LEGG MASON, INC. - FORM 8-K - EX-99 - EARNINGS RELEASE 12-31-11

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EX-99 - EARNINGS RELEASE 12-31-11 - LEGG MASON, INC.	exhibit99123111.pdf
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FOR IMMEDIATE RELEASE



Investor Relations:			Media:
Alan Magleby			Mary Athridge
410-454-5246			212-805-6035
amagleby@leggmason.com			mkathridge@leggmason.com

LEGG MASON REPORTS RESULTS FOR THIRD FISCAL QUARTER 2012

-- Third Quarter Net Income of $28 Million, or $0.20 per Diluted Share --

-- Results Include Transition-Related Costs of $42 million or $0.21 per Diluted Share --

-- Third Quarter Adjusted Income of $77 Million, or $0.55 per Diluted Share --

-- Assets Under Management of $627 Billion --

Baltimore, Maryland – January 27, 2012 – Legg Mason, Inc. (NYSE: LM) today reported its operating results for the third fiscal quarter ended December 31, 2011. The Company reported net income¹ of $28.1 million, or $0.20 per diluted share, as compared with $56.7 million, or $0.39 per diluted share, in the previous quarter and $61.6 million, or $0.41 per diluted share, in the third quarter of fiscal 2011. Included in this quarter’s results were $42.3 million, or $0.21 per diluted share, in transition-related costs as compared to $15.1 million, or $0.07 per diluted share, of such costs in the previous quarter, and $24.0 million, or $0.10 per diluted share, in the third quarter of fiscal 2011. Adjusted income² for the third quarter was $76.8 million, or $0.55 per diluted share, as compared to $87.6 million, or $0.61 per diluted share, in the previous quarter and $110.3 million, or $0.73 per diluted share, in the third quarter of fiscal 2011. For the third quarter, operating revenues were $627.0 million, down 6% from $669.9 million in the prior quarter and down 13% from $721.9 million in the prior year quarter. Operating expenses of $567.7 million were up 1% from $563.0 million in the second quarter of fiscal 2012 and down 9% from $624.9 million in the prior year quarter.

Assets Under Management (“AUM”) were $627.0 billion, up 2% as compared with $611.8 billion as of September 30, 2011 and down 7% from $671.8 billion as of December 31, 2010.

Legg Mason also announced today that its Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.08 per share.



(Amounts in millions, except per share amounts)
	Quarters Ended						Nine Months Ended
	Dec		Sep		Dec		Dec		Dec
	2011		2011		2010		2011		2010
Total Operating Revenues	$	627.0	$	669.9	$	721.9	$	2,014.0	$	2,070.9
Total Operating Expenses	567.7		563.0		624.9		1,747.4		1,783.2
Operating Income	59.3		106.9		97.0		266.5		287.7
Net Income¹	28.1		56.7		61.6		144.7		184.9
Adjusted Income²	76.8		87.6		110.3		273.4		321.6
Net Income Per Share – Diluted¹	0.20		0.39		0.41		1.00		1.20
Adjusted Income Per Share – Diluted²	0.55		0.61		0.73		1.89		2.08
(1) Net income represents Net income attributable to Legg Mason, Inc.
(2) See Supplemental Data below for non-GAAP performance measures.

Comments on the Third Quarter of Fiscal Year 2012 Results

Mark R. Fetting, Chairman and CEO of Legg Mason said, “It was a challenging quarter, with the cumulative effect of 2011’s second-half market turmoil impacting AUM and revenues. However, our core business held up well, the flow picture improved and investment performance remained strong. More generally, we enter calendar year 2012 having made significant strategic progress relative to long-term earnings per share growth. The streamlining efforts announced in May of 2010 have positioned us to realize $140 million in run rate savings starting in the fiscal 4th quarter, and our balance sheet increasingly affords us the opportunity to invest in organic growth, while thoughtfully returning capital to our shareholders. Ultimately, despite short term market movements, we remain confident in our prospects and intend to capitalize on opportunities that arise in the markets where our affiliates invest.”

Assets Under Management Increased to $627.0 Billion

AUM increased to $627.0 billion compared with $611.8 billion at September 30, 2011, primarily driven by $17.6 billion in market appreciation, partially offset by net client outflows of $1.3 billion and dispositions of $1.1 billion. AUM was down 7% from $671.8 billion as of December 31, 2010.


•	Fixed income and equity outflows were $7.1 billion and $4.9 billion, respectively, while liquidity inflows were $10.7 billion for the quarter ended December 31st.


•	At December 31, 2011, fixed income represented 56% of AUM, while equity represented 25% and liquidity represented 19% of AUM.


•	By client domicile, 63% of AUM was United States and 37% of AUM was non-U.S.


•	Average AUM during the quarter was $622.0 billion compared to $643.3 billion in the second quarter of fiscal year 2012 and $672.4 billion in the third quarter of fiscal year 2011.

Comparison to the Second Quarter of Fiscal Year 2012

Net income was $28.1 million, or $0.20 per diluted share, as compared with $56.7 million, or $0.39 per diluted share, in the second quarter of fiscal year 2012. The prior quarter’s results included a United Kingdom tax benefit of $18.3 million, or $0.13 per diluted share.


•	Revenues of $627.0 million were down 6% from $669.9 million in the prior quarter, primarily due to a 3% decline in average AUM, including a less favorable average asset mix and a $3.9 million decline in performance fees.

•

Operating expenses of $567.7 million were up 1% from $563.0 million in the prior quarter due to transition-related costs of $42.3 million, compared to $15.1 million in the prior quarter. The current quarter’s expenses also included a $1.7 million gain in the market value of deferred compensation and seed investments which are recorded as an increase in compensation and benefits with an offset in other non-operating income, compared to a loss of $14.2 million in the prior quarter. Excluding these two items, operating expenses declined 7% from the second quarter of fiscal 2012, reflecting lower compensation under revenue share arrangements due to reduced revenues.

•

Other non-operating expense was $11.6 million, as compared to $51.1 million of expense in the second quarter of fiscal 2012. Losses on corporate investments, not offset in compensation, were $1.8 million compared with losses of $19.7 million in the prior quarter. The current quarter also included gains on funded deferred compensation and seed investments as described above. In addition, the current quarter included $7.8 million in gains associated with consolidated investment vehicles compared to $1.5 million in gains in the prior quarter. The consolidation of investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.


•	Operating margin was 9.5%, as compared to 16.0% in the prior quarter. Operating margin, as adjusted,² was 21.7%, as compared with 21.3% in the prior quarter.

Adjusted income was $76.8 million, or $0.55 per diluted share, compared to adjusted income of $87.6 million, or $0.61 per diluted share, in the prior quarter.

Comparison to the Third Quarter of Fiscal Year 2011

Net income was $28.1 million, or $0.20 per diluted share, as compared with $61.6 million, or $0.41 per diluted share, in the third quarter of fiscal year 2011. This quarter’s results included transition-related costs of $42.3 million compared to $24.0 million of such costs in the prior year quarter.


•	Operating revenues of $627.0 million decreased 13% from revenues of $721.9 million in the prior year quarter reflecting a 7% decrease in average AUM, including a less favorable average asset mix, as well as a $28.5 million reduction in performance fees from the prior year quarter.

•

Operating expenses of $567.7 million were down 9% from operating expenses of $624.9 million in the prior year quarter due to lower compensation under revenue share arrangements from reduced revenues, and $26.0 million in quarterly savings related to the company’s streamlining program as compared to $2.4 million in quarterly savings in the prior year quarter. These savings were partially offset by incremental transition-related costs of $18.3 million, as well as the $17.8 million Western reimbursement step-down that was discussed in prior quarters.

•

Other non-operating expense was $11.6 million as compared to $9.8 million of expense in the prior year quarter. Losses on corporate investments not offset in compensation were $1.8 million compared with $9.4 million of gains in the prior year quarter. The current quarter also included $7.8 million in gains associated with consolidated investment vehicles, as compared to $7.7 million in losses in the prior year quarter, which are attributable to noncontrolling interests and therefore do not impact net income.


•	Operating margin was 9.5%, as compared to 13.4% in the prior year quarter. Operating margin, as adjusted, was 21.7%, as compared with 24.3% in the same period a year ago.


•	Adjusted income was $76.8 million, or $0.55 per diluted share, compared to adjusted income of $110.3 million, or $0.73 per diluted share, for the prior year quarter.

Quarterly Business Developments

Product


•	Two municipal bond funds managed by Western Asset were named as Category Kings by the Wall Street Journal based upon performance versus peers for the calendar year ended December 31, 2011.


•	Permal won three awards at the Hedge Fund Review’s Tenth European Fund of Hedge Funds Awards: Long Term Achievement in Hedge Funds, Best Performing Specialist FoHF over 10 years and the Best Performing Emerging Markets Fund of Hedge Funds.


•	Brandywine Global Investment Management won two awards from Asia Asset Management for global bond performance in 2011.


•	A Legg Mason Royce Fund was named Best in Class in the Benchmark Fund of the Year Award, based upon data provided by Morningstar Asia.


•	The Legg Mason US Equity Income Builder Fund was launched in the quarter in the UK. The fund managed by ClearBridge Advisors and mirroring the $4 billion U.S. product raised $30 million in new client money.

Performance

At December 31, 2011:


•	Of Legg Mason’s long-term U.S. mutual fund assets, 64% were beating their Lipper category averages for the 1-year period; 73% for the 3-year period; 77% for the 5-year period and 73% for the 10-year period.


•	Of Legg Mason’s long-term U.S. mutual funds assets, 52% were rated 4 or 5 stars by Morningstar, including 68% of all funds managed by Royce and 55% of all funds managed by Western.


•	None of the funds in the Western Asset institutional fund family outperformed their benchmarks for the 1-year period; 7 out of 8 outperformed their benchmarks for the 3-year period; 2 out of 8 outperformed for the 5-year period and 4 out of 6 funds outperformed for the 10-year period.


•	Seven out of 25 funds managed by Royce outperformed their benchmarks for the 1-year period; 15 out of 22 for the 3-year period; 15 out of 19 for the 5-year period; and all 11 outperformed for the 10-year period.


•	None of the funds managed by Legg Mason Capital Management outperformed their benchmarks for the 1-year, 5-year and 10-year periods; and 3 out of 5 funds outperformed for the 3-year period.


•	Four out of 11 funds managed by ClearBridge Advisors outperformed their benchmarks for the 1-year period; 6 out of 11 for the 3-year period; 5 out of 11 for the 5-year period; and 4 out of 11 outperformed for the 10-year period.

Balance Sheet

At December 31, 2011, Legg Mason’s cash position was $1.2 billion. Total debt was $1.4 billion and stockholders' equity was $5.6 billion. The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 20%.

The Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.08 per share. The dividend is payable April 16, 2012 to shareholders of record at the close of business on March 15, 2012.

Conference Call to Discuss Results

A conference call to discuss the Company's results, hosted by Mr. Fetting, will be held at 8:30 am EST today. The call will be open to the general public. Interested participants should access the call by dialing 1-877-269-7756 (or for international calls 1-201-689-7817) at least 10 minutes prior to the scheduled start to ensure connection.

The presentation slides that will be reviewed during the conference call will be available on the Investor Relations section of the Legg Mason website (http://ir.leggmason.com/CorporateProfile.aspx?iid=102761) shortly after the release of the financial results.

A replay or transcript of the live broadcast will be available on the Legg Mason website, in the investor relations section, or by dialing 1-877-660-6853 (or for international calls 1-201-612-7415), enter account number 369 followed by conference number 386821 when prompted. Please note that the replay will be available beginning at 4:00 p.m. EST on Friday, January 27, 2012 and ending on February 11, 2012.

About Legg Mason

Legg Mason is a global asset management firm, with $627 billion in assets under management as of December 31, 2011. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

This release contains forward-looking statements subject to risks, uncertainties and other factors that may cause actual results to differ materially. For a discussion of these risks and uncertainties, see "Risk Factors" and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Legg Mason's Annual Report on Form 10-K for the fiscal year ended March 31, 2011 and in the Company’s quarterly reports on Form 10-Q.



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)


				Quarters Ended									For the Nine Months Ended

				December			September			December			December			December
				2011			2011			2010			2011			2010
Operating Revenues:
	Investment advisory fees:
		Separate accounts		$	187,570		$	196,019		$	206,180		$	588,382		$	611,366
		Funds		351,598			376,835			384,341			1,128,577			1,094,531
		Performance fees		6,079			9,984			34,592			34,677			76,871
	Distribution and service fees			80,709			85,774			95,522			258,547			284,150
	Other			1,022			1,285			1,293			3,800			3,969
			Total operating revenues	626,978			669,897			721,928			2,013,983			2,070,887

Operating Expenses⁽¹⁾:
	Compensation and benefits			254,402			257,651			290,423			812,405			841,406
	Transition-related compensation			8,818			12,346			18,757			32,559			32,444
		Total compensation and benefits		263,220			269,997			309,180			844,964			873,850
	Distribution and servicing			148,275			160,391			187,412			489,422			537,946
	Communications and technology			43,466			41,571			39,399			125,538			118,689
	Occupancy			56,401			35,700			37,259			125,339			104,426
	Amortization of intangible assets			4,869			5,504			5,776			15,951			17,253
	Other			51,424			49,882			45,910			146,228			131,055
			Total operating expenses	567,655			563,045			624,936			1,747,442			1,783,219

Operating Income				59,323			106,852			96,992			266,541			287,668

Other Non-Operating Income (Expense)
	Interest income			2,577			2,982			2,209			8,614			6,194
	Interest expense			(21,831		)	(21,636		)	(22,389		)	(65,828		)	(69,639		)
	Other income (expense)			255			(35,502		)	18,806			(31,844		)	44,704
	Other non-operating income (expense) of
		consolidated investment vehicles		7,424			3,081			(8,462		)	15,607			(6,356		)
			Total other non-operating income (expense)	(11,575		)	(51,075		)	(9,836		)	(73,451		)	(25,097		)

Income Before Income Tax Provision				47,748			55,777			87,156			193,090			262,571

	Income tax provision (benefit)			12,607			(1,606		)	33,792			38,868			87,576

Net Income				35,141			57,383			53,364			154,222			174,995
	Less: Net income (loss) attributable
		to noncontrolling interests		7,009			719			(8,256		)	9,474			(9,891		)

Net Income Attributable to
	Legg Mason, Inc.			$	28,132		$	56,664		$	61,620		$	144,748		$	184,886

Net Income per share
	Attributable to Legg Mason, Inc.
	Common Shareholders:
	Basic			$	0.20		$	0.39		$	0.41		$	1.00		$	1.20

	Diluted			$	0.20		$	0.39		$	0.41		$	1.00		$	1.20

Weighted Average Number of Shares
	Outstanding:
			Basic	140,053			143,877			149,980			144,363			153,817
			Diluted	140,082			143,931			150,972			144,428			154,548

⁽¹⁾ Operating expenses include transition costs related to streamlining our business model.
	See Supplemental Data - Operating margin, as adjusted for additional details.



LEGG MASON, INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
RECONCILIATION OF NET INCOME ATTRIBUTABLE TO LEGG MASON, INC.
TO ADJUSTED INCOME ⁽¹⁾
(Amounts in thousands, except per share amounts)
(Unaudited)


				Quarters Ended							For the Nine Months Ended

				December		September			December		December			December
				2011		2011			2010		2011			2010

Net Income Attributable to Legg Mason, Inc.				$	28,132	$	56,664		$	61,620	$	144,748		$	184,886

	Plus (Less):
		Amortization of intangible assets		4,869		5,504			5,776		15,951			17,253
		Deferred income taxes on intangible assets:
			Tax amortization benefit	33,961		33,955			33,692		101,954			101,060
			UK tax rate adjustment	—		(18,268		)	—		(18,268		)	(8,878		)
		Imputed interest on convertible debt		9,793		9,741			9,194		29,023			27,249

Adjusted Income				$	76,755	$	87,596		$	110,282	$	273,408		$	321,570


Net Income per Diluted Share Attributable
to Legg Mason, Inc. Common Shareholders				$	0.20	$	0.39		$	0.41	$	1.00		$	1.20

	Plus (Less):
		Amortization of intangible assets		0.04		0.04			0.04		0.11			0.11
		Deferred income taxes on intangible assets:
			Tax amortization benefit	0.24		0.24			0.22		0.71			0.65
			UK tax rate adjustment	—		(0.13		)	—		(0.13		)	(0.06		)
		Imputed interest on convertible debt		0.07		0.07			0.06		0.20			0.18

Adjusted Income per Diluted Share				$	0.55	$	0.61		$	0.73	$	1.89		$	2.08


⁽¹⁾ See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.



LEGG MASON, INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
RECONCILIATION OF OPERATING MARGIN, AS ADJUSTED⁽¹⁾
(Amounts in thousands)
(Unaudited)


				Quarters Ended												For the Nine Months Ended

				December				September				December				December				December
				2011				2011				2010				2011				2010

Operating Revenues, GAAP basis				$	626,978			$	669,897			$	721,928			$	2,013,983			$	2,070,887

	Plus (Less):
		Operating revenues eliminated upon
			consolidation of investment vehicles	753				625				1,159				2,430				2,897
		Distribution and servicing expense excluding
			consolidated investment vehicles	(148,258		)		(160,379		)		(187,411		)		(489,380		)		(537,945		)

Operating Revenues, as Adjusted				$	479,473			$	510,143			$	535,676			$	1,527,033			$	1,535,839


Operating Income, GAAP basis				$	59,323			$	106,852			$	96,992			$	266,541			$	287,668

	Plus (Less):
		Gains (losses) on deferred compensation
			and seed investments	1,674				(14,243		)		8,566				(14,935		)		26,066
		Transition-related costs⁽²⁾		42,311				15,138				23,998				71,169				38,741
		Operating income and expenses of
			consolidated investment vehicles	858				885				643				2,905				3,347

Operating Income, as Adjusted				$	104,166			$	108,632			$	130,199			$	325,680			$	355,822

Operating margin, GAAP basis				9.5			%	16.0			%	13.4			%	13.2			%	13.9			%
Operating margin, as adjusted				21.7				21.3				24.3				21.3				23.2


⁽¹⁾ See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.
⁽²⁾ Transition-related costs:
			Compensation	$	8,818			$	12,346			$	18,757			$	32,559			$	32,444
			Communications and technology	3,911				2,577				823				8,594				1,294
			Occupancy	28,080				209				4,345				28,505				4,409
			Other	1,502				6				73				1,511				594
			Total	$	42,311			$	15,138			$	23,998			$	71,169			$	38,741



LEGG MASON, INC. AND SUBSIDIARIES
(Amounts in billions)
(Unaudited)

Assets Under Management
			Quarters Ended
			December 2011			September 2011			June 2011			March 2011			December 2010
By asset class:
	Equity		$	153.3		$	144.9		$	181.5		$	189.6		$	184.2
	Fixed Income		352.6			355.5			365.4			356.6			355.8
		Long-Term Assets	505.9			500.4			546.9			546.2			540.0
	Liquidity		121.1			111.4			115.6			131.4			131.8
		Total	$	627.0		$	611.8		$	662.5		$	677.6		$	671.8

By asset class (average):
	Equity		$	153.4		$	166.3		$	187.5		$	187.0		$	175.7
	Fixed Income		353.9			364.7			363.1			354.7			364.9
		Long-Term Assets	507.3			531.0			550.6			541.7			540.6
	Liquidity		114.7			112.3			120.2			131.8			131.8
		Total	$	622.0		$	643.3		$	670.8		$	673.5		$	672.4


Component Changes in Assets Under Management
			Quarters Ended
			December 2011			September 2011			June 2011			March 2011			December 2010
Beginning of period			$	611.8		$	662.5		$	677.6		$	671.8		$	673.5
Net client cash flows			(1.3		)	(17.6		)	(3.7		)	(8.7		)	(16.7		)
Market performance and other			17.6			(32.9		)	8.0			16.6			15.0
Acquisitions (Dispositions), net			(1.1		)	(0.2		)	(19.4		)	(2.1		)	—
End of period			$	627.0		$	611.8		$	662.5		$	677.6		$	671.8



	Note: Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results.



LEGG MASON, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENTS OF INCOME
TO NON-GAAP BASIS CONSOLIDATED STATEMENTS OF INCOME EXCLUDING INVESTMENT VEHICLES ⁽¹⁾
(Amounts in thousands, except per share amounts)
(Unaudited)

			Quarter Ended December 31, 2011									Quarter Ended September 30, 2011									Quarter Ended December 31, 2010

			GAAP Basis			Consolidated Investment Vehicles			Non-GAAP Basis - Excluding Investment Vehicles			GAAP Basis			Consolidated Investment Vehicles			Non-GAAP Basis - Excluding Investment Vehicles			GAAP Basis			Consolidated Investment Vehicles			Non-GAAP Basis - Excluding Investment Vehicles

Operating Revenues:
	Investment advisory fees		$	545,247		$	730		$	545,977		$	582,838		$	608		$	583,446		$	625,113		$	1,142		$	626,255
	Distribution and service fees		80,709			23			80,732			85,774			17			85,791			95,522			17			95,539
	Other		1,022			—			1,022			1,285			—			1,285			1,293			—			1,293
		Total operating revenues	626,978			753			627,731			669,897			625			670,522			721,928			1,159			723,087

Operating Expenses:
	Compensation and benefits		263,220			—			263,220			269,997			—			269,997			309,180			—			309,180
	Distribution and servicing		148,275			(17		)	148,258			160,391			(12		)	160,379			187,412			(1		)	187,411
	Other		156,160			(88		)	156,072			132,657			(248		)	132,409			128,344			517			128,861
		Total operating expenses	567,655			(105		)	567,550			563,045			(260		)	562,785			624,936			516			625,452

Operating Income			59,323			858			60,181			106,852			885			107,737			96,992			643			97,635

Other Non-Operating Income (Expense)
	Net interest income (expense)		(19,254		)	—			(19,254		)	(18,654		)	—			(18,654		)	(20,180		)	—			(20,180		)
	Other income (expense)		7,679			(7,782		)	(103		)	(32,421		)	(1,522		)	(33,943		)	10,344			7,659			18,003
		Other non-operating income (expense)	(11,575		)	(7,782		)	(19,357		)	(51,075		)	(1,522		)	(52,597		)	(9,836		)	7,659			(2,177		)

Income (Loss) Before Income Tax Provision			47,748			(6,924		)	40,824			55,777			(637		)	55,140			87,156			8,302			95,458

	Income tax provision (benefit)		12,607			—			12,607			(1,606		)	—			(1,606		)	33,792			—			33,792

Net Income (Loss)			35,141			(6,924		)	28,217			57,383			(637		)	56,746			53,364			8,302			61,666

	Less: Net income (loss) attributable
		to noncontrolling interests	7,009			(6,924		)	85			719			(637		)	82			(8,256		)	8,302			46

Net Income Attributable to Legg Mason, Inc.			$	28,132		$	—		$	28,132		$	56,664		$	—		$	56,664		$	61,620		$	—		$	61,620

Effective Income Tax Rate			26.4		%							(2.9		)%							38.8		%

Effective Income Tax Rate Excluding
	Consolidated Investment Vehicles								30.9		%							(2.9		)%							35.4		%

⁽¹⁾ See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.



LEGG MASON, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENTS OF INCOME
TO NON-GAAP BASIS CONSOLIDATED STATEMENTS OF INCOME EXCLUDING INVESTMENT VEHICLES ⁽¹⁾
(Amounts in thousands, except per share amounts)
(Unaudited)

			Nine Months Ended December 31, 2011									Nine Months Ended December 31, 2010

			GAAP Basis			Consolidated Investment Vehicles			Non-GAAP Basis - Excluding Investment Vehicles			GAAP Basis			Consolidated Investment Vehicles			Non-GAAP Basis - Excluding Investment Vehicles

Operating Revenues:
	Investment advisory fees		$	1,751,636		$	2,373		$	1,754,009		$	1,782,768		$	2,823		$	1,785,591
	Distribution and service fees		258,547			57			258,604			284,150			74			284,224
	Other		3,800			—			3,800			3,969			—			3,969
		Total operating revenues	2,013,983			2,430			2,016,413			2,070,887			2,897			2,073,784

Operating Expenses:
	Compensation and benefits		844,964			—			844,964			873,850			—			873,850
	Distribution and servicing		489,422			(42		)	489,380			537,946			(1		)	537,945
	Other		413,056			(433		)	412,623			371,423			(449		)	370,974
		Total operating expenses	1,747,442			(475		)	1,746,967			1,783,219			(450		)	1,782,769

Operating Income			266,541			2,905			269,446			287,668			3,347			291,015

Other Non-Operating Income (Expense)
	Net interest income (expense)		(57,214		)	—			(57,214		)	(63,445		)	—			(63,445		)
	Other income (expense)		(16,237		)	(12,135		)	(28,372		)	38,348			6,695			45,043
		Other non-operating income (expense)	(73,451		)	(12,135		)	(85,586		)	(25,097		)	6,695			(18,402		)

Income (Loss) Before Income Tax Provision			193,090			(9,230		)	183,860			262,571			10,042			272,613

	Income tax provision		38,868			—			38,868			87,576			—			87,576

Net Income (Loss)			154,222			(9,230		)	144,992			174,995			10,042			185,037

	Less: Net income (loss) attributable
		to noncontrolling interests	9,474			(9,230		)	244			(9,891		)	10,042			151

Net Income Attributable to Legg Mason, Inc.			$	144,748		$	—		$	144,748		$	184,886		$	—		$	184,886

Effective Income Tax Rate			20.1		%							33.4		%

Effective Income Tax Rate Excluding
	Consolidated Investment Vehicles								21.1		%							32.1		%

⁽¹⁾ See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.

Use of Supplemental Data as Non-GAAP Performance Measures

As supplemental information, we are providing performance measures that are based on methodologies other than generally accepted accounting principles (“non-GAAP”) for “Adjusted Income", “Consolidated Statements of Income, Excluding Consolidated Investment Vehicles”, and “Operating Margin, As Adjusted” that management uses as benchmarks in evaluating and comparing the period-to-period operating performance of Legg Mason, Inc. and its subsidiaries.

Adjusted Income

We define “Adjusted Income” as Net Income Attributable to Legg Mason, Inc., plus amortization and deferred taxes related to intangible assets and goodwill, and imputed interest and tax benefits on contingent convertible debt less deferred income taxes on goodwill and indefinite-life intangible asset impairment, if any. We also adjust for non-core items that are not reflective of our economic performance, such as impairment charges and the impact of tax rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets and goodwill, and net money market fund support losses (gains).

We believe that Adjusted Income provides a useful representation of our operating performance adjusted for non-cash acquisition related items and other items that facilitate comparison of our results to the results of other asset management firms that have not issued contingent convertible debt, made significant acquisitions, or engaged in money market fund support transactions. We also believe that Adjusted Income is an important metric in estimating the value of an asset management business.

Adjusted Income only considers adjustments for certain items that relate to operating performance and comparability, and therefore, is most readily reconcilable to Net Income Attributable to Legg Mason, Inc. determined under GAAP. This measure is provided in addition to Net Income Attributable to Legg Mason, Inc., but is not a substitute for Net Income Attributable to Legg Mason, Inc. and may not be comparable to non-GAAP performance measures, including measures of adjusted earnings or Adjusted Income, of other companies. Further, Adjusted Income is not a liquidity measure and should not be used in place of cash flow measures determined under GAAP. Legg Mason considers Adjusted Income to be useful to investors because it is an important metric in measuring the economic performance of asset management companies, as an indicator of value, and because it facilitates comparison of Legg Mason’s operating results with the results of other asset management firms that have not engaged in significant acquisitions, issued contingent convertible debt, or engaged in money market fund support transactions.

In calculating Adjusted Income, we add the impact of the amortization of intangible assets from acquisitions, such as management contracts, to Net Income Attributable to Legg Mason, Inc. to reflect the fact that these non-cash expenses distort comparisons of Legg Mason’s operating results with the results of other asset management firms that have not engaged in significant acquisitions. Deferred taxes on indefinite-life intangible assets and goodwill include actual tax benefits from amortization deductions that are not realized under GAAP absent an impairment charge or the disposition of the related business. Because we fully expect to realize the economic benefit of the current period tax amortization, we add this benefit to Net Income Attributable to Legg Mason, Inc. in the calculation of Adjusted Income. However, because of our net operating loss carry forward, we will receive the benefit of the current tax amortization over time. Conversely, we subtract the non-cash income tax benefits on goodwill and indefinite-life intangible asset impairment charges and United Kingdom tax rate adjustments on excess book basis on certain acquired indefinite-life intangible assets, if applicable, that have been recognized under GAAP. We also add back imputed interest on contingent convertible debt, which is a non-cash expense, as well as the actual tax benefits on the related contingent convertible debt that are not realized under GAAP. We also add (subtract) other non-core items, such as net money market fund support losses (gains) (net of losses on the sale of the underlying structured investment vehicle securities, if applicable). These adjustments reflect that these items distort comparisons of Legg Mason’s operating results to prior periods and the results of other asset management firms that have not engaged in money market fund support transactions or significant acquisitions, including any related impairments.

Should a disposition, impairment charge or other non-core item occur, its impact on Adjusted Income may distort actual changes in the operating performance or value of our firm. Also, realized losses on money market fund support transactions are reflective of changes in the operating performance and value of our firm.

Accordingly, we monitor these items and their related impact, including taxes, on Adjusted Income to ensure that appropriate adjustments and explanations accompany such disclosures.

Although depreciation and amortization of fixed assets are non-cash expenses, we do not add these charges in calculating Adjusted Income because these charges are related to assets that will ultimately require replacement.

Consolidated Statements of Income, Excluding Consolidated Investment Vehicles

In accordance with financial accounting standards on consolidation, Legg Mason consolidates and separately identifies certain sponsored investment vehicles, the most significant of which is a collateralized loan obligation entity. In presenting our “Consolidated Statements of Income, Excluding Consolidated Investment Vehicles”, we add back the investment advisory and distribution and servicing fees that are eliminated upon the consolidation of investment vehicles and exclude the operating expenses and the impact on non-operating income (expense) and noncontrolling interests of consolidated investment vehicles.

We believe it is important to provide the Consolidated Statements of Income, Excluding Consolidated Investment Vehicles to present the underlying economic performance of our core asset management operations, which does not include the results of the investment funds that we manage but may not own all of the equity invested. By deconsolidating the consolidated investment vehicles from the Consolidated Statements of Income, the investment advisory and distribution fees earned by Legg Mason from consolidated investment vehicles are added back to reflect our actual revenues. Similarly the operating expenses and the impact on non-operating income (expense) and noncontrolling interests of consolidated investment vehicles are removed from the GAAP basis Statements of Income since this activity does not actually belong to Legg Mason. The deconsolidation of the investment vehicles does not have any impact on Net Income Attributable to Legg Mason, Inc. in any period presented. The Consolidated Statements of Income, Excluding Consolidated Investment Vehicles are presented in addition to our GAAP basis Consolidated Statements of Income, but are not substitutes for the GAAP basis Consolidated Statements of Income and may not be comparable to Statements of Income presented on a non-GAAP basis of other companies.

Operating Margin, As Adjusted

We calculate “Operating Margin, As Adjusted,” by dividing (i) Operating Income, adjusted to exclude the impact on compensation expense of gains or losses on investments made to fund deferred compensation plans, the impact on compensation expense of gains or losses on seed capital investments by our affiliates under revenue sharing agreements, transition-related costs of streamlining our business model, income (loss) of consolidated investment vehicles and, impairment charges by (ii) our operating revenues, adjusted to add back net investment advisory fees eliminated upon consolidation of investment vehicles, less distribution and servicing expenses which we use as an approximate measure of revenues that are passed through to third parties, which we refer to as “adjusted operating revenues”. The compensation items, other than transition-related costs, are removed from Operating Income in the calculation because they are offset by an equal amount in Other non-operating income (expense), and thus have no impact on Net Income Attributable to Legg Mason, Inc. Transition-related costs and income (loss) of consolidated investment vehicles are removed from Operating Income in the calculation because these items are not reflective of our core asset management operations. We use adjusted operating revenues in the calculation to show the operating margin without distribution and servicing expenses, which we use to approximate our distribution revenues that are passed through to third parties as a direct cost of selling our products, although distribution and servicing expenses may include commissions paid in connection with the launching of closed-end funds for which there is no corresponding revenue in the period. Adjusted operating revenues 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 excluding items that have no impact on Net Income and because it indicates what Legg Mason’s operating margin would have been without the distribution revenues that are passed through to third parties as a direct cost of selling our products, transition-related costs, and the impact of the consolidation of certain investment vehicles described above. The consolidation of these investment vehicles does not have an impact on Net income Attributable to Legg Mason, Inc. This measure is provided in addition to the Company’s 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.

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