AR2016
DESIGNED FOR
WHAT
YOU
IMAGINESM
A tapestry is not formed from a single thread. Nor is it formed
from many threads. It is formed by combining those threads,
uniquely and distinctly, into something greater than its parts.
KEY HIGHLIGHTS
FINANCIAL HIGHLIGHTS
Assets under management
as of March 31, 2016
By asset class
Fixed Income
Liquidity
Operating revenues
Equity
By asset class
Financial Highlights (Dollars in thousands, except per-share amounts)
Operating results
Operating revenues
Operating income (loss)
Years ended March 31,
2016
2015
2014
2013
2012
$ 2,660,844 2,819,106
2,741,757
2,612,650
2,662,574
50,831
498,219
430,893
(434,499)
338,753
Income (loss) from continuing operations before income tax provision (benefit)
(25,218)
367,993
419,641
(510,607)
303,083
Net income (loss) attributable to Legg Mason, Inc.
(25,032)
237,080
284,784
(353,327)
220,817
Adjusted income(1)
Per share
Net income (loss), diluted
Adjusted income, diluted 1
Dividends declared
Book value
Financial condition
Total assets
370,271
378,751
417,805
347,169
397,030
$
(0.25)
3.36
0.80
2.04
3.26
0.64
2.33
3.41
0.52
(2.65)
2.61
0.44
1.54
2.77
0.32
39.37
40.23
40.32
38.44
40.59
$ 7,520,446 7,064,834
7,103,203
7,264,582
8,547,381
Total stockholders’ equity attributable to Legg Mason, Inc.
4,213,563 4,484,901
4,724,724
4,818,351
5,677,291
1 Adjusted income per diluted share 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.
Total Return Performance (Dollars)
Fixed Income
Equity
Alternatives
Liquidity
Index
Legg Mason, Inc.
SNL Asset Manager Index
S&P 500
By client domicile
U.S.
Elsewhere
200
150
100
50
0
MAR 11
MAR 12
MAR 13
MAR 14
MAR 15
MAR 16
Years ended March 31,
2011
2012
2013
2014
2015
2016
$ 100.00
100.00
100.00
78.30
97.75
108.54
91.64
125.54
123.69
141.72
158.02
150.73
161.53
172.30
169.92
103.51
142.66
172.95
The graph to the left compares the cumulative total stockholder return on Legg Mason’s
common stock for the last five fiscal years to 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, 2011). The SNL Asset Manager Index consists
of 44 asset management firms.
Source: © 2016 SNL Financial LC, Charlottesville, VA (www.snl.com)
41%46%9%4%56%17%27%37%63% Joseph A. Sullivan, Chairman & Chief Executive Officer
DEAR CLIENTS
AND FELLOW
SHAREHOLDERS,
Legg Mason’s fiscal year 2016 was a year of significant accomplishment,
as we continue to strategically build a better Legg Mason.
We believe that the actions we have undertaken this year, and over the
past few years, will benefit Legg Mason’s clients, shareholders, communities
and employees, as we accept the challenge to evolve and change as our
clients expect.
With the addition of RARE Infrastructure and our minority investment in
Precidian Investments and the announcement of two additional transactions
in Clarion Partners and the combination of EnTrust Capital with Permal, we
made substantive progress executing against our strategy of providing global
investors with more diversified choices of investment strategies, products,
vehicles and access.
While we are pleased with this essential repositioning during a time of
meaningful industry pressure and change, we clearly recognize the need now
to convert the opportunity we have created into sustained growth: we need
to deliver the results that you and our other stakeholders expect.
Legg Mason AR2016 | 3
1899Founded in3000+Employees40LocationsworldwideHeadquartered in Baltimore, Maryland Executing our long-term strategy in fiscal year 2016 was
challenging, as we navigated our legacy business through
short-term market turbulence. Market volatility, concerns
over global growth and interest rates, as well as geopolitical
instability pressured client flows, our AUM, revenues and
operating margins. This difficult environment certainly
reinforced our ongoing commitment to carefully calibrate
our costs in line with revenues.
And while we are disappointed with our financial
results for the fiscal year, we are pleased to have been
able to continue returning capital to shareholders through
our share repurchase program and our dividend, a 10%
increase in which we just announced.
Ours is an industry that is in the early stages of significant
disruption. This disruption means that change, for Legg
Mason and for the industry, is not an option, but a necessity.
The greatest risk we face is the implication of doing nothing
and perpetuating the status quo.
We are not willing to take that risk.
Asset management industry at an inflection point
Powerful forces are driving significant industry change.
The globalization of markets, persistently anemic global
growth and low interest rates (and expectations for more
of the same!), massive shifts in demographics, significant
increases in regulation across jurisdictions, and the relentless
push from innovation and technology all serve to alter the
landscape of our industry.
Being “global,” in mind and capability, has never been more
important. Investing solely in one’s home country neither
effectively diversifies risk nor appropriately capitalizes
on the opportunities that are abundant globally.
Investors need to expand their investment world, and our
own research indicates a willingness on their part to do so.
Exposure to global and unconstrained fixed income and
equity, real estate, infrastructure, and alternatives, on the one
hand, as well as volatility-mitigation strategies on the other,
can help investors achieve their desired investment goals.
We are now well-positioned to offer this.
But investing globally naturally results in more complexity
for investors and requires more from the industry. Asset
managers who can simultaneously offer global investment
capabilities, while providing local client engagement,
will be best positioned for success.
We are among them.
New investors in the emerging middle class around the
world have very different investment requirements than
those in mature economies who have invested for decades.
These demographically diverging investment needs, driven
in particular by retirement regimes that are in a dramatic
phase of evolution, are creating a massive opportunity for
those firms with scale, a broad investment capability and
a global footprint.
We have established just such a footprint.
Regulation across the globe is increasing significantly. While
designed to protect investors and rebuild confidence in the
integrity of markets, this dramatic expansion of regulatory
reach and compliance requirements clearly adds to the
industry complexity. The costs associated with regulatory
compliance requirements across multiple geographic regimes
necessitates that firms be of an appropriate size and scale.
Embracing regulatory client protection is entirely consistent
with our core values and mission.
Lastly, innovation, driven significantly by technology
advancement, has created the ability to serve investors in
more and better ways. Be it the ongoing evolution of ETFs,
the extension of classic active investment capabilities into
“next generation” products, or as technology-enabled advice
gains acceptance, innovation is transforming the investment
opportunities for our clients and redefining consumer
expectations for capabilities, access and service.
Innovation is central to our corporate DNA.
Client-driven diversification
Clients want and expect greater choice in all aspects of their
lives, and that is no less true in our business.
Higher client expectations and shifting investor preferences,
combined with the profound forces of change noted above,
create both challenges and opportunities for our industry.
Consequently, we expect to see more industry combinations
and consolidations, and there will clearly be fewer winners
in this increasingly competitive market.
The greatest risk we face is the implication of doing
nothing and perpetuating the status quo.
We are not willing to take that risk.
4 | Legg Mason AR2016
We intend to be one of them.
With our eyes focused on the future, Legg Mason has
diversified our investment capabilities and our product
and vehicle options over the past three years, efforts that
significantly intensified this year. And while we expect
to continue to add unique and differentiated investment
capabilities, products and vehicles, we also expect to
diversify the access to this expanded lineup of offerings
through multiple distribution portals.
We believe that thoughtful diversification expands client
choice and drives growth.
That growth, in turn, should benefit the investors and other
stakeholders in Legg Mason.
New investment capabilities
With the evolution of the industry in mind, we continued
this past year to pursue an aggressive strategic M&A agenda
to reposition Legg Mason.
We added investment capability in equity liquid
alternatives with the October 2015 acquisition of a 75%
majority equity interest in RARE Infrastructure, a pioneer
in global listedinfrastructure investing. We see significant
long-term growth ahead for infrastructure investing. We are
encouraged by the interest this relatively new asset class has
drawn and in our ability to bring RARE to market globally.
In April 2016, we purchased an 82% majority equity
interest in Clarion Partners, a leading real estate investment
management firm, concluding a long search to add world
class real estate investing to our broader capabilities. With
diverse offerings in private equity real estate, Clarion
Partners has a long history of delivering attractive risk-
adjusted returns for clients, and it will help to diversify
and stabilize our revenue and earnings stream. And again,
we believe that we can bring Clarion Partners' investment
capabilities to clients in the retail market to address their
needs for income and growth in a broader way.
Executive Committee
(Left to right)
Pete Nachtwey, Chief Financial Officer; Ursula Schliessler, Chief Administrative Officer; Tom Hoops, Head of Business Development;
Joseph A. Sullivan, Chairman & Chief Executive Officer; Tom Merchant, General Counsel; Terry Johnson, Head of Global Distribution
Our investment strategies may be utilized as single
investment threads or woven together, to deliver
the investment tapestry imagined by our clients.
The transaction to combine EnTrust Capital with The
Permal Group to create one of the largest global alternative
investment managers closed in May 2016, with Legg Mason
retaining a 65% stake in the newly-combined firm.
The new EnTrustPermal invests with over 180 individual
hedge fund managers, on behalf of 730 institutional
investors around the world, while also managing several
direct lending, opportunistic, co-investment and other
differentiated standalone strategies. EnTrustPermal is
one of the most highly diversified global players in the
alternatives and hedge fund space, and we are excited
about their growth prospects.
And finally, we continued to commercialize new and existing
strategies with Martin Currie and QS Investors, the two
firms that we acquired in the previous fiscal year.
Our new acquisitions have been structured with a
management-retained component of affiliate-level equity
to maximize alignment with Legg Mason. In pursuit
of similar alignment with our legacy affiliates, we have
continued to introduce new Management Equity Plans,
including one for Royce & Associates this year.
To fund our acquisitions and investments, we are pleased
to have efficiently deployed a combination of cash and debt,
successfully issuing $700 million in public bonds during
the year, at what remain historically low rates.
New products and vehicles
In December 2015, we launched our first exchange-traded
fund (ETF) vehicles with four smart beta strategies managed
by QS Investors, that leverage long institutional track records
and should deliver attractive, diversified results within a
systematic style of investing. The initial performance of these
ETFs, launched in a very volatile market, has been strong.
We’re also pleased with a minority interest investment we
made in Precidian Investments in January 2016, bringing a
product innovation capability to help us create more diverse
investment vehicle choices for investors.
The team at Precidian specializes in solving market
structure issues for ETFs, which is consistent with our
intention, not just to enter the ETF market, but to be
an innovation leader.
6 | Legg Mason AR2016
We expect to work with our affiliates to launch additional
differentiated product offerings in the ETF wrapper
throughout the coming year.
We have also continued to reshape and evolve our product
lineup, with one-third of our strategies now classified as next
generation active, including outcome-oriented, volatility-
managed, multi-asset class, unconstrained and alternative
products managed by our investment affiliates.
Increased client access
During an extremely difficult period for the retail
distribution business, our global retail platform had nearly
flat net sales for the fiscal year on gross sales of just over
$70 billion. In the midst of such a challenging market, we're
pleased to have expanded our market share in the U.S. retail,
insurance and RIA channels, and in our-cross border fund
ranges across several geographies.
But this performance reinforces the importance of
continuing to diversify our retail business by investment
product, asset class, channel and geography, with both new
and existing affiliates, positioning us to win long-term and
over market cycles.
We also announced a modest investment in iVEZT to
expand retirement product access to employees of small
businesses, and we continue to pursue creating more choice
by exploring opportunities in digital distribution to provide
our partners with technology-enabled advice.
Guided by a consequential mission
We aspire to be a great global company that, through
investing, meaningfully impacts the lives of all the
constituents with whom we interact.
And we believe that building a better, more consequential
company for our clients is the foundation for building the
best possible company for each of our stakeholders.
Investing to Improve LivesSM is our mission, our internal
compass, reinforced by a culture of doing the right thing,
always. This culture has been protected, passionately and
without compromise, throughout many challenging market
environments in our history, and it remains so today.
We recognize that this mission is meaningful only if we
deliver on our strategy, and we embrace the accountability
necessary to succeed.
Designed for What You Imagine
Legg Mason has always been a company designed
with our clients in mind, and that client-focused creation
continues today. Providing choices today that weave the
fabric of solutions for our clients’ future needs, we are
laying the foundation for a successful and enduring
asset management firm.
Thoughtfully and intentionally constructed, it is incumbent
on us to deliver what our clients want, and how they want
it, in order to help them achieve what they imagine.
Our design combines nine independent investment
managers, with a diversity of perspectives and specialized
expertise across asset classes, with a centralized global
distribution and shared services platform. Our investment
strategies may be utilized as single investment threads or
woven together, to deliver the investment tapestry imagined
by our clients.
Our design provides our investment capabilities through
varied products and vehicles and via multiple points of
access: the choices necessary to satisfy changing client
preferences, and which are necessary for growth.
We believe deeply that by providing investors with more
choice, we can become their firm of choice, and in the
process, create greater long-term shareholder value.
Choice for our clients,
Growth for our shareholders, and
Investing to improve the lives of our many constituents.
We are designed for what you imagine.
We thank you for joining us on this journey, and we look
forward to continuing to earn your trust and confidence,
every day.
Joseph A. Sullivan,
Chairman & Chief Executive Officer
Global value investing
As it nears its 30-year anniversary,
Brandywine Global celebrates a history
of success and dedication to value
investing. Acting with conviction and
challenging conventional ways of thinking
are hallmarks of its approach.
Assets by strategy (%)
78 Fixed Income
14 Diversified Equity
7 Large Cap Equity
1 Small/Mid Cap Equity
Brandywine Global’s assets under management grew for the seventh consecutive fiscal
year, to $70.2 billion as of March 31, 2016. With approximately half of AUM now originating
from over 50 countries outside of the U.S. and more than 75% being managed in global
mandates, the firm’s globally diversified reach and experience are well established.
Additionally, the firm has received several awards from leading industry publications
recognizing its strong long-term performance. Even through the volatility of the past year,
Brandywine Global continued to provide clients with attractive returns over the long term,
with 90% of client accounts outperforming their respective benchmarks over the last
five years.
Brandywine Global consistently seeks to bring value to all its relationships, including finding
ways to more effectively reach and service clients around the world. The firm expanded
operations in London and welcomed 33 new associates globally. Adding to its steady
stream of thought leadership and research, the firm launched its blog, Around the Curve.2
The blog, featuring regular topical essays and opinions from senior investment personnel,
demonstrates the firm’s commitment to bringing real-time ideas to an increasingly global
client base.
2 The contents of this blog are not incorporated into this annual report.
Legg Mason AR2016 | 7
Real estate investment specialists
Clarion Partners is a leading real estate
investment manager that has invested
for over 34 years, successfully executing
through market cycles both in private and
public equity and debt. Clarion invests
in the Americas across a broad range
of properties focusing on consistently
generating strong performance for clients.
Distinguished by its research-driven investment approach, long-term organizational stability,
and strong partnership culture, Clarion Partners provides innovative long-term real estate
solutions for its clients. Established in 1982, the firm is headquartered in New York, with
seven offices across the United States, as well as offices in London and São Paulo.
Clarion joined the Legg Mason group of affiliates on April 13, 2016. Legg Mason
owns 82% of Clarion Partners. A 2015 achievement for Clarion Partners was the $3.2
billion recapitalization of the Clarion Gables Multifamily Trust. Clarion converted Gables
Residential, a market-leading, vertically-integrated multifamily real estate company
into a perpetual life, open-end fund vehicle.
With strong real estate performance, Clarion continued its year-over-year growth
in assets under management, topping $41 billion as of April 30, 2016.
Assets by product type (%)
56 Core
31 Core Plus
12 Value
1 Opportunistic
DIVERSIFICATION BY
INVESTMENT CAPABILITY
AND STRATEGY
Globalization of markets has both created more correlation
and more complexity for investors to navigate. This also
creates opportunity for globally focused managers to provide
investors access to new asset classes and strategies from
outside their home markets. The ability to be local while
being global is essential for future success.
Traditional fixed income strategies are challenged by
persistently low interest rates. Traditional equity strategies
are challenged both by the low-return environment and
increasing volatility.
New investment strategies are needed to bridge those gaps.
Global bond, unconstrained and alternative credit product
categories can add returns in both a low and rising interest
rate environment. Real estate and infrastructure add
8 | Legg Mason AR2016
diversification. And, for those investors that want to manage
volatility or invest outside their home equity markets, there
are global equity, managed volatility, unconstrained and long-
short alternative equity strategies.
Over the past three years, we have embarked
on a strategic M&A agenda and added:
• A multi-asset class solutions capability with QS Investors
• An international equity capability with Martin Currie
• A liquid alternatives expertise with RARE Infrastructure
• A leading real estate investment firm in Clarion Partners
• A new alternatives manager with greater scale and broader
investment capability with the merger of EnTrust Capital
with Permal
Quality-focused equity
ClearBridge Investments is a leading
global equity manager that draws on
more than 50 years of experience to
deliver long-term results through active
management across strategies focused
on income, high active share and low-
volatility objectives.
ClearBridge Investments is committed to delivering long-term results through active
management. It has over a half century of experience in investment solutions driven
by fundamental research that emphasize differentiated stock selection to move our
clients forward.
Consistently strong investment performance and superior client service enabled
ClearBridge to extend its market presence across its platform of high active share,
income and low-volatility strategies, highlighted by institutional mandate wins
in multiple asset classes.
During the fiscal year, ClearBridge’s Large Cap Growth Strategy won numerous
country awards, and the firm continued to bring innovative solutions to investors with
the launch of the ClearBridge Sustainability Leaders Fund, its first ESG-focused mutual
fund. In addition, ClearBridge was named one of Pensions & Investments “Best Places
to Work in Money Management” for the fourth year in a row.
Assets by product type (%)
61 High Active Share
21 Income Solutions
18 Low Volatility
DIVERSIFICATION BY
PRODUCT AND VEHICLE
We believe the needs of retirees in mature economies
are different than those of younger investors and those in
emerging economies. Defined contribution programs have
largely replaced defined benefit plans in the United States,
and retirement regimes all over the world are in a dramatic
phase of evolution.
In the U.S., we expect the Department of Labor fiduciary
standard for retirement plans to accelerate the move by
investors toward different products and vehicles, especially
exchange-traded funds (ETFs), separately managed accounts
(SMAs), collective investment trusts (CITs) and other strategies.
We believe all of these trends signify both that individuals
throughout the world will need to assume more control over
their investments and that they will require more choice for a
variety of investment needs. And, technology and innovation
have created opportunities to offer those investors more
transparency and customization in increasingly cost-
effective vehicles.
Innovation, whether that is the ongoing evolution of ETFs,
development of alternatives and outcome-oriented strategies,
or extension of active investment capabilities into what
we call “next generation" products, is changing the face
of our industry.
At Legg Mason, we have been expanding our offering of
“next generation" products, now 34% of our total retail product
offerings. In December, we entered the solutions-oriented ETF
market with four smart beta ETFs.
In January, Legg Mason made a strategic minority investment
in Precidian Investments. Precidian specializes in creating
innovative products and solutions and solving market structure
issues, particularly with regard to the ETF marketplace. We
expect them to enhance our ability to create more diverse
investment vehicle choices for investors.
Legg Mason AR2016 | 9
DIVERSIFICATION BY
DISTRIBUTION CHANNEL
Thanks to technological advances, the average investor
has unprecedented access to information, unimagined
by previous generations. This is driving profound changes
in consumer buying behavior. Access to information and
an increasing comfort with technology by investors of
all ages suggests that new choices for client engagement
are a necessity.
Legg Mason is looking at ways to be more innovative in
distributing our strategies globally, including diversification
of distribution partners and how we work with them. We
are engaging a wider range of advisors across new channels
and using a combination of people and technology to service
them better.
In the U.S., over the past 20 months since we began
an initiative to further engage advisors, we've generated
approximately $6.2 billion in sales from nearly 15,000
advisors with whom we had done less than $25,000
in sales each over the previous two years.
Finally, there is technology-enabled advice: the next
generation of distribution. We have set a dedicated Alternative
Distribution Strategies team, to develop and evolve our
distribution model further.
One such initiative is Legg Mason’s minority investment
in iVEZT. The initiative will leverage technology to provide
small businesses without employer-sponsored retirement
programs with the back-office operations necessary to
provide their employees the opportunity to participate in
iVEZT’s payroll deduction IRAs. Forty million Americans
are currently without a retirement program, and this venture
could serve many of them.
We expect to have more to report on all of our technology
initiatives in the new fiscal year.
Global alternative funds-of-funds
EnTrustPermal is a leading global alternative
asset manager providing investment
solutions to pension funds, foundations,
endowments, sovereign wealth funds,
insurance companies, private banks,
family offices and individuals.
With 11 offices globally, EnTrustPermal offers investment solutions through customized
portfolios, co-investments, direct investments and established funds across alternative
strategies including diversified, strategy-focused and opportunistic. At the core of the firm's
culture is a strong emphasis on personal service, a high level of communication, extensive
due diligence and proprietary risk management.
In the fiscal year, EnTrust and Legg Mason announced a transaction to combine
EnTrust with The Permal Group to create one of the world’s largest alternatives managers.
The combination was closed on May 2, 2016. Legg Mason owns 65% of the newly
combined company, EnTrustPermal. The new company shares an entrepreneurial
mindset, investment-led culture, and client-centric philosophy. In addition to an expanded
investment team that can source opportunities from a broader range of managers in terms
of strategy, geography and assets, it has created an expanded operational due diligence
and compliance platform. Today, EnTrustPermal invests with over 180 managers, on behalf
of 730 institutional investors around the world, and is committed to being ahead of the
curve in evolving investment offerings to serve investors.
Multi-manager funds’ assets by strategy (%)
32 Opportunistic
24 Event Driven, Multi-
Strategy and Arbitrage
20 Activist Long/
Short Equity
15 Credit and Special
Situations
7 Long/Short Equity
2 Tail Risk
10 | Legg Mason AR2016
DESIGNED FOR
WHAT YOU IMAGINE
Global investors’ expectations of their investment managers
are evolving in significant ways. These investors expect a
diverse set of investment solutions to help them achieve their
financial goals. They expect those solutions to consistently
deliver compelling investment performance. And they want
them to be available in cost-efficient vehicles and to be able
to access them where and how they want.
No longer satisfied to simply take what the industry offers,
the global investor is demanding that investment managers
respond to these shifting preferences ... or risk losing their
business. The Legg Mason operating model is intentionally
designed to respond to shifting client preferences. It is
thoughtfully designed for what our clients imagine.
Our strategy is straightforward and focused to help
our clients meet their goals: Legg Mason aims to provide
global investors with more diversified choices of investment
strategies, products, vehicles and access. We believe
thoughtful diversification across all of those categories
will expand client choice, offer greater investment
opportunities, and ultimately drive growth to the
benefit of the Company's stakeholders.
Our design combines nine independent investment
managers that bring together a diversity of perspectives
and expertise across equities, fixed income and alternatives
with a world class global distribution platform that offers
broad choice in accessing the many different strategies
of our managers.
This client-centric design allows each part of the organization
to focus on what it does best, be that investing, product or
vehicle development, or distribution access.
Designed for what you imagine: it is what our clients
rightfully expect. It is what we deliver.
Active equity specialists
Martin Currie is an active global equity
specialist that builds high-conviction, stock-
driven portfolios based on fundamental
research. The firm is dedicated to delivering
optimum investment outcomes and
superior client relationships.
Assets by strategy (%)
34 High Active Share
31 Equity Income
27 Absolute Return
8 Passive
Headquartered in Edinburgh, Martin Currie manages money for a wide range of global,
institutional and retail clients. The firm offers high-conviction investment strategies built
around three main pillars, each delivering distinct client outcomes: high active share;
income; and absolute return. Over the past year, the firm has enhanced its three product
offerings in terms of expertise and innovation.
In high active share, there has been realignment of investment resources, focusing
research teams on client outcomes. The income pillar has been strengthened by the
recruitment of a new Head of Global Income in Edinburgh and broadening of the Martin
Currie Australia suite with the launch of new products and new hires. And absolute
return saw the launch of the Global Long-Term Unconstrained strategy and the hire
of an experienced team to lead the Japan long/short capability.
At a broader level, the firm was awarded an A+ rating by UNPRI, recognizing how
governance and sustainability is embedded across the investment proposition. Now
in its second year as a Legg Mason affiliate, the firm has benefited from initiatives such
as merging existing pooled funds into the Legg Mason platform and launching the firm’s
first two 1940 Act funds in the U.S.
Legg Mason AR2016 | 11
Quantitative equity and multi-
asset manager
QS Investors applies a diversified,
systematic and adaptive approach to its
investment discipline to provide consistent,
repeatable and risk-managed returns
across multiple market environments.
QS Investors partners with clients to create innovative solutions within a quantitative
framework. Taking a consultative approach to global asset management, it applies a
diversified, systematic and adaptive approach to managing portfolios with a repeatable,
risk-aware process. Strategies include global equities, liquid alternatives, multi-asset
and customized solutions.
QS Investors' long-term goal is to provide investors with innovative investment options
directly aligned to each investor’s individual objectives and risk tolerances. To that end,
fiscal year 2016 was a landmark year. Legg Mason's strong distribution capabilities
allowed QS to bring long-standing institutional investment strategies to retail investors.
QS launched its first alternative equity fund that directly addresses market risk and an
investor's need for growth. It launched four smart beta equity ETFs to target specific
investment outcomes in a cost-effective format. Tying it all together, the multi-asset
business continued to expand the business across target date, lifestyle and other
outcome-oriented strategies. Success was realized with strong growth in both
the multi-asset and equity businesses.
Total AUM by product (%)
58 Customized Solutions
22 Global Equities
20 U.S. Equities
ETF LAUNCH
On December 29, 2015, Legg Mason launched four new
outcome-oriented index-based ETF funds on the Nasdaq
Stock Market® in partnership with QS Investors. Increasing
concerns about macroeconomic risks, equity volatility, and
the continuing search for stable income are pressuring
investors to look beyond traditional market cap
weighted indices.
Leveraging QS Investors’ proprietary strategies with a
long institutional track record, these smart beta products are
positioned to deliver on their investment objectives in a very
crowded field, and the initial performance of these strategies
in volatile equity markets is very encouraging.
Legg Mason’s distribution and product teams are working
with authorized participants and advisors, particularly
in the RIA segment, to expand the commercialization
of these strategies.
12 | Legg Mason AR2016
Listed infrastructure equity
RARE Infrastructure is dedicated to
global listed infrastructure investments.
Established in 2006, RARE has grown to become one of the largest listed infrastructure
managers globally. RARE's experienced team of infrastructure investment specialists invest
in companies that own and develop major infrastructure, assets such as airports; gas,
electricity, and water systems; roads; ports; and communication towers in both developed
and emerging economies. Excellence in research and managing risk is at the heart of
RARE’s investment process.
Assets by product type (%)
84 Value Infrastructure
11 Tailored Portfolio
Infrastructure
4 Emerging Markets
Infrastructure
1 Yield Infrastructure
In October 2015, RARE officially joined the Legg Mason group of affiliates, with Legg
Mason acquiring a 75% equity holding. This partnership has provided opportunities
to expand RARE’s UCITS product into an additional nine new markets across Europe
and Asia. Additionally, RARE has recently expanded into the U.S. retail market through
the launch of a 40 Act Fund and is planning further expansion into the UK through
the launch of a Yield Strategy.
RARE’s head office is located in Sydney, Australia, with offices in London, Chicago
and Melbourne. As of March 31, 2016, RARE managed over $6.3 billion on behalf of
clients located in the UK, Europe, the United States and Australia. These clients include
government, corporate and industry pension funds, sovereign wealth funds, and retail
investors in Australia and Canada.
ESG INVESTING
Environmental, Social and Governance (ESG) investing
has evolved over the past several decades, as companies
and investment teams increasingly understand that
positive ESG attributes can lead to better performance
over time. Sustainability is just that: whether it’s better
resource utilization, product safety, labor relations, reporting
transparency, or adherence to regulatory or health and
safety standards, strong practices in this regard are
hallmarks of sustainable business models for the future.
As of April 2016, six of our investment Affiliates are
signatories of the Principles for Responsible Investment
(PRI), demonstrating their commitment to incorporate
environmental, social and governance factors into
investment decisions. Our affiliates believe that consideration
of those factors can have a positive impact on managing
risk and generating sustainable long-term returns.
A critical part of our strategy to serve our many stakeholders
is a culture that values diversity and inclusion. Diverse teams
and multiple perspectives throughout the organization can
yield stronger results and are supported by the management
team. Formal programs have been in place for more than
a decade, and we have evolved this work to include seven
Employee Resource Groups (ERGs), including a Veterans
group that was most recently added. In 2016, we also
launched a global Executive Diversity Council, sponsored
by a member of Executive Management, reflecting
the firm’s commitment to diversity and inclusion.
Legg Mason AR2016 | 13
Creating choice starts with understanding investors' views
Millennials: More conservative as investors
Most investors over 40 say the glass is half-full
% Optimistic about investing in 2016
78%
of millennials
are more
conservative/
risk averse than
a year ago
68%
of adults 40+
Allocation of investment assets by asset class (%)
19%
17%
24%
18%
Equities
Fixed Income
Cash
Real estate
28%
26%
13%
15%
9%
Nontraditional
6%
Global
U.S.
MOST OPTIMISTIC
75%
81%
Europe
LEAST OPTIMISTIC 64%
Source: Legg Mason Global Investment Survey 2016 — Trending Conversations.
Royce & Associates, investment advisor to The Royce Funds, is a small-cap equity
specialist offering portfolios with distinctive investment approaches to address specific
investment goals. An asset class pioneer, the firm has been managing micro-cap, small-
cap and small/mid-cap portfolios for more than 40 years.
Throughout the fiscal year, Royce continued its efforts to create more meaningful
differentiation among its portfolios. In doing this, Royce aligned its portfolio managers
with the strategy that works best with their expertise. The firm also rationalized
its portfolio lineup as part of this initiative.
In addition, Royce added more dedicated research analysts and quantitative resources
to improve and refine its advantages — a notably experienced team of small-cap portfolio
managers with an average tenure of more than 10 years (compared to less than seven
for small-cap portfolios tracked by Morningstar) and extensive access to company
managements (more than 1,200 company meetings in the last fiscal year). These changes
paved the way for many of its funds to respond positively to changes since the small-cap
Russell 2000 Index peaked on June 23, 2015. From that date through the end of the fiscal
year, more than 80 percent of Royce Funds benchmarked to that index outperformed it.
Small-cap equity
Royce & Associates is a small-cap equity
specialist with unparalleled knowledge
and experience, offering portfolios
with distinctive investment approaches
to meet an investor’s specific goals.
Assets by strategy (%)
86 U.S. Equity
7 Non-U.S. Equity
4 European Equity
3 Cash and Cash
Equivalents
14 | Legg Mason AR2016
Where they live matters
Portfolio return in 2015 (%) for investors over 40
Looking abroad for opportunity
64% of investors over 40 say they'll focus more
on international investments next year
8.6%
Global
investors
5.2%
European
investors
9.3%
Asian
investors
64%
Learn more at LeggMason.com/TrendingConversations
Fixed income
Founded in 1971, the firm is known
for its long-term fundamental value
approach, proprietary research and
team management.
Western Asset Management is one of the world's leading global fixed-income
managers. With more than 830 employees in nine global offices and $428.9 billion
in assets under management as of March 31, 2016, the firm delivers client solutions
across markets around the world. Since 1971, Western Asset has focused on
long-term fundamental value with deep experience across the range of fixed
income sectors.
In January 2016, Western Asset became a UNPRI signatory, demonstrating its
commitment to ESG issues. Strong investment performance at Western Asset also
garnered recognition from the industry. Among its many accolades, the firm was
named a finalist for Morningstar's 2015 Fixed-Income U.S. Fund Manager of the
Year award for the Core and Core Plus Funds. In addition, Western Asset was named
to Pensions & Investments' 2015 "Best Places to Work in Money Management."
Total AUM by mandate (%)
46 Specialized
26 Liquidity
23 Broad Portfolio
5 Municipals
† Awarded to Ken Leech, Carl Eichstaedt, and Mark Lindbloom for Western Asset Core Bond Fund (WACSX) and Western
Asset Core Plus Bond Fund (WAPSX), nominated Morningstar 2015 U.S. Fixed Income Manager of the Year, United States
of America. Morningstar Awards 2015 © Morningstar, Inc.
Legg Mason AR2016 | 15
Board of Directors
Standing (left to right)
Seated (left to right)
John H. Myers
Senior Advisor, Angelo, Gordon & Co.;
Retired CEO, GE Asset Management
Joseph A. Sullivan
Chairman & Chief Executive Officer,
Legg Mason, Inc.
Robert E. Angelica
Private Investor; Retired Chairman and CEO,
AT&T Investment Management Corporation;
(Chair of the Risk Committee)
Carol Anthony (“John”) Davidson
Private Investor; Retired Controller and Chief
Accounting Officer, Tyco International, LTD.
Cheryl Gordon Krongard
Private Investor; Retired CEO,
Rothschild Asset Management;
(Chair of the Compensation Committee)
Barry W. Huff
Retired Vice Chairman, Deloitte;
(Chair of the Audit Committee)
Dennis M. Kass
Private Investor; Retired CEO,
Jennison Associates
Margaret Milner Richardson
Private Consultant and Investor; Former
U.S. Commissioner of Internal Revenue
Kurt L. Schmoke
President of the University of Baltimore;
Former Mayor, City of Baltimore
W. Allen Reed
Private Investor; Retired CEO,
GM Asset Management Corporation;
(Chair of the Finance Committee)
John V. Murphy
Retired CEO, Oppenheimer Funds Inc.;
(Lead Independent Director, Chair
of the Nominating & Corporate
Governance Committee)
16 | Legg Mason AR2016
Table of Contents
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts or unless otherwise noted)
OPERATING RESULTS
Operating Revenues
Operating expenses, excluding impairment
Impairment of intangible assets and goodwill
Operating Income (Loss)
Other non-operating expense, net, including $107,074 debt
extinguishment loss in July 2014 and $68,975 in May 2012
Other non-operating income (expense) of consolidated investment
vehicles, net
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,
2016
2015
2014
2013
2012
$ 2,660,844
$ 2,819,106
$ 2,741,757
$2,612,650
$ 2,662,574
2,239,013
2,320,887
2,310,864
2,313,149
2,323,821
371,000
50,831
—
—
498,219
430,893
734,000
(434,499)
—
338,753
(68,806)
(136,114)
(13,726)
(73,287)
(54,006)
(7,243)
(25,218)
7,692
(32,910)
(7,878)
5,888
367,993
125,284
242,709
5,629
2,474
419,641
137,805
281,836
(2,948)
(2,821)
(510,607)
(150,859)
(359,748)
(6,421)
18,336
303,083
72,052
231,031
10,214
Net Income (Loss) Attributable to Legg Mason, Inc.
$
(25,032)
$
237,080
$
284,784
$ (353,327)
$
220,817
PER SHARE
Net Income (Loss) per Share Attributable to Legg Mason, Inc.
Shareholders:
Basic
Diluted
Weighted-Average Number of Shares Outstanding: (1)
Basic
Diluted
Dividends Declared
BALANCE SHEET
Total Assets(2)
Long-term debt(2)
Total Stockholders' Equity Attributable to Legg Mason, Inc.
FINANCIAL RATIOS AND OTHER DATA
Adjusted Income (3)
Adjusted Income per diluted share (3)
Operating Margin
Operating Margin, as Adjusted (4)
Adjusted EBITDA(5)
Total debt to total capital (6)
Assets under management (in millions)
Full-time employees
$
$
$
(0.25)
(0.25)
$
$
2.06
2.04
$
$
2.34
2.33
$
$
(2.65)
(2.65)
$
$
1.54
1.54
107,406
107,406
112,019
113,246
121,941
122,383
133,226
133,226
143,292
143,349
0.80
$
0.64
$
0.52
$
0.44
$
0.32
$ 7,520,446
$ 7,064,834
$ 7,103,203
$7,264,582
$ 8,547,381
1,740,985
4,213,563
1,048,946
4,484,901
1,031,118
4,724,724
1,139,876
4,818,351
1,128,526
5,677,291
$
$
370,271
3.36
1.9%
18.6%
$
621,722
29.9%
$
669,615
3,066
$
$
$
$
378,751
3.26
17.7%
23.0%
686,499
19.1%
702,724
2,982
$
$
$
$
417,805
$ 347,169
3.41
$
2.61
15.7%
22.0%
(16.6)%
17.5 %
617,092
$ 555,725
18.0%
19.2 %
701,774
$ 664,609
2,843
2,975
$
$
$
$
397,030
2.77
12.7%
22.3%
585,275
19.6%
643,318
2,979
(1)
(2)
Excludes weighted-average unvested restricted shares deemed to be participating securities for the years ended March 31, 2016 and 2015. Basic and diluted shares are the
same for periods with a Net Loss Attributable to Legg Mason, Inc. See Note 12 of Notes to Consolidated Financial Statements.
For the year ended March 31, 2016, Legg Mason elected to early adopt updated accounting guidance which requires unamortized debt issuance costs to be presented in the
balance sheet as a direct deduction from the carrying value of the associated long-term debt liability. This guidance was adopted on a retrospective basis. Therefore, for
years prior to fiscal 2016, unamortized debt issuance costs have been reclassified from Other assets to Long-term debt in the Consolidated Balance Sheets. See Note 1 of
Notes to Consolidated Financial Statements.
(3) Adjusted Income is a non-GAAP performance measure. We define Adjusted Income as Net Income (Loss) Attributable to Legg Mason, Inc., plus amortization and deferred
taxes related to intangible assets and goodwill, and imputed interest and tax benefits on contingent convertible debt less deferred income taxes on goodwill and indefinite-
life intangible asset impairment, if any. We also adjust for certain non-core items, such as intangible asset impairments, the impact of fair value adjustments of contingent
consideration liabilities, if any, 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. The calculation of Adjusted Income per diluted share includes weighted-average unvested restricted shares. See Supplemental Non-GAAP
Information in Management's Discussion and Analysis of Financial Condition and Results of Operations.
(4) Operating Margin, as Adjusted, is a non-GAAP performance measure we calculate by dividing (i) Operating Income (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, amortization related to intangible assets, transition-related costs of streamlining our business model, if any, income (loss)
of consolidated investment vehicles, the impact of fair value adjustments of contingent consideration liabilities, if any, 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.
(5) Adjusted EBITDA is a non-GAAP liquidity measure we define as cash provided by operations plus (minus) allocation of debt redemption payments, interest expense, net
of accretion and amortization of debt discounts and premiums, current income tax expense, net gains on investment securities, the net change in other assets and liabilities
and other. This definition results in a metric that is the same amount as EBITDA used in covenants in our revolving credit facility agreement. See Supplemental Non-GAAP
Information in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Calculated based on total gross debt as a percentage of total capital (total stockholders' equity attributable to Legg Mason, Inc. plus total gross debt) as of March 31.
(6)
Legg Mason AR2016 | 17 Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
We have made in this 2016 Annual Report, and from time to time may otherwise make in our public filings, press releases
and statements by our management, "forward-looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, including information relating to anticipated growth in revenues, margins or earnings per share,
anticipated changes in our business or in the amount of our client assets under management (“AUM”) or assets under
advisement (“AUA”), 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 caution 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 factors, such as: the total value and composition of our AUM; the mix
of our AUM among our affiliates, asset classes, client type and geography; the revenue yield of our AUM; the volatility and
general level of securities prices and interest rates; the relative investment performance 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
administrative fees at current levels; competitive conditions in our business; the ability to attract and retain key personnel
and the effects of acquisitions, including prior acquisitions.
Our future operating results are also dependent upon the level of operating expenses, which are subject to fluctuation for
the following or other reasons: variations in the level of compensation expense incurred as a result of changes in the number
of total employees, competitive factors, changes in the percentages of revenues paid as compensation or other reasons;
increases in distribution expenses; variations in expenses and capital costs, including depreciation, amortization and other
non-cash charges incurred by us to maintain our administrative infrastructure; unanticipated costs that may be incurred by
Legg Mason from time to time to protect client goodwill, to otherwise support investment products or in connection with
litigation or regulatory proceedings; and the effects of acquisitions and dispositions.
Our business is also subject to substantial governmental regulation and changes in legal, regulatory, accounting, tax and
compliance requirements that may have a substantial effect on our business and results of operations.
818 | Legg Mason AR2016
Table of Contents
EXECUTIVE OVERVIEW
Legg Mason, Inc., a holding company, with its subsidiaries (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 financial intermediaries. We have operations principally in the U.S. and the U.K. and also have
offices in Australia, Bahamas, Brazil, Canada, Chile, China, Dubai, France, Germany, Italy, Japan, Poland, Singapore, Spain,
Switzerland and Taiwan. All references to fiscal 2016, 2015 or 2014, refer to our fiscal year ended March 31 of that year.
Terms such as "we," "us," "our," and "Company" refer to Legg Mason.
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 investment advisory contracts for exceeding
performance benchmarks or hurdle rates. 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 products and services, for providing other support
services to investment portfolios, or for providing non-discretionary advisory services, 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 assets under management ("AUM") and assets under advisement
("AUA") and fee rates, and thus are affected by factors such as securities market conditions, our ability to attract and maintain
AUM and key investment personnel, and investment performance. Our AUM varies in large part from period to period due
to inflows and outflows of client assets as well as market performance and changes in foreign exchange rates. 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 investment objectives, liquidity needs,
investment horizon and amount of assets managed, our relationships with distributors and the external economic environment,
including market conditions.
The fees that we charge for our investment services vary based upon factors such as the type of underlying investment
product, the amount of AUM, the asset management affiliate that provides the services, and the type of services (and
investment objectives) that are provided. Fees charged for equity asset management services are generally higher than fees
charged for fixed income or liquidity asset management services. Accordingly, our revenues and average operating revenue
yields will be affected by the composition of our AUM, with changes in the relative level of equity assets and alternatives
typically more significantly impacting our revenues and average operating revenue yields. Average operating revenue yields
are calculated as the ratio of annualized investment advisory fees, distribution and service fees, and other revenues, less
performance fees, to average AUM. In addition, in the ordinary course of our business, we may reduce or waive investment
management fees, or limit total expenses, on certain products or services for particular time periods to manage fund expenses,
or for other reasons, and to help retain or increase managed assets. We have revenue sharing arrangements in place for most
of our asset management affiliates, under which specified percentages of the affiliates' revenues are required to be distributed
to us and the balance of the revenues is retained by the affiliates to pay their operating expenses, including compensation
expenses, but excluding certain expenses and income taxes. Under these arrangements, our asset management affiliates
retain different percentages of revenues to cover their costs. As such, our Net Income (Loss) Attributable to Legg Mason, Inc.,
operating margin and compensation as a percentage of operating revenues are impacted based on which affiliates and products
generate our AUM, and a change in AUM at one affiliate or with respect to one product or class of products can have a
dramatically different effect on our revenues and earnings than an equal change at another affiliate or in another product or
class of products. In addition, from time to time, we may agree to changes in revenue sharing and other arrangements 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-compensation related
operating expense levels at revenue share-based affiliates, and our overall profitability. The next largest component of our
cost structure is distribution and servicing expense, which consists primarily of fees paid to third-party distributors for selling
our asset management products and services and are largely variable in nature. Certain other operating costs are typically
consistent from period to period, such as occupancy, depreciation and amortization, and fixed contract commitments for
Legg Mason AR2016 | 19 Table of Contents
market data, communication and technology 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 materially affected by the overall trends and conditions of global financial
markets. 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, as well as changes in foreign currency exchange rates, among other things. Periods of
unfavorable market conditions are likely to have an adverse effect on our profitability. In addition, the diversification of
services and products offered, investment performance, access to distribution channels, reputation in the market, attraction
and retention of key employees and client relations are significant factors in determining whether we are successful in the
attraction and retention of clients. In the last few years, the industry has seen flows into products for which we do not
currently garner significant market share.
The financial services business in which we are engaged is extremely competitive. Our competition includes numerous
global, national, regional and local asset management firms, commercial banks, insurance companies and other financial
services companies. The industry has been impacted by continued economic uncertainty, the constant introduction of new
products and services, and the consolidation of financial services firms through mergers and acquisitions. The industry in
which we operate is also subject to extensive regulation under federal, state, and foreign laws. Like most firms, we have
been and will continue to be impacted by regulatory and legislative changes. Responding to these changes and keeping
abreast of regulatory developments, has required, and will continue to require, us to incur costs that impact our profitability.
Our strategic priorities are 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 initiatives on which management currently focuses in evaluating our performance and
financial condition.
Strategic Priorities
Products
Performance
Distribution
Initiatives
Create an innovative portfolio of investment products and promote revenue growth by
developing new products and leveraging the capabilities of our affiliates
Identify and execute strategic acquisitions to increase product offerings, strengthen our
affiliates, and fill gaps in products and services
Deliver compelling and consistent performance against both relevant benchmarks and the
products and services of our competitors
Evaluate and reallocate resources within and to our distribution platform to continue to
maintain and enhance our leading distribution function with the capability to offer
solutions to relevant investment challenges and grow market share worldwide
Productivity
Operate with a high level of effectiveness and improve ongoing efficiency
Manage expenses
Align economic relationships with affiliate management teams, including retained
affiliate management equity and the implementation of affiliate management equity plan
agreements
The strategic priorities discussed above are designed to drive improvements in our net flows, earnings, cash flows, AUM
and other key metrics, including operating margin. Certain of these key metrics are discussed in our annual results discussion
to follow.
20 | Legg Mason AR2016 Table of Contents
In connection with these strategic priorities (principally products and productivity):
• On May 2, 2016, we completed the transaction to combine The Permal Group, Limited ("Permal"), our existing
hedge fund platform, with EnTrust Capital ("EnTrust"). EnTrust is a leading alternative asset management firm
headquartered in New York with approximately $10 billion in AUM and $2 billion in AUA and committed capital.
We own 65% of the combined entity, which is branded EnTrustPermal.
The combination of the businesses of EnTrust and Permal creates a new global alternatives firm with over $26
billion in AUM and total client assets (including AUA and committed capital) of approximately $30 billion. In
connection with the restructuring of Permal for the combination with EnTrust, we expect to incur up to $100 million
of total restructuring and transition-related costs, of which $43.3 million was incurred during the year ended March
31, 2016. Approximately $40 million to $50 million of the anticipated remaining costs associated with the
restructuring are expected to be incurred in the year ending March 31, 2017. We expect to achieve approximately
$35 million in annual savings from the cost structures of the two businesses. See Notes 2 and 18 of Notes to
Consolidated Financial Statements for additional information.
• On April 13, 2016, we acquired an 82% majority equity interest in Clarion Partners, a diversified real estate asset
management firm based in New York. Clarion Partners managed approximately $41.5 billion in AUM as of April
30, 2016. See Note 18 of Notes to Consolidated Financial Statements for additional information.
•
•
In March 2016, we completed the implementation of a management equity plan with the management of Royce &
Associates ("Royce"). We incurred a non-cash charge of $21.4 million upon the issuance of management equity
plan units in fiscal 2016. See Note 11 of Notes to Consolidated Financial Statements for additional information
regarding the Royce management equity plan.
In March 2016, we issued $450 million of Senior Notes due 2026, and $250 million of Junior Subordinated Notes
due 2056, the net proceeds of which were used to finance the acquisitions of EnTrust and Clarion Partners. See
Note 6 of Notes to Consolidated Financial Statements for additional information.
• On January 22, 2016, we acquired a 20% minority equity position in Precidian Investments, LLC ("Precidian"), a
firm specializing in creating innovative products and solutions and solving market structure issues, particularly with
regard to the exchange-traded fund ("ETF") marketplace. See Note 2 of Notes to Consolidated Financial Statements
for additional information.
•
In December 2015, we launched four new ETF products on the NASDAQ Stock Exchange. These outcome-oriented
index-based ETF funds are managed by our wholly-owned asset management affiliate QS Investors Holdings, LLC
("QS Investors").
• On October 21, 2015, we acquired a 75% majority interest in RARE Infrastructure Limited ("RARE Infrastructure").
RARE Infrastructure specializes in global listed infrastructure investing, is headquartered in Sydney, Australia, and
had approximately $6.8 billion in AUM at closing. See Note 2 of Notes to Consolidated Financial Statements for
additional information.
Net Loss Attributable to Legg Mason, Inc. for the year ended March 31, 2016, was $25.0 million, or $0.25 per diluted share,
as compared to Net Income Attributable to Legg Mason, Inc. of $237.1 million, or $2.04 per diluted share for the year ended
March 31, 2015. In addition to the $43.3 million of expenses related to the restructuring of Permal for the combination with
EnTrust and the $21.4 million charge related to the Royce management equity plan, as discussed above, the year ended
March 31, 2016, included pre-tax impairment charges of $371.0 million, or $2.76 per diluted share, related to Permal
indefinite-life intangible assets, inclusive of the related intangible asset from Fauchier Partners Management Limited
("Fauchier"). The year ended March 31, 2015, included a pre-tax, non-operating charge of $107.1 million, or $0.59 per
diluted share, related to the refinancing of our previously outstanding 5.5% Senior Notes, as well as $35.8 million in expenses
related to the integration of two of our existing affiliates, Batterymarch Financial Management, Inc. ("Batterymarch") and
Legg Mason Global Asset Management, LLC ("LMGAA") into QS Investors. Average AUM and total revenues decreased
in fiscal 2016, as compared to fiscal 2015, as further discussed below.
Legg Mason AR2016 | 21 Table of Contents
Total AUM decreased during the year ended March 31, 2016, due to the negative impact of market performance and other
and net client outflows in both long-term and liquidity AUM, which were offset in part by the acquisition of RARE
Infrastructure in October 2015.
The following discussion and analysis provides additional information regarding our financial condition and results of
operations.
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
During fiscal 2016, while the U.S. economic environment was characterized by continued growth and improving
fundamentals, the business environment was strongly influenced by overall markets, which remained sensitive to increasing
concerns over economic and political conditions in other countries, as well as the U.S. Federal Reserve Board's decision to
increase the target federal funds rate in December 2015 for the first time since 2006.
Both U.S. and international equity markets experienced significant volatility during fiscal 2016. Despite recovering a
significant portion of the losses experienced as a result of this volatility, all three major U.S. equity market indices decreased
during fiscal 2016, after increasing for the past two fiscal years, while bond indices were mixed, as illustrated in the table
below:
Indices(1)
Dow Jones Industrial Average(2)
S&P 500(2)
NASDAQ Composite Index(2)
Barclays Capital U.S. Aggregate Bond Index
Barclays Capital Global Aggregate Bond Index
(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.
(2) Excludes the impact of the reinvestment of dividends and stock splits.
In December 2015, the Federal Reserve Board increased the target federal funds rate for the first time since 2006, from
0.25% to 0.50%. While the economic outlook for the U.S. has remained more positive in recent years, the financial
environment in which we operate continues to reflect a heightened level of sensitivity as we move into fiscal 2017.
% Change for the year ended
March 31:
2015
2016
(0.5)%
(0.4)%
(0.6)%
2.0 %
4.6 %
8.0 %
10.4 %
16.7 %
5.7 %
(3.7)%
2014
12.9 %
19.3 %
28.5 %
(0.1)%
1.9 %
22 | Legg Mason AR2016 Table of Contents
The following table sets forth, for the periods indicated, amounts in the Consolidated Statements of Income (Loss) as a
percentage of operating revenues and the increase (decrease) by item as a percentage of the amount for the previous period:
Percentage of Operating Revenues
Years Ended
March 31,
2015
2016
2014
Operating Revenues
Investment advisory fees
Separate accounts
Funds
Performance fees
Distribution and service fees
Other
Total Operating Revenues
Operating Expenses
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
Other non-operating income (expense) of
consolidated investment vehicles, net
Total other non-operating expense
Income (Loss) before Income Tax Provision
(Benefit)
Income tax provision (benefit)
Net Income (Loss)
Less: Net income (loss) attributable to
noncontrolling interests
31.0 %
53.0
1.6
14.3
0.1
100.0
29.2 %
54.8
3.0
12.8
0.2
100.0
28.4%
54.7
3.9
12.7
0.3
100.0
45.3
20.5
7.4
4.6
0.2
13.9
6.1
98.0
2.0
0.2
(1.8)
(1.0)
(0.3)
(2.9)
(0.9)
0.3
(1.2)
(0.3)
43.7
21.1
6.5
3.9
0.1
—
7.0
82.3
17.7
0.3
(2.1)
(3.0)
0.2
(4.6)
13.1
4.5
8.6
0.2
44.1
22.6
5.8
4.2
0.4
—
7.2
84.3
15.7
0.2
(1.9)
1.2
0.1
(0.4)
15.3
5.0
10.3
(0.1)
Net Income (Loss) Attributable to Legg
Mason, Inc.
n/m-not meaningful
(1) Calculated based on the change in actual amounts between fiscal years as a percentage of the prior year amount.
(0.9)%
8.4 %
10.4%
Period to Period Change(1)
2016
Compared
to 2015
2015
Compared
to 2014
0.2%
(8.8)
(49.7)
5.6
(60.7)
(5.6)
(2.3)
(8.3)
8.5
11.8
89.7
n/m
(17.9)
12.5
(89.8)
(24.3)
(16.8)
(69.5)
n/m
(41.6)
n/m
n/m
n/m
n/m
n/m
6.0 %
2.9
(22.0)
3.9
(32.1)
2.8
1.9
(3.9)
15.5
(4.8)
(78.9)
n/m
1.3
0.4
15.6
17.2
10.2
n/m
n/m
n/m
(12.3)
(9.1)
(13.9)
n/m
(16.8)%
Legg Mason AR2016 | 23 Table of Contents
ASSETS UNDER MANAGEMENT AND ASSETS UNDER ADVISEMENT
Assets Under Management
Our AUM is primarily managed across the following asset classes:
Equity
Fixed Income
Liquidity
Large Cap Growth
Large Cap Value
Small Cap Core
Equity Income
Large Cap Core
International Equity
Infrastructure Value
Small Cap Value
Sector Equity
Mid Cap Core
Emerging Markets Equity
Global Equity
U.S. Intermediate Investment Grade
U.S. Managed Cash
U.S. Credit Aggregate
U.S. Municipal Cash
Global Opportunistic Fixed Income
Global Government
U.S. Municipal
Global Fixed Income
U.S. Long Duration
U.S. Limited Duration
U.S. High Yield
Emerging Markets
The components of the changes in our AUM (in billions) for the years ended March 31, were as follows:
Beginning of period
Net client cash flows
Investment funds, excluding liquidity funds(1)
Subscriptions
Redemptions
Separate account flows, net
Total long-term flows
Liquidity fund flows, net
Separate account flows, net
Total liquidity flows
Total net client cash flows
Market performance and other (2)
Impact of foreign exchange
Acquisitions (dispositions), net (3)
End of period
2016
2015
2014
$
702.7
$
701.8
$
664.6
50.3
(62.3)
0.8
(11.2)
(15.1)
0.2
(14.9)
(26.1)
(15.3)
1.4
6.9
669.6
72.1
(61.2)
5.6
16.5
(21.3)
(0.9)
(22.2)
(5.7)
20.1
(18.5)
5.0
702.7
52.1
(58.1)
2.2
(3.8)
11.8
0.3
12.1
8.3
35.1
(4.9)
(1.3)
701.8
$
(1) Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes.
(2) Other is primarily the reclassification of $0.5 billion and $12.8 billion of client assets from AUM to AUA for fiscal 2016 and 2015, respectively, and the
$
$
(3)
reinvestment of dividends.
Includes $6.8 billion related to the acquisition of RARE Infrastructure and $0.1 billion related to the acquisition of PK Investments, LLP ("PK Investments")
during the year ended March 31, 2016; and $9.5 billion related to the acquisition of Martin Currie (Holdings) Limited ("Martin Currie") and $5.0 billion
related to the acquisition of QS Investors, offset in part by $9.5 billion related to the disposition of Legg Mason Investments Counsel and Trust ("LMIC"),
for the year ended March 31, 2015.
AUM at March 31, 2016, was $669.6 billion, a decrease of $33.1 billion, or 4.7%, from March 31, 2015. Total net client
outflows were $26.1 billion, consisting of net client outflows from the liquidity and long-term asset classes of $14.9 billion
and $11.2 billion, respectively. Net long-term asset outflows were comprised of equity and fixed income net outflows of
$10.8 billion and $0.4 billion, respectively. Equity net outflows were primarily in products managed by Royce, for which
outflows are expected to continue for the near-term, and ClearBridge Investments, LLC (“ClearBridge”), offset in part by
equity net inflows at QS Investors. Fixed income net outflows were primarily in products managed by Western Asset
Management Company ("Western Asset") and Permal, offset in part by fixed income net inflows at Brandywine Global
24 | Legg Mason AR2016
Table of Contents
Investment Management, LLC ("Brandywine"). We generally earn higher fees and profits on equity AUM, and outflows 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. Market performance and other was $(15.3) billion and the positive impact of
foreign currency exchange rate fluctuations was $1.4 billion. Acquisitions of $6.9 billion primarily relate to the acquisition
of RARE Infrastructure in October 2015.
AUM at March 31, 2015, was $702.7 billion, an increase of $0.9 billion, or 0.1%, from March 31, 2014. Total net client
outflows were $5.7 billion, as net client outflows of $22.2 billion from the liquidity asset class were substantially offset by
$16.5 billion of net client inflows into long-term asset classes. In fiscal 2015, we experienced net inflows into long-term
asset classes for the only time since fiscal 2007. Net long-term asset inflows were comprised of fixed income net inflows
of $19.2 billion offset in part by equity net outflows of $2.7 billion. Fixed income net inflows were primarily in products
managed by Brandywine and Western Asset. Equity net outflows were primarily in products managed by Royce and QS
Investors and were partially offset by equity inflows at ClearBridge and Brandywine. Market performance and other totaled
$20.1 billion, as the positive impact of market performance and other of $32.9 billion was offset in part by the reclassification
of $12.8 billion of client assets from AUM to AUA in the first quarter of fiscal 2015, as further discussed below. The negative
impact of foreign currency exchange rate fluctuations was $(18.5) billion. Acquisitions (dispositions), net, totaled $5.0
billion, with $9.5 billion related to the acquisition of Martin Currie and $5.0 billion related to the acquisition of QS Investors,
offset in part by $9.5 billion related to the disposition of LMIC.
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 relationships 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, including
investment performance, changes in prevailing interest rates, changes in our reputation in the marketplace, changes in
management or control of clients or third-party distributors with whom we have relationships, loss of key investment
management personnel or financial market performance.
AUM by Asset Class
AUM by asset class (in billions) for the years ended March 31 were as follows:
Equity
Fixed Income
Total long-term assets
Liquidity
Total
2016
$ 180.5
376.8
557.3
112.3
$ 669.6
% of
Total
2015
% of
Total
2014
27% $ 199.4
56
376.1
83
575.5
17
127.2
100% $ 702.7
28% $ 186.4
365.2
54
551.6
82
150.2
18
100% $ 701.8
% of
Total
27%
52
79
21
100%
Average AUM by asset class (in billions) for the years ended March 31 were as follows:
Equity
Fixed Income
Total long-term assets
Liquidity
Total
2016
$ 189.2
372.5
561.7
123.1
$ 684.8
% of
Total
2015
% of
Total
2014
28% $ 195.4
54
367.1
82
562.5
18
140.0
100% $ 702.5
28% $ 172.8
358.7
52
531.5
80
135.9
20
100% $ 667.4
% of
Total
26%
54
80
20
100%
% Change
2016
Compared
to 2015
2015
Compared
to 2014
(9)%
—
(3)
(12)
(5)
7%
3
4
(15)
—
% Change
2016
Compared
to 2015
2015
Compared
to 2014
(3)%
1
—
(12)
(3)
13%
2
6
3
5
Legg Mason AR2016 | 25 Table of Contents
The component changes in our AUM by asset class (in billions) for the fiscal years ended March 31, 2016, 2015 and 2014,
were as follows:
March 31, 2013
Investment funds, excluding liquidity funds
Subscriptions
Redemptions (1)
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other (2)
Impact of foreign exchange
Acquisitions (dispositions), net
March 31, 2014
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other (2)
Impact of foreign exchange
Acquisitions (dispositions), net (3)
March 31, 2015
Investment funds, excluding liquidity funds
Equity
Fixed
Income
$
161.8
$
365.1
Total
Long-Term
526.9
$
Liquidity
Total
$
137.7
$
664.6
27.0
(30.1)
(1.9)
—
(5.0)
31.0
(0.1)
(1.3)
186.4
29.4
(33.7)
1.6
—
(2.7)
11.4
(2.7)
7.0
199.4
25.1
(28.0)
4.1
—
1.2
3.6
(4.7)
—
365.2
42.7
(27.5)
4.0
—
19.2
8.4
(14.7)
(2.0)
376.1
52.1
(58.1)
2.2
—
(3.8)
34.6
(4.8)
(1.3)
551.6
72.1
(61.2)
5.6
—
16.5
19.8
(17.4)
5.0
575.5
—
—
0.3
11.8
12.1
0.5
(0.1)
—
150.2
—
—
(0.9)
(21.3)
(22.2)
0.3
(1.1)
—
127.2
52.1
(58.1)
2.5
11.8
8.3
35.1
(4.9)
(1.3)
701.8
72.1
(61.2)
4.7
(21.3)
(5.7)
20.1
(18.5)
5.0
702.7
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
50.3
(62.3)
1.0
(15.1)
Net client cash flows
(26.1)
Market performance and other (2)
(15.3)
Impact of foreign exchange
1.4
Acquisitions (dispositions), net (3)
6.9
669.6
March 31, 2016
(1) Fixed income redemptions include $4.7 billion for the year ended March 31, 2014, related to a single, low-fee global sovereign mandate client. Assets related
22.6
(36.1)
2.7
—
(10.8)
(15.3)
0.3
6.9
180.5
—
—
0.2
(15.1)
(14.9)
0.1
(0.1)
—
112.3
27.7
(26.2)
(1.9)
—
(0.4)
(0.1)
1.2
—
376.8
50.3
(62.3)
0.8
—
(11.2)
(15.4)
1.5
6.9
557.3
$
$
$
$
$
to this client were reclassified from AUM to AUA during the first quarter of fiscal 2015, as further discussed below.
(2) Other is primarily the reclassification of client assets from AUM to AUA for fiscal 2016 and 2015 of $0.5 billion and $12.8 billion, respectively, and the
(3)
reinvestment of dividends.
Includes $6.8 billion related to the acquisition of RARE Infrastructure and $0.1 billion related to the acquisition of PK Investments during the year ended
March 31, 2016; and $9.5 billion related to the acquisition of Martin Currie and $5.0 billion related to the acquisition of QS Investors, offset in part by $9.5
billion related to the disposition of LMIC for the year ended March 31, 2015.
Alternative Asset Class
Beginning in the first quarter of fiscal 2017, we will present alternative assets as a separate asset class of our AUM. We
currently define alternative assets as all AUM managed by EnTrustPermal, Permal Capital Management, Clarion Partners,
and RARE Infrastructure.
26 | Legg Mason AR2016 Table of Contents
AUM by Distribution Channel
Broadly, we have two principal distribution channels, Global Distribution and Affiliate/Other, through which we sell a variety
of investment 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 which principally sell institutional separate account management, liquidity (money
market) funds, and funds-of-hedge funds.
The component changes in our AUM by distribution channel (in billions) for the years ended March 31, 2016, 2015 and
2014, were as follows:
Global
Distribution
$
$
Total
March 31, 2013
Net client cash flows, excluding liquidity funds
Liquidity fund flows, net
Net client cash flows, excluding liquidity funds
Liquidity fund flows, net
Net client cash flows
Market performance and other
Impact of foreign exchange
Acquisitions (dispositions), net
March 31, 2014
Affiliate/Other
432.5
$
(2.3)
11.8
9.5
16.4
(2.7)
(1.3)
454.4
(0.8)
(21.3)
(22.1)
8.2
(12.8)
664.6
(3.5)
11.8
8.3
35.1
(4.9)
(1.3)
701.8
15.6
(21.3)
(5.7)
20.1
(18.5)
5.0
702.7
(11.0)
(15.1)
(26.1)
(15.3)
1.4
6.9
669.6
Includes $6.8 billion related to the acquisition of RARE Infrastructure and $0.1 billion related to the acquisition of PK Investments during the year ended
March 31, 2016; and $9.5 billion related to the acquisition of Martin Currie and $5.0 billion related to the acquisition of QS Investors, offset in part by $9.5
billion related to the disposition of LMIC for the year ended March 31, 2015.
232.1
(1.2)
—
(1.2)
18.7
(2.2)
—
247.4
16.4
—
16.4
11.9
(5.7)
—
270.0
(3.5)
—
(3.5)
(13.1)
1.2
—
254.6
Net client cash flows
Market performance and other
Impact of foreign exchange
Acquisitions (dispositions), net
March 31, 2016
(1)
Net client cash flows
Market performance and other
Impact of foreign exchange
Acquisitions (dispositions), net
March 31, 2015
Net client cash flows, excluding liquidity funds
Liquidity fund flows, net
432.7
(7.5)
(15.1)
(22.6)
(2.2)
0.2
6.9 (1)
5.0 (1)
415.0
$
$
$
Operating Revenue Yield
Our overall operating revenue yield, less performance fees, across all asset classes and distribution channels was 38 basis
points for the year ended March 31, 2016, and 39 basis points for each of the years ended March 31, 2015 and 2014. Fees
for equity assets are generally higher, averaging approximately 70 basis points, 75 basis points and 85 basis points for the
years ended March 31, 2016, 2015, and 2014, respectively. The average fee rate for equity assets has declined over the last
four years due to a shift in the mix of equity assets from higher fee equity products to lower fee equity products. This
compares to fees for fixed income assets, which averaged approximately 30 basis points for each of the years ended March
31, 2016, 2015 and 2014, respectively, 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, 2016, 2015,
and 2014. Equity assets are primarily managed by ClearBridge, Royce, Brandywine, Permal, QS Investors, Martin Currie
and RARE Infrastructure; fixed income assets are primarily managed by Western Asset, Brandywine, and Permal; and
liquidity assets are managed by Western Asset. Fee rates for assets distributed through Legg Mason Global Distribution,
which are predominately retail in nature, averaged approximately 45 basis points for the year ended March 31, 2016, and
approximately 50 basis points for each of the years ended March 31, 2015 and 2014, while fee rates for assets distributed
Legg Mason AR2016 | 27 Table of Contents
through the Affiliate/Other channel averaged approximately 35 basis points for each of the years ended March 31, 2016,
2015, and 2014.
Investment Performance
Overall investment performance of our AUM for the years ended March 31, 2016, 2015 and 2014, was mixed compared to
relevant benchmarks.
Year ended March 31, 2016
For the year ended March 31, 2016, U.S. indices produced mixed returns. The best performing was the Dow Jones Industrial
Average, returning 2.1%. These returns were achieved in an economic environment characterized by unexpected declines
in oil prices, a strong U.S. dollar, along with a slow-to-recover U.S. economy, and Chinese currency devaluation.
In the fixed income markets, in December 2015, the Federal Reserve raised its target rate 0.25%, representing the Federal
Reserve's first step toward monetary policy normalization, however, expectations of future Federal Reserve interest rate
increases lessened as forecasts pointed to fewer future rate increases. This resulted in the yield curve continuing to flatten
over the fiscal year as many long-dated yields declined.
The lowest performing fixed income sector for the year ended March 31, 2016, was high yield bonds, as measured by the
Barclays U.S. High Yield Index, which declined 3.7%. The best performing fixed income sector for the year ended March
31, 2016, was U.S. Government bonds as measured by the Barclays U.S. Government Index, which returned 2.4%.
Year ended March 31, 2015
For the year ended March 31, 2015, most U.S. indices produced positive returns. The best performing was the NASDAQ
Composite, which returned 16.7%. These returns were achieved in an economic environment characterized by uneven global
growth and heightened sensitivity to economic news such as declining oil prices and unrest in the Middle East.
In the fixed income markets, the Federal Reserve kept the target rate and discount rate steady while signaling an increase in
the Federal Reserve funds target rate in the near term. Overall, the yield curve flattened over the fiscal year as many long-
dated yields declined.
The lowest performing fixed income sector for the year ended March 31, 2015, was high yield bonds, as measured by the
Barclays U.S. High Yield Index, which returned 2.0%. The best performing fixed income sector for the year ended March
31, 2015, was corporate bonds as measured by the Barclays U.S. Credit Index, which returned 6.7%.
Year ended March 31, 2014
For the year ended March 31, 2014, most U.S. indices produced positive returns. The best performing was the NASDAQ
Composite, which returned 28.5%. These returns were achieved in an economic environment characterized by uneven global
growth and heightened sensitivity to economic news, such as concerns for economic growth in China and the then ongoing
Ukraine/Russia crisis.
In the fixed income markets, the Federal Reserve kept the target rate and discount rate steady while tapering the bond-buying
program. The yield curve steepened over the fiscal year but flattened in the last quarter as many long-dated yields declined.
The lowest performing fixed income sector for the year ended March 31, 2014, was U.S. Treasury Inflation Protected
Securities ("TIPS"), as measured by the Barclays U.S. TIPS Index, which declined 6.5%. The best performing fixed income
sector for the year ended March 31, 2014, was high yield bonds as measured by the Barclays U.S. High Yield Bond Index,
which returned 7.5%.
28 | Legg Mason AR2016
Table of Contents
The following table presents a summary of the percentages of our AUM by strategy(1) that outpaced their respective
benchmarks as of March 31, 2016, 2015 and 2014, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
As of March 31, 2016
As of March 31, 2015
As of March 31, 2014
1-year
3-year
5-year
10-year
1-year
3-year
5-year
10-year
1-year
3-year
5-year
10-year
Total (includes liquidity)
48%
66%
86%
82%
67%
84%
86%
88%
75%
87%
84%
92%
Equity:
Large cap
Small cap
Total equity
(includes other
equity)
Fixed income:
U.S. taxable
U.S. tax-exempt
Global taxable
Total fixed income
45%
70%
23%
19%
86%
30%
69%
63%
24%
10%
64%
11%
74%
26%
94%
42%
67%
33%
91%
26%
52%
29%
76%
82%
51%
32%
74%
68%
30%
58%
66%
81%
54%
69%
45%
77%
31%
100%
11%
29%
78%
0%
75%
72%
87%
79%
100%
100%
85%
87%
84%
82%
74%
100%
77%
76%
94%
100%
89%
93%
93%
100%
88%
92%
88%
100%
84%
88%
94%
0%
54%
74%
94%
100%
82%
91%
94%
100%
98%
96%
97%
100%
93%
96%
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, 2016, 2015 and 2014, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
As of March 31, 2016
As of March 31, 2015
As of March 31, 2014
1-year
3-year
5-year
10-year
1-year
3-year
5-year
10-year
1-year
3-year
5-year
10-year
Total (excludes liquidity)
48%
61%
72%
65%
55%
65%
63%
70%
44%
63%
56%
68%
Equity:
Large cap
Small cap
Total equity
(includes other
equity)
Fixed income:
U.S. taxable
U.S. tax-exempt
Global taxable
Total fixed income
47%
36%
69%
15%
89%
20%
52%
60%
46%
15%
82%
19%
73%
21%
69%
59%
49%
27%
86%
19%
55%
25%
54%
72%
45%
52%
67%
54%
38%
57%
53%
63%
39%
55%
42%
60%
76%
11%
30%
51%
83%
51%
75%
73%
84%
63%
83%
78%
81%
88%
50%
81%
80%
83%
79%
80%
87%
57%
86%
78%
86%
60%
81%
77%
86%
88%
55%
84%
80%
27%
27%
54%
85%
61%
86%
78%
92%
68%
84%
83%
85%
86%
86%
86%
(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 performance comparison for all of the assets is based upon the performance of the separate account.
As of March 31, 2016, 2015 and 2014, 91%, 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 comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account
and investment fund performance may differ.
(2) Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of March 31, 2016, 2015 and 2014, the U.S. long-term mutual
fund assets represented in the data accounted for 19%, 21% and 20%, respectively, of our total AUM. The performance of our U.S. long-term
mutual fund assets is included in the strategies.
Legg Mason AR2016 | 29 Table of Contents
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 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, 2016, constituted an aggregate of approximately $433 billion, or approximately 65% of
our total AUM. The only meaningful exclusion of funds are our funds-of-hedge funds strategies, which involve privately
placed hedge funds, and represent only 2% of our total AUM as of March 31, 2016, for which investment performance
is not made publicly available. Presenting 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(1)
Equity
Large Cap
Inception Date
Performance
Type(2)
1-year
3-year
5-year
10-year
Inception
Annualized Absolute/Relative Total Return vs. Benchmark
Clearbridge Aggressive Growth Fund
10/24/1983
Russell 3000 Growth
Clearbridge Appreciation Fund
S&P 500
Clearbridge Dividend Strategy
S&P 500
3/10/1970
11/6/1992
Clearbridge Large Cap Growth Fund
8/29/1997
Russell 1000 Growth
Clearbridge Value Trust
S&P 500
Clearbridge All Cap Value
Russell 3000 Value
4/16/1982
11/12/1981
Clearbridge Large Cap Value Fund
12/31/1988
Russell 1000 Value
Legg Mason Brandywine Diversified Large Cap
Value Fund
Russell 1000 Value
Small Cap
Royce Total Return Fund
Russell 2000
Royce Pennsylvania Mutual
Russell 2000
Clearbridge Small Cap Growth
Russell 2000 Growth
Royce Premier Fund
Russell 2000
Royce Special Equity
Russell 2000
n/a - not applicable
9/7/2010
12/15/1993
6/30/1967
7/1/1998
12/31/1991
5/1/1998
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
Absolute
Relative
6.24%
(1.86)%
7.22%
0.21%
5.96%
11.86%
1.99%
10.26%
(0.08)%
8.39%
(1.05)%
(0.69)%
(2.32)%
(2.25)%
(6.33)%
(1.80)%
(1.87)%
(9.70)%
9.99%
(11.04)%
(3.18)%
11.68%
(0.33)%
10.65%
(0.93)%
10.55%
(1.03)%
13.99%
1.61%
9.33%
10.28%
(1.54)%
8.67%
(3.16)%
14.64%
1.03%
9.50%
5.32%
(3.76)%
9.65%
0.27%
8.77%
(0.61)%
5.44%
(4.51)%
10.62%
0.37%
10.02%
(0.23)%
5.88%
6.80%
(0.96)%
(0.41)%
4.67%
4.92%
2.42%
0.64%
1.62%
(0.16)%
4.58%
2.06%
(5.70)%
(7.48)%
(7.37)%
(5.32)%
(0.92)%
0.62%
(2.34)%
(0.80)%
(4.09)%
5.67%
(6.99)%
2.77%
7.67%
(0.61)%
0.68%
3.81%
6.22%
0.50%
n/a
n/a
5.44%
0.19%
4.87%
(2.17)%
(2.28)%
(0.39)%
(14.24)%
4.37%
7.50%
5.83%
(2.40)%
(8.34)%
1.42%
(9.60)%
0.16%
(3.54)%
(0.20)%
(0.17)%
3.75%
3.64%
(3.09)%
(3.56)%
3.67%
5.76%
(3.17)%
(1.44)%
5.79%
0.53%
6.57%
1.32%
7.92%
2.02%
11.49%
(0.17)%
9.77%
9.49%
(0.56)%
12.82%
0.26%
10.43%
2.19%
11.45%
n/a
9.25%
3.54%
11.11%
2.05%
8.58%
2.05%
30 | Legg Mason AR2016 Table of Contents
Fund Name/Index(1)
Fixed Income
U.S. Taxable
Western Asset Core Plus Fund
Barclays US Aggregate
Western Asset Core Bond Fund
Barclays US Aggregate
Annualized Absolute/Relative Total Return vs. Benchmark
Inception
Date
Performance
Type(2)
1-year
3-year
5-year
10-year
Inception
7/8/1998
Absolute
1.71%
Relative
(0.25)%
9/4/1990
Absolute
Relative
2.07%
0.11%
(0.85)%
(2.81)%
3.27%
0.77%
3.22%
0.72%
0.87%
4.78%
1.00%
4.40%
0.62%
2.26%
(1.63)%
(1.51)%
Western Asset Total Return Unconstrained
7/6/2006
Absolute
Barclays US Aggregate
Relative
Western Asset Short Term Bond Fund
11/11/1991
Absolute
0.12%
Citi Treasury Government/Credit 1-3 YR
Relative
Western Asset Inflation Index Plus Bond
3/1/2001
Absolute
Barclays US TIPS
Relative
Western Asset Intermediate Bond Fund
7/1/1994
Absolute
Barclays Intermediate Government/Credit
Relative
Western Asset Corporate Bond Fund
11/6/1992
Absolute
Barclays US Credit
Relative
(0.87)%
(0.78)%
(2.30)%
2.14%
0.08%
(0.64)%
(1.58)%
Western Asset Mortgage Defined Opportunity Fund Inc.
2/24/2010
Absolute
0.16%
BOFAML Floating Rate Home Loan Index
Western Asset High Yield Fund
Barclays US Corp High Yield
Relative
9/28/2001
Absolute
Relative
Western Asset Adjustable Rate Income
6/22/1992
Absolute
Citi T-Bill 6-Month
U.S. Tax-Exempt
Relative
(0.65)%
(8.62)%
(4.93)%
(0.03)%
(0.20)%
0.55%
(0.36)%
(1.67)%
(0.96)%
2.20%
0.37%
3.38%
0.52%
9.13%
6.95%
(1.04)%
(2.88)%
0.54%
0.44%
Western Asset Managed Municipals Fund
3/4/1981
Absolute
3.06%
3.28%
Barclays Municipal Bond
Global Taxable
Relative
(0.92)%
(0.35)%
Legg Mason Western Asset Macro Opportunities Bond
11/30/2013
Absolute
3-Month LIBOR
Relative
Legg Mason Brandywine Global Opportunities Bond
11/1/2006
Absolute
Citi World Government Bond
Relative
Legg Mason Brandywine Absolute Return Opportunities
Fund
Citi 3-Month T-Bill
2/28/2011
Absolute
Relative
Legg Mason Brandywine Global Fixed Income
10/31/2003
Absolute
Citi World Government Bond
Relative
Legg Mason Western Asset Global Multi Strategy Fund
8/31/2002
Absolute
50% Bar. Global Agg./ 25% Bar. HY 2%/25% JPM EMBI +
Relative
Western Asset Global High Yield Bond Fund
2/22/1995
Absolute
Barclays Global High Yield
Relative
Legg Mason Western Asset Global Core Plus Bond Fund
12/31/2010
Absolute
Barclays Global Aggregate Index
Relative
Legg Mason Western Asset Australian Bond Trust
6/30/1983
Absolute
UBS Australian Composite Bond Index
Relative
Western Asset Emerging Markets Debt
10/17/1996
Absolute
(0.39)%
(0.80)%
(0.30)%
(6.23)%
(3.70)%
(3.78)%
(0.94)%
(6.87)%
(4.21)%
(7.03)%
(6.50)%
(7.13)%
(0.30)%
(2.75)%
1.99%
0.02%
0.42%
JPM EMBI Global
Liquidity
Relative
(3.94)%
n/a
n/a
0.56%
0.06%
0.07%
0.02%
(0.75)%
(1.24)%
(0.87)%
(2.51)%
(1.51)%
(3.86)%
3.60%
(0.08)%
5.70%
0.30%
(1.29)%
(3.72)%
6.02%
1.13%
5.43%
0.54%
n/a
n/a
1.86%
6.30%
1.06%
7.04%
0.68%
4.37%
(0.56)%
3.59%
(0.93)%
(0.69)%
4.10%
5.14%
1.12%
0.00%
2.28%
(0.74)%
(0.53)%
(0.35)%
3.58%
0.57%
5.37%
0.37%
12.28%
8.31%
2.94%
5.03%
0.69%
5.06%
(0.64)%
n/a
n/a
5.39%
5.90%
0.59%
6.47%
0.00%
14.59%
9.26%
6.54%
(1.99)%
(1.62)%
(1.60)%
1.21%
1.10%
6.71%
1.12%
n/a
n/a
3.91%
2.74%
2.96%
2.90%
2.15%
0.99%
1.34%
1.47%
0.25%
5.32%
0.46%
n/a
n/a
n/a
n/a
n/a
n/a
4.31%
0.12%
3.84%
2.70%
(0.13)%
7.84%
0.48%
4.43%
4.12%
5.78%
2.19%
2.98%
2.93%
4.41%
0.39%
6.01%
(2.35)%
(1.98)%
(1.14)%
2.53%
4.55%
6.66%
(2.61)%
(2.83)%
(2.20)%
4.87%
0.28%
7.14%
0.52%
2.74%
n/a
n/a
6.75%
0.48%
5.73%
(3.23)%
(1.38)%
4.86%
0.54%
6.41%
0.56%
9.31%
0.27%
3.30%
0.29%
Western Asset Institutional Liquid Reserves Ltd.
12/31/1989
Absolute
Citi 3-Month T-Bill
Relative
0.21%
0.14%
0.12%
0.07%
0.14%
0.09%
1.38%
0.31%
n/a - not applicable
(1) Listed in order of size based on AUM of fund within each subcategory.
(2) Absolute performance is the actual performance (i.e., rate of return) of the fund. Relative performance is the difference (or variance) between the performance
of the fund and its stated benchmark.
Legg Mason AR2016 | 31 Table of Contents
Assets Under Advisement
During the quarter ended June 30, 2014, we began reporting AUA as a result of the acquisition of approximately $98 billion
of AUA from QS Investors. Also during the first quarter of fiscal 2015, approximately $12.8 billion of assets previously
reported as AUM, primarily related to a low-fee global sovereign mandate for which investment discretion had abated over
time, were reclassified to AUA. We experienced significant AUA outflows during the year ended March 31, 2015 as a result
of one client withdrawing approximately $80 billion. These redemptions did not have a material impact on our net income
due to their low fee nature.
As of March 31, 2016 and 2015, AUA was approximately $39 billion and $35 billion, respectively. AUA as of March 31,
2016 was comprised of approximately $17 billion related to QS Investors, approximately $10 billion related to Western
Asset, approximately $8 billion related to ClearBridge, approximately $2 billion related to Permal, and approximately $2
billion related to Brandywine. AUA fee rates vary with the level of non-discretionary service provided. Our average
annualized fee rate related to AUA was approximately 10 basis points for the year ended March 31, 2016 and was in the low
single digit basis points for the year ended March 31, 2015. The increase in the average fee rate was due to the previously
discussed $80 billion redemption of very low fee AUA in the quarter ended March 31, 2015. Fees for AUA, aggregating
$41 million and $30 million, are considered servicing fees and are therefore recorded in Distribution and service fees in the
Consolidated Statement of Income for the years ended March 31, 2016 and 2015, respectively. Prior to fiscal 2015, fees for
AUA were not material.
RESULTS OF OPERATIONS
In accordance with financial accounting standards on consolidation, we consolidate and separately identify certain sponsored
investment vehicles. 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
other 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 Net Income (Loss) Attributable to Legg Mason, Inc. See Notes 1, 3, and 17
of Notes to Consolidated Financial Statements for additional information regarding the consolidation of investment vehicles.
Operating Revenues
The components of Total Operating Revenues (in millions), and the dollar and percentage changes between periods were as
follows:
Years Ended March 31,
2015
2016
2014
2016 Compared to
2015
$ Change % Change
2015 Compared to
2014
$ Change % Change
Investment advisory fees:
Separate accounts
Funds
Performance fees
Distribution and service fees
Other
Total Operating Revenues
$
$
826.1
1,409.0
42.0
381.5
2.2
824.2
1,544.5
83.5
361.2
5.7
$ 2,660.8 $ 2,819.1
$
$
777.4
1,501.3
107.1
347.6
8.4
$ 2,741.8 $
1.9
(135.5)
(41.5)
20.3
(3.5)
(158.3)
—% $
(9)
(50)
6
(61)
(6)
$
46.8
43.2
(23.6)
13.6
(2.7)
77.3
6%
3
(22)
4
(32)
3
Total Operating Revenues for the year ended March 31, 2016, were $2.66 billion, a decrease of 6% from $2.82 billion for
the year ended March 31, 2015. The decrease was primarily due to a decrease in our operating revenue yield, excluding
performance fees, from 39 basis points to 38 basis points, a 3% decrease in average AUM, and a decrease in performance
fees. Although equity and fixed income AUM together comprised a higher percentage of our total average AUM for the
year ended March 31, 2016, as compared to the year ended March 31, 2015, our operating revenue yield, excluding
performance fees, declined due to a less favorable product mix, with lower yielding products comprising a higher percentage
of our total average AUM for the year ended March 31, 2016, as compared to March 31, 2015.
Total Operating Revenues for the year ended March 31, 2015, were $2.82 billion, an increase of 3% from $2.74 billion for
the year ended March 31, 2014. This increase was primarily due to the impact of a 6% increase in average long-term AUM,
offset in part by a decrease in performance fees. Although equity AUM comprised a higher percentage of our total AUM
32 | Legg Mason AR2016
Table of Contents
as of March 31, 2015, as compared to March 31, 2014, our operating revenue yield, excluding performance fees, was 39
basis points in each of the years ended March 31, 2015 and 2014, due to a slightly less favorable product mix, with lower
yielding products comprising a higher percentage of our total average AUM for the year ended March 31, 2015, as compared
to the year ended March 31, 2014.
Investment Advisory Fees from Separate Accounts
For the year ended March 31, 2016, investment advisory fees from separate accounts increased $1.9 million, to $826.1
million, as compared to $824.2 million for the year ended March 31, 2015. Of this increase, $11.4 million was due to RARE
Infrastructure after it was acquired in October 2015, $8.7 million was due to a full year of results for Martin Currie, which
was acquired in October 2014, $6.8 million was the result of higher average equity assets managed by Brandywine, $6.9
million was the result of higher average fixed income assets managed by Brandywine and $3.1 million was the result of
higher average assets managed by Permal. These increases were substantially offset by a decrease of $27.7 million due to
the sale of LMIC in November 2014 and a decrease of $6.9 million due to lower averaged fixed income assets managed by
Western Asset.
For the year ended March 31, 2015, investment advisory fees from separate accounts increased $46.8 million, or 6%, to
$824.2 million, as compared to $777.4 million for the year ended March 31, 2014. Of this increase, $34.7 million was due
to higher average equity assets managed by ClearBridge, $29.5 million was due to higher average fixed income assets
managed by Western Asset and Brandywine, and $17.4 million was due to Martin Currie, which was acquired in October
2014, including an increase in revenues related to Martin Currie Australia ("MC Australia"), which includes our legacy
Australian asset manager. These increases were offset in part by approximately $25 million of revenues associated with
certain existing client assets which were reclassified from AUM to AUA during the year ended March 31, 2015, as previously
discussed. These revenues are now included in Distribution and service fees for fiscal 2015. The increases were also offset
in part by a decrease of $15.8 million resulting from the sale of LMIC in November 2014.
Investment Advisory Fees from Funds
For the year ended March 31, 2016, investment advisory fees from funds decreased $135.5 million, or 9%, to $1.41 billion,
as compared to $1.54 billion for the year ended March 31, 2015. Of this decrease, $104.9 million was due to lower average
equity assets managed by Royce, $43.9 million was due to lower average assets managed by Permal and approximately $28
million was related to revenues which, due to a change in the distributor for certain funds in May 2015, are no longer included
in advisory fee revenue. Revenues related to these funds is included in Distribution and service fees for fiscal 2016. These
decreases were offset in part by an increase of $28.8 million due to higher average fixed income assets managed by Western
Asset and Brandywine and a net increase of $18.3 million in fees from liquidity assets, largely due to a reduction in fee
waivers on liquidity funds managed by Western Asset.
For the year ended March 31, 2015, investment advisory fees from funds increased $43.2 million, or 3%, to $1.54 billion,
as compared to $1.50 billion for the year ended March 31, 2014. Of this increase, $80.1 million was due to higher average
equity assets managed by ClearBridge, $30.5 million was due to higher average fixed income assets managed by Brandywine
and Western Asset, and $14.7 million was due to Martin Currie, which was acquired in October 2014, including the increase
in revenues related to MC Australia. These increases were offset in part by a decrease of $40.5 million due to lower average
equity assets managed by Royce, a decrease of $33.8 million due to lower average assets managed by Permal, and a net
decrease of $9.3 million in fees from liquidity assets, due to fee waivers on liquidity funds managed by Western Asset.
Investment Advisory Performance Fees
Of our total AUM as of March 31, 2016, 2015, and 2014, approximately 7%, 7%, and 6% was in accounts that were eligible
to earn performance fees. For the year ended March 31, 2016, Investment advisory performance fees decreased $41.5 million
to $42.0 million, as compared to $83.5 million for the year ended March 31, 2015, primarily due to lower fees earned on
assets managed at Permal and Brandywine.
For the year ended March 31, 2015, investment advisory performance fees decreased $23.6 million to $83.5 million, as
compared to $107.1 million for the year ended March 31, 2014, primarily due to lower fees earned on assets managed at
Permal, offset in part by an increase in fees earned on assets managed at Brandywine.
Distribution and Service Fees
For the year ended March 31, 2016, Distribution and service fees increased $20.3 million, or 6%, to $381.5 million, as
compared to $361.2 million for the year ended March 31, 2015, primarily as a result of approximately $29 million of revenue
Legg Mason AR2016 | 33 Table of Contents
which is included in Distribution and service fees in fiscal 2016, due to a change in the distributor for certain funds in May
2015. Revenues related to these funds were previously included in Investment advisory fees from funds. An increase of
$11.6 million in advisement fees associated with our AUA also contributed to the increase. These increases were offset in
part by a decline in average mutual fund AUM subject to distribution and service fees.
For the year ended March 31, 2015, Distribution and service fees increased $13.6 million, or 4%, to $361.2 million, as
compared to $347.6 million for the year ended March 31, 2014, primarily as a result of approximately $25 million of revenues
related to client assets that were reclassified from AUM to AUA, as well as an increase in average mutual fund AUM subject
to distribution and service fees. As previously discussed, the revenues associated with AUA are included in Distribution
and service fees beginning in fiscal 2015. These increases were offset in part by the impact of increased fee waivers related
to liquidity funds managed by Western Asset.
Operating Expenses
The components of Total Operating Expenses (in millions), and the dollar and percentage changes between periods were as
follows:
Years Ended March 31,
2016 Compared to
2015
2015 Compared to
2014
Compensation and benefits
Transition-related compensation
$ 1,172.6 $ 1,208.2
24.6
32.2
2016
2015
2014
$
Change
%
Change
$ 1,208.2 $
2.2
1,210.4
619.1
157.9
115.2
12.3
(35.6)
7.6
(28.0)
(49.1)
15.5
12.9
2.4
$
Change
—
22.4
%
Change
n/m
n/m
(3)% $
31
(2)
(8)
8
12
92
22.4
(24.3)
24.5
(5.5)
(9.7)
2
(4)
16
(5)
(79)
—
371.0
n/m
—
n/m
1,204.8
545.7
197.9
122.6
5.0
371.0
1,232.8
594.8
182.4
109.7
2.6
—
Total Compensation and
Benefits
Distribution and servicing
Communications and technology
Occupancy
Amortization of intangible assets
Impairment of intangible assets
Other, net, including $(33.4)
million and $5.0 million of
contingent consideration fair
value (reduction) increase in
fiscal 2016 and 2014,
respectively
Total Operating Expenses
n/m - not meaningful
163.0
198.6
$ 2,610.0 $ 2,320.9
196.0
$ 2,310.9 $
(35.6)
289.1
(18)
12
$
2.6
10.0
1
—
Total Operating Expenses for the year ended March 31, 2016, increased $289.1 million, or 12%, to $2.61 billion, as compared
to $2.32 billion for the year ended March 31, 2015. The increase was primarily due to intangible asset impairment charges
of $371 million recorded during the year ended March 31, 2016, as further discussed below. Total operating expenses for
the year ended March 31, 2015, remained relatively flat at $2.32 billion, as compared to $2.31 billion, for the year ended
March 31, 2014.
Operating expenses for the years ended March 31, 2016, 2015, and 2014, 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 comprised of corporate costs, including costs of
our global distribution operations.
34 | Legg Mason AR2016
Table of Contents
Compensation and Benefits
The components of Total Compensation and Benefits (in millions), and the dollar and percentage changes between periods
were as follows:
Years Ended March 31,
2016 Compared to
2015
2015 Compared to
2014
Salaries and incentives
Benefits and payroll taxes (including
deferred compensation)
Transition and severance costs
Royce management equity plan
Gains (losses) on deferred
compensation and seed capital
investments
Total Compensation and Benefits
n/m - not meaningful
2016
$ 915.8
2015
$ 976.9
2014
$ 949.5
$
Change
$
(61.1)
%
Change
(6)% $
$
Change
27.4
%
Change
3%
232.6
36.2
21.4
214.7
31.8
—
214.5
29.4
—
17.9
4.4
21.4
8
14
n/m
0.2
2.4
—
—
8
—
(1.2)
9.4
$1,204.8 $1,232.8
17.0
$ 1,210.4 $
(10.6)
(28.0)
n/m
(2)
$
(7.6)
22.4
(45)
2
Total Compensation and Benefits for the year ended March 31, 2016, decreased 2% to $1.20 billion, as compared to $1.23
billion for the year ended March 31, 2015; and for the year ended March 31, 2015, increased 2% to $1.23 billion, as compared
to $1.21 billion for the year ended March 31, 2014:
•
•
•
•
•
•
Salaries and incentives decreased $61.1 million, to $915.8 million for the year ended March 31, 2016, as compared
to $976.9 million for the year ended March 31, 2015, primarily due to a decrease of $58.6 million in net compensation
at investment affiliates, which was substantially the result of a reduction in operating revenue at revenue share-
based affiliates, which creates an offsetting decrease in compensation per the applicable revenue share arrangements,
and the sale of LMIC in November 2014, offset in part by the acquisition of Martin Currie in October 2014.
Salaries and incentives increased $27.4 million, to $976.9 million for the year ended March 31, 2015, as compared
to $949.5 million for the year ended March 31, 2014, principally due to an increase of $15.8 million in incentive-
based compensation for distribution and corporate personnel, primarily related to increased retail sales in our global
distribution group. A $9.7 million increase in net compensation at investment affiliates also contributed to the
increase. The increase in net compensation at investment affiliates was primarily due to the acquisition of Martin
Currie and the impact of increased revenues at certain revenue-share based affiliates, offset in part by the impact
of the sale of LMIC in November 2014 and the sale of a small affiliate and the closing down of certain businesses
in connection with various corporate initiatives in fiscal 2014.
Benefits and payroll taxes increased $17.9 million, to $232.6 million for the year ended March 31, 2016, as compared
to $214.7 million for the year ended March 31, 2015, primarily as a result of an increase in costs associated with
certain employee benefit plans.
Benefits and payroll taxes increased slightly to $214.7 million for the year ended March 31, 2015, as compared to
$214.5 million for the year ended March 31, 2014, primarily as a result of an increase in payroll taxes and recruiting
costs.
Transition and severance costs increased $4.4 million, to $36.2 million for the year ended March 31, 2016, as
compared to $31.8 million for the year ended March 31, 2015. Transition and severance costs for the year ended
March 31, 2016, were primarily comprised of $32.2 million of costs associated with the previously discussed
restructuring of Permal in preparation for the combination with EnTrust. For the year ended March 31, 2015,
transition and severance costs were primarily comprised of $24.6 million of costs associated with the integration
of Batterymarch and LMGAA into QS Investors, and $4.3 million related to the sale of LMIC.
Transition costs and severance increased $2.4 million, to $31.8 million for the year ended March 31, 2015, as
compared to $29.4 million for the year ended March 31, 2014, primarily due to higher compensation costs associated
Legg Mason AR2016 | 35 Table of Contents
with the previously discussed integration of Batterymarch and LMGAA over time into QS Investors, as compared
to compensation costs associated with various corporate initiatives recognized in the prior year.
•
Royce management equity plan represents the charge arising from the grant of equity units under the Royce
management equity plan, as previously discussed.
For the year ended March 31, 2016, compensation as a percentage of operating revenues increased to 45.3% from 43.7%
for the year ended March 31, 2015, due to the impact of the charge associated with the Royce management equity plan grant,
the impact of the acquisition of Martin Currie in October 2014, and the impact of higher transition and severance costs in
the current year, offset in part by the impact of decreased revenues at certain revenue share-based affiliates that retain a
relatively higher percentage of revenues as compensation.
For the year ended March 31, 2015, compensation as a percentage of operating revenues decreased to 43.7% from 44.1%
for the year ended March 31, 2014, due to the impact of decreased revenues at certain revenue share-based affiliates that
retain a higher percentage of revenues as compensation, offset in part by the impact of higher compensation costs for corporate
and distribution personnel.
Distribution and Servicing
For the year ended March 31, 2016, Distribution and servicing expenses decreased 8% to $545.7 million, as compared to
$594.8 million for the year ended March 31, 2015, primarily due to the impact of lower average AUM in certain products
for which we pay fees to third-party distributors.
For the year ended March 31, 2015, Distribution and servicing expenses decreased 4% to $594.8 million, as compared to
$619.1 million for the year ended March 31, 2014, primarily due to a net decrease of $20.9 million in structuring fees related
to closed-end fund launches.
Communications and Technology
For the year ended March 31, 2016, Communications and technology expense increased 8% to $197.9 million, as compared
to $182.4 million for the year ended March 31, 2015, as a result of an increase in technology consulting and license fees for
software product implementations in the current year period, and the addition of Martin Currie, which was acquired in
October 2014.
For the year ended March 31, 2015, Communications and technology expense increased 16% to $182.4 million, as compared
to $157.9 million for the year ended March 31, 2014, primarily due to increases in technology consulting, data management,
depreciation expenses, and market data costs, principally resulting from cyber-security and data governance enhancements
and the addition of Martin Currie and QS Investors expenses.
Occupancy
For the year ended March 31, 2016, Occupancy expense increased 12% to $122.6 million, as compared to $109.7 million
for the year ended March 31, 2015. Real estate related charges of $17.7 million were recognized in the current year related
to reduced space requirements and the restructuring of Permal for the combination with EnTrust, while real estate related
charges of $8.2 million were recognized in the prior year in connection with the integration of Batterymarch and LMGAA
into QS Investors.
For the year ended March 31, 2015, Occupancy expense decreased 5% to $109.7 million, as compared to $115.2 million for
the year ended March 31, 2014, primarily due to a decrease of $2.0 million in depreciation on furniture and leaseholds and a
$1.9 million decrease in rent expense, principally as a result of lease reserves taken on vacant space in fiscal 2014.
Amortization and Impairment of Intangible Assets
For the year ended March 31, 2016, Amortization of intangible assets increased to $5.0 million, as compared to $2.6 million
for the year ended March 31, 2015, primarily due to additional amortization expense related to the acquisition of RARE
Infrastructure in October 2015.
For the year ended March 31, 2015, Amortization of intangible assets decreased 79% to $2.6 million, as compared to $12.3
million for the year ended March 31, 2014, primarily due to certain management contracts becoming fully amortized in
36 | Legg Mason AR2016
Table of Contents
October 2014 and December 2013 and the sale of LMIC, offset in part by additional amortization expense related to the
acquisitions of QS Investors in May 2014 and Martin Currie in October 2014.
Impairment of intangible assets was $371.0 million in the year ended March 31, 2016. The impairment charges relate to
our Permal funds-of-hedge funds contracts asset and Permal trade name. The impairment charges resulted from a number
of current trends and factors, including (i) periods of moderate inflows or outflows over recent years and related reductions
in AUM; (ii) a reduction in growth assumptions for the next five years; (iii) a decrease in projected margins for the next two
years; and (iv) an increase in the rate used to discount projected future cash flows primarily due to company specific factors
including continued market influences. These changes resulted in a reduction of the projected cash flows and our overall
assessment of fair value of the assets, such that the fair values of the Permal funds-of-hedge funds contracts asset and Permal
trade name declined below their carrying values, and accordingly were impaired by $364.0 million and $7.0 million,
respectively. See Critical Accounting Policies and Note 5 of Notes to Consolidated Financial Statements for further discussion
of the impairment charges.
Other
For the year ended March 31, 2016, Other expenses decreased $35.6 million, or 18%, to $163.0 million, as compared to
$198.6 million for the year ended March 31, 2015, primarily due to a $33.4 million credit related to fair value adjustments
to decrease the contingent consideration liabilities associated with the acquisitions of Martin Currie and Fauchier and a $14.6
million decrease in expense reimbursements paid to certain mutual funds. These decreases were partially offset by a $13.6
million increase in professional fees, due in part to costs for the acquisitions of Clarion Partners and EnTrust.
For the year ended March 31, 2015, Other expenses increased $2.6 million, or 1%, to $198.6 million, as compared to $196.0
million for the year ended March 31, 2014, primarily due to a $5.9 million increase in travel and entertainment expenses, a
$5.3 million increase in advertising expenses, and a $4.7 million increase in professional fees. These increases were offset
in part by a $14.2 million decrease in expense reimbursements paid to certain mutual funds.
Non-Operating Income (Expense)
The components of total other non-operating income (expense) (in millions), and the dollar and percentage changes between
periods were as follows:
Years Ended March 31,
2016 Compared to
2015
2015 Compared to
2014
Interest income
Interest expense
Other income (expense), net, including
$107.1 million debt extinguishment loss
in July 2014
Other non-operating income (expense) of
consolidated investment vehicles, net
Total Other Non-Operating Income
(Expense)
n/m - not meaningful
2016
2015
2014
$
5.6
(48.4)
$
7.5
(58.3)
$
6.4
(52.9)
$
Change
$
(1.9)
9.9
%
Change
$
Change
1.1
(5.4)
%
Change
17%
10
(25)% $
(17)
(26.0)
(85.3)
32.8
59.3
(70)
(118.1) n/m
(7.2)
5.9
2.4
(13.1)
n/m
3.5
146
$ (76.0) $(130.2) $ (11.3) $
54.2
(42)
$ (118.9) n/m
Interest Income
For the year ended March 31, 2016, Interest income decreased 25% to $5.6 million, as compared to $7.5 million for the year
ended March 31, 2015, primarily due to a $0.9 million decrease in the current year related to lower average interest-bearing
investment balances and lower yields earned on those balances, and $0.7 million of interest income received in the prior
year in connection with a tax refund.
For the year ended March 31, 2015, Interest income increased 17% to $7.5 million, as compared to $6.4 million for the year
ended March 31, 2014, driven by higher yields earned on investment balances.
Legg Mason AR2016 | 37 Table of Contents
Interest Expense
For the year ended March 31, 2016, Interest expense decreased 17% to $48.4 million, as compared to $58.3 million for the
year ended March 31, 2015. The decrease of $6.4 million was primarily due to a decrease in interest accruals for uncertain
tax positions, offset in part by interest accretion on contingent consideration liabilities related to the acquisitions of Martin
Currie and RARE Infrastructure.
For the year ended March 31, 2015, Interest expense increased 10% to $58.3 million, as compared to $52.9 million for the
year ended March 31, 2014, primarily due to an increase in interest accruals for uncertain tax positions and interest accretion
on Contingent consideration liabilities related to the acquisitions of QS Investors and Martin Currie.
Other Income (Expense), Net
For the year ended March 31, 2016, Other expense, net, decreased $59.3 million, to expense of $26.0 million, as compared
to expense of $85.3 million in fiscal 2015, primarily due to a $107.1 million charge recognized in the prior year related to
the refinancing of our 5.5% Senior Notes in July 2014. This decrease was offset in part by net market losses of $27.0 million
on corporate investments, which are not offset in compensation, net market losses of $10.6 million on seed capital investments
and assets invested for deferred compensation plans, which are offset by corresponding increases in compensation, mentioned
above, net market losses of $5.6 million on investments of consolidated sponsored investment vehicles that are not designated
as consolidated investment vehicles ("CIVs"), which have no impact on Net Income Attributable to Legg Mason, Inc., as
the losses are fully attributable to noncontrolling interests, and a $4.5 million loss on a foreign currency forward contract
related to the acquisition of RARE Infrastructure.
For the year ended March 31, 2015, Other income (expense), net, decreased $118.1 million, to expense of $85.3 million, as
compared to income of $32.8 million in fiscal 2014. This decrease was primarily due to a $107.1 million charge related to
the refinancing of the 5.5% Senior Notes in July 2014. A reduction in net market gains of $7.6 million on seed capital
investments and assets invested for deferred compensation plans, which are offset by corresponding decreases in
compensation mentioned above, and a reduction in net market gains of $5.3 million on corporate investments, which are
not offset in compensation, also contributed to the decrease.
Other Non-Operating Income (Loss) of Consolidated Investment Vehicles
For the year ended March 31, 2016, Other non-operating income (expense) of consolidated investment vehicles, net, decreased
$13.1 million to expense of $7.2 million, as compared to income of $5.9 million in fiscal 2015, primarily due to the
deconsolidation of a CIV during the quarter ended March 31, 2015, and net market losses on investments of certain CIVs.
For the year ended March 31, 2015, Other non-operating income (expense) of consolidated investment vehicles, net, increased
$3.5 million to income of $5.9 million, primarily due to an increase in net market gains on investments of certain CIVs.
Income Tax Provision
For the year ended March 31, 2016, the provision for income taxes was $7.7 million, as compared to $125.3 million in the
year ended March 31, 2015. The effective tax rate was (30.5)% for the year ended March 31, 2016, as compared to 34.0%
for the year ended March 31, 2015. The change in the effective tax rate was largely due to the impact of the $371.0 million
of impairment charges recognized in lower tax rate jurisdictions. In November 2015, the U.K. Finance Bill 2015 was enacted,
which reduced the main U.K. corporate tax rate from 20% to 19% effective April 1, 2017, and to 18% effective April 1,
2020. The reductions in the U.K. corporate tax rate resulted in tax benefits of $8.4 million in fiscal 2016. The impact of
CIVs increased the effective rate by 23.8 percentage points for the year ended March 31, 2016, and decreased the effective
rate by 0.5 percentage points for the year ended March 31, 2015.
For the year ended March 31, 2015, the provision for income taxes was $125.3 million, as compared to $137.8 million in
the year ended March 31, 2014. The effective tax rate was 34.0% for the year ended March 31, 2015, as compared to 32.8%
for the year ended March 31, 2014. The change in the effective rate was primarily related to the impact of $19.2 million of
income tax benefits recorded in fiscal 2014 with respect to U.K. corporate tax rate reductions, which impacted the effective
tax rate by 4.6 percentage points in fiscal 2014. The impact of CIVs decreased the effective rate by 0.5 percentage points
for the year ended March 31, 2015, and increased the effective rate by 0.2 percentage points for the year ended March 31,
2014.
38 | Legg Mason AR2016
Table of Contents
Net Income (Loss) Attributable to Legg Mason, Inc. and Operating Margin
Net Loss Attributable to Legg Mason, Inc. for the year ended March 31, 2016, totaled $25.0 million, or $0.25 per diluted
share, compared to Net Income Attributable to Legg Mason, Inc. of $237.1 million, or $2.04 per diluted share, in the year
ended March 31, 2015. The decrease was primarily attributable to the impact of the pre-tax impairment charges of $371.0
million ($296.8 million, net of income tax benefits, or $2.76 per diluted share) related to our indefinite-life intangible assets
in the year ended March 31, 2016, offset in part by the pre-tax non-operating charge of $107.1 million ($68.5 million, net
of income tax benefits, or $0.59 per diluted share) recognized in the year ended March 31, 2015, in connection with the
refinancing of the 5.5% Senior Notes. Operating margin was 1.9% for the year ended March 31, 2016, compared to 17.7%
for the year ended March 31, 2015, with the decrease primarily attributable to the impairment charges.
Net Income Attributable to Legg Mason, Inc. for the year ended March 31, 2015, totaled $237.1 million, or $2.04 per diluted
share, compared to $284.8 million, or $2.33 per diluted share, in the year ended March 31, 2014. The decrease was primarily
attributable to the pre-tax, non-operating charge of $107.1 million ($68.5 million, net of income tax benefits, or $0.59 per
diluted share) related to the refinancing of the 5.5% Senior Notes in the year ended March 31, 2015, offset in part by a $20.7
million decrease in costs related to closed-end fund launches, and the net impact of increased operating revenues. Operating
margin was 17.7% for the year ended March 31, 2015, compared to 15.7% for the year ended March 31, 2014.
Supplemental Non-GAAP Financial Information
As supplemental information, we are providing performance measures for "Adjusted Income" and "Operating Margin, as
Adjusted" and a liquidity measure for "Adjusted EBITDA", each of which are based on methodologies other than generally
accepted accounting principles (“non-GAAP”). Our management uses these measures as benchmarks in evaluating and
comparing our period-to-period operating performance and liquidity.
Adjusted Income decreased to $370.3 million for the year ended March 31, 2016, from $378.8 million for the year ended
March 31, 2015; however, due to a reduction in weighted-average shares outstanding as a result of share repurchases, Adjusted
Income per diluted share increased to $3.36 per diluted share for the year ended March 31, 2016, from $3.26 per diluted
share for the year ended March 31, 2015. The decrease in Adjusted Income was primarily attributable to the net impact of
decreased operating revenues, offset in part by the impact of the pre-tax, non-operating charge of $107.1 million ($68.5
million, net of income tax, or $0.59 per diluted share) related to the refinancing of the 5.5% Senior Notes in the prior year.
Operating Margin, as Adjusted, for the years ended March 31, 2016 and 2015, was 18.6% and 23.0%, respectively. Operating
Margin, as Adjusted, for the year ended March 31, 2016, was reduced by 2.0 percentage points due to costs associated with
the restructuring of Permal for the combination with EnTrust, by 1.0 percentage point due to the compensation charge
associated with the Royce management equity plan grant, and by 0.4 percentage points for real estate related charges
recognized in the current year associated with reduced space requirements. Operating Margin, as Adjusted, for the year
ended March 31, 2015 was reduced by 1.7 percentage points due to costs associated with the integration of Batterymarch
and LMGAA into QS Investors and various other corporate initiatives.
Adjusted EBITDA for the years ended March 31, 2016 and 2015, was $621.7 million and $686.5 million, respectively. The
decrease in Adjusted EBITDA was primarily the result of a decrease in cash provided by operating activities.
Adjusted Income decreased to $378.8 million, or $3.26 per diluted share, for the year ended March 31, 2015, from $417.8
million, or $3.41 per diluted share, for the year ended March 31, 2014. The decrease was primarily attributable to the pre-
tax, non-operating charge of $107.1 million ($68.5 million, net of income tax, or $0.59 per diluted share) related to the
refinancing of the 5.5% Senior Notes in the year ended March 31, 2015, offset in part by the net impact of increased operating
revenues. Operating Margin, as Adjusted, for the years ended March 31, 2015 and 2014, was 23.0% and 22.0%, respectively.
Operating Margin, as Adjusted, for the years ended March 31, 2015 and 2014, was reduced by 1.7 and 1.5 percentage points,
respectively, due to costs associated with the integration of Batterymarch and LMGAA into QS Investors and various other
corporate initiatives. Operating Margin, as Adjusted, for the year ended March 31, 2014, was also reduced by 1.0 percentage
point due to structuring fees related to closed-end fund and real estate investment trust launches during that fiscal year.
Adjusted EBITDA for the years ended March 31, 2015 and 2014, was $686.5 million and $617.1 million, respectively. The
$69.4 million increase in Adjusted EBITDA was primarily the result of an increase in cash provided by operating activities.
Legg Mason AR2016 | 39 Table of Contents
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 less deferred income taxes on goodwill and indefinite-life intangible asset
impairment, if any. We also adjust for non-core items that are not reflective of our economic performance, such as intangible
asset impairments, the impact of fair value adjustments of contingent consideration liabilities, if any, and the impact of tax
rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets.
We believe that Adjusted Income provides a useful representation of our operating performance adjusted for non-cash
acquisition related items and other items that facilitate comparison of our results to the results of other asset management
firms that have not made significant acquisitions. We also believe that Adjusted Income is an important metric in estimating
the value of an asset management business.
Adjusted Income only considers adjustments for certain items that relate to operating performance and comparability, and
therefore, is most readily reconcilable to Net Income (Loss) Attributable to Legg Mason, Inc. determined 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 determined under GAAP. Fair value adjustments of contingent consideration
liabilities may or may not provide a tax benefit, depending on the tax attributes of the acquisition transaction. We consider
Adjusted Income to be useful to investors because it is an important metric in measuring the economic performance of asset
management companies, as an indicator of value, and because it facilitates comparison of our operating results with the
results of other asset management firms that have not made significant acquisitions.
In calculating Adjusted Income, we adjust for the impact of the amortization of management contract assets and impairment
of indefinite-life intangible assets, and add (subtract) the impact of fair value adjustments on contingent consideration
liabilities, if any, all of which arise from acquisitions, to Net Income (Loss) Attributable to Legg Mason, Inc. to reflect the
fact that these items 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 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 current period tax amortization, we add
this benefit to Net Income (Loss) Attributable to Legg Mason, Inc. in the calculation 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 U.K.
tax rate adjustments on excess book basis on certain acquired indefinite-life intangible assets, if applicable, that have been
recognized under GAAP. These adjustments reflect that these items distort comparisons of our operating results to other
periods and the results of other asset management firms that have not engaged in significant acquisitions, including any
related impairments.
Should a disposition, impairment charge or other non-core item occur, its impact on Adjusted Income may distort actual
changes in the operating performance or value of our firm. Accordingly, we monitor these items and their related impact,
including taxes, on Adjusted Income to ensure that appropriate adjustments and explanations accompany such disclosures.
Although depreciation and amortization of fixed assets are non-cash expenses, we do not add these charges in calculating
Adjusted Income because these charges are related to assets that will ultimately require replacement.
40 | Legg Mason AR2016
Table of Contents
A reconciliation of Net Income (Loss) Attributable to Legg Mason, Inc. to Adjusted Income (in thousands except per share
amounts) is as follows:
For the Years Ended March 31,
2016
2015
2014
Net Income (Loss) Attributable to Legg Mason, Inc.
$
(25,032) $
237,080
$
284,784
Plus (less):
Amortization of intangible assets
Impairment of intangible assets
Contingent consideration fair value adjustments
Deferred income taxes on intangible assets:
Impairment charges
Tax amortization benefit
U.K. tax rate adjustment
Adjusted Income
Net Income (Loss) per diluted share Attributable to Legg
Mason, Inc. Shareholders
Plus (less):(1)
$
$
Amortization of intangible assets
Impairment of intangible assets
Contingent consideration fair value adjustments
Deferred income taxes on intangible assets:
4,979
371,000
(33,375)
(74,200)
135,260
(8,361)
370,271
$
(0.25) $
0.05
3.45
(0.31)
2,625
—
—
—
139,046
—
378,751
2.04
0.02
—
—
$
$
12,314
—
5,000
—
134,871
(19,164)
417,805
2.33
0.10
—
0.04
Impairment charges
Tax amortization benefit
U.K. tax rate adjustment
Allocation to participating securities(2)
—
1.10
(0.16)
—
3.41
In calculating Adjusted Income per diluted share, during periods of Net Income after participating securities dividends, we include the weighted-average of
unvested restricted shares deemed to be participating securities and the earnings allocated to these participating securities. Weighted-average unvested
restricted shares were 3,065 for the year ended March 31, 2015. For purposes of this non-GAAP performance measure, earnings are allocated in the same
ratio to participating securities and common shares. As a result, the inclusion of these participating securities and the earnings allocated thereto do not impact
the per share amounts of the adjustments made to Net Income (Loss) per diluted share Attributable to Legg Mason, Inc. Shareholders.
(0.69)
1.26
(0.08)
(0.07)
3.36
Adjusted Income per diluted share
(1)
—
1.20
—
—
3.26
$
$
$
In calculating Adjusted Income per diluted share during periods of Net Loss after participating securities dividends, we exclude the weighted-average of
unvested restricted shares deemed to be participating securities. Weighted-average unvested restricted shares were 2,831 for the year ended March 31, 2016.
(2) During periods of Net Loss after participating securities dividends, there is an impact from weighted-average unvested restricted shares deemed to participating
securities.
Operating Margin, as Adjusted
We calculate "Operating Margin, as Adjusted," 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 arrangements,
amortization related to intangible assets, income (loss) of CIVs, the impact of fair value adjustments of contingent
consideration liabilities, if any, 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." The compensation items are removed from Operating Income (Loss) in the calculation because they are offset
by an equal amount in Other non-operating income (expense), and thus have no impact on Net Income (Loss) Attributable
to Legg Mason, Inc. We adjust for the impact of amortization of management contract assets and the impact of fair value
adjustments of contingent consideration liabilities, if any, which arise from acquisitions to reflect the fact that these items
distort comparison of our operating results with results of other asset management firms that have not engaged in significant
acquisitions. 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 operating margin without distribution and servicing expenses, which we use to approximate
Legg Mason AR2016 | 41 Table of Contents
our distribution revenues that are passed through to third parties as a direct cost of selling our products, although distribution
and servicing expenses may include commissions paid in connection with the launching of closed-end funds for which there
is no corresponding revenue in the period. 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 measure of
our core business activities. It excludes items that have no impact on Net Income (Loss) Attributable to Legg Mason, Inc.
and indicates what our operating margin would have been without the distribution revenues that are passed through to third
parties as a direct cost of selling our products, amortization related to intangible assets, changes in the fair value of contingent
consideration liabilities, if any, impairment charges, and the impact of the consolidation of certain investment vehicles
described above. The consolidation of these investment vehicles does not have an impact on Net Income (Loss) Attributable
to Legg Mason, Inc. This measure is provided in addition to our operating margin calculated under GAAP, but is not a
substitute for calculations of margins under GAAP and may not be comparable to non-GAAP performance measures,
including measures of adjusted margins of other companies.
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:
Gains (losses) on deferred compensation and seed
investments, net
Impairment of intangible assets
Contingent consideration fair value adjustments
Amortization of intangible assets
Operating income and expenses of consolidated
investment vehicles, net
Operating Income, as Adjusted
Operating Margin, GAAP basis
Operating Margin, as Adjusted
$
$
$
$
For the Years Ended March 31,
2016
2,660,844
318
(545,668)
2,115,494
50,831
(1,205)
371,000
(33,375)
4,979
2015
2,819,106
721
(594,746)
2,225,081
498,219
$
$
$
$
$
$
9,369
—
—
2,625
2014
2,741,757
1,950
(619,022)
2,124,685
430,893
16,987
—
5,000
12,314
461
392,691
$
899
511,112
$
2,370
467,564
1.9%
18.6
17.7%
23.0
15.7%
22.0
Adjusted EBITDA
We define Adjusted EBITDA as cash provided by operating activities plus (minus) allocation of debt redemption payments,
interest expense, net of accretion and amortization of debt discounts and premiums, current income tax expense, net gains
(losses) on investment securities, the net change of other assets and liabilities and other. The net change of other assets and
liabilities adjustment aligns with the Consolidated Statements of Cash Flows. This definition results in a metric that is the
same amount as EBITDA used in covenants in our revolving credit facility agreement.
We believe that Adjusted EBITDA is useful to investors as a liquidity measure that provides additional information with
regard to our compliance with debt covenants and ability to meet future working capital requirements. This measure is
provided in addition to Cash provided by operating activities and may not be comparable to non-GAAP liquidity
measures, including measures of EBITDA or cash flow measures, of other companies. Further, Adjusted EBITDA is not to
be confused
42 | Legg Mason AR2016
Table of Contents
with Cash provided by operating activities or other measures of cash flows under GAAP, and is provided as a supplement
to, and not in replacement of, a GAAP measure.
A reconciliation of Cash provided by operating activities to Adjusted EBITDA is as follows (dollars in thousands):
Trailing twelve months ended March 31,
2015
2014
2016
Cash provided by operating activities, GAAP basis
$
454,451
$
568,118
$
437,324
Plus (less):
Debt redemption payments allocated to operations
Interest expense, net of accretion and amortization of
debt discounts and premiums
Current tax expense
Net gain on investment securities
Net change of other assets and liabilities
Other, principally transition-related costs in fiscal 2016
Adjusted EBITDA
$
—
98,418
—
45,324
15,419
8,563
30,084
67,881
621,722
$
53,999
24,897
50,853
(118,919)
9,133
686,499
$
49,846
19,375
27,370
76,140
7,037
617,092
LIQUIDITY AND CAPITAL RESOURCES
The primary objective of our capital structure is to appropriately support our business strategies and to provide needed
liquidity at all times, including maintaining required capital in certain subsidiaries. Liquidity and the access to liquidity is
important to the success of our ongoing operations. Our overall funding needs and capital base are continually reviewed to
determine if the capital base meets the expected needs of our businesses. We intend to continue to explore potential acquisition
opportunities as a means of diversifying and strengthening our asset management business. These opportunities may from
time to time involve acquisitions that are material in size and may require, among other things, and subject to existing
covenants, the raising of additional equity capital and/or the issuance of additional debt.
The consolidation of variable interest entities 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 and other
consolidated sponsored investment vehicles beyond our investments in and investment advisory fees generated from these
vehicles, which are eliminated in consolidation. Additionally, creditors of the CIVs and other consolidated sponsored
investment vehicles have no recourse to our general credit beyond the level of our investment, if any, so we do not consider
these liabilities to be our obligations.
Our assets consist primarily of intangible assets, goodwill, 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, 2016, cash and cash equivalents, total assets, long-term debt and stockholders' equity
were $1.3 billion, $7.5 billion, $1.7 billion and $4.2 billion, respectively. Total assets include amounts related to CIVs of
$0.1 billion.
Cash and cash equivalents are primarily invested in liquid domestic and non-domestic money market funds that hold
principally domestic and non-domestic corporate commercial paper and bonds, government and agency securities, and bank
deposits. We have not recognized any losses on these investments. Our monitoring of cash and cash equivalents partially
mitigates the potential that material risks may be associated with these balances.
Legg Mason AR2016 | 43 Table of Contents
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 provided by/(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
2016
2015
2014
$
$
$
454.5
(244.6)
465.7
(16.1)
659.5
669.6
1,329.1 $
568.1
(208.0)
(507.0)
(41.5)
(188.4)
858.0
669.6
$
$
437.3
137.6
(639.0)
(10.9)
(75.0)
933.0
858.0
Cash inflows provided by operating activities during fiscal 2016, were $454.5 million, primarily related to Net Loss, adjusted
for non-cash items. Cash inflows provided by operating activities during fiscal 2015 were $568.1 million, primarily related
to Net Income, adjusted for non-cash items, and net activity related to CIVs. Cash inflows provided by operating activities
during fiscal 2014 were $437.3 million, primarily related to Net Income, adjusted for non-cash items, offset in part by net
purchases of trading and other investments and a decrease in net activity related to CIVs, primarily due to the wind-down
of a consolidated loan obligation ("CLO"). See Note 17 of Notes to Consolidated Financial Statements for additional
information regarding the CLO.
Cash outflows used in investing activities during fiscal 2016, were $244.6 million, primarily related to payments associated
with the acquisitions of RARE Infrastructure and PK Investments, and the investment in Precidian Investments, aggregating
$234.1 million (net of acquired cash). Cash outflows used in investing activities during fiscal 2015, were $208.0 million,
primarily related to payments associated with the acquisitions of Martin Currie and QS Investors of $183.7 million (net of
acquired cash) and payments made for fixed assets of $45.8 million; offset in part by the proceeds from businesses sold of
$47.0 million. Cash inflows provided by investing activities during fiscal 2014, were $137.6 million, primarily related to
net activity related to CIVs, offset in part by payments made for fixed assets.
Cash inflows provided by financing activities during fiscal 2016, were $465.7 million, primarily related to the proceeds of
the issuance of $699.8 million of long-term debt, offset in part by the repurchase of 4.5 million shares of our common stock
for $209.6 million. Cash outflows used in financing activities during fiscal 2015, were $507.0 million, primarily related to
the repayment of long-term debt of $645.8 million, the repurchase of 6.9 million shares of our common stock for $356.5
million, the repayment of long-term debt of CIVs of $79.2 million, and dividends paid of $70.8 million, offset in part by the
proceeds from the issuance of $658.8 million of long-term debt. Cash outflows used in financing activities during fiscal
2014, were $639.0 million, primarily related to the repayment of long-term debt of $500.4 million, the repayment of long-
term debt of CIVs of $133.0 million, the repurchase of 9.7 million shares of our common stock for $360.0 million, and
dividends paid of $62.0 million, offset in part by the proceeds from the long-term debt issuances of $393.7 million.
44 | Legg Mason AR2016 Table of Contents
Financing Transactions
The table below reflects our primary sources of financing (in thousands) as of March 31, 2016:
Type
2.7% Senior Notes due July 2019
3.95% Senior Notes due July 2024
4.75% Senior Notes Due March 2026
5.625% Senior Notes due January 2044
6.375% Junior Subordinated Notes Due
March 2056
$
Available at
March 31,
2016
250,000
250,000
450,000
550,000
Amount Outstanding at
March 31,
2016
$ 250,000
250,000
450,000
550,000
2015
$ 250,000
250,000
—
550,000
Interest Rate
2.70%
3.95%
4.75%
5.625%
250,000
250,000
Maturity
July 2019
July 2024
March 2026
January 2044
March 2056
December
2020
—
—
6.375%
Eurocurrency
Rate + 1.25% +
0.175% annual
commitment fee
Revolving credit agreements
1,000,000
40,000
In March 2016, we issued $250 million of 6.375% Junior Subordinated Notes due 2056 (the "2056 Notes") and $450 million
of 4.75% Senior Notes due 2026 (the "2026 Notes"). The net proceeds of these offerings were used to finance the acquisitions
of Clarion Partners in April 2016 and EnTrust in May 2016, as further discussed below and in Note 18 of Notes to the
Consolidated Financial Statements.
In December 2015, we entered into a new unsecured credit agreement which provides for a $1.0 billion multi-currency
revolving credit facility, and borrowed $40 million under this revolving credit facility, which remained outstanding as of
March 31, 2016. The proceeds were used to repay the $40 million of outstanding borrowings under our previous revolving
credit facility, which were used to partially finance the acquisition of RARE Infrastructure in October 2015, as further
discussed below. In May 2016, we used $460 million of additional borrowings under the new revolving credit facility to
finance the acquisition of EnTrust and to replenish cash used to complete the acquisitions of Clarion Partners and RARE
Infrastructure. The amount of total borrowings outstanding under this facility is $500 million as of the date of filing.
The new revolving credit facility may be increased by an aggregate amount of up to $500 million, to $1.5 billion, subject
to the approval of the lenders, expires in December 2020, and can be repaid at any time. This revolving credit facility is
available to fund working capital needs and for general corporate purposes.
The financial covenants under our credit agreement were modified in March 2016 and include: maximum net debt to EBITDA
ratio of 3.5 to 1 for the period from March 31, 2016 through September 30, 2016, 3.25 to 1 for the period from October 1,
2016 through December 31, 2016, and 3.0 to 1 thereafter; and minimum EBITDA to interest ratio of 4.0 to 1. Debt is defined
to include all obligations for borrowed money, excluding non-recourse debt of CIVs and capital leases. Under these net
debt covenants, our debt is reduced by the amount of our unrestricted cash in excess of the greater of subsidiary cash or
$300 million, by the lesser of 50% of the aggregate amount of our seed capital investments or $125 million, and an amount
equal to 50% of our hybrid capital securities. 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,
any non-cash charges, and certain transition-related costs, as defined in the agreements. As of March 31, 2016, Legg Mason's
net debt to EBITDA ratio was 1.3 to 1 and EBITDA to interest expense ratio was 13.0 to 1, and therefore, Legg Mason has
maintained compliance with the applicable covenants.
If our net income (loss) significantly declines, or if we spend our available cash, it may impact our ability to maintain
compliance with the financial covenants. If we determine that our compliance with these covenants may be under pressure
at a time when we either have outstanding borrowings under this facility, want to utilize available borrowings, or otherwise
desire to keep borrowings available, 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
seeking to negotiate with our lenders to modify the terms or to restructure our debt. Using available cash to repay indebtedness
would make the cash unavailable for other uses and might affect the liquidity discussions and conclusions. Entering into
any modification or restructuring of our debt would likely result in additional fees or interest payments.
Legg Mason AR2016 | 45 (cid:55)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86)
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(cid:80)(cid:82)(cid:81)(cid:87)(cid:75)(cid:86)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:17)
46 | Legg Mason AR2016 Table of Contents
Acquisitions
RARE
Infrastructure
Martin
Currie
PK
Investments
QS
Investors
Fauchier
Total
Maximum Remaining Contingent
Consideration(1)
Contingent consideration liability
Current Contingent consideration
Non-current Contingent
consideration
Balance as of March 31, 2016
$
$
$
81.3
$
467.1
$
2.5
$
30.0
$
28.7
$
609.6
7.0
$
12.8
$
— $
6.6
$
— $
26.4
20.1
27.1
$
28.4
41.2
$
2.5
2.5
$
7.2
13.8
$
—
— $
58.2
84.6
(1) Using the applicable exchange rate as of March 31, 2016 for amounts denominated in currencies other than the U.S. dollar.
On May 2, 2016, we closed the transaction to combine Permal and EnTrust, to create EnTrustPermal, of which we own 65%.
The transaction required a cash payment of $400 million, which was funded with borrowings under our revolving credit
facility, as well as a portion of the proceeds from the 2026 Notes and the 2056 Notes that were issued in March 2016. In
connection with the combination, we expect to incur restructuring and transition costs of approximately $100 million, of
which approximately 15% are non-cash charges. As of March 31, 2016, approximately $43 million of these charges have
been incurred, and approximately $24 million have been paid. A significant portion of the remaining costs will be paid in
the year ending March 31, 2017. See Notes 2 and 18 of Notes to Consolidated Financial Statements for additional information.
On April 13, 2016, we acquired a majority interest in Clarion Partners. The acquisition required a cash payment of $577
million, which was funded with a portion of the proceeds from the issuance of the 2026 Notes and the 2056 Notes in March
2016. In conjunction with the acquisition, we committed to provide $100 million of seed capital to Clarion Partners products
within two years of closing. See Note 18 of Notes to Consolidated Financial Statements for additional information.
On October 21, 2015, we acquired a majority interest in RARE Infrastructure. The acquisition required an initial cash
payment of approximately $214 million (using the foreign exchange rate as of October 21, 2015 for the 296 million Australian
dollar payment), which was funded with $40 million of net borrowings under our previous revolving credit facility, as well
as existing cash resources. Contingent consideration may be due March 31, 2017 and March 31, 2018, aggregating up to
approximately $81 million (using the foreign exchange rate as of March 31, 2016 for the maximum 106 million Australia
dollar amount per the contract), dependent on the achievement of certain net revenue targets, and subject to potential catch-
up adjustments extending through March 31, 2019. Noncontrolling interests of 25% are subject to put and call provisions
that may result in future cash outlays.
On October 1, 2014, we acquired all outstanding equity interests of Martin Currie. The transaction included an initial cash
payment of $203 million (using the foreign exchange rate as of October 1, 2014 for the £125 million payment), which was
funded from existing cash. Contingent consideration payments may be due on the March 31 following the second and third
anniversaries of closing, aggregating up to approximately $467 million (using the foreign exchange rate as of March 31,
2016 for the maximum £325 million contract amount), inclusive of the payment of certain potential pension and other
obligations, and dependent on the achievement of certain financial metrics, as specified in the share purchase agreement, at
March 31, 2017 and 2018. No contingent consideration payment was due as of March 31, 2016, for the first anniversary
payment. Actual payments to be made may also include amounts for certain potential pension and other obligations that are
accounted for separately. In addition, Martin Currie and the trustees of the pension plan referenced above have received a
notice that the Pensions Regulator in the U.K. is reviewing the plan’s current structure and funding status. While the review
is still in process, there can be no assurance that the review will not result in accelerated funding.
In December 2015, Martin Currie acquired certain assets of PK Investments. The business acquisition was comprised of an
initial cash payment of $5.0 million and a contingent payment, due on December 31, 2017, which is currently estimated at
$2.5 million. The amount of any ultimate contingent payment will be based on certain financial metrics. The initial cash
payment was funded with existing cash resources.
Effective May 31, 2014, we completed the acquisition of QS Investors. In July 2016, we may be required to pay up to $10
million for the second anniversary contingent consideration, with the amount of the payment dependent on the achievement
Legg Mason AR2016 | 47 Table of Contents
of certain net revenue targets. We intend to fund any amount due with existing cash resources. In addition, contingent
consideration of up to $20 million for the fourth anniversary payment may be due in July 2018, also dependent on the
achievement of certain net revenue targets, and subject to a potential catch-up adjustment in the fourth anniversary payment
for any second anniversary payment shortfall.
In March 2013, we completed the acquisition of all of the outstanding share capital of Fauchier. Contingent consideration
of up to approximately $29 million (using the exchange rate as of March 31, 2016, for the £20 million maximum contractual
amount), may be due on or about the fourth anniversary of closing, dependent on achieving certain levels of revenue, net of
distribution costs.
See Note 2 of Notes to Consolidated Financial Statements for additional information related to the acquisitions of RARE
Infrastructure, Martin Currie, QS Investors, and Fauchier.
Other
In March 2016, we implemented an affiliate management equity plan with the management of Royce. Under this management
equity plan, minority interests equivalent to 16.9% in the Royce entity were issued to its management team. In addition, in
June 2013 and March 2014, we implemented affiliate management equity plans that will entitle certain key employees of
Permal and ClearBridge, respectively, to participate in 15% of the future growth of the respective enterprise value (subject
to appropriate discounts), if any, as further discussed in Note 11 of Notes to Consolidated Financial Statements. Repurchases
of units granted under these plans may impact future liquidity requirements. In conjunction with the acquisition of Clarion
Partners, we implemented an affiliate management equity plan similar to the plan implemented for ClearBridge, with
immediate vesting for the initial grant.
Certain of our asset management affiliates maintain various credit facilities for general operating purposes. Certain affiliates
are subject to the capital requirements of various regulatory agencies. All such affiliates met their respective capital adequacy
requirements during the periods presented.
In January 2015, our Board of Directors authorized $1.0 billion for additional purchases of our common stock, approximately
$800 million of which remained available as of March 31, 2016. We intend to utilize up to $90 million of cash generated
from future operations to purchase shares of our common stock on a quarterly basis, subject to market conditions and other
potential uses of cash.
Future Outlook
As described above, we currently project that our cash flows from operating activities will be sufficient to fund our present
and foreseeable, near-term liquidity needs, other than for the acquisitions of Clarion Partners in April 2016 and EnTrust in
May 2016. As of March 31, 2016, we had approximately $1.1 billion in cash and cash equivalents in excess of our working
capital requirements, $689 million of which was used to fund the previously discussed acquisitions of Clarion Partners and
EnTrust. As discussed above, we intend to utilize up to $90 million of cash generated from future operations to purchase
shares of our common stock during each quarter of the year ending March 31, 2017, subject to market conditions and other
cash needs. We temporarily interrupted share repurchases in November 2015 and resumed share repurchases in March 2016.
We intend to catch up an additional $12 million in share repurchases in the quarter ending June 30, 2016. In addition, in
fiscal 2017, we intend to repay approximately $50 million of the outstanding $500 million of borrowings under our revolving
credit facility, subject to market conditions and other cash needs. After drawing $460 million on our revolving credit facility
in May 2016, in connection with the acquisitions of Clarion Partners and EnTrust, subject to compliance with applicable
covenants, we have approximately $350 million of available borrowing capacity under our revolving credit facility, which
expires in December 2020. We do not currently expect to raise incremental debt or equity financing over the next 12 months
beyond our current levels, unless we enter into one or more acquisitions or refinancings. Going forward, there can be no
assurances of these expectations as our projections could prove to be incorrect, events may occur that require additional
liquidity in excess of amounts under our revolving credit facility, such as 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, reducing operating expenses, reducing our
expected expenditures on investments, selling assets (such as investment securities), repatriating earnings from foreign
subsidiaries, reducing our dividend, or modifying arrangements with our affiliates and/or employees. Should these types
of actions prove insufficient, or should an acquisition or refinancing opportunity arise, we would likely utilize borrowing
capacity under our revolving credit facility or seek to raise additional equity or debt.
48 | Legg Mason AR2016
Table of Contents
Our liquid assets include cash, cash equivalents, and certain current investment securities. At March 31, 2016, our total
liquid assets were $1.7 billion, $689 million of which was used to fund the previously discussed acquisitions of Clarion
Partners in April 2016 and EnTrust in May 2016. The remaining $1.0 billion of liquid assets included $378 million of cash
and investments held by foreign subsidiaries. Other net working capital amounts of foreign subsidiaries are not significant.
In order to increase our cash available in the U.S. for general corporate purposes, we plan to utilize up to $170 million of
foreign cash over the next several years, of which $8.5 million is accumulated foreign earnings. Any additional tax provision
associated with these repatriations was previously recognized. No further repatriation of accumulated prior period foreign
earnings is currently planned. However, if circumstances change, we will provide for and pay any applicable additional
U.S. taxes in connection with repatriation of offshore earnings. It is not practical at this time to determine the income tax
liability that would result from any further repatriation 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 equivalents 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.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements, as defined by the Securities and Exchange Commission ("SEC"), include certain contractual
arrangements pursuant to which a company has an obligation, such as certain contingent obligations, certain guarantee
contracts, retained or contingent interest in assets transferred to an 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 Obligations section
that follows and Consolidation discussed in Critical Accounting Policies and Notes 1 and 17 of Notes to Consolidated
Financial Statements.
Legg Mason AR2016 | 49 Contractual and Contingent Obligations
We have contractual obligations to make future payments, principally in connection with our long-term debt, non-cancelable
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:
2017
2018
2019
2020
2021
Thereafter
Total
$
40.0
$
— $
— $
— $
— $
— $
40.0
—
—
—
250.0
—
1,500.0
1,750.0
86.9
86.7
86.7
83.3
79.4
1,410.8
1,833.8
128.0
254.9
109.4
196.1
88.6
175.3
79.8
413.1
73.4
152.8
225.7
704.9
3,136.5
4,328.7
Contractual Obligations
Short-term borrowings by contract
maturity(1)
Long-term borrowings by contract
maturity
Interest on long-term borrowings
and credit facility commitment
fees
Minimum rental and service
commitments
Total Contractual Obligations
Contingent Obligations
Payments related to business
acquisitions(2)
Clarion Partners
EnTrust
Martin Currie
RARE Infrastructure
Other
577.5
400.0
467.1
23.8
38.7
—
—
—
57.5
2.5
60.0
—
—
—
—
20.0
20.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
577.5
400.0
467.1
81.3
61.2
1,587.1
Total payments related to business
acquisitions
1,507.1
Total Obligations(3)(4)(5)(6)
(1) Represents borrowings under our revolving credit facility which does not expire until December 2020. In April 2016, we borrowed an
additional $460 million under this facility and exercised an amortizing variable for fixed interest rate swap with the intention of repaying
the $500 million of borrowings through December 2020. However, we may elect to repay this debt sooner if management elects to utilize
a portion of our available cash for this purpose.
$ 1,762.0 $ 256.1
$ 5,915.8
$ 3,136.5
$ 195.3
$ 413.1
$ 152.8
(2) The amount of contingent payments reflected for any year represents the maximum amount that could be payable at the earliest possible date under
the terms of the business purchase agreements, using the applicable exchange rate as of March 31, 2016, for amounts denominated in currencies
other than the U.S. dollar. The related contingent consideration liabilities had a fair value of $84.6 million as of March 31, 2016, net of certain
potential pension and other obligations related to Martin Currie. See Notes 2 and 8 of Notes to Consolidated Financial Statements. The fiscal 2017
amounts reflected for Clarion Partners and EnTrust represent the cash payments made in April 2016 and May 2016, respectively, in connection with
the acquisitions, which are further discussed in Note 18 of Notes to Consolidated Financial Statements.
(3) The table above does not include approximately $28.9 million in capital commitments to investment partnerships in which we are a limited partner
or $100 million of co-investment commitment associated with the Clarion Partners acquisition. These obligations will be outstanding, or funded
as required, through the end of the commitment periods running through fiscal 2021.
(4) The table above does not include amounts for uncertain tax positions of $49.6 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 affiliate minority interests and CIVs, of $175.8 million
as of March 31, 2016, because the timing of any related cash outflows cannot be reliably estimated. As further described in Note 18 of Notes to
Consolidated Financial Statements, Clarion Partners and EnTrust will also have redeemable noncontrolling interests.
(6) The table above excludes potential obligations arising from the ultimate settlement of awards under the affiliate management equity plans with key
employees of Permal, ClearBridge, and Royce due to the uncertainty of the timing and amounts ultimately payable. See Notes 1and 11 of Notes
to Consolidated Financial Statements for additional information regarding affiliate management equity plans.
50 | Legg Mason AR2016 Table of Contents
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, certain 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. Market conditions,
such as the current historical low interest rate environment, may lead us to take such actions. 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 have a greater impact on our revenues. In addition, under revenue sharing arrangements, 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 dramatically different effect on our revenues and earnings than an equal
change at another subsidiary.
Trading and Non-Trading Assets
Our trading and non-trading assets are comprised of investment securities, including seed capital in sponsored mutual funds
and products, limited partnerships, limited liability companies and certain other investment products.
Trading and other current investments, excluding CIVs, at March 31, 2016 and 2015, subject to risk of security price
fluctuations are summarized in the table below (in thousands):
Investment securities, excluding CIVs:
Trading investments relating to long-term incentive compensation plans
Trading investments of proprietary fund products and other trading investments
Equity method investments relating to long-term incentive compensation plans,
proprietary fund products and other investments
Total current investments, excluding CIVs
2016
2015
$
$
106,564
393,400
15,371
515,335
$
$
80,529
358,034
16,172
454,735
Trading and other current investments of $113.0 million and $89.2 million at March 31, 2016 and 2015, respectively, relate
to long-term incentive plans which will have offsetting liabilities at the end of the respective vesting periods, but for which
the related liabilities may not completely offset at the end of each reporting period due to vesting provisions. Therefore,
fluctuations in the market value of these trading investments will impact our compensation expense, non-operating income
(expense) and, dependent on the vesting provisions of the plan, our net income (loss).
Approximately $402.3 million and $365.5 million of trading and other current investments at March 31, 2016 and 2015,
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 related to approximately
$35.8 million and $37.5 million of proprietary fund products as of March 31, 2016 and 2015, respectively, have offsetting
compensation expense under revenue share arrangements. The fluctuations in market value related to approximately $141.3
million and $163.0 million in proprietary fund products as of March 31, 2016 and 2015, 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 decision is made to no longer pursue the strategy.
Legg Mason AR2016 | 51 (cid:55)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86)
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(cid:27)(cid:22)
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(cid:7)
(cid:7)
(cid:20)(cid:23)(cid:15)(cid:24)(cid:20)(cid:20)
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(cid:76)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:72)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:3)(cid:3)(cid:58)(cid:72)(cid:3)(cid:71)(cid:82)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:73)(cid:79)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)
(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:82)(cid:85)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:17)
52 | Legg Mason AR2016 Table of Contents
Interest Rate Risk
Exposure to interest rate changes on our outstanding debt is substantially mitigated as our $250 million of 3.95% Senior
Notes due July 2024, $550 million of 5.625% Senior Notes due July 2044, $450 million of 4.75% Senior Notes due March
2026, and $250 million of 6.375% Junior Subordinated Notes due March 2056 are at fixed interest rates. In June 2014, we
entered into an interest rate swap contract, designated as a fair value hedge, to effectively convert our $250 million of 2.7%
Senior Notes due July 2019 from fixed rate debt to floating rate debt. In addition, the $40 million of outstanding borrowings
under our revolving credit agreement as of March 31, 2016, is also subject to fluctuations in interest rates. As of March 31,
2016, and as a result of the interest rate swap and the outstanding borrowings under our revolving credit agreement, we
estimate that a 1% change in interest rates would result in a net annual change to interest expense of $2.9 million. On an
economic basis, the interest rate swap contract wholly or partially hedges interest rate exposure on operating cash.
On April 21, 2016, the interest rate swap designated as a fair value hedge was terminated. Therefore, as of this date, the
$250 million of 2.7% Senior Notes are at a fixed interest rate. In addition, on April 29, 2016, we entered into a 4.67-year
amortizing interest rate swap, designated as a cash flow hedge, that reduces our exposure to interest rate risk on the $500
million of outstanding borrowings under our revolving credit facility.
See Notes 6 and 15 of Notes to Consolidated Financial Statements for additional discussion of debt and derivatives and
hedging, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting policies are an integral part of the preparation of our financial statements in accordance with accounting principles
generally accepted in the United States of America. Understanding these policies, therefore, is a key factor in understanding
our reported results of operations and financial position. See Note 1 of Notes to Consolidated Financial Statements for a
discussion of our significant accounting policies and other information. Certain critical accounting policies require us to
make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the financial
statements. Due to their nature, estimates involve judgment based upon available information. Therefore, actual results or
amounts could differ from estimates and the difference could have a material impact on the consolidated financial statements.
We consider the following to be our critical accounting policies that involve significant estimates or judgments.
Consolidation
In the normal course of our business, we sponsor and manage various types of investment vehicles. 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 managed investment vehicles were not material at March 31, 2016, we have not issued any investment performance
guarantees to these investment vehicles or their investors, and we did not sell or transfer assets to any of these investment
vehicles. In accordance with financial accounting standards, we consolidate certain sponsored investment vehicles, some
of which are designated as CIVs.
Certain investment vehicles we sponsor and are the manager of are considered to be variable interest entities ("VIEs") (further
described below) while others are considered to be voting rights entities (“VREs”) subject to traditional consolidation
concepts based on ownership rights. Sponsored 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). We may also fund the initial cash investment in certain VRE investment vehicles to generate an
investment performance track record in order to attract third-party investors in the product. Our initial investment in a new
product typically represents 100% of the ownership in that product. As further discussed below, these “seed capital
investments” are consolidated as long as we maintain a controlling financial interest in the product, but they are not designated
as CIVs unless the investment is longer-term.
A VIE is an entity which does not have adequate equity to finance its activities without additional subordinated financial
support; or the equity investors, as a group, do not have the normal characteristics of equity for a potential controlling
financial interest.
Legg Mason AR2016 | 53 Table of Contents
Investment Company VIEs
For most sponsored investment fund VIEs deemed to be investment companies, including money market funds, we determine
we are the primary beneficiary of the 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 an investment company VIE,
we consider both qualitative and quantitative factors such as the voting rights of the equity holders; economic participation
of all parties, including how fees are earned and paid to us; related party (including employees’) 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.
Other VIEs
For other sponsored investment funds that do not meet the investment company criteria, such as collateralized debt obligation
entities and CLO entities, we determine if we are the primary beneficiary of a VIE if we have both the power to direct the
activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses,
or the right to receive benefits, that potentially could be significant to the VIE. We consider the management fee structure,
including the seniority level of our fees, the current and expected economic performance of the entity, as well as other
provisions included in the governing documents that might restrict or guarantee an expected loss or residual return.
In evaluating whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be
significant to a VIE, we consider factors regarding the design, terms, and characteristics of the investment vehicles, including
the following qualitative factors: 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
vehicle; and if the variability of the expected fees in relation to the potential cash flows of the investment vehicle is
more than insignificant.
We must consolidate any VIE for which we are deemed to be the primary beneficiary.
See Notes 1, 3, and 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 securities 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 established 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
separate account AUM. Separate account customers typically select the custodian.
Valuation processes for AUM are dependent on the nature of the assets and any contractual provisions with our clients.
Equity securities under management for which market quotations are available are usually valued at the last reported sales
54 | Legg Mason AR2016
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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 securities. Short-term debt obligations are generally valued at amortized cost, which
approximates 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 brokers. 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 underlying 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, 2016, equity, fixed income, and liquidity AUM values aggregated $180.5 billion, $376.8
billion and $112.3 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, 2016, less
than 1% of total AUM is valued based on unobservable inputs. All AUM related to Clarion Partners will be Level 3.
Valuation of Financial Instruments
Substantially all financial instruments are reflected in the financial statements at fair value or amounts that approximate fair
value, except a portion of our long-term debt. Trading investments, investment securities and derivative assets and liabilities
included in the Consolidated Balance Sheets include forms of financial instruments. Unrealized gains and losses related to
these financial instruments are reflected in Net Income (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 VIE, 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 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. Our equity method investees that are investment companies
record their underlying investments at fair value. Therefore, under the equity method of accounting, our share of the investee's
underlying net income or loss predominantly represents fair value adjustments in the investments held by the equity method
investee. Our share of the investee's net income or loss is based on the most current information available and is recorded
as a net gain (loss) on investments within non-operating income (expense).
For investments, we value equity and fixed income securities using closing market prices for listed 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 determined to exist, the difference between the adjusted cost of the investment security and its current fair value is
recognized as a charge to earnings in the period in which the 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, 2016 and
2015, excluding investments in CIVs, we owned approximately $0.2 million and $0.3 million, respectively, of financial
investments that were valued on our assumptions or estimates and unobservable inputs.
At March 31, 2016 and 2015, we also had approximately $45.3 million and $62.9 million, respectively, of other investments,
such as investment partnerships, that are included in Other noncurrent assets on the Consolidated Balance Sheets, of which
approximately $37.3 million and $48.3 million, respectively, are accounted for under the equity method. The remainder is
Legg Mason AR2016 | 55 Table of Contents
accounted for under the cost method, which considers if factors indicate there may be an impairment in the value of these
investments. In addition, as of March 31, 2016 and 2015, we had $15.4 million and $16.2 million, respectively, of equity
method investments that are included in Investment securities on the Consolidated Balance Sheets.
The accounting guidance for fair value measurements and disclosures defines fair value and establishes a framework for
measuring fair value. The accounting guidance defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability in the principal or most advantageous 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 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 accounting guidance for fair value measurements establishes a hierarchy that prioritizes the inputs for valuation
techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets
for identical assets or liabilities and the lowest priority to unobservable inputs.
Our financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 — Financial instruments for which prices are quoted in active markets, which, for us, include investments
in publicly traded mutual funds with quoted market prices and equities listed in active markets.
Level 2 — Financial instruments for which prices are quoted for similar assets and liabilities in active markets;
prices are quoted for identical or similar assets in inactive markets; or prices are based on observable inputs, other
than quoted prices, such as models or other valuation methodologies. For us, this category may include fixed income
securities, certain proprietary fund products, and certain long-term debt.
Level 3 — Financial instruments for which values are based on unobservable inputs, including those for which
there is little or no market activity. This category includes investments in partnerships, limited liability companies,
and private equity funds. This category may also include certain proprietary 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.
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 securities using a variety of methods
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 therefore classified in Level 3.
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, 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.
56 | Legg Mason AR2016 Table of Contents
As of March 31, 2016, approximately 1% of total assets (3% of financial assets measured at fair value) and 3% of total
liabilities (82% of financial liabilities measured at fair value) meet the definition of Level 3. Excluding the assets and
liabilities of CIVs, approximately 1% of total assets (3% of financial assets measured at fair value) and 3% of liabilities
(82% of financial liabilities measured at fair value) meet the definition of Level 3.
Any transfers between categories are measured at the beginning of the period.
See Note 3 and 17 of Notes to Consolidated Financial Statements for additional information.
Intangible Assets and Goodwill
Balances as of March 31, 2016, are as follows (in thousands):
Amortizable intangible asset management contracts
Indefinite-life intangible assets
Trade names
Goodwill
$
$
88,344
3,000,954
57,187
1,479,516
4,626,001
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 considered indefinite-life intangible assets because they are expected to generate cash flows indefinitely.
In allocating the purchase price of an acquisition to intangible assets, we must determine the fair value of the assets acquired.
We determine fair values of 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 contracts based upon historical
experience and other factors, 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 values. Triggering events
may include significant adverse changes in our business or the 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, we perform quantitative tests, which include critical
reviews of all significant assumptions, to determine if any intangible assets or goodwill are impaired. If we have not
qualitatively concluded that it is more likely than not that the respective fair values exceed the related carrying values, we
perform these tests for indefinite-life intangible assets and goodwill annually at December 31.
We completed our annual impairment tests of goodwill and indefinite-life intangible assets as of December 31, 2015. As a
result of these impairment tests, our Permal funds-of-hedge funds contracts and trade name indefinite-life intangible assets
were determined to be partially impaired, resulting in aggregate pre-tax operating charges of $371 million. Neither goodwill
nor any other intangible assets were deemed to be impaired. Further, no impairments in the value of amortizable intangible
assets were recognized during the year ended March 31, 2016, 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, 2016, therefore, no
additional indefinite-life intangible asset and goodwill impairment testing was necessary. As a result of uncertainty regarding
future market conditions, assessing the fair value of the reporting unit and intangible assets requires management to exercise
significant judgment. Details of our intangible assets and goodwill and the related impairment tests follow.
Legg Mason AR2016 | 57 Table of Contents
Our acquisition of RARE Infrastructure resulted in the addition of an indefinite-life mutual fund contracts asset, an amortizable
separate accounts asset, a trade name asset and goodwill of $123 million, $68 million, $5 million, and $162 million (170
million Australian dollars, 94 million Australian dollars, 7 million Australian dollars, and 225 million Australian dollars),
respectively, using the foreign exchange rate as of October 21, 2015. Because the fair values of the RARE Infrastructure
indefinite-life mutual fund contracts asset and amortizable separate accounts asset were established as of the October 21,
2015 acquisition date, our December 31, 2015, impairment consideration was limited to a review of AUM trends and other
critical valuation inputs, which noted no significant changes.
Amortizable Intangible Assets
Intangible assets subject to amortization are considered for impairment at each reporting period using an undiscounted 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 no longer 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 variance in any one period must be considered in conjunction with other assumptions
that impact projected cash flows.
As of March 31, 2016, the estimated remaining useful lives of amortizable intangible assets range from three to 12 years
with a weighted-average life of approximately 10.9 years.
Indefinite-Life Intangible Assets
For intangible assets with lives that are indeterminable or indefinite, fair value is determined from a market participant's
perspective based on projected discounted cash flows, taking into account the values market participants would pay in a
taxable transaction to acquire the respective 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. The determination of the fair values of our
indefinite-life intangible assets is highly dependent on these estimates and changes in these inputs could result in a material
impairment of the related carrying values. An asset is determined to be impaired if the current implied fair value is less than
the recorded carrying value of the asset. If an asset is impaired, the difference between the current implied fair value and
the carrying value of the asset reflected on the financial statements is recognized as an Operating 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. The Fauchier acquisition completed by Permal in March 2013 included a funds-of-hedge fund business,
which was merged with the existing Permal fund business through common management, shared resources (including
infrastructure, employees and processes) and co-branding initiatives. Accordingly, the related carrying values and cash
flows of these funds have been aggregated for impairment testing.
Projected cash flows are based on annualized cash flows for the applicable contracts projected forward 40 years, assuming
annual cash flow growth from estimated net client flows and projected market performance. To estimate the projected cash
flows, projected growth rates by affiliate are used to project their AUM. 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 performance from internal
and external sources. Currently, our 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
(contraction), generally in years one through five.
The starting point for these assumptions is our corporate planning process that includes three-year AUM projections from
the management of each operating affiliate that consider the specific business circumstances of each affiliate, with flow
58 | Legg Mason AR2016 Table of Contents
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 appropriate 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, affiliate 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 appropriate 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 operating affiliates, the withdrawal of AUM by clients, changes in business climate, 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
impairment 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 indicative of a need to reassess our estimates given that: our discounted projected
cash flow analyses include projections well beyond three years and variances in the near-years may be offset in subsequent
years; fair value assessments 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 estimated costs of debt and equity capital using a market participant
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 further adjusted to consider the relative risk associated with each of our indefinite-life intangible
asset and our reporting unit. The discount rates are also calibrated based on an assessment of relevant market values.
Consistent with standard valuation practices for taxable transactions, the projected discounted cash flow analysis also factors
in a tax benefit value, as appropriate. This tax benefit represents the discounted tax savings a third party that purchased an
asset on a given valuation date would receive from future tax deductions for the amortization of the purchase price over 15
years.
The Permal funds-of-hedge funds contracts of $698 million accounted for approximately 20% of our indefinite-life intangible
assets, prior to the previously discussed impairment charge, and are supported by the combined funds-of-hedge funds business.
These funds have continued to experience periods of moderate inflows or outflows over recent years and certain increased
risks, as follows. The past several years have seen declines in the traditional high net worth client funds-of-hedge funds
business, Permal's historical focus, which Permal has offset to some extent with inflows in their institutional business.
Further, funds-of-hedge fund managers are subject to certain market influences, as evidenced in Permal's growth in
institutional funds and separate accounts, adding additional uncertainty to our estimates. Due in part to these factors, actual
results for the 12 months ended December 31, 2015, generally compared unfavorably to growth assumptions for the Permal
funds-of-hedge funds contracts used in the asset impairment testing at December 31, 2014. Additionally, the historical
Fauchier portion of Permal's business is now subject to risk associated with the loss of certain key staff. As a result, in our
December 2015 testing, the growth assumptions for these contracts were reduced in the first five years, which, together with
the impact of decreased margins in the first two years, led to decreased projected cash flows from the business. Also, the
projected cash flows from the Permal funds-of-hedge funds contracts were discounted at 16.5%, compared to 14.5% used
in the prior year's impairment testing, reflecting the factors noted above.
Based upon our projected discounted cash flow analyses, the carrying value of the Permal funds-of-hedge funds contracts
asset exceeded its fair value of $335 million, resulting in an impairment charge of $364 million for the excess. Cash flows
on the Permal funds-of-hedge funds contracts are assumed to have an average annual growth rate of approximately 7% (5%
market and 2% organic/other). However, given current experience, projected near-year cash flows reflect moderate AUM
outflows in years one and two, no net AUM flows in year three, and trend to modest AUM inflows in year four. Investment
Legg Mason AR2016 | 59 Table of Contents
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 the two largest
funds that comprise approximately half of the contracts asset AUM, have 10-year average returns approximating 5%. Our
market projections are further supported by industry statistics.
The domestic mutual fund contracts acquired in the Citigroup Asset Management (“CAM”) transaction of $2.1 billion,
account for approximately 70% of our indefinite-life intangible assets. As of December 31, 2015, approximately $150 billion
of AUM, primarily managed by ClearBridge and Western Asset, are associated with this asset, with approximately 35% in
each of equity and fixed income AUM and 30% in liquidity AUM. Previously disclosed uncertainties regarding market
conditions and asset flows and risks related to potential regulatory changes in the liquidity business, are reflected in our
projected discounted cash flow analyses. Based on our projected discounted cash flow analyses, the related fair value
exceeded its carrying value by approximately $1.0 billion. For our impairment test, cash flows from the domestic mutual
fund contracts are assumed to have annual growth rates that average approximately 6%, and reflect moderate AUM inflows
in years 1 and 2. Projected cash flows of the domestic mutual fund contracts are discounted at 13.0%. Results for the 12
months through December 31, 2015, compared favorably to the growth assumptions related to the domestic mutual fund
contracts asset impairment testing at December 31, 2014.
Assuming all other factors remain the same, our actual results and/or changes in assumptions for the domestic mutual fund
contracts cash flow projections over the long-term would have to deviate more than 30% from previous projections, or the
discount rate would have to be raised from 13.0% to more than 16.5%, for the asset to be deemed impaired. Despite the
higher excess of fair value over the related carrying value, given the current uncertainty regarding future market conditions,
it is reasonably possible that fund performance, flows and AUM levels may decrease in the near term such that actual cash
flows from the domestic mutual funds contracts could deviate from the projections by more than 30% and the asset could
be deemed to be impaired by a material amount.
Trade names account for 2% of indefinite-life intangible assets and are primarily related to Permal, which had a carrying
value of $45 million. 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 of $38 million, resulting in a $7
million impairment for the excess. The resulting fair values of the other trade names significantly exceeded the related
carrying amounts.
Goodwill
Goodwill is evaluated at the reporting unit level and is considered for impairment when the carrying amount of the reporting
unit exceeds the implied fair value of the reporting unit. In estimating the implied fair value of the reporting unit, we use
valuation techniques based on discounted projected cash flows and EBITDA multiples, similar to techniques employed in
analyzing the purchase price of an acquisition. We continue to manage our business as one Global Asset Management
operating segment. Internal management reporting of 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,
goodwill is recorded and evaluated at one Global Asset Management reporting unit level. Our Global Asset Management
reporting unit consists of the operating businesses of our asset management affiliates and our centralized global distribution
operations. In our impairment testing process, all consolidated assets (except for certain tax benefits) and liabilities are
allocated to our single Global Asset Management reporting unit. Similarly, the projected operating results of the reporting
unit include our holding company corporate costs and overhead, including costs associated with executive management,
finance, human resources, legal and compliance, internal audit and other central corporate functions.
Goodwill principally originated from the acquisitions of CAM, Permal, Royce, Martin Currie, and more recently RARE
Infrastructure. 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.
60 | Legg Mason AR2016 Table of Contents
Actual cash flows in any one period may vary from the projected cash flows without resulting in an impairment charge
because a variance in any one period must be considered in conjunction with other assumptions that impact projected cash
flows.
Discount rates are based on appropriately weighted estimated costs of equity using a market participant perspective, also
consistent with the methodology discussed above for indefinite-life intangible assets.
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 results of our two estimates of value for the
reporting unit (the discounted cash flow and EBITDA multiple analyses) are compared and any significant differences, if
any, are 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, 2015, exceeded the carrying value by a material amount. Considering the relative merits of the details
involved in each valuation process, we used an equal weighting of the two values for the December 2015 testing.
We further assess the accuracy of the reporting unit value determined from these valuation methods by comparing their
results to our market capitalization to determine an implied control premium. The reasonableness of this implied control
premium is considered by comparing it to control premiums that have been paid in relevant actual change of control
transactions. This assessment provides evidence that our underlying 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
capitalization, and if appropriate, we may consider the average market prices of our stock for a period of one or two months
before the test date to determine market capitalization. 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 company. 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.
Based on our analysis and consideration, we believe the implied control premium determined by our reporting unit value
estimation at December 31, 2015, which is at the lower end of the observed range, is reasonable.
Contingent Consideration Liabilities
In connection with business acquisitions, we may be required to pay additional future consideration based on the achievement
of certain designated financial metrics. We estimate the fair value of these potential future obligations at the time a business
combination is consummated and record a Contingent consideration liability in the Consolidated Balance Sheet. The fair
values of contingent consideration liabilities are revised as of each quarterly reporting date. As of March 31, 2016, the fair
values of our contingent consideration liabilities aggregate $84.6 million, relating to our acquisitions of RARE Infrastructure,
Martin Currie, QS Investors, and PK Investments. There was no contingent consideration liability associated with the
Fauchier acquisition as of March 31, 2016.
We estimate the fair value of contingent consideration liabilities using probability-weighted modeling specific to each
business acquisition and its arrangement for contingent consideration. Estimated payments are discounted to their present
value at the measurement date.
The Martin Currie purchase agreement requires us to pay additional consideration based on the achievement of certain
financial metrics, as specified in the share purchase agreement, at certain future dates over the three and one-half year earn-
out term. Our modeling of the Martin Currie contingent payment arrangement includes Monte Carlo simulation of projected
AUM, performance fees and product performance to determine the related estimated payment amounts. If the expected
payment amounts subsequently change, the contingent consideration liabilities are (reduced) or increased in the current
period, resulting in a (gain) or loss, which is reflected within Other operating expense in the Consolidated Statements of
Income (Loss). Significant increases (decreases) in projected AUM or performance fee levels for Martin Currie would result
in significantly higher (lower) contingent consideration liability fair value and the resulting changes could be material to
our operating results. The RARE Infrastructure, Fauchier, and QS Investors purchase agreements require us to pay additional
consideration based on whether certain future revenue thresholds are achieved. Likewise, significant increases (decreases)
Legg Mason AR2016 | 61 Table of Contents
in projected revenue levels for RARE Infrastructure, Fauchier, and QS Investors would result in significantly higher
(lower) contingent consideration liability fair value and the resulting changes could be material to our operating results.
Stock-Based Compensation
Our stock-based compensation plans include stock options, an employee stock purchase plan, market-based performance
shares payable in common stock, restricted stock awards and units, affiliate management equity plans 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, 2016, 2015,
and 2014, 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.
We granted 0.9 million, 0.9 million, and 1.2 million stock options in fiscal 2016, 2015, and 2014, respectively. During
fiscal 2016, we implemented an affiliate management equity plan with Royce which resulted in the issuance of minority
equity interests in the affiliate to its management team. These interests allow the holders to receive quarterly distributions
of the affiliate's net revenues in amounts equal to the percentage of ownership represented by the equity they hold.
During fiscal 2014, we also implemented management equity plans for Permal and ClearBridge and granted units to
certain of their employees that entitle them to participate in 15% of the future growth of the respective affiliate's
enterprise value (subject to appropriate discounts). For additional information on share-based compensation, see
Notes 1 and 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 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, with the
exception of the grant date stock price and the exercise price, require estimates or assumptions. We calculate the
dividend yield based upon the average of the historical quarterly dividend payments over a term equal to the 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.
We also determine the fair value of option-like affiliate management equity plan grants using the Black-Scholes option-
pricing model, subject to any post-vesting illiquidity discounts. Inputs to the Black-Scholes model are generally
determined in a fashion similar to the fair value of grants of options in our own stock, described above. However,
because our affiliates are private companies without quoted stock prices, we utilize discounted cash flow analyses and
market-based valuations, similar to those discussed above under the heading “Intangible Assets and Goodwill”, to
determine the respective business enterprise values, subject to appropriate discounts for lack of control and marketability.
Noncontrolling Interests
Noncontrolling interests include affiliate minority interests, third-party investor equity in consolidated sponsored
investment vehicles, and vested management equity plan interests. Noncontrolling interests where the holder may be
able to request settlement are classified as redeemable, and are reported at their estimated settlement values. When
settlement is not expected to occur until a future date, changes in the expected settlement value are recognized over the
settlement period. Nonredeemable noncontrolling interests do not permit the holder to request settlement, and are reported
at their issuance value, together with undistributed net income allocated to noncontrolling interests.
We estimate the settlement value of noncontrolling interests as their fair value. For consolidated sponsored investment
vehicles, where the investor may request withdrawal at any time, fair value is based on market quotes of the underlying
securities held by the investment vehicles. For affiliate minority interests and management equity plan interests, fair
value reflects the related total business enterprise value, after appropriate discounts for lack of marketability and control.
62 | Legg Mason AR2016
Table of Contents
There may also be features of these equity interests, such as dividend subordination, that are contemplated in their
valuations. The fair value of option-like management equity plan interests also relies on Black-Scholes option pricing
model calculations, as noted above.
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 jurisdiction. Due to the inherent
complexities arising from conducting business and being taxed in a substantial number of jurisdictions, we must make certain
estimates and judgments in determining our income tax provision for financial statement purposes.
These estimates and judgments are used in determining the tax basis of assets and liabilities and in the calculation of certain
tax assets and liabilities that arise from differences in the timing of revenue and expense recognition for tax and financial
statement purposes. Management assesses the likelihood that we will be able to realize our deferred tax assets. If it is more
likely than not that the deferred tax asset will not be realized, then a valuation allowance is established with a corresponding
increase to deferred tax provision.
As a result of the prospective application of new accounting guidance, we have offset all deferred tax assets, liabilities, and
any related valuation allowances, and present them as a single non-current amount as of March 31, 2016. We have not
retrospectively adjusted prior periods.
Substantially all of our deferred tax assets relate to U.S. federal and state, and U.K. taxing jurisdictions. As of March 31,
2016, U.S. federal deferred tax assets aggregated $711.5 million, realization of which is expected to require $3.2 billion of
future U.S. earnings, of which $740 million must be foreign sourced earnings. 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 substantially all
of the current federal tax benefits relating to net operating losses are realizable. With respect to those resulting from foreign
tax credit carryforwards, it is more likely than not that tax benefits relating to the utilization of approximately $23.5 million
of foreign taxes as credits will not be realized and a valuation allowance has been established. Further, our estimates and
assumptions do not contemplate certain possible future changes in the ownership of Legg Mason stock, which, under the
U.S. Internal Revenue Code, could limit our utilization of net operating loss and foreign tax credit benefits.
As of March 31, 2016, federal valuation allowances aggregated $21.0 million. The decrease in federal valuation allowances
from the prior year relates to $12.7 million of expiring foreign tax credits. The release was offset in part by $6.9 million,
of which $2.5 million relates to foreign tax credits, $3.4 million relates to charitable contributions, and $1.0 million relates
to Martin Currie's operating losses.
While tax planning may enhance our tax positions, the realization of tax benefits on deferred tax assets for which valuation
allowances have not been provided is not dependent on implementation of any significant tax strategies.
As of March 31, 2016, U.S. state deferred tax assets aggregated $175.7 million. Due to limitations on the utilization of net
operating loss carryforwards and taking into consideration state tax planning strategies, the related valuation allowance was
$26.8 million, substantially all of which relates to prior years for state net operating loss benefits generated in certain
jurisdictions in cases where it is more likely that these benefits will not ultimately be realized. Due to the uncertainty of
future state apportionment factors and future effective state tax rates, the value of state net operating loss benefits ultimately
realized may vary.
For foreign jurisdictions, a decrease in valuation allowances of $11.4 million in fiscal 2016 primarily relates to the change
in statutory rates, tax planning to utilize attributes previously considered realizable, and adjustments to intercompany pricing
models.
To the extent our analysis of the realization of deferred tax assets relies on deferred tax liabilities, we have considered the
timing, nature and jurisdiction of reversals, as well as, future increases relating to the tax amortization of goodwill and
indefinite-life intangible assets. 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
Legg Mason AR2016 | 63 Table of Contents
income tax provision in the period in which that determination is made. Depending on the facts and circumstances, 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.
EFFECTS OF INFLATION
The rate of inflation can directly affect various expenses, including employee compensation, communications and technology
and occupancy, which may not be readily 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 Risk — Revenues and Net Income (Loss)" and "Critical Accounting Policies — Intangible Assets
and Goodwill" previously discussed.
64 | Legg Mason AR2016 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Legg Mason, Inc. is responsible for establishing and maintaining adequate internal control over financial
reporting.
Legg Mason's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. Legg Mason's 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 transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts and expenditures of Legg Mason are being
made only in accordance with authorizations of management and directors of Legg Mason; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Legg Mason's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Legg Mason's internal control over financial reporting as of March 31, 2016,
based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
in Internal Control — Integrated Framework (2013). Based on that assessment, management concluded that, as of March
31, 2016, 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, 2016, 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, 2016.
Joseph A. Sullivan
Chairman and Chief Executive Officer
Peter H. Nachtwey
Senior Executive Vice President and Chief Financial Officer
Legg Mason AR2016 | 65 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, 2016 and March 31, 2015, and
the results of their operations and their cash flows for each of the three years in the period ended March 31, 2016 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of March 31, 2016, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its 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 financial reporting based on
our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable 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 statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
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 transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or 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 inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Baltimore, Maryland
May 23, 2016
66 | Legg Mason AR2016 Table of Contents
ASSETS
Current Assets
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, 2016
March 31, 2015
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
Deferred income taxes
Other
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Current Liabilities
Accrued compensation
Accounts payable and accrued expenses
Short-term borrowings
Contingent consideration
Other
Other current liabilities of consolidated investment vehicles
Total Current Liabilities
Deferred compensation
Deferred income taxes
Contingent consideration
Other
Long-term debt
TOTAL LIABILITIES
Commitments and Contingencies (Note 8)
REDEEMABLE NONCONTROLLING INTERESTS
STOCKHOLDERS' EQUITY
Common stock, par value $.10; authorized 500,000,000 shares; issued 107,011,664
shares in March 2016 and 111,469,142 shares in March 2015
Additional paid-in capital
Employee stock trust
Deferred compensation employee stock trust
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders' equity attributable to Legg Mason, Inc.
Nonredeemable noncontrolling interest
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
$
$
$
$
$
1,329,126
297
19,580
334,922
74,694
515,335
48,715
—
55,405
7,054
2,385,128
163,305
3,146,485
1,479,516
206,797
139,215
7,520,446
430,736
201,572
40,000
26,396
138,301
4,548
841,553
65,897
260,386
58,189
141,886
1,740,985
3,108,896
$
$
669,552
2,808
32,114
368,399
118,850
454,735
48,000
169,706
51,002
6,121
1,921,287
179,606
3,313,334
1,339,510
161,978
149,119
7,064,834
400,245
208,210
—
22,276
177,879
6,436
815,046
51,706
362,209
88,508
167,998
1,048,946
2,534,413
175,785
45,520
10,701
2,693,113
(26,263)
26,263
1,576,242
(66,493)
4,213,563
22,202
4,235,765
7,520,446
$
11,147
2,844,441
(29,570)
29,570
1,690,055
(60,742)
4,484,901
—
4,484,901
7,064,834
Legg Mason AR2016 | 67 Table of Contents
LEGG MASON, INC. AND SUBSIDIARIES
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 charges
Other, net, including $(33,375) and $5,000 of contingent
consideration fair value (reduction) increase in fiscal
2016 and 2014, respectively
Total Operating Expenses
OPERATING INCOME
OTHER NON-OPERATING INCOME (EXPENSE)
Interest income
Interest expense
Other income (expense), net, including $107,074 debt
extinguishment loss in fiscal 2015
Other non-operating income (expense) of consolidated
investment vehicles, net
Total Other Non-Operating Income (Expense)
INCOME (LOSS) BEFORE INCOME TAX PROVISION
(BENEFIT)
Income tax provision
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. SHAREHOLDERS:
Basic
Diluted
See Notes to Consolidated Financial Statements
Years Ended March 31,
2015
2014
2016
826,080
1,409,059
41,982
381,486
2,237
2,660,844
1,172,645
32,172
1,204,817
545,710
197,857
122,610
4,979
371,000
163,040
2,610,013
50,831
$
824,211
1,544,494
83,519
361,188
5,694
2,819,106
1,208,214
24,556
1,232,770
594,788
182,438
109,708
2,625
—
198,558
2,320,887
498,219
$
777,420
1,501,278
107,087
347,598
8,374
2,741,757
1,208,226
2,161
1,210,387
619,070
157,872
115,234
12,314
—
195,987
2,310,864
430,893
5,634
(48,463)
7,440
(58,274)
6,367
(52,911)
(25,977)
(85,280)
32,818
(7,243)
(76,049)
(25,218)
7,692
(32,910)
5,888
(130,226)
367,993
125,284
242,709
2,474
(11,252)
419,641
137,805
281,836
(7,878)
5,629
(2,948)
(25,032)
$
237,080
$
284,784
(0.25)
(0.25)
$
$
2.06
2.04
$
$
2.34
2.33
$
$
$
$
68 | Legg Mason AR2016 Table of Contents
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
NET INCOME (LOSS)
Other comprehensive loss:
Foreign currency translation adjustment
Unrealized losses on investment securities:
Unrealized holding losses, net of tax benefit of $3
and $123, respectively
Reclassification adjustment for losses included in net
income
Net unrealized losses on investment securities
Net actuarial gains (losses) on defined benefit pension
plan
Unrealized gains on reverse treasury rate lock, net of tax
provision of $233
Reclassification for realized gain on termination of
reverse treasury rate lock, net of tax provision of $233
Reclassification of assets held for sale
Total other comprehensive loss
COMPREHENSIVE INCOME (LOSS)
Less: Comprehensive income (loss) attributable to
noncontrolling interests
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE
TO LEGG MASON, INC.
See Notes to Consolidated Financial Statements
Years Ended March 31,
2015
2014
2016
$
(32,910)
$
242,709
$
281,836
(8,525)
(88,982)
(9,424)
—
—
—
2,774
—
—
—
(5,751)
(38,661)
(11,738)
(5)
5
—
(9,595)
405
(405)
(114)
(98,691)
144,018
(184)
18
(166)
—
—
—
—
(9,590)
272,246
5,629
(2,948)
$
(26,923)
$
138,389
$
275,194
Legg Mason AR2016 | 69 Table of Contents
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Years Ended March 31,
2015
2014
2016
STOCKHOLDERS' EQUITY ATTRIBUTABLE TO LEGG MASON, INC.
COMMON STOCK
Beginning balance
Stock options exercised
Deferred compensation employee stock trust
Stock-based compensation
Employee tax withholdings by settlement of net share transactions
Shares repurchased and retired
Ending balance
ADDITIONAL PAID-IN CAPITAL
Beginning balance
Stock options exercised
Deferred compensation employee stock trust
Stock-based compensation
Additional tax benefit on Equity Unit exchange in fiscal 2010
Employee tax withholdings by settlement of net share transactions
Shares repurchased and retired
Redeemable noncontrolling interest reclassification for affiliate management equity plans
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
Reclassification for net increase in estimated redemption value of affiliate management
equity plans
Ending balance
APPROPRIATED RETAINED EARNINGS FOR CONSOLIDATED INVESTMENT
VEHICLE
Beginning balance
Net income reclassified to appropriated retained earnings
Ending balance
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
Beginning balance
Net unrealized losses on investment securities
Net actuarial gains (losses) on defined benefit pension plan
Reclassification to assets held for sale
Foreign currency translation adjustment
Ending balance
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO LEGG MASON, INC.
Nonredeemable noncontrolling interest
TOTAL STOCKHOLDERS’ EQUITY
See Notes to Consolidated Financial Statements
12,534
78
5
123
(55)
(968)
11,717
3,449,190
23,741
1,779
53,939
—
(19,409)
(359,028)
(1,816)
3,148,396
(32,623)
(1,784)
4,485
(29,922)
32,623
1,784
(4,485)
29,922
$
$
11,147
33
2
14
(41)
(454)
10,701
$
11,717
71
5
94
(47)
(693)
11,147
3,148,396
21,994
2,218
54,935
—
(22,067)
(355,829)
(5,206)
2,844,441
(29,922)
(2,223)
2,575
(29,570)
29,922
2,223
(2,575)
29,570
2,844,441
9,482
505
65,373
9,173
(21,596)
(209,178)
(5,087)
2,693,113
(29,570)
(507)
3,814
(26,263)
29,570
507
(3,814)
26,263
1,690,055
(25,032)
(87,818)
(963)
1,576,242
1,526,662
237,080
(73,687)
1,304,259
284,784
(62,381)
—
—
1,690,055
1,526,662
—
—
—
—
—
—
(60,742)
—
2,774
—
(8,525)
(66,493)
4,213,563
22,202
4,235,765
$
37,949
—
(9,595)
(114)
(88,982)
(60,742)
4,484,901
—
4,484,901
$
$
$
4,829
(4,829)
—
47,539
(166)
—
—
(9,424)
37,949
4,724,724
—
4,724,724
70 | Legg Mason AR2016 Table of Contents
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended March 31,
2015
2014
2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)
5.5% Senior Notes Due 2019:
Loss on extinguishments
Allocation of redemption payments
Adjustments to reconcile Net Income to net cash provided by operations:
Impairment of intangible assets
Depreciation and amortization
Accretion and amortization of securities discounts and premiums, net
Stock-based compensation
Net losses (gains) on investments
Net losses (gains) of consolidated investment vehicles
Deferred income taxes
Contingent consideration fair value adjustments
Other
Decrease (increase) in assets:
Investment advisory and related fees receivable
Net sales (purchases) of trading and other 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
$ (32,910) $ 242,709
$ 281,836
—
—
107,074
(98,418)
—
—
371,000
60,297
3,140
92,927
26,056
2,496
(7,727)
(33,375)
2,631
34,308
(82,423)
(9,545)
4,947
(1,631)
—
55,086
4,275
66,245
(13,912)
(1,308)
100,387
—
(12,939)
(28,668)
47,357
19,547
(9,936)
114,934
—
62,845
3,037
66,488
(26,805)
(643)
118,430
5,000
3,276
(2,061)
(44,293)
14,105
(24,042)
(62,916)
30,998
14,316
(7,593)
(11,573)
(1,888)
$ 454,451
(17,727)
10,314
(14,763)
1,182
(3,321)
$ 568,118
76,968
(7,191)
319
(23,310)
(3,719)
$ 437,324
Legg Mason AR2016 | 71 Table of Contents
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
Years Ended March 31,
2015
2016
2014
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for fixed assets
Business investments and acquisitions, net of cash acquired of $9,667 and
$29,830 in fiscal 2016 and 2015, respectively
Proceeds from sale of businesses and assets
Change in restricted cash
Purchases of investment securities
Proceeds from sales and maturities of investments
Purchases of investments by consolidated investment vehicles
Proceeds from sales and maturities of investments by consolidated
investment vehicles
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term borrowings
Repayments of debt
Payment of contingent consideration
Repayment of long-term debt of consolidated investment vehicles
Proceeds from issuance of long-term debt
Debt issuance costs
Issuances of common stock for stock-based compensation
Employee tax withholdings by settlement of net share transactions
Repurchases of common stock
Dividends paid
Dividends paid to noncontrolling interest holders
Net (redemptions/distributions paid to) subscriptions received and other
noncontrolling interests
CASH PROVIDED BY (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 PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL DISCLOSURE
Cash paid for:
Income taxes, net of refunds of $(4,689), $(865), and $(13,835), respectively
Interest
See Notes to Consolidated Financial Statements
$
(40,330) $ (45,773) $ (40,452)
(234,053)
—
21,065
—
8,749
—
(183,747)
47,001
(25,571)
(2,641)
2,688
—
—
1,351
(5,801)
(4,335)
4,306
(17,328)
—
(244,569)
— 199,886
137,627
(208,043)
40,000
—
— (645,780)
—
(79,179)
658,769
(5,250)
24,288
(22,114)
(356,522)
(70,815)
—
(22,765)
—
699,793
(13,539)
10,022
(21,637)
(209,632)
(84,093)
(1,016)
—
(500,439)
—
(133,047)
393,740
(3,940)
25,603
(19,464)
(359,996)
(61,966)
—
68,639
465,772
(16,080)
659,574
669,552
$ 1,329,126
(10,459)
(507,062)
(41,483)
(188,470)
858,022
$ 669,552
20,438
(639,071)
(10,894)
(75,014)
933,036
$ 858,022
$
$
23,743
49,393
19,578
59,039
$ 10,140
44,295
72 | Legg Mason AR2016 Table of Contents
LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts or unless otherwise noted)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Legg Mason, Inc. ("Parent") and its subsidiaries (collectively, "Legg Mason" or "the Company") are principally engaged in
providing asset management and related financial services to individuals, institutions, corporations and municipalities.
The consolidated financial statements include the accounts of the Parent and its subsidiaries in which it has a controlling
financial interest. Generally, an entity is considered to have a controlling financial interest when it owns a majority of the
voting interest in an entity. Legg Mason is also required to consolidate any variable interest entity ("VIE") in which it is
considered to be the primary beneficiary. See "Consolidation" below and Note 17 for a further discussion of VIEs. All
material intercompany balances and transactions have been eliminated.
Certain amounts in prior year financial statements have been reclassified to conform to the current year presentation, including
the classification in our Consolidated Balance Sheets of deferred debt issuance costs, as more fully described below.
All references to fiscal 2016, 2015 or 2014, 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, which require
management to make assumptions and estimates that affect the amounts reported in the consolidated financial statements
and accompanying notes, including revenue recognition, valuation of financial instruments, intangible assets and goodwill,
stock-based compensation, income taxes, and consolidation. Management believes that the estimates used are reasonable,
although actual amounts could differ from the estimates and the differences could have a material impact on the consolidated
financial statements.
Consolidation
In the normal course of its business, Legg Mason sponsors and manages various types of investment vehicles. For its services,
Legg Mason is entitled to receive management fees and may be eligible, under certain circumstances, to receive additional
subordinated management fees or other incentive fees. 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 uncollected management fees. Legg Mason
did not sell or transfer assets to any of these investment vehicles. In accordance with financial accounting standards, Legg
Mason consolidates certain sponsored investment vehicles, some of which are designated and reported as consolidated
investment vehicles (“CIVs”). The consolidation of sponsored investment vehicles, including those designated as CIVs,
has no impact on Net Income (Loss) Attributable to Legg Mason, Inc. and does not have a material impact on Legg Mason's
consolidated operating results. The change in the value of all consolidated sponsored investment vehicles, is recorded in
Other Non-Operating Income (Expense) and reflected in Net income (loss) attributable to noncontrolling interests.
Certain investment vehicles Legg Mason sponsors and is the manager of are considered to be VIEs (as further described
below) while others are considered to be voting rights entities (“VREs”) subject to traditional consolidation concepts based
on ownership rights. Sponsored investment vehicles that are considered VREs are consolidated 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). Legg Mason may also fund the initial cash investment in certain VRE investment vehicles to generate an
investment performance track record in order to attract third-party investors in the product. Legg Mason's initial investment
in a new product typically represents 100% of the ownership in that product. As further discussed below, these “seed capital
investments” are consolidated as long as Legg Mason maintains a controlling financial interest in the product, but they are
not designated as CIVs by Legg Mason unless the investment is longer-term. Legg Mason held a longer-term controlling
financial interest in one sponsored investment fund VRE, which has third-party investors and was consolidated and included
as a CIV prior to the quarter ended March 31, 2015. Prior to March 31, 2015, Legg Mason redeemed a significant portion
Legg Mason AR2016 | 73 Table of Contents
of its investment in this fund and as a result no longer had a controlling financial interest in the fund; therefore, the fund
was not included as a CIV as of or subsequent to March 31, 2015.
A VIE is an entity which does not have adequate equity to finance its activities without additional subordinated financial
support; or the equity investors, as a group, do not have the normal characteristics of equity investors for a potential controlling
financial interest.
Investment Company VIEs
For most sponsored investment fund VIEs deemed to be investment companies, including money market funds, Legg Mason
determines it is the primary beneficiary of the VIE if it absorbs a majority of the VIE's expected losses, or receives a majority
of the VIE's expected residual returns, if any. Legg Mason's determination of expected residual returns excludes gross fees
paid to a decision maker if certain criteria relating to the fees are met. In determining whether it is the primary beneficiary
of an investment company VIE, 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 (including employees) ownership; guarantees and implied relationships.
Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and
designated as a CIV) as of March 31, 2016, 2015, and 2014, despite significant third-party investments in this product. As
of March 31, 2016, 2015, and 2014, Legg Mason also concluded it was the primary beneficiary of 14, 17, and 17 employee-
owned funds it sponsors, respectively, which were consolidated and designated as CIVs.
Other VIEs
For other sponsored investment funds that do not meet the investment company criteria, Legg Mason determines it is the
primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the
entity's economic performance and the obligation to absorb losses, or the right to receive benefits, that potentially could be
significant to the VIE.
As of March 31, 2016 and 2015, Legg Mason had a variable interest in four collateralized loan obligations ("CLOs"). Legg
Mason concluded it was not the primary beneficiary of these CLOs, which were not consolidated, as it holds no equity
interest in these investment vehicles and the level of fees they are expected to pay to Legg Mason is insignificant. As of
March 31, 2014, Legg Mason had a variable interest in two of these CLOs, which also were not consolidated during that
period.
As of March 31, 2014, Legg Mason concluded that it was the primary beneficiary of another CLO in which it held a variable
interest. Although it held no equity interest in this investment vehicle, it had both the power to control the CLO and had a
significant variable interest because of the level of its expected subordinated fees. As of March 31, 2014, the balances
related to this CLO were consolidated and reported as a CIV in the Company's consolidated financial statements. During
the three months ended June 30, 2014, this CLO was substantially liquidated and therefore was not consolidated by Legg
Mason as of, or subsequent to, June 30, 2014.
Legg Mason's investment in CIVs as of March 31, 2016 and 2015 was $13,641 and $15,553, respectively, which represents
its maximum risk of loss, excluding uncollected advisory fees, which were not material. The assets of these CIVs are primarily
comprised of investment securities. Investors and creditors of these CIVs have no recourse to the general credit or assets of
Legg Mason beyond its investment in these funds.
See Notes 3 and 17 for additional information regarding VIEs and VREs.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of 90 days or less.
Restricted Cash
Restricted cash represents cash collateral required for market hedge arrangements, long-term escrow deposits, and other
cash that is not available to Legg Mason for general corporate use.
74 | Legg Mason AR2016 Table of Contents
Financial Instruments
Substantially all financial instruments are reflected in the financial statements at fair value or amounts that approximate fair
value, except Legg Mason's long-term debt not designated for a hedging transaction.
As discussed above in "Consolidation," seed capital investments in proprietary fund products are initially consolidated and
the individual securities within the portfolio are accounted for as trading investments. Legg Mason consolidates these
products as long as it holds a controlling financial interest in the product. Upon deconsolidation, which typically occurs
after several years, Legg Mason accounts for its investments in proprietary fund products as equity method investments
(further described below) if its ownership is between 20% and 50%, or it otherwise has the ability to significantly influence
the financial and operating policies of the investee. For partnerships and LLCs, where third-party investors may have less
ability to influence operations, the equity method of accounting is considered if Legg Mason's ownership is greater than
3%. Changes in the fair value of proprietary fund products classified as trading or equity method investments are recognized
in Other Non-Operating Income (Expense) on the Consolidated Statements of Income (Loss).
Legg Mason generally redeems its investment in proprietary fund products when the related product establishes a sufficient
track record, when third-party investments in the related product are sufficient to sustain the strategy, or when a decision is
made to no longer pursue the strategy. The length of time Legg Mason holds a majority interest in a product varies based
on a number of factors, such as market demand, market conditions and investment performance.
See Notes 3 and 17 for additional information regarding Legg Mason's seed capital investments and the determination of
whether investments in proprietary fund products represent VIEs, respectively.
For equity investments in which Legg Mason does not control the investee and 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 evaluations 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. Legg Mason's
equity method investees that are investment companies 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 offsetting compensation expense adjustments under revenue sharing arrangements and deferred
compensation arrangements, therefore, fluctuations in the market value of these investments will not have a material impact
on Net Income (Loss) Attributable to Legg Mason, Inc.
Legg Mason also holds debt and marketable equity investments which are classified as trading. Certain investment securities,
including those held by CIVs, are also classified as trading securities. These investments are recorded at fair value and
unrealized gains and losses are included in current period earnings. Realized gains and losses for all investments are included
in current period earnings.
Equity and fixed income securities classified as trading are valued using closing market prices for listed instruments or
broker 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.
Legg Mason evaluates its 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 determined to exist, the amount of impairment that relates to credit losses is recognized as
a charge to income. As of March 31, 2016, 2015 and 2014, 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 available,
management 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.
Legg Mason AR2016 | 75 Table of Contents
In addition to the financial instruments described above and the derivative instruments described below, other financial
instruments that are carried at fair value or amounts that approximate fair value include Cash and cash equivalents and Short-
term borrowings. The fair value of Long-term debt at March 31, 2016 and 2015, aggregated $1,773,852 and $1,166,697,
respectively. Except for long-term debt designated for a hedging transaction, these fair values were estimated using publicly
quoted market prices and were classified as Level 2 in the fair value hierarchy, as described below. Additionally, the 2.7%
Senior Notes due 2019 designated for a hedging transaction are valued as the sum of the amortized cost of the debt and the
fair value of the related interest rate contract designated for a hedging transaction which approximates the debt fair value,
and was classified as a Level 2 measurement, as discussed 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 and liabilities on a limited basis. Also, Legg Mason has used futures contracts on index
funds to hedge the market risk of certain seed capital investments.
With the exception of an interest rate swap and a reverse treasury rate lock contract, as further discussed in Note 6, Legg
Mason has not designated any financial instruments for hedge accounting, as defined in the accounting literature, during
the periods presented. The gains or losses on derivative instruments not designated for hedge accounting are included as
Other operating income (expense) or Other Non-Operating Income (Expense) in the Consolidated Statements of Income
(Loss), depending on the strategy. Gains and losses on derivative instruments of CIVs are recorded as Other non-operating
income (loss) of consolidated investment vehicles, net, in the Consolidated Statements of Income (Loss), if applicable. See
Note 15 for additional information regarding derivatives and hedging.
Fair Value Measurements
Accounting guidance for fair value measurements defines fair value and establishes a framework for measuring fair value.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. Under 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 judgment 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 other-than-temporary impairments
and is intended to bring greater consistency to the timing of impairment recognition. It is also intended to provide greater
clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold.
The guidance also requires timely disclosures regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses.
Fair value accounting guidance also establishes a hierarchy that prioritizes the inputs for valuation techniques used to measure
fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs.
Legg Mason's financial instruments are measured and reported at fair value (except debt not designated for a hedging
transaction) 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 and
certain derivative instruments.
Level 2 — Financial instruments for which: prices are quoted for similar assets and liabilities in active markets;
prices are quoted for identical or similar assets in inactive markets; or prices are based on observable inputs, other
than quoted prices, such as models or other valuation methodologies. For Legg Mason, this category may include
fixed income securities, certain proprietary fund products and certain long-term debt.
76 | Legg Mason AR2016 Table of Contents
Level 3 — Financial instruments for which values are based on unobservable inputs, including those for which
there is little or no market activity. This category includes investments in partnerships, limited liability companies,
and private equity funds. This category may also include certain proprietary fund products with redemption
restrictions and contingent consideration liabilities.
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.
Certain proprietary fund products and 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 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, management must 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 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 therefore classified as Level 3.
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, classified as Level 2 or Level 3, as their
fair value. The NAVs that have been provided by investees are derived from the fair values of the underlying investments
as of the reporting date.
Any transfers between categories are measured at the beginning of the period.
See Note 3 for additional information regarding fair value measurements.
Appropriated Retained Earnings
Prior to June 30, 2014, Legg Mason elected the fair value option for certain eligible assets and liabilities, including corporate
loans and debt, of the then consolidated CLO. Upon the election of the fair value option for eligible assets and liabilities
of the CLO, 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 was recorded as "Appropriated retained earnings for consolidated investment vehicle" because
the investors in the CLO, not Legg Mason shareholders, would ultimately realize any benefits or losses associated with the
CLO. Changes in the fair values of the CLO assets and liabilities were recorded as Net income (loss) attributable to
noncontrolling interests in the Consolidated Statements of Income (Loss) and Appropriated retained earnings for consolidated
investment vehicle in the Consolidated Balance Sheet. The CLO substantially liquidated and was deconsolidated as of June
30, 2014. At March 31, 2014, the CLO was in the final stage of liquidation, and the fair value of its assets and liabilities
were substantially equal, and there were no Appropriated retained earnings.
Fixed Assets
Fixed assets primarily consist of equipment, software and leasehold improvements. Equipment consists primarily of
communications and technology hardware and furniture and fixtures. Capitalized software includes both purchased software
and internally developed software. The cost of software used under a service contract where Legg Mason does not own or
control the software is expensed over the term of the contract. Fixed assets are reported at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are determined 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, generally three years. Leasehold improvements 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.
Legg Mason AR2016 | 77 Table of Contents
Intangible Assets and Goodwill
Legg Mason's identifiable intangible assets consist principally of asset management contracts, contracts to manage
proprietary mutual funds or funds-of-hedge funds, and trade names resulting from acquisitions. Intangible assets are
amortized over their estimated useful lives, using the straight-line method, unless the asset is determined to have an indefinite
useful life. Asset management contracts are amortizable 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 mutual funds or funds-of-hedge
funds and the value of trade names are classified as indefinite-life intangible assets. The assignment of indefinite lives to
proprietary fund contracts is based upon the assumption that there is no foreseeable limit on the contract period to manage
proprietary funds due to the likelihood of continued renewal at little or no cost. The assignment of indefinite lives to trade
names is based on the assumption that they are expected to generate cash flows indefinitely.
Goodwill represents the residual amount of acquisition cost in excess of identified tangible and intangible assets and assumed
liabilities. Indefinite-life intangible assets and goodwill are not amortized for financial statement purposes. Given the
relative significance of intangible assets and goodwill to the Company's consolidated 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
or the 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 perform quantitative tests, which include critical reviews of all significant factors and
assumptions, to determine if any intangible assets or goodwill are impaired. Legg Mason considers 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 consolidated financial
statements and its current fair value is recognized as an expense in the period in which the impairment is determined. If a
triggering event has not occurred, the Company performs quantitative tests annually at December 31, for indefinite-life
intangible assets and goodwill, unless the Company can qualitatively conclude that it is more likely than not that the respective
fair values exceed the related carrying values. The fair values of intangible assets subject to amortization are considered
for impairment at each reporting period using an undiscounted cash flow analysis. 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 consideration estimates of future fees, profit margins, growth rates, taxes, and discount rates. Proprietary fund contracts
that are managed and operated as a single unit and meet other criteria may be aggregated for impairment testing. Goodwill
is evaluated at 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 implied fair value of the reporting unit, Legg Mason uses
valuation 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 operating 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 information, such as operating results, at any lower level, such as the asset management affiliate level.
Allocations of goodwill for management restructures, acquisitions, and dispositions are based on relative fair values of the
respective businesses restructured, acquired, or divested.
See Note 5 for additional information regarding intangible assets and goodwill and Note 16 for additional business segment
information.
Debt
For the year ended March 31, 2016, Legg Mason elected to early adopt updated accounting guidance which requires debt
issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated long-term
debt liability, consistent with the presentation of a debt discount. This updated guidance was adopted on a retrospective
basis and, as a result, Legg Mason reclassified unamortized debt issuance costs of $8,395 from Other non-current assets and
$748 from Other current assets to Long-term debt within the Consolidated Balance Sheet for the year ended March 31, 2015.
Contingent Consideration Liabilities
In connection with business acquisitions, Legg Mason may be required to pay additional future consideration based on the
achievement of certain designated financial metrics. Legg Mason estimates the fair value of these potential future obligations
78 | Legg Mason AR2016 Table of Contents
at the time a business combination is consummated and records a Contingent consideration liability in the Consolidated
Balance Sheet.
Legg Mason accretes contingent consideration liabilities to the expected payment amounts over the related earn-out terms
until the obligations are ultimately paid, resulting in Interest expense in the Consolidated Statements of Income (Loss). If
the expected payment amounts subsequently change, the contingent consideration liabilities are (reduced) or increased in
the current period, resulting in a (gain) or loss, which is reflected within Other operating expense in the Consolidated
Statements of Income (Loss). See Notes 2 and 8 for additional information regarding contingent consideration liabilities.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries that are denominated in non-U.S. dollar functional currencies are translated at
exchange rates as of the Consolidated Balance Sheet dates. Revenues and expenses are translated at average exchange rates
during the period. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars are
included in stockholders' equity and comprehensive income (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"), and 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 product, and are recognized
at the end of the performance measurement period. Accordingly, neither advanced billings 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
quarters during the year, with a portion also based on quarterly performance periods.
Legg Mason has responsibility for the valuation of AUM, substantially all of which is based on observable market data from
independent pricing services, fund accounting agents, custodians or brokers.
Distribution and Service Fees Revenue and Expense
Distribution and service fees represent fees earned from funds to reimburse the distributor for the costs of marketing and
selling fund shares and servicing proprietary funds and are generally determined as a percentage of client assets. Reported
amounts also include fees earned from providing client or shareholder servicing, including record keeping or administrative
services to proprietary funds, and non-discretionary advisory services. Distribution fees earned on company-sponsored
investment funds are reported as revenue. When Legg Mason enters into arrangements with broker-dealers or other third
parties to sell or market proprietary fund shares, distribution and servicing expense is accrued for the amounts owed to third
parties, including finders' fees and referral fees paid to unaffiliated broker-dealers or introducing parties. Distribution and
servicing expense also includes payments to third parties for certain shareholder administrative services and sub-advisory
fees paid to unaffiliated asset managers.
Deferred Sales Commissions
Commissions paid to financial intermediaries in 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 commission asset for impairment by reviewing the changes in value of the
related shares, the relevant market conditions 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 carrying value to the estimated
undiscounted cash flows expected to be generated by the asset over its remaining life. If management determines that the
deferred sales commission asset is not fully recoverable, the asset will be deemed impaired and a loss will be recorded in
the amount by which the recorded amount of the asset exceeds its estimated fair value. For the years ended March 31, 2016,
Legg Mason AR2016 | 79 Table of Contents
2015 and 2014, no impairment charges were recorded. Deferred sales commissions, included in Other non-current assets
in the Consolidated Balance Sheets, were $6,713 and $10,422 at March 31, 2016 and 2015, 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 statements. Deferred income tax assets are subject to a valuation allowance if, in
management's opinion, it is more likely than not that these benefits will not be realized. Legg Mason's deferred income
taxes principally relate to net operating loss and other carryforward benefits, business 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 merits. A tax position that meets this threshold is measured as the largest amount
of benefit that has a greater than 50% likelihood of being realized upon settlement by the appropriate taxing authority having
full knowledge of all relevant information.
The Company's accounting policy is to classify interest related to tax matters as interest expense and related penalties, if
any, as other operating expense.
For the year ended March 31, 2016, Legg Mason elected to early adopt new accounting guidance relating to the balance
sheet classification of deferred taxes. The updated guidance requires that all deferred tax assets, liabilities, and any related
valuation allowances be classified prospectively as noncurrent in a classified balance sheet.
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 reasonably estimated. Related
insurance recoveries are recorded separately when the underwriter has confirmed coverage of a specific claim amount. See
Note 8 for additional information.
Stock-Based Compensation
Legg Mason's stock-based compensation includes stock options, an employee stock purchase plan, market-based
performance shares payable in common stock, restricted stock awards and units, management equity plans for certain
affiliates 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 classified as equity at their grant date fair value amortized over the respective vesting periods on the straight-line
method. The grant-date fair value of equity-classified share-based awards with immediate vesting is also included in
Compensation and benefits expense. 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 are valued with a Monte Carlo option-pricing
model. Legg Mason also determines the fair value of option-like affiliate management equity plan grants using the Black-
Scholes option-pricing model, subject to any post-vesting illiquidity discounts. See Note 11 for additional information
regarding stock-based compensation.
Earnings Per Share
Basic earnings per share attributable to Legg Mason, Inc. shareholders ("EPS") is calculated by dividing Net Income (Loss)
Attributable to Legg Mason, Inc. (adjusted by earnings allocated to participating securities) by the weighted-average number
of shares outstanding. Legg Mason has issued to employees restricted stock that are deemed to be participating securities
prior to vesting, because the unvested restricted shares entitle their holder to nonforfeitable dividend rights. In this
circumstance, accounting guidance requires a “two-class method” for EPS calculations that excludes earnings (potentially
both distributed and undistributed) allocated to participating securities.
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 other than potentially unvested restricted shares, are considered antidilutive.
See Note 12 for additional discussion of EPS.
80 | Legg Mason AR2016 Table of Contents
Restructuring Costs
As further discussed in Note 2, Legg Mason is restructuring The Permal Group, Ltd. ("Permal") for the combination with
EnTrust Capital ("EnTrust"). The costs associated with this restructuring primarily relate to employee termination benefits,
including severance and retention incentives, which are recorded as Transition-related compensation in the Consolidated
Statement of Income (Loss), and charges for consolidating leased office space, which are recorded as Occupancy in the
Consolidated Statement of Income (Loss).
Also, as further discussed in Note 2, in May 2014, Legg Mason acquired QS Investors Holdings, LLC ("QS Investors") and
integrated its two existing affiliates, Batterymarch Financial Management, Inc. ("Batterymarch") and Legg Mason Global
Asset Allocation, LLC ("LMGAA") into QS Investors to leverage the best aspects of each subsidiary. The costs related to
this integration primarily related to employee termination benefits, including severance and retention incentives, which were
recorded as Transition-related compensation in the Consolidated Statements of Income (Loss).
Noncontrolling Interests
Noncontrolling interests include affiliate minority interests, third-party investor equity in consolidated sponsored investment
vehicles, and vested affiliate management equity plan interests. For CIVs and other consolidated sponsored investment
vehicles with third-party investors, the related noncontrolling interests are classified as redeemable noncontrolling interests
if investors in these funds may request withdrawals at any time. Also included in redeemable noncontrolling interests are
vested affiliate management equity plan interests for which the holder may, at some point, request settlement of their interests.
Redeemable noncontrolling interests are reported in the Consolidated Balance Sheets at their estimated settlement values.
When settlement is not expected to occur until a future date, changes in the expected settlement value are recognized over
the settlement period as an adjustment from retained earnings. Nonredeemable noncontrolling interests include vested
affiliate management equity plan interests that do not permit the holder to request settlement of their interests. Nonredeemable
noncontrolling interests are reported in the Consolidated Balance Sheets at their issuance value, together with undistributed
net income allocated to noncontrolling interests.
Legg Mason estimates the settlement value of noncontrolling interests as their fair value. For consolidated sponsored
investment vehicles, where the investor may request withdrawal at any time, fair value is based on market quotes of the
underlying securities held by the investment vehicles. For affiliate minority interests and management equity plan interests,
fair value reflects the related total business enterprise value, after appropriate discounts for lack of marketability and control.
There may also be features of these equity interests, such as dividend subordination, that are contemplated in their valuations.
The fair value of option-like management equity plan interests also relies on Black-Scholes option pricing model calculations,
as noted above.
Net income (loss) attributable to noncontrolling interests in the Consolidated Statements Of Income (Loss) includes that
share of income (loss) of the respective subsidiary allocated to the minority interest holders. Net income (loss) attributable
to noncontrolling interests in the Consolidated Statement of Income (Loss) for the year ended March 31, 2014, also includes
Net loss reclassified to Appropriated retained earnings for consolidated investment vehicle.
See Note 14 for additional information regarding noncontrolling interests.
Related Parties
For its services to sponsored investment funds, Legg Mason earns management fees, incentive fees, distribution and service
fees, and other revenue and incurs distribution and servicing and other expenses, as disclosed in the Consolidated Statements
of Income. Sponsored investment funds are deemed to be affiliated entities under the related party definition in relevant
accounting guidance.
Recent Accounting Developments
In March 2016, the Financial Accounting Standards Board ("FASB") updated the guidance on stock-based compensation
accounting. The updated guidance simplifies several aspects of accounting for stock-based compensation including the
income tax consequences, classification criteria for awards as either equity or liabilities, and classification of related amounts
in statements of cash flows. The guidance will be effective in fiscal 2018, with the option for early adoption in fiscal 2017.
Legg Mason is evaluating the impact of its adoption.
Legg Mason AR2016 | 81 Table of Contents
In February 2016, the FASB updated the guidance on accounting for leases. The updated guidance requires that a lessee
shall recognize the assets and liabilities that arise from lease transactions. A lessee will recognize a right-of-use asset to use
the underlying asset and a liability representing the lease payments. The updated guidance also requires an evaluation at
the inception of a contract, to determine whether the contract is or contains a lease. The guidance will be effective in fiscal
2020. Legg Mason is evaluating the impact of its adoption.
In May 2015, the FASB updated the guidance on fair value measurement. The updated guidance removes the requirement
for all investments for which fair value is measured using the NAV practical expedient to be categorized within the fair
value hierarchy and related sensitivity disclosures. The amount of such investments would instead be disclosed as a
reconciling item between the fair value hierarchy table and the investment amounts reported on the balance sheet. This
guidance will be effective for Legg Mason in fiscal 2017. Legg Mason is evaluating the impact of its adoption.
In February 2015, the FASB updated the guidance for consolidation requirements. The updated guidance eliminates the
presumption that a general partner should consolidate a limited partnership, and modifies the evaluation of whether limited
partnerships and similar legal entities are VIEs or VREs. Additionally, the updated guidance affects the conclusion such
that certain fees paid to decision makers are no longer variable interests, and certain related party relationships with a
sponsored investment fund may no longer require its consolidation. The update also eliminates the deferral of accounting
guidance that requires separate evaluation for investment company VIEs and other VIEs. This update will be effective in
fiscal 2017, and Legg Mason intends to adopt it on the modified retrospective basis. Legg Mason expects under the new
guidance that certain of its sponsored investment vehicles residing in foreign mutual fund trusts will qualify as VIEs and
will be subject to consolidation at a lower ownership percentage than the currently employed threshold of 50%.
In May 2014, the FASB updated the guidance on revenue recognition. The updated guidance improves comparability and
removes inconsistencies in revenue recognition practices across entities, industries, jurisdictions, and capital markets. In
March 2016, the FASB further updated the revenue guidance on determining whether to report revenue on a gross versus
net basis. The updated guidance clarifies how entities evaluate principal versus agent aspects of the revenue recognition
guidance issued in May 2014. The evaluation will require entities to identify all goods or services to be provided to the
customer, and determine whether they obtain control of the good or service before it is transferred to the customer, where
control would suggest a principal relationship, which would be accounted for on a gross basis. These updates are effective
for Legg Mason in fiscal 2019. Legg Mason is evaluating the impact of its adoption.
82 | Legg Mason AR2016 Table of Contents
2. ACQUISITIONS AND DISPOSITION
Acquisitions
The following table presents a summary of the acquisition-date fair values of the assets acquired and liabilities assumed for
each of Legg Mason's significant recent acquisitions:
Acquisition Date
October 21, 2015 October 1, 2014
RARE
Infrastructure
Limited (1)
Martin Currie
(Holdings)
Limited
QS Investors
Holdings, LLC
May 30, 2014
Fauchier Partners
Management,
Limited
March 13, 2013
Purchase price
Cash
$
Estimated contingent consideration
Total Consideration
Fair value of noncontrolling interest
Total
Identifiable assets and liabilities
Cash
Investments
Receivables
Indefinite-life intangible fund
management contracts
Amortizable intangible asset
management contracts
Indefinite-life trade name
Fixed assets
Other current liabilities, net
Liabilities, net
Pension liability
Deferred tax liabilities
Total identifiable assets and liabilities
Goodwill
$
$
213,739
25,000
238,739
62,722
301,461
9,667
—
6,612
$
202,577
75,211
277,788
—
277,788
29,389
—
—
122,755
135,321
67,877
4,766
673
(10,605)
(3,948)
—
(58,619)
139,178
162,283
$
15,234
7,130
784
—
(4,388)
(32,433)
(31,537)
119,500
158,288
$
$
11,000
13,370
24,370
—
24,370
441
3,281
2,699
—
7,060
—
599
—
(6,620)
—
—
7,460
16,910
$
63,433
21,566
84,999
—
84,999
8,156
—
12,174
65,126
2,865
—
—
(16,667)
—
—
(15,638)
56,016
28,983
(1) Subject to prospective adjustments, including for amounts ultimately realized and adjustments provided for in the share purchase agreement.
RARE Infrastructure Limited
On October 21, 2015, Legg Mason acquired a majority equity interest in RARE Infrastructure Limited ("RARE
Infrastructure"). RARE Infrastructure specializes in global listed infrastructure security investing, is headquartered in
Sydney, Australia, and had approximately $6,800,000 in AUM at the closing of the transaction. Under the terms of the
related transaction agreements, Legg Mason acquired a 75% ownership interest in the firm, the firm's management team
retained a 15% equity interest and The Treasury Group, a continuing minority owner, retained 10%. The acquisition required
an initial cash payment of $213,739 (using the foreign exchange rate as of October 21, 2015 for the 296,000 Australian
dollar payment), which was funded with approximately $40,000 of net borrowings under the Company's previous revolving
credit facility, as further discussed in Note 6, as well as existing cash resources. In August 2015, Legg Mason executed a
currency forward contract to economically hedge the risk of movement in the exchange rate between the U.S. dollar and
the Australian dollar in which the initial cash payment was denominated. This currency forward contract was closed in
October 2015. See Note 15 for additional information regarding derivatives and hedging. In addition, contingent
consideration may be due March 31, 2017 and 2018, aggregating up to $81,320 (using the foreign exchange rate as of March
31, 2016, for the maximum 106,000 Australian dollar amount per the related agreements), dependent on the achievement
of certain net revenue targets, and subject to potential catch-up adjustments extending through March 31, 2019.
Legg Mason AR2016 | 83 Table of Contents
The noncontrolling interests can be put by the holders or called by Legg Mason for settlement at fair value, except for the
non-management portion of the noncontrolling interests, which are callable at a pre-agreed formula, as specified in the
agreements. The fair value of the noncontrolling interests reflects the total business enterprise value, after appropriate
discounts for lack of marketability and control.
The fair value of the acquired amortizable intangible asset management contracts had a useful life of 12 years at acquisition.
Purchase price allocated to intangible assets and goodwill is not deductible for Australian tax purposes. Goodwill is
principally attributable to synergies expected to arise with RARE Infrastructure.
Management estimated the fair values of the indefinite-life intangible fund management contracts, indefinite-life trade name,
and amortizable intangible asset management contracts based upon discounted cash flow analyses, using unobservable
market data inputs, which are Level 3 measurements. The significant assumptions used in these analyses at acquisition,
including projected annual cash flows, projected AUM growth rates and discount rates, are summarized as follows:
Indefinite-life intangible fund management
contracts and indefinite-life trade name
Amortizable intangible asset management contracts
Projected Cash Flow Growth
Discount Rate
0% to 10% (weighted-average - 7%)
16.5%
Projected AUM Growth / (Attrition)
7% / (8)%
Discount Rate
16.5%
The fair value of the contingent consideration was estimated using Monte Carlo simulation in a risk-neutral framework with
various observable inputs, as well as, with various unobservable data inputs which are Level 3 measurements. The simulation
considered variables, including AUM growth and performance fee levels. Consistent with risk-neutral framework, projected
AUM and performance fees were dampened by a measure of risk referred to as 'market price of risk' to account for its market
risk or systematic risk before calculating the earn-out payments. These earn-out payments were then discounted
commensurate with their timing. A summary of various assumption values follows:
AUM growth rates
Performance fee growth rates
Projected AUM and performance fee market price of risk
AUM volatility
Earn-out payment discount rate
0% to 14% (weighted-average - 7%)
0% to 7% (weighted-average - 3%)
6.5%
20.0%
1.9%
Significant increases (decreases) in projected AUM or performance fees would result in a significantly higher (lower)
contingent consideration liability fair value.
The contingent consideration liability established at closing had an acquisition date fair value of $25,000 (using the foreign
exchange rate as of October 21, 2015). As of March 31, 2016, the fair value of the contingent consideration liability was
$27,145, of which $7,001 relates to the first anniversary payment and is included in current Contingent consideration in the
Consolidated Balance Sheet, with the remainder included in non-current Contingent consideration in the Consolidated
Balance Sheet. The increase of $2,145 from October 21, 2015, was attributable to changes in the exchange rate, which is
included in Accumulated other comprehensive loss, net, as Foreign currency translation adjustment, and accretion. The
contingent consideration liability is recorded at an entity with an Australian dollar functional currency, such that related
changes in the exchange rate do not impact net income (loss).
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 (Loss) would not have been materially different. The
financial results of RARE Infrastructure included in Legg Mason's consolidated financial results for the year ended March
31, 2016, include revenues of $18,420, and did not have a material impact on Net Income (Loss) Attributable to Legg Mason,
Inc.
84 | Legg Mason AR2016 Table of Contents
Martin Currie (Holdings) Limited
On October 1, 2014, Legg Mason acquired all outstanding equity interests of Martin Currie (Holdings) Limited ("Martin
Currie"), an international equity specialist based in the United Kingdom. The acquisition required an initial payment of
$202,577 (using the foreign exchange rate as of October 1, 2014 for the £125,000 contract amount), which was funded from
existing cash. In addition, contingent consideration payments may be due March 31 following the second and third
anniversaries of closing, aggregating up to approximately $467,076 (using the foreign exchange rate as of March 31, 2016
for the maximum £325,000 contract amount), inclusive of the payment of certain potential pension and other obligations,
and dependent on the achievement of certain financial metrics at March 31, 2017, and 2018, as specified in the share purchase
agreement. The agreement provided for a potential first anniversary payment due as of March 31, 2016, however no such
payment was due based on relevant financial metrics.
The fair value of the amortizable intangible asset management contracts asset is being amortized over a period of 12 years.
Goodwill is principally attributable to synergies expected to arise with Martin Currie. These acquired intangible assets and
goodwill are not deductible for U.K. tax purposes.
Management estimated the fair values of the indefinite-life intangible fund management contracts, indefinite-life trade name,
and amortizable intangible asset management contracts based upon discounted cash flow analyses, using unobservable
market data inputs, which are Level 3 measurements. The significant assumptions used in these analyses at acquisition,
including projected annual cash flows, projected AUM growth rates and discount rates, are summarized as follows:
Indefinite-life intangible fund management
contracts and indefinite-life trade name
Amortizable intangible asset management contracts
Projected Cash Flow Growth
Discount Rate
0% to 25% (weighted-average - 11%)
15.0%
Projected AUM Growth / (Attrition)
6% / (17)%
Discount Rate
15.0%
The fair value of the contingent consideration was measured using Monte Carlo simulation with various unobservable market
data inputs, which are Level 3 measurements. The simulation considered variables, including AUM growth, performance
fee levels and relevant product performance. Projected AUM, performance fees and earn-out payments were discounted as
appropriate. A summary of various assumption values follows:
AUM growth rates
Performance fee growth rates
Discount rates:
Projected AUM
Projected performance fees
Earn-out payments
AUM volatility
0% to 28% (weighted-average - 14%)
0% to 30% (weighted-average - 15%)
13.0%
15.0%
1.3%
18.8%
Significant future increases (decreases) in projected AUM or performance fees would result in a significantly higher (lower)
contingent consideration liability fair value.
The contingent consideration liability established at closing had an acquisition date fair value of $75,211 (using the foreign
exchange rate as of October 1, 2014). Actual payments to be made may also include amounts for certain potential pension
and other obligations that are accounted for separately. As of March 31, 2016, the fair value of the contingent consideration
liability was $41,222, a decrease of $28,892 from March 31, 2015. During the year ended March 31, 2016, a decrease in
projected AUM and performance fees resulted in a $28,361 reduction in the estimated contingent consideration liability,
recorded as a credit to Other operating expense in the Consolidated Statement of Income (Loss). Changes related to the
exchange rate of $531 for the year ended March 31, 2016, which are included in Accumulated other comprehensive loss,
net, as Foreign currency translation adjustment, net of accretion, also impacted the contingent consideration liability. The
contingent consideration liability is recorded at an entity with a British pound functional currency, such that related changes
in the exchange rate do not impact net income (loss). The total contingent consideration liability as of March 31, 2016,
Legg Mason AR2016 | 85 Table of Contents
includes $12,846 related to the second anniversary payment, which is included in current Contingent consideration in the
Consolidated Balance Sheet, with the remainder included in non-current Contingent consideration in the Consolidated
Balance Sheet.
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 (Loss) would not have been materially different. The
financial results of Martin Currie included in Legg Mason's consolidated financial results for the year ended March 31,
2015, include revenues of $32,293 and did not have a material impact on Net Income (Loss) Attributable to Legg Mason,
Inc.
Martin Currie Defined Benefit Pension Plan
Martin Currie sponsors a retirement and death benefits plan, a defined benefit pension plan with assets held in a separate
trustee-administered fund. Plan assets are measured at fair value and comprised of 60% equities (Level 1) and 40% bonds
(Level 2) as of March 31, 2016, and 58% equities (Level 1) and 42% bonds (Level 2) as of March 31, 2015. Assumptions
used to determine the expected return on plan assets targets a 55% / 45% equity/bond allocation with reference to the 15-
year FTSE U.K. Gilt yield for equities and U.K. long-dated bond yields for bonds. Plan liabilities are measured on an
actuarial basis using the projected unit method and discounted at a rate equivalent to the current rate on a high quality bond
in the local U.K. market and currency. There were no significant concentrations of risk in plan assets as of March 31, 2016
or 2015. The most recent actuarial valuation was performed as of May 31, 2013, which was updated through the acquisition
and at subsequent balance sheet dates. Accrual of service credit under the plan ceased on October 3, 2014.
The resulting net benefit obligation, comprised as follows, is included in the March 31, 2016 and 2015, Consolidated Balance
Sheets as Other non-current liabilities:
Fair value of plan assets (at 5.2 % and 6.3%, respectively, expected
weighted-average long-term return)
Benefit obligation (at 3.6% and 3.3%, respectively, discount rate)
Unfunded status (excess of benefit obligation over plan assets)
The change in the benefit obligation is summarized below:
Beginning benefit obligation
Interest costs
Actuarial (gain) loss
Benefits paid
Plan curtailments
Exchange rate changes
Ending benefit obligation
2016
2015
$
57,253
(90,010)
(32,757) $
59,404
(98,110)
(38,706)
Year ended
March 31, 2016
Period from
Acquisition through
March 31, 2015
98,110
3,268
(6,922)
(1,524)
—
(2,922)
90,010
$
$
91,750
1,730
14,461
(762)
(789)
(8,280)
98,110
$
$
$
$
86 | Legg Mason AR2016 Table of Contents
The change in plan assets is summarized below:
Beginning plan assets
Actual return on plan assets
Employer contributions
Benefits paid
Exchange rate changes
Ending plan assets
Year ended
March 31, 2016
Period from
Acquisition through
March 31, 2015
$
$
59,404
(984)
2,262
(1,524)
(1,905)
57,253
$
$
59,317
6,028
1
(762)
(5,180)
59,404
For the years ended March 31, 2016 and 2015, a net periodic loss (gain) of $92 and $(815), respectively, was included in
Compensation and benefits expense in the Consolidated Statements of Income (Loss).
The components of the net periodic loss (gain) for the year ended March 31, 2016, and for the period from acquisition
through March 31, 2015, are as follows:
Interest costs
Expected return on plan assets
Curtailment gain recognized
Net periodic benefit loss (gain)
2016
2015
$
$
3,268
(3,176)
—
92
$
$
1,730
(1,756)
(789)
(815)
Net actuarial losses of $6,821 and $9,595 were included in Accumulated other comprehensive loss, net, in the Consolidated
Balance Sheets at March 31, 2016 and 2015, respectively.
As of March 31, 2016, the plan expects to make benefit payments over the next 10 fiscal years as follows:
2017
2018
2019
2020
2021
2022 - 2026
$
1,195
1,281
1,559
1,537
1,884
14,789
The contingent consideration payments are expected to provide some, if not all, funding of the net plan benefit obligation,
through a provision of the share purchase agreement requiring certain amounts to be paid to the plan. Any contingent
consideration payments to the plan are based on determination of the plan benefit obligation under local technical provisions
utilized by the plan trustees. Absent any such funding or any regulatory requirement for additional payments, Martin Currie
expects to contribute $2,156 to the plan during the year ending March 31, 2017.
The contingent consideration provisions of the share purchase agreement also require a designated percentage of the earn-
out payments, net of any pension contribution, to be allocated to fund an incentive plan for Martin Currie's management.
No payments to employees under the arrangement will be made until the end of the earn-out period. The estimated payment
(adjusted quarterly) is being amortized over the earn-out term.
Legg Mason AR2016 | 87 Table of Contents
Other
In December 2015, Martin Currie acquired certain assets of PK Investment Management, LLP ("PK Investments"), a London
based equity manager, for an initial cash payment of $4,981 and an estimated contingent payment of $2,469 due on December
31, 2017. The amount of any ultimate contingent payment will be based on certain financial metrics. The initial cash
payment was funded with existing cash resources. In connection with the acquisition, Legg Mason recognized indefinite-
life intangible fund management contracts and goodwill of $6,619 and $827, respectively.
QS Investors Holdings, LLC
Effective May 31, 2014, Legg Mason acquired all of the outstanding equity interests of QS Investors, a customized solutions
and global quantitative equities provider. The initial purchase price was a cash payment of $11,000, funded from existing
cash. In addition, contingent consideration of up to $10,000 and $20,000 for the second and fourth anniversary payments
may be due in July 2016 and July 2018, respectively, dependent on the achievement of certain net revenue targets, and
subject to a potential catch-up adjustment in the fourth anniversary payment for any second anniversary payment shortfall.
The fair value of the amortizable intangible asset management contracts had a useful life of 10 years at acquisition. Purchase
price allocated to goodwill is expected to be deductible for U.S. tax purposes over a period of 15 years.
Management estimated the fair values of the amortizable intangible asset management contracts based upon a discounted
cash flow analysis, and the contingent consideration expected to be paid and discounted, based upon probability-weighted
revenue projections, using unobservable market data inputs, which are Level 3 measurements. The significant assumptions
used in these analyses at acquisition including projected annual cash flows, revenues and discount rates, are summarized as
follows:
Amortizable intangible asset management contracts
Contingent consideration
Projected Cash Flow Attrition, Net
(10.0)%
Projected Revenue Growth Rates
0% to 10% (weighted-average - 6%)
Discount Rate
15.0%
Discount Rates
1.2% / 2.1%
Goodwill is principally attributable to synergies expected to arise with QS Investors.
The contingent consideration liability established at closing had an acquisition date fair value of $13,370. As of March 31,
2016, the fair value of the contingent consideration liability has accreted to $13,749, an increase of $196 from March 31,
2015. Of the $13,749, $6,549 relates to the second anniversary payment and is included in current Contingent consideration
in the Consolidated Balance Sheet, with the remainder included in non-current Contingent consideration in the Consolidated
Balance Sheet as of March 31, 2016.
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 (Loss) would not have been materially different. The
financial results of QS Investors included in Legg Mason's consolidated financial results for the year ended March 31, 2015,
include revenues of $12,340 and did not have a material impact on Net Income (Loss) Attributable to Legg Mason, Inc.
Legg Mason integrated two existing affiliates, Batterymarch and LMGAA, into QS Investors to capture synergies and
leverage the best capabilities of each entity. In connection with the integration, total charges for restructuring and transition
costs of $38,404 were recognized through the completion of the plan in March 31, 2015, which includes $35,846, and $2,558
for the years ended March 31, 2015 and 2014, respectively, primarily recorded in Compensation and benefits in the
Consolidated Statements of Income (Loss). These costs were primarily comprised of charges for employee termination
benefits, including severance and retention incentives, as well as real estate related charges. Any additional charges related
to the integration are not expected to be material.
88 | Legg Mason AR2016 Table of Contents
The table below presents a summary of changes in the restructuring and transition-related liability from December 31, 2013
through March 31, 2016 and cumulative charges incurred through the completion of the plan in fiscal 2015:
Balance as of December 31, 2013
Accrued charges
Balance as of March 31, 2014
Accrued charges
Payments
Balance as of March 31, 2015
Payments
Balance as of March 31, 2016
Non-cash charges(2)
Year ended March 31, 2014
Year ended March 31, 2015
Total
Compensation
—
$
2,161
2,161
22,897
(24,658)
400
(400)
—
$
$
$
$
—
1,659
1,659
26,717
$
$
$
$
$
Other
Total
—
111
111
9,720 (1)
(3,940)
5,891
(2,148)
3,743
286
1,570
1,856
11,687
$
$
$
$
$
—
2,272
2,272
32,617
(28,598)
6,291
(2,548)
3,743
286
3,229
3,515
38,404
Cumulative charges incurred through March 31, 2015
(1)
(2)
Includes lease loss reserve of $6,760 for space permanently abandoned.
Includes stock-based compensation expense and accelerated fixed asset depreciation.
Fauchier Partners Management, Limited
On March 13, 2013, Permal, a wholly-owned subsidiary of Legg Mason, acquired all of the outstanding share capital of
Fauchier Partners Management, Limited ("Fauchier"), a European based manager of funds-of-hedge funds. The initial
purchase price was a cash payment of $63,433, which was funded from existing cash resources. In May 2015, Legg Mason
paid contingent consideration of $22,765 (using the exchange rate as of May 5, 2015 for the maximum £15,000 payment
amount) for the second anniversary payment. Additional contingent consideration of up to approximately $28,743 (using
the exchange rate as of March 31, 2016 for the £20,000 maximum contract amount), may be due on or about the fourth
anniversary of closing, dependent on achieving certain levels of revenue, net of distribution costs.
The fair value of the amortizable intangible asset management contracts is being amortized over a period of six years. These
acquired intangible assets and goodwill are not deductible for U.K. tax purposes.
Management estimated the fair values of the indefinite-life intangible fund management contracts based upon discounted
cash flow analyses, and the contingent consideration expected to be paid based upon probability-weighted revenue
projections, using unobservable market 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 expected some initial
contraction in the acquired business. The significant assumptions used in these analyses at acquisition, including projected
annual cash flows, revenues and discount rates, are summarized as follows:
Indefinite-life intangible fund management contracts
Contingent consideration
Projected Cash Flow Growth Rates
(35)% to 11% (weighted-average - 6% )
Projected Revenue Growth Rates
(16)% to 3% (weighted-average - (5)%)
Discount Rate
16.0%
Discount Rate
2.0%
As of March 31, 2016, no contingent consideration liability was included in the Consolidated Balance Sheet, and a liability
of $27,117 was included as of March 31, 2015. During the three months ended December 31, 2015, due to lower actual
and expected performance fees earned over the earn out period, the contingent consideration liability was reduced by $5,014,
recorded as a credit to Other operating expense in the Consolidated Statement of Income (Loss). The decrease of $27,117
from March 31, 2015, reflects this reduction and the payment discussed above, offset in part by changes in the exchange
Legg Mason AR2016 | 89 Table of Contents
rate, net of accretion. In December 2015, Legg Mason closed the currency forward contracts that were previously executed
to economically hedge the risk of movements in the exchange rate between the U.S. dollar and the British pound in which
the estimated contingent liability payment amounts were denominated. See Note 15 for additional information regarding
derivatives and hedging.
Precidian Investments, LLC
On January 22, 2016, Legg Mason acquired a minority equity position in Precidian Investments, LLC ("Precidian"), a firm
specializing in creating innovative products and solutions and solving market structure issues, particularly with regard to
the Exchange Traded Funds marketplace.
The transaction required a cash payment, which was funded from existing cash resources. Under the terms of the transaction,
Legg Mason acquired series B preferred units of Precidian that entitle Legg Mason to approximately 20% of the voting and
economic interests of Precidian, along with customary preferred equity protections. At its sole option during the 48 months
following the initial investment, Legg Mason may, subject to satisfaction of certain closing conditions, convert its preferred
units to 75% of the common equity of Precidian on a fully diluted basis.
Legg Mason accounts for its investment in Precidian, which is included in Other assets in the Consolidated Balance Sheet
as of March 31, 2016, under the equity method of accounting.
EnTrustPermal
On May 2, 2016, Legg Mason closed a transaction to combine Permal, Legg Mason's existing hedge fund platform, with
EnTrust, an alternative asset management firm with largely complimentary investment strategies, investor base and business
mix to Permal. In connection with the combination, Legg Mason expects to incur total restructuring and transition-related
charges of approximately $100,000, primarily comprised of charges for employee termination benefits, including severance
and retention incentives, and real estate related charges. Charges for restructuring and transition costs for the year ended
March 31, 2016, were $43,296, primarily recorded as Transition-related compensation in the Consolidated Statement of
Income (Loss). Legg Mason expects that approximately $40,000 to $50,000 of the remaining anticipated costs associated
with the combination will be incurred in the year ending March 31, 2017.
The table below presents a summary of changes in the restructuring and transition-related liability from December 31, 2015
through March 31, 2016 and cumulative charges incurred through March 31, 2016:
Balance as of December 31, 2015
Accrued charges
Payments
Balance as of March 31, 2016
Non-cash charges(2)
Year ended March 31, 2016
Cumulative charges incurred through March 31, 2016
Compensation
$
— $
31,581
(21,938)
9,643
591
32,172
$
$
$
$
$
$
Other
Total
—
9,981 (1)
(2,097)
7,884
1,143
11,124
$
$
$
$
—
41,562
(24,035)
17,527
1,734
43,296
(1)
(2)
Includes lease loss reserve of $7,212 for space permanently abandoned.
Includes stock-based compensation expense and accelerated fixed asset depreciation.
Clarion Partners
On April 13, 2016, Legg Mason acquired a majority equity interest in Clarion Partners, a diversified real estate asset
management firm based in New York. Clarion Partners managed approximately $41,500,000 in AUM as of April 30, 2016.
See Note 18 for additional information regarding the acquisitions of EnTrust and Clarion Partners.
Disposition
Legg Mason Investment Counsel & Trust
On November 7, 2014, Legg Mason completed the previously announced sale of all of its equity interests in Legg Mason
Investment Counsel & Trust Company N.A. ("LMIC") for proceeds of $47,000 to Stifel Financial Corporation's Global
90 | Legg Mason AR2016 Table of Contents
Wealth Management segment. The sale did not have a material impact on Legg Mason's consolidated financial condition
or results of operations.
3. INVESTMENTS AND FAIR VALUES OF ASSETS AND LIABILITIES
The disclosures below include details of Legg Mason's financial assets and financial liabilities that are measured at fair
value, excluding the financial assets and financial 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.
The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:
Assets:
Cash equivalents:(1)
Money market funds
Time deposits and other
Total cash equivalents
Trading investments of proprietary fund
products and other trading investments:(2)
Seed capital investments
Other(3)
Trading investments relating to long-term
incentive compensation plans(4)
Equity method investments relating to
proprietary fund products and long-term
incentive compensation plans:(5)
Seed capital investments
Investments related to long-term
incentive compensation plans
Total current investments(6)
Equity method investments in partnerships
and LLCs:(5)(7)
Seed capital investments
Investments related to long-term
incentive compensation plans
Other
Investments in partnerships and LLCs(7)
Derivative assets(7)(8)
Other investments(7)
Total
Liabilities:
Contingent consideration liabilities(9)
Derivative liabilities(8)
Total
Quoted prices in
active markets
(Level 1)
As of March 31, 2016
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
$
1,057,916
—
1,057,916
— $
35,265
35,265
— $ 1,057,916
—
35,265
— 1,093,181
205,608
65,112
105,979
1,329
—
378,028
120,216
2,352
585
7,575
6,467
137,195
112
—
325,936
67,464
—
106,564
—
—
112
8,904
6,467
515,335
—
—
20,439
20,439
—
—
—
1,051
—
1,436,995
$
—
(18,079)
(18,079) $
$
$
—
—
—
7,599
—
180,059
$
7,501
9,352
8,013
—
83
45,500
7,501
9,352
8,013
8,650
83
$ 1,662,554
—
—
— $
(84,585)
—
(84,585)
(18,079)
(84,585) $ (102,664)
Legg Mason AR2016 | 91 Table of Contents
Assets:
Cash equivalents:(1)
Money market funds
Time deposits and other
Total cash equivalents
Trading investments of proprietary fund
products and other trading investments:(2)
Seed capital investments
Other
Trading investments relating to long-term
incentive compensation plans(4)
Equity method investments relating to
proprietary fund products and long-term
incentive compensation plans:(5)
Seed capital investments
Investments related to long-term
incentive compensation plans
Total current investments(6)
Equity method investments in partnerships
and LLCs:(5)(7)
Seed capital investments
Investments related to long-term
incentive compensation plans
Other
As of March 31, 2015
Quoted prices in
active markets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
$
353,265
—
353,265
— $
47,035
47,035
— $
—
—
353,265
47,035
400,300
259,840
9,807
80,529
2,148
—
352,324
85,220
2,981
—
5,296
8,728
102,225
186
—
—
—
—
186
345,246
12,788
80,529
7,444
8,728
454,735
—
—
23,796
23,796
5,595
18,953
14,511
—
77
63,118
5,595
18,953
14,511
6,042
77
924,009
—
—
—
580
—
706,169
—
—
—
5,462
—
154,722
Investments in partnerships and LLCs(7)
Derivative assets(7)(8)
Other investments(7)
Total
Liabilities:
Contingent consideration liabilities(9)
(110,784)
Derivative liabilities(8)
(8,665)
(110,784) $ (119,449)
Total
(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 purchase of the instrument and its expected realization, and are classified as Level 2.
—
(8,665)
(8,665) $
—
—
— $
(110,784)
—
$
$
$
$
$
(2) Trading investments of proprietary fund products and other trading investments consist of approximately 68% and 32% of equity and debt securities,
respectively, as of March 31, 2016, and approximately 63% and 37% of equity and debt securities, respectively, as of March 31, 2015.
Includes $54,392 in noncontrolling interests associated with consolidated seed investment products as of March 31, 2016.
(3)
(4) 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.
(5) Legg Mason's equity method investments that are investment companies record underlying investments at fair value. Therefore, 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.
(6) Excludes seed capital investments of $13,641 and $15,553 related to Legg Mason's investments in CIVs as of March 31, 2016 and 2015, respectively.
(7) Amounts are included in Other non-current assets in the Consolidated Balance Sheets for each of the periods presented.
(8) See Note 15.
(9) See Note 2 and Note 8.
92 | Legg Mason AR2016 Table of Contents
Proprietary fund products include seed capital investments made by Legg Mason to fund new investment strategies and
products. Legg Mason had seed capital investments in proprietary fund products, which totaled $368,920 and $392,039, as
of March 31, 2016 and 2015, respectively, which are substantially comprised of investments in 63 funds and 52 funds,
respectively, that are individually greater than $1,000, with minimal third-party investment, and together comprise over 90%
of the total seed capital investments at each period end.
See Notes 1 and 17 for information regarding the determination of whether investments in proprietary fund products represent
VIEs and consolidation.
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.
The net realized and unrealized gain (loss) for investment securities classified as trading was $(27,654), $10,545, and $22,963
for the years ended March 31, 2016, 2015, and 2014, respectively.
The net unrealized gains (losses) relating to trading investments still held as of the reporting dates were $(35,111), $(10,858),
and $26,618 for the years ended March 31, 2016, 2015, and 2014, respectively.
Legg Mason AR2016 | 93 Table of Contents
The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for
the years ended March 31, 2016 and 2015, are presented in the tables below:
Value as of
March 31,
2015
Purchases
Sales
Redemptions/
Settlements/
Other
Transfers
Realized
and
unrealized
gains/
(losses),
net
Value as of
March 31,
2016
Assets:
Trading investments
of seed capital
investments in
proprietary fund
products
Investments in
partnerships and
LLCs
Equity method
investments in
partnerships and
LLCs:
Seed capital
investments
Investments related
to long-term
incentive
compensation
plans
Other
Other investments
Liabilities:
Contingent
consideration
liabilities
n/a - not applicable
$
186
$
1
$
(80) $
— $
— $
5 $
112
14,511
—
(27)
(5,647)
—
(824)
8,013
23,796
678
—
(3,127)
—
(908)
20,439
5,595
18,953
77
63,118
$
1,906
—
— (6,774)
—
—
$ (6,881) $
2,585
—
(2,037)
—
(10,811) $
—
—
—
— $
—
(790)
6
(2,511) $
7,501
9,352
83
45,500
$
$
(110,784) $ (27,457)
n/a $
22,765
n/a $ 30,891 $
(84,585)
94 | Legg Mason AR2016 Table of Contents
Assets:
Trading investments
of seed capital
investments in
proprietary fund
products
Investments in
partnerships and
LLCs
Equity method
investments in
partnerships and
LLCs:
Seed capital
investments
Investments
related to long-
term incentive
compensation
plans
Other
Other investments
Liabilities:
Contingent
consideration
liabilities
n/a - not applicable
$
$
Value as of
March 31,
2014
Purchases
Sales
Redemptions/
Settlements/
Other
Transfers
Realized
and
unrealized
gains/
(losses),
net
Value as of
March 31,
2015
$
190
$
2
$
(27) $
— $
— $
21
$
186
21,586
—
(24)
(5,108)
—
(1,943)
14,511
33,611
725
(11,617)
1,426
—
(349)
23,796
4,284
25,078
90
84,839
$
1,311
12
—
2,050
—
(2,484)
—
$(14,152) $
—
(2,547)
—
(6,229) $
—
—
—
— $
—
(1,106)
(13)
(3,390) $
5,595
18,953
77
63,118
(29,553) $ (88,581)
n/a $
—
n/a $
7,350
$
(110,784)
Realized and unrealized gains and losses recorded for Level 3 investments are primarily included in Other Non-Operating
Income (Expense) in the Consolidated Statements of Income (Loss). The change in unrealized gains (losses) for Level 3
investments and liabilities still held at the reporting date was $24,182, $2,439, $(5,210) and for the years ended March 31,
2016, 2015, and 2014, respectively.
There were no significant transfers between Level 1 and Level 2 during the years ended March 31, 2016 and 2015.
Legg Mason AR2016 | 95 Table of Contents
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, 2016 and 2015, 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, 2016
March 31,
2016
March 31,
2015
Unfunded
Commitments
Remaining
Term
$
19,139 (1) $
23,787
n/a
n/a
Category of
Investment
Funds-of-
hedge funds
Hedge funds
Private equity
funds
Investment Strategy
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
11,403
14,515
$
20,000
n/a
Up to 8
years
Various (3)
Long/short equity
20,471 (2)
23,563
8,254
Various
Other
Total
n/a - not applicable
(1) Liquidation restrictions: 2% daily redemption, 11% monthly redemption and 87% quarterly redemption as of March 31, 2016.
(2) Liquidations are expected over the remaining term.
(3) Of this balance, 28% has a remaining term of less than one year and 72% has a remaining term of 16 years.
(4) Comprised of 1%, 36%, and 63% of Level 1, Level 2, and Level 3 assets, respectively, as of March 31, 2016 and 38% and 62% of Level 2 and
1,129
62,994 (4) $
n/a
28,254
51,691 (4) $
678
$
Level 3 assets, respectively, as of March 31, 2015.
There are no current plans to sell any of these investments held as of March 31, 2016.
As of March 31, 2016 and 2015, Legg Mason did not hold any available-for-sale investments.
4. FIXED ASSETS
The following table reflects the components of fixed assets as of March 31:
Equipment
Software
Leasehold improvements
Total cost
Less: accumulated depreciation and amortization
Fixed assets, net
2016
2015
$
$
150,259
293,844
199,354
643,457
(480,152)
163,305
$
$
152,893
269,745
203,420
626,058
(446,452)
179,606
Depreciation and amortization expense related to fixed assets was $55,318, $52,461, and $50,531 for the years ended March
31, 2016, 2015, and 2014, respectively. The expense includes accelerated depreciation and amortization of $4,147 in fiscal
2016 primarily related to reduced space requirements and the restructuring of Permal for the combination with EnTrust,
$1,265 in fiscal 2015 primarily related to the integration of Batterymarch into QS Investors, and $2,542 in fiscal 2014
primarily related to various corporate initiatives.
96 | Legg Mason AR2016 Table of Contents
5. INTANGIBLE ASSETS AND GOODWILL
Goodwill and indefinite-life intangible assets are not amortized, and the values of other identifiable intangible assets are
amortized over their useful lives, unless the assets are determined to have indefinite useful lives. Goodwill and indefinite-
life intangible assets are analyzed to determine if the fair value of the assets exceeds the book value. Intangible assets subject
to amortization are considered for impairment at each reporting period. If the fair value is less than the book value, Legg
Mason will record an impairment charge.
The following table reflects the components of intangible assets as of:
Amortizable intangible asset management contracts
Cost
Accumulated amortization
Net(1)
Indefinite–life intangible assets
U.S. domestic mutual fund management contracts
Permal funds-of-hedge funds management contracts
Other fund management contracts(1)
Trade names(1)
March 31, 2016
March 31, 2015
$
259,513
(171,169)
$
88,344
2,106,351
334,104
560,499
188,312
(166,583)
21,729
2,106,351
698,104
427,816
59,334
3,291,605
3,313,334
Intangible assets, net
(1) As of March 31, 2016, Amortizable intangible asset management contracts, net, Other fund management contracts, and Trade names include $69,610,
57,187
3,058,141
3,146,485 $
$
$130,419, and $5,063, respectively, related to the acquisition of RARE Infrastructure. See Note 2 for additional information.
Certain of Legg Mason's intangible assets are denominated in currencies other than the U.S. dollar and balances related to
these assets will fluctuate with changes in the related foreign currency exchange rates.
Legg Mason completed its annual impairment testing process as of December 31, 2015, and determined that the carrying
value of the Permal indefinite-life funds-of-hedge funds management contracts intangible asset, inclusive of the related
indefinite-life funds-of-hedge funds management contracts intangible asset from Fauchier, and the Permal trade name asset
exceeded their respective fair values, and the assets were impaired by an aggregate amount of $371,000. The impairment
charges resulted from a number of current trends and factors, including (i) periods of moderate inflows or outflows over
recent years and related reductions in AUM; (ii) reduced growth assumptions for the next five years; (iii) a decrease in
projected margins for the next two years; and (iv) an increase in the rate used to discount projected future cash flows primarily
due to company specific factors including continued market influences. 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 fair values of the Permal funds-of-
hedge funds contracts asset and Permal trade name declined below their carrying values, and accordingly were impaired by
$364,000 and $7,000, respectively.
Management estimated the fair values of these assets based upon discounted cash flow analyses using unobservable market
data inputs, which are Level 3 measurements. The significant assumptions used in these cash flow analyses included projected
revenue growth rates and discount rates. Total revenues related to the Permal funds-of-hedge funds contracts were assumed
to have annual growth rates ranging from (6)% to 6% (average - 5%), and the projected cash flows from the Permal funds-
of-hedge funds contracts were discounted at 16.5%.
Projected revenue growth rates for these assets are most dependent on client AUM flows, changes in market conditions, and
product investment performance. Discount rates are also influenced by changes in market conditions, as well as interest
rates and other factors. Decreases in the projected revenue growth rates and/or increases in the discount rates could result
in lower fair value measurements and potential additional impairments.
There were no other impairments to indefinite-life intangible assets, amortizable management contracts intangible assets,
or goodwill as of December 31, 2015. Legg Mason also determined that no triggering events occurred as of March 31,
2016, that would require further impairment testing.
Legg Mason AR2016 | 97 Table of Contents
The December 31, 2015, assessed fair value of the indefinite-life domestic mutual funds contracts asset related to the
Citigroup Asset Management ("CAM") acquisition exceeds the carrying value by 48%.
As of March 31, 2016, amortizable intangible asset management contracts are being amortized over a weighted-average
remaining life of 10.9 years.
Estimated amortization expense for each of the next five fiscal years is as follows:
2017
2018
2019
2020
2021
Thereafter
Total
The change in the carrying value of goodwill is summarized below:
Balance as of March 31, 2014
Impact of excess tax basis amortization
Business acquisitions, net of $(9,271) relating to the sale of
LMIC (See Note 2)
Changes in foreign exchange rates and other
Balance as of March 31, 2015
Impact of excess tax basis amortization
Business acquisitions (See Note 2)
Changes in foreign exchange rates and other
Balance as of March 31, 2016
Gross Book
Value
2,402,423
(21,742)
$
165,927
(45,198)
2,501,410
(20,920)
163,110
(2,184)
2,641,416
$
Accumulated
Impairment
$
(1,161,900) $
—
—
—
(1,161,900)
—
—
—
$
(1,161,900) $
$
$
8,569
8,569
8,569
8,085
8,085
46,467
88,344
Net Book
Value
1,240,523
(21,742)
165,927
(45,198)
1,339,510
(20,920)
163,110
(2,184)
1,479,516
Legg Mason recognizes the tax benefit of the amortization of excess tax benefit related to the CAM acquisition. In accordance
with accounting guidance for income taxes, the tax benefit is recorded as a reduction of goodwill and deferred tax liabilities
as the benefit is realized.
6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings
In June 2012, Legg Mason entered into an unsecured credit agreement which provided for a $500,000 revolving credit
facility. In January 2014, Legg Mason entered into a $250,000 incremental borrowing credit facility, which was contemplated
in, and was in addition to the $500,000 revolving credit facility. Both revolving credit facilities were to expire in June 2017.
The revolving credit facilities had interest rates of LIBOR plus 150 basis points and annual commitment fees of 20 basis
points and were available for capital needs and for general corporate purposes. In October 2015, Legg Mason borrowed
$40,000 under these facilities to partially finance the acquisition of RARE Infrastructure. There were no borrowings
outstanding under these facilities as of March 31, 2015.
On December 29, 2015, Legg Mason entered into a new unsecured credit agreement which provides for a $1,000,000 multi-
currency revolving credit facility. Legg Mason borrowed $40,000 under this revolving credit facility, which remained
outstanding as of March 31, 2016, and used the proceeds to repay the $40,000 of outstanding borrowings under its previous
revolving credit facility, as discussed above. The previous revolving credit facility was terminated effective upon the
repayment.
98 | Legg Mason AR2016 Table of Contents
The new revolving credit facility may be increased by an aggregate amount of up to $500,000, subject to the approval of
the lenders, expires in December 2020, and can be repaid at any time. The revolving credit facility has an interest rate of
the monthly Eurocurrency Rate plus 125 basis points and an annual commitment fee of 17.5 basis points. As of March 31,
2016, the effective interest rate was 1.9%. Interest is payable at least quarterly on any amounts outstanding under the
revolving credit facility and 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.
The revolving credit facility has standard financial covenants. These covenants were modified in March 2016 and include:
maximum net debt to EBITDA ratio (as defined in the documents) of 3.5 to 1 for the period from March 31, 2016 through
September 30, 2016, 3.25 to 1 for the period from October 1, 2016 through December 31, 2016, and 3.0 to 1 thereafter; and
minimum EBITDA to interest ratio (as defined in the documents) of 4.0 to 1. As of March 31, 2016, Legg Mason's net debt
to EBITDA ratio was 1.3 to 1 and EBITDA to interest expense ratio was 13.0 to 1, and therefore, Legg Mason has maintained
compliance with the applicable covenants.
As of March 31, 2016 and 2015, Legg Mason had $960,000 and $750,000 of undrawn revolving credit facility capacity.
On April 29, 2016, Legg Mason entered into a forward starting, amortizing interest rate swap agreement with a financial
intermediary, which was designated as a cash flow hedge. The interest rate swap is being used to hedge interest rate risk
on outstanding borrowings under the revolving credit facility. The swap has a 4.67-year term, with five reductions beginning
on March 31, 2017, and expires on December 29, 2020. Under the terms of the interest rate swap agreement, Legg Mason
will pay a fixed interest rate of 2.3% on a notional amount of $500,000. As previously discussed, the interest rate on the
revolving credit facility may change in the future based on changes in Legg Mason's credit ratings, and such a change would
result in a corresponding change in the fixed interest rate paid under the interest rate swap agreement. The interest rate swap
has similar terms to the underlying debt being hedged. Changes in the market value of the interest rate swap will be recorded
in Other comprehensive income on the Consolidated Balance Sheets.
In May 2016, Legg Mason used additional borrowings under the new revolving credit facility to finance the acquisition of
EnTrust, as further discussed in Note 18, and to replenish cash used to complete the acquisitions of Clarion Partners in April
2016 and RARE Infrastructure in October 2015. The amount of total borrowings outstanding under this facility is $500,000,
as of the date of filing.
Long-term Debt
Long-term debt consists of the following:
March 31, 2016
Carrying
Value
Fair Value
Hedge
Adjustment
Unamortized
Discount
(Premium)
(7,599) $
—
359
377
Debt
Issuance
Costs(1)
$ 1,185
Maturity
Amount
$
250,000
1,595
2,970
5,615
—
(3,396)
—
7,909
(2,660) $ 19,274
250,000
450,000
550,000
250,000
March 31,
2015
Carrying
Value(1)
$ 253,452
247,792
—
547,702
—
$ 1,750,000
$1,048,946
2.7% Senior Notes due July 2019
$ 256,055
$
3.95% Senior Notes due July 2024
4.75% Senior Notes due March 2026
5.625% Senior Notes due January 2044
6.375% Junior Notes due March 2056
248,028
447,030
547,781
242,091
Total
$1,740,985
$
—
—
—
(7,599) $
(1) As previously discussed in Note 1, for the year ended March 31, 2016, Legg Mason elected to early adopt updated accounting guidance which
requires unamortized debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated long-
term debt liability. This updated guidance was adopted on a retrospective basis; therefore, the carrying value of debt as of March 31, 2015, has
been reduced by the amount of related unamortized debt issuance costs.
In March 2016, Legg Mason issued $450,000 of 4.75% Senior Notes due 2026 (the "2026 Notes") and $250,000 of 6.375%
Junior Subordinated Notes due 2056 (the "2056 Notes"). Legg Mason used the net proceeds of these offerings to finance
the acquisitions of EnTrust in May 2016 and Clarion Partners in April 2016, as further discussed in Note 18.
Legg Mason AR2016 | 99 Table of Contents
In May 2012, Legg Mason repurchased the Company's then outstanding 2.5% convertible notes (the "Convertible Notes").
The terms of the repurchase included a non-cash exchange of warrants to the holders of the Convertible Notes that replicated
and extended the contingent conversion feature of the Convertible Notes.
The warrants issued to the holders of the Convertible Notes in connection with the repurchase of the Convertible Notes
provide for the purchase, in the aggregate and subject to adjustment, of 14,205 shares of our common stock, on a net share
settled basis, at an exercise price of $88 per share. The warrants expire in July 2017 and can be settled, at the Company's
election, in either shares of common stock or cash. Accordingly, the warrants are accounted for as equity.
In January 2014, Legg Mason issued $400,000 of 5.625% Senior Notes due January 2044, the net proceeds of which, together
with cash on hand, were used to repay the $450,000 of borrowings under the Company's then outstanding five-year term
loan. The 5.625% Senior Notes were sold at a discount of $6,260, which is being amortized to interest expense over the
30-year term.
In June 2014, Legg Mason issued $250,000 of 2.7% Senior Notes due 2019 (the "2019 Notes"), $250,000 of 3.95% Senior
Notes due 2024 (the "2024 Notes"), and an additional $150,000 of the existing 5.625% Senior Notes due 2044 (the "2044
Notes" and, together with the 2019 Notes and the 2024 Notes, the "Notes"). In July 2014, the Company used $658,769 in
proceeds from the sale of the Notes, net of related fees, together with cash on hand, to call the then outstanding $650,000
of 5.5% Senior Notes and pay a related make-whole premium of $98,418, as discussed below.
On June 23, 2014, Legg Mason entered into a reverse treasury rate lock contract with a financial intermediary with a notional
amount of $650,000, which was designated as a cash flow hedge. The contract was issued in connection with the retirement
of the 5.5% Senior Notes. The Company entered into the reverse treasury rate lock agreement in order to hedge the variability
in the retirement payment on the entire principal amount of debt. The reverse treasury rate lock contract effectively fixed
the present value of the forecasted debt make-whole payment which was priced on July 18, 2014, to eliminate risk associated
with changes in the five-year U.S. treasury yield.
The 5.5% Senior Notes were retired on July 23, 2014, and resulted in a pre-tax, non-operating charge of $107,074, consisting
of a make-whole premium of $98,418 to call the 5.5% Senior Notes, net of $638 from the settlement of the reverse treasury
lock before related administrative fees, and $8,656 associated with existing deferred charges and original issue discount.
2.7% Senior Notes due July 2019
The $250,000 2019 Notes were sold at a discount of $553, which is being amortized to interest expense over the five-year
term. The 2019 Notes can be redeemed at any time prior to the 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 payments discounted at the treasury rate (as
defined) plus 0.20%, together with any related accrued and unpaid interest.
On June 23, 2014, Legg Mason entered into an interest rate swap contract with a financial intermediary with a notional
amount of $250,000, which was designated as a fair value hedge. The interest rate swap was being used to effectively
convert the 2019 Notes from fixed rate debt to floating rate debt and has identical terms as the underlying debt being hedged,
so no ineffectiveness is expected. The related hedging gains and losses offset one another resulting in no net income or loss
impact. The swap has a five-year term, and matures on July 15, 2019. The fair value of the contract at March 31, 2016 and
2015, was a derivative asset of $7,599 and $5,462, respectively, classified as Other assets in the Consolidated Balance Sheets.
The increase of $2,137 and $5,462 for the years ended March 31, 2016 and 2015, respectively, reflects a gain on hedging
activity related to the fair value adjustment on the derivative asset, which is recorded as Other income (gain on hedging
activity) in the Consolidated Statements of Income (Loss). The carrying value of the debt in the Consolidated Balance
Sheets was likewise increased by $7,599 and $5,462 as of March 31, 2016 and 2015, respectively. The increase of $2,137
and $5,462 for the years ended March 31, 2016 and 2015, respectively, reflects a loss on hedging activity related to the fair
value adjustment on the debt, which is recorded as Other expense (loss on hedging activity) in the Consolidated Statements
of Income (Loss). The swap payment dates coincide with the debt payment dates on July 15 and January 15. The related
receipts/payments by Legg Mason are recorded as Interest expense in the Consolidated Statements of Income (Loss). Since
the original terms and conditions of the hedged instruments are unchanged, the swap was an effective fair value hedge.
On April 21, 2016, the fair value hedge swap was terminated for a receipt of approximately $6,500, which will be amortized
over the hedge term.
100 | Legg Mason AR2016 Table of Contents
3.95% Senior Notes due July 2024
The $250,000 2024 Notes were sold at a discount of $458, which is being amortized to interest expense over the 10-year
term. The 2024 Notes can be redeemed at any time prior to the 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 payments discounted at the treasury rate (as
defined) plus 0.25%, together with any related accrued and unpaid interest.
4.75% Senior Notes due March 2026
The $450,000 2026 Notes were sold at a discount of $207, and Legg Mason incurred debt issuance costs of $2,970 in
connection with the issuance. The 2026 Notes can be redeemed in part or in aggregate at the greater of the related principal
amount at the time of redemption or the sum of the remaining scheduled payments discounted at the treasury rate (as defined)
plus 0.45%, together with any related accrued and unpaid interest.
5.625% Senior Notes due January 2044
As previously discussed, in January 2014, Legg Mason issued $400,000 of 5.625% Senior Notes, sold at a discount of
$6,260, which is being amortized to interest expense over the 30-year term. An additional $150,000 of 2044 Notes were
issued in June 2014 and were sold at a premium of $9,779, which is also being amortized to interest expense over the 30-
year term. All of the 2044 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 payments discounted at the
treasury rate (as defined) plus 0.30%, together with any related accrued and unpaid interest.
6.375% Junior Subordinated Notes due March 2056
The $250,000 2056 Notes were issued at 100% of principal amount and Legg Mason incurred debt issuance costs of $7,909
in connection with the issuance. The 2056 Notes rank junior and subordinate in right of payment to all of Legg Mason's
current and future senior indebtedness. Prior to March 15, 2021, the 2056 Notes can be redeemed in aggregate, but not in
part, at 100% of the principal amount, plus any accrued and unpaid interest, if called for a tax event (as defined), or 102%
of the principal amount, plus any accrued and unpaid interest, if called for a rating agency event (as defined). On or after
March 15, 2021, the 2056 Notes can be redeemed in aggregate or in part, at 100% of the principal amount, plus any related
accrued and unpaid interest.
As of March 31, 2016, $250,000 of long-term debt matures in fiscal 2020, and $1,500,000 matures thereafter.
Legg Mason AR2016 | 101 Table of Contents
7. INCOME TAXES
The components of income (loss) before income tax provision 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
Current
Deferred
Total income tax provision
2016
245,046
(270,264)
(25,218) $
$
2015
249,380
118,613
367,993
2016
87,166
(71,828)
(7,646)
7,692
15,419
(7,727)
7,692
$
$
$
$
2015
95,499
20,365
9,420
125,284
24,897
100,387
125,284
2014
320,890
98,751
419,641
2014
125,494
(1,450)
13,761
137,805
19,375
118,430
137,805
$
$
$
$
$
$
$
$
$
$
$
$
A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate is as follows:
Tax provision at statutory U.S. federal income tax rate
State income taxes, net of federal income tax benefit(1)
Uncertain tax benefits
Effect of foreign tax rates(1)
Changes in U.K. tax rates on deferred tax assets and liabilities
Net (income) loss attributable to noncontrolling interests
Change in valuation allowances(2)
Federal effect of permanent tax adjustments
Other, net
Effective income tax rate
2016
35.0 %
43.2
41.8
(172.5)
33.2
(15.6)
(33.9)
39.1
(0.8)
(30.5)%
2015
2014
35.0%
4.0
1.8
(4.8)
—
(0.5)
(2.7)
1.7
(0.5)
34.0%
35.0%
1.0
0.6
(4.8)
(4.6)
0.3
2.2
2.2
0.9
32.8%
(1) State income taxes include changes in valuation allowances related to change in apportionment and provision to return differences, net of the impact
on deferred tax assets of changes in state apportionment factors and planning strategies. The effect of foreign tax rates for fiscal 2016 also includes
a $66,780 tax benefit for non-cash impairment charges related to the intangible assets of the Permal business, as further discussed in Note 5.
(2) See schedule below for the change in valuation allowances by jurisdiction.
In July 2013, the Finance Bill 2013 was enacted, which reduced the main U.K. corporate tax rate from 23% to 21% effective
April 1, 2014, and 20% effective April 1, 2015. In November 2015, the U.K. Finance Bill 2015 was enacted, which further
reduced the main U.K. corporate tax rate to 19% effective April 1, 2017, and to 18% effective April 1, 2020. The reductions
in the U.K. corporate tax rate resulted in tax benefits of $8,383 and $19,164, recognized in fiscal 2016 and 2014, respectively,
as a result of the revaluation of deferred tax assets and liabilities at the new rates.
102 | Legg Mason AR2016 Table of Contents
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
Foreign tax credit carryforward
Federal benefit of uncertain tax positions
Mutual fund launch costs
Martin Currie defined benefit pension liability
Charitable contributions carryforwards
Net unrealized losses from investments
Basis differences in partnerships
Other
Deferred tax assets
Valuation allowance
Deferred tax assets after valuation allowance
DEFERRED TAX LIABILITIES
Basis differences, principally for intangible assets and goodwill
Depreciation and amortization
Net unrealized gains from investments
Basis differences in partnerships
Other
Deferred tax liabilities
Net deferred tax liabilities
2016
2015
$
$
$
$
185,311
50,865
273,133
3,121
258,486
12,290
30,234
5,896
4,552
4,389
—
5,181
833,458
(79,476)
753,982
$
$
$
56,625
686,421
—
64,525
—
807,571
(53,589) $
158,369
60,282
290,765
5,335
247,027
18,461
30,968
7,741
—
—
4,174
—
823,122
(96,687)
726,435
82,636
666,057
7,832
—
435
756,960
(30,525)
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 2016, 2015 or 2014, due to the cumulative net operating loss position of the
Company. As of March 31, 2016, an aggregate $22,585 of tax benefit will be recognized as an increase in Stockholders'
Equity when the related net operating losses are ultimately realized.
Legg Mason has various loss and tax credit carryforwards that may provide 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. To the extent the analysis of the realization of deferred tax assets relies on
deferred tax liabilities, Legg Mason has considered the timing, nature, and jurisdiction of reversals, as well as, future increases
relating to the tax amortization of goodwill and indefinite-life intangible assets.
On March 1, 2016, Legg Mason executed agreements with the management of its wholly-owned subsidiary Royce and
Associates ("Royce") which changed the tax reporting of Royce from a disregarded entity to a partnership. As a result, Legg
Mason's deferred balance for tax basis differences in partnership investments changed by $68,526 with an offsetting change
to the tax basis of other temporary differences.
Substantially all of Legg Mason's deferred tax assets relate to U.S. federal, state and U.K. taxing jurisdictions. As of March
31, 2016, U.S. federal deferred tax assets aggregated $711,535, realization of which is expected to require approximately
$3,200,000 of future U.S. earnings, of which $740,000 must be foreign sourced earnings. 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 substantially all of the current federal tax benefits relating to net operating losses will be realizable. With
respect to deferred tax assets relating to foreign tax credit carryforwards, it is more likely than not that tax benefits relating
Legg Mason AR2016 | 103 Table of Contents
to the utilization of approximately $23,465 of foreign taxes as credits will not be realized and a valuation allowance has
been established. Further, the Company's estimates and assumptions do not contemplate certain possible future changes in
the ownership of Legg Mason stock, which, under the U.S. Internal Revenue Code, could limit the utilization of net operating
loss and foreign tax credit benefits. Any such limitation would impact the timing or amount of net operating loss or foreign
tax credit benefits ultimately realized before they expire.
As of March 31, 2016, federal valuation allowances aggregated $20,950. Of the decrease in federal valuation allowances
from the prior year, $12,677 relates to expiring foreign tax credits which have been reclassified to net operating losses. The
release was offset in part by $6,916, of which $2,500 relates to foreign tax credits, $3,443 relates to charitable contributions,
and $973 relates to Martin Currie’s operating losses.
While tax planning may enhance Legg Mason's tax positions, the realization of tax benefits on deferred tax assets for which
valuation allowances have not been provided is not dependent on implementation of any significant tax strategies.
As of March 31, 2016, U.S. state deferred tax assets aggregated approximately $175,749. Due to limitations on utilization
of net operating loss carryforwards and taking into consideration certain state tax planning strategies, the related valuation
allowance of $26,816 was substantially established in prior years for state net operating loss benefits generated in certain
jurisdictions in cases where it is more likely that these benefits will ultimately not be realized.
For foreign jurisdictions, the decrease in valuation allowances of $11,438 during fiscal 2016, primarily relates to the change
in statutory rates, the expiration of certain deferred tax assets, and the utilization of attributes previously considered
unrealizable.
The following deferred tax assets and valuation allowances relating to carryforwards have been recorded at March 31, 2016
and 2015, respectively.
2016
2015
Expires Beginning
after Fiscal Year
96,774
247,027
233
168,069
44
—
25,877
5,290
543,314
2028
2017
2016
2017
2017
2022
2027
n/a
$
$
$
DEFERRED TAX ASSETS
U.S. federal net operating losses
U.S. federal foreign tax credits
U.S. charitable contributions
U.S. state net operating losses (1,2)
U.S. state capital losses
U.S. state tax credits
Foreign net operating losses
Foreign capital losses
Total deferred tax assets for carryforwards
VALUATION ALLOWANCES
U.S. federal net operating losses
U.S. federal foreign tax credits
U.S. charitable contributions
U.S. state net operating losses
U.S. state capital losses
Foreign net operating losses
Foreign capital losses
Valuation allowances for carryforwards
Foreign other deferred assets
$
$
$
82,350
258,486
4,552
166,772
44
308
24,192
3,077
539,781
2,255
15,252
3,443
26,816
44
20,631
3,077
71,518
7,958
79,476
1,282
25,429
—
26,828
44
23,504
5,290
82,377
14,310
96,687
Total valuation allowances
(1) Substantially all of the U.S. state net operating losses carryforward through fiscal 2036.
(2) Due to potential for change in the factors relating to apportionment of income to various states, Legg Mason'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.
$
$
104 | Legg Mason AR2016 Table of Contents
Legg Mason had total gross unrecognized tax benefits of approximately $73,873, $92,344 and $77,892 as of March 31,
2016, 2015 and 2014, respectively. Of these totals, approximately $49,629, $62,775 and $51,518, 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 2016, as a result of the net impact of effective settlement
of tax examinations, previously unrecognized benefits of $24,106 were realized, of which $5,145 was recorded in equity.
A reconciliation of the beginning and ending amount of unrecognized gross tax benefits for the years ended March 31, 2016,
2015 and 2013, 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
2016
2015
2014
$
$
92,344
3,514
10,078
(155)
(25,046)
(6,862)
73,873
$
$
77,892
9,919
13,054
—
(8,521)
—
92,344
$
$
72,650
5,659
12,610
(138)
(12,889)
—
77,892
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 possible that the Company’s gross unrecognized tax benefits balance may
change within the next 12 months by up to $9,000 as a result of the expiration of statutes of limitations and the completion
of tax authorities' examinations.
On April 13, 2015, reforms to New York City’s corporate tax structure were enacted which included changes in the calculation
of net operating loss carryforwards and changes in the way sales revenue is sourced. The revaluation of deferred tax assets
and liabilities under the new rules resulted in the recognition of a one-time income tax benefit of $17,053 for the year ended
March 31, 2016.
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, 2016, 2015 and 2014, the Company recognized approximately $(4,441),
$1,492, and $(580), respectively, which was substantially all interest. At March 31, 2016, 2015 and 2014, Legg Mason had
approximately $1,900, $8,570, and $7,300, respectively, accrued for interest and penalties on tax contingencies in the
Consolidated Balance Sheets.
Legg Mason's prior year tax returns are subject to examination by the Internal Revenue Service, Her Majesty’s Revenue &
Customs, Brazilian and other tax authorities in various other countries and 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 2014 for U.S. federal; after fiscal 2014 for the U.K.; after calendar year 2008 for Brazil; after fiscal 2011 for the state
of California; after fiscal 2008 for the state of New York; and after fiscal 2012 for the states of Connecticut and Maryland.
The Company does not anticipate making any significant cash payments with the settlement of these audits in excess of
amounts that have been reserved.
Except as noted below, Legg Mason intends to permanently reinvest overseas substantially all of the cumulative undistributed
earnings of its foreign subsidiaries. Accordingly, no additional U.S. federal income taxes have been provided for undistributed
earnings to the extent that they are permanently reinvested in Legg Mason's foreign operations. It is not practical at this
time to determine the income tax liability that would result upon repatriation of additional accumulated foreign earnings.
In order to increase the amount of cash available in the U.S. for general corporate purposes, Legg Mason plans to utilize up
to $170,000 of foreign cash over the next several years, of which $8,500 is accumulated foreign earnings. Any additional
tax provision associated with these repatriations was previously recognized. 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 offshore 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. Excluding cash
used to fund the acquisitions of Clarion Partners in April 2016 and EnTrust in May 2016, Legg Mason had available
domestically cash and cash equivalents of approximately $375,000 as of March 31, 2016; and, after borrowing $460,000 in
Legg Mason AR2016 | 105 Table of Contents
May 2016 in connection with these acquisitions, had $500,000 of remaining undrawn capacity on our revolving credit facility
to meet domestic liquidity needs, subject to compliance with applicable covenants, and to provide flexibility in maximizing
cost effective capital deployment without repatriating additional accumulated foreign 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 2028. 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, 2016, the minimum annual aggregate rentals under operating leases and service agreements are as follows:
2017
2018
2019
2020
2021
Thereafter
Total
$
$
128,023
109,368
88,644
79,765
73,432
225,678
704,910
The minimum rental commitments shown above have not been reduced by $140,780 for minimum sublease rentals to be
received in the future under non-cancelable subleases, of which approximately 35% is due from one counterparty. The lease
reserve liability, which is included in the table below, for space subleased as of March 31, 2016 and 2015, was $31,745 and
$43,726, respectively. If a sub-tenant defaults on a sublease, Legg Mason may incur operating charges to adjust the existing
lease reserve liability to reflect expected future sublease rentals at reduced amounts, as a result of the then current commercial
real estate market.
The above minimum rental commitments include $633,350 in real estate and equipment leases and $71,560 in service and
maintenance agreements.
The minimum rental commitments shown above include $32,395 for commitments related to space that has been vacated,
but for which subleases are being pursued. The related lease reserve liability, also included in the table below, was $20,495
and $2,213 as of March 31, 2016 and 2015, respectively, and remains subject to adjustment based on circumstances in the
real estate markets that may require a change in assumptions or the actual terms of a sublease that is ultimately secured.
The lease reserve liability takes into consideration various assumptions, including the expected amount of time it will take
to secure a sublease agreement and prevailing rental rates in the applicable real estate markets.
During fiscal 2016, certain headquarters space was permanently vacated to pursue a sublease and certain office space was
permanently vacated in connection with the restructuring of Permal for the combination with EnTrust, both of which are
reflected in the lease reserve liability in the table below.
106 | Legg Mason AR2016 Table of Contents
The lease reserve liability for subleased space and vacated space for which subleases are being pursued is included in Other
current liabilities and Other non-current liabilities in the Consolidated Balance Sheets. The table below presents a summary
of the changes in the lease reserve liability:
Balance as of March 31, 2014
Accrued charges for vacated and subleased space (1) (2)
Payments, net
Adjustments and other
Balance as of March 31, 2015
Accrued charges for vacated and subleased space (1) (2)
Payments, net
Adjustments and other
Balance as of March 31, 2016
$
$
55,500
9,023
(15,001)
(3,583)
45,939
14,642
(12,689)
4,348
52,240
(1)
(2)
Included in Occupancy expense in the Consolidated Statements of Income (Loss)
Includes $7,212 related to the restructuring of Permal for the merger with EnTrust and $6,760 related to the integration of Batterymarch and LMGAA into
QS Investors for the years ended March 31, 2016 and 2015, respectively. See Note 2 for additional information.
The following table reflects rental expense under all operating leases and servicing agreements:
Rental expense
Less: sublease income
Net rent expense
2016
135,850
21,154
114,696
$
$
2015
136,414
19,672
116,742
$
$
2014
130,880
16,289
114,591
$
$
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 without renewals, unless and until the exercise of lease renewal options is
reasonably assured, and also includes any periods 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, 2016, Legg Mason had commitments to invest $28,859 in limited partnerships that make private investments.
These commitments are expected to be outstanding, or funded as required, through the end of their respective investment
periods ranging through fiscal 2024.
Legg Mason AR2016 | 107 Table of Contents
As of March 31, 2016, Legg Mason had various commitments to pay contingent consideration relating to business
acquisitions. The following table presents a summary of the maximum remaining contingent consideration and changes in
the contingent consideration liability for each of Legg Mason's recent acquisitions. See Note 2 for additional details regarding
each significant acquisition.
Acquisition Date
Maximum Remaining Contingent
Consideration(1)
Contingent Consideration
Liability
Balance as of March 31, 2014
Initial purchase accounting
accrual(2)
Foreign exchange and accretion
Balance as of March 31, 2015
Initial purchase accounting
accrual(2)
Payment
Foreign exchange and accretion
Fair value adjustment
Balance as of March 31, 2016
Balance Sheet Classification
Current Contingent consideration
Non-current Contingent
consideration
Balance as of March 31, 2016
RARE
Infrastructure
October 21,
2015
Martin
Currie
October 1,
2014
PK
Investments
December
31, 2015
QS
Investors
May 30,
2014
Fauchier
March 13,
2013
Total
$
$
$
$
$
81,320
$ 467,076
$
2,469
$
30,000
$
28,743
$ 609,608
— $
— $
— $
— $
29,553
$
29,553
—
—
—
25,000
—
2,145
—
27,145
7,001
20,144
27,145
75,211
(5,097)
70,114
—
—
(531)
(28,361)
41,222
12,846
28,376
41,222
$
$
$
$
$
$
—
—
—
2,457
—
12
—
2,469
$
13,370
183
13,553
—
—
196
—
13,749
— $
6,549
2,469
2,469
$
7,200
13,749
$
$
$
—
(2,436)
27,117
—
(22,765)
662
(5,014)
— $
88,581
(7,350)
110,784
27,457
(22,765)
2,484
(33,375)
84,585
— $
26,396
—
— $
58,189
84,585
(1) Using the applicable exchange rate as of March 31, 2016 for amounts denominated in currencies other than the U.S. dollar.
(2) Using the applicable exchange rate on the date of acquisition for amounts denominated in currencies other than the U.S. dollar.
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 asset management, securities brokerage, and investment banking activities, including 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
industry self-regulatory agency inquiries, 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 pending complaints, legal actions, investigations and proceedings when it is probable that a loss has
been incurred and a reasonable estimate of loss can be made.
Legg Mason cannot estimate the reasonably possible loss or range of loss associated with matters of litigation and other
proceedings, including 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
108 | Legg Mason AR2016
Table of Contents
sought are not specified, are uncertain, unsupportable or unexplained. In addition, for legal actions, discovery may not yet
have started, may not be complete or may not be conclusive, and meaningful settlement discussions may not have occurred.
Further, for regulatory matters, investigations 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, 2016, to provide for any probable losses that
may arise from matters for which the Company could reasonably estimate an amount. Legg Mason's financial 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 litigation-related charges can vary significantly from period-to-period, depending on factors
such as market conditions, the size and volume of customer complaints and claims, including class action suits, and recoveries
from indemnification, contribution, insurance reimbursement, or reductions in compensation under revenue share
arrangements.
As of March 31, 2016 and 2015, Legg Mason's liability for losses and contingencies was $400 and $200, respectively.
During fiscal 2016, 2015, and 2014, Legg Mason incurred charges relating to litigation and other proceedings of
approximately $250, $200, and $200, respectively (net of recoveries of $19,300 in fiscal 2014).
As further described in Note 2, Legg Mason may be obligated to settle noncontrolling interests related to RARE Infrastructure.
The balance of the related noncontrolling interests was $67,155 as of March 31, 2016. Also, as further described in Note
11, in April 2016, in conjunction with the Permal restructuring in preparation for the combination with EnTrust, the Permal
management equity plan was liquidated with the payment of $7,150 to its participants.
As further described in Note 18, subsequent to March 31, 2016, Legg Mason acquired Clarion Partners and EnTrust. Both
of these acquisitions resulted in redeemable noncontrolling interests and the Clarion Partners acquisition terms included the
implementation of an affiliate management equity plan.
9. EMPLOYEE BENEFITS
Legg Mason, through its subsidiaries, maintains various 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 $16 per year. Corporate profit sharing and matching contributions,
together with contributions made under subsidiary plans, totaled $33,152, $27,888 and $29,355 in fiscal 2016, 2015 and
2014, respectively. In addition, employees can make voluntary contributions under certain plans.
In connection with the acquisition of Martin Currie on October 1, 2014, Legg Mason assumed the obligations of Martin
Currie's defined benefit pension plan, more fully discussed in Note 2.
10. CAPITAL STOCK
At March 31, 2016, the authorized numbers of common and preferred shares were 500,000 and 4,000, respectively. At
March 31, 2016 and 2015, there were 6,988 and 8,815 shares of common stock, respectively, reserved for issuance under
Legg Mason's equity plans.
In May 2012, Legg Mason's Board of Directors approved a share repurchase authorization for up to $1,000,000 for purchases
of common stock. All but $13,515 of the share repurchases under this authorization were completed by March 2015, and
the remaining share repurchases under this authorization were completed in April 2015. In January 2015, Legg Mason's
Board of Directors approved a new share repurchase authorization for up to $1,000,000 for additional repurchases of common
stock. There is no expiration attached to this share repurchase authorization. During fiscal 2016, 2015, and 2014, Legg
Mason purchased and retired 4,537, 6,931, and 9,677 shares of its common stock, respectively, for $209,632, $356,522,
and $359,996, respectively, through open market purchases. The remaining balance of the authorized stock buyback is
approximately $804,000.
As discussed in Note 6, warrants issued in connection with the repurchase of the Convertible Notes could result in the
issuance of a maximum of 14,205 shares of Legg Mason common stock, subject to adjustment, if certain conditions are met.
Legg Mason AR2016 | 109 Table of Contents
Changes in common stock for the years ended March 31, 2016, 2015 and 2014, respectively, are as follows:
COMMON STOCK
Beginning balance
Shares issued for:
Stock option exercises
Deferred compensation employee stock trust
Stock-based compensation
Shares repurchased and retired
Employee tax withholding by settlement of net share transactions
Ending balance
Years Ended March 31,
2015
2014
2016
111,469
117,173
125,341
338
12
142
(4,537)
(412)
107,012
718
44
938
(6,931)
(473)
111,469
781
50
1,233
(9,677)
(555)
117,173
Dividends declared per share were $0.80, $0.64 and $0.52 for fiscal 2016, 2015 and 2014, respectively. Dividends declared
but not paid at March 31, 2016, 2015 and 2014, were $22,038, $17,837 and $14,945, respectively, and are included in Other
current liabilities of the Consolidated Balance Sheets.
11. STOCK-BASED COMPENSATION
Legg Mason's stock-based compensation includes stock options, an employee stock purchase plan, market-based
performance shares payable in common stock, restricted stock awards and units, affiliate management equity plans and
deferred compensation payable in stock. Shares available for issuance under the active equity incentive stock plan as of
March 31, 2016, were 6,476. 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 or five years and expire
within eight to ten years from the date of grant.
As further discussed below, the components of Legg Mason's total stock-based compensation expense for the years ended
March 31, 2016, 2015, and 2014, were as follows:
Stock options
Restricted stock and restricted stock units
Employee stock purchase plan
Affiliate management equity plans
Non-employee director awards
Performance share units
Employee stock trust
Total stock-based compensation expense
Years Ended March 31,
2015
2016
2014
$
$
9,403
52,670
729
26,184
1,150
2,766
25
92,927
$
$
11,584
45,975
673
5,206
1,550
1,056
201
66,245
$
$
13,530
48,263
315
2,270
1,950
—
160
66,488
110 | Legg Mason AR2016 Table of Contents
Stock Options
Stock option transactions under Legg Mason's equity incentive plans during the years ended March 31, 2016, 2015, and
2014, are summarized below:
Options outstanding at March 31, 2013
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2014
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2015
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2016
Number of Shares
5,361
1,215
(804)
(971)
4,801
918
(694)
(593)
4,432
876
(349)
(453)
4,506
Weighted-Average
Exercise Price Per Share
53.13
$
33.64
30.52
97.49
43.02
47.65
30.75
90.31
39.58
54.51
28.35
88.06
38.48
$
The total intrinsic value of options exercised during the years ended March 31, 2016, 2015, and 2014, was $5,811, $14,351,
and $6,064, respectively. At March 31, 2016, the aggregate intrinsic value of options outstanding was $11,009.
The following information summarizes Legg Mason's stock options outstanding at March 31, 2016:
Exercise
Price Range
$ 14.81 - $ 25.00
25.01 - 35.00
35.01 - 55.18
Option Shares
Outstanding
Weighted-Average
Exercise Price
Per Share
Weighted-Average
Remaining Life
(in years)
$
567
1,706
2,233
4,506
23.68
31.88
47.28
4.10
3.39
6.27
At March 31, 2016, 2015, and 2014, options were exercisable for 2,544, 2,202, and 2,531 shares, respectively, and the
weighted-average exercise price was $32.22, $41.50, and $54.04, respectively. Stock options exercisable at March 31, 2016,
have a weighted-average remaining contractual life of 3.9 years. At March 31, 2016, the aggregate intrinsic value of
exercisable shares was $9,070.
The following summarizes Legg Mason's stock options exercisable at March 31, 2016:
Exercise
Price Range
$ 14.81 - $ 25.00
25.01 - 35.00
35.01 - 55.18
Option Shares
Exercisable
Weighted-Average
Exercise Price
Per Share
$
391
1,702
451
2,544
23.67
31.88
40.94
Legg Mason AR2016 | 111 Table of Contents
The following information summarizes unvested stock options under Legg Mason's equity incentive plans for the year
ended March 31, 2016:
Shares unvested at March 31, 2015
Granted
Vested
Canceled/forfeited
Shares unvested at March 31, 2016
Number
of Shares
Weighted-Average
Grant Date
Fair Value
2,230
876
(1,074)
(70)
1,962
$
$
11.73
11.26
11.82
11.62
11.48
For the years ended March 31, 2016, 2015, and 2014, income tax benefits related to stock options were $3,730, $4,681,
and $5,244, respectively. Unamortized compensation cost at March 31, 2016, was $13,480 and was related to unvested
options for 1,962 shares. The unamortized compensation cost at March 31, 2016, is expected to be recognized over a
weighted-average period of 1.7 years.
Cash received from exercises of stock options under Legg Mason's equity incentive plans was $9,516, $22,069, and $23,818
for the years ended March 31, 2016, 2015, and 2014, respectively. The tax benefit expected to be realized for the tax
deductions from these option exercises totaled $1,962, $4,856, and $1,815 for the years ended March 31, 2016, 2015, and
2014, respectively.
The weighted-average fair value of service-based stock options granted during the years ended March 31, 2016, 2015, and
2014, excluding those granted to our Chief Executive Officer in May 2013 discussed below, using the Black-Scholes option
pricing model, was $11.26, $12.03, and $12.13 per share, respectively.
The following weighted-average assumptions were used in the model for grants in fiscal 2016, 2015, and 2014:
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
2016
Years Ended March 31,
2015
2014
1.18%
1.44%
24.37%
4.97
1.04%
1.51%
29.53%
4.94
1.54%
0.80%
45.08%
4.93
Legg Mason uses an equally weighted combination of both implied and historical volatility to measure expected volatility
for calculating Black-Scholes option values.
In May 2013, Legg Mason awarded options to purchase 500 shares of Legg Mason, Inc. common stock at an exercise price
of $31.46, equal to the then current market value of Legg Mason's common stock, to its Chief Executive Officer, which are
included in the outstanding options table above. The award had a grant date fair value of $5,525 and was subject to
vesting requirements, all of which had been satisfied by May 2015. The vesting requirements were as follows: 25% over
a two-year service period; 25% over a two-year service period and was subject to Legg Mason's common stock price
equaling or exceeding $36.46 for 20 consecutive trading days; 25% was subject to Legg Mason's common stock price
equaling or exceeding $41.46 for 20 consecutive trading days; and 25% was subject to Legg Mason's common stock
price equaling or exceeding $46.46 for 20 consecutive trading days; and a requirement that certain shares received upon
exercise are retained for a two-year period. In each of January and June 2014, 25% (50% in aggregate) of this award
vested when the Legg Mason stock price met and exceeded $41.46 and $46.46, respectively, for 20 consecutive trading
days. In May 2015 the remaining 50% of this award vested when the two-year service period was satisfied.
112 | Legg Mason AR2016
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The weighted-average fair value per share for these awards of $11.05 was estimated as of the grant date using a grant
price of $31.46, and a Monte Carlo option pricing model with the following assumptions:
Expected dividend yield
Risk-free interest rate
Expected volatility
1.48%
0.86%
44.05%
Restricted Stock
Restricted stock and restricted stock unit transactions during the years ended March 31, 2016, 2015, and 2014, are summarized
below:
Number of Shares
Weighted-Average
Grant Date Value
Unvested shares at March 31, 2013
Granted
Vested
Canceled/forfeited
Unvested shares at March 31, 2014
Granted
Vested
Canceled/forfeited
Unvested shares at March 31, 2015
Granted
Vested
Canceled/forfeited
Unvested shares at March 31, 2016
3,738
1,369
(1,622)
(151)
3,334
1,236
(1,330)
(190)
3,050
1,332
(1,261)
(63)
3,058
$
$
27.99
35.66
28.66
29.04
30.77
48.03
30.92
35.95
37.38
48.95
34.91
42.09
43.34
The restricted stock and restricted stock units were non-cash transactions. For the years ended March 31, 2016, 2015, and
2014, Legg Mason recognized income tax benefits related to restricted stock and restricted stock unit awards of $20,597,
$18,246, and $18,575, respectively. Unamortized compensation cost related to unvested restricted stock and restricted stock
unit awards for 3,058 shares not yet recognized at March 31, 2016, was $81,271 and is expected to be recognized over a
weighted-average period of 1.7 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, of which the vesting of 85 of these shares was accelerated in connection
with the termination of the recipients' employment. The remaining shares vested on March 31, 2014.
Affiliate Management Equity Plans
Effective March 1, 2016, Legg Mason executed agreements with the management of its existing wholly-owned subsidiary,
Royce, regarding employment arrangements with Royce management, revised revenue sharing, and the implementation of
a management equity plan for its key employees. Under the management equity plan, minority equity interests equivalent
to 16.9% in the Royce entity were issued to its management team. These interests allow the holders to receive quarterly
distributions of Royce's net revenues in amounts equal to the percentage of ownership represented by the equity they hold.
The previously existing revenue sharing arrangement was terminated with an arrangement under the plan whereby the
percentage of Royce net revenues reserved to pay all expenses (including bonus awards), was reduced to reflect the percentage
of revenues paid under the equity units and an increased percentage to Legg Mason. Legg Mason receives a permanent
increase of two percent of Royce's net revenues over the percentage provided for in the prior revenue sharing arrangement,
phased in over a 13-month period. The management equity plan also provides an option for the issuance of additional equity
over the next three years. Current and future grants under the plan vest immediately and, upon issuance, the related grant-
date fair value of equity units will be recognized as Compensation and benefits expense in the Consolidated Statements of
Income (Loss) and reflected in the Consolidated Balance Sheets as Nonredeemable noncontrolling interest. As a result of
the implementation of the management equity plan, Legg Mason incurred a non-cash charge of $21,400 in the year ended
March 31, 2016. As of March 31, 2016, the redemption amount of units under the plan was $22,202.
Legg Mason AR2016 | 113 Table of Contents
In conjunction with the December 2012 modification of employment and other arrangements with certain employees of its
subsidiary, Permal, Legg Mason completed implementation of a management equity plan during the quarter ended June 30,
2013. On March 31, 2014, a similar management equity plan was implemented by Legg Mason for certain employees of
its subsidiary ClearBridge Investments, LLC ("ClearBridge"). The plans better align the interests of each affiliate's
management with those of Legg Mason and its shareholders, and provide for, among other things, higher margins at specified
higher revenue levels. The affiliate management equity plans entitle certain key employees of each affiliate to participate
in 15% of the future growth, if any, of the respective affiliates' enterprise value (subject to appropriate discounts) subsequent
to the date of grant. Current and future grants under the plans vest 20% annually for five years. Independent valuations
determined the aggregate cost of the awards to be approximately $9,000 and $16,000 for Permal and ClearBridge,
respectively, which will be recognized as Compensation and benefits expense in the Consolidated Statements of Income
(Loss) over the related vesting periods, through December 2017 and March 2019, respectively. Total compensation expense
related to the Permal and ClearBridge affiliate management equity plans was $4,784, $5,206, and $2,270 for the years ended
March 31, 2016, 2015, and 2014, respectively. Both arrangements provide that one-half of the respective cost will be
absorbed by the affiliates' incentive pool. Once vested, plan units can be put to Legg Mason for settlement at fair value,
beginning one year after the holder terminates their employment. Legg Mason can also call plan units, generally post
employment, for settlement at fair value. Changes in control of Legg Mason or either affiliate do not impact vesting,
settlement or other provisions of the units. However, upon sale of substantially all of the affiliate's assets, the vesting of the
respective units would accelerate and participants would receive a fair value payment in respect of their interests under the
plan. Future grants of additional plan units will dilute the participation of existing outstanding units in 15% of the future
growth of the respective affiliates' enterprise value, if any, subsequent to the related future grant date, for which additional
compensation expense would be incurred. Further, future grants under either plan will not entitle the plan participants,
collectively, to more than an aggregate 15% of the future growth of the respective affiliate's enterprise value. Upon vesting,
the grant-date fair value of vested plan units will be reflected in the Consolidated Balance Sheets as Redeemable
noncontrolling interests through an adjustment to additional paid-in capital. Thereafter, redeemable noncontrolling interests
will continue to be adjusted to the ultimate maximum estimated redemption value over the expected term, through retained
earnings adjustments. As of March 31, 2016, the redemption amount of vested units under the ClearBridge plan, as if they
were currently redeemable, aggregated approximately $22,160. In April 2016, in conjunction with the Permal restructuring
in preparation for the combination with EnTrust, the Permal management equity plan was liquidated with the payment of
$7,150 to its participants, and the remaining $3,481 unamortized cost was expensed.
Other
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 15% contribution towards purchases,
which is charged to earnings. Legg Mason’s contribution increased from 10% to 15% in January 2014. During the fiscal
years ended March 31, 2016, 2015, and 2014, approximately 134, 107, and 85 shares, respectively, have been purchased in
the open market on behalf of participating employees.
Legg Mason also has an equity plan for non-employee directors. Under the current equity plan, directors may elect to receive
shares of stock or restricted stock units. Prior to a July 19, 2007 amendment to the Plan, directors could also elect to receive
stock options, which were 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. Shares, options, and restricted stock units issuable under this equity plan are
limited to 625 in aggregate, of which 384 and 359 shares were issued as of March 31, 2016 and 2015, respectively. As of
March 31, 2016 and 2015, non-employee directors held no stock options, and as of March 31, 2014, non-employee directors
held 32 stock options, which are included in the outstanding options table. During the years ended March 31, 2016, 2015,
and 2014, non-employee directors did not exercise any stock options. During the year ended March 31, 2016, there were
no stock options canceled or forfeited from the current equity plan and during the years ended March 31, 2015 and 2014,
there were 32 and 26 stock options canceled or forfeited from the current equity plan for non-employee directors, respectively.
For the year ended March 31, 2014, there were 54 stock options canceled or forfeited related to an equity plan for non-
employee directors which was discontinued in July 2005. As of March 31, 2016, 2015, and 2014, non-employee directors
held 53, 45, and 64 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, 2016,
2015 and 2014, non-employee directors were granted 9, 8, and 12 restricted stock units, respectively, and 16, 23, and 47
shares of common stock, respectively. During the year ended March 31, 2016, there were no restricted stock units distributed,
and during the years ended March 31, 2015, and 2014, there were 27 and 39 restricted stock units distributed, respectively.
114 | Legg Mason AR2016
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In May 2015 and 2014, Legg Mason granted certain executive officers a total of 107 and 78 performance share units,
respectively, as part of their fiscal 2015 and 2014 incentive award with an aggregate value of $4,312 and $3,457, respectively.
The vesting of performance share units granted in May 2015 and 2014 and the number of shares payable at vesting are
determined based on Legg Mason’s relative total stockholder return over a three-year period ending March 31, 2018 and
2017, respectively. The grant date fair value per unit for the May 2015 and 2014 performance share units of $40.29 and
$44.11, respectively, was estimated as of the grant date using a Monte Carlo pricing model with the following assumptions:
Expected dividend yield
Risk-free interest rate
Expected volatility
2016
2015
1.46%
0.86%
22.63%
1.33%
0.75%
30.81%
During fiscal 2012, Legg Mason established a long-term incentive plan (the "LTIP") under its equity incentive plan, which
provided an additional element of compensation that is based on performance, determined as the achievement of a pre-
defined amount of Legg Mason’s cumulative adjusted earnings per share over a three year performance period. Under the
LTIP, executive officers were granted cash value performance units in the quarter ended September 2012 for a total targeted
amount of $1,850. The September 2012 grant performance period ended March 31, 2015, and resulted in a payment amount
of $1,000 that was settled in cash on May 31, 2015.
Deferred compensation payable in shares of Legg Mason common stock has been granted to certain employees in an elective
plan. The vesting in the plan is immediate and the plan provides for discounts of up to 10% on contributions and dividends.
Effective January 1, 2015, there will be no additional contributions to the plan, with the remaining 271 shares reserved for
future dividend distributions. During fiscal 2016, 2015, and 2014, Legg Mason issued 12, 44, and 51 shares, respectively,
under the plan with a weighted-average fair value per share at the grant date of $41.82, $45.83, and $31.90, respectively.
The undistributed shares issued under this plan are held in a rabbi trust. Assets of the rabbi trust are consolidated with those
of the employer, and the value of the employer's stock held in the rabbi trust is classified in stockholders' equity and accounted
for in a manner similar to treasury stock. Therefore, the shares Legg Mason has issued to the rabbi trust and the corresponding
liability related to the deferred compensation plan are presented as components of stockholders' equity as Employee stock
trust and Deferred compensation employee stock trust, respectively. Shares held by the trust at March 31, 2016, 2015 and
2014, were 583, 660 and 672, respectively.
12. EARNINGS PER SHARE
Basic earnings per share attributable to Legg Mason, Inc. shareholders ("EPS") is calculated by dividing Net Income (Loss)
Attributable to Legg Mason, Inc. (adjusted by earnings allocated to participating securities) by the weighted-average number
of shares outstanding. Legg Mason issues to employees restricted stock that are deemed to be participating securities prior
to vesting, because the unvested restricted shares entitle their holder to nonforfeitable dividend rights. In this circumstance,
accounting guidance requires a “two-class method” for EPS calculations that excludes earnings (potentially both distributed
and undistributed) allocated to participating securities.
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 Attributable to Legg Mason, Inc., potential common shares are considered antidilutive and are
therefore, excluded from the calculation.
During fiscal 2016, 2015, and 2014, pursuant to the $1,000,000 share repurchase authorization discussed in Note 10, Legg
Mason purchased and retired 4,537, 6,931, and 9,677 shares of its common stock, respectively, for $209,632, $356,522, and
$359,996, respectively, through open market purchases. These total repurchases reduced weighted-average shares
outstanding by 2,564, 3,528, and 4,908 shares for the years ended March 31, 2016, 2015, and 2014, 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.
Legg Mason AR2016 | 115 Table of Contents
The following table presents the computations of basic and diluted EPS:
Basic weighted-average shares outstanding for EPS
Potential common shares:
Dilutive employee stock options
Diluted weighted-average shares outstanding for EPS
Years Ended March 31,
2015
112,019
2016
107,406
2014
121,941
—
107,406
1,227
113,246
442
122,383
Net Income (Loss) Attributable to Legg Mason, Inc.
$ (25,032) $ 237,080
$ 284,784
Less: Earnings (distributed and undistributed) allocated to participating
securities
2,288
6,340
—
Net Income (Loss) (Distributed and Undistributed) Allocated to Shareholders
(Excluding Participating Securities)
$ (27,320) $ 230,740
$ 284,784
Net Income (Loss) per share Attributable to Legg Mason, Inc. Shareholders
Basic
Diluted
$
$
(0.25) $
(0.25) $
2.06
2.04
$
$
2.34
2.33
The weighted-average shares for the years ended March 31, 2016 and 2015, exclude weighted-average unvested restricted
shares deemed to be participating securities of 2,831 and 3,065, respectively.
The diluted EPS calculations for the years ended March 31, 2016, 2015, and 2014, exclude any potential common shares
issuable under the 14,205 warrants issued in connection with the repurchase of the Convertible Notes in May 2012 because
the market price of Legg Mason common stock did not exceed the exercise price, and therefore, the warrants would be
antidilutive.
The diluted EPS calculation for the year ended March 31, 2016, excludes 814 potential common shares that are antidilutive
due to the net loss in the year. Options to purchase 1,319 and 2,620 shares for the years ended March 31, 2015 and 2014,
respectively, were not included in the computation of diluted EPS because the presumed proceeds from exercising such
options, including the related income tax benefits, exceed the average price of the common shares for the period and therefore,
the options are deemed antidilutive.
Further, market- and performance-based awards are excluded from potential dilution until the designated market or
performance condition is met. Unvested restricted shares for the years ended March 31, 2016, 2015, and 2014, were
antidilutive and therefore do not further impact diluted EPS.
116 | Legg Mason AR2016 Table of Contents
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss includes cumulative foreign currency translation adjustments and gains and losses
on defined benefit pension plans. The change in the accumulated translation adjustments for fiscal 2016 and 2015, primarily
resulted from the impact of changes in the Brazilian real, British pound, the Australian dollar, the Canadian dollar, and the
Singaporean dollar, in relation to the U.S. dollar on the net assets of Legg Mason's subsidiaries in Brazil, the U.K., Australia,
Canada and Singapore, for which the real, the pound, the Australian dollar, Canadian dollar, and the Singaporean dollar, are
the functional currencies, respectively.
A summary of Legg Mason's accumulated other comprehensive loss as of March 31, 2016 and 2015, is as follows:
Foreign currency translation adjustment
Net actuarial losses on defined benefit pension plan
Total Accumulated other comprehensive loss
2016
(59,672) $
(6,821)
(66,493) $
2015
(51,147)
(9,595)
(60,742)
$
$
There were no significant amounts reclassified from Accumulated other comprehensive loss to the Consolidated Statements
of Income (Loss) for the years ended March 31, 2016, 2015, or 2014, except for $405, net of income tax provision of $233,
realized on the termination of a reverse treasury rate lock contract, in the year ended March 31, 2015 as further described
in Note 6.
14. NONCONTROLLING INTERESTS
Net income (loss) attributable to noncontrolling interests for the years ended March 31, included the following amounts:
Net income (loss) attributable to redeemable noncontrolling interests
Net income attributable to nonredeemable noncontrolling interests
Net income reclassified to appropriated retained earnings for consolidated
investment vehicle
Total
$
$
(8,680) $
802
—
(7,878) $
5,629
—
—
5,629
$
$
1,881
—
(4,829)
(2,948)
Years Ended March 31,
2015
2014
2016
Legg Mason AR2016 | 117 Table of Contents
Total redeemable and nonredeemable noncontrolling interests for the years ended March 31, included the following amounts:
Consolidated
investment
vehicles(1)
and other
Noncontrolling
Interests(2)
$
19,754
$
1,255
1,540
20,678
—
41,972
5,061
(10,484)
—
36,549
(11,052)
68,639
—
—
—
341
(240)
—
1,356
568
25
—
1,949
2,372
(1,981)
—
62,722
3,860
Value as of March 31, 2013
Net income attributable to
noncontrolling interests
Net subscriptions (redemptions)
Vesting/change in estimated
redemption value of affiliate
management equity plan interests
Value as of March 31, 2014
Net income attributable to
noncontrolling interests
Net subscriptions (redemptions)
Vesting/change in estimated
redemption value of affiliate
management equity plan interests
Value as of March 31, 2015
Net income (loss) attributable to
noncontrolling interests
Net subscriptions (redemptions)
Grants/settlements of affiliate
management equity plan interests
Business acquisition
Foreign exchange
Vesting/change in estimated
redemption value of affiliate
management equity plan interests
Redeemable noncontrolling interests
Affiliate
Nonredeemable
noncontrolling
interests(3)
Total
Management
equity plans
$
— $
—
—
1,816
1,816
21,009
$
1,881
20,438
1,816
45,144
—
—
—
—
—
—
—
—
—
802
—
21,400
—
—
—
22,202
—
—
5,629
(10,459)
5,206
7,022
—
—
(345)
—
—
5,206
45,520
(8,680)
66,658
(345)
62,722
3,860
Value as of March 31, 2016
$
(1) Principally related to VIE and seeded investment products.
(2) Principally related to RARE Infrastructure.
(3) Related to Royce.
—
94,136
$
—
68,922
$
6,050
12,727
6,050
$ 175,785
$
118 | Legg Mason AR2016 Table of Contents
15. 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 Consolidated 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, Australian dollar, British pound, euro, Japanese yen, and Singapore dollar. All derivative transactions for which
Legg Mason has certain legally enforceable rights of setoff are governed by International Swaps and Derivative Association
("ISDA") Master Agreements. For these derivative transactions, Legg Mason has one ISDA Master Agreement with each
of the significant counterparties, which covers transactions with that counterparty. Each of the respective ISDA agreements
provides for settlement netting and close-out netting between Legg Mason and that counterparty, which are legally enforceable
rights to setoff. Other assets recorded in the Consolidated Balance Sheets as of March 31, 2016 and 2015, were $8,650 and
$6,042, respectively. Other liabilities recorded in the Consolidated Balance Sheets as of March 31, 2016 and 2015, were
$18,079 and $8,665, respectively.
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.
With the exception of the interest rate swap contract and reverse treasury rate lock contract discussed in Note 6, Legg Mason
has not designated any derivatives as hedging instruments for accounting purposes during the periods ended March 31,
2016, 2015, or 2014. As of March 31, 2016, Legg Mason had open currency forward contracts with aggregate notional
amounts totaling $334,640 and open futures contracts relating to seed capital investments with aggregate notional values
totaling $127,736. These amounts are representative of the level of non-hedge designation derivative activity throughout
fiscal 2016. As of March 31, 2016, the weighted-average remaining contract terms for both currency forward contracts and
futures contracts relating to seed capital investments were three months.
As discussed in Note 6, subsequent to March 31, 2016, Legg Mason executed a 4.67-year, amortizing interest rate swap,
and terminated the previously existing interest rate swap.
Legg Mason AR2016 | 119 Table of Contents
The following table presents the derivative assets and related offsets, if any, as of March 31, 2016:
Gross amounts not
offset in the Balance
Sheet
Gross
amounts of
recognized
assets
Gross
amounts
offset in the
Balance
Sheet
Net amount
of derivative
assets
presented in
the Balance
Sheet
Financial
instruments
Cash
collateral
Net amount
as of
March 31,
2016
Derivative instruments designated as hedging instruments (See Note 6)
Interest rate swap
$
— $
— $
— $
7,599
$
— $
7,599
Derivative instruments not designated as hedging instruments
Currency forward
contracts
Futures contracts relating
to seed capital
investments
Total derivative
instruments not
designated as
hedging instruments
Total derivative instruments
1,933
(963)
—
—
970
—
—
81
—
970
1,840
1,921
1,933
1,933
$
$
(963)
(963) $
970
970
$
81
7,680
$
1,840
1,840
$
2,891
10,490
The following table presents the derivative liabilities and related offsets, if any, as of March 31, 2016:
Gross amounts not
offset in the Balance
Sheet
Gross
amounts of
recognized
liabilities
Gross
amounts
offset in the
Balance
Sheet
Net amount
of derivative
liabilities
presented in
the Balance
Sheet
Financial
instruments
Cash
collateral
Net amount
as of
March 31,
2016
Derivative instruments not designated as hedging instruments
Currency forward
contracts
Futures contracts relating
to seed capital
investments
Total derivative instruments
not designated as hedging
instruments
$
(16,364) $
280
$
(16,084) $
— $
— $
(16,084)
—
—
—
(1,995)
5,920
3,925
$
(16,364) $
280
$
(16,084) $
(1,995) $
5,920
$
(12,159)
120 | Legg Mason AR2016 Table of Contents
The following table presents the derivative assets and related offsets, if any, as of March 31, 2015:
Gross amounts not offset
in the Balance Sheet
Gross
amounts of
recognized
assets
Gross
amounts
offset in the
Balance
Sheet
Net amount
of derivative
assets
presented in
the Balance
Sheet
Financial
instruments
Cash
collateral
Net amount as
of
March 31,
2015
Derivative instruments designated as hedging instruments (See Note 6)
Interest rate swap
$
— $
— $
— $
5,462
$
— $
5,462
Derivative instruments not designated as hedging instruments
Currency forward
contracts
Futures and forward
contracts relating to
seed capital
investments
Total derivative
instruments not
designated as
hedging instruments
Total derivative instruments
781
(259)
522
75
(17)
58
—
—
—
—
522
58
856
856
$
(276)
(276) $
$
580
580
$
—
5,462
$
—
— $
580
6,042
The following table presents the derivative liabilities and related offsets, if any, as of March 31, 2015:
Gross amounts not offset
in the Balance Sheet
Gross
amounts of
recognized
liabilities
Gross
amounts
offset in the
Balance
Sheet
Net amount
of derivative
liabilities
presented in
the Balance
Sheet
Financial
instruments
Cash
collateral
Net amount as
of
March 31,
2015
Derivative instruments not designated as hedging instruments
Currency forward
contracts
Futures and forward
contracts relating to
seed capital
investments
Total derivative instruments
not designated as hedging
instruments
$
(8,623) $
2,327
$
(6,296) $
— $
— $
(6,296)
—
—
—
(2,369)
8,343
5,974
$
(8,623) $
2,327
$
(6,296) $
(2,369) $
8,343
$
(322)
Legg Mason AR2016 | 121 Table of Contents
The following table presents gains (losses) recognized in the Consolidated Statements of Income (Loss) on derivative
instruments. As described above, the currency forward contracts and futures and forward contracts for seed capital
investments included below are economic hedges of interest rate and market risk of certain operating and investing activities
of Legg Mason, including foreign exchange risk on acquisition contingent consideration. Gains and losses on these derivative
instruments substantially offset gains and losses of the economically hedged items. In connection with the acquisition of
RARE Infrastructure, in August 2015 Legg Mason executed a U.S. dollar - Australian dollar currency forward contract to
economically hedge against currency changes affecting the Australian dollar denominated purchase price, which was closed
in October 2015.
2016
Years Ended March 31,
2015
2014
Income Statement
Classification
Gains
Losses
Gains
Losses
Gains
Losses
Derivatives not designated as hedging instruments
Currency forward
contracts for:
Operating activities
Seed capital
investments
Other non-operating
activities(1)
Futures and forward
contracts relating
to seed capital
investments
Other expense
Other non-operating
income (expense)
Other non-operating
income (expense)
Other non-operating
income (expense)
$
7,887
$ (19,547) $
5,150
$ (16,518) $ 7,098
$ (2,617)
547
(1,611)
2,491
(259)
—
(4,493)
—
—
56
—
(1,719)
—
11,270
(9,206)
10,801
(15,413)
2,471
(19,403)
Total gain (loss) from derivatives not
designated as hedging instruments
19,704
(34,857)
18,442
(32,190)
9,625
(23,739)
Derivatives designated as hedging instruments (See Note 6)
Interest rate swap
Reverse treasury rate
lock
Interest expense
Other non-operating
income (expense)
Total
5,710
—
5,462
—
—
—
—
$ 25,414
—
638
$ (34,857) $ 24,542
—
—
$ (32,190) $ 9,625
—
$(23,739)
(1) Relates to a currency forward executed in August 2015 and closed in October 2015 in connection with the October 2015 acquisition of RARE
Infrastructure.
122 | Legg Mason AR2016 Table of Contents
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. The company operates in one reportable business segment, Global Asset Management. Global Asset
Management provides investment advisory services to institutional and individual clients and to company-sponsored
investment funds. The primary sources of revenue in Global Asset Management are investment advisory, distribution and
administrative fees, which typically are calculated as a percentage of 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
2016
2015
2014
$ 1,868,076 $ 1,977,975
398,729
442,402
$ 2,660,844 $ 2,819,106
338,552
454,216
$ 1,874,328
436,542
430,887
$ 2,741,757
$ 3,134,267 $ 3,135,226
1,062,332
455,286
$ 4,626,001 $ 4,652,844
820,730
671,004
$ 3,127,654
879,946
404,696
$ 4,412,296
17. VARIABLE INTEREST ENTITIES AND CONSOLIDATED INVESTMENT VEHICLES
As further discussed in Notes 1 and 3, in accordance with financial accounting standards, Legg Mason consolidates certain
sponsored investment vehicles, some of which are designated as CIVs. As of March 31, 2016, Legg Mason concluded it
was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated a CIV) as of
March 31, 2016, 2015, and 2014, despite significant third party investments in this product.
As of March 31, 2016, 2015, and 2014, Legg Mason also concluded it was the primary beneficiary of 14, 17, and 17,
respectively, employee-owned funds it sponsors, which were consolidated and reported as CIVs.
Prior to March 31, 2015, Legg Mason also held a longer-term controlling financial interest in one sponsored investment
fund VRE, which has third-party investors and was consolidated and included as a CIV prior to the three months ended
March 31, 2015. Legg Mason redeemed a significant portion of its investment in this fund prior to March 31, 2015, and as
a result no longer had a controlling financial interest in the fund; therefore, the fund was not consolidated, or included as a
CIV as of or subsequent to March 31, 2015.
Prior to June 30, 2014, Legg Mason concluded it was the primary beneficiary of one of three CLOs in which it had a variable
interest and the balances related to this CLO were consolidated and reported as a CIV in the Company's consolidated financial
statements. During the three months ended June 30, 2014, this CLO substantially liquidated and therefore was not
consolidated by Legg Mason as of, or subsequent to, June 30, 2014.
Legg Mason's investment in CIVs, as of March 31, 2016 and 2015, was $13,641 and $15,553, respectively, which represents
its maximum risk of loss, excluding uncollected advisory fees. The assets of these CIVs are primarily comprised of investment
securities. Investors and creditors of these CIVs have no recourse to the general credit or assets of Legg Mason beyond its
investment in these funds.
Legg Mason AR2016 | 123 Table of Contents
The following tables reflect the impact of CIVs in the Consolidated Balance Sheets as of March 31, 2016 and 2015,
respectively, and the Consolidated Statements of Income (Loss) for the years ended March 31, 2016, 2015, and 2014,
respectively:
Consolidating Balance Sheets
March 31, 2016
March 31, 2015
Balance
Before
Consolidation
of CIVs and
Other(1)
2,288,080
CIVs and
Other(1)
$ 110,715
5,135,318
—
7,423,398
$ 110,715
837,031
$
4,548
2,267,343
3,104,374
—
4,548
Eliminations
Consolidated
Totals
Balance
Before
Consolidation
of CIVs
CIVs
Eliminations
Consolidated
Totals
$
$
$
(13,667) $
2,385,128
$
1,879,941
$
56,929
$
(15,583) $
1,921,287
—
5,135,318
(13,667) $
7,520,446
(26) $
841,553
—
(26)
2,267,343
3,108,896
$
$
$
$
5,143,547
7,023,488
808,640
1,719,367
2,528,007
—
56,929
6,436
—
6,436
$
$
—
5,143,547
(15,583) $
7,064,834
(30) $
815,046
—
(30)
1,719,367
2,534,413
81,649
94,027
109
175,785
8,971
29,397
7,152
45,520
4,237,375
12,140
(13,750)
4,235,765
4,486,510
21,096
(22,705)
4,484,901
$
7,423,398
$ 110,715
$
(13,667) $
7,520,446
$
7,023,488
$
56,929
$
(15,583) $
7,064,834
(1) Other represents consolidated sponsored investment vehicles that are not designated as CIVs.
$
$
$
Current Assets
Non-current
assets
Total Assets
Current
Liabilities
Non-current
liabilities
Total Liabilities
Redeemable
Non-
controlling
interests
Total
Stockholders’
Equity
Total Liabilities
and Equity
124 | Legg Mason AR2016 Table of Contents
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
Year Ended March 31, 2016
Balance Before
Consolidation
of CIVs and
Other(1)
CIVs and
Other(1)
Eliminations
Consolidated
Totals
$
2,661,162
$
— $
(318) $
2,660,844
2,609,870
51,292
(65,458)
(14,166)
7,692
(21,858)
3,174
466
(466)
(12,757)
(13,223)
—
(13,223)
(323)
5
2,166
2,171
—
2,171
—
(11,052)
2,610,013
50,831
(76,049)
(25,218)
7,692
(32,910)
(7,878)
(25,032)
Net Income (Loss) Attributable to Legg Mason, Inc.
$
(25,032) $
(13,223) $
13,223
$
(1) Other represents consolidated sponsored investment vehicles that are not designated as CIVs.
Total Operating Revenues
Total Operating Expenses
Operating Income (Loss)
Total Other Non-Operating Income (Expense)
Income Before Income Tax Provision
Income tax provision
Net Income
Less: Net income attributable to noncontrolling interests
Year Ended March 31, 2015
Balance Before
Consolidation
of CIVs
CIVs
Eliminations
Consolidated
Totals
$
2,819,827
$
— $
(721) $
2,819,106
2,320,709
499,118
(136,186)
362,932
125,284
237,648
568
906
(906)
5,883
4,977
—
4,977
—
(728)
2,320,887
7
77
84
—
84
5,061
498,219
(130,226)
367,993
125,284
242,709
5,629
Net Income (Loss) Attributable to Legg Mason, Inc.
$
237,080
$
4,977
$
(4,977) $
237,080
Total Operating Revenues
Total Operating Expenses
Operating Income (Loss)
Total Other Non-Operating Income (Expense)
Income Before Income Tax Provision (Benefit)
Income tax provision
Net Income (Loss)
Less: Net income (loss) attributable to noncontrolling interests
Year Ended March 31, 2014
Balance Before
Consolidation
of CIVs
CIVs
Eliminations
Consolidated
Totals
$
2,743,707
$
— $
(1,950) $
2,741,757
2,310,444
433,263
(10,333)
422,930
137,805
285,125
341
2,376
(2,376)
2,445
69
—
69
—
69
(1,956)
2,310,864
6
(3,364)
(3,358)
—
(3,358)
(3,289)
430,893
(11,252)
419,641
137,805
281,836
(2,948)
$
(69) $
284,784
Net Income (Loss) Attributable to Legg Mason, Inc.
$
284,784
$
Other non-operating income (expense) includes interest income, interest expense, and net gains (losses) on investments.
The consolidation of CIVs has no impact on Net Income (Loss) Attributable to Legg Mason, Inc.
Legg Mason AR2016 | 125 Table of Contents
Legg Mason had no financial liabilities of CIVs carried at fair value as of March 31, 2016 or 2015. The fair value of the
financial assets of CIVs were determined using the following categories of inputs as of March 31, 2016 and 2015:
Assets:
Trading investments:
Hedge funds
Proprietary funds
Total trading investments
Assets:
Trading investments:
Hedge funds
Proprietary funds
Total trading investments
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Value as of
March 31,
2016
$
$
922
22,327
23,249
$
$
7,138
8,244
15,382
$
$
10,084
—
10,084
$
$
18,144
30,571
48,715
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Value as of
March 31,
2015
$
$
1,108
28,387
29,495
$
$
4,412
—
4,412
$
$
14,093
—
14,093
$
$
19,613
28,387
48,000
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. During
the quarter ended June 30, 2014, the CLO substantially liquidated and was not consolidated as of March 31, 2015.
126 | Legg Mason AR2016 Table of Contents
The changes in assets and (liabilities) of CIVs measured at fair value using significant unobservable inputs (Level 3) for the
years ended March 31, 2016 and 2015, are presented in the tables below:
Value as of
March 31,
2015
Purchases
Sales
Settlements
/ Other
Transfers
Realized
and
unrealized
gains/
(losses), net
Value as of
March 31,
2016
Assets:
Hedge funds
$
14,093
$
251
$
(1,455) $
(825) $
(526) $
(1,454) $
10,084
Value as of
March 31,
2014
Purchases
Sales
Settlements
/ Other
Transfers
Realized
and
unrealized
gains/
(losses), net
Value as of
March 31,
2015
17,888
$
2,580
$
(5,761) $
— $
78
$
(692) $
14,093
Assets:
Hedge funds
Private equity
funds
$
$
31,810
49,698
$
4,727
7,307
$
(3,124)
(8,885) $
(34,042)
(34,042) $
Liabilities:
CLO debt
$
Total realized and unrealized gains, net
(79,179) $
— $
— $
79,179
$
—
78
$
— $
$
629
(63) $
— $
(63)
—
14,093
—
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 in the Consolidated Statements of Income (Loss). The change in unrealized losses for
Level 3 investments and liabilities of CIVs relating only to those assets and liabilities still held at the reporting date were
$2,580 and $79 for the years ended March 31, 2016 and 2015, respectively.
There were no transfers between Level 1 and Level 2 during either of the years ended March 31, 2016 and 2015.
The NAVs 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,
2016 and 2015, the nature of these investments and any related liquidation restrictions or other factors, which may impact
the ultimate value realized:
Category of
Investment
Hedge funds
Fair Value Determined Using NAV
As of March 31, 2016
Investment Strategy March 31, 2016
March 31, 2015
Unfunded
Commitments
Remaining
Term
Global macro, fixed
income, long/short
equity, systematic,
emerging market, U.S.
and European hedge
$
18,144 (1)
$
19,613
n/a
n/a
n/a - not applicable
(1) Redemption restrictions: 5% daily redemption; 13% monthly redemption; 10% quarterly redemption; and 72% are subject to three to five year
lock-up or side pocket provisions.
There are no current plans to sell any of these investments held as of March 31, 2016.
As of March 31, 2014, Legg Mason elected the fair value option for certain eligible assets and liabilities, including corporate
loans and debt, of the consolidated CLO. Legg Mason did not elect the fair value option for any assets or liabilities as of
March 31, 2016 or 2015, as the CLO was no longer consolidated.
Legg Mason AR2016 | 127 Table of Contents
During the year ended March 31, 2014, total net losses of $5,914, were recognized in Other non-operating income (losses)
of CIVs, net, 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 year ended March 31, 2014, were attributable to instrument specific
credit risk.
As of March 31, 2016 and 2015, there were no derivative liabilities of CIVs. Gains and (losses) of $1,311 and $(1,537),
respectively, for the year ended March 31, 2014, related to derivative liabilities of CIVs are included in Other non-operating
income (loss) of CIVs.
As of March 31, 2016 and 2015, for VIEs in which Legg Mason holds a variable interest or is the sponsor and holds a
variable interest, but for which it was not the primary beneficiary, Legg Mason's carrying value and maximum risk of loss
were as follows:
As of March 31, 2016
As of March 31, 2015
CLOs
Real Estate Investment Trust
Other sponsored investment funds
Total
Equity Interests
on the
Consolidated
Balance Sheet (1)
$
9,540
22,551
32,091
$
— $
Maximum
Risk of Loss (2)
288
14,595
27,852
42,735
$
Equity Interests
on the
Consolidated
Balance Sheet (1)
$
13,026
21,983
35,009
$
— $
Maximum
Risk of Loss (2)
1,146
18,096
34,463
53,705
$
(1)
(2)
Includes $32,091 and $27,463 related to investments in proprietary funds products as of March 31, 2016 and 2015, respectively.
Includes equity investments the Company has made or is required to make and any earned but uncollected management fees.
The Company's total AUM of unconsolidated VIEs was $17,170,697 and $19,527,670 as of March 31, 2016 and 2015,
respectively.
The assets of these VIEs are primarily comprised of cash and cash equivalents, investment securities, and CLO loans, and
the liabilities are primarily comprised of CLO debt and various expense accruals. These VIEs are not consolidated because
either (1) Legg Mason does not have the power to direct significant economic activities of the entity and rights/obligations
associated with benefits/losses that could be significant to the entity, or (2) 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 gains.
18. SUBSEQUENT EVENTS
Clarion Partners
On April 13, 2016, Legg Mason acquired a majority equity interest in Clarion Partners, a diversified real estate asset
management firm based in New York. Clarion Partners managed approximately $41,500,000 in AUM as of April 30, 2016.
Under the terms of the transaction, Legg Mason acquired an 82% ownership interest in Clarion Partners for a cash payment
of $577,458, which was funded with a portion of the proceeds from the issuance of the 2026 Notes and the 2056 Notes in
March 2016. In addition, Legg Mason paid $16,000 for certain co-investments on a dollar-for-dollar basis. The Clarion
Partners management team retained 18% of the outstanding equity in Clarion Partners. In addition, Legg Mason implemented
an affiliate management equity plan for the management team of Clarion Partners. The affiliate management equity plan
entitles certain key employees of Clarion Partners to participate in 15% of the future growth, if any, of the enterprise value
(subject to appropriate discounts) subsequent to the date of the grant. The initial grant under the plan vests immediately.
The firm's previous majority owner sold its entire ownership interest in the transaction. The noncontrolling interests held
by the management team can be put by the holders or called by Legg Mason for settlement at fair value starting after three
years from the closing of the agreement. The holders' put is limited to certain amounts, which increase in years four and
five. The acquired assets and liabilities and related results of operations of Clarion Partners will be included in Legg Mason's
financial statements, subsequent to the acquisition. Due to the timing of the acquisition, purchase accounting adjustments
and related disclosures require additional analysis and are not currently possible. During fiscal 2016, there were $2,807 of
costs incurred in connection with the acquisition of Clarion Partners.
128 | Legg Mason AR2016
EnTrust
On May 2, 2016, Legg Mason closed the transaction to combine Permal, Legg Mason's existing hedge fund platform, with
EnTrust. EnTrust is an alternative asset management firm headquartered in New York with approximately $10,000,000 in
AUM and approximately $2,000,000 in assets under advisement and committed capital at closing, and largely complementary
investment strategies, investor base, and business mix to Permal. As a result of the combination, Legg Mason owns 65%
of the new entity, branded EnTrustPermal, with the remaining 35% owned by EnTrust's co-founder and managing partner.
The noncontrolling interests can be put by the holder or called by Legg Mason for settlement at fair value starting after five
years from the closing of the agreement. The transaction included a cash payment of $400,000, which was funded with
borrowings under Legg Mason's revolving credit facility, as well as a portion of the proceeds from the issuance of the 4.75%
Senior Notes due 2026 and the 6.375% Junior Subordinated Notes due 2056 in March 2016. The acquired assets and liabilities
and related results of operations of EnTrust will be included in Legg Mason's financial statements, subsequent to the
acquisition. Due to the timing of the acquisition, purchase accounting adjustments and related disclosures require additional
analysis and are not currently possible. During fiscal 2016, there were $3,492 of costs incurred in connection with the
acquisition of EnTrust.
In connection with the combination, Legg Mason expects to incur total restructuring and transition-related costs of
approximately $100,000, of which $43,296 was incurred in fiscal 2016. See Note 2 for further discussion of the restructuring
and transition-related costs.
Legg Mason AR2016 | 129 Table of Contents
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts or unless otherwise noted)
(Unaudited)
Fiscal 2016(1)
Operating Revenues
Operating Expenses
Operating Income (Loss)
Other Non-Operating Income (Expense)
Income before Income Tax Provision (Benefit)
Income tax provision (benefit)
Net Income (Loss)
Less: Net income (loss) attributable to noncontrolling
interests
Net Income (Loss) Attributable to Legg Mason, Inc.
Quarter Ended
Mar. 31
Dec. 31
Sept. 30
June 30
$
$
$
619,551
585,648
33,903
(27,455)
6,448
58,606
(52,158)
659,557
900,202
(240,645)
(1,616)
(242,261)
(103,651)
(138,610)
673,086
540,056
133,030
(42,464)
90,566
27,647
62,919
(6,885)
(45,273) $ (138,626) $
16
$
(1,400)
64,319
Net Income (Loss) per share Attributable to Legg Mason, Inc. Shareholders:
Basic
Diluted
Cash dividend declared per share
Stock price range:
High
Low
Assets Under Management (in millions):
End of period
Average
$
$
$
(0.43) $
(0.43)
0.20
(1.31) $
(1.31)
0.20
39.97
24.93
669,615
662,323
$
$
46.41
37.84
671,474
683,006
$
$
0.58
0.58
0.20
52.61
40.60
672,136
687,173
(1) Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results.
As of May 17, 2016, the closing price of Legg Mason's common stock was $31.60.
$
$
$
$
$
708,650
584,107
124,543
(4,514)
120,029
25,090
94,939
391
94,548
0.85
0.84
0.20
55.88
50.39
699,166
703,860
Fiscal 2015(1)
Operating Revenues
Operating Expenses
Operating Income
Other Non-Operating Income (Expense)
Income before Income Tax Provision
Income tax provision
Net Income
Less: Net income attributable to noncontrolling interests
Net Income Attributable to Legg Mason, Inc.
Net Income per share Attributable to Legg Mason, Inc. Shareholders:
Basic
Diluted
Cash dividend declared per share
Stock price range:
High
Low
Assets Under Management (in millions):
End of period
Average
Quarter Ended
Mar. 31
Dec. 31
Sept. 30
June 30
$
$
$
$
$
702,346
573,396
128,950
(2,115)
126,835
42,807
84,028
1,069
82,959
0.73
0.73
0.16
59.19
52.16
702,724
707,143
$
$
$
$
$
718,984
599,616
119,368
(1,303)
118,065
38,017
80,048
3,012
77,036
0.67
0.67
0.16
57.15
45.78
709,086
710,948
$
$
$
$
$
703,895
573,540
130,355
(121,530)
8,825
3,804
5,021
124
4,897
0.04
0.04
0.16
52.00
45.68
707,834
704,148
$
$
$
$
$
693,881
574,335
119,546
(5,278)
114,268
40,656
73,612
1,424
72,188
0.62
0.61
0.16
51.80
43.25
704,295
691,337
(1) Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results.
130 | Legg Mason AR2016 Executive Officers
Joseph A. Sullivan
Chairman
& Chief Executive Officer
Peter H. Nachtwey
Senior Executive Vice President
& Chief Financial Officer
Thomas K. Hoops
Executive Vice President
& Head of Business Development
Terence A. Johnson
Executive Vice President
& Head of Global Distribution
Thomas C. Merchant
Executive Vice President
& General Counsel
Ursula A. Schliessler
Executive Vice President
& Chief Administrative Officer
Corporate Data
Executive Offices
100 International Drive
Baltimore, Maryland 21202
(410) 539-0000
www.LeggMason.com
Form 10-K
Legg Mason’s Annual Report
on Form 10-K for the year ended
March 31, 2016, filed with the
Securities and Exchange Commission
and containing audited financial
statements, is available upon request
without charge by writing to the
Corporate Secretary at the Executive
Offices of the Company.
Copies can also be obtained
by accessing our website
at www.LeggMason.com
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
100 E. Pratt Street
Baltimore, Maryland 21202
(410) 783-7600
www.pwc.com
Transfer Agent
American Stock Transfer
& Trust Company
6201 15th Avenue
Brooklyn, NY 11219
(212) 936-5100
www.amstock.com
Common Stock
Shares of Legg Mason, Inc.
common stock are listed and traded
on the New York Stock Exchange
(symbol: LM). As of March 31,
2016, there were approximately
1,300 shareholders of record of
the Company’s common stock.