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Press release from PR Newswire

Legg Mason Reports Results for Third Fiscal Quarter 2011

Wednesday, January 26, 2011

Legg Mason Reports Results for Third Fiscal Quarter 201106:59 EST Wednesday, January 26, 2011- Third Quarter Net Income of $62 Million, or $0.41 per Diluted Share - - Results Include Transition Costs of $24 Million, or $0.10 per Diluted Share, and Expenses Related to the $444 Million Closed-End Fund Raise of $10 million, or $0.04 per Diluted Share - - Third Quarter Adjusted Income of $110 Million, or $0.73 per Diluted Share - - Assets Under Management of $672 Billion -BALTIMORE, Jan. 26, 2011 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the third fiscal quarter ended December 31, 2010.  The Company reported net income(1) of $61.6 million, or $0.41 per diluted share, as compared with $75.3 million, or $0.50 per diluted share, in the previous quarter and $44.9 million, or $0.28 per diluted share in the third quarter of fiscal 2010.  Included in this quarter?s results were $24.0 million or $0.10 per diluted share in transition-related costs as compared to $11.6 million, or $0.05 per diluted share of such costs in the previous quarter and $10.2 million, or $0.04 per diluted share in costs related to a closed-end fund launch.  Adjusted income(2) for the third quarter was $110.3 million, or $0.73 per diluted share, as compared to $115.0 million, or $0.76 per diluted share, in the second quarter of fiscal 2011 and $93.2 million, or $0.57 per diluted share, in the third quarter of fiscal 2010.  For the third quarter, operating revenues were $721.9 million, up 7% from $674.8 million in the prior quarter and up 5% from $690.5 million in the prior year quarter. Operating expenses of $624.9 million were up 6% from $586.9 million in the second quarter of fiscal year 2011 and were up 2% from $611.3 million in the prior year quarter. The prior quarter?s results included a United Kingdom tax benefit of $8.9 million, or $0.06 per diluted share, and the prior year?s results included real estate losses of $28.3 million or $0.11 per diluted share.Assets Under Management (?AUM?) were $671.8 billion, as compared with $673.5 billion as of September 30, 2010 and were down 1% from $681.6 billion as of December 31, 2009.Legg Mason also announced today that its Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.06 per share.(Amounts in millions, except per share amounts)Quarters EndedNine Months EndedDecSeptDecDecDec20102010200920102009Total Operating Revenues$     721.9$     674.8$     690.5$ 2,070.9$  1,963.5Total Operating Expenses624.9586.9611.31,783.21,748.1Operating Income97.087.979.1287.7215.3Net Income(1)61.675.344.9184.9140.8Adjusted Income(2)110.3115.093.2321.6270.0Net Income Per Share ? Diluted(1)0.410.500.281.200.92Adjusted Income Per Share ? Diluted(2)0.730.760.572.081.76(1)  Net income represents Net income attributable to Legg Mason, Inc.(2)  Please see Supplemental Data below for non-GAAP performance measuresComments on Third Fiscal Quarter 2011 ResultsMark R. Fetting, Chairman and CEO, said, "Legg Mason delivered solid earnings of $0.41 cents per share, up 46% from the year ago period.  Transition-related costs and expenses related to this quarter?s closed-end fund raise reduced EPS by $0.14 per share.  Improved operating results for the quarter reflect increased revenues related to a higher advisory fee yield, stronger performance fees, and our continuing focus on expense management.  Moreover, we continued to benefit from our capital management strategy as we further reduced share count in the quarter.?We are pleased that investment performance continued to improve and we are encouraged that a progressively healing economy is likely to produce additional market opportunities for investing.  That said, we are focused on the need to address persistent outflows at some of our affiliates, and together with our affiliates, we are spending a significant amount of time in front of clients, distribution partners and prospects to address this.  In the short-term, we are seeing a secular shift in the marketplace towards more specialized products with an increased investor appetite for risk assets.  We are well positioned to take advantage of this through our fixed income, equity and alternative platforms. With improved distribution and new product innovation, improving asset mix and higher fee yields we can continue to grow our business.?As we enter calendar year 2011, we remain focused on the three key strategic drivers of growth: maintaining and expanding our group of outstanding investment managers, delivering strategic value from our corporate center, and continuing to build a balanced portfolio of affiliates across asset classes, geographies and channels.  During the quarter we announced a new management structure that is aligned with, and fully engaged in supporting, these goals.  I am confident that we have built a global organization that has single purpose and direction as we take advantage of opportunities in 2011 and beyond," concluded Mr. Fetting.Assets Under Management Decreased to $672 Billion AUM decreased to $671.8 billion from $673.5 billion at September 30, 2010 driven by net outflows of $16.7 billion largely offset by market appreciation of $14.8 billion.  Fixed income, equity and liquidity outflows were $12.9 billion, $3.3 billion and $0.5 billion, respectively, for the quarter ended December 31, 2010.  At December 31, 2010, fixed income represented 53% of AUM, while equity represented 27% and liquidity represented 20% of AUM.  By division, 70% of AUM was in the Americas Division and 30% of AUM was in the International Division.  Average AUM during the quarter was $672.4 billion compared to $658.6 billion in the second quarter of fiscal 2011 and $693.3 billion in the third quarter of fiscal 2010. Comparison to the Second Quarter of Fiscal Year 2011Net income was $61.6 million, or $0.41 per diluted share, as compared with $75.3 million, or $0.50 per diluted share, in the second quarter of fiscal year 2011. The prior quarter?s results included a United Kingdom tax benefit of $8.9 million, or $0.06 per diluted share.Revenues of $721.9 million were up 7% from $674.8 million in the prior quarter, primarily due to a 2% increase in average AUM, increased advisory fee yield resulting from a more favorable asset mix and $15.1 million in higher performance fees. Operating expenses of $624.9 million increased 6% from $586.9 million in the second quarter of fiscal 2011.  The current quarter?s expenses included $10.2 million of costs related to the launch of the closed-end fund this quarter as well as $24.0 million in transition-related costs related to the previously announced streamlining initiative, compared with $11.6 million of such transition-related costs in the prior quarter. Other non-operating expenses were $9.8 million, as compared to income of $15.4 million in the second quarter of fiscal 2011. The current quarter included gains on funded deferred compensation plans and seed investments that are offset by an equal increase in compensation and benefits of $8.6 million compared with $22.1 million of such gains in the prior quarter. Gains on corporate investments, not offset by compensation, were $9.4 million as compared with $12.9 million in the prior quarter.  The current quarter also included $8.5 million in losses primarily associated with the increase in fair value of the debt of consolidated investment vehicles as compared to $4.5 million in income 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 13.4%, as compared to 13.0% in the second quarter of fiscal 2011.  Operating margin, as adjusted(2), was 24.3% as compared with 24.1% in the prior quarter. Adjusted income was $110.3 million, or $0.73 per diluted share, compared to adjusted income of $115.0 million, or $0.76 per diluted share, in the prior quarter. Comparison to the Third Quarter of Fiscal Year 2010Net income was $61.6 million, or $0.41 per diluted share, as compared with net income of $44.9 million, or $0.28 per diluted share, in the third quarter of fiscal year 2010. Revenues of $721.9 million were up 5% from revenues of $690.5 million in the prior year quarter primarily due to increased advisory fee yield due to a more favorable asset mix. Operating expenses of $624.9 million were up 2% over operating expenses of $611.3 million in the prior year quarter in large part due to higher compensation and benefits costs as a result of the increase in revenues. The current quarter?s expenses included $24.0 million in transition-related costs related to the previously announced streamlining initiative while the prior year included $28.3 million in real estate lease losses.Other non-operating expense was $9.8 million compared to $6.9 million in the prior year quarter primarily due to losses this quarter associated with an increase in fair value of the debt related to consolidated investment vehicles.Operating margin was 13.4%, as compared to 11.5% in the prior year quarter.  Operating margin, as adjusted, was 24.3%, as compared with 18.0% in the same period a year ago.  Adjusted income was $110.3 million, or $0.73 per diluted share, compared to adjusted income of $93.2 million, or $0.57 per diluted share, for the prior year quarter. Quarterly Business Developments ProductLegg Mason launched the Western Asset High Yield Defined Opportunity Closed-End Fund, with a total raise of $444 million ? the second largest raise to date for Legg Mason.  According to the Closed-End Fund Association and SEC filings, Legg Mason was the number one issuer of closed-end funds for 2010.In March of 2010, Legg Mason seeded a China-focused product for Permal with $25 million.  It has grown six fold to approximately $150 million. The fund had strong performance, beating both the MSCI Broad China index and the Shanghai Composite with significantly less volatility.   Royce was honored with five awards from the Mutual Fund Education Alliance (MFEA).  Whitney George was named best U.S. Small Cap Manager by SmartMoney for the Royce Low-Priced Stock Fund. Savingforcollege.com named the Scholars Choice College Savings Program as the top-ranked advisor-sold 529 plan based on investment performance for the one-year period ended September 30, 2010, including fees. This is the fourth consecutive quarter Scholars Choice received this accolade. PerformanceAt December 31, 2010:Of Legg Mason?s long-term U.S. mutual fund assets, 45% were beating their Lipper category averages for the 1-year period; 75% for the 3-year period; 72% for the 5-year period and 73% for the 10-year period.Of Legg Mason?s long-term U.S. mutual fund assets, 52% were rated 4 or 5 stars by Morningstar, including 82% of all funds managed by Royce and 54% of all funds managed by Western.Seven of 8 funds in the Western Asset institutional fund family outperformed their benchmarks for the 1-year period; 5 of 8 outperformed for the 3-year period; 4 of 7 outperformed for the 5-year period and all 4 funds outperformed for the 10-year period.Nine of 24 funds managed by Royce outperformed their benchmarks for the 1-year period; 17 of 21 for the 3-year period; 14 of 17 for the 5-year period; and all 9 outperformed for the 10-year period.One of 6 funds managed by Legg Mason Capital Management outperformed its benchmarks for the 1- and 10- year periods; all underperformed for the 3- and 5-year periods. Three of 13 funds managed by ClearBridge Advisors outperformed their benchmarks in the 1-year period; 4 of 13 funds outperformed for the 3-year period; 7 of 13 outperformed for the 5-year period and 8 of 13 outperformed for the 10-year period.Balance SheetAt December 31, 2010, Legg Mason?s cash position was $1.3 billion.  Total debt was $1.4 billion and stockholders' equity was $5.8 billion.  The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 20%.  In the quarter, the Company completed additional open market purchases of 1.2 million shares.  Legg Mason repurchased and retired 12.6 million shares of common stock over the last three quarters.    The Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.06 per share. The dividend is payable on April 11, 2011 to shareholders of record at the close of business on March 10, 2011. Conference Call to Discuss Results A conference call to discuss the Company's results, hosted by Mr. Fetting, will be held at 8:30 a.m. E.S.T. today. The call will be open to the general public. Interested participants should access the call by dialing 1-866-843-0890 (or for international calls 1-412-317-9250) and enter pin number 5154003 when prompted. Please dial in 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 1-877-344-7529 (or for international calls 1-412-317-0088) conference number 447346.  Please note that the replay will be available beginning at 12:00 p.m., E.S.T. on Wednesday, January 26, 2011 and ending on February 10, 2011.About Legg MasonLegg Mason is a global asset management firm, with $672 billion in assets under management as of December 31, 2010.  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, 2010 and the Company?s quarterly reports on form 10-Q. 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 IncomeAdjusted Income was formerly reported as ?Cash Income, as Adjusted?. We define ?adjusted income? as Net income (loss) attributable to Legg Mason, Inc. plus amortization and deferred taxes related to intangible assets and goodwill, and imputed interest and tax benefits on contingent convertible debt less deferred income taxes on goodwill and indefinite-life intangible asset impairment, if any.  We also adjust for 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 good 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, but is not a substitute for net income 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 includes 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 actually receive these tax benefits on indefinite-life intangibles and goodwill over time, we add them to net income in the calculation of adjusted income.  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 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 SIV 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 VehiclesEffective with the April 1, 2010 adoption of a new financial accounting standard on consolidation, Legg Mason now 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 AdjustedWe 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.  Legg Mason believes 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 to 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. LEGG MASON, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Amounts in thousands, except per share amounts)(Unaudited)Quarters EndedFor the Nine Months EndedDecember 2010September 2010December 2009December 2010December 2009Operating Revenues:Investment advisory fees:Separate accounts$         206,180$          204,214$         208,860$         611,366$         606,720Funds384,341357,491350,7671,094,5311,026,162Performance fees34,59219,50531,54676,87146,796Distribution and service fees95,52292,31497,900284,150279,220Other1,2931,2701,4063,9694,561Total operating revenues721,928674,794690,4792,070,8871,963,459Operating Expenses(1):Compensation and benefits290,423284,909287,657841,406844,028Transition-related compensation18,75710,974-32,444-Total compensation and benefits309,180295,883287,657873,850844,028Distribution and servicing187,412165,832177,660537,946524,512Communications and technology39,39939,31439,845118,689120,873Occupancy37,25933,49263,225104,426131,498Amortization of intangible assets5,7765,7495,74617,25317,038Other45,91046,62537,198131,055110,163Total operating expenses624,936586,895611,3311,783,2191,748,112Operating Income 96,99287,89979,148287,668215,347Other Non-Operating Income (Expense)Interest income2,2092,1702,2236,1945,772Interest expense(22,389)(24,449)(29,248)(69,639)(101,178)Fund support----23,171Other income (expense)18,80633,18916,04744,70471,905Other non-operating income (expense) of consolidated investment vehicles(8,462)4,4994,069(6,356)12,919Total other non-operating income (expense)(9,836)15,409(6,909)(25,097)12,589Income Before Income Tax Provision87,156103,30872,239262,571227,936Income tax provision33,79226,72026,00687,57682,057Net Income 53,36476,58846,233174,995145,879Less: Net income (loss) attributableto noncontrolling interests(8,256)1,2531,311(9,891)5,129Net Income Attributable toLegg Mason, Inc. $           61,620$            75,335$           44,922$         184,886$         140,750Net Income per shareAttributable to Legg Mason, Inc. Common Shareholders:Basic$               0.41$                0.50$               0.28$               1.20$               0.93Diluted $               0.41$                0.50$               0.28$               1.20$               0.92Weighted Average Number of SharesOutstanding:Basic149,980151,416160,815153,817151,417Diluted150,972151,940162,949154,548153,559(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 SUBSIDIARIESSUPPLEMENTAL DATARECONCILIATION OF NET INCOME ATTRIBUTABLE TO LEGG MASON, INC. TO ADJUSTED INCOME (1)(Amounts in thousands, except per share amounts)(Unaudited)Quarters EndedFor the Nine Months Ended December 2010 September 2010 December 2009 December 2010 December 2009 Net Income Attributable to Legg Mason, Inc.$              61,620$               75,335$              44,922$            184,886$            140,750Plus (Less):Amortization of intangible assets 5,7765,7495,74617,25317,038Deferred income taxes on intangible assets: Tax amortization benefit33,69233,68133,855101,060103,175UK tax rate adjustment-(8,878)-(8,878)-Imputed interest on convertible debt9,1949,1468,63227,24925,583Net money market fund support gains (2)----(16,565)Adjusted Income$            110,282$             115,033$              93,155$            321,570$            269,981Net Income per Diluted Share Attributable to Legg Mason, Inc. Common Shareholders$                  0.41$                   0.50$                  0.28$                  1.20$                  0.92Plus (Less):Amortization of intangible assets0.040.040.030.110.11Deferred income taxes on intangible assets: Tax amortization benefit0.220.220.210.650.67UK tax rate adjustment-(0.06)-(0.06)-Imputed interest on convertible debt0.060.060.050.180.17Net money market fund support gains (2)----(0.11)Adjusted Income per Diluted Share$                  0.73$                   0.76$                  0.57$                  2.08$                  1.76(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.(2)  Net of income taxes.   LEGG MASON, INC. AND SUBSIDIARIESSUPPLEMENTAL DATARECONCILIATION OF OPERATING MARGIN, AS ADJUSTED(1)(Amounts in thousands)(Unaudited)Quarters EndedFor the Nine Months EndedDecember 2010September 2010December 2009December 2010December 2009Operating Revenues, GAAP basis$         721,928$          674,794$         690,479$      2,070,887$      1,963,459Plus (Less):Operating revenues eliminated uponconsolidation of investment vehicles1,1599598562,8972,251Distribution and servicing expense excluding consolidated investment vehicles(187,411)(165,845)(177,645)(537,945)(524,467)Operating Revenues, as Adjusted$         535,676$          509,908$         513,690$      1,535,839$      1,441,243Operating Income $           96,992$            87,899$           79,148$         287,668$         215,347Plus (Less):Gains (losses) on deferred compensation and seed investments 8,56622,12212,61526,06668,134Transition-related costs(2)23,99811,587-38,741-Operating income and expenses of consolidated investment vehicles6431,4617803,3471,341Operating Income, as Adjusted$         130,199$          123,069$           92,543$         355,822$         284,822Operating margin, GAAP basis13.4%13.0%11.5%13.9%11.0%Operating margin, as adjusted24.324.118.023.219.8(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.(2) Transition-related costs:Compensation$           18,757$            10,974$           32,444Communications and technology8234721,294Occupancy4,345634,409Other7378594     Total$           23,998$            11,587$           38,741LEGG MASON, INC. AND SUBSIDIARIES(Amounts in billions)(Unaudited)Assets Under ManagementQuarters EndedDecember 2010September 2010June 2010March 2010December 2009By asset class:Equity$             184.2$              169.6$    155.8$      173.8$             168.7Fixed Income355.8371.6357.9364.3365.8Liquidity131.8132.3131.7146.4147.1Total$             671.8$              673.5$    645.4$      684.5$             681.6By asset class (average):Equity$             175.7$              162.0$    167.6$      167.4$             164.6Fixed Income364.9365.0362.0365.6378.8Liquidity131.8131.6138.7148.2149.9Total$             672.4$              658.6$    668.3$      681.2$             693.3By division:Americas$             472.6$              468.3$    450.3$      475.8$             472.9International199.2205.2195.1208.7208.7Total$             671.8$              673.5$    645.4$      684.5$             681.6Component Changes in Assets Under ManagementQuarters EndedDecember 2010September 2010June 2010March 2010December 2009Beginning of period$             673.5$              645.4$    684.5$      681.6$             702.7Net client cash flows(16.7)(12.7)(23.1)(10.9)(32.7)Market performance and other15.040.8(16.0)13.811.6End of period$             671.8$              673.5$    645.4$      684.5$             681.6By DivisionAmericasBeginning of period$             468.3$              450.3$    475.8$      472.9$             484.3Net client cash flows(10.1)(7.6)(17.6)(10.9)(21.4)Market performance and other14.425.6(7.9)13.810.0End of period$             472.6$              468.3$    450.3$      475.8$             472.9InternationalBeginning of period$             205.2$              195.1$    208.7$      208.7$             218.4Net client cash flows(6.6)(5.1)(5.5)-(11.3)Market performance and other0.615.2(8.1)-1.6End of period$             199.2$              205.2$    195.1$      208.7$             208.7LEGG MASON, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)(Amounts in thousands, except per share amounts)(Unaudited)Quarter Ended December 31, 2010GAAP BasisConsolidated Investment VehiclesNon-GAAP Basis  - Excluding Investment VehiclesOperating Revenues:Investment advisory fees $   625,113$                    1,142$                 626,255Distribution and service fees95,5221795,539Other1,293-1,293Total operating revenues 721,9281,159723,087Operating Expenses:Compensation and benefits309,180-309,180Distribution and servicing187,412(1)187,411Other 128,344517128,861Total operating expenses 624,936516625,452Operating Income 96,99264397,635Other Non-Operating Income (Expense)Net interest income (expense)(20,180)-(20,180)Other income (expense)10,3447,65918,003Other non-operating income (expense)(9,836)7,659(2,177)Income (Loss) Before Income Tax Provision 87,1568,30295,458Income tax provision 33,792-33,792Net Income (Loss) 53,3648,30261,666Less: Net income (loss) attributableto noncontrolling interests(8,256)8,30246Net Income Attributable to Legg Mason, Inc. $     61,620$                          -$                   61,620Effective Income Tax Rate38.8%Effective Income Tax Rate ExcludingConsolidated Investment Vehicles35.4%(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.LEGG MASON, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)(Amounts in thousands, except per share amounts)(Unaudited)Quarter Ended September 30, 2010GAAP BasisConsolidated Investment VehiclesNon-GAAP Basis  - Excluding Investment VehiclesOperating Revenues:Investment advisory fees $   581,210$                       914$                 582,124Distribution and service fees92,3144592,359Other1,270-1,270Total operating revenues   674,794959675,753Operating Expenses:Compensation and benefits295,883-295,883Distribution and servicing165,83213165,845Other 125,180(515)124,665Total operating expenses 586,895(502)586,393Operating Income 87,8991,46189,360Other Non-Operating Income (Expense)Net interest income (expense)(22,279)-(22,279)Other income (expense)37,688(2,663)35,025Other non-operating income (expense)15,409(2,663)12,746Income (Loss) Before Income Tax Provision 103,308(1,202)102,106Income tax provision 26,720-26,720Net Income (Loss)76,588(1,202)75,386Less: Net income (loss) attributableto noncontrolling interests1,253(1,202)51Net Income Attributable to Legg Mason, Inc. $     75,335$                          -$                   75,335Effective Income Tax Rate25.9%Effective Income Tax Rate ExcludingConsolidated Investment Vehicles26.2%(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.LEGG MASON, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)(Amounts in thousands, except per share amounts)(Unaudited)Quarter Ended December 31, 2009GAAP BasisConsolidated Investment VehiclesNon-GAAP Basis  - Excluding Investment VehiclesOperating Revenues:Investment advisory fees $   591,173$                       844$                 592,017Distribution and service fees97,9001297,912Other1,406-1,406Total operating revenues 690,479856691,335Operating Expenses:Compensation and benefits287,657-287,657Distribution and servicing177,660(15)177,645Other 146,01491146,105Total operating expenses 611,33176611,407Operating Income 79,14878079,928Other Non-Operating Income (Expense)Net interest income (expense)(27,025)-(27,025)Other income (expense)20,116(2,021)18,095Other non-operating income (expense)(6,909)(2,021)(8,930)Income (Loss) Before Income Tax Provision 72,239(1,241)70,998Income tax provision 26,006-26,006Net Income (Loss)46,233(1,241)44,992Less: Net income (loss) attributableto noncontrolling interests1,311(1,241)70Net Income Attributable to Legg Mason, Inc. $     44,922$                          -$                   44,922Effective Income Tax Rate36.0%Effective Income Tax Rate ExcludingConsolidated Investment Vehicles36.6%(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.LEGG MASON, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)(Amounts in thousands, except per share amounts)(Unaudited)Nine Months Ended December 31, 2010GAAP BasisConsolidated Investment VehiclesNon-GAAP Basis - Excluding Investment VehiclesOperating Revenues:Investment advisory fees $ 1,782,768$                    2,823$              1,785,591Distribution and service fees284,15074284,224Other3,969-3,969Total operating revenues 2,070,8872,8972,073,784Operating Expenses:Compensation and benefits873,850-873,850Distribution and servicing537,946(1)537,945Other 371,423(449)370,974Total operating expenses 1,783,219(450)1,782,769Operating Income 287,6683,347291,015Other Non-Operating Income (Expense)Net interest income (expense)(63,445)-(63,445)Other income (expense)38,3486,69545,043Other non-operating income (expense)(25,097)6,695(18,402)Income Before Income Tax Provision 262,57110,042272,613Income tax provision 87,576-87,576Net Income 174,99510,042185,037Less: Net income (loss) attributableto noncontrolling interests(9,891)10,042151Net Income Attributable to Legg Mason, Inc. $    184,886$                          -$                 184,886Effective Income Tax Rate33.4%Effective Income Tax Rate ExcludingConsolidated Investment Vehicles32.1%(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.LEGG MASON, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING INVESTMENT VEHICLES (1)(Amounts in thousands, except per share amounts)(Unaudited)Nine Months Ended December 31, 2009GAAP BasisConsolidated Investment VehiclesNon-GAAP Basis - Excluding Investment VehiclesOperating Revenues:Investment advisory fees $              1,679,678$                     2,201$              1,681,879Distribution and service fees279,22050279,270Other4,561-4,561Total operating revenues 1,963,4592,2511,965,710Operating Expenses:Compensation and benefits844,028-844,028Distribution and servicing524,512(45)524,467Other 379,572955380,527Total operating expenses 1,748,1129101,749,022Operating Income 215,3471,341216,688Other Non-Operating Income (Expense)Net interest income (expense)(95,406)-(95,406)Fund support23,171-23,171Other income (expense)84,824(6,317)78,507Other non-operating income (expense)12,589(6,317)6,272Income (Loss) Before Income Tax Provision 227,936(4,976)222,960Income tax provision 82,057-82,057Net Income (Loss)145,879(4,976)140,903Less: Net income (loss) attributableto noncontrolling interests5,129(4,976)153Net Income Attributable to Legg Mason, Inc. $                 140,750$                           -$                 140,750Effective Income Tax Rate36.0%Effective Income Tax Rate ExcludingConsolidated Investment Vehicles36.8%(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.SOURCE Legg Mason Inc.For further information: Investor Relations, Alan Magleby, +1-410-454-5246, amagleby@leggmason.com; or Media, Mary Athridge, +1-212-805-6035, mkathridge@leggmason.com