Legg Mason, Inc. (NYSE: LM) today reported its operating results for the first fiscal quarter ended June 30, 2020.

Joseph A. Sullivan, Chairman and CEO of Legg Mason stated "Legg Mason's quarterly results were negatively impacted by the significant market volatility and related redemption activity primarily related to the COVID-19 pandemic. While average AUM and revenues declined this quarter, we continued to manage our costs well, and I am pleased to announce that we achieved annual run-rate expense savings of $104 million related to the Strategic Restructuring initiative that we launched last year."

"I would like to once again express my heartfelt thanks to all of our Legg Mason and Affiliate colleagues who have demonstrated great resiliency working remotely amid ongoing uncertainty and continuing to deliver for our clients, shareholders and for each other during these unprecedented times."

"As the merger with Franklin Templeton is set to close in four days, this will be Legg Mason's final quarterly earnings announcement as a public company. I am extremely proud of all current and legacy Legg Mason and Affiliate employees and their contributions to the benefit of our clients, shareholders, employees and our communities over the course of our history and I wish the combined Franklin Templeton team much success in the future."

Assets Under Management of $783.4 Billion

Assets Under Management were $783.4 billion at June 30, 2020 compared with $730.8 billion at March 31, 2020, with the change resulting from $59.7 billion in positive market performance and positive foreign exchange of $2.9 billion, partially offset by $5.2 billion in liquidity outflows, $4.6 billion in long-term outflows and $0.2 billion in realizations.

At June 30, 2020, fixed income represented 57% of AUM, while equity represented 25%, alternative represented 9% and liquidity represented 9%.

By geography, 73% of AUM was from clients domiciled in the United States and 27% from non-US domiciled clients.

Average AUM during the quarter was $764.4 billion compared to $782.4 billion in the prior quarter and $765.9 billion in the first quarter of fiscal year 2020. Average long-term AUM was $690.1 billion compared to $716.4 billion in the prior quarter and $699.0 billion in the first quarter of fiscal year 2020.

Of Legg Mason's long-term U.S. mutual fund assets, 65% were in funds rated 4 or 5 stars by Morningstar.

Operating Results - Comparison to the Fourth Quarter of Fiscal Year 2020

Adjusted net income was $65.4 million, or $0.71 per diluted share, compared to adjusted net income of $93.2 million, or $1.02 per diluted share. The decrease in adjusted earnings was driven by lower investment advisory fees reflecting lower average AUM and changes in the product mix, as well a $5.0 million decrease in non-pass through performance fees.

Net income was $49.4 million, or $0.54 per diluted share, compared to net income of $64.2 million, or $0.70 per diluted share, in the fourth quarter of fiscal year 2020. The change was impacted by the items described below.

Operating revenues of $666.2 million were down 7% from $719.6 million in the prior quarter reflecting:

• A decrease in separate account and fund advisory fee revenues of $40.6 million, or 6%, reflecting lower average AUM.
• In addition, non-pass through performance fees decreased by $5.0 million and pass through performance fees decreased $1.5 million.

Operating expenses of $598.5 million increased 8% from $553.3 million in the prior quarter, reflecting:

• Higher compensation of $48.9 million driven by a gain of $20.0 million in the market value of deferred compensation and seed investments, with an offset in non-operating income, as compared to a loss of $32.5 million in the prior quarter.
• An increase in communications and technology expenses of $3.3 million reflecting the printing, filing and mailing costs for the proxy voting related to the Franklin Templeton merger.
• An increase in occupancy expenses of $6.5 million which included $6.4 million in strategic restructuring costs.
• A decrease in other expenses of $4.7 million reflected lower "business as usual expenses" related to T&E, advertising and conference of $13.0 million, which more than offset an increase in merger related costs of $8.4 million is primarily due to proxy solicitation costs associated with the Franklin Templeton merger.

Non-operating income was $1.3 million, as compared to $65.3 million in expense in the prior quarter reflecting:

• Gains on corporate investments, not offset in compensation, were $10.6 million compared with losses of $12.6 million in the prior quarter.
• Gains on funded deferred compensation and seed investments, as described above.
• A $1.7 million loss associated with the consolidation of sponsored investment vehicles compared to a $4.1 million gain 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 10.2% compared to 23.1% in the prior quarter. Adjusted operating margin1, was 22.1%, as compared to 25.8% in the prior quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $4.9 million compared to $7.3 million in the prior quarter, principally related to Clarion, EnTrust Global and Royce.