by competitors, resulting in a reduction in Legg
Mason’s assets under management and investment
advisory and other fees.
As of March 31, 2010, all previously existing support
arrangements had expired or were terminated in accor-
dance with their terms. For the year ended March 31,
2010, Legg Mason recognized pre-tax gains of $23,171
($16,565 net of income taxes), which represents the
reversal of unrealized, non-cash losses recorded in fis-
cal 2009 related to four CSAs to support investments in
non-asset backed securities. this amount also includes
pre-tax gains on foreign exchange forward contracts
of $1,484 and an interest payment of $1,056 received
related to SIV securities that were sold in fiscal 2009.
During fiscal 2009, Legg Mason purchased for
$2,923,666 in cash, including $24,256 of accrued
interest, $2,972,772 in principal amount of non-bank
sponsored SIV securities from six liquidity funds that
were previously supported under CSAs and LOCs. the
Company subsequently sold the purchased securities,
along with $354,934 of securities previously supported
by a tRS and $76,237 of Canadian conduit securities
held on its balance sheet, to third parties for $654,726,
excluding transaction costs. Legg Mason also paid
$181,183 to reimburse two funds for a portion of losses
they incurred in selling unsupported SIV securities. As
a result of the sale and reimbursement to the funds,
which completely eliminated the Company’s exposure
to securities issued by SIVs, the Company incurred a
realized loss of $2,261,365 ($1,362,146 net of taxes and
operating expense adjustments) in fiscal 2009. Also,
LEGG MASON 2011 ANNuAL R EpORt 105
during fiscal 2009, Legg Mason recognized unrealized
losses of $21,871 ($14,433 net of taxes and operating
expense adjustments) related to non-bank sponsored
SIV securities purchased from a liquidity fund in fiscal
2008 and unrealized losses related to the four CSAs to
support investments in non-asset backed securities,
which expired or were terminated in accordance with
their terms during fiscal 2010.
All gains and losses, including interest payments and
those related to foreign exchange forward contracts, are
included in Fund support in Other non-operating income
(expense) on the Consolidated Statements of Income.
106 LEGG MASON 2011 ANNuAL R EpORt
Quarterly Financial Data
(Dollars in thousands, except per share amounts)
(unaudited)
Fiscal 2011(1)
Operating Revenues
Operating Expenses
Operating Income
Other Non-Operating Income (Expense)
Income before Income Tax Provision
Income tax provision
Net Income
Less: Net income (loss) attributable to
noncontrolling interests
Net Income attributable to Legg Mason, Inc.
Net Income per Share attributable to
Legg Mason, Inc. common shareholders:
Basic
Diluted
Cash dividend per share
Stock price range:
High
Low
Assets Under Management:
End of period
Average
Mar. 31
$713,430
614,290
99,140
3,486
102,626
31,858
70,768
1,731
$ 69,037
$
0.45
0.45
0.06
37.29
32.21
$677,646
673,495
Quarter Ended
Dec. 31
$721,928
624,936
96,992
(9,836)
87,156
33,792
53,364
(8,256)
$ 61,620
$
0.41
0.41
0.06
37.72
29.68
$671,799
672,399
Sept. 30
$674,794
586,895
87,899
15,409
103,308
26,720
76,588
1,253
$ 75,335
$
0.50
0.50
0.04
31.04
24.94
$673,467
658,585
(1) Due to rounding of quarterly results, total amounts for each fiscal year may differ immaterially from the annual results.
As of May 20, 2011, the closing price of Legg Mason’s common stock was $33.55.
Fiscal 2010(1)
Operating Revenues
Operating Expenses
Operating Income
Other Non-Operating Income (Expense)
Income before Income tax provision
Income tax provision
Net Income
Less: Net income attributable to
noncontrolling interests
Net Income attributable to Legg Mason, Inc.
Net Income per Share attributable to
Legg Mason, Inc. common shareholders:
Basic
Diluted
Cash dividend per share
Stock price range:
High
Low
Assets under Management:
End of period
Average
Quarter Ended
Mar. 31
$671,420
565,584
105,836
(4,116)
101,720
36,619
65,101
1,494
$ 63,607
$
0.40
0.39
0.03
31.95
24.00
$684,549
681,227
Dec. 31
$690,479
611,331
79,148
(6,909)
72,239
26,006
46,233
1,311
$ 44,922
$
0.28
0.28
0.03
33.70
26.99
$681,614
693,254
Sept. 30
$659,896
582,012
77,884
(2,891)
74,993
27,671
47,322
1,548
$ 45,774
$
0.30
0.30
0.03
33.08
22.06
$702,700
684,034
(1) Due to rounding of quarterly results, total amounts for each fiscal year may differ immaterially from the annual results.
Jun. 30
$674,165
571,388
102,777
(30,670)
72,107
27,064
45,043
(2,888)
$ 47,931
$
0.30
0.30
0.04
34.83
27.36
$645,362
668,268
Jun. 30
$613,084
554,769
58,315
22,389
80,704
28,380
52,324
2,270
$ 50,054
$
0.35
0.35
0.03
26.74
15.53
$656,857
647,218
LEGG MASON 2011 ANNuAL R EpORt 107
Executive Officers
Mark R. Fetting
Chairman and Chief Executive Officer
Ronald R. Dewhurst
Senior Executive Vice President
Peter H. Nachtwey
Senior Executive Vice President and
Chief Financial Officer
Jeffrey A. Nattans
Executive Vice President
Thomas P. Lemke
Senior Vice President and
General Counsel
Joseph A. Sullivan
Senior Executive Vice President
Corporate Data
Executive Offices
100 International Drive
Baltimore, Maryland 21202
(410) 539-0000
www.leggmason.com
Form 10-K
Legg Mason’s Annual Report on Form
10-K for fiscal 2011, filed with the
Securities and Exchange Commission
and containing audited financial state-
ments, is available upon request with-
out charge by writing to the Corporate
Secretary at the Executive Offices of
the Company.
Copies can also be obtained by accessing
our website at www.leggmason.com
Independent Registered
Public Accounting Firm
pricewaterhouseCoopers LLp
100 E. pratt Street
Baltimore, Maryland 21202
(410) 783-7600
www.pwc.com
Transfer Agent
American Stock transfer
& trust Company
59 Maiden Lane
New York, New York 10038
(866) 668-6550
www.amstock.com
Common Stock
Shares of Legg Mason, Inc. common
stock are listed and traded on the New
York Stock Exchange (symbol: LM).
As of March 31, 2011, there were 1,510
shareholders of record of the Company’s
common stock.
total Return performance
the graph below compares the cumulative total stockholder return on Legg Mason’s common stock for the last five fiscal years
with the cumulative total return of the S&p 500 Stock Index and the SNL Asset Manager Index over the same period (assuming
the investment of $100 in each on March 31, 2006). the SNL Asset Manager Index consists of 32 asset management firms.
E
u
L
A
V
x
E
D
N
I
125
100
75
50
25
0
Legg Mason, Inc.
snL asset Manager Index
s&P 500
03/31/06
03/31/07
03/31/08
03/31/09
03/31/10
03/31/11
108 LEGG MASON 2011 ANNuAL R EpORt
p E R I O D E N D I N G
INDEX
03/31/06 03/31/07 03/31/08 03/31/09 03/31/10 03/31/11
Legg Mason, Inc.
100.00 75.79 45.59 13.52 24.48 31.00
SNL Asset Manager Index
100.00 112.13 100.70 53.53 98.79 115.62
S&p 500
100.00 111.83 106.15 65.72 98.43 113.83
Source: SNL Financial LC, Charlottesville, VA
© 2011
www.snl.com
Our vision is to be a proven leader in global
asset management, by delivering specialized
investment solutions that meet our clients’
objectives, and by rewarding our shareholders
and employees.
Our commitment to the global communities
in which we live and work
Legg Mason strives to enrich the global communities in which our employees live and
work. We are committed to sustainability, we support philanthropic and community
initiatives and we value diversity and inclusion in our perspectives and our workforce.
As proud members of the Baltimore community, where we are headquartered, and
through our global offices, we support a diverse network of projects including scholarship
sponsorship, mentoring programs, and Days of Caring. Legg Mason has a long history of
supporting local and global community efforts philanthropically through the Legg Mason
Charitable Foundation, including an emphasis this past year on disaster relief assistance.
Our employees are actively engaged in our philanthropic and community outreach
efforts and our perspective focuses on our efforts over the long term. We believe that by
investing in our communities, we invest in our futures.
Front cover: Investment professionals, Legg Mason Global
Asset Allocation and Legg Mason Investment Counsel
Pictured above: Western Asset investment strategy meeting
2011 Annual Report
Investment{Driven}
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