Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2016. The Company reported net income1 of $66.4 million, or $0.63 per diluted share, as compared to net income of $33.5 million, or $0.31 per diluted share, in the previous quarter, and net income of $64.3 million, or $0.58 per diluted share, in the second quarter of fiscal 2016. The current quarter's results included acquisition and transition-related costs of $13.2 million, or $0.09per diluted share, as compared to acquisition and transition-related costs of $56.8 million, or $0.37 per diluted share, last quarter. The current quarter also included a credit of $7.0 million, or $0.05 per diluted share, related to a contingent consideration fair value adjustment, compared to a similar credit of $18.0 million, or $0.11 per diluted share, in the prior quarter. In addition, the current quarter included a tax benefit of $6.3 million, or $0.06per diluted share, largely due to a reduction in the United Kingdom corporate tax rate. For the current quarter, operating revenues were $748.4 million, up 7% from $700.2 million in the prior quarter, and up 11% compared to $673.1 million in the second quarter of fiscal 2016. Operating expenses were $620.7 million, down 1% from $626.6 million in the prior quarter, and up 15% from $540.1 million in the second quarter of fiscal 2016.

Comments on the Second Quarter of Fiscal Year 2017 Results

Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "Legg Mason delivered solid operating results despite a challenging quarter for active managers. Gross and net sales in our global retail distribution platform were strong, as our teams worked to deliver our expanded investment capabilities to investors around the world.

"Our long term strategy is straightforward. We are offering global investors expanded choice across investment strategies, vehicles and access. We believe this, in turn, will reaccelerate organic growth by leveraging these capabilities in high growth areas, increasingly in multi-asset vehicles, as clients look to execute on their investment objectives in a more holistic fashion. To complement this strategy, we are pleased to be an industry leader in the rate at which capital is returned to shareholders while also continuing to invest in our business.

"Scale, diversification and global reach are going to be critically important in an increasingly regulated, low growth and low rate environment. The current Legg Mason platform helps address those concerns, by offering investors relevant and differentiated product sets, a wide variety of competitively priced investment options, and global distribution access. We intend to be among the leaders in delivering on these needs for investors and we're pleased to see progress as we execute on our strategic plan."

Assets Under Management of $732.9 Billion

Assets Under Management ("AUM") were $732.9 billion at September 30, 2016 compared with $741.9 billion at June 30, 2016, driven by liquidity outflows of $25.4 billion and long-term outflows of $0.3 billion. This was partially offset by positive market performance of $15.7 billion and $1.0 billion in positive foreign exchange. AUM was up 9% from $672.1 billion at September 30, 2015.

• Long-term net outflows of $0.3 billion included alternatives outflows of $1.6 billion and equity outflows of $1.5 billion, which were partially offset by fixed income inflows of $2.8 billion.
• At September 30, 2016, fixed income represented 54% of AUM, while equity represented 23%, liquidity represented 13% and alternatives represented 10%.
• By geography, 66% of AUM was from clients domiciled in the United States and 34% from non-US domiciled clients.
• Average AUM during the quarter was $742.1 billion compared to $709.1 billion in the prior quarter and $687.2 billion in the second quarter of fiscal year 2016. Average long-term AUM was $631.9 billioncompared to $597.7 billion in the prior quarter and $560.4 billion in the second quarter of fiscal year 2016.

Comparison to the First Quarter of Fiscal Year 2017

Net income was $66.4 million, or $0.63 per diluted share, as compared with net income of $33.5 million, or $0.31 per diluted share, in the first quarter of fiscal year 2017. This quarter's results included acquisition and transition-related costs totaling $13.2 million, or $0.09 per diluted share. The current quarter also included a tax benefit of $6.3 million, or $0.06 per diluted share, largely due to a reduction in the United Kingdomcorporate tax rate. The prior quarter included acquisition and transition-related costs of $56.8 million, or $0.37per diluted share.

• Operating revenues of $748.4 million were up 7% compared with $700.2 million in the prior quarter, principally due to $35.8 million in performance fees at Clarion that, per the terms of the acquisition, were passed through as compensation, as compared to $14.6 million of such fees in the prior quarter, as well as higher average long-term AUM, one additional day and incremental revenues resulting from a full quarter of results at Clarion and EnTrust.
• Operating expenses of $620.7 million were down 1% compared with $626.6 million in the prior quarter principally due to lower acquisition and transition-related costs of $13.2 million compared with the prior quarter costs of $56.8 million. The current quarter also included a credit of $7.0 million for a contingent consideration fair value adjustment compared to a similar credit of $18.0 million in the prior quarter. Further, the current quarter included $35.8 million in compensation related to the pass through of performance fees at Clarion compared to a similar charge of $14.6 million in the prior quarter. In addition, current quarter expenses included a $5.4 million gain in the market value of deferred compensation and seed investments, which is recorded as an increase in compensation and benefits with an offset in other non-operating income, compared to a gain of $2.2 million in the prior quarter.
• Other non-operating expense was $11.2 million, as compared to $12.9 million in the prior quarter. Interest expense increased by $3.4 million primarily due to the $500 million junior subordinated debt issued in August. Gains on corporate investments, not offset in compensation, were $7.3 millioncompared with gains of $4.2 million last quarter. Both quarters included gains and losses on funded deferred compensation and seed investments, as described above. The current quarter included a $3.7 million loss on the termination of an interest rate swap contract. In addition, the current quarter included $6.2 million in gains associated with the consolidation of sponsored investment vehicles compared to $3.5 million in gains in the prior quarter. The consolidation of sponsored investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.
• Operating margin was 17.1% compared to 10.5% in the prior quarter. Operating margin, as adjusted2, was 22.7%, as compared to 11.3% in the prior quarter with the increase primarily due to lower acquisition and transition-related costs.
• Net income attributable to non-controlling interests, excluding sponsored investment vehicles, was $14.4 million compared to $9.4 million in the prior quarter, principally related to Clarion, EnTrustPermal, RARE Infrastructure and Royce.

Comparison to the Second Quarter of Fiscal Year 2016

Net income was $66.4 million, or $0.63 per diluted share, as compared with net income of $64.3 million, or $0.58 per diluted share, in the second quarter of fiscal year 2016. This quarter's results included acquisition and transition-related costs totaling $13.2 million, or $0.9 per diluted share. The current quarter also included a tax benefit of $6.3 million, or $0.06 per diluted share, largely due to a reduction in the United Kingdomcorporate tax rate. The prior year's second quarter included an $11.1 million, or $0.06 per diluted share loss on an Australian dollar hedge, as well as a tax benefit of $5.0 million, or $0.05 per diluted share, primarily due to the successful conclusion of certain tax examinations.

• Operating revenues of $748.4 million were up 11% compared with $673.1 million in the second quarter of fiscal year 2016, principally due to incremental revenues related to the addition of revenues of Clarion and EnTrust as well as $35.8 million in performance fees at Clarion that, per the terms of the acquisition, were passed through as compensation.
• Operating expenses of $620.7 million were up 15% compared with $540.1 million in the second quarter of fiscal year 2016 primarily due to incremental expenses related to the addition of expenses of Clarion and Entrust as well as acquisition and transition-related costs of $13.2 million. The current quarter also included a credit of $7.0 million for a contingent consideration fair value adjustment and $35.8 million in additional expense at Clarion due to the pass through performance fees. Further, the current quarter expenses included a $5.4 million gain in the market value of deferred compensation and seed investments, which is recorded as an increase in compensation and benefits with an offset in other non-operating income, compared to a loss of $5.5 million in the prior year quarter.
• Other non-operating expense was $11.2 million, compared to $42.5 million in the second quarter of fiscal year 2016. Interest expense increased $14.6 million primarily due to the issuance of additional debt to fund the Clarion and EnTrust acquisitions. Gains on corporate investments, not offset in compensation, were $7.3 million compared with losses of $11.5 million in the prior year quarter. The current quarter included a $3.7 million loss on the termination of an interest rate swap contract. The prior year quarter also included an $11.1 million loss on an Australian dollar hedge related to the RARE Infrastructure acquisition. Both quarters included gains on funded deferred compensation and seed investments, as described above. In addition, the current quarter also included $6.2 million in gains associated with the consolidation of sponsored investment vehicles, as compared to $2.3 million in losses in the prior year quarter. The consolidation of sponsored investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.
• Operating margin was 17.1% as compared to 19.8% in the second quarter of fiscal year 2016. Operating margin, as adjusted, was 22.7%, as compared to 24.0% in the second quarter of fiscal year 2016. The decrease was principally the result of acquisition and transition-related costs in the current quarter.
• Net income attributable to non-controlling interests, excluding sponsored investment vehicles, was $14.4 million compared to $0.2 million in the prior year quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

Quarterly Business Developments and Recent Announcements

• Legg Mason acquired Financial Guard, an online Registered Investment Advisor and innovative technology-enabled wealth management and investment advice platform based in Salt Lake City, Utah on August 17, 2016.
• The Legg Mason International Low Volatility High Dividend ETF (BATS: LVHI) was launched on August 1, 2016. The product is an all-cap ETF composed of international stocks.
• RARE Infrastructure launched its first UK fund on July 1, 2016, the Legg Mason IF RARE Global Infrastructure Income Fund.
• On August 8, 2016, Legg Mason, completed the issuance and sale of $500 million aggregate principal amount of the Company's 5.45% Junior Subordinated Notes due 2056.

Balance Sheet

At September 30, 2016, Legg Mason's cash position was $571 million. Total debt was $2.2 billion and stockholders' equity was $4.1 billion. The ratio of total debt to total capital was 36%, in line with the prior quarter. In the second fiscal quarter, the Company completed additional open market purchases of 2.7 million shares which reduced the weighted average shares by 1.3 million.

The Board of Directors has declared a quarterly cash dividend on the Company's common stock in the amount of $0.22 per share. The dividend is payable January 9, 2017 to shareholders of record at the close of business on December 14, 2016.

About Legg Mason

Legg Mason is a global asset management firm, with $732.9 billion in AUM as of September 30, 2016. 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).