AR2017
The Power...
...of Choice
Diversified by design
Key Highlights
Founded in
Headquartered
in Baltimore, 39
1899
MD
$728B
n
o
i
l
l
i
Locations
worldwide
Assets under management
as of March 31, 2017
$2.9B
n
o
i
l
l
i
12%
Liquidity
25%
Equity
By asset class
9%
Alternative
54%
Fixed
Income
Operating revenues
for fi scal year 2017
By asset class
By client domicile
4%
Liquidity
18%
Alternative
37%
Fixed
Income
41%
Equity
33%
Non-U.S.
67%
U.S.
Over
3,300
Employees
Financial Highlights
Financial Highlights (Dollars in thousands, except per-share amounts)
Operating results
Operating revenues
Operating income (loss)
Years ended March 31,
2017
2016
2015
2014
2013
$ 2,886,902 2,660,844
2,819,106
2,741,757
2,612,650
422,243
50,831
498,219
430,893
(434,499)
Income (loss) before income tax provision (benefi t)
370,878
(25,218)
367,993
419,641
(510,607)
Net income (loss) attributable to Legg Mason, Inc.
227,256
(25,032)
237,080
284,784
(353,327)
Per share
Net income (loss), attributable to Legg Mason, Inc. shareholders, diluted
$
Dividends declared
Book value
Financial condition
Total assets
2.18
0.88
41.61
(0.25)
0.80
39.37
2.04
0.64
2.33
0.52
40.23
40.32
(2.65)
0.44
38.44
$
8,290,415
7,520,446
7,064,834
7,103,203
7,264,582
Total stockholders’ equity attributable to Legg Mason, Inc.
3,983,374
4,213,563
4,484,901
4,724,724
4,818,351
Adjusted EBITDA1
560,240
561,432
658,262
581,462
499,479
1 Adjusted EBITDA represents a liquidity measure that is based on a methodology other than generally accepted accounting principles (”non-GAAP“). For more information regarding
this non-GAAP measure, see Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report.
Total Return Performance (Dollars)
Years ended March 31,
2012
2013
2014
2015
2016
2017
$ 100.00
117.04
180.99
206.30
132.20
100.00
113.96
138.87
156.55
159.34
141.29
186.71
100.00
128.44
161.67
176.28
145.95
162.86
The graph to the left compares the cumulative total stockholder return
on Legg Mason’s common stock for the last fi ve fi scal 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, 2012). The SNL Asset Manager Index consists of
41 asset management fi rms.
Source: © 2017 SNL Financial LLC, Charlottesville, VA (www.snl.com)
Index
Legg Mason, Inc.
SNL Asset Manager Index
S&P 500
250
200
150
100
50
0
MAR 12
MAR 13
MAR 14
MAR 15
MAR 16
MAR 17
Key Highlights
Founded in
Headquartered
in Baltimore, 39
1899
MD
$728B
n
o
i
l
l
i
Locations
worldwide
Assets under management
as of March 31, 2017
$2.9B
n
o
i
l
l
i
12%
Liquidity
25%
Equity
By asset class
9%
Alternative
54%
Fixed
Income
Operating revenues
for fi scal year 2017
By asset class
By client domicile
4%
Liquidity
18%
Alternative
37%
Fixed
Income
41%
Equity
33%
Non-U.S.
67%
U.S.
Over
3,300
Employees
Financial Highlights
Financial Highlights (Dollars in thousands, except per-share amounts)
Operating results
Operating revenues
Operating income (loss)
Years ended March 31,
2017
2016
2015
2014
2013
$ 2,886,902 2,660,844
2,819,106
2,741,757
2,612,650
422,243
50,831
498,219
430,893
(434,499)
Income (loss) before income tax provision (benefi t)
370,878
(25,218)
367,993
419,641
(510,607)
Net income (loss) attributable to Legg Mason, Inc.
227,256
(25,032)
237,080
284,784
(353,327)
Per share
Net income (loss), attributable to Legg Mason, Inc. shareholders, diluted
$
Dividends declared
Book value
Financial condition
Total assets
2.18
0.88
41.61
(0.25)
0.80
39.37
2.04
0.64
2.33
0.52
40.23
40.32
(2.65)
0.44
38.44
$
8,290,415
7,520,446
7,064,834
7,103,203
7,264,582
Total stockholders’ equity attributable to Legg Mason, Inc.
3,983,374
4,213,563
4,484,901
4,724,724
4,818,351
Adjusted EBITDA1
560,240
561,432
658,262
581,462
499,479
1 Adjusted EBITDA represents a liquidity measure that is based on a methodology other than generally accepted accounting principles (”non-GAAP“). For more information regarding
this non-GAAP measure, see Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report.
Total Return Performance (Dollars)
Years ended March 31,
2012
2013
2014
2015
2016
2017
$ 100.00
117.04
180.99
206.30
132.20
100.00
113.96
138.87
156.55
159.34
141.29
186.71
100.00
128.44
161.67
176.28
145.95
162.86
The graph to the left compares the cumulative total stockholder return
on Legg Mason’s common stock for the last fi ve fi scal 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, 2012). The SNL Asset Manager Index consists of
41 asset management fi rms.
Source: © 2017 SNL Financial LLC, Charlottesville, VA (www.snl.com)
Index
Legg Mason, Inc.
SNL Asset Manager Index
S&P 500
250
200
150
100
50
0
MAR 12
MAR 13
MAR 14
MAR 15
MAR 16
MAR 17
Dear Clients
and Fellow
Shareholders,
Joseph A. Sullivan,
Chairman & Chief Executive Offi cer
I am pleased to report a strong year of progress in executing our strategy
of expanding choice for investors, which we continue to pursue and achieve
— diversifying options for clients across investment strategies, with diff erent
products and vehicles and through additional and innovative access portals, all
while continuing to return a signifi cant amount of capital to our shareholders.
This year we were pleased to add new capabilities in private equity real
estate through our addition of Clarion Partners and in alternatives through
our addition of EnTrust Capital, which we combined with an existing affi liate
to form EnTrustPermal. We invested in new product technology through a
minority investment in Precidian Investments, a leader in vehicle innovation,
particularly with ETFs. Finally, we expanded our alternative distribution
capabilities through our acquisition of Financial Guard.
We believe that our strategy of expanding client choice,
effected through increasing diversifi cation, has become even
more important during this time of serious challenges for our
clients and meaningful disruption within our industry.
The disconnect between what investors need fi nancially to preserve their
future and what the markets and benchmark strategies are projected to return
over the next several years is growing. The impact and ramifi cations of this
disconnect are wide-ranging and are not to be minimized. However, it is this
very disconnect that underscores the fundamental need for strong, eff ective,
active asset management, a need that we believe is greater than ever. And the
good news is that there are solutions for the increasing and evolving needs of
our clients.
3
Legg Mason AR2017
Legg Mason AR2017
3
It is precisely these increasing preferences for varied and
easy access, deeper levels of engagement and higher levels
of satisfaction that support our strategy for becoming the firm
of choice by expanding client choice through diversification.”
Further, at this critical time of need for WHAT we do, our
industry faces an existential challenge around HOW we do
it: the industry is being fundamentally disrupted in multiple
ways that will permanently reshape the asset management
landscape. This creates an opportunity for those asset
managers that respond to changing industry dynamics
and reposition themselves for a very different future.
This disruption that we are experiencing is not altogether
different from that which has affected other industries
and, for those managers willing to evolve and change,
learning from others can actually serve to create a
differentiating growth opportunity. We believe that
Legg Mason is just such a firm.
Investor preferences and expectations are evolving at
a rapid pace, influenced by their experiences in other
consumer segments. In particular, investors increasingly
expect to be engaged in more aspects of their investment
experience. So, at a time when investors need WHAT we
do more than ever, they also expect us to respond to HOW
they want to be served.
For a business that has long focused heavily on relative
benchmarks to measure performance, our clients are now
benchmarking the entirety of their investment experience
with us against their other consumer experiences ... at a
time when they have more and more diverse options, should
they be less than satisfied with their traditional ones.
It is precisely these increasing preferences for varied and
easy access, deeper levels of engagement and higher levels
of satisfaction that support our strategy for becoming
the firm of choice by expanding client choice through
diversification.
Investors, retail and institutional, all over the world, in
both developed and emerging economies, need thoughtful
solutions from the asset management industry to address
their increasingly complex client needs that are as diverse
as they are personal to the end client.
At the same time, world economies are in need of
investment capital — whether to fund water projects in
emerging markets, rebuild infrastructure in developed
markets, or fuel growth across all sectors of the global
economy. Asset managers are an essential connector in
facilitating capital flows between those with excess capital
to invest and those who need capital to grow: the industry’s
raison d’être has never been more clear ... or challenged.
A need for diversification and the necessity
of active management
Evolving demographics, relatively slow global growth
and persistently low inflation are contributing to the
increasing disparity or disconnect between the return
needs of investors and the expected beta returns of the
global markets.
“Market” returns are simply unlikely to generate the
income or the growth required by individuals and
institutions to meet their future needs, and therefore
a combination of diversification beyond traditional
asset classes and geographies with the alpha-generating
potential of active asset management is needed to help
close that gap.
Investors need to access global markets and expand beyond
traditional investment strategies to diversify their portfolios,
mitigate volatility and generate alpha. Asset managers
with scaled, broad capabilities in traditional markets and
specialized expertise beyond mainstream asset classes can
provide such needed diversification. We are pleased that
Legg Mason is better positioned than ever to deliver that
diversification, for greater client choice, across asset classes
globally, through multiple products and vehicles, and all
accessible in multiple ways.
At the same time, the industry faces meaningful
disruption coming from a number of fronts, including
competitors offering very low-cost, market capitalization-
oriented passive strategies that appear, for the moment, to
be an attractive option. This is understandable, as many
4
Legg Mason AR2017
active managers have failed to deliver meaningful returns
to justify their higher fees — but it provides opportunity
for those managers who deliver investment results.
The regulatory environment continues to expand, rewriting
the rules of what is expected and how managers are to
engage with clients.
These changes are designed to protect investors further from
potential confl icts of interest by increasing transparency and
disclosure. Ensuring investor confi dence is critical. However,
these regulations compel asset managers to revise or modify
many of their operating processes and procedures.
And fi nally, technology will continue to be an enormous
driver of change across all aspects of the industry,
including the investment process itself, how the industry
distributes its strategies and through operational effi ciency.
While all of this is challenging in the near term,
we believe the industry will improve as a result and
ultimately investors should benefi t through better
pricing and enhanced service.
Perhaps the most disruptive of forces faced by the industry
is the degree to which individual investors increasingly
are becoming more involved in their investment decisions,
driving managers to respond to their shifting preferences.
Investors expect a complete, tailored fi nancial plan that
is informed by their needs, anticipates and plans for
unforeseen circumstances, is intuitive, easily accessible
and cost-eff ective. Investors today expect to dictate what
they want, how and when they want it ... and what they’re
willing to pay for it.
And these investors have options.
Expanding client choice
In response to this evolving investor dynamic, we have
been intentional in repositioning Legg Mason over the
past few years to provide expanded client choice. We believe
that we can now provide investors with deeper insight and
greater options for how to use single investment strategies
or combine them to achieve the solutions and outcomes they
desire. Specifi cally, through a number of transactions over
the past four years, we have expanded choice for our clients
across investment strategies, product and vehicle capabilities
and enhanced client access.
Executive Committee
Left to right: Peter H. Nachtwey, Chief Financial Offi cer; Ursula A. Schliessler, Chief Administrative Offi cer; Thomas K. Hoops,
Head of Business Development; Joseph A. Sullivan, Chairman & Chief Executive Offi cer; Thomas C. Merchant, General Counsel;
Terence A. Johnson, Head of Global Distribution
Not pictured: Frances L. Cashman, Global Head of Communications & Engagement; John D. Kenney, Global Head of Affi liate
Strategic Initiatives; Patricia Lattin, Chief Human Resources Offi cer
Legg Mason AR2017 5
While all of this is challenging in the near term, the industry
will improve as a result, and ultimately investors should benefi t
through better pricing and enhanced service.”
Our previous acquisitions of QS Investors, Martin Currie
and RARE Infrastructure provided investment expertise
in customized client solutions, non-U.S. equity and
listed infrastructure strategies. With QS Investors in
particular, Legg Mason now provides multi-asset class
models and solutions to help investors optimize their
portfolios, consistent with their investment objectives
and risk tolerance. In Martin Currie, we off er investors
diff erentiated exposure to the global and emerging
markets in higher alpha-potential strategies. And in
Sydney-based RARE Infrastructure, we acquired a listed
infrastructure investment capability at a time in which
global infrastructure fi nancing needs and capital seeking
an attractive return are both rising.
This year, we extended our alternative expertise with
the combined EnTrustPermal so that now, in addition
to our comingled funds-of-funds capability, we can provide
investors with the meaningful return potential associated
with co-investment and direct lending strategies.
The acquisition of Clarion Partners brings world-class
investment expertise in private equity commercial real
estate, an asset class that continues to experience a
robust growth in global demand.
In addition to expanding client choice across asset class
strategies, we have made important investments and
acquisitions to support expanded product, vehicle and
client access options. Specifi cally, we have bolstered our
vehicle development capabilities with critical hires of
highly experienced professionals and our investment in
and partnership with Precidian Investments, a recognized
thought and vehicle development leader in ETFs. We
are very encouraged with the potential to expand vehicle
choice through our ETF development work, much of
which we expect to launch this year.
Through our acquisition of Financial Guard this past
year, we are beginning to expand digital access options
for our clients. We believe that this particular investment,
while early-stage, holds great long-term promise for
expanding the manner in which our clients may
choose to engage with us in years to come.
Responding to evolving client needs and expanding choice
for what and how clients want to invest is what has driven
our repositioning activity for the past several years and we
see Legg Mason as better positioned than ever to become
the fi rm OF choice for investors.
The foundation of all our eff orts remains a focus
on a consequential corporate mission: Investing to
Improve Lives SM... and that mission extends to multiple
constituencies, beginning with investors.
Increasingly, clients expect their investments to be doing
good while doing well, and without sacrifi cing quality,
performance, convenience or price in the process. To that
end, in various ways, our managers incorporate principles
of responsible investing (PRI) into their investment process
at eight of our nine affi liates.
We are also delivering on our mission to fi nancial
stakeholders by continuing to be a leader in the rate
of capital returned to shareholders.
We work to improve the lives of employees through
increased investment in individual training, development
and benefi ts. Legg Mason was voted a “Best Places to Work
in Money Management” for the second consecutive year
in Pensions & Investments’ annual survey of employee
satisfaction, a gratifying endorsement.
And fi nally, we feel compelled to improve the lives of those
in our communities through the Legg Mason Foundation
and CSR initiatives around the world.
I look forward to reporting to you on our continued
progress next year, and I remain most grateful for
your continued confi dence and support, as we remain
passionate about delivering results for you.
Joseph A. Sullivan,
Chairman & Chief Executive Offi cer
6
Legg Mason AR2017
8%
Large Cap
15%
Diversifi ed
Equity
Assets by
strategy
77%
Fixed
Income
1%
Opportunistic
12%
Value
Assets by
product
type
31%
Core Plus
56%
Core
Real estate investment specialists
For over 35 years, Clarion Partners has been a leading real
estate investment manager, providing innovative real estate
solutions to its global and diverse institutional client base.
Clarion invests in the Americas in both equity and debt
positions across a broad range of property types with
varied risk profi les.
Headquartered in New York, Clarion has 280 employees
in nine offi ces across the U.S., Latin America, and the UK.
Distinguished by its research-driven investment approach
and strong partnership culture, Clarion invests with the
consistent goal of generating superior investment returns
and creating value for its clients.
Clarion offi cially joined the Legg Mason group of affi liates
as of April 13, 2016. The fi rm continued its path of steady
growth in fi scal year 2017, as total assets under management
grew to exceed $43.1 billion, as of March 31, 2017, and 33
new clients were added.
Global value investing
Brandywine Global believes in the power of value investing.
Acting with conviction and discipline, the fi rm looks beyond
short-term, conventional thinking to deliver long-term value
to clients across a broad range of global fi xed income and
equity strategies.
In a year characterized by geopolitical surprises and
economic challenges, Brandywine Global ended the fi scal
year (as of March 31, 2017) with $69.5 billion in AUM. Half
of AUM originates from over 50 countries outside of the
U.S., and more than 75% is managed in global mandates.
Brandywine Global is proud that approximately 90% of
client assets outperformed their respective benchmark
since inception.
In addition to multiple industry accolades for strong long-
term performance, the fi rm earned a “Best Places to
Work in Money Management” award from Pensions &
Investments, which recognized its engaging workplace
culture and commitment to employees. Brandywine Global
furthered its commitment to clients by adding seasoned
talent through several key appointments. The Global Fixed
Income team hired a veteran portfolio manager and two
analysts, positioning the fi rm for future growth, while the
appointment of a new CEO to the fi rm’s Singapore affi liate
expanded support for the important and growing Asia-
Pacifi c region. Brandywine Global also became a signatory
of the United Nations-supported Principles for Responsible
Investment (UNPRI), formalizing its long-standing
commitment to sustainable investment.
Legg Mason AR2017 7
4%
Liquid
Alternatives
Multi-manager
funds' assets
by strategy
48%
Strategic
Partnership
48%
Commingled
Funds
11%
Low
Volatility
24% Assets by
Income
Solutions
product
type
65%
High Active
Share
Global alternative funds-of-funds
As one of the world’s largest hedge fund investors,
EnTrustPermal has the global talent, scale and resources
to bring clients meaningful innovation in a dynamic industry.
With histories dating back to 1997 and 1973, respectively,
EnTrust and Permal combined their deep industry
knowledge and expertise in 2016 in an effort to lead the
way forward in alternative investing, creating EnTrustPermal.
With 11 offi ces globally, EnTrustPermal offers investment
solutions through customized portfolios, co-investments,
direct investments and established funds across alternative
strategies including diversifi ed, strategy-focused and
opportunistic. At the core of the fi rm's culture is a strong
emphasis on personal service, a high level of communication,
extensive due diligence and proprietary risk management.
During the fi scal year, EnTrustPermal won the Thomson
Reuters Lipper Fund Award for its Alternative Core Fund
for the second year in a row; the award recognizes
excellence in providing risk-adjusted returns in its class.
EnTrustPermal has continued to offer innovative products
in the alternative investment space with the introduction
of the Blue Ocean Fund, a direct lending vehicle focusing
on distressed debt in the maritime industry. While the
fi rm enjoys continued growth in creating highly bespoke
portfolios, the impending launch of EnTrustPermal’s
Strategic Opportunities Fund 4 is also suggestive of the
fi rm’s expertise in sourcing differentiated and unique
co-investments for institutional and high net worth
investors across the globe.
8
Legg Mason AR2017
Active global 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. Its investment
solutions are driven by fundamental research that integrates
environmental, social and governance (ESG) factors and
differentiated, high-conviction stock selection to move
its clients forward.
Consistently strong investment performance during
the fi scal year enabled ClearBridge to extend its market
presence across its platform of high active share, income
and low-volatility strategies, highlighted by new client
mandates across U.S. and international equities that led
to positive net infl ows.
During the fi scal year, ClearBridge continued to expand its
leadership position in ESG investment, taking an active role
promoting ESG integration in global equity strategies. The
fi rm also saw continued strong adoption of its innovative
Dynamic MDA Portfolios. In addition, ClearBridge was
named one of Pensions & Investments’ “Best Places to
Work in Money Management” for the fi fth year in a row.
15%
Absolute
Return
Assets by
strategy
27%
Equity
Income
58%
High Active
Share
37%
Customized
Solutions
20%
Global
Equities
14%
Liquid
Alternatives
Assets by
product
type
29%
U.S.
Equities
Active equity specialists
Martin Currie is an international equity specialist fi rm,
crafting high-conviction portfolios to deliver client-
focused solutions.
Martin Currie’s product range is designed to meet its
clients’ needs. Martin Currie offers three distinctive solutions,
defi ned by the risk framework and the outcomes it provides:
Market Aware; Sustainable Income; and Unconstrained.
Integral to its investment process is Martin Currie’s
differentiated approach to ESG. The fi rm believes that
by implementing comprehensive ESG analysis, it can
identify companies best able to sustain high returns and
resist competitive pressures. Stewardship of client capital
through active engagement is central to its approach. This
is recognized by Martin Currie’s A+ rating from the UNPRI.
The last fi scal year saw AUM increase by over 50% to
$18 billion, with $5 billion net fl ows. Japanese distribution
of its Australian Equity products contributed strongly to
that success. Martin Currie also saw $200 million in initial
seeding for its International Unconstrained Equity product.
Its established expertise in Emerging Markets produced
strong results for its U.S. 1940 Act fund, and also a $250
million mandate from a large U.S. public plan.
Quantitative equity and multi-asset manager
QS Investors applies a diversifi ed, systematic and adaptive
approach to its investment discipline to provide consistent,
repeatable and risk-managed returns across multiple
market environments.
Now in its third year as a Legg Mason affi liate, QS Investors
has continued to forge and strengthen strategic partnerships
across the fi rm and with other Legg Mason affi liates to
design next-generation products and solutions that take
advantage of the best QS Investors and Legg Mason
have to offer. Multi-asset models, a pillar of QS Investors’
institutional capabilities, were launched for broader retail
distribution through Legg Mason to enhance solutions-
based partnerships across channels. Within the institutional
business, QS Investors continues to see growth in the multi-
asset business.
QS Investors’ equity outcome strategies focused on
Defensive Equity Income won several leading industry
awards during the fi scal year, recognizing its strong long-
term performance. Client demand continues in these
strategies, supporting asset growth and further product
expansion in the ETF business.
Legg Mason AR2017 9
1%
5%
Cash
Non-U.S.
Equity
Multi-manager
funds' assets
by strategy
94%
U.S.
Equity
5%
Emerging
Markets
Infrastructure
Assets by
product
type
95%
Value
Infrastructure
Small-cap equity
Royce & Associates, investment advisor to The Royce
Funds, is a small-cap equity specialist offering strategies
with distinctive investment approaches to address specifi c
investment goals. An asset class pioneer, the fi rm has been
managing micro-cap, small-cap and small/mid-cap portfolios
for more than 40 years.
In fi scal year 2017, Royce was very pleased that 11 of its 13
domestic small-cap portfolios advanced 16% or more in the
fi scal year, while four increased at least 23% (and two bested
their benchmark in the process). These performances were
largely rooted in our long-standing commitment to disciplined
approaches to highly active, small-cap equity investing.
In the last fi scal year, Royce continued to deepen
relationships with its existing intermediary partners,
and it established a major new relationship with a leading
brokerage fi rm, while also seeing a substantial increase in
investment from international investors. In addition, Royce
continued to enhance the development and distribution of
strategic research and thought leadership around the small-
cap asset class.
Royce continues to build on what they view their core
investment advantages: an unparalleled domain knowledge
and sustained focus on the small-cap asset class, their
notably experienced team of 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 management teams
(more than 2,000 company meetings in the last fi scal year).
10
Legg Mason AR2017
Global listed infrastructure
RARE is a specialist investment manager focused exclusively
on global listed infrastructure.
Established in 2006, RARE has grown to 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.
In fi scal year 2017, RARE pursued opportunities to develop
and grow its business across the globe. Together with
Legg Mason, RARE launched a Retail 40 Act Fund, an
Infrastructure Benchmark and an ETF in the United States.
In the United Kingdom, RARE launched a Global Infrastructure
Income Fund and merged the RARE UCITS Fund into the
Legg Mason Global Funds Plc, facilitating greater distribution
in the UK, Europe and Asia.
As of March 31, 2017, RARE employed 50 staff and managed
over $5.4 billion. RARE’s head offi ce is located in Sydney,
Australia, and the company has been a signatory of the
UNPRI since 2009.
5%
Municipals
22%
Liquidity
46%
Specialized
Assets by
strategy
27%
Broad
Portfolio
Global value investors in fi xed income
Western Asset is known for its long-term fundamental
value approach, proprietary macro and credit research
capabilities, and team-oriented culture.
With 867 employees in nine global offi ces and $426.9
billion in assets under management as of March 31, 2017,
the fi rm sources investment ideas and delivers client
solutions worldwide. Founded in 1971, Western Asset has
been an independent affi liate of Legg Mason since 1986.
Western Asset’s strong capabilities and investment
performance continue to garner broad recognition. Last
year, the fi rm was honored across a diverse range of
investment categories and geographical regions, winning
accolades from Hong Kong-based Asian Investor Marquee
Awards, Lipper Fund Awards Germany and the Revista
Investidor Institucional Benchmark Awards in São Paulo,
among others.
Western Asset was named one of the “Best Places to Work
in Money Management” by Pensions & Investments in 2016
— a distinction earned four times in the last fi ve years.
ESG
Investing
Time to believe the hype behind ESG investing
With sustainability becoming increasingly important
to investors, Legg Mason’s affi liates have integrated
environmental, social and governance (ESG) issues into
their businesses. Legg Mason has seen a number of affi liates
actively engage on issues that impact the businesses in
which they invest.
Several recent studies examined the performance aspects
of integrating ESG factors and concluded that ESG portfolio
performance should be comparable to the performance of
conventionally managed portfolios.2
As investors have realized this, sustainably invested assets in
the United States have risen considerably. According to the
Forum for Sustainable and Responsible Investment (U.S. SIF),
by the end of the year in 2015 “more than one out of every
fi ve dollars under professional management in the United
States — $8.72 trillion or more — was invested according
to SRI strategies.” The same study reported that from 2012
through 2014 those ESG assets rose 76% to nearly $6.6
trillion.3 Even after 2014’s dramatic increase, there has been
another 33% increase in assets invested in ESG strategies.
Nearly a quarter (22%) of the $40.3 trillion in total AUM
tracked by Cerulli Associates — is involved in ESG. Clearly,
this isn’t just a trend, but rather, the new normal.
Legg Mason has strengthened its commitment to the UNPRI over
the past year, with eight affi liates now signed on to the initiative.
Our signatories include:
Brandywine Global
Martin Currie
Clarion Partners
RARE Infrastructure
ClearBridge Investments
Royce & Associates
EnTrustPermal
Western Asset
We are proud of these efforts and look forward to reporting
our progress next fi scal year.
2 http://www.ussif.org/performance
3 http://www.ussif.org/sribasics
Legg Mason AR2017 11
Board of Directors
Standing (left to right)
W. Allen Reed
Private Investor; Retired Chief Executive
Offi cer, GM Asset Management Corporation;
(Chair of the Finance Committee)
Carol Anthony (“John”) Davidson
Private Investor; Retired Controller & Chief
Accounting Offi cer, Tyco International, LTD.
Barry W. Huff
Retired Vice Chairman, Deloitte;
(Chair of the Audit Committee)
John V. Murphy
Retired Chief Executive Offi cer, Oppenheimer
Funds Inc.; (Lead Independent Director,
Chair of the Nominating & Corporate
Governance Committee)
Joseph A. Sullivan
Chairman & Chief Executive Offi cer,
Legg Mason, Inc.
Cheryl Gordon Krongard
Private Investor; Retired Chief Executive
Offi cer, Rothschild Asset Management;
(Chair of the Compensation Committee)
Dennis M. Kass
Private Investor; Retired Chief Executive
Offi cer, Jennison Associates
Kurt L. Schmoke
President of the University of Baltimore;
Former Mayor, City of Baltimore
12
12
Legg Mason AR2017
Legg Mason AR2017
Seated (left to right)
Robert E. Angelica
Private Investor; Retired Chairman &
Chief Executive Offi cer, AT&T Investment
Management Corporation; (Chair of the
Risk Committee)
Margaret Milner Richardson
Private Consultant & Investor; Former
U.S. Commissioner of Internal Revenue
Robert Chiu
President, Shanda Group
Not pictured
John H. Myers
Senior Advisor, Angelo, Gordon & Co.;
Retired Chief Executive Offi cer,
GE Asset Management
Tianqiao Chen
Vice Chairman, Legg Mason, Inc.;
Chairman & Chief Executive Offi cer,
Shanda Group
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)
Years ended March 31,
2017
2016
2015
2014
2013
$ 2,886,902
$ 2,660,844
$ 2,819,106
$ 2,741,757
$2,612,650
2,429,659
2,239,013
2,320,887
2,310,864
2,313,149
35,000
422,243
371,000
50,831
—
—
498,219
430,893
734,000
(434,499)
Non-operating expense, net, including $107,074 debt extinguishment
loss in July 2014 and $68,975 in May 2012
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
(64,694)
(68,806)
(136,114)
(13,726)
(73,287)
13,329
370,878
84,175
286,703
59,447
(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)
Net Income (Loss) Attributable to Legg Mason, Inc.
$ 227,256
$
(25,032)
$
237,080
$
284,784
$ (353,327)
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
Long-term debt, net
Total Stockholders' Equity Attributable to Legg Mason, Inc.
FINANCIAL RATIOS AND OTHER DATA
Operating Margin
Operating Margin, as Adjusted (2)
Cash provided by operating activities
Adjusted EBITDA(3)
Total debt to total capital (4)
Assets under management (in millions)
Full-time employees
$
$
$
2.19
2.18
$
$
(0.25)
(0.25)
$
$
2.06
2.04
$
$
2.34
2.33
$
$
(2.65)
(2.65)
100,580
100,799
107,406
107,406
112,019
113,246
121,941
122,383
133,226
133,226
0.88
$
0.80
$
0.64
$
0.52
$
0.44
$ 8,290,415
$ 7,520,446
$ 7,064,834
$ 7,103,203
$7,264,582
2,221,867
3,983,374
1,740,985
4,213,563
1,048,946
4,484,901
1,031,118
4,724,724
1,139,876
4,818,351
14.6%
19.7%
1.9%
18.6%
17.7%
23.0%
15.7%
22.0%
(16.6)%
17.5 %
$ 539,772
560,240
$
454,451
561,432
$
568,118
658,262
$
437,324
581,462
$ 303,332
499,479
36.2%
29.9%
19.1%
18.0%
19.2 %
$ 728,406
$
669,615
$
702,724
$
701,774
$ 664,609
3,338
3,066
2,982
2,843
2,975
(1) Excludes weighted-average unvested restricted shares deemed to be participating securities for the years ended March 31, 2017, 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
in Financial Statements and Supplemental Data.
(2) 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, 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, and less performance fees that
are passed through as compensation expense or net income (loss) attributable to noncontrolling interests, 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.
(3) Adjusted EBITDA is a non-GAAP liquidity measure we define as cash provided by (used in) operating activities plus (minus) interest expense, net of
accretion and amortization of debt discounts and premiums, current income tax expense (benefit), the net change in assets and liabilities, net (income)
loss attributable to noncontrolling interests, net gains (losses) on consolidated investment vehicles, and other. We previously disclosed Adjusted EBITDA
that conformed to calculations required by our debt covenants, which adjusted for certain items that required cash settlement that are not part of the
current definition. See Supplemental Non-GAAP Information in Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(4) 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.
1
Legg Mason AR2017 13
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FORWARD-LOOKING STATEMENTS.
We have made in this 2017 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 political and 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;
the impact, extent and timing of technological changes and the adequacy of intellectual property, information and cyber
security protection; and the introduction, withdrawal, success and timing of business initiatives, strategies and 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.
14
Legg Mason AR2017
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Table of Contents
EXECUTIVE OVERVIEW
Legg Mason, Inc., a holding company, together with its subsidiaries (collectively, "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, Singapore, Spain,
Switzerland and Taiwan. All references to fiscal 2017, 2016 or 2015, 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.
We also earn performance fees on alternative products that lock at the end of varying investment periods or in multiple-year
intervals. Per the terms of certain recent acquisitions, performance fees earned on pre-close assets under management
("AUM") of the acquired entities are fully passed through as compensation expense, and therefore have no impact on Net
Income (Loss) Attributable to Legg Mason, Inc. 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 for assets under advisement ("AUA"), and are generally calculated as a percentage of the assets in an
investment portfolio or as a percentage of new assets added to an investment portfolio. Our revenues, therefore, are dependent
upon the level of our AUM and 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 changes from
period to period primarily due to inflows and outflows of client assets and market performance as well as 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. In general, fees earned for asset management services are highest for alternative
assets, followed by equity assets, fixed income assets and liquidity assets. Accordingly, our revenues and average operating
revenue yields will be affected by the composition of our AUM, with changes in the relative level of alternative and equity
assets typically more significantly impacting our revenues and average operating revenue yields. Average operating revenue
yields are calculated as the ratio of annualized total operating revenue, less performance fees, to average AUM. In addition,
in the ordinary course of our business, we may reduce or waive investment management fees or total expenses, on certain
products or services for particular time periods to limit fund expenses, or for other reasons, and to help retain or increase
managed assets. Our industry continues to be impacted by the generally low growth and low return environment, with
continued migration from active to passive strategies (which tend to have lower fees), which, together with regulatory reform,
continue to put pressure on fees.
We have revenue sharing arrangements in place with certain 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 revenue-sharing arrangements, our asset management affiliates retain different percentages of revenues
to cover their costs. Other affiliates operate under budgetary processes. 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 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.
3
Legg Mason AR2017 15
Table of Contents
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, a portion of which is based upon revenue levels, non-compensation related
operating expense levels at revenue share-based affiliates, performance fees passed through as compensation expense, 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 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, interest rates, and changes in 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, including, in particular, passive products, and corresponding flows out of products in which we do have 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, technological changes, 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
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
- Performance
- Deliver compelling and consistent performance against both relevant benchmarks and the
products and services of our competitors
- Distribution
- Continue to maintain and enhance our top tier 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
16
Legg Mason AR2017
4
Table of Contents
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.
In connection with these strategic priorities:
• On April 13, 2016, we acquired a majority equity interest in Clarion Partners, LLC ("Clarion Partners"), a diversified
real estate firm headquartered in New York. Clarion Partners managed approximately $42 billion in AUM at closing,
across the real estate risk/return spectrum. During the years ended March 31, 2017 and 2016, we incurred acquisition-
related costs of $25.9 million and $2.8 million, respectively, in connection with this transaction, including $15.2
million in fiscal 2017 related to the implementation of an affiliate management equity plan for the management
team of Clarion Partners. See Note 11 of Notes to Consolidated Financial Statements for additional information
regarding the Clarion Partners management equity plan.
• On May 2, 2016, we acquired a majority equity interest in EnTrust Capital ("EnTrust") and combined it with The
Permal Group, Limited ("Permal"), our existing hedge fund platform to form EnTrustPermal. EnTrust is an
independent hedge fund investor and alternative asset manager headquartered in New York with approximately $10
billion in AUM at closing. During the years ended March 31, 2017 and 2016, we incurred transition-related costs
of $41.8 million and $43.3 million, respectively, and acquisition-related costs of $7.0 million and $3.5 million,
respectively, in connection with this combination. We expect to achieve approximately $35 million in annual savings
in fiscal 2018 from the pre-transaction cost structures of the two businesses.
• On August 17, 2016, we acquired an 82% equity interest in Financial Guard LLC ("Financial Guard"), an online
registered investment adviser and innovative technology-enabled wealth management and investment advice
platform.
• During fiscal 2017, we sold our ownership interests in two small, non-strategic investment managers and our share
of a joint venture for aggregate net proceeds of $19.5 million. These sales resulted in the disposition of $4.8 billion
of AUM and did not have a material impact on our results of operations.
• During fiscal 2017, we launched several exchange-traded fund ("ETF") products. We expect ETFs to be a growth
opportunity, as investor interest has tended to trend away from traditional mutual funds, and intend to continue to
focus on increasing our ETF product offerings during fiscal 2018.
See Note 2 of Notes to Consolidated Financial Statements for additional information regarding these acquisitions
and dispositions.
Net Income Attributable to Legg Mason, Inc. for the year ended March 31, 2017, was $227.3 million, or $2.18 per diluted
share, as compared to Net Loss Attributable to Legg Mason, Inc. of $25.0 million, or $0.25 per diluted share for the year
ended March 31, 2016. In addition to the transition-related and acquisition-related costs discussed above, Net Income (Loss)
Attributable to Legg Mason, Inc. for the years ended March 31, 2017 and 2016, included pre-tax impairment charges related
to intangible assets of $35 million, or $0.26 per diluted share, and $371.0 million, or $2.76 per diluted share, respectively;
pre-tax non-cash charges of $4.6 million and $21.4 million, respectively, related to the grant of equity units under the Royce
and Associates ("Royce") management equity plan; and pre-tax contingent consideration credit adjustments of $39.5 million
and $33.4 million, respectively. These items are more fully discussed below.
Average AUM and total revenues increased by approximately 5% and 8%, respectively, in fiscal 2017 as compared to fiscal
2016, as further discussed below. Total AUM increased during the year ended March 31, 2017, due to the acquisitions of
Clarion Partners and EnTrust and the impact of positive market performance and other, which were offset in part by net
client outflows in both liquidity and long-term AUM.
The following discussion and analysis provides additional information regarding our financial condition and results of
operations.
5
Legg Mason AR2017 17
Table of Contents
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
During fiscal 2017 all three major U.S. equity indices improved significantly and reached historic highs during the fiscal
year. Uncertainty regarding the U.S. presidential election and the timing of an increase in interest rates by the Federal
Reserve resulted in volatility during the first half of the fiscal year. While equity markets rallied following the U.S. presidential
election, economic and political uncertainty has continued to impact equity markets. In addition, economic and market
uncertainty were impacted by the shifting of political and military paradigms in both Europe and Asia. In June 2016, the
U.K. held a referendum in which voters approved an exit from the European Union, commonly referred to as "Brexit." The
announcement of Brexit had a temporary impact on domestic markets to date, but has created some volatility in international
and currency markets.
Our industry continues to be impacted by the generally low growth and low return environment, with continued migration
from active to passive strategies, which, together with regulatory reform, continues to put pressure on fees and is contributing
to the consolidation of products and managers on distribution platforms. For example, in the December 2016 quarter, active
U.S. mutual funds experienced $157 billion in outflows. Although active U.S. mutual fund outflows subsided during the
March 2017 quarter, it is likely the trend of asset flows into passive products will continue. These factors continue to create
significant flow pressure for active managers like ourselves.
All three major U.S. equity market indices increased significantly during fiscal 2017, after decreasing slightly during fiscal
2016, while bond indices were mixed, as illustrated in the table below:
% Change for the year ended
March 31:
2016
2015
2017
16.8 %
14.7 %
21.4 %
0.4 %
(1.9)%
(0.5)%
(0.4)%
(0.6)%
2.0 %
4.6 %
8.0 %
10.4 %
16.7 %
5.7 %
(3.7)%
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%. The Federal Reserve Board increased the target funds rate again in December 2016, from 0.50% to 0.75%,
and in March 2017 from 0.75% to 1.00%. While the economic outlook for the U.S. has remained positive in recent years,
it has been impacted by increased uncertainty. The financial environment in which we operate continues to reflect a heightened
level of sensitivity and continued pressure on our fees, as previously discussed, as we move into fiscal 2018.
18
Legg Mason AR2017
6
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,
2016
2017
2015
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
Non-Operating Income (Expense)
Interest income
Interest expense
Other income (expense), net
Non-operating income (expense) of
consolidated investment vehicles, net
Total non-operating income (expense)
Income (Loss) before Income Tax Provision
Income tax provision
Net Income (Loss)
Less: Net income (loss) attributable to
noncontrolling interests
32.0%
51.3
3.8
12.7
0.2
100.0
31.0 %
53.0
1.6
14.3
0.1
100.0
29.2%
54.8
3.0
12.8
0.2
100.0
48.6
17.3
7.2
3.9
0.9
1.2
6.3
85.4
14.6
0.2
(3.9)
1.4
0.5
(1.8)
12.8
2.9
9.9
2.0
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
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)%
7.9%
8.4%
Period to Period Change(1)
2017
Compared
to 2016
2016
Compared
to 2015
12%
5
n/m
(4)
n/m
8
16
(9)
6
(7)
n/m
(91)
10
(6)
n/m
n/m
n/m
n/m
n/m
(32)
n/m
n/m
n/m
n/m
n/m
—%
(9)
(50)
6
(61)
(6)
(2)
(8)
9
12
92
n/m
(18)
12
(90)
(25)
(17)
(70)
n/m
(42)
n/m
n/m
n/m
n/m
n/m
7
Legg Mason AR2017 19
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
Alternative
Liquidity
- Real Estate
- U.S. Managed Cash
- U.S. Municipal Cash
- Hedge Funds
- Listed
Infrastructure
- Large Cap Growth
- Large Cap Value
- Equity Income
- International Equity
- Small Cap Core
- Large Cap Core
- Sector Equity
- Small Cap Value
- Mid Cap Value
- Global Equity
- Emerging Markets Equity
- U.S. Intermediate Investment Grade
- U.S. Credit Aggregate
- Global Opportunistic Fixed Income
- Global Government
- U.S. Municipal
- U.S. Long Duration
- Global Fixed Income
- U.S. Limited Duration
- High Yield
- Emerging Markets Debt
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
Long-term separate account flows, net
Total long-term flows
Liquidity fund flows, net
Liquidity 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
2017
2016
2015
$
669.6
$
702.7
$
701.8
64.0
(65.4)
(0.2)
(1.6)
(27.8)
0.5
(27.3)
(28.9)
42.7
(1.3)
46.3
728.4
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
$
(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 $0.4 billion, $0.5 billion and $12.8 billion of client assets from AUM to AUA for fiscal 2017, 2016 and 2015,
$
$
(3)
respectively, and the reinvestment of dividends.
Includes $41.5 billion and $9.6 billion related to the acquisitions of Clarion Partners and EnTrust, respectively, offset in part by $4.8 billion related to the
disposition of two small investment managers and our share of a joint venture during the year ended March 31, 2017; $6.8 billion and $0.1 billion related to
the acquisitions of RARE Infrastructure and PK Investments, LLP ("PK Investments"), respectively, during the year ended March 31, 2016; and $9.5 billion
and $5.0 billion related to the acquisitions of Martin Currie and QS Investors, respectively, offset in part by $9.5 billion related to the disposition of Legg
Mason Investment Counsel and Trust ("LMIC"), for the year ended March 31, 2015.
AUM at March 31, 2017 was $728.4 billion, an increase of $58.8 billion, or 9%, compared to March 31, 2016. Total net
client outflows were $28.9 billion, consisting of net client outflows from the liquidity and long-term asset classes of $27.3
billion and $1.6 billion, respectively. Long-term asset net outflows were comprised of alternative and equity net outflows
of $7.2 billion and $5.2 billion, respectively, partially offset by fixed income net inflows of $10.8 billion. Beginning in
fiscal 2017, we now present alternative assets as a separate asset class of our AUM. The alternative asset class consists of
all AUM managed by Clarion Partners, EnTrustPermal, RARE Infrastructure, and Glouston Capital Partners, prior to its
sale on March 31, 2017. All prior periods have been revised to present the alternative asset class. Alternative net outflows
were primarily in products managed by EnTrustPermal and RARE Infrastructure. Equity net outflows were primarily in
8
20
Legg Mason AR2017
Table of Contents
products managed by Royce, QS Investors and Brandywine Global Investment Management, LLC ("Brandywine"), offset
in part by equity net inflows at Martin Currie. Fixed income net inflows were primarily in products managed by Western
Asset Management Company ("Western Asset"), offset in part by fixed income net outflows at Brandywine. We generally
earn higher fees and profits on alternative and equity AUM, and outflows in those asset classes will more negatively impact
our revenues and Net Income (Loss) Attributable to Legg Mason, Inc. than would outflows in the fixed income or liquidity
asset classes. Market performance and other was $42.7 billion and the negative impact of foreign currency exchange rate
fluctuations was $1.3 billion. Acquisitions (dispositions), net, totaled $46.3 billion, and included $41.5 billion related to the
acquisition of Clarion Partners in April 2016 and $9.6 billion related to the acquisition of EnTrust in May 2016, offset in
part by $4.8 billion related to the disposition of two small investment managers and our portion of a joint venture.
AUM at March 31, 2016, was $669.6 billion, a decrease of $33.1 billion, or 5%, 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. Long-term asset net outflows were comprised of equity and alternative net outflows of $9.7
billion and $1.9 billion, respectively, offset by fixed income net inflows of $0.4 billion. Equity net outflows were primarily
in products managed by Royce and ClearBridge, offset in part by equity net inflows at QS Investors. Alternative net outflows
were primarily in products managed by legacy Permal. Fixed income net inflows were primarily in products managed by
Brandywine, offset in part by fixed income net outflows at Western Asset. 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.
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 was as follows:
Equity
Fixed Income
Alternative
Total long-term assets
Liquidity
Total
n/m - not meaningful
2017
$ 179.8
394.3
67.9
642.0
86.4
$ 728.4
% of
Total
2016
% of
Total
2015
% of
Total
25% $ 162.3
54
372.3
9
22.7
88
557.3
12
112.3
100% $ 669.6
24% $ 186.2
370.1
56
19.2
3
575.5
83
17
127.2
100% $ 702.7
26%
53
3
82
18
100%
Average AUM by asset class (in billions) for the years ended March 31 was as follows:
Equity
Fixed Income
Alternative
Total long-term assets
Liquidity
Total
n/m - not meaningful
2017
$ 167.6
386.5
66.9
621.0
99.2
$ 720.2
% of
Total
2016
% of
Total
2015
% of
Total
23% $ 173.4
54
367.2
9
21.1
86
561.7
14
123.1
100% $ 684.8
25% $ 181.3
361.4
54
19.8
3
562.5
82
140.0
18
100% $ 702.5
26%
51
3
80
20
100%
% Change
2017
Compared
to 2016
2016
Compared
to 2015
11%
6
n/m
15
(23)
9
(13)%
1
18
(3)
(12)
(5)
% Change
2017
Compared
to 2016
2016
Compared
to 2015
(3)%
5
n/m
11
(19)
5
(4)%
2
7
—
(12)
(3)
9
Legg Mason AR2017 21
Table of Contents
The component changes in our AUM by asset class (in billions) for the fiscal years ended March 31, 2017, 2016 and 2015,
were as follows:
Equity
$
171.9
Fixed
Income Alternative
19.7
$
$
360.0
Total
Long-
Term
$
551.6
Liquidity
150.2
$
Total
$
701.8
28.4
(31.4)
0.7
—
(2.3)
11.7
(2.1)
7.0
186.2
21.8
(34.4)
2.9
—
(9.7)
(14.2)
(0.1)
0.1
162.3
42.1
(26.7)
3.5
—
18.9
7.8
(14.6)
(2.0)
370.1
27.4
(25.2)
(1.8)
—
0.4
0.6
1.2
—
372.3
1.6
(3.1)
1.4
—
(0.1)
0.3
(0.7)
—
19.2
1.1
(2.7)
(0.3)
—
(1.9)
(1.8)
0.4
6.8
22.7
72.1
(61.2)
5.6
—
16.5
19.8
(17.4)
5.0
575.5
50.3
(62.3)
0.8
—
(11.2)
(15.4)
1.5
6.9
557.3
—
—
(0.9)
(21.3)
(22.2)
0.3
(1.1)
—
127.2
—
—
0.2
(15.1)
(14.9)
0.1
(0.1)
—
112.3
72.1
(61.2)
4.7
(21.3)
(5.7)
20.1
(18.5)
5.0
702.7
50.3
(62.3)
1.0
(15.1)
(26.1)
(15.3)
1.4
6.9
669.6
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 (1)
Impact of foreign exchange
Acquisitions (dispositions), net (2)
March 31, 2015
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other (1)
Impact of foreign exchange
Acquisitions(2)
March 31, 2016
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
27.0
(27.0)
(5.2)
—
(5.2)
25.4
(0.7)
(2.0)
179.8
30.8
(28.6)
8.6
—
10.8
12.5
(0.9)
(0.4)
394.3
6.2
(9.8)
(3.6)
—
(7.2)
3.7
(0.2)
48.9
67.9
64.0
(65.4)
(0.2)
—
(1.6)
41.6
(1.8)
46.5
642.0
—
—
0.5
(27.8)
(27.3)
1.1
0.5
(0.2)
86.4
64.0
(65.4)
0.3
(27.8)
(28.9)
42.7
(1.3)
46.3
728.4
Net client cash flows
Market performance and other (1)
Impact of foreign exchange
Acquisitions (dispositions), net (2)
$
March 31, 2017
(1) Other is primarily the reclassification of client assets from AUM to AUA for fiscal 2017, 2016 and 2015 of $0.4 billion, $0.5 billion and $12.8 billion,
$
$
$
$
$
(2)
respectively, and the reinvestment of dividends.
Includes $41.5 billion and $9.6 billion related to the acquisitions of Clarion Partners and EnTrust, respectively, offset in part by $4.8 billion related to the
disposition of two small investment managers and our portion of a joint venture during the year ended March 31, 2017; $6.8 billion and $0.1 billion related
to the acquisitions of RARE Infrastructure and PK Investments, respectively, during the year ended March 31, 2016; and $9.5 billion and $5.0 billion related
to the acquisitions of Martin Currie and QS Investors, respectively, offset in part by $9.5 billion related to the disposition of LMIC, for the year ended March
31, 2015.
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, real estate and other privately placed investment funds, and funds-of-hedge funds.
22
Legg Mason AR2017
10
Table of Contents
The component changes in our AUM by distribution channel (in billions) for the years ended March 31, 2017, 2016 and
2015, were as follows:
March 31, 2014
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, 2015
Net client cash flows, excluding liquidity funds
Liquidity fund flows, net
Net client cash flows
Market performance and other
Impact of foreign exchange
Acquisitions
March 31, 2016
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, 2017
Global
Distribution(1)
247.4
$
16.4
—
16.4
11.9
(5.7)
—
270.0
(3.5)
—
(3.5)
(13.1)
1.2
—
254.6
8.9
—
8.9
22.7
(0.6)
—
285.6
$
Affiliate/Other
454.4
$
(0.8)
(21.3)
(22.1)
8.2
(12.8)
5.0 (2)
432.7
(7.5)
(15.1)
(22.6)
(2.2)
0.2
6.9 (2)
415.0
(10.0)
(27.8)
(37.8)
20.0
(0.7)
46.3 (2)
442.8
$
Total
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
(1.1)
(27.8)
(28.9)
42.7
(1.3)
46.3
728.4
$
$
(1) Excludes $15.9 billion, $10.3 billion, and $8.2 billion of AUA as of March 31, 2017, 2016, and 2015, respectively. Net client cash flows for the years ended
March 31, 2017, 2016, and 2015, excludes $3.7 billion, $2.1 billion and $2.8 billion of AUA net inflows.
(2) Includes $41.5 billion and $9.6 billion related to the acquisitions of Clarion Partners and EnTrust, respectively, offset in part by $4.8 billion related to the
disposition of two small investment managers and our share of a joint venture during the year ended March 31, 2017; $6.8 billion and $0.1 billion related to
the acquisitions of RARE Infrastructure and PK Investments, respectively, during the year ended March 31, 2016; and $9.5 billion and $5.0 billion related
to the acquisitions of Martin Currie and QS Investors, respectively, offset in part by $9.5 billion related to the disposition of LMIC, for the year ended March
31, 2015.
Operating Revenue Yield
Our overall operating revenue yield, less performance fees, across all asset classes and distribution channels was 39 basis
points, 38 basis points and 39 basis points for the years ended March 31, 2017, 2016, and 2015, respectively. Fees for
managing alternative and equity assets are generally higher, with alternative assets averaging 73 basis points, 105 basis
points and 140 basis points for the years ended March 31, 2017, 2016, and 2015, respectively, and equity assets averaging
67 basis points, 70 basis points and 73 basis points for the years ended March 31, 2017, 2016, and 2015, respectively. The
average fee rate for managing alternative assets declined over the last year due to the acquisitions of Clarion Partners in
April 2016, EnTrust in May 2016, and RARE Infrastructure in October 2015, whose products typically earn lower average
fees than our legacy alternative asset products, while the average fee rate for managing 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 27 basis points, 29 basis points and 28 basis points
for the years ended March 31, 2017, 2016 and 2015, respectively, and liquidity assets, which averaged approximately 12
basis points, 9 basis points and 7 basis points for the years ended March 31, 2017, 2016 and 2015, respectively. The average
fee rate for managing liquidity assets for each of the years ended March 31, 2017, 2016 and 2015, reflects the impact of
current advisory fee waivers due to the low interest rate environment. The average fee rate for managing liquidity assets
has increased over the last year due to a reduction in fee waivers. As a result of withdrawals and interest rate increases, fee
waivers for competitive and regulatory reasons decreased to approximately $22 million for the year ended March 31, 2017,
as compared to approximately $70 million for the year ended March 31, 2016. We do not expect fee waivers for competitive
and regulatory reasons to continue in fiscal 2018. Equity assets are primarily managed by ClearBridge, Royce, Brandywine,
11
Legg Mason AR2017 23
Table of Contents
QS Investors, and Martin Currie; alternative assets are managed by Clarion Partners, EnTrustPermal, and RARE
Infrastructure; fixed income assets are primarily managed by Western Asset and Brandywine; 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 each of the years ended March 31, 2017 and 2016, and approximately
50 basis points for the year ended March 31, 2015, while fee rates for assets distributed through the Affiliate/Other channel
averaged approximately 35 basis points for each of the years ended March 31, 2017, 2016, and 2015.
Investment Performance
Overall investment performance of our AUM for the years ended March 31, 2017, 2016 and 2015, was mixed compared to
relevant benchmarks.
Year ended March 31, 2017
For the year ended March 31, 2017, U.S. indices produced positive returns. The best performing was the Russell 2000,
which returned 26.2%. These returns were achieved in a volatile economic environment defined by the decision of the U.K.
to leave the European Union and the newly elected administration in the U.S.
In the fixed income markets, the Federal Reserve raised its target rate by 0.25% in both December 2016 and March 2017,
continuing the Federal Reserve's steps toward monetary policy normalization. Expectations of future Federal Reserve interest
rate increases remained unchanged. 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, 2017, was U.S. Government bonds, as measured
by the Barclays U.S. Government Index, which declined 1.3%. The best performing fixed income sector for the year ended
March 31, 2017, was high yield bonds as measured by the Barclays U.S. High Yield Index, which returned 16.4%.
Year ended March 31, 2016
For the year ended March 31, 2016, U.S. indices produced mixed returns. The best performing index was the Dow Jones
Industrial Average, which returned 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%.
24
Legg Mason AR2017
12
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, 2017, 2016 and 2015, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
As of March 31, 2017
As of March 31, 2016
As of March 31, 2015
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)
79%
71%
80%
88%
48%
66%
86%
82%
67%
84%
86%
88%
70%
35%
27%
19%
62%
19%
95%
51%
44%
70%
23%
19%
86%
30%
68%
63%
24%
10%
65%
11%
74%
26%
94%
42%
58%
33%
61%
88%
53%
31%
76%
68%
28%
58%
65%
80%
Equity:
Large cap
Small cap
Total equity
(includes other
equity)
Fixed income:
U.S. taxable
94%
86%
87%
84%
U.S. tax-exempt
100% 100% 100% 100%
Global taxable
Total fixed income
Alternative
75%
89%
45%
69%
82%
84%
75%
84%
88%
88%
86%
65%
31%
100%
11%
29%
20%
78%
0%
75%
72%
42%
87%
100%
85%
87%
55%
79%
100%
84%
82%
96%
72%
100%
76%
75%
78%
94%
100%
89%
93%
81%
92%
100%
88%
91%
98%
88%
100%
83%
87%
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, 2017, 2016 and 2015, for the trailing 1-year, 3-year, 5-year, and 10-year periods:
As of March 31, 2017
As of March 31, 2016
As of March 31, 2015
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)
65%
63%
70%
78%
48%
61%
72%
65%
55%
65%
63%
70%
Equity:
Large cap
Small cap
Total equity
(includes other
equity)
Fixed income:
U.S. taxable
U.S. tax-exempt
Global taxable
Total fixed income
Alternative
n/a - not applicable
60%
67%
62%
21%
81%
26%
82%
60%
47%
36%
69%
15%
89%
20%
52%
60%
46%
15%
82%
19%
73%
21%
69%
59%
57%
49%
64%
75%
45%
52%
67%
54%
38%
57%
53%
63%
92%
43%
50%
75%
86%
60%
78%
79%
85%
59%
82%
78%
98% 100% 100%
84%
87%
61%
82%
n/a
76%
11%
30%
51%
0%
83%
51%
75%
73%
84%
63%
83%
78%
100%
100%
81%
88%
50%
81%
n/a
80%
83%
79%
80%
87%
57%
86%
78%
86%
60%
81%
77%
100%
100%
100%
86%
88%
55%
84%
n/a
(1) For purposes of investment performance comparisons, strategies are an aggregation of 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, 2017, 2016 and 2015, 88%, 91% and 90% of total AUM is included in strategy AUM, respectively, although not all strategies have
3-year, 5-year, and 10-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 which are not
managed in a separate account format, performance comparisons are based on net-of-fee performance. Funds-of-hedge funds generally do not have
specified benchmarks. For purposes of this comparison, performance of those products is net of fees, and is compared to the relevant HFRX Index.
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, 2017, 2016 and 2015, the U.S. long-term mutual
fund assets represented in the data accounted for 18%, 19% and 21%, respectively, of our total AUM. The performance of our U.S. long-term
mutual fund assets is included in the strategies.
13
Legg Mason AR2017 25
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,
2017, constituted an aggregate of approximately $426 billion, or approximately 58% of our total AUM. The most meaningful
exclusion of funds are our alternative fund strategies, which primarily involve privately placed hedge funds and privately
placed real estate funds, and represent only 5% of our total AUM as of March 31, 2017, 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
17.76%
1.49%
14.99%
(0.77)%
12.91%
(4.26)%
14.13%
(3.04)%
18.00%
0.83%
26.41%
6.44%
16.03%
(3.19)%
18.76%
(0.46)%
22.35%
(3.87)%
22.39%
(0.64)%
20.92%
(5.30)%
27.39%
1.17%
24.77%
(1.45)%
5.80%
(5.10)%
11.68%
0.41%
8.54%
(1.83)%
8.33%
(2.04)%
6.68%
(3.69)%
7.66%
(0.92)%
7.90%
(0.77)%
8.00%
(0.67)%
6.37%
(0.85)%
3.24%
13.46%
0.24%
15.09%
1.77%
11.69%
(1.61)%
11.22%
(2.08)%
11.76%
(1.54)%
11.30%
(1.78)%
12.14%
(0.99)%
11.88%
(1.25)%
11.05%
(1.30)%
9.87%
7.83%
(1.21)%
9.07%
(0.06)%
7.55%
0.04%
6.46%
(1.05)%
2.01%
(5.50)%
5.20%
(0.74)%
6.47%
0.54%
n/a
n/a
6.76%
(0.36)%
8.00%
(3.48)%
(2.23)%
(0.06)%
4.03%
9.33%
6.25%
(3.19)%
(3.02)%
(0.87)%
5.30%
8.66%
(1.92)%
(3.69)%
5.57%
9.46%
(1.65)%
(2.89)%
7.99%
0.87%
8.13%
1.01%
12.03%
1.97%
8.27%
1.88%
10.32%
(0.17)%
8.62%
(0.78)%
11.67%
(0.15)%
10.20%
(1.66)%
9.60%
(0.76)%
13.70%
0.14%
10.91%
1.96%
9.91%
3.34%
11.65%
0.01%
11.71%
2.02%
9.38%
1.88%
ClearBridge Aggressive Growth Fund
10/24/1983
Russell 3000 Growth
ClearBridge Large Cap Growth Fund
8/29/1997
Russell 1000 Growth
ClearBridge Appreciation Fund
S&P 500
ClearBridge Dividend Strategy
S&P 500
ClearBridge Value Trust
S&P 500
ClearBridge All Cap Value
Russell 3000 Value
3/10/1970
11/6/1992
4/16/1982
11/12/1981
ClearBridge Large Cap Value Fund
12/31/1988
Russell 1000 Value
Legg Mason Brandywine Diversified Large Cap
9/7/2010
12/15/1993
7/1/1998
6/30/1967
12/31/1991
5/1/1998
Value Fund
Russell 1000 Value
Small Cap
Royce Total Return Fund
Russell 2000
ClearBridge Small Cap Growth
Russell 2000 Growth
Royce Pennsylvania Mutual
Russell 2000
Royce Premier Fund
Russell 2000
Royce Special Equity
Russell 2000
n/a - not applicable
26
Legg Mason AR2017
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
14
Annualized Absolute/Relative Total Return vs. Benchmark
Inception
Date
Performance
Type(2)
1-year
3-year
5-year
10-year
Inception
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
7/8/1998
Absolute
Relative
9/4/1990
Absolute
Relative
Western Asset Total Return Unconstrained
7/6/2006
Absolute
Barclays US Aggregate
Relative
Western Asset Short Term Bond Fund
11/11/1991
Absolute
Citi Treasury Government/Credit 1-3 YR
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
Western Asset Inflation Index Plus Bond
3/1/2001
Absolute
4.06%
3.62%
2.48%
2.04%
7.68%
7.24%
2.15%
1.42%
1.97%
1.55%
6.96%
4.00%
0.49%
4.26%
1.58%
3.78%
1.10%
2.80%
0.12%
1.08%
0.15%
2.78%
0.77%
4.53%
1.01%
0.71%
8.72%
6.64%
2.36%
1.33%
1.10%
3.60%
0.05%
4.72%
4.22%
1.10%
2.30%
1.84%
1.69%
1.78%
3.24%
2.78%
(0.05)%
(0.20)%
9.44%
8.59%
2.23%
5.88%
4.84%
4.50%
4.11%
1.77%
3.46%
1.12%
3.19%
0.85%
1.24%
0.32%
2.78%
0.90%
5.24%
1.54%
0.21%
(0.76)%
14.01%
8.93%
5.59%
5.58%
1.31%
4.86%
0.59%
4.36%
0.09%
1.55%
6.18%
1.21%
6.86%
0.73%
4.68%
0.18%
3.53%
(0.79)%
(0.61)%
4.51%
0.75%
5.06%
(0.23)%
3.55%
(0.69)%
n/a
n/a
5.94%
5.72%
0.63%
6.49%
0.17%
4.85%
(0.38)%
14.29%
9.28%
7.25%
1.76%
1.58%
3.30%
0.06%
n/a
n/a
2.58%
3.16%
3.03%
2.92%
0.52%
1.10%
2.74%
1.32%
0.55%
4.74%
0.41%
n/a
n/a
5.56%
2.53%
n/a
n/a
3.81%
0.78%
4.23%
2.72%
(0.01)%
7.61%
0.46%
5.91%
5.44%
5.43%
2.57%
3.29%
3.18%
4.07%
0.64%
6.34%
(0.43)%
(1.10)%
(0.65)%
5.15%
5.23%
7.13%
5.74%
0.69%
4.12%
0.69%
2.97%
6.63%
0.48%
n/a
n/a
5.85%
6.20%
0.37%
4.18%
0.38%
9.40%
0.38%
3.20%
0.29%
(1.56)%
(1.38)%
(2.18)%
(1.92)%
Barclays US TIPS
Relative
(0.99)%
(1.32)%
Western Asset Mortgage Defined Opportunity Fund Inc.
2/24/2010
Absolute
12.47%
BOFAML Floating Rate Home Loan Index
Relative
9.39%
Western Asset High Yield Fund
Barclays US Corp High Yield
9/28/2001
Absolute
18.17%
Relative
(2.20)%
(1.23)%
(1.52)%
(1.40)%
Western Asset Adjustable Rate Income
6/22/1992
Absolute
Citi T-Bill 6-Month
U.S. Tax-Exempt
Relative
Western Asset Managed Municipals Fund
3/4/1981
Absolute
Barclays Municipal Bond
Global Taxable
Relative
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
(0.07)%
(0.61)%
Citi World Government Bond
Relative
3.58%
Legg Mason Western Asset Global Multi Strategy Fund
8/31/2002
Absolute
10.87%
50% Bar. Global Agg./ 25% Bar. HY 2%/25% JPM EMBI +
Relative
6.09%
Western Asset Global High Yield Bond Fund
2/22/1995
Absolute
17.56%
0.59%
2.95%
0.51%
2.10%
Barclays Global High Yield
Relative
Legg Mason Western Asset Australian Bond Trust
6/30/1983
Absolute
UBS Australian Composite Bond Index
Relative
Legg Mason Western Asset Global Core Plus Bond Fund
12/31/2010
Absolute
4.31%
2.59%
0.50%
0.67%
5.10%
0.12%
3.44%
Barclays Global Aggregate Index
Relative
(0.42)%
(0.17)%
Western Asset Emerging Markets Debt
10/17/1996
Absolute
11.11%
3.55%
JPM EMBI Global
Liquidity
Relative
2.29%
(2.18)%
(2.28)%
(1.06)%
Western Asset Institutional Liquid Reserves Ltd.
12/31/1989
Absolute
Citi 3-Month T-Bill
Relative
0.64%
0.30%
0.31%
0.16%
0.24%
0.13%
0.93%
0.32%
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.
15
Legg Mason AR2017 27
Table of Contents
Assets Under Advisement
As of March 31, 2017, 2016 and 2015, AUA was approximately $43 billion, $39 billion and $35 billion, respectively. AUA
as of March 31, 2017 was comprised of approximately $18 billion related to QS Investors, approximately $12 billion related
to ClearBridge, approximately $10 billion related to Western Asset, approximately $2 billion related to EnTrustPermal, and
approximately $1 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 15 basis points and 10 basis points for the years ended
March 31, 2017 and 2016, respectively, and was in the low single digit basis points for the year ended March 31, 2015. The
increase in the average fee rate from fiscal 2015 to fiscal 2016, was due to the redemption of approximately $80 billion of
very low fee AUA by a single client in the quarter ended March 31, 2015.
RESULTS OF OPERATIONS
In accordance with financial accounting standards on consolidation, we consolidate and separately identify certain sponsored
investment products. The consolidation of these investment products 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 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 products.
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,
2016
2017
2015
2017 Compared to
2016
$ Change % Change
2016 Compared to
2015
$ Change % Change
Investment advisory fees:
Separate accounts
Funds
Performance fees
Distribution and service fees
Other
Total Operating Revenues
n/m - not meaningful
$
$
925.2
1,482.0
108.3
366.7
4.7
826.1
1,409.0
42.0
381.5
2.2
$ 2,886.9 $ 2,660.8
$
$
824.2
1,544.5
83.5
361.2
5.7
$ 2,819.1 $
99.1
73.0
66.3
(14.8)
2.5
226.1
12% $
5
n/m
(4)
n/m
8
$
1.9
(135.5)
(41.5)
20.3
(3.5)
(158.3)
—%
(9)
(50)
6
(61)
(6)
Total Operating Revenues for the year ended March 31, 2017, were $2.89 billion, an increase of 8% from $2.66 billion for
the year ended March 31, 2016. The increase was primarily due to incremental revenues related to the acquisitions of Clarion
Partners and EnTrust and the inclusion of a full year of revenues of RARE Infrastructure, which was acquired in October
2015. Total operating revenues for the year ended March 31, 2017, included $60.8 million of performance fees earned by
Clarion Partners that are passed through to employees as compensation, per the terms of the acquisition agreement. Our
operating revenue yield, excluding performance fees, increased to 39 basis points in the year ended March 31, 2017, compared
to 38 basis points in the year ended March 31, 2016, as average long-term AUM comprised a higher percentage of total
average AUM for the year ended March 31, 2017, as compared to the year ended March 31, 2016.
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 average long-term AUM 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 the year ended March 31, 2015.
28
Legg Mason AR2017
16
Table of Contents
Investment Advisory Fees from Separate Accounts
For the year ended March 31, 2017, Investment advisory fees from separate accounts increased $99.1 million, to $925.2
million, as compared to $826.1 million for the year ended March 31, 2016. Of this increase, $60.2 million was due to Clarion
Partners after it was acquired in April 2016, $35.0 million was due to EnTrust after it was acquired in May 2016, $14.8
million was due to higher average fixed income assets managed by Western Asset and Brandywine and $12.9 million was
due to a full year of results of RARE Infrastructure, which was acquired in October 2015. These increases were offset in
part by a decrease of $15.2 million due to lower average equity assets managed by Martin Currie, Brandywine and QS
Investors and a decrease of $11.6 million due to lower average alternative assets managed by legacy Permal.
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 the
inclusion of 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 legacy 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.
Investment Advisory Fees from Funds
For the year ended March 31, 2017, Investment advisory fees from funds increased $73.0 million, or 5%, to $1.48 billion,
as compared to $1.41 billion for the year ended March 31, 2016, primarily due to increases of $125.3 million due to Clarion
Partners after it was acquired in April 2016, $63.6 million due to EnTrust after it was acquired in May 2016, $22.0 million
due to higher average equity assets managed by Martin Currie, $13.7 million due to fees from liquidity assets, largely related
to a reduction in fee waivers on liquidity funds managed by Western Asset, $9.7 million primarily due to including a full
year of results for RARE Infrastructure, which was acquired in October 2015, and $6.0 million due to higher average fixed
income assets managed by Western Asset. These increases were offset in part by decreases of $84.7 million due to lower
average alternative assets managed by legacy Permal, $73.5 million due to lower average equity assets managed by Royce
and ClearBridge, and $11.6 million due to lower average fixed income assets managed by Brandywine.
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 legacy Permal and approximately
$28 million was related to revenues which, due to a change in the distributor for certain funds in May 2015, were no longer
included in advisory fee revenue. Revenues related to these funds were included in Distribution and service fees beginning
in 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.
Investment Advisory Performance Fees
Of our total AUM as of March 31, 2017, 2016, and 2015, approximately 11%, 7%, and 7% was in accounts that were eligible
to earn performance fees. For the year ended March 31, 2017, Investment advisory performance fees increased $66.3 million
to $108.3 million, as compared to $42.0 million for the year ended March 31, 2016, primarily due to $60.8 million in
performance fees earned by Clarion Partners on assets invested with them prior to the closing in April 2016, fees earned by
EnTrust which was acquired in May 2016, and higher fees earned on assets managed by Brandywine and Western Asset,
offset in part by lower fees earned on assets managed by legacy Permal. Performance fees earned on pre-close AUM at
Clarion Partners (which accounts for approximately 35% of our performance fee eligible AUM as of March 31, 2017) are
fully passed through to the Clarion Partners management team, per the terms of the acquisition agreement, and recorded as
compensation expense, and therefore have no impact on Net Income (Loss) Attributable to Legg Mason, Inc. The pass
through of Clarion Partners performance fees only applies to historic AUM in place as of the closing of the acquisition. We
expect the pass through of performance fees to phase out approximately five years post-closing.
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
legacy Permal and Brandywine.
17
Legg Mason AR2017 29
Table of Contents
Distribution and Service Fees
For the year ended March 31, 2017, Distribution and service fees decreased $14.8 million, or 4%, to $366.7 million, as
compared to $381.5 million for the year ended March 31, 2016, primarily due to a decrease of $21.6 million related to a
decline in average mutual fund AUM subject to distribution and service fees, offset in part by an increase of $9.4 million in
advisement fees associated with our AUA.
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
which was 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.
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,
2017 Compared to
2016
2016 Compared to
2015
2017
2016
$ 1,374.4 $ 1,172.6
32.2
1,204.8
545.7
197.9
122.6
5.0
27.3
1,401.7
499.1
208.9
113.7
26.2
35.0
180.1
371.0
163.0
$ 2,464.7 $ 2,610.0
2015
$ 1,208.2
24.6
1,232.8
594.8
182.4
109.7
2.6
—
198.6
$ 2,320.9
$
Change
201.8
$
(4.9)
196.9
(46.6)
11.0
(8.9)
21.2
(336.0)
17.1
(145.3)
$
%
Change
$
Change
17% $
(15)
16
(9)
6
(7)
n/m
(91)
10
(6)
$
(35.6)
7.6
(28.0)
(49.1)
15.5
12.9
2.4
371.0
(35.6)
289.1
%
Change
(3)%
31
(2)
(8)
8
12
92
n/m
(18)
12
Compensation and benefits
Transition-related compensation
Total Compensation and Benefits
Distribution and servicing
Communications and technology
Occupancy
Amortization of intangible assets
Impairment charges
Other
Total Operating Expenses
n/m - not meaningful
Total Operating Expenses for the year ended March 31, 2017, decreased $145.3 million, or 6%, to $2.46 billion, as compared
to $2.61 billion for the year ended March 31, 2016. The decrease was primarily due to a reduction in intangible asset
impairment charges of $336 million during the year ended March 31, 2017, offset in part by an increase in Compensation
and benefits, as further discussed below. 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.
Operating expenses for the years ended March 31, 2017, 2016, and 2015, incurred at the investment management affiliate
level comprised approximately 70% of total operating expenses in each year, excluding impairment charges, which are
deemed to be corporate expenses. The remaining operating expenses (other than impairment charges) are comprised of
corporate costs, including costs of our global distribution operations.
30
Legg Mason AR2017
18
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,
2017
2016
$1,024.9 $ 915.8
2015
$ 976.9
2017 Compared to
2016
2016 Compared to
2015
$
Change
109.1
$
%
Change
$
Change
%
Change
12% $ (61.1)
(6)%
245.5
36.3
19.8
60.8
232.6
36.2
21.4
—
214.7
31.8
—
—
12.9
0.1
(1.6)
60.8
6
—
n/m
n/m
17.9
4.4
—
—
8
14
—
—
14.4
(1.2)
$1,401.7 $1,204.8
9.4
$ 1,232.8 $
15.6
196.9
n/m
16
(10.6)
$ (28.0)
n/m
(2)
Salaries and incentives
Benefits and payroll taxes (including
deferred compensation)
Transition and severance costs
Management equity plan charges
Performance fee pass through
Gains (losses) on deferred
compensation and seed capital
investments
Total Compensation and Benefits
n/m - not meaningful
Total Compensation and Benefits for the year ended March 31, 2017, increased 16% to $1.40 billion, as compared to $1.20
billion for the year ended March 31, 2016; and 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:
•
Salaries and incentives increased $109.1 million, to $1,024.9 million for the year ended March 31, 2017, as compared
to $915.8 million for the year ended March 31, 2016, driven by a $92.1 million increase in net compensation at
investment affiliates, primarily due to the acquisitions of Clarion Partners in April 2016 and EnTrust in May 2016,
offset in part by the impact of a reduction in operating revenue at revenue share-based affiliates, which creates an
offsetting decrease in compensation per the applicable revenue share arrangements.
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.
• Benefits and payroll taxes increased $12.9 million, to $245.5 million for the year ended March 31, 2017, as compared
to $232.6 million for the year ended March 31, 2016, primarily due to the acquisitions of Clarion Partners in April
2016 and EnTrust in May 2016, offset in part by a decrease at legacy Permal.
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.
• Transition and severance costs remained relatively flat at $36.3 million for the year ended March 31, 2017, as
compared to $36.2 million for the year ended March 31, 2016, with $27.3 million and $32.2 million as of March
31, 2017 and 2016, respectively, associated with the previously discussed restructuring of Permal for the combination
with EnTrust. The remaining amounts in each period were primarily comprised of severance costs related to corporate
and distribution personnel.
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 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.
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Legg Mason AR2017 31
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• Management equity plan charges for the year ended March 31, 2017, were comprised of $15.2 million associated
with the implementation of a management equity plan for the management team of Clarion Partners, as previously
discussed, and $4.6 million associated with an additional grant of equity units under the Royce management equity
plan.
Management equity plan charges for the year ended March 31, 2016, represent the charge arising from the initial
grant of equity units under the Royce management equity plan.
See Note 11 of Notes to Consolidated Financial Statement for additional information regarding management equity
plans.
•
Performance fee pass through represents Clarion Partners performance fees that are fully passed through to Clarion
Partners employees as compensation expense, as discussed above.
For the year ended March 31, 2017, compensation as a percentage of operating revenues increased to 48.6% from 45.3%
for the year ended March 31, 2016, primarily due to the impact of the acquisition of Clarion Partners in April 2016, including
the impact of performance fees earned by Clarion Partners that are passed through fully as compensation expense, and the
impact of the charges associated with the implementation of the Clarion Partners management equity plan and the grant of
additional units under the Royce management equity plan, offset by the impact of decreased revenues at certain revenue
share-based affiliates that retain a relatively higher percentage of revenues as compensation and the impact of the charge
associated with the initial Royce management equity plan grant during fiscal 2016.
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 initial 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 fiscal 2016, 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.
Distribution and Servicing
For the year ended March 31, 2017, Distribution and servicing expenses decreased 9% to $499.1 million, as compared to
$545.7 million for the year ended March 31, 2016, 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, 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.
Communications and Technology
For the year ended March 31, 2017, Communications and technology expense increased 6% to $208.9 million, as compared
to $197.9 million for the year ended March 31, 2016, as a result of an increase in costs related to data management and
technology maintenance and consulting, due in part to the addition of expenses related to Clarion Partners after its acquisition
in April 2016 and EnTrust after its acquisition in May 2016.
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 fiscal 2016, and the addition of Martin Currie, which was acquired in October 2014.
Occupancy
For the year ended March 31, 2017, Occupancy expense decreased 7% to $113.7 million, as compared to $122.6 million for
the year ended March 31, 2016. Net real estate related charges of $12.3 million were recognized during the year ended
March 31, 2017, in connection with the restructuring of Permal for the combination with EnTrust, and were offset in part
by a $2.7 million reduction to a previously existing lease reserve, while real estate related charges of $17.7 million were
recognized during the year ended March 31, 2016, in connection with reduced space requirements and the restructuring of
Permal for the combination with EnTrust.
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Legg Mason AR2017
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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 fiscal 2016 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 fiscal 2015 in connection with the integration of Batterymarch and LMGAA into
QS Investors.
Amortization
For the year ended March 31, 2017, Amortization of intangible assets increased to $26.2 million, as compared to $5.0 million
for the year ended March 31, 2016, due to additional amortization expense related to the acquisitions of Clarion Partners in
April 2016, EnTrust in May 2016, and RARE Infrastructure in October 2015.
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.
Impairment Charges
Impairment charges were $35.0 million for the year ended March 31, 2017, as compared to $371.0 million for the year ended
March 31, 2016. The impairment charges recognized during fiscal 2017, were comprised of $18.0 million related to the
RARE Infrastructure amortizable management contracts asset and $17.0 million related to the Permal trade name asset. The
impairment of the RARE Infrastructure amortizable management contracts asset resulted from client attrition, the related
decline in revenues, and a reduction in the estimated remaining useful life of the contracts from 11 years to eight years. The
impairment of the Permal trade name resulted from a decrease in revenues and a reduction in the royalty rate, reflecting a
decline in the value of the separate Permal trade name due to the combination with EnTrust.
The impairment charges recognized in fiscal 2016, were comprised of $364.0 million related to the legacy Permal indefinite-
life fund-of-hedge funds management contracts asset and $7.0 million related to the Permal trade name asset, and resulted
from a number of then current trends and factors which resulted in decreased cash flow projections.
See Critical Accounting Policies and Note 5 of Notes to Consolidated Financial Statements for further discussion of these
impairment charges.
See Note 18 of Notes to Consolidated Financial Statements regarding the aggregate $34 million impairment of the RARE
Infrastructure amortizable asset management contracts asset and trade name indefinite-life intangible asset subsequent to
March 31, 2017.
Other
For the year ended March 31, 2017, Other expenses increased $17.1 million, or 10%, to $180.1 million, as compared to
$163.0 million for the year ended March 31, 2016, primarily as a result of a $9.1 million increase in travel and entertainment
expenses and a $4.6 million increase in insurance costs, largely due to costs incurred in connection with the acquisitions of
Clarion Partners and EnTrust, and a $6.3 million increase in professional fees. These increases were offset by a $6.1 million
increase in credits related to fair value adjustments to decrease contingent consideration liabilities, with $39.5 million of
such credits recognized during the year ended March 31, 2017, related to the acquisitions of Martin Currie, RARE
Infrastructure, QS Investors and Financial Guard, and $33.4 million of such credits recognized during the year ended March
31, 2016, related to the acquisitions of Martin Currie and Fauchier.
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 associated with the acquisitions of Clarion Partners and EnTrust.
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Legg Mason AR2017 33
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Non-Operating Income (Expense)
The components of Total Non-Operating Income (Expense) (in millions), and the dollar and percentage changes between
periods were as follows:
Interest income
Interest expense
Other income (expense), net, including
$107.1 million debt extinguishment loss
in fiscal 2015
Non-operating income (expense) of
consolidated investment vehicles, net
Total Non-Operating Income (Expense)
n/m - not meaningful
Years Ended March 31,
2017
2016
2015
$
6.8
(113.2)
$
5.6
(48.4)
$
7.5
(58.3)
2017 Compared to
2016
2016 Compared to
2015
$
Change
1.2
$
(64.8)
%
Change
$
Change
%
Change
21% $
n/m
(1.9)
9.9
(25)%
(17)
41.7
(26.0)
(85.3)
13.3
(7.2)
$ (51.4) $ (76.0) $(130.2) $
5.9
67.7
20.5
24.6
n/m
59.3
(70)
n/m
(32)
(13.1)
54.2
$
n/m
(42)
Interest Expense
For the year ended March 31, 2017, Interest expense increased $64.8 million to $113.2 million, as compared to $48.4 million
for the year ended March 31, 2016. The increase was primarily due to the issuance of $450 million of 4.75% Senior Notes
due 2026 (the "2026 Notes") and $250 million of 6.375% Junior Subordinated Notes due 2056 (the "6.3754% 2056 Notes")
in March 2016, the net proceeds of which were used to fund the acquisitions of Clarion Partners in April 2016 and EnTrust
in May 2016 and to replenish cash used to acquire RARE Infrastructure in October 2015, and $500 million of 5.45% Junior
Subordinated Notes due 2056 (the "5.45% 2056 Notes") in August 2016, the net proceeds of which were used to repay
outstanding borrowings under our revolving credit facility.
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 $9.9 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.
Other Income (Expense), Net
For the year ended March 31, 2017, Other income (expense), net, totaled income of $41.7 million, as compared to expense
of $26.0 million in for the year ended March 31, 2016. The change was primarily due to a $34.6 million increase from net
market gains on corporate investments, which are not offset by a corresponding increase in compensation expense, a $15.6 million
increase from net market gains on seed capital investments and assets invested for deferred compensation plans, which are
offset by a corresponding increase in compensation expense, gains totaling $8.7 million associated with the disposition of
two small investment managers and our share of a joint venture during fiscal 2017, and a $7.9 million increase from net
market gains on investments of consolidated sponsored investment vehicles that are not designated as consolidated investment
vehicles ("CIVs"), which have no impact on Net Income (Loss) Attributable to Legg Mason, Inc., as the losses are fully
attributable to noncontrolling interests.
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 for the year ended March 31, 2015, primarily due to a $107.1 million charge recognized in fiscal
2015 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, net market losses of $5.6 million on investments of consolidated sponsored investment products that are not
designated as CIVs, which have no impact on Net Income (Loss) 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.
Non-Operating Income (Loss) of Consolidated Investment Vehicles
For the year ended March 31, 2017, Non-operating income (expense) of consolidated investment vehicles, net, totaled income
of $13.3 million, as compared to expense of $7.2 million in the year ended March 31, 2016, primarily due to the consolidation
22
34
Legg Mason AR2017
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of additional CIVs, as a result of the adoption of updated consolidation accounting guidance effective April 1, 2016, as well
as an increase from net market gains on investments of certain CIVs. See Notes 1 and 17 of Notes to Consolidated Financial
Statements for additional information regarding the adoption of the updated guidance.
For the year ended March 31, 2016, Non-operating income (expense) of consolidated investment vehicles, net, totaled
expense of $7.2 million, as compared to income of $5.9 million in the year ended March 31, 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.
Income Tax Provision
For the year ended March 31, 2017, the provision for income taxes was $84.2 million, as compared to $7.7 million in the
year ended March 31, 2016. The effective tax rate was 22.7% for the year ended March 31, 2017, as compared to (30.5)%
for the year ended March 31, 2016. The change in the effective tax rate was largely due to the impact of the $371.0 million
of impairment charges recognized in fiscal 2016 in lower tax rate jurisdictions. Also, in fiscal 2017, as part of a larger
strategic initiative, we restructured certain of our holding company businesses, which increased the amount of foreign tax
credits available for utilization and reduced the effective tax rate by 5.0 percentage points. In September 2016, the U.K.
Finance Act 2016 was enacted, which further reduced the main U.K. corporate tax rate to be effective on April 1, 2020 from
18% to 17%. The impact of the tax rate reduction on certain existing deferred tax assets and liabilities resulted in a tax
benefit of $4.1 million, and reduced the effective tax rate by 1.1 percentage points in fiscal 2017. Noncontrolling interests
in EnTrustPermal, Clarion Partners and Royce are structured as partnerships that pass related tax attributes to the related
noncontrolling interest holders. As such, the consolidated financial statements do not generally include any tax provision/
benefit associated with the net income allocated to these noncontrolling interests, which caused the effective tax rate to be
reduced by 4.3 percentage points for the year ended March 31, 2017. The impact of CIVs decreased the effective rate by
1.1 percentage points for the year ended March 31, 2017, and increased the effective rate by 23.8 percentage points for the
year ended March 31, 2016.
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 fiscal 2016 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.
Net Income (Loss) Attributable to Legg Mason, Inc. and Operating Margin
Net Income Attributable to Legg Mason, Inc. for the year ended March 31, 2017, was $227.3 million, or $2.18 per diluted
share, as compared to Net Loss Attributable to Legg Mason, Inc. of $25.0 million, or $0.25 per diluted share, for the year
ended March 31, 2016. The increase was primarily attributable to the impairment charges of $371.0 million, or $2.76 per
diluted share, recognized in fiscal 2016, incremental net income related to the acquisitions of Clarion Partners and EnTrust
in fiscal 2017, the inclusion of a full year of results from RARE Infrastructure, which was acquired in October 2015, and
the pre-tax charge of $21.4 million recognized in fiscal 2016 in connection with the initial grant of equity units under the
Royce management equity plan. These increases were offset in part by impairment charges of $35.0 million, or $0.26 per
diluted share, recognized in fiscal 2017, an increase of $24.7 million in acquisition costs primarily related to the acquisitions
of Clarion Partners and EnTrust, including $15.2 million related to the implementation of the Clarion Partners management
equity plan, and the net impact of reduced operating revenue at certain legacy affiliates. Operating margin was 14.6% for
the year ended March 31, 2017, compared to 1.9% for the year ended March 31, 2016, with the increase primarily attributable
to the decrease in impairment charges.
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.
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Legg Mason AR2017 35
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Supplemental Non-GAAP Financial Information
As supplemental information, we are providing a performance measure for "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.
Operating Margin, as Adjusted
We calculate "Operating Margin, as Adjusted," by dividing (i) Operating Income, adjusted to exclude the impact on
compensation expense of gains or losses on investments made to fund deferred compensation plans, the impact on
compensation expense of gains or losses on seed capital investments by our affiliates under revenue sharing 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, and less performance fees that are passed
through as compensation expense or net income (loss) attributable to noncontrolling interests, which we refer to as "Operating
Revenues, as Adjusted." The deferred compensation items are removed from Operating Income in the calculation because
they are offset by an equal amount in Non-operating income (expense), net, and thus have no impact on Net Income (Loss)
Attributable to Legg Mason, Inc. We adjust for the impact of the 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 the 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 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 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. We also use Operating Revenues, as Adjusted, in the calculation
to show the operating margin without performances fees which are passed through as compensation expense or net income
(loss) attributable to noncontrolling interests per the terms of certain more recent acquisitions. Operating Revenues, as
Adjusted, also include our advisory revenues we receive from consolidated investment vehicles 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 distribution revenues that are passed through to third
parties as a direct cost of selling our products, performance fees that are passed through as compensation expense or net
income (loss) attributable to noncontrolling interests per the terms of certain more recent acquisitions, 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.
36
Legg Mason AR2017
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The calculation of Operating Margin and Operating Margin, as Adjusted, is as follows (dollars in thousands):
Operating Revenues, GAAP basis
Plus (less):
Pass-through performance fees
Operating revenues eliminated upon consolidation of
investment vehicles
Distribution and servicing expense, excluding
consolidated investment vehicles
Operating Revenues, as Adjusted
Operating Income, GAAP basis
Plus (less):
Gains (losses) on deferred compensation and seed
investments, 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,
$
$
$
2017
2,886,902
(60,756)
529
(499,126)
2,327,549
422,243
14,427
35,000
(39,500)
26,190
$
$
$
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
819
459,179
$
461
392,691
$
899
511,112
$
$
$
$
14.6%
19.7
1.9%
18.6
17.7%
23.0
Operating Margin, as Adjusted, for the years ended March 31, 2017, 2016, and 2015, was 19.7%, 18.6%, and 23.0%,
respectively. Operating Margin, as Adjusted, for the year ended March 31, 2017, was reduced by 1.8 percentage points due
to transition-related costs incurred in connection with the restructuring of Permal for the combination with EnTrust, 0.8
percentage points due to acquisition-related costs incurred in connection with the Clarion Partners and EnTrust acquisitions,
and 0.7 percentage points due to the charge associated with the implementation of the Clarion Partners management equity
plan.
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 initial Royce management equity plan grant, and by 0.4 percentage points for real estate related
charges recognized in fiscal 2016 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
We define Adjusted EBITDA as cash provided by (used in) operating activities plus (minus) interest expense, net of accretion
and amortization of debt discounts and premiums, current income tax expense (benefit), the net change in assets and liabilities,
net (income) loss attributable to noncontrolling interests, net gains (losses) and earnings on investments, net gains (losses)
on consolidated investment vehicles, and other. The net change in assets and liabilities adjustment aligns with the Consolidated
Statements of Cash Flows. Adjusted EBITDA is not reduced by equity-based compensation expense, including management
equity plan non-cash issuance-related charges. Most management equity plan units may be put to or called by us for cash
payment, although their terms do not require this to occur.
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Legg Mason AR2017 37
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We believe that this measure is useful to investors and us as it provides additional information with regard to our ability to
meet working capital requirements, service our debt, and return capital to our shareholders. This measure is provided in
addition to Cash provided by operating activities and may not be comparable to non-GAAP performance measures or liquidity
measures of other companies, including their measures of EBITDA or Adjusted EBITDA. Further, this measure is not to
be confused with Net Income (Loss), Cash provided by operating activities, or other measures of earnings or cash flows
under GAAP, and are provided as a supplement to, and not in replacement of, GAAP measures.
We previously disclosed Adjusted EBITDA that conformed to calculations required by our debt covenants, which adjusted
for certain items that required cash settlement that are not part of the current definition.
The calculation of Adjusted EBITDA is as follows (dollars in thousands):
For the Years Ended March 31,
2016
2015
2017
Cash provided by operating activities, GAAP basis
$
539,772
$
454,451
$
568,118
Plus (less):
Loss on extinguishment of debt
Interest expense, net of accretion and amortization of
debt discounts and premiums
Current tax expense
Net change in assets and liabilities
Net change in assets and liabilities of consolidated
investment vehicles
Net (income) loss attributable to noncontrolling interests
Net gains and earnings on investments
Net gains (losses) on consolidated investment vehicles
Other
Adjusted EBITDA
$
—
107,483
26,371
(33,900)
(41,365)
(59,447)
9,717
13,329
(1,720)
560,240
$
—
45,323
15,419
26,565
3,519
7,878
13,404
(7,243)
2,116
561,432
$
98,418
53,999
24,897
(7,306)
(111,613)
(5,629)
37,970
5,888
(6,480)
658,262
Adjusted EBITDA for the years ended March 31, 2017 and 2016, was $560.2 million, and $561.4 million, respectively.
Adjusted EBITDA remained relatively flat as the net impact of a reduction in operating revenues at certain legacy affiliates
was substantially offset by incremental earnings from Clarion Partners and EnTrust, and the inclusion of a full year of results
of RARE Infrastructure.
Adjusted EBITDA for the years ended March 31, 2016 and 2015, was $561.4 million and $658.3 million, respectively. The
$96.8 million decrease in Adjusted EBITDA was primarily the result of the net impact of a reduction in operating revenues.
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 are
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 products beyond our investments in and investment advisory fees generated from these
products, which are eliminated in consolidation. Additionally, creditors of the CIVs and other consolidated sponsored
investment products 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.
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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, 2017, cash and cash equivalents, total assets, long-term debt, net, and stockholders'
equity were $0.7 billion, $8.3 billion, $2.2 billion and $4.0 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 government and agency securities, bank deposits, and corporate commercial paper.
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.
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 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
2017
2016
2015
$
$
539.8
(1,019.7)
(116.9)
1.4
(595.4)
1,329.1
733.7
$
$
$
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
Cash inflows provided by operating activities during fiscal 2017 were $539.8 million, primarily related to Net Income,
adjusted for non-cash items, and net sales of investment securities. 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 outflows used in investing activities during fiscal 2017 were $1.0 billion, primarily related to payments associated
with the acquisitions of Clarion Partners and EnTrust aggregating $997.9 million (net of cash acquired). 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 outflows provided by financing activities during fiscal 2017 were $116.9 million, primarily related to $482.4 million
of net proceeds from the issuance of the 5.45% 2056 Notes in August 2016, offset in part by the repurchase of 11.7 million
shares of our common stock for $381.7 million. 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.
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Financing Transactions
The table below reflects our primary sources of financing (in thousands) as of March 31, 2017:
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
5.45% Junior Subordinated Notes due
September 2056
$
Available at
March 31,
2017
250,000
250,000
450,000
550,000
250,000
Amount Outstanding at
March 31,
2017
$ 250,000
250,000
450,000
550,000
250,000
2016
$ 250,000
250,000
450,000
550,000
250,000
Interest Rate
2.70%
3.95%
4.75%
5.625%
6.375%
500,000
500,000
—
5.45%
Revolving credit agreements
500,000
—
40,000
Eurocurrency
Rate + 1.25% +
0.175% annual
commitment fee
Maturity
July 2019
July 2024
March 2026
January 2044
March 2056
September
2056
December
2020
Long-term Debt
In August 2016, we issued an aggregate principal amount of $500 million of 5.45% 2056 Notes, the net proceeds of which,
together with cash on hand, were used to repay the total $500 million of then outstanding borrowings under our revolving
credit facility, as further discussed below.
In March 2016, we issued $250 million of 6.375% 2056 Notes and $450 million of 4.75% 2026 Notes. The net proceeds
of these offerings were used to partially finance the acquisitions of Clarion Partners in April 2016 and EnTrust in May 2016,
as previously discussed.
In June 2014, we issued $250 million of 2.7% Senior Notes due 2019 at a discount of $0.6 million, $250 million of 3.95%
Senior Notes due 2024 at a discount of $0.5 million, and an additional $150 million of 5.625% Senior Notes due 2044 at a
premium of $9.8 million. In July 2014, the proceeds of $659 million, net of related fees, together with cash on hand, were
used to redeem $650 million of then outstanding 5.5% Senior Notes. The retirement of the 5.5% Senior Notes resulted in
a pre-tax, non-operating charge of $107.1 million in July 2014, consisting of a cash make-whole premium payment of $98.6
million, net of $0.6 million from a reverse treasury lock settlement, to call the 5.5% Senior Notes and $8.5 million associated
with existing deferred costs and original issue discount.
In January 2014, we issued $400 million of 5.625% Senior Notes due 2044, at a discount of $6.3 million, the net proceeds
of which, together with cash on hand, were used to repay $450 million of then outstanding borrowings under a five-year
term loan.
Revolving Credit Agreements
In December 2015, we entered into an unsecured credit agreement which provided for a $1.0 billion multi-currency revolving
credit facility. On March 31, 2017, the unsecured credit agreement was amended to reduce the amount available under the
revolving credit facility from $1.0 billion to $500 million. The revolving credit facility may be increased by an aggregate
amount of up to $500 million, to $1.0 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.
In May 2016, we borrowed $460 million under this revolving credit facility to partially finance the acquisition of EnTrust
and to replenish cash used to complete the acquisitions of Clarion Partners in April 2016 and RARE Infrastructure in October
2015. In December 2015, we borrowed $40 million under this revolving credit facility, which remained outstanding as of
March 31, 2016. The borrowings 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 August 2016, the total $500 million of then outstanding borrowings under this revolving credit facility
were repaid using the net proceeds of the 5.45% 2056 Notes, together with cash on hand, as previously discussed.
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The financial covenants under our credit agreement include: maximum net debt to EBITDA ratio, which was modified in
March 2017, of 3.5 to 1 for the period from January 1, 2017 through March 31, 2018, and 3.0 to 1 thereafter; and a 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, 2017, Legg Mason's net debt to EBITDA ratio was 2.6 to 1 and EBITDA to interest expense
ratio was 5.7 to 1, and therefore, Legg Mason has maintained compliance with the applicable covenants.
If our net income significantly declines, or if we spend our available cash, it may impact our ability to maintain compliance
with the financial covenants under our credit agreement. 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.
Our outstanding revolving credit facility agreement is currently impacted by the ratings of two rating agencies. The interest
rate and annual commitment fee on our revolving line of credit are based on the higher credit rating of the two rating agencies.
In June 2011, our rating by one of these agencies was downgraded one grade below the other. Should the other agency
downgrade our rating, absent an upgrade from the former agency, and if there are borrowings outstanding under the revolving
credit facility, our interest costs will rise modestly.
Other
In May 2012, we refinanced our then outstanding 2.5% Senior Convertible Notes (the "Convertible Notes"). The terms of
the repurchase included the issuance of warrants to the holders of the Convertible Notes. The warrants replaced a conversion
feature of the Convertible Notes, and provide for the purchase, in the aggregate and subject to adjustment, of 14.2 million
shares of our common stock, on a net share settled basis, at an exercise price of $88 per share. The warrants expire in July
2017 and can be settled, at our election, in either shares of common stock or cash.
See Note 6 of Notes to Consolidated Financial Statements for additional information regarding our debt.
Other Transactions
We expect that over the next 12 months cash generated from our operating activities and available cash on hand will be
adequate to support our operating cash needs, and planned share repurchases. We currently intend to utilize our available
resources for any number of potential activities, including, but not limited to, acquisitions, repurchase of shares of our
common stock, seed capital investments in new and existing products, repayment of outstanding debt, or payment of increased
dividends. In addition to our ordinary operating cash needs, we anticipate other cash needs during the next 12 months, as
discussed below.
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Acquisitions
As of March 31, 2017, we had various commitments to pay contingent consideration relating to business acquisitions. The
following table presents a summary of the maximum remaining aggregate contingent consideration and the Contingent
consideration liability (in millions) for each of our acquisitions. Additional details regarding contingent consideration for
each significant recent acquisition are discussed below.
RARE
Infrastructure Martin Currie QS Investors
Other(2)
Total
Maximum Remaining Contingent
Consideration(1)
Contingent consideration liability
Current Contingent consideration
Non-current Contingent
consideration
Balance as of March 31, 2017
$
$
$
81.1
$
407.4
$
23.4
$
5.5
$
517.4
7.8
$
12.0
$
— $
2.5
$
9.7
17.5
$
—
12.0
$
4.8
4.8
$
—
2.5
$
22.3
14.5
36.8
(1) Using the applicable exchange rate as of March 31, 2017 for amounts denominated in currencies other than the U.S. dollar.
(2) Includes amounts related to the acquisitions of Financial Guard and PK Investments.
As further described below, we may be obligated to settle noncontrolling interests related to certain affiliates. The following
table presents a summary of our affiliate noncontrolling interests (in millions), excluding amounts related to management
equity plans, as of March 31, 2017. The ultimate timing of noncontrolling interest settlements are too uncertain to project
with any accuracy.
Affiliate noncontrolling interests
as of March 31, 2017
$
404.9
$
113.2
$
68.7
$
4.5
$
591.3
EnTrustPermal
Clarion
Partners
RARE
Infrastructure
Other
Total
On August 17, 2016, we acquired a majority interest in Financial Guard. The acquisition closing required a cash payment,
which was funded with existing cash resources. Contingent consideration of up to $3 million may be due one year after the
closing date. The amount of any ultimate contingent payment will be based on certain metrics. We also committed to
contribute up to $5 million of additional working capital to Financial Guard, to be paid over the two year period following
the acquisition, of which $1.3 million has been paid as of March 31, 2017. As of March 31, 2017, no contingent consideration
is expected to be paid.
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 6.375% 2056 Notes that were issued in March
2016. In connection with the combination, as of March 31, 2017, we have incurred restructuring and transition-related costs
of approximately $85 million, of which approximately 15% were non-cash charges, and approximately $66 million have
been paid. The significant portion of the $19 million of costs that have not been paid relate to lease charges which will be
paid over the remaining lease term. While the combination is substantially complete, we expect to incur additional costs
totaling $5 million to $6 million during fiscal 2018 and 2019. See Note 2 of Notes to Consolidated Financial Statements
for additional information. Noncontrolling interests of 35% of the outstanding equity are subject to put and call provisions
that may result in future cash outlays.
On April 13, 2016, we acquired a majority interest in Clarion Partners. The acquisition required a cash payment of
approximately $632 million (including a payment for cash delivered of $37 million and co-investments of $16 million),
which was funded with a portion of the proceeds from the issuance of the 2026 Notes and the 6.375% 2056 Notes in March
2016. We also implemented an affiliate management equity plan for the management team of Clarion Partners, as further
discussed below. In conjunction with the acquisition, we committed to provide $100 million of seed capital to Clarion
Partners products, after the second anniversary of the transaction closing. Noncontrolling interests of 18% of the outstanding
equity are subject to put and call provisions that may result in future cash outlays.
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On January 22, 2016, we acquired a minority equity position in Precidian Investments, LLC ("Precidian"). The transaction
required a cash payment, which was funded from existing cash resources. Under the terms of the transaction, we acquired
series B preferred units of Precidian that entitle us to approximately 20% of the voting and economic interests of Precidian.
At our sole option during the 48 months following the initial investment or, if earlier, within nine months of the SEC's
approval of Precidian's application to operate its Active SharesSM product, we may, subject to satisfaction of certain closing
conditions and upon payment of further consideration, convert our preferred units to 75% of the common equity of Precidian
on a fully diluted basis. The equity conversion, and the put and call options that would then attach to the noncontrolling
interests of 25% of the outstanding equity may result in future cash outlays.
On December 31, 2015, Martin Currie acquired certain assets of PK Investments. The purchase price was comprised of an
initial cash payment of $5 million and a contingent payment, due on December 31, 2017, which is currently estimated at
approximately $3 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.
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, 2018, aggregating up to approximately $81
million (using the foreign exchange rate as of March 31, 2017 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. No contingent consideration was payable for the first potential payment due March 31, 2017.
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 third anniversary
of closing, aggregating up to approximately $407 million (using the foreign exchange rate as of March 31, 2017 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, 2018.
No contingent consideration payment was due as of March 31, 2017 for the second anniversary payment or 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, the Pensions Regulator in the U.K ("the Regulator") is
reviewing the pension plan’s current structure and funding status. While the review is still in process, the Regulator has
expressed certain concerns that plan transactions effected around the acquisition closing were detrimental to the plan. While
Martin Currie and the trustees of the pension plan dispute the Regulator's concerns, they are cooperating with the Regulator
on a revised plan structure, which will likely result in certain changes to the plan structure, including additional guarantees
and potential accelerated funding of a portion of the plan's benefit obligations.
Effective May 31, 2014, we completed the acquisition of QS Investors. In August 2016, we paid $6.6 million for the second
anniversary contingent consideration, which was funded from existing cash resources. In addition, contingent consideration
of up to $20 million for the fourth anniversary payment, and up to $3.4 million for a potential catch-up adjustment for the
second anniversary payment shortfall, may be due in July 2018, dependent on the achievement of certain net revenue targets.
In March 2013, we completed the acquisition of all of the outstanding share capital of Fauchier. In May 2015, we paid
contingent consideration of $22.8 million (using the exchange rate as of May 5, 2015) for the second anniversary payment.
No additional contingent consideration will be paid in connection with the acquisition of Fauchier.
See Note 2 of Notes to Consolidated Financial Statements for additional information regarding these acquisitions.
Affiliate Management Equity Plans
In conjunction with the acquisition of Clarion Partners in April 2016, we implemented an affiliate management equity plan
that 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. In March 2016, we implemented an affiliate
management equity plan with the management of Royce. Under this management equity plan, as of March 31, 2017,
noncontrolling interests equivalent to 19.0% in the Royce entity have been issued to its management team. In addition, we
implemented an affiliate management equity plan in March 2014, that entitles certain key employees of ClearBridge to
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participate in 15% of the future growth, if any, of the enterprise value (subject to appropriate discounts). In June 2013, we
implemented an affiliate management equity plan that entitled key employees of Permal to participate in 15% of the future
growth of the enterprise value (subject to appropriate discounts), if any. In April 2016, in conjunction with the combination
of Permal with EnTrust, the Permal management equity plan was liquidated with the payment of $7.2 million to its participants.
As of March 31, 2017, the estimated redemption value for units under management equity plans aggregated $72.3 million.
Repurchases of units granted under the plans may impact future liquidity requirements, however, the amounts and timing
of repurchases are too uncertain to project with any accuracy. See Note 11 of Notes to Consolidated Financial Statements
for additional information regarding affiliate management equity plans.
Other
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
$423 million of which remained available as of March 31, 2017. Over the past several years, we have focused on returning
capital to shareholders through share repurchases. Our capital management priorities have evolved, and in fiscal 2018, we
currently plan to return capital of approximately $450 million, through a combination of share repurchases and payment of
increased dividends, which we currently expect to aggregate approximately $340 million and $110 million, respectively,
subject to market conditions and other cash needs.
Future Outlook
As of March 31, 2017, we had approximately $459 million in cash and cash equivalents in excess of our working capital
and regulatory requirements. The $459 million includes amounts expected to be used to fund accrued compensation payments,
primarily in the first quarter of fiscal 2018. As previously discussed, in fiscal 2018, we currently plan to return capital of
approximately $450 million through a combination of share repurchases and the payment of increased dividends, subject to
market conditions and other cash needs. As of March 31, 2017, we have approximately $500 million of available borrowing
capacity under our revolving credit facility, subject to compliance with applicable covenants, which expires in December
2020, and can be increased by another $500 million with the approval of the lenders. We do not currently expect to raise
incremental debt or equity financing over the next 12 months. However, during the next 12 months, we intend to grow our
ETF business and are exploring various options to seed these new products. 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 may 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.
Our liquid assets include cash, cash equivalents, and certain current investment securities. At March 31, 2017, our total
liquid assets of approximately $999 million, included $336 million of cash, cash equivalents, 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 approximately $276 million of foreign cash
over the next several years, of which $4.3 million is accumulated foreign earnings. Any additional tax provision associated
with these repatriations was previously recognized. See Note 7 of Notes to Consolidated Financial Statements for further
discussion of repatriation of foreign earnings. 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.
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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.
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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 and other consolidated sponsored investment products, as we are not responsible or liable for these obligations:
Contractual Obligations
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:(1)
Martin Currie
RARE Infrastructure
Other
Total payments related to business
acquisitions
2018
2019
2020
2021
2022
Thereafter
Total
$
— $
— $ 250.0
$
— $
— $ 2,000.0
$ 2,250.0
113.0
113.0
109.7
106.1
105.4
2,272.8
2,820.0
128.4
241.4
105.9
218.9
93.2
452.9
84.3
190.4
83.3
188.7
182.9
678.0
4,455.7
5,748.0
407.4
81.1
5.5
494.0
—
—
23.4
23.4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
407.4
81.1
28.9
517.4
Total Obligations(2)(3)(4)(5)
(1) 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, 2017, for amounts denominated in currencies
other than the U.S. dollar. The related contingent consideration liabilities had an aggregate fair value of $36.8 million as of March 31, 2017, net of
certain potential pension and other obligations related to Martin Currie. See Notes 2 and 8 of Notes to Consolidated Financial Statements.
$ 4,455.7 $ 6,265.4
$ 190.4
$ 188.7
$ 242.3
$ 452.9
735.4
$
(2) The table above does not include approximately $35.5 million in capital commitments to investment partnerships in which we are a limited partner,
which will be outstanding, or funded as required, through the end of the commitment periods running through fiscal 2029; $100 million of co-
investment commitment associated with the Clarion Partners acquisition, which will be funded after the second anniversary of the transaction
closing; or up to $3.7 million of remaining additional working capital commitment associated with the Financial Guard acquisition, which will be
funded over the two year period ending in August 2018.
(3) The table above does not include amounts for uncertain tax positions of $69.7 million (net of the federal benefit for state tax liabilities), because
the timing of any related cash outflows cannot be reliably estimated.
(4) The table above does not include redeemable noncontrolling interests, primarily related to minority equity interests in our affiliates, of $619.3 million
as of March 31, 2017, because the timing and amount of any related cash outflows cannot be reliably estimated, and noncontrolling interests of
CIVs of $58.5 million as of March 31, 2017, because we have no obligations in relation to these amounts.
(5) The table above excludes potential obligations arising from the ultimate settlement of awards under the affiliate management equity plans with key
employees of Clarion Partners, ClearBridge and Royce due to the uncertainty of the timing and amounts ultimately payable. See Note 11 of Notes
to Consolidated Financial Statements for additional information regarding affiliate management equity plans.
(6) The table above excludes net pension benefit obligations of $37.5 million due to the uncertainty of the timing and amounts ultimately payable.
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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 and alternative assets than fees charged for fixed income and liquidity assets. Declines in market values
of AUM in these asset classes 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, and our affiliates
operate at different levels of margins. 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, subject to risk of security price fluctuations as of March 31, 2017
and 2016, 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
2017
2016
$
$
150,903
262,585
10,131
423,619
$
$
106,564
393,400
15,371
515,335
Trading and other current investments of $158.5 million and $113.0 million at March 31, 2017 and 2016, 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 $265.1 million and $402.3 million of trading and other current investments at March 31, 2017 and 2016,
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
$23.5 million and $35.8 million of proprietary fund products as of March 31, 2017 and 2016, respectively, have offsetting
compensation expense under revenue share arrangements. The fluctuations in market value related to approximately $136.3
million and $141.3 million in proprietary fund products as of March 31, 2017 and 2016, 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.
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Non-trading assets, excluding CIVs, subject to risk of security price fluctuations at March 31, 2017 and 2016, are summarized
in the table below (in thousands):
Investment securities, excluding CIVs:
Investments in partnerships, LLCs and other
Equity method investments in partnerships and LLCs
Other investments
Total non-trading assets, excluding CIVs
2017
2016
$
$
14,679
67,636
113
82,428
$
$
15,432
29,873
83
45,388
Investment securities of CIVs totaled $58.7 million and $48.7 million as of March 31, 2017 and 2016, respectively. As of
March 31, 2017 and 2016, we held equity investments in the CIVs of $28.3 million and $13.6 million, respectively.
Fluctuations in the market value of investments of CIVs in excess of our equity investment will not impact Net Income
(Loss) Attributable to Legg Mason, Inc. However, it may have an impact on non-operating income (expense) of CIVs with
a corresponding offset in Net income (loss) attributable to noncontrolling interests.
Valuation of trading and non-trading investments is described below within Critical Accounting Policies under the heading
"Valuation of Financial Instruments." See Notes 1 and 15 of Notes to Consolidated Financial Statements for further discussion
of derivatives.
The following is a summary of the effect of a 10% increase or decrease in the market values of our financial instruments
subject to market valuation risks at March 31, 2017 (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
Carrying Value
Fair Value
Assuming a
10% Increase(1)
Fair Value
Assuming a
10% Decrease(1)
$
150,903
$
165,993
$
135,813
262,585
288,844
236,327
Total current investments, excluding CIVs
Investments in CIVs
Investments in partnerships, LLCs and other
Equity method investments in partnerships and LLCs
Other investments
Total investments subject to market risk
(1) Gains and losses related to investments in deferred compensation plans are directly offset over the full vesting period by a corresponding adjustment to
compensation expense and related liability. In addition, investments in proprietary fund products of approximately $136.3 million have been economically
hedged to limit market risk. As a result, a 10% increase or decrease in the unrealized market value of our financial instruments subject to market valuation
risks would result in a $19.4 million increase or decrease in our pre-tax earnings as of March 31, 2017.
$
$
$
9,118
381,258
25,470
13,211
60,872
102
480,913
11,144
465,981
31,130
16,147
74,400
124
587,782
10,131
423,619
28,300
14,679
67,636
113
534,347
Also, as of March 31, 2017 and 2016, cash and cash equivalents included $403.6 million and $1.1 billion, respectively, of
money market funds.
Foreign Exchange Sensitivity
We operate primarily in the U.S., but provide services, earn revenues and incur expenses outside the U.S. Accordingly,
fluctuations in foreign exchange rates for currencies, principally in the U.K., Brazil, Australia, Singapore and those
denominated in the euro, may impact our AUM, revenues, expenses, comprehensive income (loss) and net income (loss).
We and certain of our affiliates have entered into forward contracts to manage a portion of the impact of fluctuations in
foreign exchange rates on their results of operations. We do not expect foreign currency fluctuations to have a material
effect on our net income (loss) or liquidity.
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Interest Rate Risk
Exposure to interest rate changes on our outstanding debt is substantially mitigated as our $250 million of 2.7% Senior Notes
due July 2019, $250 million of 3.95% Senior Notes due July 2024, $450 million of 4.75% Senior Notes due March 2026,
$550 million of 5.625% Senior Notes due July 2044, $250 million of 6.375% Junior Subordinated Notes due March 2056,
and $500 million of 5.45% Junior Notes due September 2056, are at fixed interest rates.
See Note 6 of Notes to Consolidated Financial Statements for additional discussion of debt.
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 products. 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 products were not material as of March 31, 2017, we have not issued any investment performance
guarantees to these investment products or their investors, and we did not sell or transfer assets to any of these investment
products. In accordance with financial accounting standards, we consolidate certain sponsored investment products, some
of which are designated as CIVs.
Certain investment products we sponsor and manage 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 products that are considered VREs are consolidated if we have a controlling
financial interest in the investment product, absent substantive investor rights to replace the manager of the entity (kick-out
rights). We may fund the initial cash investment in certain VRE investment products 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. We must consolidate any VIE for which we are deemed to be the primary beneficiary.
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Updated Consolidation Accounting Guidance
Effective April 1, 2016, we adopted updated consolidation accounting guidance on a modified retrospective basis. Under
the updated guidance, if limited partners in a sponsored investment product structured as a limited partnership or a similar
entity do not have either substantive kick-out or substantive participation rights over the general partner, the entities are
VIEs. As a sponsor and manager of an investment product, we may be deemed a decision maker under the accounting
guidance. If the fees paid to a decision maker are market-based, such fees are not considered variable interests in a VIE.
Additionally, if employee interests in a sponsored investment product are not made to circumvent the consolidation guidance
and are not financed by the sponsor, they are not included in the variable interests assessment, and are not included in the
primary beneficiary determination.
A decision maker is deemed to be a primary beneficiary of a VIE if it has the power to direct activities that most significantly
impact the economic performance of the VIE and the obligation to absorb losses or receive benefits from variable interests
that could be significant to the VIE. In determining whether it is the primary beneficiary of a VIE, we consider both qualitative
and quantitative factors such as the voting rights of the equity holders, guarantees, and implied relationships. If a fee paid
to a decision maker is not market-based, it will be included in the primary beneficiary determination.
Prior Consolidation Accounting Guidance
Under prior accounting guidance, for most sponsored investment fund VIEs deemed to be investment companies, including
money market funds, our determination of expected residual returns excluded gross fees paid to a decision maker if certain
criteria relating to the fees were met. In determining whether we were the primary beneficiary of a VIE, we considered both
qualitative and quantitative factors such as the voting rights of the equity holders, economic participation of all parties
(including how fees were earned and paid to us), related party ownership, guarantees, and implied relationships.
For other sponsored investment funds that do not meet the investment company criteria, we determined if we were the
primary beneficiary of a VIE if we had both the power to direct the activities of the VIE that most significantly impact the
entity's economic performance and the obligation to absorb losses, or the right to receive benefits, that could be significant
to the VIE. We considered 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.
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.
As of March 31, 2017, equity, fixed income, alternative and liquidity AUM values aggregated $179.8 billion, $394.3 billion,
$67.9 billion, and $86.4 billion, respectively. As the majority of our AUM is valued by independent pricing services based
on 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, as further discussed below,
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, 2017, approximately 5% of total AUM is valued based on
unobservable inputs, the majority of which is related to our real estate funds discussed below.
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
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discussed above for mutual funds that are reasonably designed to ensure consistency in the application of revenue recognition.
Management relies extensively on the data provided by independent pricing services and the custodians in the pricing of
separate account AUM. Separate account customers typically select the custodian.
Valuation processes for AUM are dependent on the nature of the assets and any contractual provisions with our clients.
Equity securities under management for which market quotations are available are usually valued at the last reported sales
price or official 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 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. The most significant
portion of our AUM for which the fair value is determined based on unobservable inputs are certain of our real estate funds.
The values of real estate investments are prepared giving consideration to the income, cost and sales comparison approaches
of estimating property value. The income approach estimates an income stream for a property and discounts this income
plus a reversion (presumed sale) into a present value at a risk adjusted rate. Yield rates and growth assumptions utilized in
this approach are derived from market transactions as well as other financial and industry data. The discount rate and the
exit capitalization rate are significant inputs to these valuations. These rates are based on the location, type and nature of
each property, and current and anticipated market conditions. The cost approach estimates the replacement cost of the
building less physical depreciation plus the land value. The sales comparison approach compares recent transactions to the
appraised property. Adjustments are made for dissimilarities which typically provide a range of value. Many factors are
also considered in the determination of fair value including, but not limited to, the operating cash flows and financial
performance of the properties, property types and geographic locations, the physical condition of the asset, prevailing market
capitalization rates, prevailing market discount rates, general economic conditions, economic conditions specific to the
market in which the assets are located, and any specific rights or terms associated with the investment. Because of the
inherent uncertainties of valuation, the values may materially differ from the values that would be determined by negotiations
held between parties in a sale transaction.
Valuation of Financial Instruments
Substantially all financial instruments are reflected in the financial statements at fair value or amounts that approximate fair
value. 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
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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, 2017 and
2016, we owned $67.6 million and $29.9 million, respectively, of investments in partnerships and limited liability companies
which were accounted for under the equity method and included in Other noncurrent assets on the Consolidated Balance
Sheets. Of these amounts, $29.3 million and $0.6 million, respectively, were valued based on our assumptions and estimates
and unobservable inputs. The remainder was valued using net asset value ("NAV") as a practical expedient, as further
discussed below. As of March 31, 2017 and 2016, we also owned $14.7 million and $15.4 million of investments in
partnerships and limited liability companies that were accounted for under the cost method, which considers if factors indicate
that there may be an impairment in the value of these investments. In addition, as of March 31, 2017 and 2016, we had
$10.1 million and $15.4 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,
private equity funds, and real estate funds. This category may also include certain proprietary fund products with
redemption restrictions and contingent consideration.
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 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 funds, real estate funds 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.
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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. Effective April 1, 2016,
we adopted updated accounting guidance on fair value measurements which removed the requirement to categorize within
the fair value hierarchy all investments for which the fair value is measured using NAV as a practical expedient.
As of March 31, 2017, approximately 1% of total assets (4% of financial assets measured at fair value) and 1% of total
liabilities (89% of financial liabilities measured at fair value) meet the definition of Level 3. Excluding the assets and
liabilities of CIVs does not change these percentages.
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, 2017, are as follows (in thousands):
Amortizable intangible asset management contracts
Indefinite-life intangible assets
Trade names
Goodwill
$
$
213,654
3,750,863
69,863
1,924,889
5,959,269
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.
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We completed our annual impairment tests of goodwill and indefinite-life intangible assets as of December 31, 2016. We
also completed our periodic impairment review of amortizable intangible assets as of December 31, 2016. As a result of
these impairment tests, our RARE Infrastructure amortizable asset management contracts asset and our Permal trade name
indefinite-life intangible asset were determined to be partially impaired, resulting in pre-tax operating charges of $18 million
and $17 million, respectively. Neither goodwill nor any other indefinite-life intangible assets were deemed to be impaired.
Further, no impairments in the values of other amortizable intangible assets were recognized during the year ended March
31, 2017, 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, 2017, 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.
See Note 18 of Notes to Consolidated Financial Statements regarding the aggregate $34 million impairment of the RARE
Infrastructure amortizable asset management contracts asset and trade name indefinite-life intangible asset subsequent to
March 31, 2017.
The acquisitions of Clarion Partners and EnTrust resulted in the addition of indefinite-life fund management contracts assets
of $505 million and $262 million, respectively, amortizable separate accounts assets of $103 million and $66 million,
respectively, trade name assets of $23 million and $7 million, respectively, and goodwill of $80 million and $411 million,
respectively. Because the fair values of the Clarion Partners and EnTrust indefinite-life assets and amortizable separate
accounts assets were established as of the April 13, 2016 and May 2, 2016 acquisition dates, respectively, our December 31,
2016 impairment consideration was limited to a qualitative 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, over time, the amortization periods become 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.
During the nine months ended December 31, 2016, revenues related to the RARE Infrastructure separate account contracts
asset declined due to client withdrawals of assets. Based on revised attrition estimates, the remaining useful life of the
acquired contracts was decreased from 11 years to eight years at December 31, 2016. As a result of the client attrition, the
related decline in revenues, and the revised estimate of the remaining useful life, the evaluation at December 31, 2016,
indicated the amortized carrying value of $61 million would not be fully recoverable. Projected cash flows on remaining
acquired contracts indicated a fair value of $43 million, and an impairment charge of $18 million on this asset was recorded
in the year ended March 31, 2017. The significant assumptions used in the cash flow analysis used to determine the fair
value included projected AUM growth/(attrition) rates of 7%/(13)% and a discount rate of 15.5%. Future decreases in our
cash flow projections or increases in the discount rate, resulting from actual results, or changes in assumptions due to client
attrition and the related reduction in revenues, investment performance, market conditions, or other factors, may result in
further impairment of this asset. There can be no assurance that continued client attrition, asset outflows, market uncertainty,
or other factors, will not produce an additional impairment in this asset.
As of March 31, 2017, the estimated remaining useful lives of amortizable intangible assets range from two to 10 years with
a weighted-average life of approximately 8.0 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.
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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. As further discussed in Note 2 of Notes to Consolidated Financial Statements, EnTrust has been combined
with Permal to form EnTrustPermal, through common management, shared resources (including infrastructure, employees
and processes) and branding initiatives. Accordingly, after completing the annual impairment testing process as of December
31, 2016, the indefinite-life funds management contracts asset related to the EnTrust acquisition was combined with the
indefinite-life funds-of-hedge funds management contracts asset related to the legacy Permal business. The related carrying
values and cash flows of these funds will continue to be aggregated for future impairment testing.
Projected cash flows are based on annualized cash flows for the applicable contracts projected forward 40 years or for shorter
periods with a terminal value assumption, assuming annual cash flow growth from estimated net client flows and projected
market performance. To estimate the projected cash flows, projected fund 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, alternative 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, 4% for alternative 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
assumptions for years one through five 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, as appropriate. 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.
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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 the
relevant amortization period (15 years in the U.S.).
As of December 31, 2016, the Permal funds-of-hedge funds contracts of $334 million accounted for approximately 10% of
our indefinite-life intangible assets and were supported by its 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 fund-of-hedge fund business, particularly the traditional high net worth client portion
of the 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. As a result of continued risk and
uncertainty with its funds business, the near-term growth assumptions for these contracts were reduced compared to
management's three-year AUM projections.
Based upon our projected discounted cash flow analyses, the fair value of the Permal funds-of-hedge funds contracts asset
exceeded its carrying value by approximately $15 million. Cash flows on the Permal funds-of-hedge funds contracts were
assumed to have an average annual growth rate of approximately 9% (4% market and 5% organic/other). However, given
current experience, projected near-year cash flows reflect moderate AUM outflows in years one, two, and three, and trend
to modest AUM inflows in year four. Investment performance, including its expected impact on future asset flows, is a
significant factor in our growth projections for the Permal funds-of-hedge funds contracts. Our market performance
projections are supported by the fact that 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
projected cash flows from the Permal funds-of-hedge funds contracts were discounted at 16.0%, reflecting the factors noted
above.
As previously discussed, after completing the annual impairment testing process as of December 31, 2016, the indefinite-
life funds management contracts asset related to the EnTrust acquisition was combined with the indefinite-life funds-of-
hedge funds management contracts asset related to the legacy Permal business. We completed a qualitative impairment test
for the combined asset and no impairment indicators were noted.
As of December 31, 2016, the RARE Infrastructure mutual funds contracts of $123 million (using the exchange rate as of
December 31, 2016) accounted for approximately 3% of our indefinite-life intangible assets. Based on our projected
discounted cash flow analyses, the fair value of the mutual funds contracts asset exceeded its carrying value by $4 million.
For our impairment test, cash flows from the RARE Infrastructure mutual fund contracts were assumed to have annual
growth rates averaging approximately 7%, and reflect moderate AUM inflows in years 1 and 2. Projected cash flows of the
RARE Infrastructure mutual fund contracts were discounted at 15.5%.
Assuming all other factors remain the same, our actual results and/or changes in assumptions for the RARE Infrastructure
mutual fund contracts cash flow projections over the long-term would have to deviate more than 4% from projections, or
the discount rate would have to be raised from 15.5% to 16.0%, for the asset to be deemed impaired. Despite the 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
RARE Infrastructure mutual funds contracts could deviate from the projections by more than 4% and the asset could be
deemed to be impaired by a material amount.
The domestic mutual fund contracts acquired in the Citigroup Asset Management (“CAM”) transaction of $2.1 billion,
account for approximately 55% of our indefinite-life intangible assets. As of December 31, 2016, approximately $150 billion
of AUM, primarily managed by ClearBridge and Western Asset, are associated with this asset, with approximately 35% in
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equity AUM, 40% in fixed income AUM and 25% in liquidity AUM. Although our domestic mutual funds overall have
maintained strong recent market performance, 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 a material amount. For our impairment test, cash flows from the domestic mutual fund contracts are assumed to have
annual growth rates averaging approximately 6%, and reflect moderate AUM inflows in years 1 and 2. Projected cash flows
of the domestic mutual fund contracts were discounted at 13.0%.
Trade names account for 2% of indefinite-life intangible assets and are primarily related to Permal and Clarion Partners,
which had carrying values of $38 million and $23 million, respectively. We tested these intangible assets using a relief from
royalty approach and discounted cash flow methods similar to those described above for indefinite-life contracts and
determined that the carrying value of the Permal trade name exceeded its fair value, which resulted in an impairment charge
of $17 million. The impairment charge was primarily the result of a decrease in revenues and a reduction in the royalty rate,
reflecting a decline in the value of the Permal trade name due to a change in branding and decline in the use of the separate
Permal name following the combination with EnTrust. The significant assumptions used in the cash flow analysis included
projection annual revenue growth rates of 3% to 9% (average: 7%), a royalty rate of 1.5%, and a discount rate of 16.0%.
Future decreases in our cash flow projections or increases in the discount rate, resulting from actual results, or changes in
assumptions resulting from flow and AUM levels, investment performance, market conditions, or other factors, may result
in further impairment of this asset. There can be no assurance that asset outflows, market uncertainty, or other factors, will
not produce an additional impairment in this asset. 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 be managed 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, RARE Infrastructure, and
more recently Clarion Partners and EnTrust. The value of the reporting unit is based in part, on projected consolidated net
cash flows, including all cash flows of assets managed in our mutual funds, closed-end funds and other proprietary funds,
in addition to separate account assets of our managers.
Significant assumptions used in assessing the implied fair value of the reporting unit under the discounted cash flow method
are consistent with the methodology discussed above for indefinite-life intangible assets. Also, at the reporting unit level,
future corporate costs are estimated and consolidated with the projected operating results of all our affiliates.
Actual cash flows in any one period may vary from the projected cash flows without resulting in an impairment charge
because a variance in any one period must be 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 significant differences, if any,
are assessed to determine the reasonableness of each value and whether any adjustment to either result is warranted. Once
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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, 2016, exceeded the carrying value by 14%, or approximately $550 million. Considering the relative merits
of the details involved in each valuation process, we used an equal weighting of the two values for the December 2016
testing. Changes in the assumptions underlying projected cash flows from the reporting unit or its EBITDA multiple, resulting
from market conditions, reduced AUM or other factors, could result in an impairment of goodwill, and such impairment
could potentially have a material impact on our results of operations and financial condition.
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.
Recent market evidence regarding control premiums suggests values of 14% to 54%, with an average of 34%, as realistic
and common and we believe such premiums to be a reasonable range of estimates for our equity value. Based on our analysis
and consideration, we believe the implied control premium of 43% determined by our reporting unit value estimation at
December 31, 2016, is reasonable in relation to the observed relevant market control premium values.
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, 2017, the fair
values of our contingent consideration liabilities aggregate $36.8 million, relating to our acquisitions of RARE Infrastructure,
Martin Currie, QS Investors, Financial Guard and PK Investments.
See Note 18 of Notes to Consolidated Financial Statements regarding an $11.5 million reduction in the contingent
consideration liability related to the acquisition of RARE Infrastructure subsequent to March 31, 2017.
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 and QS Investors purchase agreements require us to pay additional
consideration based on whether certain future revenue thresholds are achieved. Likewise, significant increases (decreases)
in projected revenue levels for RARE Infrastructure 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.
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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, 2017, 2016,
and 2015, includes compensation cost for all non-vested share-based awards at their grant date fair value amortized over
the respective vesting periods, which may be reduced for retirement-eligible recipients, 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 0.8 million, 0.9 million, and 0.9 million stock options in fiscal 2017, 2016, and 2015, respectively. 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.
During fiscal 2017, we implemented an affiliate equity management plan that entitles certain key employees of Clarion
Partners to participate in 15% of the future growth, if any, of the affiliate's enterprise value (subject to appropriate discounts)
subsequent to the date of the grant. 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 in both fiscal 2016 and
fiscal 2017. 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). During
fiscal 2017, in connection with the combination of Permal with EnTrust, the Permal management equity plan was liquidated.
For additional information on share-based compensation, see Notes 1 and 11 of Notes to Consolidated Financial Statements.
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
products, and vested affiliate 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
products, 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 affiliate management equity plan interests,
fair value reflects the related total business enterprise value, after appropriate discounts for lack of marketability and control.
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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 relevant 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 and our intent and ability to implement certain tax planning strategies. Management assesses the
likelihood that we will be able to realize our deferred tax assets. If it is more likely than not that the deferred tax asset will
not be realized, then a valuation allowance is established with a corresponding increase to deferred tax provision.
Substantially all of our deferred tax assets relate to U.S. federal and state, and U.K. taxing jurisdictions. As of March 31,
2017, U.S. federal deferred tax assets aggregated $732 million, realization of which is expected to require $3.7 billion of
future U.S. earnings, of which $811 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 will be 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
$6.1 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, 2017, the change in federal valuation allowances aggregated $11.1 million. The decrease in federal valuation
allowances from the prior year primarily relates to $10.4 million of expiring foreign tax credits which have been reclassified
to net operating losses. This was offset in part by additional valuation allowances of $1.3 million related to foreign tax
credits and $0.6 million related to Martin Currie’s operating losses. There was also a decrease in the valuation allowance
of $2.6 million related to charitable contributions.
As of March 31, 2017, U.S. state deferred tax assets aggregated $174 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
$29.1 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, the net increase in valuation allowances of $0.5 million in fiscal 2017 primarily relates to statutory
rate changes and revised estimates of the realization of deferred tax benefits.
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, including future increases relating to the tax amortization of goodwill and
indefinite-life intangible assets, as well as, planning strategies to measure and value the realizability of our deferred tax
assets. In the event we determine all or any portion of our deferred tax assets that are not already subject to a valuation
allowance are not realizable, we will be required to establish a valuation allowance by a charge to the income tax provision
in the period in which that determination is made. The value of our deferred tax assets are based on enacted corporate tax
rates for future periods. Legislative changes related to these rates would require a remeasurement of our deferred tax assets
in the period of enactment. 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.
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Currently there are proposals to significantly change U.S. federal income tax rules which include proposals to reduce tax
rates, limit deductibility of interest expense, and changes to the taxation of non-U.S. earnings. Although details are not yet
available, these changes could impact the carrying value of our deferred tax balances, result in one time cash tax payments
during a transitional period, and impact our effective tax rate going forward. At this time there is insufficient detail to these
reform proposals to estimate their impact with any certainty.
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.
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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, 2017,
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, 2017, 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, 2017, 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, 2017.
Joseph A. Sullivan
Chairman and Chief Executive Officer
Peter H. Nachtwey
Senior Executive Vice President and Chief Financial Officer
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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, 2017 and March 31, 2016, and
the results of their operations and their cash flows for each of the three years in the period ended March 31, 2017 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, 2017, 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 24, 2017
51
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ASSETS
Current Assets
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, 2017
March 31, 2016
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
Other
Other current assets of consolidated investment vehicles
Total Current Assets
Fixed assets, net
Intangible assets, net
Goodwill
Deferred income taxes
Other
Other assets of consolidated investment vehicles
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Current Liabilities
Accrued compensation
Accounts payable and accrued expenses
Short-term borrowings
Contingent consideration
Other
Other current liabilities of consolidated investment vehicles
Total Current Liabilities
Deferred compensation
Deferred income taxes
Contingent consideration
Other
Long-term debt, net
TOTAL LIABILITIES
Commitments and Contingencies (Note 8)
REDEEMABLE NONCONTROLLING INTERESTS
STOCKHOLDERS' EQUITY
Common stock, par value $.10; authorized 500,000,000 shares; issued 95,726,628 shares
for March 2017 and 107,011,664 shares for March 2016
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
64
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52
$
$
$
$
$
733,709
651
16,046
433,192
70,527
423,619
49,901
74,102
—
1,801,747
159,662
4,034,380
1,924,889
202,843
156,907
9,987
8,290,415
486,679
181,793
—
22,316
117,863
736
809,387
87,757
329,229
14,494
138,737
2,221,867
3,601,471
$
$
1,329,126
297
19,580
334,922
74,694
515,335
48,715
55,405
6,970
2,385,044
163,305
3,146,485
1,479,516
206,797
139,215
84
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
677,772
175,785
9,573
2,385,726
(24,057)
24,057
1,694,859
(106,784)
3,983,374
27,798
4,011,172
8,290,415
$
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
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
Total Operating Expenses
OPERATING INCOME
NON-OPERATING INCOME (EXPENSE)
Interest income
Interest expense
Other income (expense), net, including $107,074 debt
extinguishment loss in fiscal 2015
Non-operating income (expense) of consolidated investment
vehicles, net
Total Non-Operating Income (Expense)
INCOME (LOSS) BEFORE INCOME TAX PROVISION
Income tax provision
NET INCOME (LOSS)
Less: Net income (loss) attributable to noncontrolling
interests
NET INCOME (LOSS) ATTRIBUTABLE TO LEGG
MASON, INC.
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO
LEGG MASON, INC. SHAREHOLDERS:
Basic
Diluted
See Notes to Consolidated Financial Statements
$
$
$
Years Ended March 31,
2017
2016
2015
$
925,250
$
826,080
$
824,211
1,482,045
1,409,059
1,544,494
108,277
366,677
4,653
41,982
381,486
2,237
83,519
361,188
5,694
2,886,902
2,660,844
2,819,106
1,374,334
27,314
1,401,648
499,125
208,885
113,714
26,190
35,000
180,097
2,464,659
422,243
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
1,208,214
24,556
1,232,770
594,788
182,438
109,708
2,625
—
198,558
2,320,887
498,219
6,815
(113,173)
5,634
(48,463)
7,440
(58,274)
41,664
(25,977)
(85,280)
13,329
(51,365)
370,878
84,175
286,703
(7,243)
(76,049)
(25,218)
7,692
(32,910)
5,888
(130,226)
367,993
125,284
242,709
59,447
(7,878)
5,629
227,256
$
(25,032)
$
237,080
2.19
2.18
$
$
(0.25)
(0.25)
$
$
2.06
2.04
53
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LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
NET INCOME (LOSS)
Other comprehensive income (loss):
Foreign currency translation adjustment
Reclassification of cumulative foreign currency
translation on Legg Mason Poland sale
Unrealized losses on interest rate swap:
Unrealized losses on interest rate swap, net of tax
benefit of $1,708
Reclassification adjustment for losses included in net
income, net of tax benefit of $1,708
Net unrealized losses on interest rate swap
Unrealized holding losses on investment securities, net
of tax benefit of $3
Reclassification adjustment for losses on investment
securities included in net income, net of tax benefit of
$3
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
Net actuarial gains (losses) on defined benefit pension
plan
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,
2017
2016
2015
$
286,703
$
(32,910)
$
242,709
(32,924)
(8,525)
(88,982)
2,493
(2,718)
2,718
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5)
5
405
(405)
(114)
(9,860)
(40,291)
246,412
2,774
(5,751)
(38,661)
(9,595)
(98,691)
144,018
59,600
(11,738)
5,629
$
186,812
$
(26,923)
$
138,389
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LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
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
Performance-based restricted share units related to the acquisition of Clarion Partners
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
Reclassifications to noncontrolling interest for:
EnTrustPermal combination
Net increase in estimated redemption value of affiliate management equity plans
Ending balance
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
Beginning balance
Net actuarial gains (losses) on defined benefit pension plan
Reclassification to assets held for sale
Foreign currency translation adjustment
Reclassification of cumulative foreign currency translation on Legg Mason Poland
Ending balance
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO LEGG MASON, INC.
NONREDEEMABLE NONCONTROLLING INTEREST
Beginning balance
Net income attributable to noncontrolling interests
Grants of affiliate management equity plan interests
Distributions
Ending balance
TOTAL STOCKHOLDERS’ EQUITY
See Notes to Consolidated Financial Statements
Years Ended March 31,
2016
2015
2017
$
$
10,701
32
2
45
(37)
(1,170)
9,573
$
11,147
33
2
14
(41)
(454)
10,701
11,717
71
5
94
(47)
(693)
11,147
2,693,113
8,958
514
71,494
11,121
—
(12,102)
(380,502)
(6,870)
2,385,726
(26,263)
(516)
2,722
(24,057)
26,263
516
(2,722)
24,057
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
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
1,576,242
227,256
(90,578)
1,690,055
(25,032)
(87,818)
1,526,662
237,080
(73,687)
(15,500)
(2,561)
1,694,859
(66,493)
(9,860)
—
(32,924)
2,493
(106,784)
3,983,374
—
(963)
1,576,242
—
—
1,690,055
(60,742)
2,774
—
(8,525)
—
(66,493)
4,213,563
37,949
(9,595)
(114)
(88,982)
—
(60,742)
4,484,901
22,202
7,397
4,600
(6,401)
27,798
$ 4,011,172
—
802
21,400
—
22,202
$ 4,235,765
—
—
—
—
—
$ 4,484,901
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LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended March 31,
2016
2015
2017
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 (Loss) to net cash provided by
operations:
Impairments of intangible assets
Depreciation and amortization
Accretion and amortization of securities discounts and premiums, net
Stock-based compensation
Net unrealized (gains) losses on investments
Net (gains) and earnings on investments
Net (gains) losses 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
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
$ 286,703
$ (32,910) $ 242,709
—
—
—
—
107,074
(98,418)
35,000
80,213
5,691
93,008
(33,088)
(9,717)
(13,329)
57,804
(39,500)
1,722
(28,921)
98,473
(13,481)
(11,766)
45,177
371,000
60,297
3,140
92,927
39,460
(13,404)
2,496
(7,727)
(33,375)
2,631
34,308
(82,423)
(9,545)
4,947
(1,631)
—
55,086
4,275
66,245
24,058
(37,970)
(1,308)
100,387
—
(12,939)
(28,668)
47,357
19,547
(9,936)
114,934
34,456
30,998
22,248
(16,082)
(51,027)
(3,812)
$ 539,772
14,316
(7,593)
(11,573)
(1,888)
$ 454,451
(17,727)
10,314
(14,763)
1,182
(3,321)
$ 568,118
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LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
Years Ended March 31,
2016
2015
2017
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for fixed assets
Business investments and acquisitions, net of cash acquired of $33,547,
$9,667 and $29,830 in fiscal 2017, 2016 and 2015, respectively
Proceeds from sales of businesses and investments
Change in restricted cash
Purchases of investment securities
Returns of capital and proceeds from sales and maturities of investments
CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) 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
Distributions to affiliate noncontrolling interests
Net subscriptions/(redemptions) attributable to 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 $(1,014), $(4,689) and $(865), respectively
Interest
See Notes to Consolidated Financial Statements
$
(39,977) $
(40,330) $
(45,773)
(1,010,428)
19,469
2,982
—
8,289
(1,019,665)
(40,000)
—
(6,587)
—
500,000
(17,639)
9,506
(12,139)
(381,672)
(87,897)
(35,862)
(44,587)
(116,877)
1,353
(595,417)
1,329,126
$ 733,709
(234,053)
—
21,065
—
8,749
(244,569)
(183,747)
47,001
(25,571)
(2,641)
2,688
(208,043)
40,000
—
(22,765)
—
699,793
(13,539)
10,022
(21,637)
(209,632)
(84,093)
(1,016)
68,639
465,772
(16,080)
659,574
669,552
—
(645,780)
—
(79,179)
658,769
(5,250)
24,288
(22,114)
(356,522)
(70,815)
—
(10,459)
(507,062)
(41,483)
(188,470)
858,022
$ 1,329,126 $ 669,552
$
21,552
105,381
$
$
23,743
49,393
19,578
59,039
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LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts or unless otherwise noted)
March 31, 2017
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.
All references to fiscal 2017, 2016 or 2015, 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, and income taxes. 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 products. 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 investment assets to any of these investment products. In accordance with financial accounting
standards, Legg Mason consolidates certain sponsored investment products, some of which are designated and reported as
consolidated investment vehicles (“CIVs”). The consolidation of sponsored investment products, 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 products is recorded
in Non-Operating Income (Expense) and reflected in Net income (loss) attributable to noncontrolling interests.
Certain of the investment products Legg Mason sponsors and manages 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 products 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 fund the initial cash investment in certain VRE investment products 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, the products with 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. As of March 31, 2017 and 2016,
no consolidated VREs were designated as CIVs.
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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. Legg Mason must consolidate any VIE for which it is deemed to be the primary beneficiary.
Legg Mason's investment in CIVs as of March 31, 2017 and 2016 was $28,300 and $13,641, respectively, which represents
its maximum risk of loss, excluding uncollected advisory fees, which were not material. The assets of these CIVs are
primarily comprised on 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.
Updated Consolidation Accounting Guidance
Effective April 1, 2016, Legg Mason adopted updated consolidation accounting guidance on a modified retrospective basis.
Under the updated guidance, if limited partners or similar equity holders in a sponsored investment vehicle structured as a
limited partnership or a similar entity do not have either substantive kick-out or substantive participation rights over the
general partner, the entities are VIEs. As a sponsor and manager of an investment vehicle, Legg Mason may be deemed a
decision maker under the accounting guidance. If the fees paid to a decision maker are market-based, such fees are not
considered variable interests in a VIE. Market-based fees are both customary and commensurate with the level of effort
required for the services provided. Additionally, if employee interests in a sponsored investment vehicle are not made to
circumvent the consolidation guidance and are not financed by the sponsor, they are not included in the variable interests
assessment, and are not included in the primary beneficiary determination.
A decision maker is deemed to be a primary beneficiary of a VIE if it has the power to direct activities that most significantly
impact the economic performance of the VIE and the obligation to absorb losses or receive benefits from variable interests
that could be significant to the VIE. In determining whether it is the primary beneficiary of a VIE, Legg Mason considers
both qualitative and quantitative factors such as the voting rights of the equity holders, guarantees, and implied relationships.
If a fee paid to a decision maker is not market-based, it will be considered in the primary beneficiary determination.
The adoption of this accounting guidance as of April 1, 2016, resulted in certain sponsored investment products that reside
in foreign mutual fund trusts that were previously accounted for as VREs to be evaluated as VIEs, and the consolidation of
nine funds, which were also designated as CIVs. Under the updated accounting guidance, Legg Mason also concluded it
was the primary beneficiary of one EnTrust Capital ("EnTrust") sponsored investment fund VIE, which was consolidated
and designated a CIV upon the merger of EnTrust and The Permal Group, Ltd. ("Permal"). The adoption also resulted in
the deconsolidation of 13 of 14 previously consolidated employee-owned funds, as Legg Mason no longer has a variable
interest in those 13 funds.
As of March 31, 2017, Legg Mason no longer held a significant financial interest in seven of the above foreign mutual funds,
and therefore concluded it was no longer the primary beneficiary. As a result, these seven funds were not consolidated as
of March 31, 2017. In addition, during the year ended March 31, 2017, Legg Mason concluded that it was the primary
beneficiary of one additional foreign mutual fund, which was consolidated and designated as a CIV.
Legg Mason also concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated
(and designated as a CIV) as of March 31, 2017. This sponsored investment fund was also consolidated under prior accounting
guidance, as further discussed below.
The adoption of the updated accounting guidance on the Consolidated Balance Sheet as of March 31, 2017, resulted in net
reductions of $5,276 in assets, $4,362 in liabilities, and $4,959 in redeemable noncontrolling interests from CIVs.
Prior Consolidation Accounting Guidance
Under prior accounting guidance, for most sponsored investment fund VIEs deemed to be investment companies, including
money market funds, Legg Mason determined it was the primary beneficiary of a VIE if it absorbed a majority of the VIE's
expected losses, or received a majority of the VIE's expected residual returns, if any. Legg Mason's determination of expected
residual returns excluded gross fees paid to a decision maker if certain criteria relating to the fees were met. In determining
whether it was the primary beneficiary of a VIE, Legg Mason considered both qualitative and quantitative factors such as
the voting rights of the equity holders, economic participation of all parties (including how fees were earned and paid to
Legg Mason), related party ownership, guarantees, and implied relationships.
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For other sponsored investment funds that did not meet the investment company criteria, Legg Mason determined it was the
primary beneficiary of a VIE if it had both the power to direct the activities of the VIE that most significantly impacted the
entity's economic performance and the obligation to absorb losses, or the right to receive benefits, that could have been
significant to the VIE.
Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE, that was consolidated as of
March 31, 2016 and 2015, despite significant third-party investments in this product. Also, as of March 31, 2016 and 2015,
Legg Mason concluded it was the primary beneficiary of 14 and 17 employee-owned funds, respectively, it sponsored which
were consolidated and designated as CIVs. As discussed above, effective April 1, 2016, under new accounting guidance,
all but one of those employee-owned funds no longer qualified as VIEs, and 13 of the employee-owned funds which were
consolidated as of March 31, 2016, were therefore deconsolidated.
As of March 31, 2016, Legg Mason had a variable interest in three collateralized loan obligations ("CLOs"). Legg Mason
concluded it was not the primary beneficiary of these CLOs, which were not consolidated, as it held no equity interest in
these investment products and the level of fees they were expected to pay to Legg Mason was insignificant. Under the new
guidance, effective April 1, 2016, these CLOs no longer qualify as VIEs in which Legg Mason might be a primary beneficiary.
See Notes 3 and 17 for additional information related to VIEs.
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 and other cash that is not available to
Legg Mason for general corporate use.
Financial Instruments
Substantially all financial instruments are reflected in the financial statements at fair value or amounts that approximate fair
value, except Legg Mason's long-term debt not designated for a hedging transaction.
As discussed above in "Consolidation," proprietary fund products with seed capital investments 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), net, on the Consolidated Statements of Income (Loss).
Legg Mason generally redeems its investments 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
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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
Other non-operating income (expense), net. A 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, 2017, 2016, and 2015, 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.
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, 2017 and 2016, aggregated $2,264,867 and $1,773,852,
respectively. Except for long-term debt designated for a hedging transaction as of March 31, 2016, these fair values were
estimated using publicly quoted market prices and were classified as Level 2 in the fair value hierarchy, as described below.
As of March 31, 2016, the 2.7% Senior Notes due 2019 designated for a hedging transaction were 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. During fiscal 2017, the
related interest rate contract was terminated, and therefore, as of March 31, 2017, the fair value of the 2.7% Senior Notes
was estimated using publicly quoted market prices and was classified as Level 2 in the fair value hierarchy.
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 interest rate swaps 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), net, 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
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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 (the "fair value hierarchy"):
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.
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,
private equity funds, and real estate funds. This category may also include certain proprietary fund products with
redemption restrictions and contingent consideration.
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 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. Effective April
1, 2016, Legg Mason retroactively adopted updated accounting guidance on fair value measurement which removed the
requirement to categorize within the fair value hierarchy all investments for which fair value is measured using NAV as a
practical expedient.
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Any transfers between categories are measured at the beginning of the period.
As a result of the acquisition of Clarion Partners, LLC ("Clarion Partners") in April 2016, Legg Mason holds investments
in real estate funds structured as partnerships and limited liability companies, which are classified as Level 3. The fair values
of investments in real estate funds are prepared giving consideration to the income, cost and sales comparison approaches
of estimating property value. The income approach estimates an income stream for a property and discounts this income
plus a reversion (presumed sale) into a present value at a risk adjusted rate. Yield rates and growth assumptions utilized in
this approach are derived from market transactions as well as other financial and industry data. The discount rate and the
exit capitalization rate are significant inputs to these valuations. These rates are based on the location, type and nature of
each property, and current and anticipated market conditions. The cost approach estimates the replacement cost of the
building less physical depreciation plus the land value. The sales comparison approach compares recent transactions to the
appraised property. Adjustments are made for dissimilarities which typically provide a range of value. Many factors are
also considered in the determination of fair value including, but not limited to, the operating cash flows and financial
performance of the properties, property types and geographic locations, the physical condition of the asset, prevailing market
capitalization rates, prevailing market discount rates, general economic conditions, economic conditions specific to the
market in which the assets are located, and any specific rights or terms associated with the investment. Because of the
inherent uncertainties of valuation, the values may materially differ from the values that would be determined by negotiations
held between parties in a sale transaction.
See Note 3 for additional information regarding fair value measurements.
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.
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 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
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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
Long-term debt is recorded at amortized cost. Unamortized premiums, discounts, debt issuance costs and fair value hedge
adjustments related to long-term debt are presented in the balance sheet as direct adjustments to the carrying value of the
associated long-term debt liability and amortized to Interest expense over the legal term of the associated debt.
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
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
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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 also earns performance
fees on alternative products that lock at the end of varying investment periods or in multiple-year intervals.
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 for assets under advisement. 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, 2017,
2016, and 2015, no impairment charges were recorded. Deferred sales commissions, included in Other non-current assets
in the Consolidated Balance Sheets, were $4,891 and $6,713 at March 31, 2017 and 2016, 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.
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
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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, which may be reduced
for retirement-eligible recipients, 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 removing earnings allocated to participating securities) by the weighted-
average number of shares outstanding, which excludes participating securities. Legg Mason has issued to employees restricted
stock and restricted stock units that are deemed to be participating securities prior to vesting, because the related unvested
restricted shares/units 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 and does not allocate losses to participating securities.
Diluted EPS is similar to basic EPS, but the effect of potential common shares is included in the calculation unless the
potential common shares are antidilutive. For periods with a net loss, potential common shares other than participating
securities, are considered antidilutive and are excluded from the calculation.
See Note 12 for additional discussion of EPS.
Restructuring Costs
As further discussed in Note 2, Legg Mason restructured The Permal Group, Ltd. ("Permal") for the combination with
EnTrust Capital ("EnTrust"). The costs associated with this restructuring primarily related to employee termination benefits,
including severance and retention incentives, which were recorded as Transition-related compensation in the Consolidated
Statement of Income (Loss), and charges for consolidating leased office space, which were 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
products, and vested affiliate management equity plan interests. For CIVs and other consolidated sponsored investment
products 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 and affiliate minority 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. Changes in the expected settlement values are recognized over the settlement period as
adjustments to 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
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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 products, where the investor may request withdrawal at any time, fair value is based on market quotes of the
underlying securities held by the investment products. 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.
Net income (loss) attributable to noncontrolling interests in the Consolidated Statements of Income (Loss) includes the share
of net income (loss) of the respective subsidiary allocated to the minority interest holders.
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 (Loss). Sponsored investment funds are deemed to be affiliated entities under the related party definition in
relevant accounting guidance.
Recent Accounting Developments
In January 2017, the Financial Accounting Standards Board ("FASB") updated the guidance to simplify the test for goodwill
impairment. The updated guidance still requires entities to perform annual goodwill impairment tests by comparing the fair
value of a reporting unit with its related carrying amount, but it eliminates the requirement to potentially calculate the implied
fair value of goodwill to determine the amount of impairment, if any. Under the new guidance, an entity should recognize
an impairment charge if the reporting unit's carrying amount exceeds the reporting unit’s fair value, in the amount of such
excess. The guidance will be effective in fiscal 2020, with the option for early adoption in fiscal 2018. Legg Mason is
evaluating its adoption.
In August and November 2016, the FASB updated the guidance on the classification of certain cash receipts, cash payments
and restricted cash in the statement of cash flows. The updated guidance addresses the reporting classification of several
specific cash flow items, including restricted cash, debt prepayment or extinguishment costs, contingent consideration
payments, and distributions received from equity method investees, with the objective of reducing diversity in practice where
no specific guidance exists, or current guidance is unclear. The updated guidance will be effective in fiscal 2019, with the
option for early adoption. Legg Mason is currently evaluating the impact of its adoption.
In March 2016, the 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. In accordance with the updated guidance, Legg Mason will record a cumulative-effect
adjustment of approximately $22,600 as an increase to both deferred tax assets and Retained earnings on the Consolidated
Balance Sheet as of April 1, 2018 for tax benefits that were not previously recognized due to Legg Mason's cumulative tax
loss position. The updated guidance requires all excess tax benefits and deficiencies to be recognized as discrete items in
Income tax provision in the Consolidated Statements of Income (Loss) in the reporting period in which they occur, thereby
increasing the volatility of the Income tax provision as a result of fluctuations in Legg Mason's stock price. Legg Mason
expects to record a related discrete income tax expense of approximately $2,500 during the first quarter of fiscal 2018 for
vested stock awards with a grant date exercise price higher than the vesting date stock prices.
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 service or other 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 2014, the FASB updated the guidance on revenue recognition. The updated guidance provides a single, comprehensive
revenue recognition model for all contracts with customers, improves comparability and removes inconsistencies in revenue
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recognition practices across entities, industries, jurisdictions, and capital markets. The guidance also requires comprehensive
disclosures about the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers,
including significant judgments made in applying the guidance. 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. Legg Mason is currently reviewing its revenue contracts, and does not anticipate any
significant changes to current revenue recognition practices, except as follows. Legg Mason may be required to recognize
longer-term performance and incentive fees subject to clawback when clawback is not reasonably possible, which is earlier
than under its current revenue recognition process, which defers recognition until all contingencies are resolved. Additionally,
Legg Mason is evaluating whether certain separate account commissions currently expensed when paid meet the criteria for
capitalization and amortization. Legg Mason is also evaluating whether revenue-related costs currently recorded on a gross
presentation will be recorded on a net presentation, or vice versa. The evaluation is ongoing, and Legg Mason has not
determined the ultimate impact of the adoption or the transition method to be used upon adoption, which is effective for
Legg Mason on April 1, 2018.
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2. ACQUISTIONS AND DISPOSITIONS
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:
EnTrust
Capital(1)
May 2,
2016
Clarion
Partners(1)
April 13,
2016
RARE
Infrastructure
Limited
October 21,
2015
Martin Currie
(Holdings)
Limited
October 1,
2014
QS Investors
Holdings,
LLC
May 31,
2014
Acquisition Date
Purchase price
Cash
Estimated contingent consideration
$
400,000
—
$
Performance-based Legg Mason
restricted share units
Minority equity interest transferred
Total consideration
Fair value of noncontrolling interests
Total
Identifiable assets and liabilities
Cash
Investments
Receivables
Indefinite-life intangible fund
management contracts
Indefinite-life trade name
Amortizable intangible asset
management contracts
Fixed assets
Other current assets (liabilities), net
Liabilities, net
Pension liability
Deferred tax liabilities
Total identifiable assets and liabilities
Goodwill
$
—
140,000 (2)
540,000
247,700 (2)
787,700
8,236
16,220
20,820
262,300
7,400
65,500
4,479
1,030
(8,823)
—
—
377,162
410,538
$
631,476
—
11,121
—
642,597
105,300
747,897
25,307
22,285
53,657
505,200
23,100
102,800
8,255
(25,585)
(10,579)
—
(36,788)
667,652
80,245
$
$
213,739
25,000
—
—
238,739
62,722
301,461
9,667
—
6,612
122,755
4,766
67,877
673
(10,605)
(3,948)
—
(58,619)
139,178
162,283
$
$
202,577
75,211
—
—
277,788
—
277,788
29,389
—
—
135,321
7,130
15,234
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
(1) Subject to measurement period adjustments, including for amounts ultimately realized.
(2) Post combination EnTrustPermal noncontrolling interest of $403,200 also includes a fair value reclassification of $15,500 from retained earnings.
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EnTrust Capital
On May 2, 2016, Legg Mason acquired EnTrust and combined it with Permal, Legg Mason's existing hedge fund platform,
to form EnTrustPermal. EnTrust, an alternative asset management firm headquartered in New York, had $9,600,000 in
assets under management ("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. 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 $450,000 of 4.75% Senior Notes due 2026 (the "2026 Notes") and
$250,000 of 6.375% Junior Subordinated Notes due 2056 (the "6.375% 2056 Notes") in March 2016. As a result of the
combination, Legg Mason owns 65% of the new entity, 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 subject to various conditions, including the passage of time. The fair value of the noncontrolling interests in
the Consolidated Balance Sheet reflects the total business enterprise value of the combined entity, after appropriate discounts
for lack of marketability and control.
The fair value of the acquired amortizable intangible asset management contracts has a useful life of approximately eight
years at acquisition. Purchase price allocated to intangible assets and goodwill is expected to be deductible for U.S. tax
purposes over a period of 15 years. Goodwill is principally attributable to synergies expected to arise with EnTrust.
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
Indefinite-life trade name
Amortizable intangible asset management contracts
Projected Cash Flow Growth
Discount Rate
(1)% to 5% (weighted-average: 4%)
6% to 14% (weighted-average: 6%)
14.5%
14.5%
Projected AUM Growth / (Attrition)
10% / (13)%
Discount Rate
13.5%
Costs incurred in connection with the acquisition of EnTrust were $7,046 and $3,492 during the years ended March 31, 2017
and 2016, respectively.
The financial results of EnTrust included in Legg Mason's consolidated financial results for the year ended March 31, 2017,
include revenues of $115,327 and currently does not have a material impact on Net Income (Loss) Attributable to Legg
Mason, Inc.
In connection with the combination, Legg Mason incurred total charges for restructuring and transition costs of $85,081
through March 31, 2017, which includes $41,785 recognized during the year ended March 31, 2017. These costs were
primarily comprised of charges for employee termination benefits, including severance and retention incentives, which were
recorded as Transition-related compensation, in the Consolidated Statements of Income (Loss), and real estate related charges,
which were recorded as Occupancy, in the Consolidated Statements of Income (Loss). While the combination is substantially
complete, Legg Mason expects to incur additional costs totaling $5,000 to $6,000 during fiscal 2018 and 2019.
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The table below presents a summary of changes in the restructuring and transition-related liability from December 31, 2015
through March 31, 2017, and cumulative charges incurred to date:
Balance as of December 31, 2015
Accrued charges
Payments
Balance as of March 31, 2016
Accrued charges
Payments
Balance as of March 31, 2017
Non-cash charges(2)
Year ended March 31, 2016
Year ended March 31, 2017
Total
Cumulative charges incurred through March 31, 2017
Compensation
$
— $
31,581
(21,938)
9,643
22,891
(29,211)
3,323
591
4,423
5,014
59,486
$
$
$
$
$
$
$
$
Other
Total
—
9,981 (1)
(2,097)
7,884
11,075 (1)
(12,408)
6,551
1,143
3,396
4,539
25,595
$
$
$
$
$
—
41,562
(24,035)
17,527
33,966
(41,619)
9,874
1,734
7,819
9,553
85,081
Includes lease loss reserve for space permanently abandoned of $9,069 for the year ended March 31, 2017, and $7,212 for the year ended March 31, 2016.
(1)
(2) 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 headquartered in New York. Clarion Partners managed approximately $41,500,000 in AUM on the date
of acquisition. Legg Mason acquired an 82% ownership interest in Clarion Partners for a cash payment of $631,476 (including
a payment for cash delivered of $36,772 and co-investments of $16,210), which was funded with a portion of the proceeds
from the issuance of the 2026 Notes and the 6.375% 2056 Notes in March 2016. The Clarion Partners management team
retained 18% of the outstanding equity in Clarion Partners. The Clarion Partners management team also retained rights to
the full amount of performance fee revenues earned on historic AUM in place as of the closing of the acquisition. Performance
fees earned on this historic AUM are fully passed through, per the terms of the acquisition agreement, and recorded as
compensation expense. Legg Mason expects the full pass through of performance fees to phase out approximately five
years post-closing. 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 subject
to various conditions, including the passage of time. The fair value of the noncontrolling interests reflects the total business
enterprise value, after appropriate discounts for lack of marketability and control.
Upon the acquisition, Legg Mason also granted certain key employees of Clarion Partners a total of 716 performance-based
Legg Mason restricted share units with an aggregate fair value of $11,121, which vest upon Clarion Partners achieving a
certain level of EBITDA, as defined in the award agreements, within a designated period after the closing of the acquisition.
The aggregate value of the award was included in the purchase price and was determined as of the grant date using a Monte
Carlo pricing model with the following assumptions:
Long-term EBITDA growth rate
Risk-free interest rate
Expected volatility:
Legg Mason
Clarion Partners
6.0%
2.3%
38.0%
30.0%
In connection with the transaction, Legg Mason also implemented an affiliate management equity plan for the management
team of Clarion Partners, which resulted in a non-cash charge of $15,200 in the three months ended June 30, 2016. See
Note 11 for additional information related to the Clarion Partners management equity plan.
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The fair value of the acquired amortizable intangible asset management contracts had an average useful life of approximately
10 years at acquisition. Approximately 82% of the purchase price allocated to intangible assets and goodwill is expected
to be deductible for U.S. tax purposes over a period of 15 years. Goodwill is principally attributable to synergies expected
to arise with Clarion Partners.
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
Indefinite-life trade name
Amortizable intangible asset management contracts:
Projected Cash Flow Growth
6% to 20% (weighted-average: 6%)
5% to 17% (weighted-average: 6%)
Projected AUM Growth / (Attrition)
7% / (10)%
Discount Rate
13.5%
13.5%
Discount Rate
13.4%
In addition to the previously discussed charge of $15,200 incurred in connection with the implementation of the Clarion
Partners management equity plan, during the years ended March 31, 2017 and 2016, there were $10,757 and $2,807,
respectively, of costs incurred in connection with the acquisition of Clarion Partners.
The financial results of Clarion Partners included in Legg Mason's consolidated financial results for the year ended March
31, 2017, include revenues of $249,468 and currently does not have a material impact to Net Income (Loss) Attributable to
Legg Mason, Inc.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined financial results of Legg Mason, Clarion
Partners, and EnTrust, as though the acquisitions had occurred as of April 1, 2015. The unaudited pro forma financial
information reflects certain adjustments for amortization expense related to the fair value of acquired intangible assets,
acquisition- and transition-related costs, interest expense related to debt incurred to finance the acquisitions, and the income
tax impact of the pro forma adjustments. The unaudited pro forma financial information is for informational purposes only,
excludes projected cost savings, and is not necessarily indicative of the financial results that would have been achieved had
the acquisitions actually occurred at the beginning of the first period presented.
Revenues
Net Income (Loss) Attributable to Legg Mason, Inc.
Net Income (Loss) Per Share Attributable to Legg Mason, Inc. Shareholders:
Basic
Diluted
$
$
$
Years Ended March 31,
2016
2,977,612
(79,347)
2017
2,904,253
272,985
$
2.63
2.62
$
$
(0.74)
(0.74)
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 (subsequently renamed Pacific Current 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 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, 2018, aggregating up to $81,063 (using the foreign exchange rate as of
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March 31, 2017, 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.
The transaction also provided for a potential contingent payment as of March 31, 2017, however no such payment was due
based on relevant net revenue targets.
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 of RARE Infrastructure,
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 was
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
Up to 10% (weighted-average: 7%)
16.5%
Projected AUM Growth / (Attrition)
7% / (8)%
Discount Rate
16.5%
During the year ended March 31, 2017, the amortizable intangible asset management contracts asset was impaired by $18,000.
See Note 5 for additional information.
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
Weighted-average: 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, 2017, the fair value of the contingent consideration liability was
$17,444, a decrease of $9,701 from March 31, 2016. During the year ended March 31, 2017, reductions in projected AUM
and revenues resulted in a $10,000 reduction in the estimated contingent consideration liability, recorded as a credit to Other
operating expense in the Consolidated Statement of Income (Loss). The reduction was offset in part by an increase of $299
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). Of
the total contingent consideration liability, $7,791 is included in current Contingent consideration in the Consolidated Balance
Sheet as of March 31, 2017, with the remaining $9,653 included in non-current Contingent consideration.
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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.
See Note 18 regarding the aggregate $34,000 impairment of the RARE Infrastructure amortizable asset management contracts
asset and trade name indefinite-life intangible asset and an $11,500 reduction in the estimated contingent consideration
liability subsequent to March 31, 2017.
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, a contingent consideration payment may be due March 31 following the third anniversary of
closing, aggregating up to approximately $407,403 (using the foreign exchange rate as of March 31, 2017 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, 2018, as specified in the share purchase agreement. The agreement
also provided for potential first and second anniversary contingent payments as of March 31, 2016 and 2017, respectively,
however no such payments were 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
Up 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
Weighted-average: 14%
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
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and other obligations that are accounted for separately. As of March 31, 2017, the fair value of the contingent consideration
liability was $12,018, a decrease of $29,204 from March 31, 2016. During the year ended March 31, 2017, reductions in
projected AUM and performance fees resulted in a $25,000 reduction in the estimated contingent consideration liability,
recorded as a credit to Other operating expense in the Consolidated Statement of Income (Loss). The remaining decrease
of $4,204 was attributable to changes in the exchange rate, which is included in Accumulated other comprehensive loss,
net, as Foreign currency translation adjustment, net of accretion. The contingent consideration liability was included in
current Contingent consideration in the Consolidated Balance Sheet as of March 31, 2017, and recorded at an entity with a
British pound functional currency, such that related changes in the exchange rate do not impact net income (loss).
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 65% equities (Level 1) and 35% bonds
(Level 2) as of March 31, 2017, and 60% equities (Level 1) and 40% bonds (Level 2) as of March 31, 2016. Assumptions
used to determine the expected return on plan assets targets a 60% / 40% 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, 2017.
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. Legg Mason uses the
corridor approach to account for this plan. Under the corridor approach, actuarial gains and losses on plan assets and
liabilities are deferred and reported as Other comprehensive income (loss). However, if at the beginning of the next fiscal
year, the actuarial gains and losses exceed 10% of the greater of the fair value of the plan assets or the plan benefit obligation,
the excess will be amortized as Compensation expense over the recovery period of 15 years.
The resulting net benefit obligation, comprised as follows, is included in the March 31, 2017 and 2016, Consolidated Balance
Sheets as Other non-current liabilities:
Fair value of plan assets (at 5.4% and 5.2%, respectively, expected
weighted-average long-term return)
Benefit obligation (at 2.7% and 3.6%, 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
Exchange rate changes
Ending benefit obligation
2017
2016
$
59,623
(97,137)
(37,514) $
57,253
(90,010)
(32,757)
Years ended March 31,
2017
2016
90,010
2,904
18,308
(1,946)
(12,139)
97,137
$
$
98,110
3,268
(6,922)
(1,524)
(2,922)
90,010
$
$
$
$
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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
Years ended March 31,
2017
2016
$
$
57,253
10,019
1,945
(1,946)
(7,648)
59,623
$
$
59,404
(984)
2,262
(1,524)
(1,905)
57,253
For the years ended March 31, 2017 and 2016, a net periodic benefit cost of $93 and $92, 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 years ended March 31, 2017 and 2016, are as follows:
Interest costs
Expected return on plan assets
Net periodic benefit cost
2017
2016
$
$
2,904
(2,811)
93
$
$
3,268
(3,176)
92
Net actuarial losses of $16,681 and $6,821 were included in Accumulated other comprehensive loss, net, in the Consolidated
Balance Sheets at March 31, 2017 and 2016, respectively.
As of March 31, 2017, the plan expects to make benefit payments over the next 10 fiscal years as follows:
2018
2019
2020
2021
2022
2023 - 2027
$
916
1,114
1,099
1,346
1,771
11,381
The contingent consideration payments may provide some 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.
The Pensions Regulator in the U.K. ("the Regulator"), is reviewing the pension plan's current structure and funding status.
While the review is still in process, the Regulator has expressed certain concerns that plan transactions effected around the
acquisition closing were detrimental to the plan. While Martin Currie and the trustees of the pension plan dispute the
Regulator's concerns, they are cooperating with the Regulator on a revised plan structure, which will likely result in certain
changes to the plan structure, including additional guarantees and potential accelerated funding of a portion of the plan's
benefit obligations. Absent funding from contingent consideration payments or any requirement from the Regulator for
additional payments or guarantees, Martin Currie expects to contribute $1,880 to the plan during the year ended March 31,
2018.
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.
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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 $2,507 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 August 2016, Legg Mason paid contingent consideration of $6,587 for the second anniversary payment. Additional
contingent consideration of up to $20,000 for the fourth anniversary payment, and up to $3,400 for a potential catch-up
adjustment for the second anniversary payment shortfall, may be due in July 2018, dependent on the achievement of certain
net revenue targets.
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. Goodwill is principally
attributable to synergies expected to arise with QS Investors.
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%
As of March 31, 2017, the fair value of the contingent consideration liability was $4,841, a decrease of $8,908 from March
31, 2016, which reflects the payment discussed above, offset in part by accretion. In addition, during the year ended March
31, 2017, a reduction in projected net revenue resulted in a $2,500 reduction in the estimated contingent consideration
liability, recorded as a credit to Other operating expense in the Consolidated Statement of Income (Loss). The contingent
consideration liability was included in non-current Contingent consideration in the Consolidated Balance Sheet as of March
31, 2017.
Legg Mason integrated two existing affiliates, Batterymarch and Legg Mason Global Asset Allocation, 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 for the year ended March 31, 2015, 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.
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The table below presents a summary of changes in the restructuring and transition-related liability from December 31, 2013
through March 31, 2017, 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
Payments
Balance as of March 31, 2017
Non-cash charges(2)
Year ended March 31, 2014
Year ended March 31, 2015
Total
Cumulative charges incurred through March 31, 2015
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
(1,522)
2,221
286
1,570
1,856
11,687
$
$
$
$
$
—
2,272
2,272
32,617
(28,598)
6,291
(2,548)
3,743
(1,522)
2,221
286
3,229
3,515
38,404
(1)
(2)
Includes lease loss reserve of $6,760 for space permanently abandoned.
Includes stock-based compensation expense and accelerated fixed asset depreciation.
Financial Guard, LLC
On August 17, 2016, Legg Mason acquired 82% of the equity interests in Financial Guard, LLC ("Financial Guard"), an
online registered investment advisor and technology-enabled wealth management and investment advice platform. The
acquisition required an initial cash payment, which was funded with existing cash resources, and a contingent payment of
up to $3,000 based on certain metrics within the first year after the acquisition. In connection with the acquisition, Legg
Mason recognized certain business assets and goodwill of $11,995. Legg Mason also committed to contribute up to $5,000
of additional working capital to Financial Guard, to be paid over the two year period following the acquisition, of which
$1,250 has been paid as of March 31, 2017. During the year ended March 31, 2017, the $2,000 estimated contingent
consideration recorded at acquisition was reduced to zero.
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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 or, if earlier, within nine months of the SEC's approval of Precidian's application to operate
its active shares product. Legg Mason may, subject to satisfaction of certain closing conditions and upon payment of further
consideration, 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, 2017 and 2016, under the equity method of accounting.
Fauchier Partners Management, Limited
On March 13, 2013, Permal 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 for
the second anniversary payment. The agreement also provided for a potential fourth anniversary contingent consideration
payment, however, no such payment was due based on relevant financial metrics and no additional contingent consideration
will be paid in connection with this acquisition.
Dispositions
On December 23, 2016 and March 31, 2017, Legg Mason sold all of its ownership interests in each of a small equity advisor
in Poland and a small Boston-based private equity advisor. Also, on February 24, 2017, Legg Mason liquidated its share
of a small equity advisory joint venture. Net proceeds from these transactions were $19,469 and the transactions did not
have a material impact on Legg Mason's consolidated financial condition or results of operations.
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
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.
Effective April 1, 2016, Legg Mason adopted updated accounting guidance on fair value measurement which removed both
the requirement to categorize within the fair value hierarchy and the requirement to provide related sensitivity disclosures
for all investments for which fair value is measured using NAV as a practical expedient. The amount of these investments
is disclosed separately in the following tables as a reconciling item between investments included in the fair value hierarchy
and investments reported in the Consolidated Balance Sheets. The updated guidance was adopted on a retrospective basis,
therefore, the investment amounts for which fair value is measured using NAV as a practical expedient have been removed
from the fair value hierarchy for all periods presented.
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The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:
As of March 31, 2017
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investments
measured at
NAV
Total
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:(6)(8)
Seed capital investments(6)
Seed capital investments in real estate
funds
Other proprietary fund products
Investments in partnerships and LLCs:(7)
Seed capital investments
Investments related to long-term
incentive compensation plans
Other proprietary fund products
Derivative assets(7)(8)
Other investments(7)
Total
Liabilities:
Contingent consideration liabilities(9)
Derivative liabilities(7)
Total
$
$
$
$
403,585
—
403,585
141,025
39,177
150,576
—
—
330,778
—
—
—
—
$
— $
35,835
35,835
75,275
2,724
—
2,502
—
80,501
—
—
—
—
— $
—
—
— $ 403,585
35,835
—
439,420
—
—
—
—
—
4,373
11
220,673
41,912
327
150,903
—
2,502
1,337
1,337
6,292
11,003
7,629
423,619
752
22,712
23,464
26,909
1,646
—
15,617
26,909
17,263
—
3,440
3,440
—
—
2,718
—
737,081
$
— $
(4,522)
(4,522) $
—
99
—
—
116,435
$
9,315
1,825
—
113
41,897
$
—
—
—
—
52,772
9,315
1,924
2,718
113
$ 948,185
— $
—
— $
(36,810) $
—
(36,810) $
— $ (36,810)
—
(4,522)
— $ (41,332)
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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
Other proprietary fund products
Investments in partnerships and LLCs:(7)
Investments related to long-term
incentive compensation plans
Other proprietary fund products
Derivative assets(7)(8)
Other investments(7)
Total
Liabilities:
Contingent consideration liabilities(9)
Derivative liabilities(8)
Total
Quoted prices in
active markets
(Level 1)
Significant other
observable
inputs
(Level 2)
As of March 31, 2016
Significant
unobservable
inputs
(Level 3)
Investments
measured at
NAV
Total
$
1,057,916
—
1,057,916
205,608
65,112
105,568
$
— $
35,265
35,265
102,021
2,331
—
1,329
7,575
—
377,617
—
111,927
— $
—
—
— $ 1,057,916
—
35,265
— 1,093,181
3
—
—
—
—
3
18,304
21
325,936
67,464
996
106,564
—
8,904
6,467
25,788
6,467
515,335
—
—
—
—
627
—
19,812
9,434
20,439
9,434
—
—
1,051
—
1,436,584
$
— $
(18,079)
(18,079) $
$
$
$
—
—
7,599
—
154,791
$
7,501
4,807
—
83
13,021
$
—
3,124
—
—
58,158
7,501
7,931
8,650
83
$ 1,662,554
— $
—
— $
(84,585) $
—
(84,585) $
(84,585)
— $
—
(18,079)
— $ (102,664)
(1) Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds 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.
(2) Trading investments of proprietary fund products and other trading investments consist of approximately 79% and 21% equity and debt securities, respectively,
as of March 31, 2017, and approximately 68% and 32% equity and debt securities, respectively, as of March 31, 2016.
Includes $26,854 and $54,392 in noncontrolling interests associated with consolidated seed investment products as of March 31, 2017 and 2016, respectively.
(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) Certain of Legg Mason's equity method investments are investment companies that record underlying investments at fair value. Therefore, the fair value of
these investments 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. Other equity method investments are excluded from the tables above.
(6) Excludes $28,300 and $13,641 of seed capital as of March 31, 2017, and 2016, respectively, which is related to Legg Mason's investments in CIVs. See Note
17.
(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.
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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 $305,288 and $368,920, as
of March 31, 2017 and 2016, respectively, which are substantially comprised of investments in 57 funds and 63 funds,
respectively, that are individually greater than $1,000, 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.
The net realized and unrealized gain (loss) for investment securities classified as trading was $44,534, $(27,654), and $10,545
for the years ended March 31, 2017, 2016, and 2015, respectively.
The net unrealized gains (losses) relating to trading investments still held as of the reporting dates were $32,862, $(35,111),
and $(10,858) for the years ended March 31, 2017, 2016, and 2015, respectively.
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The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for
the years ended March 31, 2017 and 2016, are presented in the tables below:
Balance as of
March 31,
2016
Purchases
Sales
Redemptions/
Settlements/
Other
Transfers
Realized
and
unrealized
gains/
(losses),
net
Balance as of
March 31,
2017
Assets:
Trading investments
of seed capital
investments in
proprietary fund
products
Equity method
investments
relating to long-
term incentive
compensation
plans
Equity method
investments in
partnerships and
LLCs:
Seed capital
investments
Seed capital
investments in
real estate funds
Other proprietary
fund products
Investments in
partnerships and
LLCs:
Investments related
to long-term
incentive
compensation
plans
Other proprietary
fund products
Other investments
Liabilities:
Contingent
consideration
liabilities
n/a - not applicable
$
$
$
3
$
— $ — $
(3) $
— $
— $
—
—
3,334
—
(2,194)
—
197
1,337
627
—
—
—
26,130
—
—
—
—
—
(1,216)
—
—
—
—
125
752
1,995
1,646
26,909
1,646
7,501
1,814
—
—
—
—
4,807
83
13,021
—
—
$ 31,278
—
—
$ — $
(3,001)
—
(6,414) $
—
—
— $
19
30
4,012
$
9,315
1,825
113
41,897
(84,585) $ (2,000)
n/a $
6,587
n/a $ 43,188
$
(36,810)
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Assets:
Trading investments
of seed capital
investments in
proprietary fund
products
Equity method
investments in
partnerships and
LLCs:
Seed capital
investments
Other
Investments in
partnerships and
LLCs:
Investments
related to long-
term incentive
compensation
plans
Other proprietary
fund products
Other investments
Liabilities:
Contingent
consideration
liabilities
n/a - not applicable
Balance as of
March 31,
2015
Purchases
Sales
Redemptions/
Settlements/
Other
Transfers
Realized
and
unrealized
gains/
(losses),
net
Balance as of
March 31,
2016
$
2
$
1
$
— $
— $
— $
— $
3
734
7,526
—
—
— (5,352)
—
(1,853)
—
—
(107)
(321)
627
—
5,595
1,906
10,027
77
23,961
$
—
—
1,907
$
—
—
—
$ (5,352) $
—
—
(5,820)
—
(7,673) $
—
—
— $
—
600
6
178
$
7,501
4,807
83
13,021
$
(110,784) $ (27,457)
n/a $
22,765
n/a $ 30,891
$
(84,585)
Realized and unrealized gains and losses recorded for Level 3 investments are primarily included in Other non-operating
income (expense), net, 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 $45,099, $27,056, and $7,479 for the years ended March 31,
2017, 2016, and 2015, respectively.
There were no significant transfers between Level 1 and Level 2 during the years ended March 31, 2017 and 2016.
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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, 2017 and 2016, 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, 2017
March 31,
2017
March 31,
2016
Unfunded
Commitments
Remaining
Term
$
18,537 (1) $
19,139
n/a
n/a
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
Category of
Investment
Funds-of-
hedge funds
Hedge funds
Private equity
funds
Equity
7,236
n/a
n/a
Up to 12
years
n/a
Various (3)
Long/short equity
17,612 (2)
20,471
10,107
11,403
$
20,000
method
Long/short fixed income
6,292
6,467
Various
Other
Total
n/a - not applicable
(1) Liquidation restrictions: 1% daily redemption, 11% monthly redemption, 12% quarterly redemption, and 76% are not subject to redemption or are
678
58,158
n/a
27,236
224
52,772
$
$
$
not currently redeemable.
(2) Liquidations are expected over the remaining term.
(3) Of this balance, 26% has a remaining term of less than one year and 74% has a remaining term of 15 years.
There are no current plans to sell any of these investments held as of March 31, 2017.
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
2017
2016
$
$
159,102
304,943
204,551
668,596
(508,934)
159,662
$
$
150,259
293,844
199,354
643,457
(480,152)
163,305
Depreciation and amortization expense related to fixed assets was $54,023, $55,318, and $52,461 for the years ended March
31, 2017, 2016, and 2015, respectively. The expense includes accelerated depreciation and amortization of $2,688 and
$4,147 for the years ended March 31, 2017 and 2016, respectively, primarily related to space vacated in connection with
the restructuring of Permal for the combination with EnTrust, and $1,265 for the year ended March 31, 2015, primarily
related to the integration of Batterymarch into QS Investors.
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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 and other
Cost
Accumulated amortization
Net(1)
Indefinite–life intangible assets
U.S. domestic mutual fund management contracts
Clarion Partners fund management contracts
EnTrustPermal fund management contracts(2)
Other fund management contracts
Trade names(1)
March 31, 2017
March 31, 2016
$
408,025
(194,371)
$
213,654
2,106,351
505,200
596,404
542,908
259,513
(171,169)
88,344
2,106,351
—
334,104
560,499
69,863
3,820,726
4,034,380 $
57,187
3,058,141
3,146,485
Intangible assets, net
(1) As of March 31, 2017, Amortizable intangible asset management contracts, net and Trade names include $92,844 and $23,100, respectively, related
to the acquisition of Clarion Partners and $57,995 and $7,400, respectively, related to the acquisition of EnTrust. See Note 2 for additional
information.
$
(2) As of March 31, 2017, includes $262,300 related to the acquisition of EnTrust. As further discussed below, the indefinite-life funds-of-hedge funds
management contracts asset related to the legacy Permal business was combined with the indefinite-life funds-of-hedge funds management contracts
asset related to EnTrust as of March 31, 2017. See Note 2 for additional information regarding the EnTrust acquisition.
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.
During the nine months ended December 31, 2016, revenues related to the RARE Infrastructure separate account contracts
amortizable asset declined due to client withdrawals of AUM. Based on revised attrition estimates, the remaining useful
life of the acquired contracts was decreased from 11 years to eight years at December 31, 2016. As a result of the client
attrition, the related decline in revenues, and the revised estimate of the remaining useful life, the amortized carrying value
of the management contracts asset was determined to exceed its fair value and an impairment charge of $18,000 was recorded
during the year ended March 31, 2017. Management estimated the fair value of this asset based upon a discounted cash
flow analysis using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used
in the cash flow analysis included projected AUM growth/(attrition) rates of 7%/(13)% and a discount rate of 15.5%.
Legg Mason completed its annual impairment testing process of goodwill and indefinite-life intangible assets as of December
31, 2016, and determined that the carrying value of the Permal trade name indefinite-life asset exceeded its fair value, which
resulted in an impairment charge of $17,000. The impairment charge was primarily the result of a decrease in revenues and
a reduction in the royalty rate, reflecting a decline in the value of the Permal trade name due to a change in branding and
decline in the use of the separate Permal name following the combination with EnTrust. Management estimated the fair
value of the Permal trade name based upon a discounted cash flow analysis using unobservable market data inputs, which
are Level 3 measurements. The significant assumptions used in the cash flow analysis included projected annual revenue
growth rates of 3% to 9% (average: 7%), a royalty rate of 1.5% and a discount rate of 16.0%.
Projected revenue, AUM growth rates and client attrition 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
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well as interest rates and other factors. Decreases in the projected revenue or AUM growth rates and/or increases in the
discount rates could result in lower fair value measurements and potential additional impairments in these intangible assets.
There were no other impairments to indefinite-life intangible assets, amortizable management contracts intangible assets,
or goodwill as of December 31, 2016. Legg Mason also determined that no triggering events occurred as of March 31,
2017, that would require further impairment testing.
As of December 31, 2016, the assessed fair value of the indefinite-life funds-of-hedge funds management contracts asset
related to the legacy Permal business exceeded the carrying value by 4%. As further discussed in Note 2, EnTrust has been
combined with Permal to form EnTrustPermal, through common management, shared resources (including infrastructure,
employees, and processes) and branding initiatives. Accordingly, after completing the annual impairment testing process
as of December 31, 2016, the indefinite-life funds management contracts asset related to the EnTrust acquisition was
combined with the indefinite-life funds-of-hedge funds management contracts asset related to the legacy Permal business.
Legg Mason completed a qualitative impairment test for the combined asset and no impairment indicators were noted. The
related carrying values and cash flows of the funds will continue to be aggregated for future impairment testing.
The current assessed fair value of the indefinite-life domestic mutual funds contracts asset related to the Citigroup Asset
Management acquisition exceeds the carrying value by a material amount.
Legg Mason's annual impairment testing process in the prior fiscal year determined that the carrying value of the legacy
Permal indefinite-life funds-of-hedge funds management contracts intangible asset 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 then current trends and factors. 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%.
As of March 31, 2017, amortizable intangible asset management contracts and other are being amortized over a weighted-
average remaining life of 8.0 years.
Estimated amortization expense for each of the next five fiscal years and thereafter is as follows:
2018
2019
2020
2021
2022
Thereafter
Total
$
$
27,742
27,742
27,278
27,278
27,040
76,574
213,654
See Note 18 regarding the aggregate $34,000 impairment of the RARE Infrastructure amortizable asset management contracts
asset and trade name indefinite-life intangible asset subsequent to March 31, 2017.
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The change in the carrying value of goodwill is summarized below:
Balance as of March 31, 2015
Impact of excess tax basis amortization
Business acquisitions(1)
Changes in foreign exchange rates and other
Balance as of March 31, 2016
Impact of excess tax basis amortization
Business acquisitions (dispositions), net(1)
Changes in foreign exchange rates and other
Balance as of March 31, 2017
(1) See Note 2 for additional information.
Gross Book
Value
2,501,410
(20,920)
163,110
(2,184)
2,641,416
(20,818)
491,835
(25,644)
3,086,789
$
$
Accumulated
Impairment
$
(1,161,900) $
—
—
—
(1,161,900)
—
—
—
$
(1,161,900) $
Net Book
Value
1,339,510
(20,920)
163,110
(2,184)
1,479,516
(20,818)
491,835
(25,644)
1,924,889
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
On December 29, 2015, Legg Mason entered into an unsecured credit agreement which provided for a $1,000,000 multi-
currency revolving credit facility. On March 31, 2017, the unsecured credit agreement was amended to reduce the amount
available under the revolving credit facility from $1,000,000 to $500,000. The 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. This revolving credit facility is available to fund working capital needs and for general corporate purposes.
In May 2016, Legg Mason borrowed $460,000 under its revolving credit facility to finance the acquisition of EnTrust and
to replenish cash used to complete the acquisitions of Clarion Partners in April 2016 and RARE Infrastructure in October
2015, as further discussed in Note 2. In December 2015, Legg Mason borrowed $40,000 under this revolving credit facility,
which remained outstanding as of March 31, 2016. The proceeds were used to repay the $40,000 of outstanding borrowings
under its previous revolving credit facility, which were drawn in October 2015 to partially finance the acquisition of RARE
Infrastructure. This previous $500,000 revolving credit facility and $250,000 incremental borrowing facility were terminated
effective upon the repayment.
As further discussed below, in August 2016, Legg Mason issued $500,000 of 5.45% Junior Subordinated Notes due 2056
(the "5.45% 2056 Notes"), the net proceeds of which, together with existing cash resources, were used to repay the $500,000
of then outstanding borrowings under the revolving credit facility. There were no borrowings outstanding under the revolving
credit facility as of March 31, 2017.
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. 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. The revolving
credit facility has standard financial covenants. These covenants include: maximum net debt to EBITDA ratio (as defined
in the documents), which was modified in March 2017, of 3.5 to 1 for the period from January 1, 2017 through and including
March 31, 2018, 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, 2017, Legg Mason's net debt to EBITDA ratio was 2.6 to 1 and EBITDA to interest expense ratio was 5.7
to 1, and therefore, Legg Mason has maintained compliance with the applicable covenants.
As of March 31, 2017 and 2016, Legg Mason had $500,000 and $960,000, respectively, of undrawn revolving credit facility
capacity.
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Interest Rate Swap - Revolving Credit Facility
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 was used to convert outstanding borrowings
under the revolving credit facility from floating rate to fixed rate debt. Under the terms of the interest rate swap agreement,
Legg Mason paid a fixed interest rate of 2.3% on a notional amount of $500,000. The swap had a 4.67-year term, with
scheduled reductions in notional amount and was to expire on December 29, 2020. In August 2016, in connection with the
repayment of the outstanding borrowings under the revolving credit facility, the interest rate swap was terminated for a cash
payment of $3,662. As a result, Legg Mason reclassified a loss of $2,249 (net of deferred income taxes of $1,413), representing
the fair value of the cash flow hedge, from Accumulated other comprehensive loss, net, to Other non-operating income
(expense), net.
Prior to its termination in August 2016, the swap settled monthly and during the year ended March 31, 2017, $764 was
reclassified from Accumulated other comprehensive loss, net, to Interest expense. Until the swap was terminated, the original
terms and conditions of the hedged instruments were unchanged and the swap was an effective cash flow hedge.
Long-term debt
Long-term debt, net, consists of the following:
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 Notes due
March 2056
5.45% Junior Notes due
September 2056
Carrying
Value
Fair Value
Hedge
Adjustment
March 31, 2017
Unamortized
Discount
(Premium)
Unamortized
Debt Issuance
Costs
March 31,
2016
Maturity
Amount
Carrying
Value
$
252,980
$
(4,059) $
250
$
829
$
250,000
$
256,055
248,265
446,812
547,861
242,054
483,895
—
—
—
—
—
332
—
1,403
250,000
248,028
3,188
450,000
447,030
(3,274)
5,413
550,000
547,781
—
7,946
250,000
242,091
—
(2,692) $
16,105
500,000
—
34,884
$ 2,250,000
$ 1,740,985
Total
$
2,221,867
$
(4,059) $
In August 2016, Legg Mason issued $500,000 of 5.45% 2056 Notes, the net proceeds of which, together with cash on hand,
were used to repay the total $500,000 of then outstanding borrowings under its revolving credit facility, as previously
discussed.
In March 2016, Legg Mason issued $450,000 of 2026 Notes and $250,000 of 6.375% 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 2.
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
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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.
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.
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.
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 used to effectively convert the
2019 Notes from fixed rate debt to floating rate debt and had identical terms as the underlying debt being hedged. The
related hedging gains and losses offset one another and resulted in no net income or loss impact. The swap had a five-year
term, and was scheduled to mature on July 15, 2019. On April 21, 2016, the fair value hedge swap was terminated for a
cash receipt of $6,500, and the related fair value hedge adjustment is being amortized as Interest expense over the remaining
life of the debt. During the year ended March 31, 2017, $1,804 was amortized and recorded as Interest expense in the
Consolidated Statements of Income (Loss).
During the years ended March 31, 2016 and 2015, $2,137 and $5,462 was recorded as Other income (gain on hedging
activity) in the Consolidated Statements of Income (Loss), which reflects a gain on hedging activity related to the fair value
adjustment on the derivative asset. Also, during the years ended March 31, 2016 and 2015, $2,137 and $5,462 was recorded
as Other expense (loss on hedging activity) in the Consolidated Statements of Income (Loss), which reflects a loss on hedging
activity related to the fair value adjustment on the debt. The swap payment dates coincided with the debt payment dates on
July 15 and January 15. The related receipts/payments by Legg Mason were recorded as Interest expense in the Consolidated
Statements of Income (Loss). Until the swap was terminated on April 21, 2016, the original terms and conditions of the
hedged instruments were unchanged and the swap was an effective fair value hedge.
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. 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
In January 2014, Legg Mason issued $400,000 of 2044 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
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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 6.375% 2056 Notes were issued at 100% of the principal amount. The 6.375% 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
6.375% 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 6.375% 2056 Notes can be redeemed in
aggregate or in part, at 100% of the principal amount, plus any related accrued and unpaid interest.
5.45% Junior Subordinated Notes due September 2056
In August 2016, Legg Mason issued an aggregate principal amount of $500,000 of 5.45% 2056 Notes. The 5.45% 2056
Notes rank junior and subordinate in right of payment to all of Legg Mason's current and future senior indebtedness. Prior
to September 15, 2021, the 5.45% 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 in the prospectus supplement), or 102% of the
principal amount, plus any accrued and unpaid interest, if called for a rating agency event (as defined in the prospectus
supplement). On or after September 15, 2021, the 5.45% 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, 2017, $250,000 of long-term debt matures in fiscal 2020, and $2,000,000 matures after fiscal 2022.
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
2017
308,751
62,127
370,878
2017
68,336
2,535
13,304
84,175
26,371
57,804
84,175
$
$
$
$
$
$
$
$
$
$
$
$
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
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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(2)
Changes in U.K. tax rates on deferred tax assets and liabilities
Net (income) loss attributable to noncontrolling interests
Change in valuation allowances(3)
Federal effect of permanent tax adjustments
Holding company restructuring(4)
Other, net
Effective income tax rate
2017
2016
2015
35.0%
2.3
1.3
(3.9)
(1.1)
(5.4)
1.6
(0.5)
(5.0)
(1.6)
22.7%
35.0 %
43.2
41.8
(172.5)
33.2
(15.6)
(33.9)
39.1
—
(0.8)
(30.5)%
35.0%
4.0
1.8
(4.8)
—
(0.5)
(2.7)
1.7
—
(0.5)
34.0%
(1) State income taxes include changes in valuation allowances related to change in apportionment and provision to return differences, net of the impact
on related deferred tax assets.
(2) The effect of foreign tax rates for fiscal 2017 and 2016 includes a $2,890 and $66,780, respectively, tax benefit for non-cash impairment charges
related to the intangible assets of the Permal business, as further discussed in Note 5.
(3) See schedule below for the change in valuation allowances by jurisdiction.
(4)
In fiscal 2017, as part of a larger strategic initiative, Legg Mason restructured certain of its holding company businesses, which increased the amount
of foreign tax credits available for utilization.
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. In September 2016, the U.K. Finance Act 2016 was enacted,
which further reduced the main U.K. corporate tax rate effective on April 1, 2020 to 17%. The reductions in the U.K.
corporate tax rate resulted in tax benefits of $4,055 and $8,383, recognized in fiscal 2017 and 2016, respectively, as a result
of the revaluation of deferred tax assets and liabilities at the new rates.
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.
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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
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
2017
2016
$
$
$
$
221,895
46,311
246,614
6,183
283,746
13,421
25,292
5,293
814
—
—
849,569
(71,063)
778,506
$
$
$
20,339
801,133
4,730
75,653
3,037
904,892
(126,386) $
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)
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 or 2015, due to the cumulative net operating loss position of the Company.
As of March 31, 2017, the related unrecognized tax benefit aggregated $22,585. As further described in Note 1, upon the
adoption of a new accounting standard effective April 1, 2018, this tax benefit will be recognized as an increase in deferred
tax assets and Retained earnings on the Consolidated Balance Sheet.
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, including future increases
relating to the tax amortization of goodwill and indefinite-life intangible assets, as well as planning strategies to measure
and value the realizability of its deferred tax assets.
On April 13, 2016, Legg Mason acquired a majority ownership in Clarion Partners, which, as a partnership, creates a basis
difference and a related deferred tax liability of $21,991.
On May 2, 2016, the Permal business was merged with EnTrust. As part of the transaction, Legg Mason paid cash and a
35% ownership in the Permal business for a 65% ownership in the new EnTrustPermal joint venture. As a result of the
transaction, Legg Mason converted a portion of its Permal legacy business into a partnership which decreased the related
deferred tax liability by $4,102.
Substantially all of Legg Mason's deferred tax assets relate to U.S. federal, state and U.K. taxing jurisdictions. As of March
31, 2017, U.S. federal deferred tax assets aggregated $731,636, realization of which is expected to require approximately
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$3,700,000 of future U.S. earnings, of which $811,000 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
to the utilization of approximately $6,147 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, 2017, the change in federal valuation allowances aggregated $11,133. Of the decrease in federal valuation
allowances from the prior year, $10,413 relates to expiring foreign tax credits which have been reclassified to net operating
losses. This was offset in part by additional valuation allowances of $1,308 related to foreign tax credits and $601 related
to Martin Currie’s operating losses. There was also a decrease in the valuation allowance of $2,629 related to charitable
contributions.
As of March 31, 2017, U.S. state deferred tax assets aggregated approximately $173,788. Due to limitations on utilization
of net operating loss carryforwards and taking into consideration certain state tax planning strategies, the related valuation
allowance of $29,075 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 net increase in valuation allowances of $502 during fiscal 2017, primarily relates to statutory
rate changes and revised estimates of the realization of deferred tax benefits.
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The following deferred tax assets and valuation allowances relating to carryforwards have been recorded at March 31, 2017
and 2016, respectively.
2017
2016
Expires Beginning
after Fiscal Year
82,350
—
258,486
4,552
166,772
44
308
24,192
3,077
539,781
2031
2021
2018
2017
2017
2017
2022
2027
n/a
$
$
$
DEFERRED TAX ASSETS
U.S. federal net operating losses(1)
U.S. federal capital losses
U.S. federal foreign tax credits
U.S. charitable contributions
U.S. state net operating losses (2,3)
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
$
$
$
57,715
3,644
283,746
814
168,655
4
366
20,244
2,535
537,723
2,856
6,147
814
29,075
4
15,975
2,535
57,406
13,657
71,063
2,255
15,252
3,443
26,816
44
20,631
3,077
71,518
7,958
79,476
Total valuation allowances
(1) Currently, there are proposals to significantly change U.S. federal income tax rules, which include proposals to reduce tax rates, limit deductibility
of interest expense, and changes to the taxation on non-U.S. earnings. Although details are not yet available, these changes could impact the carrying
value of Legg Mason's deferred tax assets.
$
$
(2) Substantially all of the U.S. state net operating losses carryforward through fiscal 2036.
(3) 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.
Legg Mason had total gross unrecognized tax benefits of approximately $70,787, $73,873 and $92,344 as of March 31,
2017, 2016 and 2015, respectively. Of these totals, approximately $50,462, $49,629 and $62,775, 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 2017, as a result of the net impact of effective settlement
of tax examinations, recent developments of case law and the expiration of statutes of limitation in certain jurisdictions,
previously unrecognized benefits of $8,611 were realized.
A reconciliation of the beginning and ending amount of unrecognized gross tax benefits for the years ended March 31, 2017,
2016, and 2015, 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
2017
2016
2015
$
$
73,873
3,303
5,673
(8,257)
(2,200)
(1,605)
70,787
$
$
92,344
3,514
10,078
(155)
(25,046)
(6,862)
73,873
$
$
77,892
9,919
13,054
—
(8,521)
—
92,344
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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 $15,958 as a result of the expiration of statutes of limitations and the completion
of tax authorities' examinations.
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, 2017, 2016 and 2015, the Company recognized approximately $(139),
$(4,441), and $1,492, respectively, which was substantially all interest. At March 31, 2017, 2016 and 2015, Legg Mason
had approximately $2,155, $1,900, and $8,570, 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 ("IRS"), 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 2015 for U.S. federal; after fiscal 2015 for the U.K.; after calendar year 2008 for Brazil; after fiscal 2012 for the
state of California; after fiscal 2008 for the state of New York; and after fiscal 2013 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. However, if circumstances
change, Legg Mason will provide for and pay any additional U.S. taxes in connection with repatriation of these earnings.
During the year ended March 31, 2017, Legg Mason implemented a restructure of its offshore holding company structure
which resulted in the repatriation of approximately $11,600 of foreign earnings and resulted in a tax benefit of approximately
$17,000.
In order to increase the amount of cash available in the U.S. for general corporate purposes, Legg Mason plans to utilize up
to approximately $276,000 of foreign cash over the next several years, of which $4,255 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.
Legg Mason had available domestically cash and cash equivalents of approximately $438,000 as of March 31, 2017; and
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.
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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, 2017, the minimum annual aggregate rentals under operating leases and service agreements are as follows:
2018
2019
2020
2021
2022
Thereafter
Total(1)
(1) Includes $615,651 in real estate and equipment leases and $62,325 in service and maintenance agreements.
$
$
128,445
105,864
93,154
84,339
83,302
182,872
677,976
The minimum rental commitments shown above have not been reduced by $126,280 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, 2017 and 2016, was $28,821 and
$31,745, 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, dependent on the commercial real estate
market at such time.
The minimum rental commitments shown above also include $20,443 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 $10,867
and $20,495 as of March 31, 2017 and 2016, 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 and the first and second quarters of fiscal 2017, certain office space was permanently vacated in connection
with the combination of EnTrust and Permal (further described in Note 2). During the year ended March 31, 2017, the lease
related to a portion of this space was terminated, resulting in a reduction in the lease reserve liability of $4,495. In addition,
during fiscal 2016, certain headquarters space was permanently vacated to pursue a sublease resulting in an increase to the
lease reserve of approximately $7,200. During the year ended March 31, 2017, a sublease was executed for the vacated
headquarters space, resulting in a $2,700 reduction in the lease reserve liability for terms more favorable than estimated.
This activity is reflected in the lease reserve liability in the table below.
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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, 2015
Accrued charges for vacated and subleased space (1) (2)
Payments, net
Adjustments and other
Balance as of March 31, 2016
Accrued charges for vacated and subleased space (1) (2)
Payments, net
Adjustments and other
Balance as of March 31, 2017
$
$
45,939
14,642
(12,689)
4,348
52,240
9,454
(16,531)
(5,475)
39,688
(1)
(2)
Included in Occupancy expense in the Consolidated Statements of Income (Loss)
Includes $9,069 and $7,212 related to the restructuring of Permal for the combination with EnTrust for the years ended March 31, 2017 and 2016,
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
2017
139,781
21,010
118,771
$
$
2016
135,850
21,154
114,696
$
$
2015
136,414
19,672
116,742
$
$
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, 2017, Legg Mason had commitments to invest $35,525 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 2029. Also, in connection with the acquisition of Clarion Partners, Legg Mason committed
to provide $100,000 of seed capital to Clarion Partners products after the second anniversary of the transaction closing.
Legg Mason also committed to contribute up to $5,000 of additional working capital to Financial Guard, to be paid over
the two year period following the acquisition, of which $1,250 has been paid as of March 31, 2017.
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As of March 31, 2017, 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, 2015
Initial purchase accounting accrual(3)
Payment
Fair value adjustments
Foreign exchange and accretion
Balance as of March 31, 2016
Initial purchase accounting accrual
Payment
Fair value adjustments
Foreign exchange and accretion
Balance as of March 31, 2017
Balance Sheet Classification
Current Contingent consideration
Non-current Contingent
consideration
Balance as of March 31, 2017
RARE
Infrastructure
October 21,
2015
Martin
Currie
October 1,
2014
QS
Investors
May 30,
2014
Fauchier
March 13,
2013
Other(2)
Total
Various
$
$
$
$
$
81,063
$ 407,403
$ 23,400
$
— $
5,507
$ 517,373
— $ 70,114
—
—
(28,361)
(531)
41,222
—
—
(25,000)
(4,204)
$ 12,018
25,000
—
—
2,145
27,145
—
—
(10,000)
299
17,444
$ 13,553
—
—
—
196
13,749
—
(6,587)
(2,500)
179
4,841
$
$
$ 27,117
—
(22,765)
(5,014)
662
—
—
—
—
—
— $
$
— $ 110,784
27,457
(22,765)
(33,375)
2,484
84,585
2,000
(6,587)
(39,500)
(3,688)
36,810
2,457
—
—
12
2,469
2,000
—
(2,000)
38
2,507
$
7,791
$ 12,018
$
— $
— $
2,507
$
22,316
9,653
17,444
—
$ 12,018
$
4,841
4,841
$
—
— $
—
2,507
$
14,494
36,810
(1) Using the applicable exchange rate as of March 31, 2017, for amounts denominated in currencies other than the U.S. dollar.
(2)
Includes amounts related to the acquisition of Financial Guard on August 17, 2016 and PK Investments on December 31, 2015.
(3) Using the applicable exchange rate on the date of acquisition for amounts denominated in currencies other than the U.S. dollar.
See Note 18 regarding an $11,500 reduction in the estimated contingent consideration liability related to the acquisition of
RARE Infrastructure subsequent to March 31, 2017.
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.
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There are numerous aspects to customer complaints, legal actions, inquiries, proceedings and investigations that prevent
Legg Mason from estimating a related amount or range of reasonably possible losses. These aspects include, among other
things, the nature of the matters; that significant relevant facts are not known, are uncertain or are in dispute; and that damages
sought are not specified, are uncertain, unsupportable or 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, 2017, 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, 2017 and 2016, Legg Mason's liability for losses and contingencies was $700 and $400, respectively.
During fiscal 2017, 2016, and 2015, Legg Mason incurred charges relating to litigation and other proceedings of
approximately $1,100, $250, and $200, respectively.
As further described in Note 2, Legg Mason may be obligated to settle noncontrolling interests related to certain affiliates.
As of March 31, 2017, affiliate noncontrolling interests, excluding amounts related to management equity plans, aggregated
$591,254. In addition, as of March 31, 2017, the estimated redemption value for units under affiliate management equity
plans aggregated $72,298. See Notes 11 and 14 for additional information regarding affiliate management equity plans and
noncontrolling interests, respectively.
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 the IRS limit. Corporate profit sharing and matching contributions,
together with contributions made under subsidiary plans, totaled $37,249, $33,152 and $27,888 in fiscal 2017, 2016 and
2015, 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, 2017, the authorized numbers of common and preferred shares were 500,000 and 4,000, respectively. At
March 31, 2017 and 2016, there were 4,111 and 6,988 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 2017, 2016, and 2015, Legg
Mason purchased and retired 11,697, 4,537, and 6,931 shares of its common stock, respectively, for $381,672, $209,632,
and $356,522, respectively, through open market purchases. The remaining balance of the authorized stock buyback is
approximately $423,000.
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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
prior to their expiration in July 2017.
Changes in common stock for the years ended March 31, 2017, 2016 and 2015, 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,
2016
2015
2017
107,012
111,469
117,173
321
16
445
(11,697)
(370)
95,727
338
12
142
(4,537)
(412)
107,012
718
44
938
(6,931)
(473)
111,469
Dividends declared per share were $0.88, $0.80 and $0.64 for fiscal 2017, 2016 and 2015, respectively. Dividends declared
but not paid at March 31, 2017, 2016 and 2015, were $21,153, $22,038 and $17,837, 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 equity incentive stock plan as of March
31, 2017, were 3,659. 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 10 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, 2017, 2016, and 2015, 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,
2016
2017
2015
$
$
8,347
52,049
696
26,566
1,400
3,924
26
93,008
$
$
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
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Stock Options
Stock option transactions under Legg Mason's equity incentive plans during the years ended March 31, 2017, 2016, and
2015, are summarized below:
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
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2017
Number of Shares
4,801
918
(694)
(593)
4,432
876
(349)
(453)
4,506
753
(313)
(353)
4,593
Weighted-Average
Exercise Price Per Share
43.02
$
47.65
30.75
90.31
39.58
54.51
28.35
88.06
38.48
31.31
27.66
37.13
38.15
$
The total intrinsic value of options exercised during the years ended March 31, 2017, 2016, and 2015, was $2,289, $5,811,
and $14,351, respectively. At March 31, 2017, the aggregate intrinsic value of options outstanding was $15,135.
The following information summarizes Legg Mason's stock options outstanding at March 31, 2017:
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)
$
473
1,990
2,130
4,593
23.68
31.70
47.39
3.10
4.74
5.28
At March 31, 2017, 2016, and 2015, options were exercisable for 2,688, 2,544, and 2,202 shares, respectively, with a
weighted-average exercise price of $35.04, $32.22, and $41.50 , respectively. Stock options exercisable at March 31, 2017,
have a weighted average remaining contractual life of 3.9 years. At March 31, 2017, the aggregate intrinsic value of
exercisable shares was $11,403.
The following summarizes Legg Mason's stock options exercisable at March 31, 2017:
Exercise
Price Range
$ 14.81 - $ 25.00
25.01 - 35.00
35.01 - 55.18
Option Shares
Exercisable
Weighted-Average
Exercise Price
Per Share
$
473
1,240
975
2,688
23.68
31.94
44.49
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The following information summarizes unvested stock options under Legg Mason's equity incentive plans for the year
ended March 31, 2017:
Options unvested at March 31, 2016
Granted
Vested
Canceled/forfeited
Options unvested at March 31, 2017
Number
of Shares
Weighted-Average
Grant Date
Fair Value
1,962
753
(759)
(51)
1,905
$
$
11.48
31.31
41.57
47.13
42.54
For the years ended March 31, 2017, 2016, and 2015, income tax benefits related to stock options were $3,178, $3,730, and
$4,681, respectively. Unamortized compensation cost related to unvested options for 1,905 shares at March 31, 2017, was
$11,727, which is expected to be recognized over a weighted-average period of 1.5 years.
Cash received from exercises of stock options under Legg Mason's equity incentive plans was $8,988, $9,516, and $22,069
for the years ended March 31, 2017, 2016, and 2015, respectively. The tax benefit expected to be realized for the tax
deductions from these option exercises totaled $725, $1,962, and $4,856 for the years ended March 31, 2017, 2016, and
2015, respectively.
The weighted-average fair value of service-based stock options granted during the years ended March 31, 2017, 2016, and
2015, excluding those granted to our Chief Executive Officer in May 2013 discussed below, using the Black-Scholes option
pricing model, was $7.78, $11.26, and $12.03 per share, respectively.
The following weighted-average assumptions were used in the model for grants in fiscal 2017, 2016, and 2015:
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
2017
Years Ended March 31,
2016
2015
1.45%
1.25%
30.95%
5.02
1.18%
1.44%
24.37%
4.97
1.04%
1.51%
29.53%
4.94
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 when the final 50% of the award vested at the end of the two-
year service period.
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%
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Restricted Stock
Restricted stock and restricted stock unit transactions during the years ended March 31, 2017, 2016, and 2015, are summarized
below:
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
Granted
Vested
Canceled/forfeited
Unvested shares at March 31, 2017
Number of Shares
Weighted-Average
Grant Date Value
3,334
1,236
(1,330)
(190)
3,050
1,332
(1,261)
(63)
3,058
1,658
(1,267)
(128)
3,321
$
$
30.77
48.03
30.92
35.95
37.38
48.95
34.91
42.09
43.34
31.26
39.15
42.39
38.92
The restricted stock and restricted stock unit transactions reflected in the table above were non-cash transactions. For the
years ended March 31, 2017, 2016, and 2015, Legg Mason recognized income tax benefits related to restricted stock and
restricted stock unit awards of $21,138, $20,597, and $18,246, respectively. Unamortized compensation cost related to
unvested restricted stock and restricted stock unit awards for 3,321 shares not yet recognized at March 31, 2017, was $74,921
and is expected to be recognized over a weighted-average period of 1.6 years.
Affiliate Management Equity Plans
In connection with the acquisition of Clarion Partners in April 2016, as further discussed in Note 2, Legg Mason implemented
a management equity plan for the management team of Clarion Partners that entitles certain of its key employees to participate
in 15% of the future growth, if any, of the Clarion Partners enterprise value (subject to appropriate discounts) subsequent
to the date of the grant. The initial grant under the plan vested immediately and the related grant-date fair value of $15,200,
determined by independent valuation, was recognized as Compensation and benefits expense in the Consolidated Statement
of Income (Loss) and reflected in the Consolidated Balance Sheet as Redeemable noncontrolling interest. Future grants
under the plan will vest 20% annually over five years, and will result in the recognition of additional compensation expense
over the related vesting period. Subject to various conditions, including the passage of time, vested plan units can be put
to Legg Mason for settlement at fair value. Legg Mason can also call plan units, generally post employment, for settlement
at fair value. As of March 31, 2017, the aggregate redemption amount of units under the plan was $18,700.
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. On March 31, 2017, additional minority equity interests
under this plan equivalent to 2.1% in the Royce entity were issued to its management team, which resulted in Compensation
and benefits expense of $4,600. These interests allow the holders to receive quarterly distributions of a portion of Royce's
pre-tax income in amounts equal to the percentage of ownership represented by the equity they hold, subject to payment of
Legg Mason's revenue share and reasonable expenses. The plan permits additional grants under the plan of up to 3.8 revenue
share points. Future grants will 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 of March 31, 2017, the estimated aggregate
redemption amount of units under the plan was $27,798.
On March 31, 2014, Legg Mason implemented a management equity plan and granted units to key employees of its subsidiary
ClearBridge Investments, LLC ("ClearBridge") that entitle them to participate in 15% of the future growth, if any, of the
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ClearBridge enterprise value (subject to appropriate discounts) subsequent to the grant date. Independent valuation
determined the aggregate cost of the award to be approximately $16,000, which will be recognized as Compensation and
benefits expense in the Consolidated Statements of Income (Loss) over the related vesting periods through March 2019.
Total compensation expense related to the ClearBridge affiliate management equity plan was $3,285, $3,271, and $3,390
for the years ended March 31, 2017, 2016, and 2015, respectively. This arrangement provides that one-half of the cost will
be absorbed by the ClearBridge 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 ClearBridge do not impact vesting, settlement
or other provisions of the units. However, upon sale of substantially all ClearBridge assets, the vesting of the 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 will not entitle the plan participants, collectively, to more than an aggregate 15%
of the future growth of the ClearBridge 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, 2017, the
estimated aggregate redemption amount of vested units under the ClearBridge plan, as if they were currently redeemable,
was approximately $25,800.
On June 28, 2013, Legg Mason implemented a similar management equity plan with key employees of Permal. Independent
valuation determined the aggregate cost of the awards to be approximately $9,000, which was being recognized as
Compensation and benefits expense in the Consolidated Statements of Income (Loss) over the related vesting period through
December 2017. In April 2016, in conjunction with the Permal restructuring in preparation for the combination with EnTrust,
the Permal management equity plan was liquidated with a payment of $7,150 to its participants, and the remaining $3,481
unamortized cost was expensed during the year ended March 31, 2017. Compensation expense related to the Permal affiliate
management equity plan was $1,513 and $1,816 for the years ended March 31, 2016 and 2015, respectively.
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. During the years ended March 31, 2017, 2016, and 2015, approximately 164, 134, and 107
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 427 and 384 shares were issued as of March 31, 2017 and 2016, respectively. During
the year ended March 31, 2015, there were 32 stock options canceled or forfeited from the current equity plan for non-
employee directors, which were the last outstanding options under the plan. As of March 31, 2017, 2016, and 2015, non-
employee directors held 66, 53, and 45 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, 2017, 2016, and 2015, non-employee directors were granted 11, nine, and eight restricted stock units, respectively.
During the years ended March 31, 2017, 2016, and 2015, non-employee directors were granted 30, 16, and 23 shares of
common stock, respectively. During the years ended March 31, 2017 and 2016, there were no restricted stock units distributed
and during the year ended March 31, 2015, there were 27 restricted stock units distributed.
As discussed in Note 2, upon the acquisition of Clarion Partners in April 2016, Legg Mason granted certain key employees
of Clarion Partners a total of 716 performance-based Legg Mason restricted share units, which are not included in the
unvested shares of restricted stock and restricted stock units in the table above, with an aggregate fair value of $11,121,
which was included in the purchase price, that vest upon Clarion Partners achieving a certain level of EBITDA, as defined
in the purchase agreement, within a designated period after the closing of the acquisition.
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In May 2016, 2015 and 2014, Legg Mason granted certain executive officers a total of 182, 107, and 78 performance share
units, respectively, as part of their fiscal 2016, 2015, and 2014 incentive award with an aggregate value of $3,528, $4,312,
and $3,457, respectively. The vesting of performance share units granted in May 2016, 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, 2019, 2018, and 2017, respectively. The May 2014 grant performance period ended March 31, 2017, and
resulted in no payment. The grant date fair value per unit for the May 2016, 2015, and 2014 performance share units of
$19.36, $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
2017
2016
2015
2.87%
0.89%
25.99%
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 was 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.
Since January 1, 2015, there are no additional contributions to the plan, with the remaining 254 shares reserved for future
dividend distributions. During fiscal 2017, 2016, and 2015, Legg Mason issued 17, 12, and 44 shares, respectively, under
the plan with a weighted-average fair value per share at the grant date of $29.60, $41.82, and $45.83, 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, 2017, 2016, and
2015, were 540, 583, and 660, 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 removing earnings allocated to participating securities) by the weighted-
average number of shares outstanding, which excludes participating securities. Legg Mason issues to employees restricted
stock and restricted stock units that are deemed to be participating securities prior to vesting, because the related unvested
restricted shares/units 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 and does not allocate losses to participating securities.
Diluted EPS is similar to basic EPS, but the effect of potential common shares is included in the calculation unless the
potential common shares are antidilutive. For periods with a net loss, potential common shares other than participating
securities, are considered antidilutive and are excluded from the calculation.
During fiscal 2017, 2016, and 2015, pursuant to the $1,000,000 share repurchase authorization discussed in Note 10, Legg
Mason purchased and retired 11,697, 4,537, and 6,931 shares of its common stock, respectively, for $381,672, $209,632,
and $356,522, respectively, through open market purchases. The total repurchases reduced weighted-average shares
outstanding by 6,005, 2,564, and 3,528 shares for the years ended March 31, 2017, 2016, and 2015, 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.
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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,
2016
107,406
2017
100,580
2015
112,019
219
100,799
—
107,406
1,227
113,246
Net Income (Loss) Attributable to Legg Mason, Inc.
$ 227,256
$ (25,032) $ 237,080
Less: Earnings (distributed and undistributed) allocated to participating
securities
7,384
2,288
6,340
Net Income (Loss) (Distributed and Undistributed) Allocated to Shareholders
(Excluding Participating Securities)
$ 219,872
$ (27,320) $ 230,740
Net Income (Loss) per share Attributable to Legg Mason, Inc. Shareholders
Basic
Diluted
$
$
2.19
2.18
$
$
(0.25) $
(0.25) $
2.06
2.04
The weighted-average shares exclude weighted-average unvested restricted shares deemed to be participating securities of
3,335, 2,831, and 3,065 for the years ended March 31, 2017, 2016, and 2015, respectively.
The diluted EPS calculations for the years ended March 31, 2017, 2016, and 2015, exclude any potential common shares
issuable under the 14,205 warrants issued in connection with the repurchase of 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.
Options to purchase 3,454 and 1,319 for the years ended March 31, 2017 and 2015, 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.
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.
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, 2017, 2016, and 2015, were
antidilutive and, therefore, do not further impact diluted EPS.
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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 2017 and 2016, primarily
resulted from the impact of changes in the British pound, the Brazilian real, the Australian dollar, the Polish zloty, and the
Singaporean dollar, in relation to the U.S. dollar on the net assets of Legg Mason's subsidiaries in the U.K., Brazil, Australia,
Poland, and Singapore, for which the pound, the real, the Australian dollar, the Polish zloty, and the Singaporean dollar, are
the functional currencies, respectively.
A summary of Legg Mason's accumulated other comprehensive loss as of March 31, 2017 and 2016, is as follows:
Foreign currency translation adjustment
Net actuarial losses on defined benefit pension plan
Total Accumulated other comprehensive loss
$
2017
(90,103) $
(16,681)
$ (106,784) $
2016
(59,672)
(6,821)
(66,493)
There were no significant amounts reclassified from Accumulated other comprehensive loss to the Consolidated Statements
of Income (Loss) for the years ended March 31, 2017, 2016, or 2015, except for $2,493 of cumulative foreign currency
translation related to the sale of Legg Mason Poland and $2,718, net of income tax benefit of $1,708, realized on the settlement
and termination of an interest rate swap, in the year ended March 31, 2017, as further described in Note 6, and $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, also further described in Note 6, all of which were reclassified to Other non-operating income (expense) in the
Consolidated Statements of Income (Loss).
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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
Total
$
$
Years Ended March 31,
2016
2015
$
$
(8,680) $
802
(7,878) $
5,629
—
5,629
2017
52,050
7,397
59,447
Total redeemable and nonredeemable noncontrolling interests for the years ended March 31, included the following amounts:
Redeemable noncontrolling interests
Affiliate
Consolidated
investment
vehicles(1)
and other
Noncontrolling
Interests
Management
equity plans
1,816
$
$
41,972
$
1,356
$
45,144
$
Nonredeemable
noncontrolling
interests(2)
Total
Value as of March 31, 2014
Net income attributable to
noncontrolling interests
Net subscriptions (redemptions)
Vesting/change in estimated
redemption value
Balance as of March 31, 2015
Net income (loss) attributable to
noncontrolling interests
Net subscriptions (redemptions)
Grants (settlements), net
Business acquisition
Foreign exchange
Vesting/change in estimated
redemption value
Balance as of March 31, 2016
Net income attributable to
noncontrolling interests
Net subscriptions (redemptions) and
other(3)
Distributions
Grants (settlements), net
Business acquisitions
Foreign exchange
Vesting/change in estimated
5,061
(10,484)
—
36,549
(11,052)
68,639
—
—
—
—
94,136
11,452
(47,118)
—
—
—
—
568
25
—
1,949
2,372
(1,981)
—
62,722
3,860
—
68,922
40,598
2,531
(29,461)
—
508,817
(153)
—
—
5,629
(10,459)
5,206
7,022
—
—
(345)
—
—
5,206
45,520
(8,680)
66,658
(345)
62,722
3,860
6,050
12,727
6,050
175,785
—
52,050
—
—
5,986
—
—
(44,587)
(29,461)
5,986
508,817
(153)
redemption value
Balance as of March 31, 2017
$
—
58,470
$
—
591,254
$
9,335
28,048
9,335
$ 677,772
$
(1) Principally related to VIE and seeded investment products.
(2) Related to Royce management equity plan.
(3) Includes the impact related to the adoption of updated consolidation accounting guidance further discussed in Note 1.
—
—
—
—
—
802
—
21,400
—
—
—
22,202
7,397
—
(6,401)
4,600
—
—
—
27,798
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Redeemable noncontrolling interests by affiliate (exclusive of management equity plans) for the years ended March 31, included
the following amounts:
EnTrust-
Permal
Redeemable noncontrolling interests
RARE
Clarion
Infrastructure
Partners
Other
Total
$
— $
— $
— $
1,949
$
1,949
—
—
—
—
—
—
—
—
—
—
22,146
—
(20,494)
403,200
—
404,852
$
12,171
—
(4,298)
105,300
—
113,173
$
$
1,859
(1,286)
62,722
3,860
67,155
5,742
—
(3,997)
—
(153)
68,747
$
513
(695)
—
—
1,767
539
2,531
(672)
317
—
4,482
$
2,372
(1,981)
62,722
3,860
68,922
40,598
2,531
(29,461)
508,817
(153)
591,254
Balance as of March 31, 2015
Net income attributable to noncontrolling
interests
Distributions
Business acquisition
Foreign exchange
Balance as of March 31, 2016
Net income attributable to noncontrolling
interests
Subscriptions (redemptions), net
Distributions
Business acquisitions
Foreign exchange
Balance as of March 31, 2017
15. DERIVATIVES AND HEDGING
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, Singapore dollar, and Brazilian real. 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, 2017 and 2016, were $2,718 and
$8,650, respectively. Other liabilities recorded in the Consolidated Balance Sheets as of March 31, 2017 and 2016, were
$4,522 and $18,079, 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.
As further discussed in Note 6, in April 2016, Legg Mason executed a 4.67-year, amortizing interest rate swap, which was
terminated in August 2016. Also, in April 2016, Legg Mason terminated another previously existing interest rate swap.
With the exception of the two interest rate swap contracts discussed in Note 6, Legg Mason has not designated any derivatives
as hedging instruments for accounting purposes during the years ended March 31, 2017, 2016, or 2015. As of March 31,
2017, Legg Mason had open currency forward contracts with aggregate notional amounts totaling $163,366 and open futures
contracts relating to seed capital investments with aggregate notional values totaling $134,190. These amounts are
representative of the level of non-hedge designation derivative activity throughout fiscal 2017. As of March 31, 2017, the
weighted-average remaining contract terms for both currency forward contracts and futures contracts relating to seed capital
investments were three months.
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The following table presents the derivative assets and related offsets, if any, as of March 31, 2017:
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,
2017
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
$
3,470
$
(928) $
2,542
$
— $
— $
2,542
—
—
—
176
2,878
3,054
$
3,470
$
(928) $
2,542
$
176
$
2,878
$
5,596
The following table presents the derivative liabilities and related offsets, if any, as of March 31, 2017:
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,
2017
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
$
(3,641) $
751
$
(2,890) $
— $
— $
(2,890)
—
—
—
(1,632)
4,155
2,523
$
(3,641) $
751
$
(2,890) $
(1,632) $
4,155
$
(367)
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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
1,933
(963)
—
—
970
—
—
81
—
970
1,840
1,921
1,933
(963)
970
81
1,840
2,891
Total derivative instruments
$
1,933
$
(963) $
970
$
7,680
$
1,840
$
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)
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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 entering into the
agreement to acquire 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. The acquisition was completed (and the hedge terminated) in October 2015.
2017
Years Ended March 31,
2016
2015
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 for seed
capital investments
Other expense
Other non-operating
income (expense)
Other non-operating
income (expense)
$ 14,524
$ (13,098) $
7,887
$ (19,547) $ 5,150
$ (16,518)
2,681
(2,443)
547
(1,611)
2,491
(259)
—
—
—
(4,493)
—
—
Other non-operating
income (expense)
2,103
(18,602)
11,270
(9,206)
10,801
(15,413)
Total gain (loss) from derivatives not
designated as hedging instruments
19,308
(34,143)
19,704
(34,857)
18,442
(32,190)
Derivative designated as a fair value hedge (See Note 6)
Interest rate swap
Reverse treasury rate
lock
Interest expense
Other non-operating
income (expense)
—
—
—
—
5,710
—
—
—
5,462
638
—
—
Derivative designated as a cash flow hedge (See Note 6)
Interest rate swap
(termination)
Interest rate swap
Other non-operating
income (expense)
Interest expense
Total
—
—
$ 19,308
(3,662)
(764)
—
—
$ (38,569) $ 25,414
—
—
—
—
$ (34,857) $ 24,542
—
—
$ (32,190)
(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.
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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 and do not necessarily reflect where the customer resides or the currency in which the
revenues are denominated.
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
2017
2016
2015
$ 2,175,721 $ 1,868,076
338,552
454,216
$ 2,886,902 $ 2,660,844
242,238
468,943
$ 1,977,975
398,729
442,402
$ 2,819,106
$ 4,240,579 $ 3,134,267
820,730
671,004
$ 5,959,269 $ 4,626,001
996,136
722,554
$ 3,135,226
1,062,332
455,286
$ 4,652,844
For the year ended March 31, 2017, operating revenues reported in the United Kingdom in the table above did not have
exposure to any single non-U.S. currency in excess of 20% of the total U.K. operating revenues. In addition, as of March
31, 2017, the percentage of Legg Mason's long-term AUM currency exposure (AUM invested in securities that are
denominated in the British pound or euro, as applicable) was less than 5% for each the British pound and euro. As of March
31, 2017, Legg Mason's long-term AUM country exposure (AUM invested in securities by entities domiciled in the United
Kingdom or Eurozone, as applicable) was less than 5% for each the U.K. and the Eurozone.
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 products, some of which are designated as CIVs.
Updated Consolidation Accounting Guidance
Effective April 1, 2016, Legg Mason adopted updated consolidation guidance on a modified retrospective basis. See Note
1 for additional information regarding the adoption of this updated guidance. The adoption of the updated guidance as of
April 1, 2016, resulted in certain sponsored investment products that reside in foreign mutual fund trusts that were previously
accounted for as VREs to be evaluated as VIEs, and the consolidation of nine funds, which were designated as CIVs. Under
the updated accounting guidance, Legg Mason also concluded it was the primary beneficiary of one EnTrust sponsored
investment fund VIE, which was consolidated and designated a CIV upon the merger of EnTrust and Permal. The adoption
also resulted in the deconsolidation of 13 of 14 previously consolidated employee-owned funds, as Legg Mason no longer
had a variable interest in those 13 VIEs.
As of March 31, 2017, Legg Mason no longer held a significant financial interest in seven of the above foreign mutual funds,
and therefore concluded it was no longer the primary beneficiary. As a result, those seven funds were not consolidated as
of March 31, 2017. In addition, during the year ended March 31, 2017, Legg Mason also concluded that it was the primary
beneficiary of one additional foreign mutual fund, which was consolidated and designated as a CIV.
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Legg Mason also concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated
(and designated as CIVs) as of March 31, 2017. This sponsored investment fund was also consolidated under prior accounting
guidance, as further discussed below.
Prior Consolidation Accounting Guidance
Under prior consolidation guidance, as of March 31, 2016 and March 31, 2015, 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,
and 2015. Also, as of both March 31, 2016, and 2015, Legg Mason also concluded it was the primary beneficiary of 14 and
17 employee-owned funds, respectively, it sponsors, which were consolidated and designated as CIVs. As discussed above,
effective April 1, 2016, under new accounting guidance, all but one of those employee-owned funds no longer qualified as
VIEs, and 13 of those employee-owned funds which were consolidated as of March 31, 2016, were therefore deconsolidated.
See Note 1 for additional information regarding the adoption of the new consolidation accounting guidance.
Legg Mason's investment in CIVs, as of March 31, 2017 and 2016, was $28,300 and $13,641, 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.
The following tables reflect the impact of CIVs in the Consolidated Balance Sheets as of March 31, 2017 and 2016,
respectively, and the Consolidated Statements of Income (Loss) for the years ended March 31, 2017, 2016, and 2015,
respectively:
Consolidating Balance Sheets
March 31, 2017
March 31, 2016
Balance
Before
Consolidation
of CIVs and
Other(1)
CIVs and
Other(1)
Eliminations
Consolidated
Totals
1,749,959
$
77,406
$
(25,618) $
1,801,747
Balance
Before
Consolidation
of CIVs and
Other(1)
2,288,080
$
CIVs and
Other(1)
$ 110,631
$
$
6,481,376
8,231,335
808,664
2,792,084
3,600,748
9,987
87,393
736
—
736
$
$
(2,695)
6,488,668
5,135,318
84
(28,313) $
8,290,415
(13) $
809,387
$
$
7,423,398
$ 110,715
837,031
$
4,548
—
(13)
2,792,084
3,601,471
2,267,343
3,104,374
—
4,548
Eliminations
Consolidated
Totals
$
$
$
(13,667) $
2,385,044
—
5,135,402
(13,667) $
7,520,446
(26) $
841,553
—
(26)
2,267,343
3,108,896
619,302
26,853
31,617
677,772
81,649
94,027
109
175,785
4,011,285
59,804
(59,917)
4,011,172
4,237,375
12,140
(13,750)
4,235,765
$
8,231,335
$
87,393
$
(28,313) $
8,290,415
$
7,423,398
$ 110,715
$
(13,667) $
7,520,446
(1) Other represents consolidated sponsored investment products (VREs) that are not designated as CIVs.
115
Legg Mason AR2017 127
$
$
$
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
Net Income Attributable to Legg Mason, Inc.
$
227,256
$
12,512
$
(12,512) $
(1) Other represents consolidated sponsored investment products (VREs) that are not designated as CIVs.
Table of Contents
Consolidating Statements of Income (Loss)
Total Operating Revenues
Total Operating Expenses
Operating Income (Loss)
Total 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, 2017
Balance Before
Consolidation
of CIVs and
Other(1)
CIVs and
Other(1)
Eliminations
Consolidated
Totals
$
2,887,431
$
— $
(529) $
2,886,902
2,464,369
423,062
(63,636)
359,426
84,175
275,251
47,995
816
(816)
15,602
14,786
—
14,786
2,274
(526)
(3)
(3,331)
(3,334)
—
(3,334)
9,178
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
2,464,659
422,243
(51,365)
370,878
84,175
286,703
59,447
227,256
2,610,013
50,831
(76,049)
(25,218)
7,692
(32,910)
(7,878)
(25,032)
Total Operating Revenues
Total Operating Expenses
Operating Income (Loss)
Total Non-Operating Income (Expense)
Income (Loss) Before Income Tax Provision
Income tax provision
Net Income (Loss)
Less: Net income (loss) attributable to noncontrolling interests
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)
Net Income (Loss) Attributable to Legg Mason, Inc.
$
(25,032) $
(13,223) $
13,223
$
(1) Other represents consolidated sponsored investment products (VREs) that are not designated as CIVs.
Total Operating Revenues
Total Operating Expenses
Operating Income (Loss)
Total 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 Attributable to Legg Mason, Inc.
$
237,080
$
4,977
$
(4,977) $
237,080
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.
As further discussed in Notes 1 and 3, effective April 1, 2016, Legg Mason retroactively adopted updated accounting guidance
on fair value measurement. In accordance with the updated guidance, investments for which fair value is measured using
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NAV as a practical expedient are disclosed separately in the following tables as a reconciling item between investments
included in the fair value hierarchy and investments reported in the Consolidated Balance Sheets.
Legg Mason had no financial liabilities of CIVs carried at fair value as of March 31, 2017 or 2016. The fair value of the
financial assets of CIVs was determined using the following categories of inputs as of March 31, 2017 and 2016:
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investments
measured at
NAV
Balance as of
March 31,
2017
Assets:
Trading investments:
Hedge funds
Other proprietary fund
products
Total trading investments
Investments:
Hedge funds
Total investments
$
$
— $
— $
— $
15,910
$
15,910
33,991
33,991
—
33,991
$
—
—
—
— $
—
—
—
15,910
—
— $
8,824
24,734
$
33,991
49,901
8,824
58,725
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Investments
measured at
NAV
Balance as of
March 31,
2016
Assets:
Trading investments:
Hedge funds
Other proprietary fund
products
Total trading investments
$
$
— $
— $
— $
18,144
$
18,144
22,327
22,327
$
8,244
8,244
$
—
— $
—
18,144
$
30,571
48,715
There were no transfers between Level 1 and Level 2 during either of the years ended March 31, 2017 and 2016.
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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,
2017 and 2016, 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, 2017
Investment Strategy March 31, 2017
March 31, 2016
Unfunded
Commitments
Remaining
Term
Global macro, fixed
income, long/short
equity, systematic,
emerging market, U.S.
and European hedge
$
24,734 (1)
$
18,144
n/a
n/a
n/a - not applicable
(1) Redemption restrictions: 4% daily redemption; 11% monthly redemption; 43% quarterly redemption; and 42% are subject to three to five year
lock-up or side pocket provisions.
As of March 31, 2017 and 2016, there were no derivative liabilities of CIVs.
As of March 31, 2017 and 2016, for VIEs in which Legg Mason 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, 2017
As of March 31, 2016
CLOs
Real Estate Investment Trust
Other investment funds
Total
Equity Interests
on the
Consolidated
Balance Sheet (1)
$
— $
11,660
47,063
58,723
$
$
Maximum
Risk of Loss (2)
Equity Interests
on the
Consolidated
Balance Sheet (1)
— $
15,763
73,710
89,473
$
Maximum
Risk of Loss (2)
288
14,595
27,852
42,735
$
— $
9,540
22,551
32,091
(1) Amounts are related to investments in proprietary and other fund products.
(2)
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 $26,735,285 and $17,170,697 as of March 31, 2017 and 2016,
respectively.
The assets of these VIEs are primarily comprised of cash and cash equivalents and investment securities, and the liabilities
are primarily comprised of various expense accruals. As of March 31, 2016, the assets and liabilities of these VIEs also
included CLO loans and CLO debt, respectively. These VIEs were 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. Under the new consolidation guidance, effective April
1, 2016, these CLOs are no longer deemed to be VIEs.
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18. SUBSEQUENT EVENTS
Losses of RARE Infrastructure separate account AUM and other factors, including an expected withdrawal in June 2017 of
approximately $1,500,000 from an institutional client pursuant to notification in late April 2017, have resulted in a decrease
in related projected revenues and a revised estimate of the remaining useful life of the RARE Infrastructure separate account
contracts intangible asset, and the related amortized carrying value was determined to exceed its fair value by approximately
$32,000. Also, due to the projected decrease in revenues, the carrying value of the RARE Infrastructure trade name indefinite-
life intangible asset exceeded its fair value by approximately $2,000. The aggregate impairments of approximately $34,000
will be recorded in the June 2017 quarter.
Additionally, the decrease in AUM and projected revenues resulted in a reduction of approximately $11,500 in the estimated
contingent consideration liability related to the RARE Infrastructure acquisition, which will be recorded as a credit to Other
operating expense in the June 2017 quarter.
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Legg Mason AR2017 131
Table of Contents
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts or unless otherwise noted)
(Unaudited)
Quarter Ended
Mar. 31
Dec. 31
Sept. 30
June 30
Fiscal 2017(1)
Operating Revenues
Operating Expenses, excluding Impairment Charges
Impairment Charges
Operating Income
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.
$
$
723,126
613,237
—
109,889
(7,064)
102,825
12,521
90,304
14,380
75,924
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
$
$
$
0.76
0.76
0.22
38.99
30.22
728,406
718,889
$
$
$
$
$
715,241
569,075
35,000
111,166
(20,198)
90,968
26,441
64,527
13,088
51,439
0.50
0.50
0.22
34.35
28.10
710,387
716,740
$
$
$
$
$
748,370
620,737
—
127,633
(11,199)
116,434
29,902
86,532
20,091
66,441
0.63
0.63
0.22
35.09
27.62
732,900
742,134
$
$
$
$
$
700,165
626,610
—
73,555
(12,904)
60,651
15,311
45,340
11,888
33,452
0.31
0.31
0.22
35.83
27.54
741,853
709,098
(1) Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results.
As of May 18, 2017, the closing price of Legg Mason's common stock was $37.46.
Quarter Ended
Mar. 31
Dec. 31
Sept. 30
June 30
Fiscal 2016(1)
Operating Revenues
Operating Expenses, excluding Impairment Charges
Impairment Charges
Operating Income (Loss)
Non-Operating Income (Expense)
Income (Loss) before Income Tax Provision (Benefit)
Income tax provision (benefit)
Net Income (Loss)
Less: Net income (loss) attributable to noncontrolling interests
Net Income (Loss) Attributable to Legg Mason, Inc.
$
$
$
$
619,551
585,648
—
33,903
(27,455)
6,448
58,606
(52,158)
(6,885)
(45,273) $ (138,626) $
659,557
529,202
371,000
(240,645)
(1,616)
(242,261)
(103,651)
(138,610)
16
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
$
$
(1) Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results.
132
132
Legg Mason AR2017
Legg Mason AR2017
120
673,086
540,056
—
133,030
(42,464)
90,566
27,647
62,919
(1,400)
64,319
0.58
0.58
0.20
52.61
40.60
672,136
687,173
$
$
$
$
$
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
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, 2017, 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,
2017, there were approximately
1,300 shareholders of record of
the Company’s common stock.
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
Frances L. Cashman
Global Head of Communications
& Engagement
John D. Kenney
Global Head of Affiliate
Strategic Initiatives
Patricia Lattin
Chief Human Resources Officer