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| LM > SEC Filings for LM > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
Legg Mason, Inc., a holding company, with its subsidiaries (which collectively comprise "Legg Mason") is a global asset management firm. Acting through our subsidiaries, we provide investment management and related services to institutional and individual clients, company-sponsored mutual funds and other investment vehicles. We offer these products and services directly and through various financial intermediaries. We have operations principally in the United States of America and the United Kingdom and also have offices in Australia, Bahamas, Brazil, Canada, Chile, China, Dubai, France, Germany, Italy, Japan, Luxembourg, Poland, Singapore, Spain and Taiwan.
We operate in one reportable business segment, Asset Management, with two divisions or operating segments: Americas and International, which are primarily based on the geographic location of the advisor or the domicile of the fund families we manage. The Americas Division consists of our U.S.-domiciled fund families, the separate account business of our U.S.-based investment affiliates and the U.S. distribution organization. Similarly, the International Division consists of our fund complexes, distribution teams and investment affiliates located outside the U.S.
Our financial position and results of operations are materially affected by the overall trends and conditions of the financial markets, particularly in the United States, but increasingly in the other countries in which we operate. Results of any individual period should not be considered representative of future results. Our profitability is sensitive to a variety of factors, including, among other things, the amount and composition of our assets under management, and the volatility and general level of securities prices and interest rates. Sustained periods of unfavorable market conditions are likely to affect our profitability adversely. In addition, the diversification of services and products offered, investment performance, access to distribution channels, reputation in the market, attracting and retaining key employees and client relations are significant factors in determining whether we are successful in attracting and retaining clients. For a further discussion of factors that may affect our results of operations, refer to Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.
Certain prior year amounts have been retroactively revised as a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 160, "Noncontrolling Interests in Consolidated Financial Statements, An Amendment of ARB No. 51" and Financial Accounting Standards Board ("FASB") Staff Position ("FSP") APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." See Note 2 of Notes to Consolidated Financial Statements for more information on the adoption of this SFAS and FSP.
Terms such as "we," "us," "our," and "company" refer to Legg Mason.
The financial environment in the United States, while very challenging, showed signs of stabilization during the quarter ended June 30, 2009. During the quarter equity markets rose as a result of slowing growth in unemployment rates, although still at elevated levels, perceived strengthening of major financial institutions based on the results of governmental stress tests, and an increase in the overall confidence of consumers. As a result, all three major U.S. equity market indices increased sharply during the quarter ended June 30, 2009. The NASDAQ Composite Index1, S&P 5002, and Dow Jones Industrial Average3 increased 20%, 15% and 11%, respectively, during the quarter ended June 30, 2009. The Barclays Capital Global Aggregate Bond Index4 and the Barclays Capital U.S. Aggregate Bond Index4 also increased 5% and 2%, respectively during the quarter ended June 30, 2009. During the quarter ended June 30, 2009, the Federal Reserve Board held the discount rate at 0.25%. The financial environment in which we operate continues to be challenging, although we are encouraged by the recent improvements in securities markets, and we expect the challenges presented by high unemployment and troubles in the real estate and credit markets to persist throughout the rest of the fiscal year. We cannot predict how these uncertainties will impact the Company's results.
Quarter Ended June 30, 2009 Compared to Quarter Ended June 30, 2008
Assets Under Management
The components of the changes in our assets under management ("AUM") (in
billions) for the three months ended June 30 were as follows:
2009 2008
Beginning of period $ 632.4 $ 950.1
Investment funds, excluding liquidity funds
Sales 7.2 9.3
Redemptions (8.5) (13.9)
Separate account flows, net (27.1) (19.3)
Liquidity fund flows, net (1.9) 5.5
Net client cash flows (30.3) (18.4)
Market performance and other (1) 54.8 (8.4)
Acquisitions (dispositions), net - (0.5)
End of period $ 656.9 $ 922.8
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Includes impact of foreign exchange
In the last three months, AUM increased by $24.5 billion or 3.9% from $632.4 billion at March 31, 2009. The increase in AUM was attributable to market appreciation of $55 billion, of which approximately 15% resulted from the impact of foreign currency exchange fluctuation, which was partially offset by net client outflows of $30 billion. There were reduced net client outflows from those experienced in the quarter ended March 31, 2009 in all asset classes. The majority of outflows were in fixed income with $22 billion, or 73% of the outflows, followed by equity outflows and liquidity outflows of $6 billion and $2 billion, respectively. The majority of fixed income outflows were in products managed by Western Asset and Brandywine Global Investment Management, LLC ("Brandywine"). Equity outflows, which in part were driven by
1 NASDAQ is a trademark of the NASDAQ Stock Market, Inc., which is not affiliated with Legg Mason.
2 S&P is a trademark of Standard & Poor's, a division of the McGraw-Hill Companies, Inc., which is not affiliated with Legg Mason.
3 Dow Jones Industrial Average is a trademark of Dow Jones & Company, which is not affiliated with Legg Mason.
4 Barclays Capital U.S. Aggregate Bond Index and Barclays Capital Global Aggregate Bond Index are trademarks of Barclays Capital, which is not affiliated with Legg Mason.
AUM at June 30, 2009 were $656.9 billion, a decrease of $265.9 billion or 28.8% from June 30, 2008. The decrease in AUM was attributable to net client outflows of $171 billion and market depreciation of $94 billion, of which approximately 7% resulted from the impact of foreign currency exchange fluctuation. There were net client outflows in all asset classes. The majority of outflows were in fixed income with $101 billion, or 59% of the outflows, followed by equity outflows and liquidity outflows of $41 billion and $29 billion, respectively. The majority of fixed income outflows were in products managed by Western Asset that have experienced investment performance issues, particularly during last fiscal year, but to a lesser extent over the last quarter. Equity outflows were primarily experienced by key equity products managed at ClearBridge, LMCM and Permal. Due in part to investment performance issues, we have experienced net equity outflows since fiscal 2007. We generally earn higher fees and profits on equity AUM, and outflows in this asset class will more negatively impact our revenues and net income than would outflows in other asset classes. In addition, due in part to investment performance issues, we have experienced outflows in our fixed income asset class for the past six quarters.
Permal continues to require 95 days prior written notice of redemptions, which will be reduced to 65 days beginning with the September 30, 2009 redemption date. As of June 30, 2009, Permal had received approximately $1.0 billion of gross redemption notices that, unless withdrawn, will be redeemed in the September quarter.
AUM by Asset Class
AUM by asset class (in billions) as of June 30 was as follows:
% of % of %
2009 Total 2008 Total Change
Equity $ 143.6 21.9 % $ 253.4 27.5 % (43.3) %
Fixed Income 366.6 55.8 493.4 53.4 (25.7)
Liquidity 146.7 22.3 176.0 19.1 (16.6)
Total $ 656.9 100.0 % $ 922.8 100.0 % (28.8) %
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The component changes in our AUM by asset class (in billions) for the three months ended June 30, 2009 were as follows:
Fixed
Equity Income Liquidity Total
March 31, 2009 $ 126.9 $ 357.6 $ 147.9 $ 632.4
Investment funds, excluding liquidity funds
Sales 3.5 3.7 - 7.2
Redemptions (4.4) (4.1) - (8.5)
Separate account flows, net (5.5) (21.8) 0.2 (27.1)
Liquidity fund flows, net - - (1.9) (1.9)
Net client cash flows (6.4) (22.2) (1.7) (30.3)
Market performance 23.1 31.2 0.5 54.8
June 30, 2009 $ 143.6 $ 366.6 $ 146.7 $ 656.9
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% of % of %
2009 Total 2008 Total Change
Equity $ 138.0 21.3 % $ 270.9 28.6 % (49.1) %
Fixed Income 362.3 56.0 502.9 53.0 (28.0)
Liquidity 146.9 22.7 174.7 18.4 (15.9)
Total $ 647.2 100.0 % $ 948.5 100.0 % (31.8) %
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AUM by Division
AUM by division (in billions) as of June 30 was as follows:
% of % of %
2009 Total 2008 Total Change
Americas $ 456.9 69.6 % $ 650.3 70.5 % (29.7) %
International 200.0 30.4 272.5 29.5 (26.6)
Total $ 656.9 100.0 % $ 922.8 100.0 % (28.8) %
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The component changes in our AUM by division (in billions) for the three months ended June 30, 2009 was as follows:
Americas International Total
March 31, 2009 $ 446.5 $ 185.9 $ 632.4
Investment funds, excluding liquidity funds
Sales 5.3 1.9 7.2
Redemptions (6.8) (1.7) (8.5)
Separate account flows, net (20.4) (6.7) (27.1)
Liquidity fund flows, net (5.1) 3.2 (1.9)
Net client cash flows (27.0) (3.3) (30.3)
Market performance and other 37.4 17.4 54.8
June 30, 2009 $ 456.9 $ 200.0 $ 656.9
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Investment Performance(5)
Investment performance in the quarter ended June 30, 2009 improved significantly from the previous quarter. Unemployment claims, while still high, declined in April; improvements in existing homes sales and consumer spending, and some positive news from major banks and financial institutions restored some level of investor confidence and possibly suggested the U.S. economy may be on the verge of hitting a bottom. However, as consumers continue to deleverage, debates about inflation versus deflation and the strength of certain major U.S. companies still looms. As of June 30, 2009, for the trailing 1-year, 3-year, 5-year, and 10-year periods approximately 54%, 54%, 57%, and 91%, respectively, of our marketed equity composite(6) assets outpaced their benchmarks. As of June 30, 2008, for the trailing 1-year, 3-
5 Index performance in this section includes reinvestment of dividends and capital gains.
6 A composite is an aggregation of discretionary portfolios (separate accounts and investment funds) into a single group that represents a particular investment objective or strategy. Each of our asset managers has its own specific guidelines for including portfolios in its marketed composites. Assets under management that are not managed in accordance with the guidelines are not included in a composite. As of June 30, 2009 and 2008, 87% of our equity assets under management and 83% of our fixed income assets under management, respectively, were in marketed composites.
In the fixed income markets, Government yields continued to rise as investors grew concerned about the need to finance the growing federal deficit while demand for government bonds decreased due to investors' returning appetite for risk. Many sector spreads declined in the quarter as investors returned to riskier securities such as high yield bonds and emerging market debt securities.
For the 1-year period, the Treasury yield curve steepened from last quarter with the 30-year yield rising nearly 0.80% due to longer-term Treasury yields increasing as investors shift from Treasuries to Corporate bonds. The worst performing fixed income sector was Government bonds as measured by the Barclays U.S. Government Bond returning (2.21)%. As of June 30, 2009, for the trailing 1-year, 3-year, 5-year, and 10-year periods approximately 29%, 12%, 19%, and 78%, respectively, of our marketed fixed income composite assets outpaced their benchmarks. As of June 30, 2008, for the trailing 1-year, 3-year, 5-year, and 10-year periods approximately 4%, 18%, 57%, and 62%, respectively, of our fixed income marketed composite assets outpaced their benchmarks.
As of June 30, 2009, for the trailing 1-year, 3-year, 5-year, and 10-year periods 54%, 56%, 58%, and 78%, respectively, of our U.S. long-term mutual fund(7) assets outpaced their Lipper category average. As of June 30, 2008, for the trailing 1-year, 3-year, 5-year, and 10-year periods 45%, 49%, 58%, and 84%, respectively, of our U.S. long-term mutual fund(7) assets outpaced their Lipper category average.
As of June 30, 2009, for the trailing 1-year, 3-year, 5-year, and 10-year periods 49%, 61%, 52%, and 77%, respectively, of our U.S. equity mutual fund(7) assets outpaced their Lipper category average. As of June 30, 2008, for the trailing 1-year, 3-year, 5-year, and 10-year periods 50%, 55%, 52%, and 87%, respectively, of our U.S. equity mutual fund(7) assets outpaced their Lipper category average.
As of June 30, 2009, for the trailing 1-year, 3-year, 5-year, and 10-year periods 63%, 49%, 67%, and 80%, respectively, of our U.S. fixed income mutual fund(7) assets outpaced their Lipper category average. As of June 30, 2008, for the trailing 1-year, 3-year, 5-year, and 10-year periods 36%, 37%, 70%, and 73%, respectively, of our U.S. fixed income mutual fund(7) assets outpaced their Lipper category average.
Revenue by Division
Operating revenues by division (in millions) for the three months ended June 30
were as follows:
% of % of %
2009 Total 2008 Total Change
Americas $ 444.6 72.5% $ 714.0 67.7% (37.7)%
International 168.5 27.5 340.0 32.3 (50.4)
Total $ 613.1 100.0% $ 1,054.0 100.0% (41.8)%
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The decrease in operating revenues in the Americas division was primarily due to decreased mutual fund advisory fees on assets managed by Western Asset, ClearBridge, LMCM and Royce
7 Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of June 30, 2009 and 2008, the U.S. long-term mutual fund assets represented in the data accounted for 13% and 14%, respectively, of our total assets under management. The performance of our U.S. long-term mutual fund assets is included in the marketed composites.
Results of Operations
Operating Revenues
Total operating revenues in the quarter ended June 30, 2009 were $613.1 million, down 42% from $1.1 billion in the prior year quarter, primarily as a result of a 32% decrease in average AUM, driven by a decline in average equity assets of 49%, fixed income assets of 28%, and liquidity assets of 16%. The shift in the mix of AUM from higher fee equity assets to a greater percentage of fixed income and liquidity assets also contributed to the revenue decline.
Investment advisory fees from separate accounts decreased $125.8 million, or 40%, to $190.9 million. Of this decrease, $65.2 million was the result of lower average equity assets at ClearBridge, Private Capital Management, LP, LMCM, Brandywine, and Batterymarch Financial Management, Inc. ("Batterymarch") and $45.9 million was the result of lower average fixed income assets managed at Western Asset.
Investment advisory fees from funds decreased $241.5 million, or 42%, to $328.0 million. Of this decrease, approximately $179 million was the result of lower average equity assets managed at Permal, LMCM, ClearBridge, and Royce, and approximately $33 million was the result of lower average fixed income and liquidity assets managed at Western Asset.
Performance fees decreased $4.5 million, or 44%, to $5.7 million, primarily as a result of lower performance fees earned on alternative investment products at Permal.
Distribution and service fees decreased $66.8 million, or 44%, to $86.7 million, primarily as a result of a decline in average AUM of the retail share classes of our domestic equity and liquidity funds and our international fixed income funds, which resulted in a decrease of $47.7 million and $7.2 million, respectively.
Operating Expenses
Operating expenses in the quarter ended June 30, 2009 continued to benefit from the cost reduction initiatives implemented in fiscal 2009. As of June 30, 2009, cost-saving measures have resulted in the elimination of approximately $160 million in costs on an annualized basis, before costs incurred to achieve these savings, such as severance. The discussion below for each of our operating expenses identifies the amount of variance attributable to cost-savings achieved during the quarter ended June 30, 2009, where applicable.
Compensation and benefits decreased 29% to $268.8 million. This decrease was primarily driven by a $106 million decrease in revenue share based compensation, primarily resulting from lower revenues in the quarter ended June 30, 2009, and the impact of cost savings initiatives such as reductions in headcount, discretionary incentives and other discretionary compensation that lowered compensation by approximately $25 million. These were offset in part by an increase in deferred compensation obligations of approximately $26 million resulting from market gains on invested assets of deferred compensation plans (which are offset by gains in other non-operating income). Compensation as a percentage of operating revenues increased to 43.8% from 35.8% in the prior year period primarily as a result of compensation increases related to unrealized
Distribution and servicing expenses decreased 44% to $172.5 million as a result of a decrease in average AUM in certain products for which we pay fees to third-party distributors.
Communications and technology expense decreased 19% to $40.5 million, primarily as a result of cost savings initiatives that led to a $4.3 million decrease in technology consulting fees. Reductions in printing costs and lower technology depreciation expense, which resulted from the full depreciation of certain assets prior to or during the current quarter, of $1.6 million and $1.5 million, respectively, also contributed to the decrease.
Occupancy expense decreased 5% to $32.6 million, primarily due to recognition of
a $3.4 million loss in the prior year quarter related to a sublease arrangement.
This decrease was partially offset by increased rent expense at new office
locations and an increase in furniture and leasehold depreciation of $1.5
million, primarily as a result of the relocation of our corporate headquarters.
Amortization of intangible assets decreased 42% to $5.6 million, primarily as a result of the impact of the impairment of intangible assets during fiscal 2009, which reduced amortization expense by $3.7 million.
Other expenses decreased 24% to $34.8 million, primarily as a result of cost savings initiatives that resulted in reduced travel and entertainment costs of $9.3 million and advertising costs of $1.9 million.
Non-Operating Income (Expense)
Interest income decreased 92% to $1.8 million, primarily as a result of a decline in average interest rates earned on investment balances and lower average investment balances, which reduced interest income by $13.4 million and $6.6 million, respectively.
Interest expense decreased 2% to $43.4 million, primarily as a result of an $11.5 million decrease due to the payment of our 6.75% senior notes in July 2008 and lower interest rates paid on our term loans. This decrease was partially offset by the impact of a full quarter of interest expense recognized on our Equity Units in the June 2009 quarter and an increase in debt issuance costs, of $8.2 million and $1.2 million, respectively.
Fund support losses decreased by $284.4 million to a gain of $17.6 million, primarily as a result of our elimination of SIV exposure in the fourth quarter of fiscal 2009. In addition, due to improvement in financial markets during the three months ended June 30, 2009, and the related impact on the net asset values of supported liquidity funds, we reduced unrealized, non-cash losses recorded in fiscal 2009 on existing liquidity fund support arrangements for our offshore funds of $16.5 million. See Note 10 of Notes to Consolidated Financial Statements for additional information.
Other non-operating income increased $45.1 million to $46.4 million, primarily as a result of an increase of $27.9 million in unrealized market gains on assets held in deferred compensation plans, which are substantially offset by corresponding compensation increases discussed above,
Income Tax Benefit (Expense)
The provision for income taxes was $28.4 million compared to a benefit of $21.7 million in the prior year period, primarily as a result of increased earnings due to the elimination of losses related to liquidity fund support. The effective tax rate was 35.2% compared to 37.6% in the prior year period, primarily due to lower effective tax rates on foreign earnings.
Net Income (Loss) Attributable to Legg Mason, Inc.
Net income attributable to Legg Mason, Inc., hereafter referred to as "Net income (loss)", for the three months ended June 30, 2009 totaled $50.1 million, or $0.35 per diluted share, compared to net loss of $36.1 million, or $0.26 per diluted share, in the prior year period. Cash income (see Supplemental Non-GAAP Financial Information) for the quarter ended June 30, 2009 totaled $99.3 million, or $0.69 per diluted share, compared to $11.0 million, or $0.08 per diluted share in the prior year quarter. These increases were due to a reduction in losses related to liquidity fund support, net of income tax benefits, and the reduction of our operating expenses as a result of cost-savings initiatives implemented during fiscal 2009, which were offset in part by an overall reduction in our operating revenues due to a 32% decline in average AUM. The pre-tax profit margin increased to 13.2% from (5.5%) in the prior year period. The pre-tax profit margin, as adjusted (see Supplemental Non-GAAP Financial Information), for the quarters ended June 30, 2009 and 2008 was 18.3% and (7.7%), respectively. During the quarter ended June 30, 2009, gains related to liquidity fund support increased the pre-tax profit margin and pre-tax profit margin, as adjusted, by 2.9 percentage points and 4.0 percentage points, respectively. During the quarter ended June 30, 2008, losses related to liquidity fund support reduced the pre-tax profit margin and the pre-tax profit margin, as adjusted, by 23.9 percentage points and 33.8 percentage points, respectively.
Quarter Ended June 30, 2009 Compared to Quarter Ended March 31, 2009
Results of Operations
Net income for the quarter ended June 30, 2009 was $50.1 million, or $0.35 per diluted share, compared to net loss of $330.2, or $2.33 per diluted share, in the quarter ended March 31, 2009. The increase in net income and diluted earnings per share was primarily the result of a reduction in losses related to liquidity fund support, net of income tax benefits and expense related adjustments, of $380.0 million, or $2.67 per diluted share. Impairment charges and real estate lease losses, net of income tax benefits, of $50.9 million and . . .
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