Forward
2013 Annual Report
together
“ We can’t change the
direction of the wind, but
we can adjust the sails.”
— I n d I a n P r o v e r b
Western Asset
Management is one of
the world’s leading fixed
income managers. With
a focus on long-term fun-
damental value investing,
the firm has nine offices
around the globe and
deep experience across
the range of fixed income
sectors. Founded in 1971,
Western Asset’s approach
emphasizes team man-
agement, intensive
proprietary research and
robust risk management.
For more than 40 years,
Royce & Associates has
utilized a disciplined,
value-oriented approach
in managing smaller-
company portfolios.
Known primarily through
its family of mutual
funds, The Royce Funds,
Royce is committed to
the same investment
principles that have
served it well since 1972.
ClearBridge Investments
is a well-established
global equity manager
focusing on proprietary
research and fundamen-
tal investing. With over
45 years of experience
building portfolios for
clients seeking income
solutions, high active
share or managed volatil-
ity, long-tenured portfolio
managers provide strong
leadership in a centralized
investment structure.
Permal Group is a pioneer
in multi-manager, multi-
strategy alternative
investing. Established
in 1973, the firm has
offices in 10 international
financial centers and
extensive networks of
experienced managers
and relationships around
the globe. Permal is rec-
ognized for investments
in new and established
hedge fund managers
across strategies, asset
classes and regions.
Founded in 1986,
Brandywine Global
is committed to pur-
suing value investing
in equity and fixed
income markets, in
the U.S. and around
the globe. Historically
an institutionally-
focused firm, with
offices in the U.S.,
Europe and Asia,
Brandywine Global
combines the agility
of a boutique asset
manager with the
stability and resources
of an industry leader.
Batterymarch Financial
Management is a global
quantitative equity spe-
cialist whose core and
solutions-based strat-
egies are characterized
by rigorous bottom-up
stock selection, inte-
grated risk control and
cost-efficient trading.
Batterymarch is known
for pioneering the
use of fundamentally-
based, quantitative
techniques and its early
entrance into interna-
tional and emerging
market investing.
Legg Mason Global
Equities Group is a
collection of three spe-
cialty firms dedicated
to the global equities
asset class, including
Esemplia Emerging
Markets, Legg Mason
Australian Equities and
Legg Mason Poland. As
with all of our manag-
ers, each affiliate oper-
ates with investment
autonomy pursuing its
own unique investment
style and process.
Legg Mason Investment
Counsel provides highly
tailored investment
and trust strategies for
affluent individuals,
families and institutions
through an iterative and
collaborative approach
with its clients. In addi-
tion to its core invest-
ment capabilities, the
firm has specializations
in socially responsive
investing, philan-
thropy and trust and
family office services.
Legg Mason Global
Asset Allocation draws
on global expertise
and deep intellec-
tual curiosity to build
innovative portfolios
of diversified assets
aimed at achieving a
variety of investment
goals. The firm offers
a broad range of asset
allocation capabilities
to meet the needs of
institutional and retail
investors, combining
asset allocation exper-
tise with dynamic risk
management solutions.
As a global asset management
firm with over $664 billion in
managed assets, Legg Mason
unites some of the industry’s
leading investment managers
under a single banner. Our
diverse family of specialized
managers is dedicated to creat-
ing sustainable value for their
clients through active strategies,
unique investment processes
and an independent approach
to research and analysis. Our
managers leverage the Legg
Mason-led retail global distribu-
tion network to further deliver
their investment solutions across
geographies and channels,
guided by client priorities.
San Francisco
Pasadena
Montreal
Boston
Stamford
New York
Philadelphia
Wilmington
Baltimore
Toronto
Cincinnati
Naples
Miami
Nassau
São Paulo
Santiago
London
Luxembourg
Paris
Frankfurt
Geneva
Milan
Madrid
Warsaw
Tokyo
Shanghai
Dubai
Hong Kong
Taipei
Investment Centers (17)
Distribution Locations (23)
Singapore
Melbourne
Investment Driven Client Centered Joseph A. Sullivan, President and Chief Executive Officer
Letter from Joseph A. Sullivan,
President and Chief Executive Officer
Dear Fellow Shareholders
I am honored to be writing to you for the first time since being elected
Legg Mason’s new President and CEO this past February and am grateful
for the trust and confidence that our Board and you have placed in me. I
am very proud to be leading a firm with a long and rich history and a future
filled with opportunity.
At Legg Mason, our goal is straightforward: we strive to be the best asset
management firm in the world...for our clients, our shareholders and our
employees...and in that order.
By focusing first on clients, we will deliver investment performance that
builds the loyalty of current clients and attracts new ones. In turn, the oper-
ating performance that results will reward our shareholders appropriately. In
so doing, we will continue to make Legg Mason a firm of great opportunity
for our employees and of which we can be justifiably proud.
As a company, we have chosen and are committed to active investment
management through an independent, multi-affiliate model combined with
world-class distribution. This model, well executed, is a unique value propo-
sition for shareholders and will differentiate us favorably in the marketplace.
We are a firm with demonstrated ability to manage assets, robust global
distribution and the scale, diversity and determination to succeed.
1Legg Mason The Board’s Perspective
The past year has seen the culmination of
Achieving this success going forward is wholly dependent
a process of reassessment, restructure and
on combining the many competitive strengths of our model
renewal for Legg Mason.
to deliver, together, the results that clients and sharehold-
ers expect. We are never better as a company than when
Given the challenges of the post financial crisis
we come together to perform for our clients and it is that
environment, reassessment of the fundamen-
focus—moving forward, together, in serving our clients—
tal beliefs that support our business model
that will drive Legg Mason to realize its potential and distin-
was required. Our conclusion—the unique
guish the company among many in an increasingly competi-
combination of investment focus and product
tive marketplace.
flexibility provided by our multi-affiliate busi-
ness model, when combined with our global
In this letter, I will highlight the company’s results for the
distribution capability, presents significant
2013 fiscal year, discuss our ongoing operating priorities,
opportunities for our clients and our sharehold-
review our progress against those priorities and look ahead
ers that distinguish Legg Mason in the asset
to the future of Legg Mason, a future I’m confident you will
management industry.
agree is bright.
However, the financial markets and investor
Our clients look to us for insight and ideas to address their
requirements and expectations have changed
need for both the security and growth of their investment
significantly from the pre-crisis era. These
portfolios in this low rate, low growth economic environment
changes require a leaner organization and more
and beyond. This opportunity to serve and perform for our
focused and strategic leadership. Our man-
clients is also a responsibility that we take very seriously.
agement processes have been restructured to
And we recognize that we must earn this opportunity, this
improve their effectiveness and efficiency, and
privilege, daily.
we have a new leadership team under CEO
Joe Sullivan.
Fiscal Year Highlights
Our fiscal year results showed important signs of improve-
Your Board and the management team have
ment and progress and while we are encouraged, we know
reaffirmed the fundamental principles that
have served Legg Mason clients and share-
holders well in the past. As your represen-
that we must and can perform still better.
We finished our fiscal year with the lowest level of quarterly
tatives, we are committed to renewing the
long-term outflows in over five years and our global retail
growth of our business and creating value for
distribution group achieved its best fiscal year of net flows
our shareholders.
W. Allen Reed
Chairman of the Board
since 2007. Our investment performance continues to be
strong, with at least 80% of our strategy AUM, excluding
liquidity assets, beating their respective benchmarks for
the 1-, 3-, 5- and 10-year periods ended March 31, 2013.
And, our strong cash generation enabled us to deleverage
our balance sheet by $350 million, repurchase 16.2 million
shares of Legg Mason stock and increase dividends by
38%, returning over $480 million to shareholders during the
fiscal year, while finishing the year with a cash position of
over $930 million.
2Legg Mason Our Operating Priorities and Progress
As we move forward, we are focused on four operating pri-
First, offering products that meet the needs of investors:
we must continually review and evolve our product
orities that we believe will best serve our clients and share-
lineup to meet the requirements and preferences of
holders and will most competitively position our franchise
our clients.
for growth: Products, Investment Performance, Distribution
and Productivity.
We commissioned a Global Income Survey to gain a deeper
understanding of the income needs and preferences of global
Our performance this past fiscal year, in the context of these
retail investors. This survey yielded a number of interesting
priorities, is highlighted as follows:
insights, including the fact that these investors are more
Financial Highlights
(dollars in thousands, except per share amounts)
Years Ended March 31,
OPERATING RESULTS
Operating revenues
Operating income (loss)
Income (loss) from continuing operations before
income tax provision (benefit)
Net income (loss) attributable to Legg Mason, Inc.(1)
Adjusted income (loss)(2)
PER COMMON SHARE
Net income (loss), diluted(1)
Adjusted income (loss)(2)
Dividends declared
Book Value
FINANCIAL CONDITION
Total assets
Total stockholders’ equity
2013
2012
2011
2010
2009
$2,612,650
$2,662,574
$2,784,317
$2,634,879
$ 3,357,367
(434,499)
(510,607)
(353,327)
347,169
338,753
303,083
220,817
397,030
386,808
365,197
253,923
439,248
321,183
329,656
204,357
381,258
(669,180)
(3,188,197)
(1,967,918)
(1,191,389)
$ (2.65)
$ 1.54
$ 1.63
$ 1.32
$ (13.99)
2.61
0.44
38.44
2.77
0.32
40.59
2.83
0.20
38.41
2.45
0.12
35.94
(8.47)
0.96
31.87
$7,269,660
$8,555,747
$8,707,756
$8,622,632
$ 9,232,299
4,818,351
5,677,291
5,770,384
5,841,724
4,598,625
(1) Fiscal 2013 includes non-cash impairment charges related to intangible assets, net of income tax benefits, of $508,252 or $3.81 per share. 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 (loss) represents a performance measure that is based on a methodology other than generally accepted accounting principles (“non-GAAP”).
For more information regarding this non-GAAP financial measure, see Management’s Discussion and Analysis of Financial Condition and Results of Operations
included in this Annual Report.
3Legg Mason willing than ever before to consider global and equity income
solutions to meet their income needs.
This past year, we launched over 20 new products that raised
over $2.6 billion in assets under management as of fiscal
year end, and we continue to invest seed capital and other
resources to develop and bring additional innovative products
to market.
Examples of firm-wide product launches this year include
a CLO product and mortgage REIT at Western Asset,
income-related products and an energy MLP managed by
ClearBridge Investments, global and sovereign fixed income
products within Brandywine Global and a Permal multi-strat-
egy fund of hedge funds product. Our recently completed
acquisition of Fauchier Partners with Permal is another exam-
ple of how we intend to seek new sources of product, asset
diversification and revenue growth.
Fauchier is a leading European-based manager in the fund
of hedge funds space, with an institutionally focused
European and Asian Pacific client base and expertise in
equity hedged and event driven strategies, all of which are
highly complementary to Permal’s capabilities. Combined,
in a transaction we expect to be accretive in the first year,
Permal and Fauchier further expand our product suite and
client base as one of the largest fund of hedge funds manag-
ers in the world.
Second, delivering compelling investment performance:
we must consistently deliver for our clients perfor-
mance that differentiates itself in an increasingly
competitive marketplace.
For the critical three-year time period ending March 31,
2013, 81% of strategy AUM, excluding liquidity, including all
of Legg Mason’s investment affiliates beat their respective
benchmarks. Additionally, the percentage of our strategy
AUM, excluding liquidity, beating benchmark was 80% for the
1-year, 84% for the 5-year and 87% for the 10-year periods
ending March 31, 2013.
Legg Mason Global Income Survey
With many investors rethinking their
approach to income and asset diver-
sification, we conducted a special
research study of affluent investors
in 13 countries for our Global Income
Survey: Bridging the gap in income
investing. To read about our key find-
ings, visit http://www.leggmason.com/
globalthoughtleadership
4Legg Mason Western Asset, our largest affiliate, Permal and Brandywine
increasing asset retention. These efforts contributed to the
Global continued to deliver strong investment results and
group’s best year of net flows in over five years with gross
were recognized for their strong performance track records:
sales increasing by 15% to $57 billion during fiscal year 2013
and strong improvement in the group’s net contribution to
• Western Asset was named manager of the year in the
Legg Mason’s earnings.
fixed income core category by Institutional Investor;
Importantly, net flows increased year over year in nine out
• a Permal diversified multi-manager fund was named the
of the ten sales channels in which we offer products in the
best performing specialist fund of hedge funds over ten
United States and five out of the six regions in which we
years by Hedge Fund Review; and
operate outside of the United States. We continue to believe
that, while significant opportunities for improvement remain,
• Brandywine Global received accolades from Institutional
our distribution platform...through its broad global footprint...
Investor and Morningstar for their global fixed income
represents a unique competitive strength for Legg Mason.
performance.
ClearBridge Investments, our largest equity affiliate, also
ating productivity: quite simply, operating effectiveness
delivered strong performance, resulting in their best net flow
and efficiency are competitive imperatives in our indus-
performance since 2005.
try and for Legg Mason.
And fourth, managing our business with a focus on oper-
We remain focused with our affiliates on improving upon
A significant component of our ability to deliver shareholder
areas of investment underperformance and importantly, we
value is a disciplined and ongoing focus on expenses and
are working aggressively to bring those products with strong
efficiency, which this past year included the consolidation of
investment performance to a broader set of clients.
certain corporate functions and real estate that will result in
a long-term benefit to our shareholders. We have also com-
Third, distributing our products effectively across
menced a bottom-up review of ways that we can further lever-
channels and geographies: the standard for our institu-
age our operating functions to continue to reallocate resources
tional and retail distribution teams is nothing short of
toward our critical priorities, including product innovation,
world class.
enhanced client service and an expanded global footprint.
Our distribution and client service philosophy for both institu-
tional and retail clients begins and ends with the needs and
preferences of our clients. Our investment affiliates serve
Capital Deployment and
Investing for Future Growth
We are pleased that our capital strength and consistent
institutional clients, who prefer direct coverage and access
cash generation enabled us to reduce shares outstanding by
to our portfolio teams, and have worked hard to enhance
12% and raise dividends by 38%, returning over $480 mil-
their capabilities and global reach, through investments and
lion to our shareholders since our prior fiscal year ended
improvements in technology and infrastructure.
March 31, 2012.
Our centralized global retail distribution group, which col-
Since 2010, we have reduced shares outstanding by 23%
laborates with our affiliates to serve retail client advisors,
and returned $1.4 billion to shareholders in the form of
has refocused its strategy to place greater emphasis on
repurchases and dividends. In May of 2012, we further
improving sales productivity, expanding market share and
enhanced our financial flexibility by refinancing $1.25 billion
5Legg Mason of convertible senior notes due in 2015 with longer maturity
We must add investment capabilities where we have product
debt, reducing outstanding debt by $350 million.
gaps, improve our revenue diversification and flows and
Importantly, our cash position, which totaled over $930 mil-
focus on European equities and alternative investments.
lion at the end of our fiscal year, provides resources to buffer
market volatility, while also capturing opportunities to expand
While we’re committed to our core business model, it can be
broaden our capabilities outside the United States, with a
and strengthen our business.
Looking Ahead
The past several years have been a difficult period for Legg
improved. We are in discussions with our affiliates to create affil-
iate equity plans to help attract and retain investment talent and
better align the long-term interests of our affiliates with those of
our shareholders. We recently initiated just such a plan with
Mason. In responding to the multiple challenges we have
Permal and we expect additional affiliate equity plans to follow.
faced, we have taken deliberate and aggressive actions to
reduce our cost structure, divest and/or combine some of our
We are focused on strengthening our global retail distribution
smaller investment affiliates and modify leadership throughout
capability through greater affiliate collaboration and by invest-
the company, including at the highest levels.
ing in more client-facing professionals and increased support
As a result, Legg Mason’s competitive position is strong and
areas of growing demand, such as income-oriented product
we are now poised for growth.
solutions, alternatives and specialized fixed income products,
for them. We seek to further develop targeted solutions in
consistent with the appetite of retail investors globally.
We have a unique combination of independent investment
affiliates and a robust global distribution platform to lever-
During the past several years, our focused business model,
age our affiliate investment capabilities. Our independent,
disciplined investment processes and global scale have helped
multi-affiliate model supports investment autonomy, promotes
us maintain our fundamental strength as a firm. But moving
creativity and innovation and, we believe, should lead to supe-
ahead, to effectively compete, our focus must be on gaining
rior long-term investment performance over time. Our firm
market share and diversifying our revenue stream to provide
is diversified by asset class and investment style, geography
consistent earnings, sustaining and improving our investment
and client type. We operate globally in 31 cities with over
performance to increase flows, and maintaining an efficient
435 investment professionals and more than 500 members
cost structure to drive greater profitability.
of our global distribution team located throughout the world.
We have a strong foundation for success...and now, we must
deliver on the opportunities before us.
Appreciation and Closing
Before closing, I would like to acknowledge with sincere grati-
tude the significant contributions made by Denny Beresford and
Change is constant and accelerating within our industry...and
Nick St. George, both of whom will be retiring from our Board
we embrace it. In fact, we view this change as an opportunity
of Directors this year, after a combined 41 years of service to
to further distinguish ourselves for current and future clients
our shareholders. We join all of our shareholders in thanking
by anticipating, adapting and responding to business and mar-
Denny and Nick for their guidance, leadership and dedication to
ket opportunities as they unfold.
our firm and wish them both continued future success.
6Legg Mason Over the past year, we have taken thoughtful and meaningful
steps to improve Legg Mason for long-term success but more
work remains.
As we think about the future, we are both excited and optimis-
tic about what lies ahead.
We know that the markets will be challenging and that the
industry will continue to change and evolve. We also know
that the challenges before our clients are significant and it is
our primary goal to listen to them, understand their needs
and work to develop solutions that meet their financial hopes
and objectives.
I am very proud of our many talented and highly professional
employees who have been so unwavering in their dedication
to our clients during this past year of transition. We now enter
a new year of challenge and opportunity, better positioned,
with new momentum and a clear commitment to growth.
We are very grateful for your continued trust and confidence, as
we work tirelessly to deliver performance for clients and results
for shareholders and move Legg Mason forward, together!
Joseph A. Sullivan
President and Chief Executive Officer
“ At Legg Mason, our goal is
straightforward: we strive to
be the best asset management
firm in the world...for our clients,
our shareholders and our
employees...and in that order.”
Executive Committee
Legg Mason’s Executive Committee is com-
posed of (left to right) Pete Nachtwey, Chief
Financial Officer; Terry Johnson, Head of Global
Distribution; Joe Sullivan, Chief Executive
Officer; Jennifer Murphy, Chief Administrative
Officer; and Tom Merchant, General Counsel.
7 U.S. Investment
Management Awards
Western Asset Management
Western Asset was named manager
of the year in the fixed income core
category by Institutional Investor, which
recognizes managers who “stood out in the
eyes of the investor community for their
exceptional performance, risk management
and service.”
“ 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.”
Established in 1971, Western Asset is one of the world’s
largest and leading managers of fixed income investments,
with nearly $460 billion of assets under management. With
a combined staff of 867 employees, Western Asset offers a
broad range of fixed income investment services representing
a global array of currencies, investment strategies and mar-
kets. Western Asset has 133 products, managed globally, in
17 currencies. Clients domiciled outside of the United States
represented 27% of Western Asset’s total assets under man-
agement at year-end.
Over the past 15 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:
•
Deliver superior risk adjusted investment performance
results versus benchmark and peers;
•
Continue to reinvest and allocate resources to develop
and attract top talent and to support increasingly complex
customized solutions;
•
Strive to achieve industry best practices across all areas
of the firm;
•
Continue to provide virtually any fixed income solution in
any currency; and,
•
Continue to expand and develop globally while preserving
its culture of teamwork.
8Legg Mason Located in New York City and founded by President and
Co-Chief Investment Officer, Chuck Royce, the company uses
a bottom-up value approach, primarily seeking companies
with strong balance sheets and above-average returns on
invested capital that are trading at substantial discounts to
their intrinsic value. Royce manages approximately $37 billion
of assets through open-end mutual funds, variable annuity
funds and closed-end funds, as well as institutional accounts
and limited partnerships.
Wealth of Experience: Royce & Associates is committed to
the same investment principles that have served it well for
40 years. Chuck Royce enjoys one of the longest tenures of
any active mutual fund manager. Royce’s investment staff also
includes Co-Chief Investment Officer W. Whitney George,
18 portfolio managers, five assistant portfolio managers and
analysts, and nine traders.
Multiple Funds, Common Focus: Royce’s goal is to offer
both individual and institutional investors the best available
micro-cap, small-cap and mid-cap portfolios. They have cho-
sen to concentrate on smaller-company investing by providing
investors with a range of funds that take full advantage of this
large and diverse sector.
Consistent Discipline: Royce’s approach emphasizes paying
close attention to risk and maintaining the same discipline,
regardless of market movements and trends. The price they
pay for a security must be significantly below their appraisal
This year, Royce & Associates, our small-cap
manager, celebrated the 40th anniversary of
its flagship portfolio Royce Pennsylvania
Mutual Fund. Manager Chuck Royce has
successfully navigated the many changes in
the small-cap marketplace by adhering to a
disciplined, value-oriented approach.
Total Invested Assets
by Geography
U.S. Equity—83%
Rest of the World Equity—9%
of its current worth. This requires a thorough analysis of the
European Equity—3%
financial and business dynamics of an enterprise, as though
Cash—5%
they were purchasing the entire company.
Co-Ownership of Funds: It is important that Royce’s
employees and shareholders share a common financial goal.
The officers, employees and their families currently have
approximately $160 million invested in The Royce Funds and
are often among the largest individual shareholders.
9Legg Mason ClearBridge Investments is an active global equity manager
with more than $65 billion in assets under management. With
a legacy dating back over 45 years, ClearBridge’s long-tenured
portfolio managers and fundamental research team focus on
building equity portfolios for clients that target three primary
investment objectives: income solutions, high active share and
managed volatility.
At ClearBridge Investments, all equity strategies start with the
same fundamental principle: the key to long-term success is
selecting high-quality companies through rigorous fundamen-
tal research and analysis. Driven by the insight and expertise
of portfolio managers and analysts, ClearBridge’s time-tested
investment process has guided the firm throughout its history.
Strengthened by advanced trading and risk management sys-
tems, ClearBridge’s disciplined, methodical approach is designed
to achieve consistent top-tier performance over the long term.
ClearBridge operates with investment independence from its
headquarters in New York and offices in San Francisco and
Wilmington. The firm has 177 employees, including 28 portfolio
managers, 25 research analysts and 9 traders. ClearBridge port-
folio managers are among the most seasoned in the industry,
having an average of 25 years of investment experience and
19 years at the firm.
ClearBridge Investments and
Legg Mason Japan collaborated
earlier this year to promote the
launch of the LM U.S. High
Dividend Equity Fund. A confer-
ence was held in Tokyo for over
200 distributors and included a
presentation on the U.S. energy
MLP marketplace by ClearBridge.
Assets by Product Type
High Active Share—43%
Managed Volatility—32%
Income Solutions—25%
10Legg Mason With 40 years of experience and long track records across invest-
ment strategies and markets, Permal Group is a leading global
alternative asset manager offering investment solutions through
established funds and more customized investment portfolios.
Permal has developed extensive networks of experienced
managers and relationships around the globe, and today there is
a global investment team based in New York and London, with
investment hubs in Singapore and Paris. There are additional
offices in Dubai, Hong Kong, Nassau, Paris, Tokyo and Shanghai.
Permal’s clients include sovereign wealth funds, pension funds,
endowments, foundations, insurance companies, family offices,
private banks and high net worth individuals.
Alongside its long-term performance track record, Permal is
widely regarded for its capabilities in fundamental analysis and
highly sophisticated analytic and risk management tools, as well
as its ability to structure and manage highly diversified portfolios
of specialized managers. A core element of Permal’s invest-
ment offering is its leading buyside managed account platform
(Permal MAP), consisting of pari passu and product engineered
vehicles, covering a wide variety of investment strategies and
offering investors greater flexibility, control, transparency and
often lower costs.
Multi-Manager Funds’
Assets by Strategy
Global Macro—33%
Fixed Income—20%
Global Long/Short—18%
Event Driven—18%
Equity Long—2%
Relative Value Arbitrage—2%
Natural Resources—2%
Cash/Other—5%
A Permal diversified multi-manager fund
was named the best specialist fund of hedge
funds over 10 years by Hedge Fund Review,
which recognizes funds that “delivered out-
standing risk-adjusted returns across a variety
of individual strategies.”
11Legg Mason Brandywine Global won a 2013
Morningstar Hong Kong Fund Award in
the Global Bond Category. The awards
recognize “retail funds that added the most
value for investors within the context of their
relevant peer group in 2012 and over the
longer term.”
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 multi-asset class portfolios that invest in U.S., international,
and global markets on behalf of over 400 institutional clients.
With over $46 billion in assets under management, Brandywine
Global’s growth has been fueled primarily by an increasing pres-
ence in international markets, with 43% of assets managed on
behalf of non-U.S. domiciled clients. Its institutional client base
includes public funds, corporations, educational institutions,
Taft-Hartley plans and health care organizations.
Brandywine Global has 183 employees, including 44 invest-
ment professionals, located in Philadelphia, San Francisco,
London and Singapore.
Brandywine Global works consistently to strengthen its funda-
mental 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 perfor-
mance 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 cul-
ture of integrity and partnership; and finding value, throughout
the world, that others have not yet recognized.
In May 2013, Brandywine Global hosted a
conference for over 100 clients and consul-
tants with the theme: Where Some See
Risk, Others See Opportunity. Francis
Scotland, director of global macro research,
discussed market trends and the global eco-
nomic climate.
Assets by Strategy
Fixed Income—79%
Diversified Equity—9%
Large Cap Equity—9%
Small/Mid Cap Equity—3%
12Legg Mason “ Batterymarch’s mission is to
provide consistent long-term
value by exceeding client
expectations in both performance
and service. We are committed
to fostering a culture that rewards
creative, collaborative thinking
and leverages new technology
to maximize the effectiveness
of our entire organization.”
Batterymarch, a pioneer in quantitative equity manage-
ment, 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 and to provide investment solu-
tions to address client identified concerns.
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 84 employees, including 25 investment professionals.
Its clients represent a broad spectrum of investors, including
corporate pension plans, public funds, foundations and
endowments, Taft-Hartley plans, investment companies and
sovereign wealth funds. More than half of Batterymarch’s
over $12 billion in assets under management represent global,
international or emerging markets accounts, and 31% is man-
aged for clients domiciled outside the United States.
A Range of Products to Meet Client Objectives
Core
• Global
• International
• US Large Cap
Higher Alpha
Solutions-Based
• Global Unconstrained
• Global TAA
• International Small Cap
• Global Market Neutral
• US Small Cap
• Global Yield Hunter
• US Large Cap Enhanced Index
• Global Emerging Markets
• Managed Volatility
• US MidCap
• Canada
• GEM Smaller Companies
• Inflation Sensitive
• Asia ex-Japan
• ESG
• Asia ex-Japan Absolute Return
13Legg Mason The Legg Mason Global Equities Group is a collection of
reflective of the diversity of its people, a number of whom
three specialty firms dedicated to the global equities asset
were either born and/or have lived and worked in the emerg-
class. As with all our managers, each affiliate operates with
ing markets for a considerable period of their lives.
investment autonomy, pursuing its own unique investment
philosophy and process.
Legg Mason Australian Equities is a specialist Australian
equities fund manager with an extensive range of investment
Esemplia Emerging Markets is a dedicated global emerging
strategies, including core, value, property securities, small
markets asset management firm. It has a core active funda-
companies, equity and real income, tactical asset allocation
mental-based approach to investing and manages a range of
and multi-sector funds. With a 39-year history, Legg Mason
long only and alternative investment strategies. Esemplia has
Australian Equities has an experienced and stable investment
offices and manages money for clients out of London and
team that combines fundamental research and quantitative
Hong Kong. The company has a unique boutique-like culture
analysis with market expertise. Its clients include government
Warsaw
London
agencies, institutional funds and retail investors.
Legg Mason Poland is one of the longest established asset
managers in Poland, investing in Polish and Central European
securities, including bonds, equities and money markets.
Legg Mason Poland utilizes a fundamental bottom-up
approach to investing with an emphasis on efficient risk
Hong Kong
control. The firm’s clients are mostly affluent and institutional
investors, including pension funds, insurance companies,
foundations and local governments.
Melbourne
Legg Mason Australian Equities was named
Asset Allocator of the Year at the 2013 Money
Management/Lonsec Fund Manager of the Year
Awards. The firm was recognized for the “combi-
nation of a highly regarded investment team and
a robust investment process.”
14Legg Mason Legg Mason Investment Counsel provides highly tailored
investment and trust strategies for affluent individuals, fam-
ilies and institutions. Through an iterative and collaborative
approach with its clients, the firm focuses on understanding
goals and needs before building individualized strategies.
Integral to its core investment capabilities and to help clients
pursue their financial goals, the firm also has specializations
in socially responsive investing, philanthropy, trust and family
office services, as well as estate and tax planning. Legg
Mason Investment Counsel’s dedicated team of 21 portfolio
managers and trust officers average over 27 years of expe-
rience. The firm also employs 14 analysts whose work is for
the benefit of the firm’s clients only. Legg Mason Investment
Counsel operates from offices in Baltimore, Cincinnati, New
York and Philadelphia.
Assets by Investment Type
U.S./Global Balanced—48%
U.S./Global Equity—29%
Fixed Income—23%
Legg Mason Global Asset Allocation (LMGAA) provides
strategic asset allocation, tactical asset allocation and custom
risk management solutions, creating multi-manager/multi-
asset class solutions aimed at achieving a variety of client
investment goals. Based in New York, the firm draws on
global expertise and deep intellectual curiosity to offer a broad
range of asset allocation capabilities that meet the needs of
institutional and retail investors, combining asset allocation
expertise with dynamic risk management solutions and the
depth of resources of one of the world’s largest investment
management firms. LMGAA’s investment process combines
conceptual creativity with quantitative discipline, with an
emphasis on managing downside risk. LMGAA’s products and
strategies are deliverable across multiple vehicles, including
mutual funds, variable insurance trusts, institutional separate
accounts and cross-border mutual funds.
Investment Process Overview
Strategic Asset
Allocation
Manager
Selection
Attribution and
Measurement
Tactical Asset
Allocation
Dynamic Risk
Management
15Legg Mason Board of Directors
Standing left to right
Seated left to right
John E. Koerner III
Managing Member, Koerner Capital, LLC
Nicholas J. St. George
Private Investor
W. Allen Reed
Private Investor; Retired CEO,
GM Asset Management Corporation
(Chairman of the Board, Lead Independent
Director, Chairman of Finance Committee)
Dennis M. Kass
Private Investor; Retired CEO,
Jennison Associates
Cheryl Gordon Krongard
Private Investor; Former CEO,
Rothschild Asset Management
Joseph A. Sullivan
President and CEO, Legg Mason, Inc.
Dennis R. Beresford
Professor, University of Georgia;
Former Chairman of Financial Accounting
Standards Board
Kurt L. Schmoke
Vice President and General Counsel,
Howard University;
Former Mayor of Baltimore
Nelson Peltz
Chief Executive Officer and Founding Partner,
Trian Fund Management, L.P.
(Chairman of Nominating &
Corporate Governance Committee)
Barry W. Huff
Retired Vice Chairman, Deloitte
(Chairman of Audit Committee)
John T. Cahill
Executive Chairman, Kraft Foods Group, Inc.
(Chairman of Compensation Committee)
Margaret Milner Richardson
Private Consultant and Investor;
Former U.S. Commissioner of Internal Revenue
Harold L. Adams
Chairman Emeritus, RTKL Associates, Inc.
Robert E. Angelica
Private Investor; Former Chairman and CEO,
AT&T Investment Management Corporation
(Chairman of Risk Committee)
Not pictured
John V. Murphy
Former CEO, OppenheimerFunds Inc.
John H. Myers
Senior Advisor, Angelo, Gordon & Co.;
Former CEO, GE Asset Management
Our New Directors
Dennis Kass joined the Legg Mason Board in April 2013. Mr. Kass’s previous
positions have included serving as Chairman and CEO of Jennison Associates from
2003 to 2012 and more than a decade with J.P. Morgan’s Investment Management
unit, including as Vice Chairman of J.P. Morgan Fleming Asset Management.
John Murphy joined the Legg Mason Board in June 2013. Mr. Murphy’s
previous positions include serving as Chairman and Chief Executive Officer of
OppenheimerFunds Inc. as part of more than 18 years with Oppenheimer and its
corporate parent, MassMutual Financial Group, in a variety of senior roles.
John Myers joined the Legg Mason Board in June 2013. Mr. Myers is cur-
rently a senior advisor to Angelo, Gordon & Co. Mr. Myers’ previous positions
include almost 10 years as President and Chief Executive Officer of GE Asset
Management as part of more than almost 40 years with General Electric
Company and its subsidiaries.
16Legg Mason Selected Financial Data
(Dollars in thousands, except per share amounts or unless otherwise noted)
OPERATING RESULTS
Operating revenues
2013
2012
2011
2010
2009
Years Ended March 31,
$2,612,650
$2,662,574
$2,784,317
$2,634,879
$ 3,357,367
Operating expenses, excluding impairment
2,313,149
2,323,821
2,397,509
2,313,696
Impairment of intangible assets and goodwill
Operating income (loss)
Other non-operating expense
Other non-operating income (expense) of
consolidated investment vehicles, net
Fund support
Income (loss) before income tax provision (benefit)
Income tax provision (benefit)
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interests
734,000
(434,499)
(73,287)
(2,821)
—
(510,607)
(150,859)
(359,748)
—
338,753
(54,006)
18,336
—
303,083
72,052
231,031
—
386,808
(23,315)
1,704
—
365,197
119,434
245,763
—
321,183
(32,027)
17,329
23,171
329,656
118,676
210,980
2,718,577
1,307,970
(669,180)
(243,577)
7,796
(2,283,236)
(3,188,197)
(1,223,203)
(1,964,994)
(6,421)
10,214
(8,160)
6,623
2,924
Net income (loss) attributable to Legg Mason, Inc.
$ (353,327)
$ 220,817
$ 253,923
$ 204,357
$(1,967,918)
PER SHARE
Net income (loss) per share attributable to
Legg Mason, Inc. common shareholders:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted(1)
Dividends declared
BALANCE SHEET
Total assets
Long-term debt
Total stockholders’ equity
FINANCIAL RATIOS AND OTHER DATA
Adjusted income (loss)(2)
Adjusted income (loss) per diluted share(2)
Operating margin
Operating margin, as adjusted(3)
Total debt to total capital(4)
$ (2.65)
$ 1.54
$ 1.63
$ 1.33
$ (13.99)
$ (2.65)
$ 1.54
$ 1.63
$ 1.32
$ (13.99)
133,226
133,226
143,292
143,349
155,321
155,484
153,715
155,362
140,669
140,669
$ 0.44
$ 0.32
$ 0.20
$ 0.12
$ 0.96
$7,269,660
$8,555,747
$8,707,756
$8,622,632
$ 9,232,299
1,144,954
4,818,351
1,136,892
1,201,868
1,170,334
5,677,291
5,770,384
5,841,724
2,740,190
4,598,625
$ 347,169
$ 2.61
$ 397,030
$ 439,248
$ 381,258
$(1,191,389)
$ 2.77
$ 2.83
$ 2.45
$ (8.47)
(16.6)%
16.8%
19.2%
12.7%
21.3%
19.6%
13.9%
23.2%
20.1%
12.2%
20.7%
19.6%
(19.9)%
23.9%
39.4%
Assets under management (in millions)
$ 664,609
$ 643,318
$ 677,646
$ 684,549
$ 632,404
Full-time employees
2,975
2,979
3,395
3,550
3,890
(1) Basic shares and diluted shares are the same for periods with a net loss.
(2) Adjusted income (loss) is a non-GAAP performance measure. We define Adjusted income (loss) 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, such as intangible asset impairments, the
impact of tax rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets, and loss on extinguishment of contingent convert-
ible debt. See Supplemental Non-GAAP Information in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(3) Operating margin, as adjusted, is a non-GAAP performance measure we calculate by dividing (i) Operating income (loss), 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 “Operating revenues, as adjusted.” See Supplemental Non-GAAP Information in Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
(4) Calculated based on total debt as a percentage of total capital (total stockholders’ equity plus total debt) as of March 31.
17
Legg Mason Management’s Discussion and Analysis of Financial Condition
and Results of Operations
EXECUTIVE OVERVIEW
Legg Mason, Inc., a holding company, with its subsidiar-
ies (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 investment vehicles. We offer these
products and services directly and through various finan-
cial intermediaries. We have operations principally in the
United States of America (“U.S.”) and the United Kingdom
(“U.K.”) and also have offices in Australia, Bahamas, Brazil,
Canada, Chile, China, Dubai, France, Germany, Italy, Japan,
Luxembourg, Poland, Singapore, Spain, Switzerland and
Taiwan. All references to fiscal 2013, 2012 or 2011, refer to
our fiscal year ended March 31 of that year. Terms such as
“we,” “us,” “our,” and “Company” refer to Legg Mason.
In connection with a realignment of our executive manage-
ment team during fiscal 2011, we no longer manage our
business in two divisions and, during fiscal 2012, eliminated
the previous separation of the Americas and International
divisions and combined them into one operating segment,
Global Asset Management. We believe this structure allows
us to function as a global organization with a single purpose.
As a result of this change, we no longer present assets
under management (“AUM”) or revenues by division.
Our operating revenues primarily consist of investment
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 invest-
ment advisory contracts for exceeding performance
benchmarks. The largest portion of our performance fees
is earned based on 12-month performance periods that
end in differing quarters during the year, with a portion
based on quarterly performance periods. Distribution and
service fees are received for distributing investment prod-
ucts and services, or for providing other support services
to investment portfolios, and are generally 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, therefore, are dependent upon
the level of our AUM and fee rates, and thus are affected
by factors such as securities market conditions, our ability
to attract and maintain AUM and key investment person-
nel, and investment performance. Our AUM primarily vary
from period to period due to inflows and outflows of client
assets as well as 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 marketplace,
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 situation, including invest-
ment objectives, liquidity needs, investment horizon and
amount of assets managed, our relationships with distribu-
tors 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 underlying invest-
ment product, the amount of assets under management,
the asset management affiliate that provides the services,
and the type of services (and investment objectives) that
are provided. Fees charged for equity asset manage-
ment services are generally higher than fees charged for
fixed income and liquidity asset management services.
Accordingly, our revenues and average AUM advisory
revenue yields will be affected by the composition of our
AUM, with changes in the relative level of equity assets
more significantly impacting our revenues and average
AUM advisory revenue yields. Average AUM advisory
revenue yields are calculated as the ratio of annualized
investment advisory fees, excluding performance fees,
to average AUM. In addition, in the ordinary course of our
business, we may reduce or waive investment manage-
ment 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. We have in place revenue
sharing agreements with most of our asset management
affiliates, under which specified percentages of the affili-
ates’ revenues are required to be distributed to us and
the balance of the revenues is retained to pay operating
expenses, including compensation expenses, but exclud-
ing certain expenses and income taxes. Under these
agreements, our asset management affiliates retain dif-
ferent percentages of revenues to cover their costs. As
such, our Net Income (Loss) Attributable to Legg Mason,
Inc., operating margin and compensation as a percent-
age of operating revenues are impacted based on which
affiliates generate our revenues, and a change in AUM at
one affiliate can have a dramatically different effect on our
revenues and earnings than an equal change at another
affiliate. In addition, from time to time we may agree to
changes in revenue sharing agreements and other arrange-
ments with our asset management personnel, which may
impact our compensation expenses and profitability.
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, non-com-
pensation related operating expense levels at revenue
18
Legg Mason share-based affiliates, and profits. The next largest com-
ponent of our cost structure is distribution and servicing
expense, which are primarily fees paid to third-party dis-
tributors for selling our asset management products and
services and are largely variable in nature. Certain other
operating costs are quasi-fixed in nature, such as occu-
pancy, depreciation and amortization, and fixed contract
commitments for market data, communication and tech-
nology services, and usually do not decline with reduced
levels of business activity or, conversely, usually do not
rise proportionately with increased business activity.
Our financial position and results of operations are materi-
ally affected by the overall trends and conditions of the
financial markets, particularly in the United States, but also
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
AUM, and the volatility and general level of securities
prices and interest rates, among other things. Periods of
unfavorable market conditions are likely to adversely affect
our profitability. 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 signifi-
cant factors in determining whether we are successful in
attracting and retaining clients. In the last few years, the
Strategic Priorities
Recent Initiatives
industry has seen flows into products for which we do not
currently garner significant market share. In addition, the
economic downturn of fiscal 2008 and 2009 contributed to
a significant contraction in our business and we have not
recovered to pre-downturn levels.
The financial services business in which we are engaged
is extremely competitive. Our competition includes numer-
ous global, national, regional and local asset management
firms, broker-dealers and commercial banks. The industry
has been impacted by continued economic uncertainty,
and in prior years, by the consolidation of financial services
firms through mergers and acquisitions.
The industry in which we operate is also subject to exten-
sive regulation under federal, state, and foreign laws. Like
most firms, we have been impacted by 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.
Our strategy is focused on four primary areas listed below.
Management keeps these strategic priorities in mind
when it evaluates our operating performance and financial
condition. Consistent with this approach, we have also
presented in the table below the most important matters
on which management currently focuses in evaluating our
performance and financial condition.
Product expansion
• Promote revenue growth through new product development, leveraging the capabilities of our affiliates
• Identify and execute strategic acquisitions to increase product offerings and fill gaps in products
and services
Investment performance
• Deliver compelling and consistent performance against both relevant benchmarks and the products
and services of our competitors for 1-year, 3-year, 5-year, and 10-year periods
Distribution focus
• Evaluation and reallocation of resources within and to our distribution platform to continue to build a
top distribution function with the capability to offer solutions to relevant investment challenges
Operating efficiency
• Management of expenses
• Restructuring of affiliate arrangements
Net Loss Attributable to Legg Mason, Inc. for fiscal 2013
was $353.3 million, or $2.65 per diluted share, as com-
pared to Net Income Attributable to Legg Mason, Inc. of
$220.8 million, or $1.54 per diluted share, for fiscal 2012.
The current year loss is primarily attributable to $734.0 mil-
lion, or $3.81 per diluted share, of non-cash impairment
charges related to intangible assets and a $69.0 million,
or $0.34 per diluted share, non-operating charge from the
extinguishment of debt.
Average AUM, and total revenues, remained relatively flat
in fiscal year 2013, as compared to fiscal year 2012. Strong
overall performance and the improvement of our global
distribution function contributed to a continued reduction
in outflows. The modest outflows were mostly offset by
increases in AUM due to market performance, an acquisi-
tion, and new product launches in fiscal 2013.
19
Legg Mason The following discussion and analysis provides additional
information regarding our financial condition and results
of operations.
BUSINESS ENVIRONMENT AND
RESULTS OF OPERATIONS
The business environment in fiscal 2013 was marked by
uneven growth and a continued heightened sensitivity to
economic news. Major economic events and news of the
year included uneven domestic growth, periodic develop-
ments in the ongoing European sovereign debt crisis, the
fiscal cliff, sequestration, and the actions of the Federal
Reserve to maintain low interest rates, including beginning
a third round of quantitative easing and the continued sup-
port of the secondary mortgage market. These events led
to a challenging financial environment, both globally and in
the United States. However, during fiscal 2013 most U.S.
indices produced positive returns, with record highs in the
equity markets in March 2013. While the economic out-
look has remained more positive than in recent years, the
financial environment in which we operate still reflects a
heightened level of sensitivity as we move into fiscal 2014.
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 over 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
% Change for the
Year Ended March 31,
2013
10.34%
11.41%
5.69%
2012
7.24%
6.23%
11.16%
Bond Index
3.77%
7.71%
Barclays Capital Global Aggregate
Bond Index
1.26%
5.26%
(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.
20
Legg Mason The following table sets forth, for the periods indicated, amounts in the Consolidated Statements of Income (Loss) as a per-
centage of operating revenues and the increase (decrease) by item as a percentage of the amount for the previous period:
Percentage of Operating Revenues
Period to Period Change(1)
Years Ended March 31,
2013
2012
2011
2013
Compared
to 2012
2012
Compared
to 2011
28.0%
29.1%
29.3%
(5.8)%
(4.9)%
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 intangible assets
Other
Total operating expenses
Operating Income (Loss)
Other Income (Expense)
Interest income
Interest expense
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 interests
55.3
3.8
12.6
0.3
56.0
1.9
12.8
0.2
53.4
3.5
13.6
0.2
100.0
100.0
100.0
45.5
—
45.5
23.0
5.7
6.6
0.5
28.1
7.2
116.6
(16.6)
0.3
(2.4)
(0.7)
(0.1)
(2.9)
(19.5)
(5.7)
(13.8)
(0.3)
41.7
1.3
43.0
24.4
6.2
5.8
0.7
—
7.2
87.3
12.7
0.4
(3.3)
0.8
0.8
(1.3)
11.4
2.7
8.7
0.4
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)
Net Income (Loss) Attributable to Legg Mason, Inc.
(13.5)%
8.3%
9.1%
n/m—not meaningful
(1) Calculated based on the change in actual amounts between fiscal years as a percentage of the prior year amount.
(3.0)
99.1
(3.1)
37.3
(1.9)
7.1
n/m
3.9
(7.6)
(9.1)
11.1
(28.4)
n/m
(1.2)
31.1
n/m
(33.9)
(28.2)
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
0.3
(48.8)
(10.1)
(16.0)
(4.4)
(2.7)
(23.1)
(3.5)
(8.9)
1.7
12.3
(14.6)
n/m
8.0
(3.1)
(12.4)
24.2
(5.0)
(62.9)
n/m
n/m
(17.0)
(39.7)
(6.0)
n/m
(13.0)%
21
Legg Mason FISCAL 2013 COMPARED WITH FISCAL 2012
Assets Under Management
Our AUM is primarily managed across the following asset classes:
Equity
Fixed Income
• Large Cap Growth
• Small Cap Core
• Large Cap Value
• Equity Income
• Mid Cap Core
• Global Emerging Market Equity
• Global Equity
• International Equity
• U.S. Intermediate Investment Grade
• Global Government
• U.S. Municipal
• U.S. Long Duration
• Global Opportunistic Fixed Income
• U.S. Credit Aggregate
• U.S. Limited Duration
• Global Fixed Income
• U.S. Government Intermediate
• Government/Credit
Liquidity
• U.S. Managed Cash
• U.S. Municipal Cash
The components of the changes in our 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)
Acquisitions (dispositions), net
2013
$643.3
2012
$677.6
44.9
(49.0)
(27.4)
19.8
(11.7)
34.2
(1.2)
46.9
(51.1)
(35.9)
12.6
(27.5)
17.1
(23.9)
End of period
$664.6
$643.3
(1) Subscriptions and redemptions reflect the gross activity in the funds and
include assets transferred between funds and between share classes.
(2) Includes impact of foreign exchange, reinvestment of dividends, and other.
AUM at March 31, 2013, was $664.6 billion, an increase of
$21.3 billion, or 3%, from March 31, 2012. The increase in
AUM was attributable to market performance and other of
$34.2 billion, including the negative impact of foreign cur-
rency exchange fluctuations of $8.3 billion, and $5.4 billion
related to the acquisition of Fauchier Partners Management
Limited (“Fauchier”). These increases were offset in part by
net client outflows of $11.7 billion and dispositions of $6.6 bil-
lion. The dispositions were in liquidity assets which resulted
from the amendment of historical Smith Barney brokerage
programs providing for investment in liquidity funds that our
asset managers manage. Long-term asset classes accounted
for the net client outflows, with $20.4 billion and $11.0 bil-
lion in equity and fixed income outflows, respectively,
partially offset by liquidity inflows of $19.7 billion. Equity out-
flows were primarily experienced by products managed at
Batterymarch Financial Management, Inc. (“Batterymarch”),
Royce & Associates (“Royce”), The Permal Group, Ltd.
(“Permal”), and Legg Mason Capital Management LLC
(“LMCM”). Due in part to investment performance
issues, we have experienced net annual outflows in our
equity asset class since fiscal 2007. The majority of fixed
income outflows were in products managed by Western
Asset Management Company (“Western Asset”), includ-
ing $6.4 billion in outflows from a single, low fee global
sovereign mandate. We expect to continue to experience
outflows from this mandate of approximately $500 million
per month during fiscal 2014. Fixed income outflows were
offset in part by inflows at Brandywine Global Investment
Management, LLC (“Brandywine”). We have experienced
outflows in our fixed income asset class in all but two
quarters since the fourth quarter of fiscal 2008. We gener-
ally earn higher fees and profits on equity AUM, and out-
flows in the equity asset class will more negatively impact
our revenues and Net Income (Loss) Attributable to Legg
Mason, Inc. than would outflows in other asset classes.
We experienced liquidity outflows of approximately $13 bil-
lion from a sovereign wealth client during the month ended
April 30, 2013, however, we do not expect this outflow to
have a material impact on our revenues or net income.
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 individual clients can terminate their relation-
ships with us, reduce the aggregate amount of assets under
management, or shift their funds to other types of accounts
with different rate structures for any number of reasons, includ-
ing 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 personnel or financial market performance.
22
Legg Mason AUM by Asset Class
AUM by asset class (in billions) for the years ended March 31 were as follows:
Equity
Fixed Income
Liquidity
Total
2013
$161.8
365.1
137.7
$664.6
% of Total
24%
55
21
100%
2012
$163.4
356.1
123.8
$643.3
% of Total % Change
26%
(1)%
55
19
3
11
100%
3%
The component changes in our AUM by asset class (in billions) for the fiscal year ended March 31, 2013, were as follows:
March 31, 2012
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
Acquisitions (dispositions), net
March 31, 2013
Equity
$163.4
Fixed Income
Liquidity
$356.1
$123.8
Total
$643.3
18.9
(26.4)
(12.9)
—
(20.4)
13.4
5.4
26.0
(22.6)
(14.4)
—
(11.0)
20.0
—
—
—
(0.1)
19.8
19.7
0.8
(6.6)
44.9
(49.0)
(27.4)
19.8
(11.7)
34.2
(1.2)
$161.8
$365.1
$137.7
$664.6
Average AUM by asset class (in billions) for the years ended March 31 were as follows:
Equity
Fixed Income
Liquidity
Total
2013
$152.1
364.5
128.9
$645.5
% of Total
24%
56
20
100%
2012
$168.4
359.8
116.6
$644.8
% of Total % Change
26%
(10)%
56
18
1
11
100%
—%
AUM by Distribution Channel
We have two principal distribution channels, Global Distribution and Affiliate/Other, through which we sell a variety of invest-
ment products and services. Global Distribution, which consists of our centralized global distribution operations, principally
sells U.S. and international mutual funds and other commingled vehicles, retail separately managed account programs, and
sub-advisory accounts for insurance companies and similar clients. Affiliate/Other consists of the distribution operations
within our asset managers and principally sells institutional separate accounts and liquidity (money market) funds.
The component changes in our AUM by distribution channel (in billions) for the year ended March 31, 2013, were as follows:
March 31, 2012
Net client cash flows, excluding liquidity funds
Liquidity fund flows, net
Net client cash flows
Market performance and other
Acquisitions/(dispositions), net
March 31, 2013
Global
Distribution
Affiliate/Other
$220.6
$422.7
2.2
—
2.2
9.3
—
(33.7)
19.8
(13.9)
24.9
(1.2)
Total
$643.3
(31.5)
19.8
(11.7)
34.2
(1.2)
$232.1
$432.5
$664.6
23
Legg Mason For the years ended March 31, 2013 and 2012, our overall
effective fee rate across all asset classes and distribution
channels was 34 and 35 basis points, respectively. Fees
for managing equity assets are generally higher, averaging
approximately 75 basis points for each of the years ended
March 31, 2013 and 2012. This compares to fees for man-
aging fixed income assets, which averaged approximately
25 basis points for each of the years ended March 31,
2013 and 2012, and liquidity assets, which averaged under
10 basis points (reflecting the impact of current advisory
fee waivers due to the low interest rate environment) for
each of the years ended March 31, 2013 and 2012. Equity
assets are primarily managed by ClearBridge, Royce,
Batterymarch, and Permal; fixed income assets are primar-
ily managed by Western Asset and Brandywine; and liquid-
ity assets are primarily managed by Western Asset. Fee
rates for assets distributed through Legg Mason Global
Distribution, which are predominately retail in nature, aver-
aged approximately 50 basis points for each of the years
ended March 31, 2013 and 2012, while fee rates for assets
distributed through the Affiliate/Other channel averaged
approximately 20 basis points for each of the years ended
March 31, 2013 and 2012. The decline in higher yielding
equity assets has impacted our revenues, as further dis-
cussed below.
Investment Performance
Overall investment performance of our assets under man-
agement in the year ended March 31, 2013, was generally
positive compared to relevant benchmarks.
For the year ended March 31, 2013, most U.S. indices
produced positive returns. The best performing was the
S&P 400 Mid Cap Index, returning 17.8% for the year
ended March 31, 2013. These returns were achieved in an
economic environment characterized by uneven domestic
growth and heightened sensitivity to economic news which
included improving unemployment and housing figures, the
anticipation and implementation of the sequestration, con-
cerns surrounding the fiscal cliff, and periodic developments
in the continuing European sovereign debt crisis.
In the fixed income markets, the Federal Reserve affirmed
its commitment to hold the federal funds rate at historic
lows, by beginning a third round of quantitative easing and
continuing support of the secondary mortgage market.
These actions were taken to keep interest rates low and
stimulate economic growth, and resulted in a downward
shift in the yield curve over the year.
The lowest yielding fixed income sector for the year was
U.S. government bonds, as measured by the Barclays
U.S. Government Bond Index returning 3.0%. The best
performing fixed income sector for the year was high yield
bonds as measured by the Barclays U.S. High Yield Bond
Index returning 13.1% as of March 31, 2013.
The following table presents a summary of the percentages of our AUM by strategy(1) that outpaced their respective
benchmarks as of March 31, 2013 and 2012, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
Total (includes liquidity)
Equity:
Large cap
Small cap
Total equity
As of March 31, 2013
As of March 31, 2012
1-year
84%
65%
13%
3-year
85%
68%
15%
5-year
88%
88%
27%
10-year
91%
1-year
62%
3-year
81%
5-year
70%
10-year
87%
80%
62%
66%
49%
43%
63%
66%
88%
78%
89%
(includes other equity)
48%
50%
62%
71%
53%
52%
66%
80%
Fixed income:
U.S. taxable
U.S. tax-exempt
Global taxable
Total fixed income
96%
100%
89%
94%
94%
100%
94%
94%
91%
100%
95%
93%
90%
100%
98%
94%
66%
2%
38%
51%
95%
2%
93%
87%
61%
2%
70%
60%
89%
1%
97%
84%
24
Legg Mason The following table presents a summary of the percentages of our U.S. mutual fund assets(2) that outpaced their Lipper
category averages as of March 31, 2013 and 2012, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
As of March 31, 2013
As of March 31, 2012
1-year
3-year
5-year
10-year
1-year
3-year
5-year
10-year
59%
57%
70%
64%
67%
66%
78%
74%
Total long-term
(excludes liquidity)
Equity:
Large cap
Small cap
Total equity
90%
27%
(includes other equity)
56%
Fixed income:
U.S. taxable
U.S. tax-exempt
Global taxable
Total fixed income
74%
50%
71%
64%
79%
16%
44%
92%
57%
74%
76%
77%
48%
59%
85%
86%
95%
87%
40%
68%
53%
90%
84%
54%
85%
78%
44%
51%
63%
48%
93%
45%
98%
57%
56%
73%
71%
76%
91%
96%
84%
91%
70%
81%
81%
82%
91%
87%
87%
83%
82%
83%
83%
(1) For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and
other products) into a single group that represents a particular investment objective. In the case of separate accounts, the investment performance of the
account is based upon the performance of the strategy to which the account has been assigned. Each of our asset managers has its own specific guidelines
for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the per-
formance comparison for all of the assets is based upon the performance of the separate account.
As of March 31, 2013 and 2012, 90% and 91% of total AUM is included in strategy AUM, respectively, although not all strategies have three-, five-, and ten-
year histories. Total strategy AUM includes liquidity assets. Certain assets are not included in reported performance comparisons. These include: accounts
that are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet
been assigned to a strategy; and certain smaller products at some of our affiliates.
Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds included in the
same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds (including fund-of-hedge
funds) which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. These performance com-
parisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund
performance may differ.
Certain prior year amounts have been updated to conform to the current year presentation.
(2) Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of March 31, 2013 and 2012, the U.S. long-term mutual fund assets rep-
resented in the data accounted for 19% and 18%, respectively, of our total AUM. The performance of our U.S. long-term mutual fund assets is included in
the strategies.
25
Legg Mason
The following table presents a summary of the absolute and relative performance compared to the applicable benchmark
for a representative sample of funds within our AUM, net of management and other fees as of the end of the period
presented, for the 1-year, 3-year, 5-year, and 10-year periods, and from each fund’s inception. The table below includes
a representative sample of funds from each significant subclass of our investment strategies (i.e., large cap equity, small
cap equity, etc.). The funds within this group are representative of the performance of significant investment strategies
we offer, that as of March 31, 2013, constituted an aggregate of approximately $393 billion, or approximately 59%, of
our AUM. The only meaningful exclusions are our funds-of-hedge funds strategies, which involve privately placed hedge
funds, and represent only 3% of our total assets under management as of March 31, 2013, for which investment per-
formance is not made publicly available. Providing investment returns of funds provides a relevant representation of our
performance while avoiding the many complexities relating to factors such as multiple fee structures, bundled pricing, and
asset level break points, that would arise in reporting performance for strategies or other product aggregations.
Fund Name/Index
Equity
Large Cap
Inception
Date
Performance
Type(1)
Annualized Absolute & Relative Total Return (%)
vs. Benchmark
1-year
3-year
5-year
10-year
Inception
ClearBridge Appreciation Fund
3/10/1970
Absolute
14.80% 11.78%
5.77%
8.45% 10.26%
S&P 500
Relative
0.83% (0.89)% (0.04)% (0.08)% 0.02%
ClearBridge All Cap Value Fund
11/12/1981
Absolute
15.65%
9.15%
3.72%
7.96% 11.69%
Russell 3000 Value
Relative
(3.06)% (3.55)% (1.32)% (1.37)% 0.04%
Legg Mason Capital Management Value Trust
4/16/1982
Absolute
12.55%
7.65%
0.67%
3.64% 6.68%
S&P 500
Relative
(1.42)% (5.02)% (5.14)% (4.90)% 2.19%
ClearBridge Aggressive Growth Fund
10/24/1983
Absolute
20.02% 16.86%
Russell 3000 Growth
Relative
9.60%
3.67%
ClearBridge Large Cap Value Fund
12/31/1988
Absolute
15.94% 12.51%
8.25%
0.81%
5.84%
9.14% 12.05%
0.30% 2.51%
9.03% 9.48%
Russell 1000 Value
Relative
(2.83)% (0.23)%
0.99% (0.14)% (0.65)%
ClearBridge Equity Income Fund
11/6/1992
Absolute
16.20% 13.86%
5.81%
8.46% 8.35%
Russell 3000 Value
Relative
(2.51)%
1.16%
0.76% (0.87)% (1.38)%
ClearBridge Large Cap Growth Fund
8/29/1997
Absolute
16.52% 11.22%
7.07%
7.79% 10.20%
Russell 1000 Growth
Relative
6.44% (1.84)% (0.24)% (0.83)% (1.68)%
Legg Mason Brandywine Diversified Large
Cap Value Fund
Russell 1000 Value
Small Cap
9/7/2010
Absolute
Relative
14.68%
(4.08)%
n/a
n/a
n/a
n/a
n/a
n/a
17.74%
1.26%
Royce Pennsylvania Mutual
6/30/1967
Absolute
12.63% 12.03%
7.28% 12.17% 11.97%
Russell 2000
Royce Premier Fund
Russell 2000
Relative
(3.68)% (1.42)% (0.96)%
0.65%
n/a
12/31/1991
Absolute
6.47% 11.80%
7.91% 13.77% 12.19%
Relative
(9.83)% (1.66)% (0.33)%
2.25% 2.81%
Royce Total Return Fund
12/15/1993
Absolute
16.28% 12.70%
7.18% 10.46% 11.15%
Russell 2000
Royce Low-Priced Stock
Russell 2000
Royce Special Equity
Russell 2000
Fixed Income
U.S. Taxable
Relative
(0.03)% (0.75)% (1.06)% (1.06)% 2.70%
12/15/1993
Absolute
(5.04)%
4.42%
4.31% 10.78% 11.51%
Relative
(21.34)% (9.04)% (3.93)% (0.74)% 3.05%
5/1/1998
Absolute
13.02% 11.75% 10.14% 10.76% 9.60%
Relative
(3.28)% (1.71)%
1.90% (0.76)% 3.13%
Western Asset Core Bond Fund
9/4/1990
Absolute
Barclays US Aggregate
Relative
5.17%
1.39%
7.22%
1.70%
7.76%
2.30%
5.64% 7.55%
0.61% 0.67%
26
Legg Mason Fund Name/Index
Inception
Date
Performance
Type(1)
Annualized Absolute & Relative Total Return (%)
vs. Benchmark
1-year
3-year
5-year
10-year
Inception
Western Asset Short Term Bond Fund
11/11/1991
Absolute
Citi Treasury Gov’t/Credit 1-3 YR
Relative
Western Asset Adjustable Rate Income
6/22/1992
Absolute
Citi T-Bill 6-Month
Relative
Western Asset Corporate Bond Fund
11/6/1992
Absolute
Barclays US Credit
Relative
Western Asset Intermediate Bond Fund
7/1/1994
Absolute
Barclays Intermediate Gov’t/Credit
Relative
Western Asset Core Plus Fund
7/8/1998
Absolute
Barclays US Aggregate
Relative
Western Asset Inflation Index Plus Bond
3/1/2001
Absolute
2.42%
1.29%
3.97%
3.84%
9.25%
2.25%
5.37%
1.84%
6.73%
2.95%
5.80%
3.24%
1.60%
3.59%
3.45%
8.38%
3.04%
2.14% 4.02%
0.68% (0.94)% (0.74)%
2.30%
1.81%
7.38%
1.84% 3.11%
0.03% (0.12)%
4.96% 6.93%
0.53% (0.14)% (1.00)% (0.08)%
6.15%
1.40%
7.66%
2.13%
8.02%
6.59%
1.97%
8.63%
3.16%
5.65%
5.52% 6.50%
1.03% 0.62%
6.61% 6.93%
1.58% 1.12%
6.15% 6.91%
Barclays US TIPS
Relative
0.12% (0.55)% (0.24)% (0.17)% (0.19)%
Western Asset High Yield Fund
9/28/2001
Absolute
14.63% 11.30% 10.56%
9.08% 8.61%
Barclays US Corp High Yield
Relative
Western Asset Total Return Unconstrained
7/6/2006
Absolute
1.51%
5.86%
5.22%
0.06% (1.08)% (1.04)% (1.24)%
Barclays US Aggregate
Relative
2.09% (0.30)%
Western Asset Mortgage Defined Opportunity
Fund Inc.
2/24/2010
Absolute
31.77% 20.13%
BOFAML Floating Rate Home Loan Index
Relative
15.30% 12.23%
6.47%
1.00%
n/a
n/a
n/a
n/a
n/a
n/a
5.97%
(0.07)%
20.14%
12.31%
U.S. Tax-Exempt
Western Asset Managed Municipals Fund
3/4/1981
Absolute
Barclays Municipal Bond
Global Taxable
Relative
6.82%
1.58%
7.01%
0.78%
6.92%
0.82%
5.71% 8.28%
0.71% 0.56%
Legg Mason Australian Bond Trust
6/30/1983
Absolute
UBS Australian Composite Bond Index
Relative
9.12%
2.09%
9.02%
1.07%
Western Asset Global High Yield Bond Fund
2/22/1995
Absolute
14.42% 10.40%
8.96%
1.14%
9.67%
6.70% 6.56%
0.60% 0.61%
8.43% 8.08%
Barclays Global High Yield
Relative
1.44% (0.78)% (1.65)% (2.50)% (1.90)%
Legg Mason Core Plus Global Bond Trust
2/28/1995
Absolute
11.49% 10.24%
8.94%
6.28% 6.20%
Barclays Global Aggregate (AUD Hedged)
Relative
Western Asset Emerging Markets Debt
10/17/1996
Absolute
2.85%
8.31%
0.93% (0.09)% (1.33)% (1.04)%
9.41%
9.53% 10.99% 11.36%
JPM EMBI Global
Relative
(2.13)% (1.14)% (0.28)%
0.40% 1.07%
Western Asset Global Multi Strategy Fund
8/31/2002
Absolute
5.98%
5.56%
6.17%
7.19% 8.05%
50% Bar. Global Agg./ 5% Bar. HY 2%/25%
JPM EMBI +
Relative
(0.26)% (2.10)% (1.10)% (0.87)% (0.72)%
Legg Mason Brandywine Global Fixed Income
9/30/2003
Absolute
Citi World Gov’t Bond
Relative
5.03%
5.70%
7.08%
3.22%
Legg Mason Brandywine Global Opportunities
Bond
Citi World Gov’t Bond
Liquidity
11/1/2006
Absolute
9.30% 10.33%
Relative
9.97%
6.47%
6.11%
3.34%
8.30%
5.53%
n/a
n/a
n/a
n/a
6.00%
0.93%
8.31%
3.23%
Western Asset Institutional Cash Reserves Ltd.
12/31/1989
Absolute
Citi 3-Month T-Bill
Relative
0.18%
0.10%
0.19%
0.10%
0.67%
0.37%
1.98% 3.72%
0.32% 0.32%
(1) Absolute performance is the actual performance (i.e., rate of return) of the fund. Relative performance is the difference (or variance) between the perfor-
mance of the fund or strategy and its stated benchmark.
27
Legg Mason Business Model Streamlining Initiative
In May 2010, we announced an initiative to streamline
our business model to drive increased profitability and
growth that primarily involved transitioning certain shared
services to our investment affiliates which are closer to
the actual client relationships. The initiative resulted in
over $140 million in annual cost savings, substantially all
of which are cash savings. These cost savings consist
of (i) over $80 million in compensation and benefits cost
reductions from eliminating positions in certain corporate
shared services functions as a result of transitioning such
functions to the affiliates, and charging affiliates for other
centralized services that will continue to be provided to
them without any corresponding adjustment in revenue
sharing or other compensation arrangements; (ii) approxi-
mately $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
$10 million from our global distribution group sharing in
affiliate revenues from retail assets under management
without any corresponding adjustment in revenue sharing
or other compensation arrangements.
The initiative involved $127.5 million in transition-related
costs that primarily included charges for employee termina-
tion benefits and incentives to retain employees during the
transition period. The transition-related costs also included
charges for consolidating leased office space, early con-
tract terminations, accelerated depreciation of fixed assets,
asset disposals and professional fees. During the years
ended March 31, 2012 and 2011, transition-related costs
totaled $73.1 million and $54.4 million, respectively. All
transition-related costs were accrued as of the completion
of the initiative on March 31, 2012. We achieved total cost
savings from the initiative of approximately $140 million
and $97 million as of March 31, 2013 and 2012, respec-
tively, when compared to similar expenses prior to the
commencement of the streamlining initiative. A portion of
the estimated transition-related savings were incremental
to fiscal 2012, and are explained, where applicable, in the
results of operations discussion to follow. See Note 15 of
Notes to Consolidated Financial Statements for additional
information on our business streamlining initiative.
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 (Loss), net of amounts allocated to
noncontrolling interests. See Notes 1 and 17 of Notes to
Consolidated Financial Statements for additional informa-
tion regarding the consolidation of investment vehicles.
Operating Revenues
Total operating revenues for the year ended March 31,
2013, were $2.6 billion, a decrease of 1.9% from $2.7 bil-
lion in the year ended March 31, 2012, despite average
AUM remaining essentially flat. This decrease was pri-
marily due to the impact of a reduction in average AUM
advisory revenue yields, from 35.2 basis points in the year
ended March 31, 2012, to 33.7 basis points in the year
ended March 31, 2013. The reduction in average AUM
advisory revenue yields was the result of a less favorable
average asset mix, with equity assets, which generally
earn higher fees than fixed income and liquidity assets,
comprising a lower percentage of our total average AUM
for the year ended March 31, 2013, as compared to the
year ended March 31, 2012. This decrease was offset in
part by a $49.1 million increase in performance fees.
Investment advisory fees from separate accounts
decreased $45.2 million, or 5.8%, to $730.3 million. Of
this decrease, $41.5 million was the result of lower aver-
age equity assets managed by Batterymarch, LMCM
and Legg Mason Global Equities Group (“LMGE”), and
$12.3 million was due to the divestiture of an affiliate in
February 2012. These decreases were offset in part by
an increase of $9.6 million due to higher average fixed
income assets managed by Brandywine.
Investment advisory fees from funds decreased $45.3 mil-
lion, or 3.0%, to $1.4 billion. Of this decrease, $52.9 mil-
lion was due to lower average assets managed by Permal,
and $48.7 million was due to lower average equity assets
managed by Royce, LMCM and LMGE. These decreases
were offset in part by a $39.1 million increase as a result of
higher average fixed income assets managed by Western
Asset and Brandywine, and a $16.7 million increase as a
result of higher average equity assets at ClearBridge.
RESULTS OF OPERATIONS
In accordance with financial accounting standards on con-
solidation, we consolidate and separately identify certain
sponsored investment vehicles, the most significant of
which is a collateralized loan obligation entity (“CLO”). The
consolidation of these investment vehicles has no impact
on Net Income (Loss) Attributable to Legg Mason, Inc.
and does not have a material impact on our consolidated
operating results. We also hold investments in certain
Of our total AUM as of March 31, 2013 and 2012, approxi-
mately 6% was in accounts that were eligible to earn
performance fees. Performance fees increased $49.1 mil-
lion to $98.6 million, primarily due to $32.0 million of fees
received by Western Asset related to the wind-down
of its participation in the U.S. Treasury’s Public-Private
Investment Program (“PPIP”). Higher fees earned on
assets managed at Permal and Brandywine also contrib-
uted to the increase.
28
Legg Mason Distribution and service fees decreased $10.5 million, or
3.1%, to $330.5 million, as the result of the decline in aver-
age fee rates received on mutual fund AUM subject to
distribution and service fees.
Operating Expenses
Total operating expenses for the year ended March 31, 2013
were $3.0 billion, an increase of 31.1% from $2.3 billion in
the prior year. The increase in total operating expenses was
primarily the result of $734.0 million of intangible asset
impairment charges recorded during the current year, as
further discussed below. Operating expenses for the years
ended March 31, 2013 and 2012 incurred at the investment
management affiliate level comprised approximately 70%
of total operating expenses in each year, excluding the
impairment charges, which are deemed to be corporate
expenses. The remaining operating expenses are com-
prised of corporate and distribution costs.
The components of total compensation and benefits (in
millions) for the years ended March 31 were as follows:
Salaries and incentives
Benefits and payroll taxes
Transition-related costs
Management transition
compensation costs
Other
Years Ended March 31,
2013
2012
$ 924.5
$ 895.0
204.5
—
17.9
41.6
196.7
34.6
—
18.0
Total compensation and benefits
$1,188.5
$1,144.3
Total compensation and benefits increased 3.9% to
$1.2 billion;
• Salaries and incentives increased $29.5 million,
principally due to an increase of $38.5 million in
incentive-based compensation at investment affili-
ates, primarily resulting from costs associated with
the modification of employment and other arrange-
ments, most significantly with the management of
Permal, and the impact of reductions in other non-
compensation related operating expenses at revenue
share based affiliates, which create an offsetting
increase in compensation per the applicable revenue
share agreements. Additional salary and incentive
costs of $12.2 million, resulting from market-based
compensation increases among retained staff and
new hires to support ongoing growth initiatives, also
contributed to the increase. These increases were
offset in part by a $23.7 million decrease in corporate
salaries primarily due to headcount reductions result-
ing from our business streamlining initiative.
• Benefits and payroll taxes increased $7.8 million,
primarily as a result of an increase in non-cash amor-
tization expense and other costs associated with
certain deferred compensation plans.
• Transition-related costs decreased $34.6 million, due
to the completion of our business streamlining initia-
tive in March 2012.
• Management transition compensation costs in
the current year were associated with our Chief
Executive Officer stepping down in September 2012
and the subsequent reorganization of our executive
committee. These costs were primarily comprised
of $7.5 million of cash severance and $6.4 million
of net non-cash accelerated vesting of stock based
awards. Also included in this line item was $3.0 mil-
lion of non-cash amortization expense related to
retention awards granted to certain executives and
key employees.
• Other compensation and benefits increased
$23.6 million, primarily due to an increase in revenue-
share based incentive obligations resulting from net
market gains on assets invested for deferred com-
pensation plans and seed capital investments, which
were offset by corresponding increases in Other
non-operating income (expense).
Compensation as a percentage of operating revenues
increased to 45.5% from 43.0% in the prior year, due
to the impact of reductions in other non-compensation
related operating expenses at revenue share based affili-
ates, the impact of the modification of employment and
other arrangements, as well as the impact of quasi-fixed
compensation costs of administrative and distribution per-
sonnel which do not typically vary with revenues. These
increases were offset in part by the impact of transition-
related compensation recorded in the prior year, as well as
the impact of lower corporate compensation costs, princi-
pally attributable to our business streamlining initiative.
Distribution and servicing expenses decreased 7.6% to
$600.6 million, driven by a $53.8 million decrease due to
a reduction in average AUM in certain products for which
we pay fees to third-party distributors.
Communications and technology expense decreased 9.1%
to $149.6 million, driven by the impact of $8.4 million in
transition-related costs recognized in the prior year, as well
as $4.4 million in cost savings as a result of our business
streamlining initiative.
Occupancy expense increased 11.1% to $171.9 million, pri-
marily due to real estate related charges totaling $52.8 mil-
lion, recorded during fiscal 2013 related to further space
29
Legg Mason consolidation which will result in savings of approximately
$10.0 million per year, prospectively. This increase was off-
set in part by the impact of $11.9 million of lease reserves
recorded in the prior year, as well as the acceleration of
$10.3 million of depreciation in the prior year, both primar-
ily related to certain office space permanently vacated as
a part of our business streamlining initiative. The increase
was also offset in part by $6.0 million in cost savings, also
as a result of our business streamlining initiative.
Amortization of intangible assets decreased 28.4% to
$14.0 million, primarily due to certain management con-
tracts becoming fully amortized during fiscal 2012.
Impairment of intangible assets was $734.0 million in
the year ended March 31, 2013. The impairment charges
relate to our domestic mutual fund contracts asset,
Permal funds-of-hedge fund contracts asset, and Permal
trade name. The impairment charges resulted from a
number of current trends and factors, including (i) a
decrease in near-term margin projections; (ii) an increase
in the rate used to discount projected future cash flows
primarily due to company specific factors including
continued market and regulatory influences, continued
stock price uncertainty and the search for a permanent
Chief Executive Officer, which was ongoing as of our
December 31, 2012, impairment testing date; (iii) recent
outflows and related reductions in assets under man-
agement; and (iv) a reduction in the near-term projected
growth rates. These changes resulted in a reduction of
the projected cash flows and our overall assessment of
fair value of the assets, such that the domestic mutual
fund contracts asset, Permal funds-of-hedge funds
contracts asset, and Permal trade name asset, declined
below their carrying values, and accordingly were
impaired by $396.0 million, $321.0 million, and $17.0 mil-
lion, respectively. See Critical Accounting Policies and
Note 5 of Notes to Consolidated Financial Statements for
further discussion of the impairment charges.
Other expenses decreased $2.2 million, or 1.2%, to
$188.4 million, primarily due to a $4.1 million reduction
in charges for trading errors. A $2.5 million decrease in
expense reimbursements paid to certain mutual funds,
and the impact of $1.7 million of transition-related costs
recognized in the prior year, also contributed to the
decrease. These decreases were offset in part by a
$5.0 million increase in litigation-related expenses as a
result of certain regulatory investigations. See Note 8 of
Notes to Consolidated Financial Statements for further
discussion of these investigations. A $1.8 million increase
in professional fees, primarily related to initiatives with
Permal, including the acquisition of Fauchier during fiscal
2013, also offset the decrease.
Non-Operating Income (Expense)
Interest income decreased 33.9% to $7.6 million, driven
by a $2.6 million decrease due to lower yields earned on
investment balances and a $1.8 million decrease due to
lower average investment balances.
Interest expense decreased 28.2% to $62.9 million, primar-
ily as a result of the refinancing of the 2.5% Convertible
Senior Notes (the “Notes”) in May 2012.
Other non-operating income (expense) decreased
$40.1 million, to an expense of $18.0 million, from
income of $22.1 million in the prior year. This decrease
was primarily a result of the $69.0 million loss on debt
extinguishment recognized in connection with the
repurchase of the Notes in May 2012. The impact of
an $8.6 million gain related to an assigned bankruptcy
claim, and a $7.5 million gain on the sale of a small affili-
ate, both recognized in the prior year, also contributed to
the decrease. These decreases were offset in part by a
$22.7 million increase in net market gains on seed capital
investments and assets invested for deferred compensa-
tion plans, which are offset by corresponding increases
in compensation discussed above, as well as a $20.8 mil-
lion increase in net market gains on corporate invest-
ments in proprietary fund products, which are not offset
in compensation.
Other non-operating income (expense) of consolidated
investment vehicles (“CIVs”) decreased $21.2 million to
an expense of $2.8 million, from income of $18.3 mil-
lion in the prior year, primarily due to net market losses
on investments of certain CIVs, as well as the impact of
market gains recognized in the prior year period related to
a previously consolidated CIV that was redeemed in the
prior year.
Income Tax Provision (Benefit)
The benefit for income taxes was $150.9 million com-
pared to a provision of $72.1 million in the prior year.
In July 2011, The U.K. Finance Act 2011 was enacted,
which reduced the main U.K. corporate tax rate from
27% to 26% effective April 1, 2011, and from 26%
to 25% effective April 1, 2012. In July 2012, The U.K.
Finance Act 2012 was enacted, further reducing the main
U.K. corporate tax rate to 24% effective April 1, 2012
and 23% effective April 1, 2013. The impact of the tax
rate changes on certain existing deferred tax assets and
liabilities resulted in a tax benefit of $18.1 million in the
current year. The prior year also included a similar U.K.
tax benefit of $18.3 million on the revaluation of deferred
tax assets and liabilities, and the impact was more sub-
stantial due to the higher level of pre-tax income in that
fiscal year.
30
Legg Mason The effective benefit rate was 29.5% for the year ended
March 31, 2013, compared to an effective tax rate of
23.8% in the prior year. Changes in the U.K. tax rate
impacted the effective tax (benefit) rate by 3.5 percentage
points in the year ended March 31, 2013, and 6.0 percent-
age points in the prior year. The impact of CIVs reduced
the effective tax (benefit) rate by 0.5 and 0.8 percentage
points for the years ended March 31, 2013 and 2012,
respectively. Otherwise, the change in the effective tax
rate was primarily related to a lower tax benefit associated
with the intangible asset impairment charge recorded in
fiscal 2013, due to the lower statutory rates in the jurisdic-
tions where certain intangible assets were held, partially
offset by adjustments to reserves and the impact of cer-
tain tax planning initiatives recorded in fiscal 2012.
Net Income (Loss) Attributable to Legg Mason, Inc.
Net Loss Attributable to Legg Mason, Inc. for the year
ended March 31, 2013, totaled $353.3 million, or $2.65
per diluted share, compared to Net Income Attributable to
Legg Mason, Inc. of $220.8 million, or $1.54 per diluted
share, in the prior year. The decrease was primarily attrib-
utable to the impact of the pre-tax impairment charges of
$734.0 million ($508.3 million, net of income tax benefits,
or $3.81 per diluted share), recorded in the current year,
related to our indefinite-life intangible assets, as well as
the $69.0 million pre-tax loss ($44.8 million, net of income
tax benefits, or $0.34 per diluted share) on debt extin-
guishment recognized in connection with the repurchase
of the Notes in May 2012. Real estate related charges
of $52.8 million also contributed to the decrease. These
decreases were offset in part by the impact of transition-
related costs recorded in the prior year, and the impact of
increased cost savings in the current year, both in connec-
tion with our business streamlining initiative. These items
were previously discussed above.
Supplemental Non-GAAP Financial Information
As supplemental information, we are providing performance
measures that are based on methodologies other than
generally accepted accounting principles (“non-GAAP”) for
“Adjusted Income” and “Operating Margin, As Adjusted”
that management uses as benchmarks in evaluating and
comparing our period-to-period operating performance.
Adjusted Income decreased to $347.2 million, or $2.61
per diluted share, for the year ended March 31, 2013,
from $397.0 million, or $2.77 per diluted share, in the prior
year. Operating Margin, as Adjusted, for the years ended
March 31, 2013 and 2012, was 16.8% and 21.3%, respec-
tively. Operating Margin, as Adjusted for the year ended
March 31, 2013 was reduced by 3.5 percentage points due
to real estate related charges and management transition
compensation costs recorded during fiscal 2013.
Adjusted Income
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 con-
vertible 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 eco-
nomic performance, such as intangible asset impairments,
the impact of tax rate adjustments on certain deferred tax
liabilities related to indefinite-life intangible assets, and
loss on extinguishment of contingent convertible debt.
We believe that Adjusted Income provides a useful rep-
resentation 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/extin-
guished contingent convertible debt or made significant
acquisitions. We also believe that Adjusted Income is an
important metric in estimating the value of an asset man-
agement business.
Adjusted Income only considers adjustments for certain
items that relate to operating performance and compa-
rability, and therefore, is most readily reconcilable to Net
Income (Loss) Attributable to Legg Mason, Inc. deter-
mined under GAAP. This measure is provided in addition
to Net Income (Loss) Attributable to Legg Mason, Inc.,
but is not a substitute for Net Income (Loss) Attributable
to Legg Mason, Inc. 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 deter-
mined under GAAP. We consider Adjusted Income to be
useful to investors because it is an important metric in
measuring the economic performance of asset manage-
ment 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
issued/extinguished contingent convertible debt or made
significant acquisitions.
In calculating Adjusted Income, we add the impact of the
amortization of management contract assets and impair-
ment of indefinite-life intangible assets, both of which
arise from acquisitions, to Net Income (Loss) Attributable
to Legg Mason, Inc. to reflect the fact that these non-cash
expenses distort 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 deductions
31
Legg Mason that are not realized under GAAP absent an impairment
charge or the disposition of the related business. Because
we fully expect to realize the economic benefit of the cur-
rent period tax amortization, we add this benefit to Net
Income (Loss) Attributable to Legg Mason, Inc. in the cal-
culation of Adjusted Income. However, because of our net
operating loss carry-forward, 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 United Kingdom tax rate adjustments on excess book
basis on certain acquired indefinite-life intangible assets,
if applicable, that have been recognized under GAAP. We
also add back non-cash imputed interest and the extin-
guishment loss on contingent convertible debt adjusted
for amounts allocated to the conversion feature, as well
as adding the actual tax benefits on the imputed inter-
est that are not realized under GAAP. These adjustments
reflect that these items distort comparisons of our operat-
ing results to prior periods and the results of other asset
management firms that have not engaged in significant
acquisitions, including any related impairments, or issued/
extinguished contingent convertible debt.
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. Accordingly, we monitor these items and their
related impact, including taxes, on Adjusted Income to
ensure that appropriate adjustments and explanations
accompany such disclosures.
Although depreciation and amortization of fixed assets are
non-cash expenses, we do not add these charges in calcu-
lating Adjusted Income because these charges are related
to assets that will ultimately require replacement.
A reconciliation of Net Income (Loss) Attributable to Legg Mason, Inc. to Adjusted Income (in thousands except per share
amounts) is as follows:
Net Income (Loss) Attributable to Legg Mason, Inc.
Plus (less):
Amortization of intangible assets
Loss on extinguishment of 2.5% senior notes
Impairment of intangible assets
Deferred income taxes on intangible assets:
Impairment charges
Tax amortization benefit
U.K. tax rate adjustment
Imputed interest on convertible debt (2.5% senior notes)
Adjusted Income
Net Income (Loss) per diluted share Attributable to
Legg Mason, Inc. common shareholders
Plus (less):
Amortization of intangible assets
Loss on extinguishment of 2.5% senior notes
Impairment of intangible assets
Deferred income taxes on intangible assets:
Impairment charges
Tax amortization benefit
U.K. tax rate adjustment
Imputed interest on convertible debt (2.5% senior notes)
For the Years Ended March 31,
2013
2012
$(353,327)
$220,817
14,019
54,873
734,000
(225,748)
135,588
(18,075)
5,839
19,574
—
—
—
135,830
(18,268)
39,077
$ 347,169
$397,030
$ (2.65)
$ 1.54
0.11
0.41
5.51
(1.69)
1.02
(0.14)
0.04
0.14
—
—
—
0.95
(0.13)
0.27
Adjusted Income per diluted share
$ 2.61
$ 2.77
32
Legg Mason Operating Margin, as Adjusted
We calculate “Operating Margin, as Adjusted,” by divid-
ing (i) Operating Income (Loss), 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 investment advisory fees eliminated upon consolida-
tion 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 “Operating Revenues, as Adjusted.” The
compensation items, other than transition-related costs,
are removed from Operating Income (Loss) in the calcula-
tion because they are offset by an equal amount in Other
non-operating income (expense), and thus have no impact
on Net Income (Loss) Attributable to Legg Mason, Inc.
Transition-related costs, impairment charges and income
(loss) of CIVs are removed from Operating Income (Loss)
in the calculation because these items are not reflective of
our core asset management operations. We use Operating
Revenues, as Adjusted in the calculation to show the oper-
ating 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 cor-
responding revenue in the period. Operating Revenues, as
Adjusted, 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 mea-
sure of our core business activities excluding items that
have no impact on Net Income (Loss) Attributable to Legg
Mason, Inc. and because it indicates what our operating
margin would have been without the distribution rev-
enues that are passed through to third parties as a direct
cost of selling our products, transition-related costs and
impairment charges, and the impact of the consolidation
of certain investment vehicles described above. The con-
solidation of these investment vehicles does not have an
impact on Net Income (Loss) Attributable to Legg Mason,
Inc. This measure is provided in addition to our operating
margin calculated under GAAP, but is not a substitute for
calculations of margins under GAAP and may not be com-
parable to non-GAAP performance measures, including
measures of adjusted margins of other companies.
The calculation of Operating margin and Operating margin, as adjusted, is as follows (dollars in thousands):
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 (Loss), GAAP basis
Plus (less):
Gains (losses) on deferred compensation and seed investments
Transition-related costs
Impairment of intangible assets
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,
2013
2012
$2,612,650
$2,662,574
2,397
(600,582)
$2,014,465
$ (434,499)
3,094
(649,679)
$2,015,989
$ 338,753
36,497
—
734,000
2,959
13,809
73,066
—
3,702
$ 338,957
$ 429,330
(16.6)%
16.8
12.7%
21.3
33
Legg Mason FISCAL 2012 COMPARED WITH FISCAL 2011
Assets Under Management
The components of the changes in our 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
2012
$677.6
2011
$684.5
46.9
(51.1)
(35.9)
12.6
(27.5)
17.1
(23.9)
49.5
(44.3)
(52.1)
(14.2)
(61.1)
56.3
(2.1)
$643.3
$677.6
(1) Subscriptions and redemptions reflect the gross activity in the funds and
include assets transferred between funds and between share classes.
(2) Includes impact of foreign exchange, reinvestment of dividends, and other.
AUM at March 31, 2012, was $643.3 billion, a decrease of
$34.3 billion, or 5%, from March 31, 2011. The decrease
in AUM was attributable to net client outflows of $27.5 bil-
lion and dispositions of $23.9 billion, which were partially
offset by market performance and other of $17.1 billion,
including the negative impact of foreign currency exchange
fluctuations. The majority of dispositions were in liquidity
assets, $19.9 billion, which resulted from the amendment
of historical Smith Barney brokerage programs discussed
below. There were also $4.0 billion in dispositions from
the divestiture of two small affiliates. Long-term asset
classes accounted for the net client outflows, with
$21.3 billion and $18.6 billion in equity and fixed income
outflows, respectively, partially offset by liquidity inflows
of $12.4 billion. Equity outflows were primarily expe-
rienced by products managed at LMCM, ClearBridge,
Batterymarch and Royce. The majority of fixed income
outflows were in products managed by Western Asset,
including $12.7 billion in outflows from a single, low fee
global sovereign mandate.
The amendment of certain historical Smith Barney broker-
age programs during the first quarter of fiscal 2012, as
previously discussed, resulted in a reduction of $19.9 bil-
lion in liquidity AUM during the year ended March 31,
2012. As a significant portion of the management fees
generated by these assets were being waived prior to the
disposition, the disposition of this liquidity AUM resulted
in a reduction in operating revenue of $52.3 million, net of
related fee waivers, in the year ended March 31, 2012, as
compared to the year ended March 31, 2011. The disposi-
tion of this AUM also resulted in reductions in distribu-
tion and servicing expenses of $41.4 million in the year
ended March 31, 2012, as compared to the year ended
March 31, 2011.
AUM by Asset Class
AUM by asset class (in billions) as of March 31 were as follows:
Equity
Fixed income
Liquidity
Total
2012
$163.4
356.1
123.8
$643.3
% of Total
26%
55
19
100%
2011
$189.6
356.6
131.4
$677.6
% of Total % Change
28%
(14)%
53
19
—
(6)
100%
(5)%
The component changes in our AUM by asset class (in billions) for the fiscal year ended March 31, 2011, were as follows:
March 31, 2011
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
Dispositions
March 31, 2012
34
Equity
$189.6
Fixed Income
Liquidity
$356.6
$131.4
Total
$677.6
21.7
(30.4)
(12.6)
—
(21.3)
(2.1)
(2.8)
25.2
(20.7)
(23.1)
—
(18.6)
19.3
(1.2)
—
—
(0.2)
12.6
12.4
(0.1)
(19.9)
46.9
(51.1)
(35.9)
12.6
(27.5)
17.1
(23.9)
$163.4
$356.1
$123.8
$643.3
Legg Mason Average AUM by asset class (in billions) for the years ended March 31 were as follows:
Equity
Fixed Income
Liquidity
Total
2012
$168.4
359.8
116.6
$644.8
% of Total
26%
56
18
100%
2011
$173.8
361.6
133.8
$669.2
% of Total % Change
26%
(3)%
54
20
—
(13)
100%
(4)%
AUM by Distribution Channel
The component changes in our AUM by distribution channel (in billions) for the fiscal year ended March 31, 2012, were
as follows:
March 31, 2011
Net client cash flows, excluding liquidity funds
Liquidity fund flows, net
Net client cash flows
Market performance and other
Dispositions
March 31, 2012
Global
Distribution
Affiliate/Other
$220.3
$457.3
(2.3)
—
(2.3)
2.6
—
(37.8)
12.6
(25.2)
14.5
(23.9)
Total
$677.6
(40.1)
12.6
(27.5)
17.1
(23.9)
$220.6
$422.7
$643.3
For the years ended March 31, 2012 and 2011, our overall
effective fee rate across all asset classes and distribution
channels was 35 and 34 basis points, respectively. Fees
for managing equity assets are generally higher, averaging
approximately 75 basis points for each of the years ended
March 31, 2012 and 2011. This compares to fees for manag-
ing fixed income assets, which averaged approximately 25
basis points for each of the years ended March 31, 2012 and
2011, and liquidity assets, which averaged under 10 basis
points (reflecting the impact of current advisory fee waivers
due to the low interest rate environment) for each of the
years ended March 31, 2012 and 2011. Fee rates for assets
distributed through Legg Mason Global Distribution, which
are predominately retail in nature, averaged approximately
50 basis points for each of the years ended March 31, 2012
and 2011, while fee rates for assets distributed through the
Affiliate/Other channel averaged approximately 20 basis
points for each of the years ended March 31, 2012 and 2011.
The decline in higher yielding equity assets has impacted
our revenues, as further discussed below.
Investment Performance
Overall investment performance of our assets under man-
agement in the year ended March 31, 2012, was generally
positive compared to relevant benchmarks.
The equity markets ended a difficult year on a positive
note, responding favorably to improving unemployment
figures, the conclusion of bank stress tests resulting in
certain banks increasing dividends, and reduced fears of
a European debt fallout. As a result, most U.S. indices
produced positive returns for our fiscal 2012. The most
notable was the NASDAQ Composite returning 11.2% for
the year ended March 31, 2012.
In the fixed income markets, improved economic data
suggested that the recovery was strengthening. Flights-to-
safety ebbed as the European debt crisis eased allowing
U.S. Treasury rates to climb from historically low levels.
The yield curve steepened over the year as economic
releases from the Federal Reserve Board painted an
increasingly optimistic picture and talk of a third round of
quantitative easing diminished.
The worst performing fixed income sector for the year
was high yield bonds, as measured by the Barclays
High Yield Index returning 6.5%. The best performing
fixed income sector for the year was Treasury Inflation
Protected Securities (TIPS), as measured by the Barclays
U.S. TIPS Index returning 12.2% as of March 31, 2012.
35
Legg Mason The following table presents a summary of the percentages by strategy(1) that outpaced their respective benchmarks as of
March 31, 2012 and 2011, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
Total (includes liquidity)
1-year
62%
3-year
81%
5-year
70%
10-year
87%
1-year
76%
3-year
79%
5-year
74%
10-year
84%
As of March 31, 2012
As of March 31, 2011
Equity:
Large cap
Small cap
Total equity
66%
49%
43%
63%
66%
88%
78%
89%
40%
68%
61%
75%
55%
89%
63%
99%
(includes other equity)
53%
52%
66%
80%
47%
59%
60%
77%
Fixed income:
U.S. taxable
U.S. tax-exempt
Global taxable
Total fixed income
66%
2%
38%
51%
95%
2%
93%
87%
61%
2%
70%
60%
89%
1%
97%
84%
93%
3%
81%
82%
83%
3%
91%
80%
77%
2%
73%
70%
83%
3%
94%
81%
The following table presents a summary of the percentages of our U.S. mutual fund assets(2) that outpaced their Lipper
category averages as of March 31, 2012 and 2011, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
As of March 31, 2012
As of March 31, 2011
1-year
3-year
5-year
10-year
1-year
3-year
5-year
10-year
Total long-term
(excludes liquidity)
67%
66%
78%
74%
56%
74%
70%
67%
Equity:
Large cap
Small cap
Total equity
78%
44%
51%
63%
48%
93%
45%
98%
39%
72%
63%
76%
31%
91%
21%
98%
(includes other equity)
57%
56%
73%
71%
58%
70%
68%
60%
Fixed income:
U.S. taxable
U.S. tax-exempt
Global taxable
Total fixed income
76%
91%
96%
84%
91%
70%
81%
81%
82%
91%
91%
87%
83%
82%
87%
83%
79%
6%
80%
52%
85%
77%
94%
83%
78%
82%
41%
78%
80%
90%
88%
85%
(1) For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and
other products) into a single group that represents a particular investment objective. In the case of separate accounts, the investment performance of the
account is based upon the performance of the strategy to which the account has been assigned. Each of our asset managers has its own specific guidelines
for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the per-
formance comparison for all of the assets is based upon the performance of the separate account.
As of March 31, 2012 and 2011, 91% of total AUM is included in strategy AUM in each period, although not all strategies have three-, five-, and ten-year
histories. Total strategy AUM includes liquidity assets. Certain assets are not included in reported performance comparisons. These include: accounts that
are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet been
assigned to a strategy; and certain smaller products at some of our affiliates.
Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds included in the
same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds (including fund-of-hedge
funds) which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. These performance com-
parisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund
performance may differ.
Certain prior year amounts have been updated to conform to the current year presentation.
(2) Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of March 31, 2012 and 2011, the U.S. long-term mutual fund assets rep-
resented in the data accounted for 18% and 17%, respectively, of our total AUM. The performance of our U.S. long-term mutual fund assets is included in
the marketed composites.
36
Legg Mason
RESULTS OF OPERATIONS
Operating Revenues
Total operating revenues for the year ended March 31,
2012, were $2.7 billion, a decrease of 4.4% from $2.8 bil-
lion in the prior year, primarily due to a 4% decrease in
average AUM and a $47.2 million decrease in performance
fees. This decrease was offset in part by an increase in
average AUM revenue yields, from 34.4 basis points in
the year ended March 31, 2011, to 35.2 basis points in
the year ended March 31, 2012, resulting from a more
favorable average asset mix. The disposition of liquidity
AUM related to the Morgan Stanley Wealth Management
(“MSWM”) relationship resulted in a reduction in operat-
ing revenues of $52.3 million, net of related fee waivers,
in fiscal 2012, as compared to fiscal 2011, as a significant
portion of the management fees generated by these
assets were being waived prior to the disposition.
Investment advisory fees from separate accounts
decreased $40.1 million, or 4.9%, to $775.5 million.
Of this decrease, $25.9 million was primarily the result
of lower average equity assets managed by LMCM,
Batterymarch, ClearBridge and Legg Mason Investment
Counsel & Trust Company (“LMIC”), and $8.0 million was
primarily due to the divestiture of a Singapore-based asset
manager in fiscal 2011. These decreases were offset in
part by an increase of $6.7 million due to higher average
fixed income assets managed by Brandywine.
Investment advisory fees from funds remained essen-
tially flat at $1.5 billion for both periods. Higher average
equity assets managed by Royce and ClearBridge, and
higher average fixed income assets, primarily managed at
Western Asset, resulted in an increase of $41.3 million and
$41.1 million, respectively. These increases were offset by a
decrease of $51.3 million, net of related fee waivers, due to
lower average liquidity assets managed at Western Asset,
primarily as a result of the previously discussed disposition
of liquidity AUM related to our MSWM relationship, as well
as a $31.5 million decrease as a result of lower average
equity assets managed by LMCM and Permal.
Of our total AUM as of March 31, 2012 and 2011, approxi-
mately 6% for each period was in accounts that were
eligible to earn performance fees. Performance fees
decreased 48.8%, or $47.2 million, to $49.5 million dur-
ing the year ended March 31, 2012, primarily as a result
of lower fees earned on assets managed at Permal and
Western Asset, offset slightly by an increase in perfor-
mance fees earned on assets managed at Brandywine.
Distribution and service fees decreased $38.2 million, or
10.1%, to $341.0 million, primarily due to the disposition
of the liquidity AUM related to the MSWM relationship, as
well as a decline in average mutual fund AUM subject to
distribution and service fees.
Operating Expenses
Total operating expenses for the year ended March 31,
2012, were $2.3 billion, a decrease of 3.1% from $2.4 bil-
lion in the prior year. Operating expenses for the year
ended March 31, 2012, incurred at the investment manage-
ment affiliate level comprised approximately 70% of total
operating expenses. The remaining operating expenses are
comprised of corporate and distribution costs.
The components of total compensation and benefits (in
millions) for the years ended March 31 were as follows:
Years Ended March 31,
2012
2011
Salaries and incentives
$ 895.0
$ 905.8
Benefits and payroll taxes
Transition-related costs
Other
196.7
34.6
18.0
194.7
45.0
39.9
Total compensation and benefits
$1,144.3
$1,185.4
Total compensation and benefits decreased 3.5% to
$1.1 billion;
• Salaries and incentives decreased $10.8 million,
primarily due to a $40.6 million decrease in corpo-
rate salaries and incentives, primarily resulting from
headcount reductions in connection with our busi-
ness streamlining initiative, and a $40.3 million net
decrease in salaries and incentives at revenue-share
based affiliates. These decreases were offset in part
by an increase in incentives of $51.0 million resulting
from changes in an expense reimbursement arrange-
ment with Western Asset, as well as additional costs
of $20.5 million associated with market-based com-
pensation increases among retained staff and new
employees, primarily in our global distribution group,
to support ongoing growth initiatives.
• Benefits and payroll taxes increased $2.0 million,
primarily due to an $11.2 million increase in non-
cash amortization expense associated with certain
deferred compensation awards at revenue-share
based affiliates. This increase was offset in part by a
$9.2 million decrease in corporate benefits expense,
primarily due to headcount reductions resulting from
our business streamlining initiative.
• Transition-related costs decreased $10.4 million. These
costs represent accruals for severance and retention
costs related to our business streamlining initiative.
• Other compensation and benefits decreased $21.9 mil-
lion, primarily due to a decrease in revenue-share
37
Legg Mason based incentive obligations resulting from net market
losses on assets invested for seed capital invest-
ments and deferred compensation plans, which were
offset by corresponding increases in Other non-oper-
ating income (expense).
Compensation as a percentage of operating revenues
increased to 43.0% from 42.6% in the prior fiscal year,
primarily due to the impact of the change in the expense
reimbursement arrangement with Western Asset, as well
as market-based compensation increases among retained
staff and new employees. These increases were offset in
part by the impact of lower corporate compensation costs,
primarily attributable to our business streamlining initiative,
the impact of compensation decreases related to reduced
market gains on assets invested for deferred compensa-
tion plans and seed capital investments, and the decrease
in transition-related compensation.
Distribution and servicing expenses decreased 8.9%
to $649.7 million, principally driven by a $41.4 million
decrease due to the previously discussed disposition of
liquidity AUM related to the MSWM relationship, as well
as a $6.9 million decrease in servicing expenses as a
result of our business streamlining initiative. A $5.8 mil-
lion decline in structuring fees related to closed-end fund
launches also contributed to the decrease.
Communications and technology expense increased 1.7%
to $164.7 million, driven by increases, principally in data
processing costs, market data costs, and consulting fees,
totaling $12.2 million, primarily due to transition-related
costs incurred as a result of our business streamlining
initiative. These increases were offset in part by $9.3 mil-
lion in cost savings as a result of our streamlining changes,
including reduced depreciation of technology hardware
and software and consulting fees.
Occupancy expense increased 12.3% to $154.8 mil-
lion, primarily due to a $14.7 million net increase in lease
reserves recorded in fiscal 2012, primarily related to per-
manently abandoning certain office space as part of our
business streamlining initiative. In addition, there was a
$10.3 million increase as a result of the acceleration of
depreciation related to space permanently abandoned in
fiscal 2012, also related to our business streamlining initia-
tive. These increases were offset in part by the impact of
the write-off of a $4.1 million real estate escrow deposit in
the prior year and a $3.3 million reduction in depreciation
on furniture and leasehold improvements, both resulting
from our business streamlining initiative.
Amortization of intangibles decreased 14.6% to $19.6 mil-
lion, primarily due to the full amortization of certain man-
agement contracts during fiscal 2012.
Other expenses increased $14.1 million, or 8.0%, to
$190.7 million, primarily as a result of an increase in
expense reimbursements paid to certain mutual funds dur-
ing the current year under expense cap arrangements.
Non-Operating Income (Expense)
Interest income increased 24.2% to $11.5 million, driven
by higher yields earned on investment balances.
Interest expense decreased 5.0% to $87.6 million, pri-
marily as a result of the retirement of our Equity Units
during fiscal 2012, which reduced interest expense by
$4.1 million.
Other non-operating income decreased $37.5 million
to $22.1 million, primarily as a result of $56.0 million in
net market losses on investments in proprietary fund
products, which were partially offset by corresponding
compensation decreases discussed above, and $11.8 mil-
lion due to reduced gains on assets invested for deferred
compensation plans, which were substantially offset by
corresponding compensation decreases described above.
These decreases were offset in part by an $11.3 million
increase in dividend income, which was partially offset by
a corresponding compensation increase under revenue-
sharing agreements, a gain of $8.6 million related to an
assigned bankruptcy claim, and a gain of $7.5 million on
the sale of a small affiliate.
Other non-operating income of CIVs increased $16.6 mil-
lion to $18.3 million, due to net market gains on invest-
ments of certain CIVs.
Income Tax Provision
The provision for income taxes was $72.1 million com-
pared to $119.4 million in the prior year. During fiscal
2012, The U.K. Finance Act 2011 (the “Act”) was enacted.
The Act reduced the main U.K. corporate income tax
rate from 27% to 26% effective April 1, 2011, and to
25% effective April 1, 2012. The impact of the tax rate
changes on the revaluation of certain existing deferred
tax liabilities resulted in a tax benefit of $18.3 million in
the current year. The prior year also included a similar tax
benefit of $8.9 million on the revaluation of deferred tax
liabilities. In addition, the restructuring of our Australian
business, partially offset by adjustments to the net value
of certain deferred tax assets, resulted in a net tax benefit
of $10.1 million in the current year. The effective tax rate
was 23.8% compared to 32.7% in the prior year. Changes
in the U.K. tax rate impacted the effective tax rate by 6.0
38
Legg Mason and 2.5 percentage points in the years ended March 31,
2012 and 2011, respectively. In addition, the restructuring
of our Australian business, partially offset by adjustments
to the net value of certain deferred tax assets, impacted
the effective tax rate by 3.3 percentage points in the cur-
rent year.
Net Income Attributable to Legg Mason, Inc.
Net Income Attributable to Legg Mason, Inc. for the year
ended March 31, 2012, totaled $220.8 million, or $1.54
per diluted share, compared to $253.9 million, or $1.63
per diluted share, in the prior year. The decrease in Net
Income was primarily due to an increase in incentive
compensation from changes in an expense reimburse-
ment arrangement with Western Asset, the impact of net
market losses on proprietary fund products and assets
invested for deferred compensation plans which are not
offset in compensation and benefits, and the net impact of
decreased operating revenues. These decreases were off-
set in part by the impact of cost savings due to our busi-
ness streamlining initiative, and the impact of tax benefits
associated with the restructuring of a foreign subsidiary
and U.K. tax rate changes. These items were previously
discussed in “Results of Operations” above.
Supplemental Non-GAAP Financial Information
Adjusted Income decreased to $397.0 million, or $2.77
per diluted share, for the year ended March 31, 2012,
from $439.2 million, or $2.83 per diluted share, in the
prior year primarily due to the decrease in Net Income,
previously discussed, excluding the impact of U.K. tax
rate adjustments. Operating Margin, as Adjusted, for the
years ended March 31, 2012 and 2011, was 21.3% and
23.2%, respectively.
Adjusted Income
A reconciliation of Net Income Attributable to Legg Mason, Inc. to Adjusted Income (in thousands except per share
amounts) is as follows:
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 (2.5% senior notes)
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 (2.5% senior notes)
Adjusted Income per diluted share
For the Years Ended March 31,
2012
2011
$220,817
$253,923
19,574
22,913
135,830
(18,268)
39,077
134,602
(8,878)
36,688
$397,030
$439,248
$ 1.54
$ 1.63
0.14
0.95
(0.13)
0.27
0.15
0.87
(0.06)
0.24
$ 2.77
$ 2.83
39
Legg Mason Operating Margin, as Adjusted
The calculation of Operating margin and Operating margin, as adjusted, is as follows (dollars in thousands):
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, GAAP basis
Plus (less):
Gains (losses) on deferred compensation and seed investments
Transition-related costs
Operating income and expenses of consolidated investment vehicles
For the Years Ended March 31,
2012
2011
$2,662,574
$2,784,317
3,094
4,133
(649,679)
(712,779)
$2,015,989
$ 338,753
$2,075,671
$ 386,808
13,809
73,066
3,702
36,274
54,434
4,704
$ 429,330
$ 482,220
12.7%
21.3
13.9%
23.2
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, good-
will, cash and cash equivalents, 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 our operations. At March 31,
2013, our cash and cash equivalents, total assets, long-
term debt and stockholders’ equity were $0.9 billion,
$7.0 billion, $1.1 billion and $4.8 billion, respectively. Total
assets and total liabilities of the CIVs at March 31, 2013,
were $285 million and $221 million, respectively.
Cash and cash equivalents are primarily invested in liquid
domestic and non-domestic money market funds that hold
principally domestic and non-domestic bank time deposits,
bank and corporate commercial paper and bonds, and gov-
ernment and agency securities. We have not recognized
any losses on these investments. Our monitoring of cash
and cash equivalents mitigates the potential that material
risks may be associated with these balances.
Operating Income, as Adjusted
Operating Margin, GAAP basis
Operating Margin, as Adjusted
LIqUIDITy AND CAPITAL RESOURCES
The primary objective of our capital structure is to appro-
priately 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 opera-
tions. Our overall funding needs and capital base are con-
tinually 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 man-
agement 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 cov-
enants, the raising of additional equity capital and/or the
issuance of additional debt.
The consolidation of variable interest entities discussed
above does 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 eliminated
in consolidation. Additionally, creditors of the CIVs have
40
Legg Mason The following table summarizes our Consolidated Statements of Cash Flows for the years ended March 31 (in millions):
Cash flows provided by operating activities
Cash flows provided by/(used in) investing activities
Cash flows used in financing activities
Effect of exchange rate changes
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2013
$ 303.3
(11.0)
(735.9)
(5.7)
(449.3)
1,382.3
$ 933.0
2012
2011
$ 496.8
$ 412.1
2.3
(481.8)
(10.9)
6.4
1,375.9
$1,382.3
(44.4)
(468.5)
10.8
(90.0)
1,465.9
$1,375.9
Cash inflows provided by operating activities during fiscal
2013 were $303.3 million, primarily related to net sales
of trading and other current investments and results of
operations, adjusted for non-cash items, offset in part by
the allocation of extinguished debt repayment and pay-
ments for accrued compensation. Cash outflows used in
investing activities during fiscal 2013, were $11.0 million,
primarily related to payments related to the acquisition of
Fauchier and payments made for fixed assets, offset in
part by net activity related to CIVs. Cash outflows used
in financing activities during fiscal 2013 were $735.9 mil-
lion, primarily related to the repayment of long-term debt
of $1,049.2 million, the repurchase of 16.2 million shares
of our common stock for $425.5 million, the $250.0 mil-
lion repayment of short-term debt, and dividends paid of
$55.3 million, offset in part by the proceeds from the sub-
sequent long-term debt issuances of $1,143.2 million.
Cash inflows provided by operating activities during fis-
cal 2012 were $496.8 million, primarily related to Net
Income, adjusted for non-cash items. Cash inflows
provided by investing activities during fiscal 2012, were
$2.3 million, primarily related to $20.2 million of net
activity related to CIVs and a release of restricted cash
required for market hedge arrangements, offset in part
by payments made for fixed assets. Cash outflows used
in financing activities during fiscal 2012, were $481.8 mil-
lion, primarily due to the repurchase of 13.6 million shares
of our common stock for $400.3 million and dividends
paid of $43.6 million.
Cash inflows provided by operating activities during fis-
cal 2011 were $412.1 million, primarily attributable to Net
Income, adjusted for non-cash items. Cash outflows used
in investing activities during fiscal 2011 were $44.4 mil-
lion, primarily attributable to payments made for fixed
assets. Cash outflows used in financing activities during
fiscal 2011 were $468.5 million, primarily attributable to
the repurchase of 14.6 million of our common shares for
$445 million.
Financing Transactions
The table below reflects our primary sources of financing (in thousands) as of March 31, 2013:
Type
Total at
March 31,
2013
Amount Outstanding
at March 31,
2013
2012
Interest Rate
5.5% Senior Notes
$650,000
$650,000
Five-year Amortizing Term Loan
Revolving Credit Agreement
500,000
500,000
2.5% Convertible Senior Notes
Previous Revolving Credit Agreement
—
—
500,000
—
—
—
N/A
N/A
N/A
5.50%
LIBOR + 1.5%
LIBOR + 1.5% + 0.20%
annual commitment fee
Maturity
May 2019
June 2017
June 2017
1,127,009
2.50%
Repurchased June 2012
250,000
LIBOR + 2.625%
Terminated June 2012
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 was used for general
corporate purposes, including the purchase of structured
investment vehicle securities from our liquidity funds.
The Notes were repurchased in May 2012, as further
discussed below. Prior to the repurchase of the Notes,
we were accreting the carrying value of the Notes to the
principal amount at maturity using an 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 2013,
2012 and 2011, of approximately $5.8 million, $39.1 million
41
Legg Mason and $36.7 million, respectively. In connection with this
financing, we entered into economic hedge transactions
that increased the effective conversion price of the Notes.
These hedge transactions had a net cost to us of $83 mil-
lion, which we paid from the proceeds of the Notes. These
transactions closed on January 31, 2008.
Capital Plan
In May 2012, we announced a capital plan that included
refinancing the Notes. The refinancing was effected
through the issuance of $650 million of 5.5% senior
notes, the net proceeds of which, together with cash on
hand and $250 million of remaining borrowing capacity
under a then existing revolving credit facility, were used
to repurchase all $1.25 billion of the Notes. The terms of
the repurchase included the repayment of the Notes at par
plus accrued interest, a prepayment fee of $6.3 million,
and the issuance of warrants to the holders of the Notes.
The warrants provide for the purchase, in the aggregate
and subject to adjustment, of 14.2 million shares of our
common stock, on a net share settled basis, at an exercise
price of $88 per share. The warrants expire in June 2017
and can be settled, at our election, in either shares of com-
mon stock or cash.
Also pursuant to the capital plan, in June 2012, we entered
into an unsecured credit agreement which provides for
an undrawn $500 million revolving credit facility and a
$500 million term loan. The proceeds of the term loan
were used to repay the $500 million of outstanding bor-
rowings under the previous revolving credit facility, which
was then terminated.
The $500 million revolving credit facility may be increased
by an aggregate amount up to $250 million, subject to the
approval of the lenders, and expires June 2017. This revolv-
ing credit facility is available to fund working capital needs
and for general corporate purposes. There were no borrow-
ings outstanding under this facility as of March 31, 2013.
The $500 million term loan entered into in conjunction
with the unsecured credit agreement noted above can be
repaid at any time and is due in four annual installments of
$50 million, beginning in June 2013, with the remainder to
be repaid at maturity in June 2017.
The $650 million 5.5% senior notes are due May 2019
and were sold at a discount of $6.8 million, which is being
amortized to interest expense over the seven-year term.
The financial covenants under our bank agreements
include: maximum net debt to EBITDA ratio of 2.5 to 1
and minimum EBITDA to interest expense ratio of 4.0 to
1. Debt is defined to include all obligations for borrowed
money, excluding non-recourse debt of CIVs, and capi-
tal 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 (loss) plus/minus
tax expense (benefit), interest expense, depreciation and
amortization, amortization of intangibles, any extraordinary
expense or losses, and any non-cash charges, as defined
in the agreements. As of March 31, 2013, our net debt to
EBITDA ratio was 1.4 to 1 and EBITDA to interest expense
ratio was 11.6 to 1, and, therefore, we have maintained
compliance with the applicable covenants. In addition,
the 5.5% senior notes are subject to certain nonfinancial
covenants, including provisions relating to dispositions of
certain assets, which could require a percentage of any
related proceeds to be applied to accelerated repayments.
If our net income (loss) significantly declines, or if we
spend our available cash, it may impact our ability to main-
tain compliance with the financial 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 outstanding debt subject to these covenants or seek-
ing to negotiate with our lenders to modify the terms or to
restructure our debt. We anticipate that we will have avail-
able 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 bank debt agreement is currently impacted
by the ratings of two rating agencies. The interest rate and
annual commitment fee on our revolving line of credit is
based on the higher credit rating of the two rating agen-
cies. In June 2011, our rating by one of these agencies was
downgraded one notch below the other. Should the other
agency downgrade our rating, absent an upgrade from the
former agency, our interest costs will rise modestly. In addi-
tion, under the terms of the 5.5% senior notes, the interest
rate paid on these notes will increase modestly if our credit
ratings are reduced below investment grade.
In connection with the extinguishment of the Notes, the
hedge transactions (purchased call options and warrants)
executed in connection with the initial issuance of the
Notes were also terminated.
Also in connection with the capital plan, our board of direc-
tors authorized $1.0 billion for additional purchases of our
common stock, $730 million of which remained available
as of March 31, 2013, and the completion of the purchase
42
Legg Mason of the then remaining $155 million of our common stock
previously authorized, which occurred in the quarter ended
June 30, 2012. The capital plan authorizes using up to
65% of cash generated from future operations, beginning
in fiscal 2013, to purchase shares of our common stock.
Other Transactions
On March 13, 2013, we completed the acquisition of all
of the outstanding share capital of Fauchier, a leading
European based manager of funds-of-hedge funds, from
BNP Paribas Investment Partners, S.A. The transaction
included an initial cash payment of $63.4 million, which
was funded from existing cash resources. In addition,
contingent consideration of up to approximately $23.0 mil-
lion and approximately $30.0 million, utilizing exchange
rates as of March 31, 2013, may be due on the second and
fourth anniversaries of closing, respectively, dependent on
achieving certain financial targets and subject to a catch up
adjustment. The contingent consideration liability had an
acquisition date fair value of approximately $21.6 million.
In May 2010, we terminated the exchangeable share
arrangement related to the acquisition of Legg Mason
Canada Inc., in accordance with its terms. In this transac-
tion, 1.1 million shares, representing all remaining out-
standing exchangeable shares, were exchanged for shares
of our common stock on a one-for-one basis.
Certain of our asset management affiliates maintain vari-
ous credit facilities for general operating purposes. Certain
affiliates are also subject to the capital requirements of
various regulatory agencies. All such affiliates met their
respective capital adequacy requirements during the peri-
ods presented.
See Notes 2 and 6 of Notes to Consolidated Financial
Statements for additional information related to the
Fauchier acquisition and our capital plan, respectively.
Future Outlook
We expect that over the next 12 months cash generated
from our operating activities will be adequate to support
our operating and investing cash needs, and planned
share repurchases. We currently intend to utilize our other
available resources for any number of potential activities,
including, but not limited to, seed capital investments in
new products, repurchase of shares of our common stock,
acquisitions, repayment of outstanding debt, or payment
of increased dividends.
working capital requirements. As previously discussed, and
in accordance with our capital plan, we intend to utilize up to
65% of cash generated from future operations to purchase
shares of our common stock. 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,
events may occur that require additional liquidity, such as
an acquisition opportunity or an opportunity to refinance
indebtedness, or market conditions might significantly
worsen, affecting our results of operations and generation
of available cash. If these events result 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 reducing future share repurchases,
additional cost-cutting, reducing our expected expenditures
on investments, selling assets (such as investment securi-
ties), repatriating earnings from foreign subsidiaries, or mod-
ifying 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.
At March 31, 2013, our total cash and cash equivalents
of $933 million included $415 million held by foreign sub-
sidiaries. Some of the amounts held by foreign subsidiar-
ies may be subject to material repatriation tax effects.
During the year ended March 31, 2013, we repatriated
approximately $390 million of foreign cash and we plan to
repatriate up to another $325 million over the next several
years, in order to increase our cash available in the U.S. for
general corporate purposes. We anticipate an incremental
tax cost of approximately $18 million with respect to this
repatriation and have adjusted our tax reserve accordingly.
No further repatriation of accumulated prior period foreign
earnings is currently planned. However, if circumstances
change, we will provide for and pay any applicable addi-
tional U.S. taxes in connection with repatriation of these
funds. It is not practical at this time to determine the
income tax liability that would result from any further repa-
triation of accumulated foreign earnings.
Credit and Liquidity Risk
Cash and cash equivalent deposits involve certain credit
and liquidity risks. We maintain our cash and cash equiva-
lents with a number of high quality financial institutions or
funds and from time to time may have concentrations with
one or more of these institutions. The balances with these
financial institutions or funds and their credit quality are
monitored on an ongoing basis.
As described above, we currently project that our cash
flows from operating activities will be sufficient to fund
our liquidity needs. As of March 31, 2013, we had over
$550 million in cash and cash equivalents in excess of our
Off-Balance Sheet Arrangements
Off-balance sheet arrangements, as defined by the
Securities and Exchange Commission (“SEC”), include
43
Legg Mason certain contractual arrangements pursuant to which a
company has an obligation, such as certain contingent
obligations, certain guarantee contracts, retained or con-
tingent interest in assets transferred to an unconsolidated
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 reasonably 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-balance sheet arrangements,
as defined, other than those described in the Contractual
Obligation section that follows and Consolidation discussed
in Critical Accounting Policies and Notes 1 and 17 of Notes
to Consolidated Financial Statements.
Contractual and Contingent Obligations
We have contractual obligations to make future payments, principally in connection with our long-term debt, non-can-
celable lease agreements, acquisition agreements and service agreements. See Notes 6 and 8 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, and excludes contractual obligations
of CIVs, as we are not responsible or liable for these obligations:
2014
2015
2016
2017
2018 Thereafter
Total
Contractual Obligations
Long-term borrowings by contract maturity(1)
$ 50.4 $ 50.5 $ 50.0 $ 50.0 $300.0 $ 650.0 $1,150.9
Interest on long-term borrowings and credit facility commitment fees(1)
44.9
Minimum rental and service commitments
Total Contractual Obligations
Contingent Obligation
132.5
227.8
43.9
121.2
215.6
43.0
106.6
199.6
42.2
95.3
37.2
86.7
53.6
422.6
264.8
964.9
187.5
423.9
1,126.2
2,380.6
Payments related to business acquisition(2)
—
23.0
—
30.0
—
—
53.0
Total Contractual and Contingent Obligations(3)(4)(5)(6)
$227.8 $238.6 $199.6 $217.5 $423.9 $1,126.2 $2,433.6
(1) Excludes long-term borrowings of the consolidated CLO of $207.8 million and interest on these long-term borrowings, as applicable.
(2) The amount of contingent payments reflected for any year represents the maximum amount that could be payable, using exchange rates as of March 31, 2013,
at the earliest possible date under the terms of the business purchase agreement. The contingent obligation had an acquisition date fair value of $21.6 million.
(3) The table above does not include approximately $37.4 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 2021.
(4) The table above does not include amounts for uncertain tax positions of $51.5 million (net of the federal benefit for state tax liabilities), because the timing
of any related cash outflows cannot be reliably estimated.
(5) The table above does not include redeemable noncontrolling interests, primarily related to CIVs, of $21.0 million, because the timing of any related cash
outflows cannot be reliably estimated.
(6) The table above excludes commitments arising from any potential awards under the proposed Permal management equity plan for its key employees.
MARKET RISK
We maintain an enterprise risk management program to
oversee and coordinate risk management activities of
Legg Mason and its subsidiaries. Under the program, cer-
tain risk activities are managed at the subsidiary level. The
following describes certain aspects of our business that
are sensitive to market risk.
Revenues and Net Income (Loss)
The majority of our revenue is calculated from the market
value of our AUM. Accordingly, a decline in the value of
the underlying securities will cause our AUM, and thus
our revenues, to decrease. In addition, our fixed income
and liquidity AUM are subject 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 separately 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, and strong markets
tend to increase these fees. 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 values of AUM in this asset class will dispropor-
tionately impact our revenues. In addition, under revenue
sharing agreements, certain of our affiliates retain different
percentages of revenues to cover their costs, including
compensation. Our net income (loss), profit margin and
compensation as a percentage of operating revenues are
impacted based on which affiliates generate our revenues,
and a change in AUM at one subsidiary can have a dramat-
ically different effect on our revenues and earnings than an
equal change at another subsidiary.
44
Legg Mason 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.
Trading and other current investments, excluding CIVs, at March 31, 2013 and 2012, subject to risk of security price fluc-
tuations 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 current investments, excluding CIVs
2013
2012
$ 86,583
228,156
56,341
$371,080
$111,257
222,585
78,277
$412,119
Approximately $39.2 million and $80.0 million of trad -
ing and other current investments related to long-term
incentive compensation plans as of March 31, 2013 and
2012, respectively, have offsetting 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 (loss) 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 $91.1 million and
$86.2 million at March 31, 2013 and 2012, respectively,
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 compensa-
tion expense, non-operating income (expense) and net
income (loss).
Approximately $240.8 million and $245.9 million of trading
and other current investments at March 31, 2013 and 2012,
respectively, are investments in proprietary fund products
and other investments for which fluctuations in market
value will impact our non-operating income (expense). Of
these amounts, the fluctuations in market value of approxi-
mately $13.8 million and $12.6 million of proprietary fund
products as of March 31, 2013 and 2012, respectively, have
offsetting compensation expense under revenue share
agreements. The fluctuations in market value of approxi-
mately $71.9 million and $11.8 million in proprietary fund
products as of March 31, 2013 and 2012, respectively, are
substantially offset by gains (losses) on market hedges
and therefore do not materially impact Net Income (Loss)
Attributable to Legg Mason, Inc. Investments in proprietary
fund products are not liquidated before the related fund
establishes a track record, has other investors, or a deci-
sion is made to no longer pursue the strategy.
Non-trading assets, excluding CIVs, at March 31, 2013 and 2012, subject to risk of security price fluctuations are summa-
rized (in thousands) below.
Investment securities, excluding CIVs:
Available-for-sale
Investments in partnerships, LLCs and other
Equity method investments in partnerships and LLCs
Other investments
Total non-trading assets, excluding CIVs
2013
2012
$ 12,400
31,143
68,780
99
$112,422
$ 11,913
34,965
169,201
112
$216,191
Equity method investments in partnerships and LLCs at
March 31, 2012, included approximately $89.3 million of
investments related to our involvement with the PPIP.
Fluctuations in the market value of these investments
had offsetting compensation expense under revenue-
sharing agreements. Our investments related to the PPIP
were fully redeemed during fiscal 2013, upon liquidation
of the fund.
Investment securities of CIVs totaled $24.8 million and
$31.6 million as of March 31, 2013 and 2012, respec-
tively, and investments of CIVs totaled $210.6 million and
$294.9 million as of March 31, 2013 and 2012, respec-
tively. As of March 31, 2013 and 2012, we held equity
investments in the CIVs of $39.1 million and $38.9 mil-
lion, respectively. Fluctuations in the market value of
investments of CIVs in excess of our equity investment
45
Legg Mason will not impact Net Income (Loss) Attributable to Legg
Mason, Inc. However, it may have an impact on other
non-operating income (expense) of CIVs with a corre-
sponding offset in Net income (loss) attributable to non-
controlling interests.
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 14 of Notes to Consolidated Financial
Statements for further discussion of derivatives.
The following is a summary of the effect of a 10% increase or decrease in the market values of our financial instruments
subject to market valuation risks at March 31, 2013:
Investment securities, excluding CIVs:
Trading investments relating to long-term incentive compensation plans
Trading proprietary fund products and other investments
$ 86,583
228,156
$ 95,241
250,972
$ 77,925
205,340
Equity method investments relating to long-term incentive compensation plans,
Carrying Value
Fair Value
Assuming a
10% Increase(1)
Fair Value
Assuming a
10% Decrease(1)
proprietary fund products and other investments
Total current investments, excluding CIVs
Investments in CIVs
Available-for-sale investments
Investments in partnerships, LLCs and other
Equity method investments in partnerships and LLCs
Other investments
Total investments subject to market risk
56,341
371,080
39,056
12,400
31,143
68,780
99
61,975
408,188
42,962
13,640
34,257
75,658
109
50,707
333,972
35,150
11,160
28,029
61,902
89
$522,558
$574,814
$470,302
(1) Gains and losses related to certain investments in deferred compensation plans and proprietary fund products are directly offset by a corresponding adjust-
ment to compensation expense and related liability. In addition, investments in proprietary fund products of approximately $71.9 million have been eco-
nomically hedged to limit market risk. As a result, a 10% increase or decrease in the unrealized market value of our financial instruments subject to market
valuation risks would result in a $33.1 million increase or decrease in our pre-tax earnings as of March 31, 2013.
Also, as of March 31, 2013 and 2012, cash and cash equiv-
alents included $485.8 million and $893.7 million, respec-
tively, of money market funds.
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 the United
Kingdom, Brazil, Japan, Canada, Singapore, Australia, and
those denominated in the euro, may impact our compre-
hensive income (loss) and net income (loss). Certain of
our affiliates have entered into forward contracts to man-
age 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 (loss) or liquidity.
Interest Rate Risk
Exposure to interest rate changes on our outstanding
debt is partially mitigated as our $650 million of 5.5%
senior notes are at fixed interest rates. At March 31, 2013,
approximately $500 million of our outstanding floating rate
debt is subject to fluctuations in interest rates and will
have an impact on our non-operating income (loss) and
net income (loss). As of March 31, 2013, we estimate that
a 1% change in interest rates would result in a net annual
change to interest expense of $5 million. See Note 6 of
Notes to Consolidated Financial Statements for additional
disclosures regarding debt.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting policies are an integral part of the preparation
of our financial statements in accordance with account-
ing 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 esti-
mates and assumptions that affect the amounts of assets,
liabilities, revenues and expenses reported in the financial
statements. Due to their nature, estimates involve judg-
ment based upon available information. Therefore, actual
results or amounts could differ from estimates and the
difference could have a material impact on the consoli-
dated financial statements.
46
Legg Mason We consider the following to be our critical accounting
policies that involve significant estimates or judgments.
Consolidation
Effective April 1, 2010, we adopted revised 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 variable interest enti-
ties (“VIEs”) which includes a new approach for determin-
ing 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
application of the revised 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 guid-
ance, 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 considered 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 management fees from these VIEs were
not material at March 31, 2013. We have not issued any
investment performance guarantees to these VIEs, VREs
or their investors. Investment vehicles that are considered
VREs are consolidated if we have a controlling financial
interest in the investment vehicle, absent substantive
investor rights to replace the manager of the entity (kick-
out rights).
Financial Accounting Standards Board Interpretation
No. 46(R) (Accounting Standards Update 2010-10,
“Amendments to Statement 167 for Certain
Investment Funds”)
For most sponsored investment funds, including money
market funds, 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 if certain criteria are met. In determining
whether we are the primary beneficiary of a VIE, we con-
sider both qualitative and quantitative factors such as the
voting rights of the equity holders, economic participa-
tion 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 determination of the
primary beneficiary.
Statement of Financial Accounting Standards
No. 167 (Accounting Standards Codification
Topic 810, “Consolidation”)
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 revised
accounting guidance, as follows. We determine whether
we have a variable interest in a VIE by considering if,
among other things, we have the obligation 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 docu-
ments that might restrict or guarantee an expected loss or
residual return. If we have a significant variable interest,
we determine whether we are the primary beneficiary of
the VIE if we have both the power to direct the activities
of the VIE that most significantly impact the entity’s eco-
nomic performance and the obligation to absorb losses,
or the right to receive benefits, that potentially could be
significant to the VIE.
In evaluating whether we have the obligation to absorb
losses, or the right to receive benefits, that could poten-
tially be significant to the VIE, we consider factors
regarding the design, terms, and characteristics of the
investment vehicles, including the following qualitative fac-
tors: if we have involvement with the investment vehicle
beyond providing management services; if we hold equity
or debt interests in the investment vehicle; if we have
transferred any assets to the investment vehicle; if the
potential aggregate fees in future periods are insignificant
relative to the potential cash flows of the investment vehi-
cle; and if the variability of the expected fees in relation to
the potential cash flows of the investment vehicle is more
than insignificant.
Legg Mason must consolidate any VIE for which it is
deemed to be the primary beneficiary.
47
Legg Mason See Note 17 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 underlying
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 secu-
rities and assets, fair value as determined in good faith.
For most of our mutual funds and other pooled products,
their boards of directors or similar bodies are responsible
for establishing policies and procedures related to the
pricing of securities. Each board of directors generally
delegates the execution of the various functions related
to pricing to a fund valuation committee which, in turn,
may rely on information from various 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 estab-
lished policies to ensure consistency in the application of
revenue 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 valuation
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 sepa-
rate 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 closing 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 securi-
ties. 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 underly-
ing 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, unobservable inputs. Management fees on
AUM where fair values are based on unobservable inputs
are not material. As of March 31, 2013, equity, fixed
income and liquidity AUM values aggregated $161.8 bil-
lion, $365.1 billion and $137.7 billion, respectively.
As the vast majority of our AUM is valued by independent
pricing services based upon observable market prices
or inputs, we believe market risk is the most significant
risk underlying the value of our AUM. Economic events
and financial market turmoil have increased market price
volatility; however, the valuation 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, 2013, 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 approxi-
mate fair value, except our long-term debt. Trading invest-
ments, 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 (Loss) or Other Comprehensive
Income (Loss), depending on the underlying purpose of
the instrument.
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 accounting.
The evaluation of whether we exert control or significant
influence over the financial and operational policies of
an investee 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
48
Legg Mason legal rights of other investors 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).
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 market for the asset or liability
in an orderly transaction between market participants
on the measurement date. A fair value measurement
should reflect all of the assumptions that market partici-
pants would use in pricing the asset or liability, including
assumptions about the risk inherent in a particular valua-
tion technique, the effect of a restriction on the sale or use
of an asset, and the risk of non-performance.
For investments, we value equity and fixed income securi-
ties 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 estimates based on spreads to actively traded
benchmark debt instruments with readily available market
prices. We evaluate our non-trading 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 deter-
mined to exist, the difference between the adjusted cost
of the investment security and its current fair value is rec-
ognized as a charge to earnings in the period in which the
impairment is determined.
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, 2013 and 2012, excluding investments in CIVs,
we owned approximately $0.1 million and $11.9 million,
respectively, of financial investments that were valued on
our assumptions or estimates and unobservable inputs.
At March 31, 2013 and 2012, we also have approximately
$99.9 million and $204.2 million, respectively, of other
investments, such as investment partnerships, that are
included in Other noncurrent assets on the Consolidated
Balance Sheets, of which approximately $68.8 million
and $169.2 million, respectively, are accounted for under
the equity method. The remainder is accounted for under
the cost method, which considers if factors indicate
there may be an impairment in the value of these invest-
ments. In addition, as of March 31, 2013 and 2012, we
had $56.3 million and $78.3 million, respectively, of equity
method investments that are included in Investment secu-
rities on the Consolidated Balance Sheets.
The accounting guidance for fair value measurements
establishes a hierarchy that prioritizes the inputs for valua-
tion 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 low-
est 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 invest-
ments 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 mar-
kets; 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 agreements, fixed income
securities and certain proprietary fund products. This
category also includes CLO loans and derivative liabili-
ties 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 cat-
egory includes investments in partnerships, limited
liability companies, private equity funds and CLO debt
of a CIV. This category may also include certain propri-
etary fund products with redemption restrictions.
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 measurement in its
entirety falls is determined based on the lowest level input
that is significant to the fair value measurement in its entirety.
49
Legg Mason Proprietary fund products and certain investments held by
CIVs are valued at net asset value (“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 restrictions. 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 securi-
ties using a variety of methods and resources, including the
most current available financial information for the invest-
ment and the industry to which it applies in order to deter-
mine fair value. These valuation 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 pricing
services that utilize available market data and are there-
fore classified as Level 2. Legg Mason has established
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 deter-
mine the expected cash flows include assumptions about
forecasted default and recovery rates that a market partici-
pant would use in determining the fair value of the CLO’s
underlying collateral assets. Given the significance of the
unobservable 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 valu-
ations. Options are classified 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 classified
as Level 1. Index and single name credit default swaps and
interest rate swaps previously held were valued based on valu-
ations furnished by pricing services and classified as Level 2.
As a practical expedient, we rely on the NAVs 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.
As of March 31, 2013, approximately 2% of total assets
(10% of financial assets measured at fair value) and 9%
of total liabilities meet the definition of Level 3. Excluding
the assets and liabilities of CIVs, approximately 1% of total
assets (8% 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, 2013, are as follows (in thousands):
Amortizable asset management contracts
Indefinite-life intangible assets
Trade names
Goodwill
$ 22,327
3,102,435
52,800
1,269,165
$4,446,727
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 management 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 con-
sidered indefinite-life intangible assets because they are
expected to generate cash flows indefinitely.
In allocating the purchase price of an acquisition to intan-
gible assets, we must determine the fair value of the assets
acquired. We determine fair values of intangible assets
acquired based upon projected future cash flows, which
take into consideration estimates and assumptions including
profit margins, growth or attrition rates for acquired con-
tracts 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.
Goodwill represents the residual amount of acquisition
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 statements, on
a quarterly basis we consider if triggering events have
occurred that may indicate a significant change in fair
50
Legg Mason values. Triggering events may include significant adverse
changes in our business, legal or regulatory environment,
loss of key personnel, significant business dispositions,
or other events, including changes in economic arrange-
ments with our affiliates that will impact future operating
results. If a triggering 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 annu-
ally at December 31.
We performed an impairment test of the Permal funds-of-
hedge funds contracts indefinite-life intangible asset as of
December 12, 2012, because a modification of our employ-
ment contracts and other arrangements with the manage-
ment of Permal that was completed on that day constituted
a triggering event. Our test indicated that the funds-of-
hedge funds contracts asset was impaired, thereby trigger-
ing impairment tests of our other indefinite-life intangible
assets and goodwill. As a result of these impairment tests,
updated through our annual test date of December 31,
2012, our Permal funds-of-hedge funds contracts and trade
name indefinite-life intangible assets and our domestic
mutual fund contracts indefinite-life intangible assets were
each determined to be partially impaired, resulting in aggre-
gate pre-tax operating charges of $734 million. Neither
goodwill nor any other intangible assets were deemed to
be impaired. Details of our intangible assets and goodwill
and the related impairment tests follow.
No impairment in the value of amortizable intangible
assets was recognized during the year ended March 31,
2013, as our estimates of the related future cash flows
exceeded the asset carrying values. We also determined
that no triggering events had occurred as of March 31,
2013, therefore, no additional indefinite-life intangible
asset and goodwill impairment testing was necessary.
Amortizable Intangible Assets
Intangible assets subject to amortization are considered
for impairment at each reporting period using an undis-
counted cash flow analysis. Significant assumptions used
in assessing the recoverability of management 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 resulting in an impairment charge because a vari-
ance in any one period must be considered in conjunction
with other assumptions that impact projected cash flows.
The estimated remaining useful lives of amortizable intan-
gible assets currently range from one to six years with a
weighted-average life of approximately 2.8 years.
Indefinite-Life Intangible Assets
For intangible assets with lives that are indeterminable or
indefinite, fair value is determined from a market partici-
pant’s perspective based on projected discounted cash
flows, taking into account the values market participants
would pay in a taxable transaction to acquire the respec-
tive assets. We have two primary types of indefinite-life
intangible assets: proprietary fund contracts 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 future fees, profit margins,
growth rates, taxes, 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. The
determination of the fair values of our indefinite-life intan-
gible assets is highly dependent on these estimates and
changes in these inputs could result in a material impair-
ment of the related carrying values. 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 exist.
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 considered 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.
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 cli-
ent flows and projected market performance. To estimate
the projected cash flows, projected growth rates by affili-
ate are used to project their assets under management.
Cash flow growth rates consider estimates of both AUM
flows and market expectations by asset class (equity,
fixed income and liquidity) and by investment manager
based upon, among other things, historical experience
and expectations of future market and investment perfor-
mance from internal and external sources. Currently, our
51
Legg Mason market growth assumptions are 6% for equity, 3% for
fixed income, and 0% for liquidity products, with a general
assumption of 2% organic growth for all products, subject
to exceptions for organic growth in near-term periods.
The starting point for these assumptions is our corporate
planning process that includes three-year AUM projec-
tions from the management of each operating affiliate that
consider the specific business circumstances of each affili-
ate, with near-year flow assumptions for certain affiliates
adjusted, as appropriate, to reflect a market participant
view. Beyond year three, the estimates move towards our
general organic growth assumption of 2%, as appropri-
ate for each affiliate and asset class, through year 20. The
resulting cash flow growth rate for year 20 is held constant
and used to further project cash flows through year 40.
Based on projected AUM by affiliate and asset class, affili-
ate advisory fee rates are applied to determine projected
revenues. The domestic mutual fund contracts projected
revenues are applied to a weighted-average margin for the
applicable affiliates that manage the AUM. Margins are
based on arrangements currently in place at each affiliate.
Projected operating income is further reduced by an appro-
priate tax rate to calculate the projected cash flows.
We believe our growth assumptions are reasonable given
our consideration of multiple inputs, including internal and
external sources, although our assumptions are subject
to change based on fluctuations in our actual results and
market conditions. Our assumptions are also subject to
change due to, among other factors, poor investment
performance by one or more of our advisory affiliates, the
withdrawal of AUM by clients, changes in business cli-
mate, adverse regulatory actions, or loss of key personnel.
We consider these risks in the development of our growth
assumptions and discount rates, discussed further below.
Further, actual cash flows in any one period may vary from
the projected cash flows without resulting in an impair-
ment charge because a variance in any one period must
be considered in conjunction with other assumptions that
impact projected cash flows.
Our process includes comparison of actual results to prior
growth projections. However, differences between actual
results and our prior projections are not necessarily indica-
tive of a need to reassess our estimates given that our dis-
counted projected cash flow analyses include projections
well beyond three years and variances in the near-years
may be offset in subsequent years; fair value assess-
ments are point-in-time; and the consistency of a fair value
assessment with other indicators of value that reflect
expectations of market participants at that point-in-time
is critical evidence of the soundness of the estimate of
value. In subsequent periods, we consider the differences
in actual results from our prior projections in considering
the reasonableness of the growth assumptions used in our
current impairment testing.
Discount rates are based on appropriately weighted esti-
mated costs of debt and equity capital using a market par-
ticipant perspective. We estimate the cost of debt based
on published debt rates. We estimate the cost of equity
capital based on the Capital Asset Pricing Model, which
considers the risk-free interest rate, peer-group betas, and
company and equity risk premiums. The equity risk is fur-
ther adjusted to consider the relative risk associated with
each Legg Mason indefinite-life intangible asset and our
reporting unit. The discount rates are also calibrated based
on an assessment of relevant market values. Continued
market uncertainty and the resulting impact on Legg
Mason’s stock price and our search for a permanent CEO,
which was ongoing during our impairment testing process,
increase the relative risk associated with all aspects of our
business, resulting in higher discount rates in the current
year for our evaluation of each of Legg Mason’s indefinite-
life intangible assets and the reporting unit.
Consistent with standard valuation practices for taxable
transactions, the projected discounted cash flow analysis
also factors in a tax benefit value. This tax benefit repre-
sents the discounted tax savings a third party that pur-
chased an asset on a given valuation date would receive
from future tax deductions for the amortization of the pur-
chase price over 15 years.
The Permal funds-of-hedge funds contracts of $626 mil-
lion account for approximately 20% of our indefinite-life
intangible assets. As noted above, the modification of
employment contracts and other arrangements with the
management of Permal constituted a triggering event as
of December 12, 2012. Further, Permal has experienced
recent outflows and increased risk associated with its
business. The past several years have seen declines in
the traditional high net worth client fund-of-hedge funds
business, Permal’s historical focus, which Permal has
offset to some extent with new institutional business. As
a result of these factors, actual results generally compare
unfavorably to the growth assumptions for the Permal
funds-of-hedge funds contracts used in the asset impair-
ment testing at December 31, 2011 and 2010. As a result,
in our December 2012 testing, the near-term growth
assumptions for these contracts were reduced, which,
together with the impact of decreased margins in near-
years resulting from the modifications of the employment
arrangements, led to decreased projected cash flows from
the business. Further, fund-of-hedge fund managers are
subject to unique market and regulatory influences, adding
additional uncertainty to our estimates.
52
Legg Mason Based upon our projected discounted cash flow analy-
ses, the carrying value of the Permal funds-of-hedge
funds contracts asset exceeded its fair value, resulting in
impairment charges of $321 million for the excess. Cash
flows on the Permal funds-of-hedge funds contracts are
assumed to have an average annual growth rate of approx-
imately 8%. However, given current experience, projected
cash flows reflect no net AUM flows trending to moderate
inflows in years 1 and 2, respectively. The projected cash
flows from the Permal funds-of-hedge funds contracts
are discounted at 16.0%, reflecting the Permal and Legg
Mason specific factors noted above.
Investment performance, including its expected impact
on future asset flows, is a significant factor in our growth
projections for the Permal funds-of-hedge funds contracts.
Our market performance projections are supported by the
fact that Permal’s two largest funds that comprise over
half of the contracts asset AUM have 10-year average
returns exceeding 6%. Our market projections are further
supported by industry statistics.
The domestic mutual fund contracts acquired in the
Citigroup Asset Management (“CAM”) transaction of
$2,106 million account for approximately 65% of our
indefinite-life intangible assets. As of December 31, 2012,
approximately $127 billion of AUM, primarily managed by
ClearBridge and Western Asset, are associated with this
asset, with approximately 40% in long-term fixed income
AUM and 30% in each of equity AUM and liquidity AUM.
Although our domestic mutual fund contracts overall have
maintained strong recent market performance, previously
disclosed uncertainties regarding market conditions and
asset flows and more recent assessments of related risk,
including risks related to potential regulatory changes
in the liquidity business, are reflected in our projected
discounted cash flow analyses. As a result of the impact
of these factors on our projected discounted cash flow
analyses, the related carrying value exceeded its fair
value, resulting in an impairment charge of $396 million
for the excess. For our impairment test, cash flows from
the domestic mutual fund contracts are assumed to have
annual growth rates that average approximately 6%, but
given current uncertainties, reflect no net AUM flows
trending to moderate inflows in years 1 and 2, respec-
tively. Projected cash flows of the domestic mutual fund
contracts are discounted at 14.5%, reflecting the business
and Legg Mason specific factors noted above.
We believe that investment performance also has a signifi-
cant influence on our domestic mutual fund contract long-
term flows, and that recent improvements in performance
will favorably impact our flows, as long as performance
is strong. In aggregate, 76% of our domestic mutual fund
long-term AUM was in funds that had outpaced their
three-year Lipper category average at December 31, 2012,
the date through which the testing was completed, which
compares to 33% at September 30, 2008. Generally, there
tends to be a four to five-year lag before improved invest-
ment performance results in increased asset flows.
In addition, we believe a recent reorganization of our distri-
bution platform, which provides an improved focus on the
growth of our business, has also favorably impacted our
flows. The improvement in investment performance has
assisted distribution personnel in selling more products.
As a result of improved performance and the reorganiza-
tion of the distribution platform, our U.S. distribution group
had net inflows for the nine months through September
30, 2012, with the quarter ended June 30, 2012 having
the highest net inflows since March 2007. Year-to-date
results generally compare slightly favorably to the growth
assumptions related to the domestic mutual fund con-
tracts asset impairment testing at December 31, 2011. In
the past several years, however, such actual to projection
comparisons are less favorable, and flows in the last sev-
eral months have been less consistent and are considered
in our current estimates.
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. The Permal
trade name carrying value exceeded its estimated fair
value, resulting in a $17 million impairment for the excess.
The resulting fair value of the other trade name signifi-
cantly exceeded the related carrying amount.
Goodwill
Goodwill is evaluated at the reporting unit level and is con-
sidered for impairment when the carrying amount of the
reporting unit exceeds the implied fair value of the report-
ing unit. In estimating the implied fair value of the report-
ing unit, we use valuation techniques based on discounted
projected cash flows and EBITDA multiples, similar to
techniques employed in analyzing the purchase price of an
acquisition. In December 2010, we announced a realign-
ment of our executive management team, which during
fiscal 2012, resulted in the combination of our Americas
and International divisions into one operating segment,
Global Asset Management. Internal management report-
ing has been modified consistent with this realignment
such that discrete financial information regularly received
by the chief operating decision maker, our Chief Executive
Officer, is at the consolidated Global Asset Management
business level. As a result, the former Americas and
International operating segments are no longer our report-
ing units, and subsequently, goodwill is recorded and
53
Legg Mason evaluated at one Global Asset Management reporting
unit level. Our Global Asset Management reporting unit
consists of the operating businesses of our asset man-
agement affiliates and our centralized global distribution
operations. In our most recent impairment testing process,
all consolidated assets and liabilities were allocated to our
single Global Asset Management reporting unit, except
deferred tax assets arising from net operating losses not
related to any assets or liabilities of the reporting unit.
Similarly, the projected operating results of the reporting
unit include our holding company corporate costs and
overhead, including costs associated with executive man-
agement, finance, human resources, legal and compliance,
internal audit and other central corporate functions.
results of our two estimates of value for the reporting unit
(the discounted cash flow and EBITDA multiple analyses)
are compared and any significant difference is assessed to
determine the reasonableness of each value and whether
any adjustment to either result is warranted. Once the
values are accepted, the appropriately weighted average
of the two reporting unit valuations (the discounted cash
flow and EBITDA multiple analyses) is used as the implied
fair value of our Global Asset Management reporting unit,
which at December 31, 2012, exceeds the carrying value
by approximately $660 million. Considering the relative
merits of the details involved in each valuation process,
we used an equal weighting of the two values for the
December 2012 testing.
Goodwill principally originated from the acquisitions of
CAM, Permal and Royce. The value of the reporting unit
is based in part, on projected consolidated net cash flows,
including all cash flows of assets managed in our mutual
funds, closed-end funds and other proprietary funds, in
addition to separate account assets of our managers.
Significant assumptions used in assessing the implied fair
value of the reporting unit under the discounted cash flow
method are consistent with the methodology discussed
above for indefinite-life intangible assets. Also, at the
reporting unit level, future corporate costs are estimated
and consolidated with the projected operating results of all
our affiliates.
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 con-
sidered in conjunction with other assumptions that impact
projected cash flows. For the reporting unit discounted
projected cash flow analysis, projected cash flows, on an
aggregate basis across all asset classes, are assumed to
have an average annual growth rate of approximately 8%.
Discount rates are based on appropriately weighted esti-
mated costs of debt using a market participant perspec-
tive, also consistent with the methodology discussed
above for indefinite-life intangible assets. For our impair-
ment test during the quarter ended December 31, 2012,
the projected cash flows were discounted at 15.0% to
determine their present value, reflecting the company/
asset specific factors noted above.
We also perform a market-based valuation of our reporting
unit value, which applies an average of EBITDA multiples
paid in change of control transactions for peer companies
to our EBITDA. The observed average EBITDA multiple
utilized was 9.5x, from ten asset management transac-
tions dated October 2009 through December 2012. The
We further assess the accuracy of the reporting unit value
determined from these valuation methods by compar-
ing their results to our market capitalization to determine
an implied control premium. The reasonableness of this
implied control premium is tested by comparing it to
control premiums that have been paid in relevant actual
change of control transactions, as further discussed
below. This assessment provides evidence that our under-
lying assumptions in our analyses of our reporting unit fair
value are reasonable.
In calculating our market capitalization for these purposes,
market volatility can have a significant impact on our capi-
talization, and if appropriate, we may consider the aver-
age market prices of our stock for a period of up to two
months before the test date to determine market capital-
ization. A control premium arises from the fact that in an
acquisition, there is typically a premium paid over current
market prices of publicly traded companies that relates to
the ability to control the operations of an acquired com-
pany. Further, assessments of control premiums in the
asset management industry are difficult because many
acquisitions involve privately held companies, or involve
only portions of a public company, such that no control
premium can be calculated. Asset manager transactions
are often valued on EBITDA multiples which, absent
unusual circumstances, have generally been consistently
priced in a range of 8x to 13x EBITDA over the past sev-
eral years.
Recent market evidence regarding control premiums sug-
gests values of 11% to 99% as realistic and common,
and we believe such premiums to be a reasonable range
of estimation for our equity value. Our market evidence
is from a published source for the two years ended
December 31, 2011 and includes 56 transactions from the
banking and finance and brokerage and investment con-
sulting industry groups with an average control premium
value of 43%. As noted above, control premium values
54
Legg Mason specific to public asset manager transactions are limited.
However, since 2000, 17 public asset manager transac-
tions available to us had control premium values ranging
from 20% to 154%, and averaged 55%. We consider
the specific circumstances of our company to determine
whether there are specific differences for our situation
that make these market control premiums not applicable.
We also exclude from our consideration outlying values
and transactions with known unique circumstances. Based
on our analysis and consideration, we believe the implied
control premium of 48% determined by our reporting unit
value estimation at December 31, 2012, is reasonable in
relation to the range of observed relevant market control
premium values. Subsequent to our December 31, 2012
analysis, the market price of Legg Mason common stock
has appreciated by more than 20% as of March 31, 2013,
which would reduce our implied control premium assum-
ing all other values remain constant.
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,
2013, 2012 and 2011, 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. 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.
expected life 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 exercised 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 numerous foreign
jurisdictions in which we operate. We file income tax
returns representing our filing positions with each jurisdic-
tion. Due to the inherent complexities arising from con-
ducting business and being taxed in a substantial number
of jurisdictions, we must make certain estimates and judg-
ments in determining our income tax provision for financial
statement purposes.
These estimates and judgments are used in determining
the tax basis of assets and liabilities and in the calculation
of certain tax assets and liabilities that arise from differ-
ences 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.
We granted 1.0 million, 0.8 million, and 0.7 million stock
options in fiscal 2013, 2012 and 2011, respectively. For
additional information on share-based compensation, see
Note 11 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 would use a Monte Carlo
option-pricing model. Both models require management
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 exer-
cise price require estimates or assumptions. We calculate
the dividend yield based upon the average of the histori-
cal quarterly dividend payments over a term equal to the
Substantially all of our deferred tax assets relate to U.S. and
U.K. taxing jurisdictions. As of March 31, 2013, U.S. federal
deferred tax assets aggregated $771 million, realization
of which is expected to require $4.2 billion of future U.S.
earnings, approximately $332 million of which must be in
the form of foreign source 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 generated. Based on estimates
of future taxable income, using assumptions consistent
with those used in our goodwill impairment testing, it is
more likely than not that current federal tax benefits relat-
ing 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 the utilization of $36.3 million
55
Legg Mason foreign tax credits as credits will not be realized and an
additional valuation allowance of $17.1 million was recorded
in fiscal 2013 with respect thereto. In addition, a valuation
allowance was established in prior years for the substantial
portion of our deferred tax assets relating to U.K. taxing
jurisdictions. While tax planning may enhance our posi-
tions, the realization of current tax benefits is not depen-
dent on any significant tax strategies.
As of March 31, 2013, U.S. state deferred tax assets
aggregated $173 million. Due to state tax planning which
will allow for the utilization of net operating losses gener-
ated in certain jurisdictions, we recognized a net valuation
allowance release of $2.0 million during fiscal 2013. Due to
the uncertainty of future state apportionment factors and
future effective state tax rates, the value of state net oper-
ating loss benefits ultimately realized may vary.
A net valuation allowance release of $3.5 million in fiscal
2013 primarily related to the full release of the valuation
allowance on deferred tax assets related to Australia and
Singapore offset by an establishment of a valuation allow-
ance against certain U.K. deferred tax assets. To the extent
our analysis of the realization of deferred tax assets relies
on deferred tax liabilities, we have considered the tim-
ing, nature and jurisdiction of reversals, as well as, future
increases relating to the tax amortization of goodwill and
indefinite-life intangible assets. In the event we determine
all or any portion of our deferred tax assets that are not
already subject to a valuation 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 determination is made. Depending on the facts and cir-
cumstances, the charge could be material to our earnings.
The calculation of our tax liabilities involves uncertainties 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 estimate 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 2013 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, includ-
ing information relating to anticipated growth in revenues,
margins or earnings per share, anticipated 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 performance 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 statements.
Such forward-looking statements are subject to various
known and unknown risks and uncertainties and we cau-
tion readers that any forward-looking information 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 factors, some
of which are beyond our control, including but not limited
to those discussed below and those discussed under
the heading “Risk Factors” and elsewhere 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
obligations 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 fac-
tors, such as: the total value and composition of our AUM;
the mix of our AUM among our affiliates; the revenue yield
of our AUM; the volatility and general level of securities
prices and interest rates; the relative investment perfor-
mance of company-sponsored investment funds and other
asset management products both in absolute terms and
relative to competing offerings and market indices; investor
sentiment and confidence; general economic conditions;
our ability to maintain investment management and admin-
istrative 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 fluctua-
tion 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
capital costs, including depreciation, amortization and other
56
Legg Mason non-cash charges incurred by us to maintain our admin-
istrative 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 substantial
effect on our business and results of operations.
EFFECTS OF INFLATION
The rate of inflation can directly affect various expenses,
including employee compensation, communications
and technology and occupancy, which may not be read-
ily recoverable in charges for services provided 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” pre-
viously discussed.
57
Legg Mason 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 account-
ing principles generally accepted in the United States of America. Legg Mason’s internal 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 transac-
tions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles gen-
erally accepted in the United States of America, and that receipts and expenditures of Legg Mason are being made only in
accordance with authorizations of management and directors of Legg Mason; and (iii) provide reasonable assurance regard-
ing 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 misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inade-
quate 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, 2013,
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, 2013,
Legg Mason’s internal control over financial reporting is effective based on the criteria established in the COSO framework.
The effectiveness of Legg Mason’s internal control over financial reporting as of March 31, 2013, 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, 2013.
Joseph A. Sullivan
President, Chief Executive Officer and Director
Peter H. Nachtwey
Senior Executive Vice President and Chief Financial Officer
58
Legg Mason 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 (“the Company”) at March 31, 2013 and March 31, 2012, and
the results of their operations and their cash flows for each of the three years in the period ended March 31, 2013 in con-
formity 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, 2013, based on cri-
teria 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 maintain-
ing effective internal control over financial reporting and for its assessment 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 finan-
cial 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 assurance 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 state-
ments 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.
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 reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transac-
tions 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 unauthor-
ized acquisition, use, or disposition 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 misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inade-
quate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Baltimore, Maryland
May 24, 2013
59
Legg Mason 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
Other assets of consolidated investment vehicles
Total Current Assets
Fixed assets, net
Intangible assets, net
Goodwill
Investments of consolidated investment vehicles
Deferred income taxes
Other
Other assets of consolidated investment vehicles
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
Other liabilities of consolidated investment vehicles
Long-term debt
Long-term debt of consolidated investment vehicles
Total Liabilities
Commitments and Contingencies (Note 8)
Redeemable Noncontrolling Interests
Stockholders’ Equity
Common stock, par value $.10; authorized 500,000,000 shares;
issued 125,341,361 shares in 2013 and 139,874,034 shares in 2012
Additional paid-in capital
Employee stock trust
Deferred compensation employee stock trust
Retained earnings
Appropriated retained earnings for consolidated investment vehicle
Accumulated other comprehensive income, net
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See Notes to Consolidated Financial Statements.
60
March 31,
2013
2012
$ 933,036
46,541
8,812
350,726
72,392
371,080
24,792
85,257
48,239
1,987
1,942,862
201,819
3,177,562
1,269,165
210,553
279,361
187,274
1,064
$7,269,660
$ 351,965
214,803
—
50,438
74,940
10,320
702,466
56,809
161,298
204,446
2,930
1,094,516
207,835
2,430,300
$1,382,263
26,139
2,167
333,777
100,060
412,119
31,575
117,391
51,977
326
2,457,794
239,411
3,856,866
1,275,045
294,853
142,706
287,653
1,419
$8,555,747
$ 409,759
195,808
250,000
1,278
114,840
4,097
975,782
57,339
242,567
167,544
3,872
1,135,614
271,707
2,854,425
21,009
24,031
12,534
3,449,190
(32,623)
32,623
1,304,259
4,829
47,539
4,818,351
$7,269,660
13,987
3,864,216
(32,419)
32,419
1,715,395
12,221
71,472
5,677,291
$8,555,747
Legg Mason 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 intangible assets
Other
Total Operating Expenses
OPERATING INCOME (LOSS)
OTHER NON-OPERATING INCOME (EXPENSE)
Interest income
Interest expense
Other income (expense), net, including $68,975 debt extinguishment loss in 2013
Other non-operating income (loss) 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
Years Ended March 31,
2013
2012
2011
$ 730,326
$ 775,534
$ 815,633
1,446,066
1,491,325
1,486,615
98,568
330,480
7,210
49,499
340,966
5,250
96,661
379,161
6,247
2,612,650
2,662,574
2,784,317
1,188,470
1,109,671
1,140,305
—
34,638
45,048
1,188,470
1,144,309
1,185,353
600,644
149,645
171,941
14,019
734,000
188,430
649,739
164,712
154,816
19,574
—
712,839
161,969
137,861
22,913
—
190,671
176,574
3,047,149
2,323,821
2,397,509
(434,499)
338,753
386,808
7,590
(62,919)
(17,958)
(2,821)
(76,108)
(510,607)
(150,859)
(359,748)
(6,421)
11,481
(87,584)
22,097
18,336
9,246
(92,157)
59,596
1,704
(35,670)
(21,611)
303,083
72,052
231,031
10,214
365,197
119,434
245,763
(8,160)
NET INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
$ (353,327)
$ 220,817
$ 253,923
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO LEGG MASON, INC.
COMMON SHAREHOLDERS
Basic
Diluted
See Notes to Consolidated Financial Statements.
$ (2.65)
$ 1.54
$ 1.63
$ (2.65)
$ 1.54
$ 1.63
61
Legg Mason Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
NET INCOME (LOSS)
Other comprehensive income (loss):
Foreign currency translation adjustment
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses), net of tax provision (benefit) of
$(1), $132 and $(22), respectively
Reclassification adjustment for losses included in net income (loss)
Net unrealized gains (losses) on investment securities
Total other comprehensive income (loss)
COMPREHENSIVE INCOME (LOSS)
Less: Comprehensive income (loss) attributable to noncontrolling interests
Years Ended March 31,
2013
2012
2011
$(359,748)
$231,031
$245,763
(23,945)
(22,098)
35,159
(1)
13
12
198
11
209
(33)
8
(25)
(23,933)
(383,681)
(6,421)
(21,889)
209,142
10,214
35,134
280,897
(8,160)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
$(377,260)
$198,928
$289,057
See Notes to Consolidated Financial Statements.
62
Legg Mason 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
Employee tax withholdings by net share transactions
Shares repurchased and retired
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
Exchangeable shares
Equity Units exchanged
Employee tax withholdings by net share transactions
Shares repurchased and retired
Allocation from 2.5% Convertible Senior Notes repurchase, net of tax
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 FOR CONSOLIDATED INVESTMENT VEHICLE
Beginning balance
Cumulative effect of change in accounting principle
Net income (loss) reclassified to appropriated retained earnings
Ending balance
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Beginning balance
Net unrealized holding gains (losses) on investment securities
Foreign currency translation adjustment
Ending balance
Years Ended March 31,
2013
2012
2011
$ 13,987
8
8
192
—
—
(41)
(1,620)
12,534
$ 15,022
17
7
124
—
183
(6)
(1,360)
13,987
$ 16,144
64
7
152
110
—
—
(1,455)
15,022
—
—
—
—
—
—
2,760
(2,760)
—
3,864,216
5,198
1,803
44,246
—
—
(11,303)
(423,855)
(31,115)
3,449,190
(32,419)
(1,811)
1,607
(32,623)
32,419
1,811
(1,607)
32,623
4,111,095
16,508
2,020
32,193
—
102,831
(1,525)
(398,906)
—
3,864,216
(34,466)
(2,027)
4,074
(32,419)
34,466
2,027
(4,074)
32,419
4,447,612
31,674
2,673
34,619
2,650
35,877
—
(444,010)
—
4,111,095
(33,095)
(2,136)
765
(34,466)
33,095
2,136
(765)
34,466
1,715,395
(353,327)
(57,809)
1,304,259
1,539,984
220,817
(45,406)
1,715,395
1,316,981
253,923
(30,920)
1,539,984
12,221
—
(7,392)
4,829
71,472
12
(23,945)
47,539
10,922
—
1,299
12,221
93,361
209
(22,098)
71,472
—
24,666
(13,744)
10,922
58,227
(25)
35,159
93,361
TOTAL STOCKHOLDERS’ EqUITy
$4,818,351
$5,677,291
$5,770,384
See Notes to Consolidated Financial Statements.
63
Legg Mason Consolidated Statements of Cash Flows
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)
2.5% Convertible Senior Notes:
Allocation of repurchase payment
Loss on extinguishment
Adjustments to reconcile Net Income (Loss) to net cash provided by operations:
Impairment of intangible assets
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 on investments
Net losses (gains) of consolidated investment vehicles
Deferred income taxes
Other
Decrease (increase) in assets:
Investment advisory and related fees receivable
Net sales (purchases) of trading and other current investments
Other receivables
Other assets
Other assets of consolidated investment vehicles
Increase (decrease) in liabilities:
Accrued compensation
Deferred compensation
Accounts payable and accrued expenses
Other liabilities
Other liabilities of consolidated investment vehicles
CASH PROVIDED By OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for fixed assets
Business acquisition, net of cash acquired
Proceeds from sale of assets
Change in restricted cash
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
Years Ended March 31,
2013
2012
2011
$ (359,748)
$ 231,031
$ 245,763
(216,038)
68,975
734,000
87,848
5,839
3,295
58,983
(43,684)
5,358
(157,355)
1,725
(11,045)
189,347
(9,712)
(1,605)
(14,378)
(54,964)
(530)
8,690
3,112
5,219
—
—
—
93,795
39,077
4,552
48,735
(1,714)
(6,711)
49,192
(12,191)
31,790
(40,020)
1,432
1,810
53,720
42,763
(35,148)
(11,147)
28,135
(22,332)
—
—
—
102,748
36,688
4,539
56,245
(58,851)
3,959
80,272
5,393
(13,794)
(55,540)
1,962
(20,923)
25,880
75,970
(44,825)
(251)
(49,954)
16,859
303,332
496,769
412,140
(38,351)
(55,277)
—
(7,245)
(5,787)
5,272
(98,374)
188,739
(31,822)
(32,904)
—
3,060
11,221
(6,493)
6,197
—
—
—
(8,430)
9,077
(141,727)
(173,261)
161,894
161,047
CASH PROVIDED By (USED IN) INVESTING ACTIVITIES
$ (11,023)
$ 2,330
$ (44,471)
64
Legg Mason Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
Repayment of 2.5% Convertible Senior Notes, net of operating allocation
(1,040,212)
(1,014)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of short-term borrowings
Third-party distribution financing, net
Repayment of long-term debt
Repayment of long-term debt of consolidated investment vehicles
Proceeds from issuance of long-term debt
Debt issuance costs
Issuance of common stock
Repurchase of common stock, including net shares
Dividends paid
Net repayments of consolidated investment vehicles
Net (redemptions/distributions paid to)/subscriptions received from
noncontrolling interest holders
CASH USED IN FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATES 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
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Years Ended March 31,
2013
2012
2011
$ (250,000)
$ — $ —
—
—
(1,639)
(3,515)
—
—
—
—
—
—
—
—
(9,006)
(75,561)
1,143,246
(10,289)
1,986
4,538
14,440
(436,818)
(401,797)
(445,465)
(55,250)
—
(43,602)
(18,309)
(26,813)
(7,025)
(3,993)
(21,596)
1,551
(735,897)
(481,780)
(468,466)
(5,639)
(10,974)
(449,227)
6,345
10,827
(89,970)
1,382,263
1,375,918
1,465,888
$ 933,036
$1,382,263
$1,375,918
Income taxes, net of refunds of $(2,313), $(12,034), and $(12,090), respectively
$ 32,318
$ 24,552
$ 39,524
Interest
See Notes to Consolidated Financial Statements.
40,262
41,039
46,620
65
Legg Mason 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 (collec-
tively, “Legg Mason”) are principally engaged in providing
asset management and related financial services to indi-
viduals, 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 17 for a further discussion of VIEs.
All material intercompany balances and transactions have
been eliminated.
Where appropriate, prior years financial statement
amounts reflect reclassifications of certain less significant
items to conform to the current year presentation.
All references to fiscal 2013, 2012 or 2011, 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 and the applicable
rules and regulations of the Securities and Exchange
Commission (the “SEC”), which require management to
make assumptions and estimates that affect the amounts
reported in the financial statements and accompanying
notes, including revenue recognition, valuation of finan-
cial instruments, intangible assets and goodwill, stock-
based compensation, income taxes, and consolidation.
Management believes that the estimates used are reason-
able, although actual amounts could differ from the esti-
mates and the differences could have a material impact on
the consolidated financial statements.
Consolidation
Legg Mason applies 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 guidance for determining who should
consolidate a VIE, when it is necessary to reassess who
should consolidate a VIE, and for the assessment of which
entities are VIEs. However, certain investment funds,
including money market funds, qualify for a deferral of the
application of SFAS No. 167 and 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 interpretation of ARB No. 51”) (“FIN 46(R)”).
In the normal course of its business, Legg Mason spon-
sors and is the manager of various types of investment
vehicles. Certain of these investment vehicles are consid-
ered to be VIEs while others are considered to be voting
rights entities (“VREs”) subject to traditional consolidation
concepts based on ownership rights. For its services,
Legg Mason is entitled to receive management fees and
may be eligible, under certain circumstances, to receive
additional subordinate 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
entities 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, 2013 and
2012. Legg Mason has not issued any investment perfor-
mance guarantees to these VIEs, VREs or their investors.
Investment vehicles that are considered VREs are consoli-
dated if Legg Mason has a controlling financial interest in
the investment vehicle, absent substantive investor rights
to replace the manager of the entity (kick-out rights).
Financial Accounting Standards Board Interpretation
No. 46(R) (Accounting Standards Update 2010-10,
“Amendments to Statement 167 for Certain
Investment Funds”)
For most sponsored investment funds, including money
market funds, which qualify for the deferral of the revised
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 determina-
tion of expected residual returns excludes gross fees paid
to a decision maker. It is unlikely that 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 interest 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 vari-
able interest. In determining whether it is the primary
beneficiary 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, guaran-
tees and implied relationships. In determining the primary
beneficiary, Legg Mason must make assumptions and
66
Legg Mason estimates about, among other things, the future perfor-
mance 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 fac-
tors used for determination of the primary beneficiary.
be used by Legg Mason, nor is Legg Mason obligated
for the debt. The consolidation of the CLO had no impact
on Net Income Attributable to Legg Mason, Inc.’s com-
mon shareholders. See Note 17 for additional information
related to the application of the amended VIE consolida-
tion model and the required disclosures.
Statement of Financial Accounting Standards
No. 167 (Accounting Standards Codification
Topic 810, “Consolidation”)
Legg Mason sponsors and is the manager for collateral-
ized debt obligation entities (“CDOs”) and collateralized
loan obligations (“CLOs”) that do not qualify for the defer-
ral, and are assessed under the revised accounting guid-
ance, as follows. Legg Mason determines whether it has
a variable interest in a VIE by considering 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 cur-
rent and expected economic performance of the entity, as
well as other provisions included in the governing docu-
ments that might restrict or guarantee an expected loss
or residual 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 signifi-
cant 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 provid-
ing management services; if Legg Mason holds equity or
debt interests in the investment vehicle; if Legg Mason
has transferred any assets to the investment vehicle; if the
potential aggregate fees in future periods are insignificant
relative to the potential cash flows of the investment vehi-
cle; and if the variability of the expected fees in relation to
the potential cash flows of the investment vehicle is more
than insignificant.
Under both the revised accounting guidance and prior
guidance, Legg Mason must consolidate VIEs for which it
is deemed to be the primary beneficiary. As of March 31,
2013 and 2012, Legg Mason’s Consolidated Balance
Sheets reflect $224,193 and $291,853, respectively, in
assets, and $207,835 and $271,707, respectively, in debt
issued by a CLO, despite the fact that the assets cannot
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original
maturities of 90 days or less.
Restricted Cash
Restricted cash primarily represents long-term escrow
deposits and 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 approxi-
mate 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 VIE, but can exert significant influence
over the financial and operating 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 an investee requires significant judgment
based on the facts and circumstances surrounding each
individual investment. Factors considered in these evalu-
ations may include investor voting or other rights, any
influence Legg Mason may have on the governing board
of the investee, the legal rights of other investors 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
represents 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 has offset-
ting compensation expense adjustments under revenue
sharing agreements and deferred compensation arrange-
ments, therefore, fluctuations in the market value of these
investments will not have a material impact on Net Income
(Loss) Attributable to Legg Mason, Inc.
67
Legg Mason Legg Mason also holds debt and marketable equity invest-
ments 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 stock-
holders’ equity, noncontrolling interests, and comprehen-
sive income (loss), 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 consolidated investment vehicles
(“CIVs”), are classified as trading securities. These invest-
ments 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 price quotations, when avail-
able. Fixed income securities may also be valued using val-
uation models and estimates based on spreads to actively
traded benchmark debt instruments with readily available
market prices.
Legg Mason evaluates its non-trading investment securi-
ties 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 deter-
mined to exist, the amount of impairment that relates to
credit losses is recognized as a charge to income. As of
March 31, 2013, 2012 and 2011, 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 readily avail-
able, including certain investments held by CIVs, manage-
ment estimates 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.
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 borrow-
ings. The fair values of Long-term debt at March 31, 2013
and 2012, aggregated $1,206,166 and $1,214,245, respec-
tively. The carrying value of the five-year term loan approx-
imates fair value because the debt is a credit facility with
a variable interest rate based on a short-term rate. These
fair values were estimated using publicly quoted market
prices or discounted cash flow analyses, as appropriate,
and were classified as Level 2 in the fair value hierarchy as
described below.
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 forwards and
interest rate swaps to hedge the risk of movement in
exchange rates or interest rates on financial assets on a
limited basis. Also, Legg Mason has used futures con-
tracts on index funds to hedge the market risk of certain
seed capital investments. In addition, certain CIVs use
derivative instruments. However, 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.
Legg Mason has not designated any financial instru-
ments for hedge accounting, as defined in the account-
ing literature, during the periods presented. The gains or
losses on derivative instruments not designated for hedge
accounting are included as Other income (expense) or
Other non-operating income (expense) in the Consolidated
Statements of Income (Loss), with the exception of gains
and losses on derivative instruments of CIVs, which are
recorded as Other non-operating income (expense) of
consolidated investment vehicles, net, in the Consolidated
Statements of Income (Loss).
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 liabil-
ity in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. Under accounting
guidance, 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 technique, the
effect of a restriction on the sale or use of an asset, and
the risk of non-performance.
The objective of fair value accounting measurements is to
reflect, at the date of the financial statements, how much
an asset would be sold for in an orderly transaction (as
opposed to a distressed or forced transaction) under current
market conditions. Specifically, it requires the use of judg-
ment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have
become inactive. This accounting guidance also relates to
68
Legg Mason other-than-temporary impairments and is intended to bring
greater consistency to the timing of impairment recogni-
tion. 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 guid-
ance also requires timely disclosures regarding expected
cash flows, credit losses, and an aging of securities with
unrealized losses.
Fair value accounting guidance also establishes a hier-
archy 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 are measured and
reported at fair value and 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 mar-
kets; prices are quoted for identical or similar assets
in inactive markets; or prices are based on observ-
able 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
derivative 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 cat-
egory includes investments in partnerships, limited
liability companies, private equity funds and CLO debt
of a CIV. This category may also include certain propri-
etary fund products with redemption restrictions.
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 in which a fair value measurement falls in its
entirety 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 administrator. These funds are typically
invested in exchange traded investments with observ-
able 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 deter-
minations 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 readily available, including
certain investments held by CIVs, management must esti-
mate the value of the securities using a variety of meth-
ods and resources, including the most current available
financial information for the investment and the industry
to which it applies in order to determine fair value. These
valuation processes for illiquid and privately-held securities
inherently require management’s judgment and are there-
fore classified in Level 3.
The fair values of CLO loans and bonds are determined
based on prices from well-recognized third-party pricing
services that utilize available market data and are there-
fore classified as Level 2. Legg Mason has established
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 deter-
mine the expected cash flows include assumptions about
forecasted default and recovery rates that a market partici-
pant would use in determining the fair value of the CLO’s
underlying collateral assets. Given the significance of the
unobservable 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 settlement price at
the end of each day on the exchange upon which they are
traded and are classified as Level 1.
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 val-
ues 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 corporate loans
and debt, of a CLO it is consolidating (see Note 17).
69
Legg Mason Management believes that the use of the fair value option
eliminates certain timing differences 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 instru-
ment basis, must be applied to an entire instrument, and
is irrevocable 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 invest-
ment 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 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 for consolidated investment vehicle on
the Consolidated Balance Sheets equal to the difference
between the fair values 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. Changes in the fair
values of the CLO assets and liabilities are recorded as
Net income (loss) attributable to noncontrolling interests
in the Consolidated Statements of Income (Loss) and
Appropriated retained earnings for consolidated invest-
ment vehicle in the Consolidated Balance Sheets.
Fixed Assets
Fixed assets primarily consist of equipment, software
and leasehold improvements. Equipment consists pri-
marily 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 accumulated depreciation and
amortization. Depreciation and amortization are deter-
mined by use of the straight-line method. Equipment is
depreciated over the estimated 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 improve-
ments 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 useful
life, or if an impairment in value may exist. If impairment
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
Legg Mason’s intangible assets consist principally of
asset management contracts, contracts to manage propri-
etary 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 manage-
ment contracts are amortizable intangible assets that are
capitalized at acquisition and amortized 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 gener-
ate 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 amor-
tized for book purposes. Given the relative significance
of intangible assets and goodwill to the Company’s con-
solidated financial statements, on a quarterly 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, including changes in economic arrangements with
our affiliates that will impact future operating results. If
a triggering event has occurred, the Company will per-
form tests, which include critical reviews of all significant
assumptions, to determine if any intangible assets or
goodwill are impaired. At a minimum, the Company per-
forms these tests annually 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 recognized as an expense in the period in which
the impairment is determined. The fair values of intan-
gible assets subject to amortization are reviewed at each
reporting period using an undiscounted cash flow analy-
sis. For intangible assets with indefinite lives, fair value is
determined from a market participant’s perspective based
on projected discounted cash flows, which take into con-
sideration estimates of future fees, profit margins, growth
rates, taxes, and discount rates. Goodwill is evaluated at
70
Legg Mason the reporting unit level, and is considered for impairment
when the carrying value of the reporting unit exceeds the
implied fair value of the reporting unit. In estimating the
fair value of the reporting unit, Legg Mason uses valua-
tion techniques principally based on discounted projected
cash flows and EBITDA multiples, similar to techniques
employed in analyzing the purchase price of an acquisition.
Goodwill is deemed to be recoverable at the reporting
unit level, which is also the operating segment level that
Legg Mason defines as the Global Asset Management
segment. This results from the fact that the chief operat-
ing decision maker, Legg Mason’s Chief Executive Officer,
regularly receives discrete financial information at the
consolidated Global Asset Management business level
and does not regularly receive discrete financial informa-
tion, such as operating results, at any lower level, such
as the asset management affiliate level. Prior to fiscal
2012, Legg Mason’s reporting units were its Americas and
International divisions. Allocations of goodwill for manage-
ment restructures, acquisitions and dispositions are based
on relative fair values of the respective businesses restruc-
tured, added to or sold from the divisions.
See Note 5 for additional information regarding intangible
assets and goodwill and Note 16 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 trans-
lated 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 stock-
holders’ equity and comprehensive income (loss). Gains
or losses resulting from foreign currency transactions are
included in Net Income (Loss).
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 (current) 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
on a relative or absolute basis, depending on the prod-
uct, and are recognized at the end of the performance
measurement period. Accordingly, neither advanced bill-
ings nor performance fees are subject to reversal. The
largest portion of performance fees are earned based on
12-month performance periods that end in differing quar-
ters during the year, with a portion also based on quarterly
performance periods. Of Legg Mason’s total AUM at
each period ended as of March 31, 2013, 2012 and 2011,
approximately 6% was in accounts that were eligible to
earn performance fees.
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 market-
ing 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 shareholder servicing, including record
keeping or administrative services to proprietary funds.
Distribution fees earned on company-sponsored invest-
ment 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, distribu-
tion and servicing expense is accrued for the amounts
owed to third parties, including finders’ fees and refer-
ral fees paid to unaffiliated broker-dealers or introducing
parties. Distribution and servicing expense also includes
payments to third parties for certain shareholder adminis-
trative services and sub-advisory fees paid to unaffiliated
asset managers.
Deferred Sales Commissions
Commissions paid to financial intermediaries in connection
with sales of certain classes of company-sponsored mutual
funds are capitalized as deferred sales commissions. The
asset is amortized over periods not exceeding six years,
which represent the periods during which commissions
are generally recovered from distribution and service fee
revenues and from contingent deferred sales charges
(“CDSC”) received from shareholders of those funds upon
redemption of their shares. CDSC receipts are recorded
as distribution and service fee revenue when received and
a reduction of the unamortized balance of deferred sales
commissions, with a corresponding expense.
Management periodically tests the deferred sales com-
mission asset for impairment by reviewing the changes in
value of the related shares, the relevant market conditions
71
Legg Mason and other events and circumstances that may indicate an
impairment in value has occurred. If these factors indicate
an impairment in value, management compares the car-
rying 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, 2013,
2012 and 2011, no impairment charges were recorded.
Deferred sales commissions, included in Other non-current
assets in the Consolidated Balance Sheets, were $8,259
and $9,510 at March 31, 2013 and 2012, respectively.
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 state-
ments. Deferred income tax assets are subject to a valu-
ation allowance if, in management’s opinion, it is more
likely than not that these benefits will not be realized.
Legg Mason’s deferred income taxes principally relate to
net operating loss and other carryforward benefits, busi-
ness combinations, amortization of intangible assets and
accrued 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 technical mer-
its. 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 pen-
alties, if any, as other operating expense.
See Note 7 for additional information regarding income taxes.
Loss Contingencies
Legg Mason accrues estimates for loss contingencies
related to legal actions, investigations, and proceedings,
exclusive of legal fees, when it is probable that a liability
has been incurred and the amount of loss can be reason-
ably 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 com-
mon stock and deferred compensation payable in stock.
Under its stock compensation plans, Legg Mason issues
equity awards to directors, officers, and other key employees.
In accordance with the applicable accounting guidance,
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 performance grants, which
would be valued with a Monte Carlo option-pricing model.
See Note 11 for additional information regarding stock-
based compensation.
Earnings Per Share
Basic earnings per share attributable to Legg Mason, Inc.
common shareholders (“EPS”) is calculated by dividing
Net Income (Loss) Attributable to Legg Mason, Inc. by
the weighted-average number of shares outstanding. The
calculation of weighted-average shares includes common
shares, shares exchangeable into common stock and
certain unvested share-based payment awards that are
considered participating securities because they contain
nonforfeitable rights to dividends. 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 12 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 15. The streamlining initiative was completed as
of March 31, 2012. The costs associated with this initia-
tive primarily related to employee termination benefits,
incentives to retain employees during the transition
period, charges for consolidating leased office space, and
contract termination costs. Termination benefits, includ-
ing severance and retention incentives, were recorded
as Transition-related compensation in the Consolidated
Statements of Income (Loss). These compensation
items required employees to provide future service and
were therefore expensed ratably over the required ser-
vice period. Contract termination and other costs were
expensed when incurred.
Capital Plan
In May 2012, Legg Mason implemented a capital plan
for the refinancing/restructuring of debt, the completion
of the existing share repurchase authorization, and the
authorization of further share repurchases. As a result,
Net Income (Loss) Attributable to Legg Mason, Inc. for
the year ended March 31, 2013, includes a pre-tax loss
on debt extinguishment of $68,975 and a net reduction
72
Legg Mason in outstanding debt obligations of $350,000. See Notes 6
and 12 for further details.
employees that will entitle them to participate in 15% of
the future growth in value of the Permal business.
Other Developments
On December 12, 2012, the Company modified its employ-
ment and other arrangements with the management of its
investment management affiliate The Permal Group, Ltd
(“Permal”). These modifications included the Company
investing in the Permal business in part by sharing certain
compensation and other costs that result in lower margins
from the business at current revenue levels in exchange for
higher margins at significantly increased revenue levels. In
addition, the Company and Permal are engaged in imple-
menting a profits interest management equity plan for key
Noncontrolling Interests
Noncontrolling interests related to CIVs are classified as
redeemable noncontrolling interests if investors in these
funds may request withdrawals at any time. There are no
nonredeemable noncontrolling interests as of March 31,
2013, 2012 and 2011. As noted above, Net income (loss)
attributable to noncontrolling interests in the Consolidated
Statements of Income (Loss) also includes Net income
(loss) reclassified to appropriated retained earnings for
consolidated investment vehicle in the Consolidated
Balance Sheets.
Net income (loss) attributable to noncontrolling interests for the years ended March 31, 2013, 2012 and 2011, included the
following amounts:
Net income attributable to redeemable noncontrolling interests
Net Income (loss) reclassified to appropriated retained earnings
for consolidated investment vehicle
Total
2013
$ 971
(7,392)
$(6,421)
2012
$ 8,915
1,299
$10,214
2011
$ 5,584
(13,744)
$ (8,160)
Redeemable noncontrolling interests as of and for the years ended March 31, 2013, 2012 and 2011, included the follow-
ing amounts:
Balance, beginning of period
Net income attributable to redeemable noncontrolling interests
Net (redemptions/distributions paid to)/subscriptions received
from noncontrolling interest holders
Balance, end of period
2013
$24,031
971
(3,993)
$21,009
2012
$ 36,712
8,915
(21,596)
$ 24,031
2011
$29,577
5,584
1,551
$36,712
Recent Accounting Developments
In December 2011, the Financial Accounting Standards
Board (“FASB”) updated the guidance on disclosures
for offsetting assets and liabilities to require both gross
and net information about instruments and transactions,
including derivatives, repurchase and reverse repurchase
and other arrangements that are eligible for offset in
the balance sheet. The disclosures will be effective
for Legg Mason in fiscal 2014, and are not expected to
have a material impact on Legg Mason’s consolidated
financial statements.
In July 2012, the FASB updated the guidance on the
annual indefinite-lived intangible asset tests for impair-
ment. The update permits companies to assess qualitative
factors to determine if it is more likely than not that the
fair value of the intangible asset is less than its carrying
amount as a basis for determining whether it is necessary
to perform the currently required quantitative fair value
assessment. This update will be effective for Legg Mason
in fiscal 2014. This update is not expected to have a mate-
rial effect on Legg Mason’s recorded indefinite-lived
assets, and Legg Mason is still evaluating its adoption.
In January 2013, the FASB updated the guidance on a
parent’s accounting for a cumulative translation adjust-
ment upon the sale, transfer, or liquidation of a foreign
subsidiary entity. The update states that a cumulative
translation adjustment should be released into earnings
only if an entity ceases to have a controlling financial
interest in a foreign subsidiary or a group of assets within
a foreign subsidiary, and the sale or transfer results in
the complete or substantially complete liquidation of
the foreign entity. This update will be effective for Legg
Mason in fiscal 2014. This update is not expected to have
a material effect on Legg Mason’s cumulative translation
adjustment and Legg Mason is still evaluating the impact
of its adoption.
73
Legg Mason 2. ACqUISITIONS
On March 13, 2013, Permal, a wholly-owned subsidiary of
Legg Mason, completed the acquisition of all of the out-
standing share capital of Fauchier Partners Management,
Limited (“Fauchier”), a leading European based manager
of funds-of-hedge funds, from BNP Paribas Investment
Partners, S.A. in accordance with a Sale and Purchase
Agreement (“SPA”) entered into in December 2012. This
transaction significantly expands Permal’s institutional
business, creating a global institutional capability across
geographies and client profiles. At the time of acquisition
Fauchier managed assets of approximately $5,400,000.
The initial purchase price was a cash payment of $63,433,
which was funded from existing cash resources. In addition,
contingent consideration of up to approximately $23,000
and approximately $30,000, using exchange rates as of
March 31, 2013, may be due on the second and fourth anni-
versaries of closing, respectively, dependent on achieving
certain financial targets and subject to a catch up adjust-
ment. The contingent consideration liability established
at closing had an acquisition date fair value of $21,566,
which represents the present value of the contingent con-
sideration expected to be paid and is included in Other
liabilities in the Consolidated Balance Sheet. Any changes
in estimates for the fair value of the contingent consider-
ation will be recorded as Other non-operating income (loss)
in the Consolidated Statements of Income (Loss).
A summary of the fair values of the assets acquired and
liabilities assumed are as follows:
Cash(1)
Receivables(1)
Amortizable asset management contracts
Indefinite-life fund management contracts
Goodwill(1)
Other current liabilities, net(1)
Contingent consideration
Deferred tax liability
Total net assets acquired
$ 8,156
12,174
2,865
65,126
28,983
(16,667)
(21,566)
(15,638)
$ 63,433
(1) Subject to adjustment for amounts ultimately realized, as provided for in
the SPA.
The fair value of the amortizable asset management con-
tracts are being amortized over a period of 6 years. None
of the acquired intangible assets or goodwill are deductible
for local tax purposes.
Management estimated the fair values of the indefinite-life fund management contracts based upon discounted cash flow
analyses and the contingent consideration expected to be paid based upon revenue projections, using unobservable mar-
ket data inputs, which are Level 3 measurements. As is typical with the acquisition of a portion of a business from a larger
financial services firm with other related operations, Legg Mason expects some initial contraction in the acquired business.
The significant assumptions used in these analyses included projected cash flows, revenues and discount rates, summa-
rized as follows:
Indefinite-life fund management contracts
(35)% to 11% (weighted-average - 6%)
Projected Cash Flow Growth Rates
Contingent consideration
Projected Revenue Growth Rates
(23)% to 3% (weighted-average - (6)%)
Discount Rate
16.0%
Discount Rate
2.0%
The Company has not presented pro forma combined
results of operations for this acquisition because the
results of operations as reported in the accompanying
Consolidated Statements of Income would not have been
materially different. The post-acquisition financial results of
Fauchier included in Legg Mason’s consolidated financial
results for the year ended March 31, 2013 were not sig-
nificant. Legg Mason incurred acquisition costs of $1,380,
which is included in Other operating expenses in the
Consolidated Statement of Income (Loss).
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 17,
Variable Interest Entities and Consolidation of Investment
Vehicles, for information related to the assets and liabilities
of CIVs that are measured at fair value.
74
Legg Mason Legg Mason has investments in debt and equity securi-
ties that are generally classified as trading as described in
Note 1. Investments as of March 31, 2013 and 2012, are
as follows:
securities and equity securities. Gross unrealized gains
and (losses) for investments classified as available-for-sale
were $230 and $(188), respectively, as of March 31, 2013,
and $551 and $(184), respectively, as of March 31, 2012.
Investment securities:
Current investments
Available-for-sale
Other(1)
Total
2013
2012
$371,080
12,400
99
$383,579
$412,119
11,913
112
$424,144
(1) Includes investments in private equity securities that do not have readily
determinable fair values.
The net unrealized and realized gain (loss) for investment
securities classified as trading was $18,260, $(6,063) and
$28,355 for fiscal 2013, 2012 and 2011, respectively.
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:
Available-for-sale:
Proceeds
Gross realized gains
Years Ended March 31,
2013
2012
2011
$5,272
22
$6,197
6
$4,012
7
Gross realized losses
(43)
(25)
(19)
Legg Mason’s available-for-sale investments consist of
mortgage backed securities, U.S. government and agency
Legg Mason had no investments classified as held-to-
maturity as of March 31, 2013 and 2012.
The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:
quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Value as of
March 31,
2013
ASSETS:
Cash equivalents(1):
Money market funds
Time deposits and other
Total cash equivalents
Current investments:
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)(5)
Total current investments
Available-for-sale investment securities(6)
Investments in partnerships, LLCs and other(6)
Equity method investments in partnerships and LLCs(4)(6)
Derivative assets:
Currency and market hedges
Other investments(6)
LIABILITIES:
Derivative liabilities:
$485,776
$ —
$ —
$ 485,776
—
485,776
177,471
177,471
86,583
158,846
12,600
258,029
2,034
761
1,518
1,939
—
—
69,064
43,741
112,805
10,354
2,620
924
—
—
—
—
—
246
—
246
12
27,762
66,338
—
99
177,471
663,247
86,583
228,156
56,341
371,080
12,400
31,143
68,780
1,939
99
$750,057
$304,174
$94,457
$1,148,688
Currency and market hedges
$ (781)
$ —
$ —
$ (781)
75
Legg Mason Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Value as of
March 31,
2012
ASSETS:
Cash equivalents(1):
Money market funds
Time deposits
Total cash equivalents
Current investments:
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)(5)
Total current investments
Available-for-sale investment securities(6)
Investments in partnerships, LLCs and other(6)
Equity method investments in partnerships and LLCs(4)(6)
Derivative assets:
Currency and market hedges
Other investments(6)
LIABILITIES:
Derivative liabilities:
$ 893,738
$ —
$ —
$ 893,738
—
893,738
111,257
143,002
88,289
88,289
—
79,583
11,565
54,934
265,824
134,517
2,091
851
1,415
84
—
9,810
5,351
1,348
—
—
—
—
—
—
11,778
11,778
12
28,763
166,438
—
112
88,289
982,027
111,257
222,585
78,277
412,119
11,913
34,965
169,201
84
112
$1,164,003
$239,315
$207,103
$1,610,421
Currency and market hedges
$ (886)
$ —
$ —
$ (886)
(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 and other are measured at amortized cost, which approximates fair value
because of the short time between the purchase of the instrument 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 primarily offset by an adjustment to compensation
expense and related deferred compensation liability.
(3) Trading proprietary fund products and other investments primarily represent mutual funds that are invested approximately 49% and 51% in equity and debt
securities, respectively, as of March 31, 2013, and were invested approximately 52% and 48% in equity and debt securities, respectively, as of March 31, 2012.
(4) Substantially all of Legg Mason’s equity method investments are investment companies which record their underlying investments at fair value. Fair value is
measured using Legg Mason’s share of the investee’s underlying net income or loss, which is predominately representative of fair value adjustments in the
investments held by the equity method investee.
(5) Includes investments under the equity method (which approximates fair value) relating to long-term incentive compensation plans of $43,741 and $54,934
as of March 31, 2013 and March 31, 2012, respectively, and proprietary fund products and other investments of $12,600 and $23,343 as of March 31, 2013
and March 31, 2012, respectively, which are classified as Investment securities on the Consolidated Balance Sheets.
(6) Amounts are included in Other non-current assets on the Consolidated Balance Sheets for each of the periods presented.
Substantially all of the above financial instruments where valuation methods rely on other than observable market inputs
as a significant input utilize the equity method, the cost method, or NAV practical expedient discussed below, such that
measurement uncertainty has little relevance.
76
Legg Mason The changes in financial assets measured at fair value using significant unobservable inputs (Level 3) for the years ended
March 31, 2013 and 2012, are presented in the tables below:
Value as of
March 31,
2012
Purchases
Sales
Redemptions/
Settlements/
Other
Transfers
Realized and
Unrealized
Gains/
(Losses), Net
Value as of
March 31,
2013
ASSETS:
Trading proprietary fund products
and other investments
$ —
$ 246
$ —
$ —
$ —
$ —
$ 246
Equity method investments in
proprietary fund products
Investments in partnerships,
LLCs and other
Equity method investments in
partnerships and LLCs
11,778
28,763
—
—
—
(11,705)
(970)
(1,014)
166,438
2,827
(2,268)
(117,411)
Other investments
124
—
—
—
—
—
—
—
(73)
—
983
27,762
16,752
(13)
66,338
111
$207,103
$3,073
$(3,238)
$(130,130)
$ —
$17,649
$94,457
Value as of
March 31,
2011
Purchases
Sales
Settlements/
Other
Transfers
Realized and
Unrealized
Gains/
(Losses), Net
Value as of
March 31,
2012
ASSETS:
Trading proprietary fund products
and other investments
$ 11,378
$ —
$(11,906)
$ —
$ —
$ 528
$ —
Equity method investments in
proprietary fund products
Investments in partnerships,
LLCs and other
Equity method investments in
partnerships and LLCs
12,167
—
22,167
6,932
—
—
—
(578)
153,931
25,883
(6,387)
(14,168)
Other investments
282
—
—
(159)
—
—
—
—
(389)
11,778
242
28,763
7,179
166,438
1
124
$199,925
$32,815
$(18,293)
$(14,905)
$ —
$7,561
$207,103
Realized and unrealized gains and losses recorded for Level 3 investments are included in Other Non-Operating Income
(Expense) on the Consolidated Statements of Income (Loss). The change in unrealized gains (losses) for Level 3 invest-
ments still held at the reporting date was $(1,229) and $5,495 for the years ended March 31, 2013 and 2012, respectively.
There were no significant transfers between Level 1 and Level 2 during the years ended March 31, 2013 and 2012.
77
Legg Mason As a practical expedient, Legg Mason relies on the NAV of certain investments as their fair value. The NAVs that have
been provided by the investees have been derived from the fair values of the underlying investments as of the respective
reporting dates. The following table summarizes, as of March 31, 2013, the nature of these investments and any related
liquidation restrictions or other factors which may impact the ultimate value realized:
Fair Value Determined Using NAV
As of March 31, 2013
March 31,
2013
$38,811(1)
March 31,
2012
$ 51,251(2)
Unfunded
Commitments
Remaining
Term
n/a
n/a
24,716
25,460
$20,000
n/a
Category of Investment
Investment Strategy
Funds-of-hedge funds
Hedge funds
Global macro, fixed income, long/short
equity, natural resources, systematic,
emerging market, European hedge
Fixed income—developed market, event
driven, fixed income—hedge, relative
value arbitrage, European hedge
Private equity funds
Long/short equity
Fixed income, residential and commercial
mortgage-backed securities
Private fund(4)
Other
Total
Various
2,408
2,450
$89,698(6)
$196,411(6)
$25,235
23,763(3)
—
27,927(3)
89,323
5,235
Up to 7 years
n/a
n/a
n/a
Various(5)
n/a—not applicable
(1) 49% monthly redemption; 51% quarterly redemption, of which 38% is subject to two-year lock-up, which expires in June 2013.
(2) 63% monthly redemption; 37% quarterly redemption, of which 36% is subject to two-year lock-up, which expires in June 2013.
(3) Liquidations are expected over the remaining term.
(4) Legg Mason’s investment was fully redeemed in the quarter ended December 31, 2012 upon liquidation of the fund.
(5) Of this balance, 4% has a remaining term of less than one year and 96% has a remaining term of 20 years.
(6) Comprised of approximately 32% and 68% of Level 2 and Level 3 assets, respectively, as of March 31, 2013 and 13% and 87% of Level 2 and Level 3 assets,
respectively, as of March 31, 2012.
There are no current plans to sell any of these investments held as of March 31, 2013.
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
2013
2012
$ 152,065
$ 155,173
227,739
205,760
222,260
242,566
602,064
603,499
(400,245)
(364,088)
$ 201,819
$ 239,411
Depreciation and amortization expense related to fixed
assets was $73,829, $74,221 and $79,835 for fiscal 2013,
2012 and 2011, respectively, and includes accelerated depre-
ciation and amortization of $21,020 in fiscal 2013, related to
an initiative to reduce space requirements, and $10,256 in
fiscal 2012, related to our business streamlining initiative.
INTANGIBLE ASSETS AND GOODWILL
5.
Goodwill and indefinite-life intangible assets are not amor-
tized, 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.
78
Legg Mason The following table reflects the components of intangible
assets as of:
March 31,
2013
March 31,
2012
Amortizable asset
management contracts
Cost
$ 208,651
$ 206,411
Accumulated amortization
(186,324)
(172,974)
Net
22,327
33,437
Indefinite-life intangible assets
U.S. domestic mutual fund
management contracts
Permal/Fauchier funds-of-hedge
fund management contracts
Other fund management contracts
Trade names
Intangible assets, net
2,106,351
2,502,351
692,133
303,951
52,800
947,000
304,278
69,800
3,155,235
3,823,429
$3,177,562
$3,856,866
As part of Legg Mason’s annual impairment testing pro-
cess, and considering aspects of the modifications to
Permal compensation and other related arrangements
discussed in Note 1, on December 12, 2012, and as
updated through December 31, 2012, the Company con-
cluded that the carrying value of two significant indefinite-
life fund management contract intangible assets and a
trade name asset exceeded their respective fair values,
and the assets were impaired by an aggregate amount
of $734,000. The impairment charges resulted from a
number of trends and factors, including (i) a decrease in
near-term margin projections; (ii) an increase in the rate
used to discount projected future cash flows primarily due
to company specific factors including continued market
and regulatory influences, continued stock price uncer-
tainty and the search for a permanent Chief Executive
Officer, which was ongoing during the impairment test-
ing process; (iii) recent outflows and related reductions in
assets under management; and (iv) a reduction in near-
term projected growth rates. These changes resulted in a
reduction of the projected cash flows and Legg Mason’s
overall assessment of fair value of the assets, such that
the domestic mutual fund management contracts asset,
Permal funds-of-hedge fund management contracts
asset, and Permal trade name declined below their carry-
ing values, and accordingly were impaired by $396,000,
$321,000, and $17,000, respectively.
Management estimated the fair values of these assets
based upon discounted cash flow analyses using
unobservable market data inputs, which are Level 3 mea-
surements. The significant assumptions used in these
cash flow analyses included projected cash flows and dis-
count rates, summarized as follows:
Projected Cash Flow
Growth Rates
Range
Weighted-
Average
Discount
Rates
Domestic mutual funds
contracts asset
3% to 9%
6%
14.5%
Permal funds-of-hedge
funds contracts and
trade name assets
(1)% to 17%
8%
16.0%
Projected cash flow growth rates for these assets are
most dependent on product investment performance,
client AUM flows, and market conditions. Discount rates
are influenced by changes in market conditions, as well as
interest rates and other factors. Decreases in the projected
cash flow growth rates and/or increases in the discount
rates could result in lower fair value measurements and
potential additional impairments that could be material.
There were no impairments to other indefinite-life intan-
gible assets, amortizable management contracts intan-
gible assets, or goodwill, as of December 31, 2012. Legg
Mason also determined that no triggering events occurred
as of March 31, 2013 that would require further impair-
ment testing.
Changes in indefinite-life intangible assets, other than the
impairments noted above and the Fauchier business acqui-
sition further discussed in Note 2, relate to the impact of
foreign currency translation.
As of March 31, 2013, amortizable asset management
contracts are being amortized over a weighted-average
remaining life of 2.8 years.
Estimated amortization expense for each of the next five
fiscal years is as follows:
2014
2015
2016
2017
2018
Thereafter
Total
$12,320
3,405
3,148
2,484
485
485
$22,327
79
Legg Mason The change in the carrying value of goodwill is summarized below:
Balance as of March 31, 2011
Impact of excess tax basis amortization
Other, including changes in foreign exchange rates
Balance as of March 31, 2012
Impact of excess tax basis amortization
Business acquisition (see Note 2)
Other, including changes in foreign exchange rates
Gross Book Value
Accumulated
Impairment
Net Book Value
$2,473,552
$(1,161,900)
$1,311,652
(21,694)
(14,913)
—
—
(21,694)
(14,913)
$2,436,945
$(1,161,900)
$1,275,045
(21,573)
28,983
(13,290)
—
—
—
(21,573)
28,983
(13,290)
Balance as of March 31, 2013
$2,431,065
$(1,161,900)
$1,269,165
Legg Mason also recognizes the tax benefit of the amortization of excess tax basis related to the Citigroup Asset
Management (“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 AND LONG-TERM DEBT
The disclosures below include details of Legg Mason’s debt, excluding the debt of CIVs. See Note 17, 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:
5.5% senior notes
Five-year amortizing term loan
Other term loans
2.5% convertible senior notes
Subtotal
Less: current portion
Total
Current
Accreted Value
$ 644,077
500,000
877
—
1,144,954
50,438
$1,094,516
March 31, 2013
Unamortized
Discount
$5,923
—
—
—
5,923
—
$5,923
Maturity
Amount
$ 650,000
500,000
877
—
1,150,877
50,438
$1,100,439
March 31, 2012
Accreted
Value
$ —
—
9,883
1,127,009
1,136,892
1,278
$1,135,614
In January 2008, Legg Mason sold $1,250,000 of 2.5%
Convertible Senior Notes (the “Notes”) due 2015. In May
2012, Legg Mason announced a capital plan that included
the refinancing of the Notes, as further discussed below. The
refinancing was effected through the issuance of $650,000
of 5.5% senior notes, the net proceeds of which, together
with cash on hand and $250,000 of additional borrowing
under a then existing revolving credit facility, were used to
repurchase the entire $1,250,000 face amount of the Notes.
Also, pursuant to the capital plan, in June 2012, Legg
Mason entered into an unsecured credit agreement which
provides for an undrawn $500,000 revolving credit facility
and a $500,000 term loan, also further discussed below.
The proceeds of the term loan were used to repay the
$500,000 of outstanding borrowings under the previous
revolving credit facility, which was then terminated. As of
March 31, 2012, there was $250,000 outstanding under
the previous revolving credit facility, which had a then
effective interest rate of 2.9%.
The $500,000 revolving credit facility may be increased
by an aggregate amount of up to $250,000, subject to
the approval of the lenders, and expires in June 2017. The
revolving credit facility has an interest rate of LIBOR plus
150 basis points and an annual commitment fee of 20 basis
points. The interest rate may change in the future based
on changes in Legg Mason’s credit ratings. This revolving
credit facility is available to fund working capital needs and
for general corporate purposes. There were no borrowings
outstanding under this facility as of March 31, 2013.
The revolving credit facility and term loan have standard
financial covenants, including a maximum net debt to
EBITDA ratio (as defined in the documents) of 2.5 to 1
and minimum EBITDA to interest ratio (as defined in the
80
Legg Mason documents) of 4.0 to 1. As of March 31, 2013, Legg Mason’s
net debt to EBITDA ratio was 1.4 to 1 and EBITDA to inter-
est expense ratio was 11.6 to 1, and therefore, Legg Mason
has maintained compliance with the applicable covenants.
Five-year Amortizing Term Loan
The $500,000 term loan entered into in conjunction with
the unsecured credit agreement noted above can be repaid
at any time and will be due in four annual installments of
$50,000, beginning in June 2013, with the remainder to be
repaid at maturity in June 2017. The term loan bears interest
at LIBOR plus 150 basis points, which may change in the
future based on changes in Legg Mason’s credit ratings.
The effective interest rate as of March 31, 2013 was 1.7%.
5.5% Senior Notes
The $650,000 5.5% Senior Notes (the “Senior Notes”)
due May 2019, were sold at a discount of $6,754, which
is being amortized to interest expense over the seven-
year term. The Senior Notes are subject to certain
nonfinancial covenants, including provisions relating to
dispositions of certain assets, which could require a per-
centage of any related proceeds to be applied to acceler-
ated repayments. The Senior Notes can be redeemed at
any time prior to their scheduled maturity, in part or in
aggregate, at the greater of the related principal amount
at that time or the sum of the remaining scheduled pay-
ments discounted at the Treasury rate (as defined) plus
0.50%, together with any related accrued and unpaid
interest. In February 2013, the Senior Notes were regis-
tered to trade in public markets, consistent with the terms
of a registration rights agreement signed in connection
with the issuance. In addition, under the terms of the
5.5% senior notes, the interest rate paid on these notes
will increase modestly if Legg Mason’s credit ratings are
reduced below investment grade.
2.5% Convertible Senior Notes and
Related Hedge Transactions
Prior to the repurchase of the Notes in May 2012, as previ-
ously discussed, Legg Mason was accreting the carrying
value of the Notes to the principal amount at maturity
using an 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 interest expense
of $5,839, $39,077 and $36,688 for the years ended
March 31, 2013, 2012 and 2011, respectively. The Notes
were convertible, if certain conditions were 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 per share), or a maximum of 14,205 shares, subject
to adjustment. Unconverted notes would mature at par in
January 2015. Upon conversion of a one thousand dollar
principal amount note, the holder would receive cash in an
amount equal to one thousand dollars or, if less, the con-
version value of the note. If the conversion value exceeded
the principal amount of the Note at conversion, Legg
Mason would 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.
In connection with the sale of the Notes, in January 2008,
Legg Mason entered into convertible note hedge transac-
tions with respect to its common stock (the “Purchased
Call Options”) with financial institution counterparties
(“Hedge Providers”). The Purchased Call Options were
exercisable solely in connection with any conversions of
the Notes in the event that the market value per share
of Legg Mason common stock at the time of exercise
was greater than the exercise price of the Purchased Call
Options, which was 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 sub-
ject 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 were not part of the terms of the Notes and
did 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.
These transactions effectively increased the conversion
price of the Notes to $107.46 per share of common stock.
Legg Mason had contractual rights, and, at execution of
the related agreements, had the ability to settle its obli-
gations under the conversion feature of the Notes, the
Purchased Call Options and warrants, with Legg Mason
common stock. Accordingly, these transactions were
accounted for as equity, with no subsequent adjustment
for changes in the value of these obligations.
The terms of the repurchase of the Notes in May 2012
noted above included their repayment at par plus accrued
interest, a prepayment fee of $6,250, and a non-cash
exchange of warrants (the “Warrants”) to the holders
of the Notes that replicated and extended the contin-
gent conversion feature of the Notes. The cash payment
of $1,256,250 to repurchase the Notes was allocated
between their liability and equity components based on a
liability fair value of $1,193,971, determined using a then
current market interest rate of 4.1%, resulting in a loss
on debt extinguishment of $68,975, including $7,851 of
accelerated deferred issue costs. The remaining balance of
the cash payment was allocated to the equity component
of the Notes for a $62,279 reduction of additional paid-in
81
Legg Mason In connection with the extinguishment of the Notes, the
hedge transactions (Purchased Call Options and warrants)
executed in connection with the initial issuance of the
Notes were also terminated.
Other Term Loans
In fiscal 2006, a subsidiary of Legg Mason entered into a
$12,803 term loan agreement to finance an aircraft. The
outstanding balance at March 31, 2012 was $8,568 and
was paid in full during fiscal 2013.
As of March 31, 2013, the aggregate maturities of long-
term debt, based on their contractual terms, are as follows:
capital, offset by related tax benefits of $31,446. The
$1,193,971 amount of cash repurchase payment allocated
to the liability component of the Notes upon their extin-
guishment exceeds the initial allocated value at issuance of
$977,933, requiring the Consolidated Statements of Cash
Flows for the year ended March 31, 2013 to include an allo-
cation of the $216,038 excess to operating activities.
The Warrants issued to the holders of the Notes in con-
nection with the repurchase of the Notes provide for the
purchase, in the aggregate and subject to adjustment,
of 14,205 shares of Legg Mason common stock, on a
net share settled basis, at an exercise price of $88 per
share. Upon exercise of the Warrants, Legg Mason will
be required to deliver to the holders of the Warrants, at
its election, either shares of its common stock or cash, in
an amount based on the excess of the market price per
share of its common stock over the exercise price of the
Warrants. The Warrants expire in July 2017. Legg Mason
has had the option to settle its obligations under the
Warrants with Legg Mason common stock. Accordingly,
the Warrants are accounted for as equity.
2014
2015
2016
2017
2018
Thereafter
Total
INCOME TAXES
7.
The components of income (loss) before income tax provision (benefit) are as follows:
Domestic
Foreign
Total
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)
2013
$(264,342)
(246,265)
$(510,607)
2012
$257,866
45,217
$303,083
2013
$ (74,185)
(85,677)
9,003
$(150,859)
$ 6,496
(157,355)
$(150,859)
2012
$54,179
(7,850)
25,723
$72,052
$22,860
49,192
$72,052
82
$ 50,438
50,439
50,000
50,000
300,000
650,000
$1,150,877
2011
$230,334
134,863
$365,197
2011
$ 75,290
18,788
25,356
$119,434
$ 39,162
80,272
$119,434
Legg Mason A reconciliation of the difference between the effective income tax (benefit) rate and the statutory federal income tax
(benefit) rate is as follows:
Tax provision (benefit) at statutory U.S. federal income tax rate
State income taxes, net of federal income tax benefit(1)
Effect of foreign tax rates(1)
Effect of loss on Australian restructuring
Changes in U.K. tax rates on deferred tax assets and liabilities
Net (income) loss attributable to noncontrolling interests
Other, net(1)
Effective income tax (benefit) rate
2013
(35.0)%
2012
35.0%
1.5
3.8
—
(3.5)
0.5
3.2
5.4
(1.8)
(6.0)
(6.0)
(0.8)
(2.0)
2011
35.0%
4.9
(5.4)
—
(2.5)
0.8
(0.1)
(29.5)%
23.8%
32.7%
(1) State income taxes include changes in valuation allowances, net of the impact on deferred tax assets of changes in state apportionment factors and plan-
ning strategies. The effect of foreign tax rates also includes changes in valuation allowances. Other includes changes in federal valuation allowances. See
schedule below for the change in valuation allowances by jurisdiction.
During the quarter ended September 30, 2010, the U.K. Finance (No. 2) Act 2010 was enacted, which reduced the main
U.K. corporate tax rate from 28% to 27%. In July 2011, The U.K. Finance Act 2011 (the “Act”) was enacted. The Act fur-
ther reduced the main U.K. corporate tax rate from 27% to 26% effective April 1, 2011, and from 26% to 25% effective
April 1, 2012. In July 2012, The U.K. Finance Act 2012 was enacted, further reducing the main U.K. corporate tax rate to
24% effective April 1, 2012 and 23% effective April 1, 2013. The reductions in the U.K. corporate tax rate resulted in tax
benefits of $18,075, $18,268 and $8,878, recognized in fiscal 2013, 2012 and 2011, respectively, as a result of the revalua-
tion of deferred tax assets and liabilities at the new rates. In addition, during the year ended March 31, 2012, Legg Mason
recorded $18,254 of tax benefits related to a restructuring of our Australian business.
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
Mutual fund launch costs
Net unrealized losses from investments
Other
Deferred tax assets
Valuation allowance
Deferred tax assets after valuation allowance
2013
2012
$ 107,411
$ 125,797
73,181
449,806
41,256
—
115,819
21,165
24,324
4,447
5,086
62,410
397,013
46,244
4,951
59,871
17,602
14,476
5,327
18,119
842,495
(115,815)
751,810
(102,722)
$ 726,680
$ 649,088
83
Legg Mason DEFERRED TAX LIABILITIES
Basis differences, principally for intangible assets and goodwill
Depreciation and amortization
Other
Deferred tax liabilities
Net deferred tax asset
2013
2012
$134,873
386,959
1,528
523,360
$203,320
$196,611
431,280
3,667
631,558
$ 17,530
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 fiscal 2013, 2012 or 2011, due to the net operat-
ing loss position of the Company. As of March 31, 2013,
an additional $6,700 of net operating loss will be recog-
nized as an increase in Stockholders’ Equity when ulti-
mately realized.
In connection with the completion and filing of its fiscal
2010 federal tax return in December 2010, Legg Mason
recorded a net additional tax benefit of approximately
$36,000 in fiscal 2011 with respect to the Equity Unit
extinguishment that occurred in fiscal 2010. The tax
benefit increased Additional paid-in capital in a manner
consistent with the fiscal 2010 allocation of the extin-
guishment payment.
Legg Mason has various loss carryforwards that may pro-
vide future tax benefits. Related valuation allowances are
established in accordance with accounting guidance for
income taxes, if it is management’s opinion 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 U.K. taxing jurisdictions. As of March 31, 2013,
U.S. federal deferred tax assets aggregated $770,933,
realization of which is expected to require approximately
$4,200,000 of future U.S. earnings, approximately
$331,606 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 the utilization of $36,319 of foreign tax
credits as credits will not be realized and an additional valu-
ation allowance of $17,066 was provided in fiscal 2013.
In addition, a valuation allowance was established in prior
years for the substantial portion of our deferred tax assets
relating to U.K. taxing jurisdictions. While tax planning may
enhance Legg Mason’s tax positions, the realization of
these current tax benefits is not dependent on any signifi-
cant tax strategies.
As of March 31, 2013, U.S. state deferred tax assets
aggregated approximately $172,704. Due to state tax plan-
ning which will allow for the utilization of NOLs generated
in certain jurisdictions the Company recognized a net valu-
ation allowance release of $2,046. Due to the uncertainty
of future state apportionment factors and future effective
state tax rates, the value of state net operating loss ben-
efits ultimately realized may vary.
A net valuation allowance release of approximately $3,500
in fiscal 2013 was primarily related to the full release of
the valuation allowance on deferred tax assets related
to Australia and Singapore offset by an establishment of
a valuation allowance against certain U.K. deferred tax
assets. 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 juris-
diction of reversals, as well as, future increases relating
to the tax amortization of goodwill and indefinite-life
intangible assets.
84
Legg Mason The following deferred tax assets and valuation allowances relating to carryforwards have been recorded at March 31,
2013 and 2012, respectively.
Deferred tax assets
U.S. federal net operating losses
U.S. federal capital losses
U.S. federal foreign tax credits
U.S. charitable contributions
U.S. state net operating losses(1)(2)
U.S. state capital losses
Non-U.S. net operating losses
Non-U.S. capital losses
Total deferred tax assets for carryforwards
Valuation allowances
U.S. federal capital losses
U.S. federal foreign tax credits
U.S. charitable contributions
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
Expires
Beginning after
Fiscal Year
2029
2015
2015
2013
2015
2015
2027
n/a
2013
2012
$266,659
$219,984
74
115,819
5,401
161,136
34,960
22,011
6,222
74
59,871
4,709
151,762
39,046
26,704
7,124
$612,282
$509,274
$ 74
$ 74
23,608
1,597
25,951
34,960
15,899
6,222
108,311
7,504
6,542
—
23,911
39,046
22,956
7,124
99,653
3,069
$115,815
$102,722
(1) Substantially all of the U.S. state net operating losses carryforward through fiscal 2029.
(2) 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 $72,650, $90,831 and $77,653 as of March 31,
2013, 2012 and 2011, respectively. Of these totals, approximately $46,340, $62,400 and $53,500, 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. During fiscal 2013, as a result of the expiration of statutes of
limitation and the completion of tax authority examinations, unrecognized benefits of $16,842 were realized.
A reconciliation of the beginning and ending amount of unrecognized gross tax benefits for the years ended March 31,
2013, 2012 and 2011, 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 statutes of limitations
Balance, end of year
2013
$ 90,831
11,726
8,439
(13,083)
(25,205)
(58)
2012
$77,653
9,822
10,668
(3,575)
(3,185)
(552)
2011
$51,027
1,361
34,959
(6,107)
(2,667)
(920)
$ 72,650
$90,831
$77,653
85
Legg Mason Although management cannot predict with any degree of
certainty the timing of ultimate resolution of matters under
review by various taxing jurisdictions, it is reasonably pos-
sible that the Company’s gross unrecognized tax benefits
balance may change within the next twelve months by up
to $11,400 as a result of the expiration of statutes of limita-
tion and the completion of tax authorities’ exams.
The Company accrues interest related to unrecognized tax
benefits in interest expense and recognizes penalties in
other operating expense. During the years ended March 31,
2013, 2012 and 2011, the Company recognized approxi-
mately $5,500, $1,300, and $3,000, respectively, which
was substantially all interest. At March 31, 2013, 2012 and
2011, Legg Mason had approximately $14,000, $10,000,
and $9,000, respectively, accrued for interest and penalties
on tax contingencies in the Consolidated Balance Sheets.
Legg Mason is under examination by the Internal Revenue
Service, the Inland Revenue Service, and other tax authori-
ties in various states. The following tax years remain open
to income tax examination for each of the more significant
jurisdictions where Legg Mason is subject to income taxes:
after fiscal 2009 for U.S. federal; after fiscal 2012 for the
United Kingdom; after fiscal 2004 for the state of California;
after fiscal 2005 for the state of New York; and after fis-
cal 2009 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 excess of amounts that have been reserved.
During the year ended March 31, 2013, Legg Mason
repatriated approximately $394,000 of foreign cash, and
plans to repatriate up to another $325,000, over the next
several years in order to make the cash available in the U.S.
for general corporate purposes. Legg Mason anticipates
an incremental tax cost of approximately $18,000 with
respect to this repatriation and has adjusted the tax reserve
accordingly. No further repatriation of accumulated prior
period foreign earnings is currently planned. However, if
circumstances change, Legg Mason will provide for and
pay any applicable additional U.S. taxes in connection with
repatriation of these funds. It is not practical at this time to
determine the income tax liability that would result from
any further repatriation of accumulated foreign earnings.
Except as noted above, Legg Mason intends to perma-
nently 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 perma-
nently 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.
8. 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 2026.
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, 2013, the minimum annual aggregate
rentals under operating leases and service agreements are
as follows:
2014
2015
2016
2017
2018
Thereafter
Total
$132,524
121,176
106,623
95,369
86,669
422,581
$964,942
The minimum rental commitments shown above have
not been reduced by $151,664 for minimum sublease
rentals to be received in the future under non-cancelable
subleases, of which approximately half is due from one
counterparty. If a sub-tenant defaults on a sublease, Legg
Mason may incur operating charges to adjust the exist-
ing liability of $31,321 to reflect expected future sublease
rentals at reduced amounts, as a result of the current com-
mercial real estate market.
The above minimum rental commitments include $877,807
in real estate and equipment leases and $87,135 in service
and maintenance agreements.
Included in the table above is $75,894 in commitments
related to space that has been vacated, but for which sub-
leases are being pursued. A lease liability was adjusted
in fiscal 2013 and 2012, to reflect the present value of
the excess existing lease obligations over the estimated
sublease income and related costs, including any newly
vacated or subleased space. 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.
As of March 31, 2013, the liability related to vacant space
for which a sublease is being pursued aggregated $35,592,
but is subject to adjustment based on circumstances in the
real estate markets that may require a change in assump-
tions or the actual terms of a sublease that is ultimately
secured. In addition to accelerated depreciation and amor-
tization discussed in Note 4, these and other related costs
incurred during fiscal 2013, driven by an initiative to reduce
86
Legg Mason space requirements, and during fiscal 2012, related to
the business streamlining initiative, aggregated $28,788
and $13,375, respectively, and are included in Occupancy
expense in the Consolidated Statements of Income.
The following table reflects rental expense under all oper-
ating leases and servicing agreements.
2013
2012
2011
Rental expense
$138,488
$140,285
$137,072
Less: sublease income
14,750
14,310
10,848
Net rent expense
$123,738
$125,975
$126,224
certain class actions, which primarily allege violations of
securities laws and seek unspecified damages, which
could be substantial. In the normal course of its business,
Legg Mason has also received subpoenas and is currently
involved in governmental and self-regulatory agency inqui-
ries, investigations and, from time to time, proceedings
involving asset management activities. In accordance with
guidance for accounting for contingencies, Legg Mason
has established provisions for estimated losses from pend-
ing complaints, legal actions, investigations and proceed-
ings when it is probable that a loss has been incurred and
a reasonable estimate of loss can be made.
Legg Mason recognizes rent expense ratably over the lease
period based upon the aggregate lease payments. The
lease period is determined as the original lease term with-
out renewals, unless and until the exercise 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, 2013 and 2012, Legg Mason had com-
mitments to invest approximately $37,410 and $36,653,
respectively, in limited partnerships that make private
investments. These commitments are expected to be
funded as required through the end of the respective
investment periods ranging through fiscal 2021.
In connection with the acquisition of Fauchier, as further
discussed in Note 2, contingent consideration of up to
approximately $23,000 and approximately $30,000, using
exchange rates as of March 31, 2013, may be due on the
second and fourth anniversaries of closing, respectively,
which is dependent upon the achievement of certain
financial targets and subject to a catch up adjustment. The
contingent consideration liability had an acquisition date
fair value of $21,566.
In the normal course of business, Legg Mason enters
into contracts that contain a variety of representations
and warranties and that provide general indemnifications,
which are not considered financial guarantees by relevant
accounting guidance. 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 complaints
and has also been named as a defendant in various legal
actions arising primarily from securities brokerage, asset
management and investment banking activities, including
In a transaction with Citigroup in December 2005, Legg
Mason transferred to Citigroup the subsidiaries that con-
stituted its Private Client/Capital Markets (“PC/CM”)
businesses, thus transferring the entities that would have
primary liability for most of the customer complaint, litiga-
tion and regulatory liabilities and proceedings arising from
those businesses. However, as part of that transaction,
Legg Mason agreed to indemnify Citigroup for most cus-
tomer complaint, litigation and regulatory liabilities of Legg
Mason’s former PC/CM businesses that result from pre-
closing events. While the ultimate resolution of these mat-
ters cannot be 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, 2013 and 2012, 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 busi-
ness, 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.
One of Legg Mason’s asset management subsidiaries was
named as the defendant in a lawsuit filed by a former insti-
tutional client in late August 2011. The complaint alleges
breach of contract and breach of fiduciary duty arising from
investments in the former client’s account allegedly being
inconsistent with the account’s objectives, and seeks dam-
ages in excess of $90,000. Legg Mason believes that the
claims are without merit and intends to defend the matter
vigorously. Discovery in the case is ongoing, and a pre-
trial conference is currently scheduled for October 2013.
Because of the continued preliminary status of the matter,
Legg Mason cannot estimate the possible loss or range
of loss from this matter, if any. In addition, although Legg
Mason believes that this matter would likely be covered
by insurance policies that may substantially mitigate the
amount of any eventual loss, as is not unusual with litiga-
tion at this point in the process, there can be no assurance
the action will not have a material effect on Legg Mason’s
financial position, results of operations or cash flows.
87
Legg Mason Additionally, there are two matters subject to regula-
tory investigations involving one of Legg Mason’s asset
management subsidiaries regarding its compliance with
applicable legal requirements with respect to investments
made for certain client accounts. Legg Mason is continu-
ing discussions to resolve the matters, subsequent to the
fiscal year-end. As a result of these discussions, Legg
Mason has agreed in principle, subject to agreement on
final terms and documentation, to settle these two mat-
ters for approximately $20,000, which was accrued as
of March 31, 2013, the majority of which is covered by
expected insurance proceeds. Any ultimate loss on these
matters beyond amounts covered by insurance policies
will be substantially mitigated by reductions in compensa-
tion under revenue share arrangements.
Other than the specific matters discussed above, Legg
Mason cannot estimate the reasonably possible loss or
range of loss associated with matters of litigation, includ-
ing those described above as customer complaints, legal
actions, inquiries, proceedings and investigations. The
inability to provide a reasonably possible amount or range
of losses is not because there is uncertainty as to the
ultimate outcome of a matter, but because liability and
damage issues have not developed to the point where
Legg Mason can conclude that there is both a reasonable
possibility of a loss and a meaningful amount or range of
possible losses. There are numerous aspects to customer
complaints, legal actions, inquiries, proceedings and
investigations that prevent Legg Mason from estimating
a related amount or range of reasonably possible losses.
These aspects include, among other things, the nature of
the matters; that significant relevant facts are not known,
are uncertain or are in dispute; and that damages sought
are not specified, are uncertain, unsupportable or unex-
plained. In addition, for legal actions, discovery may not
yet have started, may not be complete or may not be con-
clusive, and meaningful settlement discussions may not
have occurred. Further, for regulatory matters, investiga-
tions may run their course without any clear indication of
wrongdoing or fault until their conclusion.
In management’s opinion, an adequate accrual has been
made as of March 31, 2013, to provide for any probable
losses that may arise from matters for which the Company
could reasonably estimate an amount. Legg Mason’s finan-
cial condition, results of operations and cash flows could
be materially affected during a period in which a matter is
ultimately resolved. In addition, the ultimate costs of litiga-
tion-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 indemnifi-
cation, contribution or insurance reimbursement.
As of March 31, 2013 and 2012, Legg Mason’s liability
for losses and contingencies was $20,300 and $200,
respectively. During fiscal 2013, 2012 and 2011, Legg
Mason recorded litigation related charges of approximately
$5,200, $1,000, and $2,500, respectively (net of recover-
ies of $15,200 in fiscal 2013). During fiscal 2013, 2012 and
2011, the liability was reduced for settlement payments of
approximately $300, $1,300, and $23,500, respectively.
9. EMPLOyEE BENEFITS
Legg Mason, through its subsidiaries, maintains vari-
ous defined contribution plans covering substantially all
employees. Through these plans, Legg Mason can make
two types of discretionary contributions. One is a profit
sharing contribution to eligible Plan participants based on
a percentage of qualified compensation and the other is a
match of employee 401(k) contributions. Matches range
from 50% to 100% of employee 401(k) contributions,
up to a maximum of the lesser of up to 6% of employee
compensation or a specified amount up to $15 per year.
Corporate profit sharing and matching contributions,
together with contributions made under subsidiary plans,
totaled $25,868, $22,336 and $22,739 in fiscal 2013, 2012
and 2011, respectively. In addition, employees can make
voluntary contributions under certain plans.
10. CAPITAL STOCK
At March 31, 2013, the authorized numbers of common
and preferred shares were 500,000 and 4,000, respec-
tively. At March 31, 2013 and 2012, there were 11,948 and
13,932 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 acqui-
sition 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 outstanding. In May 2010,
all outstanding exchangeable shares were converted into
shares of Legg Mason common stock.
In May 2012, as part of a capital plan, Legg Mason’s Board
of Directors authorized $1,000,000 for additional purchases
of Legg Mason common stock, as well as the completion of
the repurchase of the then remaining approximate $155,000
of Legg Mason common stock previously authorized. There
is no expiration date attached to this new authorization.
During fiscal 2013, Legg Mason purchased and retired
16,199 shares of its common stock for $425,475 through
open market purchases, which completed the repurchase
of its common stock under the previous authorization, and
began purchases under the new authorization. During fis-
cal 2012, Legg Mason purchased and retired 13,597 shares
of its common stock for $400,266 through open market
88
Legg Mason purchases. The remaining balance of the authorized stock
buyback is approximately $730,000.
In May 2008, Legg Mason issued $1,150,000 of Equity
Units, each unit consisting of a 5% interest in one thou-
sand 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.
During fiscal 2012, Legg Mason issued 1,830 shares of
Legg Mason common stock upon the exercise of the
purchase contracts from the remaining Equity Units
and the senior notes from the Equity Units were retired
in a remarketing.
As discussed in Note 6, warrants issued in connection
with the repurchase of the Notes could result in the issu-
ance of a maximum of 14,205 shares of Legg Mason
common stock, subject to adjustment, if certain condi-
tions are met.
Changes in common stock and shares exchangeable into common stock for the three years ended March 31, 2013, 2012
and 2011, respectively, 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
Net share transactions
Equity Units exchange
Ending balance
SHARES EXCHANGEABLE INTO COMMON STOCK
Beginning balance
Exchanges
Ending balance
Years Ended March 31,
2013
2012
2011
139,874
150,219
161,439
80
71
1,925
—
172
68
1,246
—
638
75
1,520
1,099
(16,199)
(13,597)
(14,552)
(410)
—
(64)
1,830
—
—
125,341
139,874
150,219
—
—
—
—
—
—
1,099
(1,099)
—
Dividends declared per share were $0.44, $0.32 and $0.20 for fiscal 2013, 2012 and 2011, respectively. Dividends declared
but not paid at March 31, 2013, 2012 and 2011, were $14,185, $11,493 and $8,990, respectively, and are included in Other
current liabilities.
11. STOCK-BASED COMPENSATION
Legg Mason’s stock-based compensation includes stock
options, employee stock purchase plans, restricted
stock awards and units, market-based performance
shares payable in common stock, and deferred com-
pensation payable in stock. Effective July 26, 2011,
the number of shares authorized to be issued under
Legg Mason’s active equity incentive stock plan was
increased by 6,500 to 41,500. Shares available for issu-
ance under the active equity incentive stock plan as
of March 31, 2013, were 11,273. 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 four to five years and expire within eight to ten
years from the date of grant.
Compensation expense relating to stock options for the
years ended March 31, 2013, 2012, and 2011 was $10,979,
$14,076, and $19,926, respectively. The related income
tax benefit for the years ended March 31, 2013, 2012, and
2011 was $4,293, $5,539, and $7,718, respectively.
89
Legg Mason Stock option transactions under Legg Mason’s equity incentive plans during the years ended March 31, 2013, 2012 and
2011, respectively, are summarized below:
Options outstanding at March 31, 2010
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2011
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2012
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2013
Number
of Shares
Weighted-Average
Exercise Price
Per Share
6,054
729
(634)
(730)
5,419
810
(117)
(488)
5,624
966
(25)
(1,204)
5,361
$57.75
33.12
21.85
48.94
59.82
33.99
25.32
48.80
57.78
23.72
21.80
51.87
$53.13
The total intrinsic value of options exercised during the years ended March 31, 2013, 2012 and 2011, was $168, $398, and
$6,977, respectively. At March 31, 2013, the aggregate intrinsic value of options outstanding was $12,649.
The following information summarizes Legg Mason’s stock options outstanding at March 31, 2013:
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
Weighted-Average
Exercise Price
Per Share
Weighted-Average
Remaining Life
(in years)
971
2,649
84
462
1,195
5,361
$ 23.03
31.86
61.02
95.14
107.98
6.8
4.7
0.3
1.3
1.1
At March 31, 2013, 2012 and 2011, options were exercisable on 3,254, 3,334, and 2,860 shares, respectively, and the
weighted-average exercise prices were $69.07, $73.60, and $77.20, respectively. Stock options exercisable at March 31,
2013, have a weighted-average remaining contractual life of 2.6 years. At March 31, 2013, the aggregate intrinsic value of
options exercisable was $3,555.
The following information summarizes Legg Mason’s stock options exercisable at March 31, 2013:
Exercise Price Range
$ 12.65–$ 25.00
25.01– 35.00
35.01– 94.00
94.01– 100.00
100.01– 134.97
90
Option Shares
Exercisable
Weighted-Average
Exercise Price
Per Share
81
1,432
84
462
1,195
3,254
$ 17.32
31.59
61.02
95.14
107.98
Legg Mason The following information summarizes unvested stock options under Legg Mason’s equity incentive plans for the year
ended March 31, 2013:
Shares unvested at March 31, 2012
Granted
Vested
Canceled/forfeited
Shares unvested at March 31, 2013
Number
of Shares
Weighted-Average
Grant Date
Fair Value
2,290
966
(874)
(275)
2,107
$14.00
9.47
15.17
12.35
$11.65
Unamortized compensation cost related to unvested
options at March 31, 2013, was $17,167 and is expected to
be recognized over a weighted-average period of 1.6 years.
Legg Mason uses an equally weighted combination of
both implied and historical volatility to measure expected
volatility for calculating Black-Scholes option values.
Cash received from exercises of stock options under Legg
Mason’s equity incentive plans was $660, $2,851, and
$12,094 for the years ended March 31, 2013, 2012 and
2011, respectively. The tax benefit expected to be realized
for the tax deductions from these option exercises totaled
$45, $47, and $2,645 for the years ended March 31, 2013,
2012 and 2011, respectively.
The weighted-average fair value of stock option grants dur-
ing the years ended March 31, 2013, 2012 and 2011, using
the Black-Scholes option pricing model, was $9.47 and
$13.13, and $14.32 per share, respectively.
The following weighted-average assumptions were used
in the model for grants in fiscal 2013, 2012, and 2011:
Expected dividend yield
Risk-free interest rate
2013
1.44%
0.81%
2012
1.39%
1.95%
2011
1.39%
2.37%
Expected volatility
51.80%
47.16%
52.64%
Expected life (in years)
5.02
5.12
5.18
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% con-
tribution towards purchases, which is charged to earn-
ings. During the fiscal years ended March 31, 2013, 2012
and 2011, approximately 107, 107, and 102 shares, respec-
tively, were purchased in the open market on behalf of
participating employees. In fiscal 2013, 2012 and 2011,
Legg Mason recognized $238, $267, and $286, respec-
tively, in compensation expense related to the stock pur-
chase plan.
On January 28, 2008, the Legg Mason Compensation
Committee approved grants to senior officers of 120
market-based performance shares. During fiscal 2013
the remaining 100 shares from this award were forfeited
resulting in no outstanding balance as of March 31, 2013.
91
Legg Mason Restricted stock and restricted stock unit transactions during the years ended March 31, 2013, 2012 and 2011, respec-
tively, are summarized below:
Unvested shares at March 31, 2010
Granted
Vested
Canceled/forfeited
Unvested shares at March 31, 2011
Granted
Vested
Canceled/forfeited
Unvested shares at March 31, 2012
Granted
Vested
Canceled/forfeited
Unvested shares at March 31, 2013
Number
of Shares
Weighted-Average
Grant Date Value
1,605
1,867
(617)
(218)
2,637
1,370
(1,075)
(59)
2,873
2,185
(1,177)
(143)
3,738
$34.80
33.02
38.62
30.42
33.01
33.48
31.49
32.68
33.83
24.04
31.22
58.30
$27.99
The restricted stock and restricted stock unit awards were
non-cash transactions. In fiscal 2013, 2012 and 2011,
Legg Mason recognized $46,351, $32,826, and $35,770,
respectively, in compensation expense and related tax
benefits of $17,697, $12,705, and $13,854, respectively,
for restricted stock and restricted stock unit awards.
Unamortized compensation cost related to unvested
restricted stock and restricted stock unit awards for 3,738
shares not yet recognized at March 31, 2013, was $66,854
and is expected to be recognized over a weighted-average
period of 1.6 years.
In connection with the change in Legg Mason’s Chief
Executive Officer in September 2012, 325 shares of
restricted stock were granted to certain executives and
key employees, with an aggregate value of $8,400. In
March 2013, the vesting of 85 of these shares was accel-
erated. The remaining shares vest on March 31, 2014.
Compensation expense for the year ended March 31, 2013
includes approximately $6,400 of accelerated stock-based
net compensation costs associated with the departure of
three Legg Mason executive officers during fiscal 2013, of
which $1,400 relates to the accelerated vesting of shares
in March 2013.
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, direc-
tors 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 2013, 2012 and 2011, Legg Mason rec-
ognized expense of $1,250, $1,375, and $1,425, respec-
tively, 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 328 shares
were issued under the plan as of March 31, 2013. As
of March 31, 2013, 2012 and 2011 non-employee direc-
tors held 112, 184 and 220, stock options, respectively,
which are included in the outstanding options presented
in the table above. As of March 31, 2013, 2012 and 2011
non-employee directors held 91, 74 and 62 restricted
stock units, respectively, 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. During the years ended March 31, 2013 and
2012, non-employee directors did not exercise any stock
options and no restricted stock units were distributed.
During the year ended March 31, 2011, non-employee
directors exercised 9 stock options. In the fiscal year
ended March 31, 2011, 7 restricted stock units were
distributed for non-employee directors. During the years
ended March 31, 2013, 2012 and 2011 non-employee
directors were granted 17, 12 and 17 restricted stock
units and 35, 31 and 31 shares of common stock, respec-
tively. In the fiscal years ended March 31, 2013, 2012 and
2011, there were 72, 36 and 59 stock options canceled or
forfeited, respectively.
During fiscal 2012, Legg Mason established a long-term
incentive plan (the “LTIP”) under its equity incentive plan,
which provides an additional element of compensation
that is based on performance. Under the LTIP, executive
officers were granted cash value performance units in
92
Legg Mason the June 2011 quarter and the September 2012 quarter
that will vest at the end of their performance periods on
March 31, 2014 and March 31, 2015, respectively, based
upon Legg Mason’s cumulative adjusted earnings per
share over the respective periods. Awards granted under
the LTIP may be settled in cash and/or shares of Legg
Mason common stock, at the discretion of Legg Mason.
The estimated payout amounts of the awards, if any, are
expensed over the future vesting periods based on a prob-
ability assessment of the expected outcome under the
LTIP provisions.
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 con-
tributions and dividends. There are 378 additional shares
reserved for future issuance under the plan. In fiscal 2013,
2012 and 2011, Legg Mason recognized $165, $191, and
$263, respectively, in compensation expense related to
this plan. During fiscal 2013, 2012 and 2011, Legg Mason
issued 71, 68, and 77 shares, respectively, under the plan
with a weighted-average fair value per share at the grant
date of $23.07, $27.05, and $28.38, 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 com-
ponents of stockholders’ equity as Employee stock trust
and Deferred compensation employee stock trust, respec-
tively. Shares held by the trusts at March 31, 2013, 2012
and 2011, were 726, 690 and 706, respectively.
As part of the Company’s streamlining initiative, as further
discussed in Note 15, the employment of certain recipi-
ents of stock option and restricted stock awards has been
terminated. The termination benefits extended to these
employees included 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 was revalued and was expensed over
the new vesting period, the impact of which is included
above. Also in connection with the restructuring initiative,
the departure of an executive officer in December 2010
resulted in the accelerated vesting of a portion of cer-
tain equity incentive awards, the impact of which is also
included above.
In May 2013, Legg Mason awarded options to purchase
500 shares of Legg Mason, Inc. common stock at an exer-
cise price of $31.46 to its President and Chief Executive
Officer. The award had a grant date fair value of $5,525
and is subject to vesting requirements, the majority of
which contain market-based hurdles, as well as a require-
ment that certain shares received upon exercise are
retained for a two year period.
12. EARNINGS PER SHARE
Basic EPS is calculated by dividing Net Income (Loss)
Attributable to Legg Mason, Inc. by the weighted-aver-
age number of shares outstanding. The calculation of
weighted-average shares includes common shares and
unvested restricted shares deemed to be participating
securities. Diluted EPS is similar to basic EPS, but adjusts
for the effect of potentially issuable common shares,
except when inclusion is antidilutive. For periods where
a net loss attributable to Legg Mason, Inc. is reported,
the inclusion of potentially issuable common shares will
decrease the net loss per share. Since this would be anti-
dilutive, such shares are excluded from the calculation.
In May 2012, as part of a capital plan, Legg Mason’s Board
of Directors authorized $1,000,000 for additional purchases
of Legg Mason common stock, as well as the comple-
tion of the repurchase of the then remaining approximate
$155,000 of Legg Mason common stock previously autho-
rized. The capital plan authorizes using up to 65% of cash
generated from future operations, beginning in fiscal 2013,
to purchase shares of Legg Mason common stock.
During the years ended March 31, 2013 and 2012, Legg
Mason purchased and retired 16,199 and 13,597 shares
of its common stock, respectively, for $425,475 and
$400,266, through open market purchases. The fiscal
2013 purchases completed the repurchase of its com-
mon stock under the previous authorization and includes
approximately $270,000 of purchases under the new
authorization. During fiscal 2011, Legg Mason purchased
and retired 14,552 shares of its common stock for
$445,465, through accelerated share repurchase agree-
ments and open market purchases. These repurchases
reduced weighted-average shares outstanding by 8,449,
9,716, and 9,088 shares for the years ended March 31,
2013, 2012, and 2011, respectively. The par value of the
shares repurchased is charged to common stock, with the
excess of the purchase price over par first charged against
additional paid-in capital, with the remaining balance, if
any, charged against retained earnings.
During the year ended March 31, 2013 and 2012, Legg
Mason issued 2,185 and 1,370 shares of restricted stock,
respectively, primarily related to its annual incentive
93
Legg Mason awards and retention awards. Of the shares issued in fis-
cal 2013 and 2012, 1,807 and 1,153 shares, respectively,
are included in weighted-average shares outstanding.
In June 2011, Legg Mason issued 1,830 shares of com-
mon stock upon the exercise of purchase contracts on
the remaining outstanding Equity Units. Of these shares,
1,380 shares are included in weighted-average shares out-
standing for the year ended March 31, 2012.
The following table presents the computations of basic and diluted EPS:
Weighted-average basic shares outstanding
Potential common shares:
Employee stock options
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(1)
(1) Diluted shares are the same as basic shares for periods with a net loss.
The diluted EPS calculation for the year ended March 31,
2013 excludes 5,730 potential common shares that are
antidilutive due to the net loss for the fiscal year. Further,
the diluted EPS calculation for the years ended March 31,
2013, 2012 and 2011, excludes any potential common
shares issuable under the 2.5% Convertible Senior Notes
extinguished in May 2012, or the Warrants exchanged for
the Note conversion feature, because the market price of
Legg Mason common stock had not exceeded the price
at which conversion/exercise would be dilutive using the
treasury stock method. Also at March 31, 2012 and 2011,
warrants issued in connection with the convertible note
hedge transactions associated with the issuance of the
2.5% Convertible Senior Notes are excluded from the cal-
culation of diluted earnings per share because the effect
would be antidilutive.
Options to purchase 5,239 and 5,204 shares for the fis-
cal years ended March 31, 2012 and 2011, respectively,
Years Ended March 31
2013
133,226
2012
143,292
—
133,226
$(359,748)
(6,421)
$(353,327)
57
143,349
$231,031
10,214
$220,817
2011
155,321
163
155,484
$245,763
(8,160)
$253,923
$ (2.65)
$ (2.65)
$ 1.54
$ 1.54
$ 1.63
$ 1.63
were not included in the computation of diluted earnings
per share because the presumed proceeds from exercis-
ing such options, including related income tax benefits,
exceed the average price of the common shares for the
period and therefore the options are deemed antidilutive.
13. ACCUMULATED OTHER
COMPREHENSIVE INCOME
Accumulated other comprehensive income includes cumu-
lative foreign currency translation adjustments and net of
tax, gains and losses on investment securities. The change
in the accumulated translation adjustments for fiscal 2013
and 2012, primarily resulted from the impact of changes
in the Brazilian real, the Japanese yen, the British pound,
the Australian dollar, and the Polish zloty in relation to the
U.S. dollar on the net assets of Legg Mason’s subsidiaries
in Brazil, Japan, the United Kingdom, Australia and Poland,
for which the real, the yen, the pound, the Australian dollar,
and the zloty are the functional currencies, respectively.
A summary of Legg Mason’s accumulated other comprehensive income as of March 31, 2013 and 2012, is as follows:
Foreign currency translation adjustment
Unrealized gains on investment securities, net of tax provision of $187 and $179, respectively
Total
94
2013
$47,259
280
$47,539
2012
$71,204
268
$71,472
Legg Mason There were no significant amounts reclassified from
Accumulated other comprehensive income to the
Consolidated Statements of Income (Loss) for the years
ended March 31, 2013, 2012 or 2011.
14. DERIVATIVES AND HEDGING
The disclosures below detail Legg Mason’s derivatives and
hedging activities excluding the derivatives and hedging
activities of CIVs. See Note 17, Variable Interest Entities
and Consolidation of Investment Vehicles, for information
related to the derivatives and hedging of CIVs.
Legg Mason uses currency forwards to economically
hedge the risk of movements in exchange rates, primarily
between the U.S. dollar, euro, Japanese yen, Singapore
dollar, British pound, Chinese yuan, and South Korean
won. In the Consolidated Balance Sheets, Legg Mason
nets the fair value of certain foreign currency forwards
executed with the same counterparty where Legg Mason
has both the legal right and intent to settle the contracts
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 $7,131
and $1,919 as of March 31, 2013 and 2012, respectively.
The following table presents the fair values as of March 31, 2013 and 2012, of derivative instruments not designated for
accounting purposes as hedging instruments, classified as Other assets and Other liabilities:
Currency forward contracts
Futures contracts
Total
2013
2012
Liabilities
Assets
Liabilities
$101
680
$781
$38
46
$84
$685
201
$886
Assets
$1,496
443
$1,939
The following table presents gains (losses) recognized on derivative instruments for the years ended March 31, 2013,
2012, and 2011:
Income Statement Classification
Gains
Losses
Gains
Losses Gains
Losses
2013
2012
2011
Currency forward contracts for:
Operating activities
Other expense
$3,650 $(1,858) $ 5,604 $(3,159) $4,943 $ (6,094)
Seed capital investments
Other non-operating income (expense)
1,090 (380)
431 (351)
123 (355)
Futures contracts for seed
capital investments
Other non-operating income (expense)
1,914 (5,597)
5,684 (4,560)
1,652 (7,146)
Total
$6,654 $(7,835) $11,719 $(8,070) $6,718 $(13,595)
15. RESTRUCTURING
In May 2010, Legg Mason announced a plan to stream-
line its business model to drive increased profitability
and growth that primarily involved transitioning certain
shared services to its investment affiliates which are
closer to actual client relationships. This plan involved
headcount reductions in operations, technology, and
other administrative areas, which were partially offset
by headcount increases at the affiliates, and enabled
Legg Mason to eliminate a portion of its corporate office
space that was primarily dedicated to operations and
technology employees. The initiative was completed as
of March 31, 2012.
Total transition-related costs were $127,500, including
non-cash charges of $30,841, through completion of the
plan in March 2012. Of the total transition-related costs
incurred, $79,686 were related to charges for employee
termination benefits and retention incentives during
the transition period, and were recorded in Transition-
related compensation in the Consolidated Statements
of Income (Loss). The remainder represents other costs,
including charges for consolidating leased office space,
early contract terminations, asset disposals, and pro-
fessional fees, which were recorded in the appropriate
operating expense classifications. Charges for transition-
related costs were $73,066 and $54,434 for the years
ended March 31, 2012 and 2011, respectively, which
primarily represent costs for lease loss accruals and fixed
asset accelerated depreciation related to space perma-
nently abandoned, as well as costs for severance and
retention incentives.
95
Legg Mason The table below presents a summary of changes in the transition-related liability from March 31, 2011 through March 31, 2013:
Balance as of March 31, 2011
Accrued charges
Payments
Balance as of March 31, 2012
Payments and other
Balance as of March 31, 2013
Severance
and Retention
Incentives
$ 23,211
29,096
(51,140)
1,167
(1,167)
Lease Loss
Accruals
and Other
$ 5,835
25,916(1)
(16,121)
15,630
(10,744)
Total
$ 29,046
55,012
(67,261)
16,797
(11,911)
$ —
$ 4,886
$ 4,886
(1) Includes lease loss accruals of $17,983 for space permanently abandoned.
16. BUSINESS SEGMENT INFORMATION
Legg Mason is a global asset management company that
provides investment management and related services to a
wide array of clients. Due to a realignment of its executive
management team, beginning in fiscal 2012, the previous
separation of the Americas and International divisions has
been eliminated and the company operates in one report-
able business segment, Global Asset Management. Global
Asset Management provides investment advisory services
to institutional and individual clients and to company-spon-
sored investment funds. The primary sources of revenue
in Global Asset Management are investment advisory,
distribution and administrative fees, which typically are cal-
culated as a percentage of the AUM and vary based upon
factors such as the type of underlying investment product
and the type of services that are provided. In addition,
performance fees may be earned under certain investment
advisory contracts for exceeding performance benchmarks.
Revenues by geographic location are primarily based on
the geographic location of the advisor or the domicile of
fund families managed by Legg Mason.
The table below reflects our revenues and long-lived assets by geographic region 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
2013
2012
2011
$1,800,539
$1,806,990
$1,919,680
387,966
424,145
448,863
406,721
512,313
352,324
$2,612,650
$2,662,574
$2,784,317
$3,139,050
$3,548,628
$3,565,019
895,767
411,910
1,108,297
474,986
1,136,386
487,022
$4,446,727
$5,131,911
$5,188,427
17. VARIABLE INTEREST ENTITIES AND
CONSOLIDATION OF INVESTMENT VEHICLES
Legg Mason is the investment manager for CDOs/CLOs
that are considered VIEs under revised accounting guid-
ance, since investors in these structures lack unilateral
decision making authority. These investment vehicles
were created for the sole purpose of issuing collateralized
instruments that offer investors the opportunity for returns
that vary with the risk level of their investment. 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 transfer or sell any assets
to any of these investment vehicles. In accordance with
the methodology described in Note 1 above, Legg Mason
concluded that it had a variable interest in only two of
these investment vehicles, which are CLOs, and is the
primary beneficiary of one of the two CLOs, because
although Legg Mason holds no equity interest in either
of these investment vehicles, it had both the power
to control and had a significant variable interest in one
CLO because of its expected subordinated fees. As of
March 31, 2013 and 2012, the balances related to this CLO
96
Legg Mason were consolidated on the Company’s consolidated finan-
cial statements. The collateral assets of this VIE are pri-
marily 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 (Loss) Attributable
to Legg Mason, Inc. The liabilities of this VIE are primarily
comprised of debt and the CLO’s debt holders have no
recourse to the general credit or assets of Legg Mason.
The other CLO is not consolidated, as its level of expected
subordinated fees is insignificant.
In addition, Legg Mason was the primary beneficiary
of one sponsored investment fund VIE, and also held
a controlling financial interest in one sponsored invest-
ment fund VRE, both of which were consolidated as of
March 31, 2013, 2012 and 2011. Effective December 31,
2011, a controlling financial interest of $20,814 in a second
sponsored investment fund VRE, which was consolidated
by Legg Mason as of March 31, 2011 was redeemed.
Accordingly, the fund was deconsolidated by Legg Mason
and the fund’s balance sheet amounts have been excluded
from Legg Mason’s consolidated balance sheet as of
March 31, 2012 and later, but partial income statement
and cash flow amounts for the fund have been included in
Legg Mason’s consolidated income and cash flow state-
ments for the year ended March 31, 2012. Legg Mason’s
investment in CIVs as of March 31, 2013 and 2012, was
$39,056 and $38,919, respectively, which represents its
maximum risk of loss, excluding uncollected advisory fees.
The assets of these CIVs are primarily comprised of invest-
ment 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.
The following tables reflect the impact of CIVs on the Consolidated Balance Sheets as of March 31, 2013 and 2012, respec-
tively, and the Consolidated Statements of Income (Loss) for the years ended March 31, 2013, 2012 and 2011 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
$1,908,932
5,115,181
$7,024,113
$ 692,261
—
1,517,069
2,209,330
1,355
4,813,428
$7,024,113
Balance before
Consolidation of CIVs
$2,439,161
5,801,681
$8,240,842
$ 971,803
—
1,603,064
2,574,867
996
5,664,979
$8,240,842
March 31, 2013
CIVs
$ 73,320
211,617
$284,937
$ 10,539
207,835
2,930
221,304
—
63,633
$284,937
Eliminations
Consolidated Totals
$(39,390)
—
$(39,390)
$ (334)
—
—
(334)
19,654
(58,710)
$(39,390)
$1,942,862
5,326,798
$7,269,660
$ 702,466
207,835
1,519,999
2,430,300
21,009
4,818,351
$7,269,660
March 31, 2012
CIVs
$ 58,040
296,272
$354,312
$ 4,467
271,707
3,872
280,046
—
74,266
$354,312
Eliminations
Consolidated Totals
$(39,407)
—
$(39,407)
$ (488)
—
—
(488)
23,035
(61,954)
$(39,407)
$2,457,794
6,097,953
$8,555,747
$ 975,782
271,707
1,606,936
2,854,425
24,031
5,677,291
$8,555,747
97
Legg Mason Consolidating Statements of Income (Loss)
Total operating revenues
Total operating expenses
Operating income (loss)
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
Fiscal year Ended March 31, 2013
Balance before
Consolidation of CIVs
$2,615,047
3,046,587
(431,540)
(72,177)
(503,717)
(150,859)
(352,858)
469
CIVs
$ —
2,965
(2,965)
(2,864)
(5,829)
—
(5,829)
—
Eliminations
As Reported
$(2,397)
(2,403)
6
(1,067)
(1,061)
—
(1,061)
(6,890)
$2,612,650
3,047,149
(434,499)
(76,108)
(510,607)
(150,859)
(359,748)
(6,421)
Net income (loss) attributable to Legg Mason, Inc.
$ (353,327)
$(5,829)
$ 5,829
$ (353,327)
Total operating revenues
Total operating expenses
Operating income (loss)
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
Fiscal Year Ended March 31, 2012
Balance before
Consolidation of CIVs
CIVs
Eliminations
As Reported
$2,665,668
2,323,213
342,455
(49,236)
293,219
72,052
221,167
350
$ —
3,709
(3,709)
18,336
14,627
—
14,627
—
$ (3,094)
(3,101)
$2,662,574
2,323,821
7
(4,770)
(4,763)
—
(4,763)
9,864
338,753
(35,670)
303,083
72,052
231,031
10,214
Net income (loss) attributable to Legg Mason, Inc.
$ 220,817
$14,627
$(14,627)
$ 220,817
Total operating revenues
Total operating expenses
Operating income (loss)
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
Fiscal Year Ended March 31, 2011
Balance before
Consolidation of CIVs
$2,788,450
2,396,938
391,512
(17,931)
373,581
119,434
254,147
224
CIVs
$ —
4,704
(4,704)
1,704
(3,000)
—
(3,000)
—
Eliminations
As Reported
$(4,133)
(4,133)
—
(5,384)
(5,384)
—
(5,384)
(8,384)
$2,784,317
2,397,509
386,808
(21,611)
365,197
119,434
245,763
(8,160)
Net income (loss) attributable to Legg Mason, Inc.
$ 253,923
$(3,000)
$ 3,000
$ 253,923
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.
The consolidation of CIVs has no impact on Net Income (Loss) Attributable to Legg Mason, Inc.
98
Legg Mason The fair value of the financial assets and (liabilities) of CIVs were determined using the following categories of inputs as of
March 31, 2013:
ASSETS:
Trading investments:
Hedge funds
Investments:
CLO loans
CLO bonds
Private equity funds
Total investments
LIABILITIES:
CLO debt
Derivative liabilities
ASSETS:
Trading investments:
Hedge funds
Investments:
CLO loans
CLO bonds
Private equity funds
Total investments
LIABILITIES:
CLO debt
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,
2013
$2,076
$ 3,268
$ 19,448
$ 24,792
—
—
—
—
$2,076
$ —
—
$ —
172,519
11,052
—
183,571
$186,839
$ —
(2,930)
$ (2,930)
—
—
26,982
26,982
172,519
11,052
26,982
210,553
$ 46,430
$ 235,345
$(207,835)
—
$(207,835)
$(207,835)
(2,930)
$(210,765)
As of March 31, 2012
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Value as of
March 31,
2012
$1,016
$ 6,443
$ 24,116
$ 31,575
—
—
—
—
$1,016
$ —
—
$ —
260,690
9,092
—
269,782
$276,225
$ —
(3,872)
$ (3,872)
—
—
25,071
25,071
260,690
9,092
25,071
294,853
$ 49,187
$ 326,428
$(271,707)
—
$(271,707)
$(271,707)
(3,872)
$(275,579)
99
Legg Mason Except for the CLO debt, substantially all of the above financial instruments where valuation methods rely on other than
observable market inputs as a significant input utilize the NAV practical expedient, such that measurement uncertainty has
little relevance. The following table provides a summary of qualitative information relating to the valuation of CLO debt:
Value as of
March 31, 2013
$(207,835)
Valuation Technique
Discounted cash flow
Value as of
March 31, 2012
$(271,707)
Valuation Technique
Discounted cash flow
Unobservable Input
Range (Weighted-Average)
Discount rate
Default rate
1.1%–11.0% (2.3%)
3.0%– 4.0% (3.5%)
Constant prepayment rate
25.0%
Unobservable Input
Range (Weighted-Average)
Discount rate
Default rate
1.7%–24.5% (3.8%)
2.5%– 4.0% (3.4%)
Constant prepayment rate
15.0%
Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair
value measurement. Generally, both the constant rate of prepayment and default rate are driven by market conditions
related to interest rates, credit ratings, and other factors. Each of the inputs noted could move independently depend-
ing on specific market conditions, making it possible for varying market conditions to drive changes in these inputs
with a positive, negative, or zero correlation.
The changes in assets and (liabilities) of CIVs measured at fair value using significant unobservable inputs (Level 3) for the
years ended March 31, 2013 and 2012 are presented in the table below:
ASSETS:
Hedge funds
Private equity funds
LIABILITIES:
CLO debt
Total realized and unrealized gains
(losses), net
Value as of
March 31,
2012
Purchases
Sales
Settlements/
Other
Transfers
Realized and
Unrealized
Gains/
(Losses), Net
Value as of
March 31,
2013
$ 24,116
25,071
$ 49,187
$1,980
2,622
$4,602
$(6,602)
$ —
(2,030)
—
$(8,632)
$ —
$ —
—
$ —
$ (46)
$ 19,448
1,319
26,982
$ 1,273
$ 46,430
$(271,707)
$ —
$ —
$75,798
$ —
$(11,926)
$(207,835)
$(10,653)
ASSETS:
Hedge funds
Value as of
March 31,
2011
Purchases
Sales
Transfers
In
Transfers
Out
Realized and
Unrealized
Gains, Net
Value as of
March 31,
2012
$ 34,272
$17,018
$(32,058)
$3,302
$(3,316)
$ 4,898
$ 24,116
Private equity funds
17,879
4,889
(762)
—
—
3,065
25,071
$ 52,151
$21,907
$(32,820)
$3,302
$(3,316)
$ 7,963
$ 49,187
LIABILITIES:
CLO debt
$(278,320)
$ — $ —
$ —
$ —
$ 6,613
$(271,707)
Total realized and unrealized gains, net
$14,576
100
Legg Mason 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 (Loss). 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
$(11,842) and $7,297 for the years ended March 31, 2013 and 2012, respectively.
There were no transfers between Level 1 and Level 2 during either of the years ended March 31, 2013 and 2012.
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 respective reporting dates. The following table summarizes, as of
March 31, 2013 and March 31, 2012, 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
Investment Strategy
Global macro, fixed income, long/short
equity, systematic, emerging market,
U.S. and European hedge
Fair Value Determined Using NAV
As of March 31, 2013
March 31,
2013
March 31,
2012
Unfunded
Commitments
Remaining
Term
$24,792(1)
$31,575(2)
n/a
n/a
Private equity funds
Long/short equity
Total
26,982(3)
25,071(3)
$51,774
$56,646
$5,549
$5,549
6 years
n/a—not applicable
(1) 11% daily redemption; 8% monthly redemption; 2% quarterly redemption; and 79% are subject to three to five year lock-up or side pocket provisions.
(2) 5% daily redemption; 6% monthly redemption; 5% quarterly redemption; and 84% are subject to three to five year lock-up or side pocket provisions.
(3) Liquidations are expected over the remaining term.
There are no current plans to sell any of these investments held as of March 31, 2013.
Legg Mason has elected the fair value option for certain eligible assets and liabilities, including corporate loans and debt,
of the consolidated CLO. Management believes that the use of the fair value option eliminates certain timing differences
and better matches the changes in fair value of assets and liabilities related to the CLO.
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, 2013 and March 31, 2012:
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
CLO debt
Principal amounts outstanding
Excess unpaid principal over fair value
Fair value
March 31, 2013
March 31, 2012
$186,839
(3,268)
$183,571
$277,156
(7,374)
$269,782
$ —
$ 2,963
—
$ —
$225,161
(17,326)
$207,835
(1,023)
$ 1,940
$300,959
(29,252)
$271,707
101
Legg Mason During the years ended March 31, 2013 and 2012, total net
gains (losses) of $(8,455) and $2,054, respectively, were
recognized in Other non-operating income (loss) of CIVs
in the Consolidated Statements of Income (Loss) related
to assets and liabilities for which the fair value option was
elected. CLO loans and CLO debt measured at fair value
have floating interest rates, therefore, substantially all of
the estimated gains and losses included in earnings for the
years ended March 31, 2013 and 2012, were attributable
to instrument specific credit risk.
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. The CLO commenced its
wind-down in July 2012, such that proceeds from securi-
ties cannot be reinvested and are applied to reduce the
debt outstanding in the quarter subsequent to receipt,
after other required payments.
Total derivative liabilities of CIVs of $2,930 and $3,872 as
of March 31, 2013 and 2012, respectively, are recorded
in Other liabilities of CIVs. Gains and (losses) of $942 and
$(1,223), respectively, for the fiscal year ended March 31,
2013, and $54,603 and $(47,697), respectively, for the fis-
cal year ended March 31, 2012, related to derivative liabili-
ties of CIVs are included in Other non-operating income
(loss) 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.
As of March 31, 2013 and 2012, for VIEs in which Legg Mason holds a variable interest or is the sponsor and holds a vari-
able interest, but for which it was not the primary beneficiary, Legg Mason’s carrying value and maximum risk of loss
were as follows:
CLOs
Real Estate Investment Trust
Other sponsored investment funds
Total
CLO
Public-Private Investment Program(2)
Other sponsored investment funds
Total
As of March 31, 2013
Equity Interests on
the Consolidated
Balance Sheet
Maximum Risk
of Loss(1)
$ —
989
43,104
$44,093
$ 496
2,644
87,121
$90,261
As of March 31, 2012
Equity Interests on
the Consolidated
Balance Sheet
Maximum Risk
of Loss(1)
$ —
282
54,161
$54,443
$ 442
282
93,521
$94,245
(1) Includes equity investments the Company has made or is required to make and any earned but uncollected management fees.
(2) Upon liquidation of the fund, Legg Mason’s investment was fully redeemed in the quarter ended December 31, 2012.
The Company’s total AUM of unconsolidated VIEs was
$17,090,267 and $17,534,840 as of March 31, 2013 and
2012, respectively.
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 vari-
ous expense accruals. These VIEs are not consolidated
because Legg Mason does not absorb a majority of each
VIE’s expected losses or does not receive a majority of
each VIE’s expected residual returns.
102
Legg Mason quarterly Financial Data
(Dollars in thousands, except per share amounts)
(Unaudited)
Fiscal 2013(1)
Operating Revenues
Operating Expenses
Operating Income (Loss)
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
Mar. 31
$667,763
624,750
43,013
5,633
48,646
17,955
30,691
1,487
quarter Ended
Dec. 31
$ 673,900
1,307,223
(633,323)
(5,441)
(638,764)
(180,214)
(458,550)
(4,680)
Sept. 30
$640,295
560,561
79,734
17,758
97,492
16,397
81,095
298
June 30
$630,692
554,615
76,077
(94,058)
(17,981)
(4,997)
(12,984)
(3,526)
Net Income (Loss) Attributable to Legg Mason, Inc.
$ 29,204
$ (453,870)
$ 80,797
$ (9,458)
Net Income (Loss) 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
$ 0.23
$ (3.45)
$ 0.60
$ (0.07)
0.23
0.11
32.59
25.43
(3.45)
0.11
26.63
23.88
0.60
0.11
27.14
23.31
(0.07)
0.11
28.47
22.36
$664,609
657,357
$ 648,879
648,354
$650,700
639,389
$631,823
635,463
(1) Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results.
As of May 21, 2013, the closing price of Legg Mason‘s common stock was $36.13.
Fiscal 2012(1)
Operating Revenues
Operating Expenses
Operating Income
Other Non-Operating Income (Expense)
Income before Income Tax Provision (Benefit)
Income tax provision (benefit)
Net Income
Less: Net income attributable to noncontrolling interests
Mar. 31
$648,591
576,379
72,212
37,781
109,993
33,184
76,809
740
Quarter Ended
Dec. 31
$626,978
567,655
59,323
(11,575)
47,748
12,607
35,141
7,009
Sept. 30
$669,897
563,045
106,852
(51,075)
55,777
(1,606)
57,383
719
June 30
$717,108
616,742
100,366
(10,801)
89,565
27,867
61,698
1,746
Net Income attributable to Legg Mason, Inc.
$ 76,069
$ 28,132
$ 56,664
$ 59,952
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
$ 0.54
$ 0.20
$ 0.39
$ 0.40
0.54
0.08
29.49
23.75
0.20
0.08
29.56
22.61
0.39
0.08
34.32
24.11
0.40
0.08
37.82
30.86
$643,318
634,916
$626,960
622,004
$611,794
643,296
$662,533
670,761
(1) Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results.
103
Legg Mason Executive Officers
Corporate Data
Joseph A. Sullivan
President and Chief Executive Officer
Peter H. Nachtwey
Senior Executive Vice President and
Chief Financial Officer
EXECUTIVE OFFICES
100 International Drive
Baltimore, Maryland 21202
(410) 539-0000
www.leggmason.com
TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
(866) 668-6550
www.amstock.com
Terence Johnson
Executive Vice President and
Head of Global Distribution
Thomas C. Merchant
Executive Vice President and
General Counsel
Jennifer Murphy
Executive Vice President and
Chief Administrative Officer
FORM 10-K
Legg Mason’s Annual Report on Form 10-K
for fiscal 2013, filed with the Securities
COMMON STOCK
Shares of Legg Mason, Inc. common
and Exchange Commission and containing
stock are listed and traded on the New
audited financial statements, is available
York Stock Exchange (symbol: LM).
upon request without charge by writing to
As of March 31, 2013, there were 1,360
the Corporate Secretary at the Executive
Offices of the Company.
shareholders of record of the Company’s
common stock.
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
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, 2008). The SNL Asset Manager Index consists of 34 asset management firms.
E
U
L
A
V
x
E
D
N
I
150
125
100
75
50
25
0
03/31/08
03/31/09
03/31/10
03/31/11
03/31/12
03/31/13
Legg Mason, Inc.
snL asset Manager Index
s&P 500
104
P E R I O D E N D I N G
INDEX
03/31/08
03/31/09 03/31/10
03/31/11
03/31/12
03/31/13
Legg Mason, Inc.
100.00
29.65
53.69
67.99
53.23
62.31
SNL Asset Manager Index
100.00
53.16
98.11
114.82
112.23
144.15
S&P 500
100.00
61.91
92.72
107.23
116.39 132.64
Source: SNL Financial LC, Charlottesville, VA
© 2013
www.snl.com
Legg Mason
Legg Mason was named among
2012’s Best Corporate Citizens
in the financials/insurance/
real estate sector by Corporate
Responsibility Magazine.
Volunteerism: Enriching and participating in our
communities. At Legg Mason, we strive to enrich our
surrounding communities through employee volunteerism,
including mentoring programs and our community-based
Days of Caring program. We are proud to have been awarded
the SIFMA Diversity Leadership Award this year for our work
partnering with community-based nonprofit organizations and
their boards to provide opportunities for employees to better
serve their communities.
Diversity and Inclusion: Appreciating and leverag-
ing our differences. Legg Mason is proud to be a com-
pany that promotes respect, inclusion and participation in a
team-focused environment. We value collaboration and its
impact on achieving creative solutions and new perspectives.
Corporate Citizenship
At Legg Mason, we affirm our commitment to corporate citi-
zenship each day—through philanthropic giving, environmental
awareness, volunteerism efforts and diversity and inclusion in
our workplace. Our employees are actively engaged in our cor-
porate citizenship efforts which touch a wide range of causes
and reach locales both inside the United States and abroad.
We have always believed that by investing in our communi-
ties, we invest in our futures.
Philanthropy: Supporting and strengthening our
communities. Legg Mason’s long history of supporting
community efforts and initiatives philanthropically through
the Legg Mason Charitable Foundation focuses on our efforts
over the long term and making our communities strong and
vibrant for generations to come.
Environment: Protecting and improving our world.
We are committed to advancing sustainability and environ-
mental initiatives. Our online Sustainability Report details our
efforts and dedication to making continued progress towards
a more sustainable future.
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Independent Expertise. Singular Focus.
Legg Mason, Inc.
100 International Drive
Baltimore, MD 21202
(410) 539-0000
www.leggmason.com