LM_10Q_12.31.2014


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2014
OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
 
 
to
 
Commission file number: 1-8529
 
LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
 
 
 
MARYLAND
 
52-1200960
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
100 International Drive - Baltimore, MD
 
21202
(Address of principal executive offices)
 
(Zip code)
 
 
 
(410) 539-0000
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
 
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes
X
 
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
 
No
X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
112,656,449 shares of common stock as of the close of business on January 30, 2015.





PART I. FINANCIAL INFORMATION

Item 1.      Financial Statements


LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

 
 
December 31, 2014
 
March 31, 2014
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
665,120

 
$
858,022

Cash and cash equivalents of consolidated investment vehicles
 
2,426

 
56,372

Restricted cash
 
16,976

 
13,455

Receivables:
 
 
 
 
Investment advisory and related fees
 
360,690

 
348,633

Other
 
61,387

 
68,186

Investment securities
 
433,991

 
467,726

Investment securities of consolidated investment vehicles
 
48,461

 
50,463

Deferred income taxes
 
180,056

 
186,147

Other
 
40,574

 
47,677

Other assets of consolidated investment vehicles
 
3,693

 
31,702

Total Current Assets
 
1,813,374

 
2,128,383

Fixed assets, net
 
183,655

 
189,241

Intangible assets, net
 
3,314,487

 
3,171,773

Goodwill
 
1,375,836

 
1,240,523

Investments of consolidated investment vehicles
 
33,528

 
31,810

Deferred income taxes
 
167,295

 
165,705

Other
 
153,946

 
183,706

Other assets of consolidated investment vehicles
 
1,109

 
208

TOTAL ASSETS
 
$
7,043,230

 
$
7,111,349

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 

LIABILITIES
 
 

 
 

Current Liabilities
 
 

 
 

Accrued compensation
 
$
358,816

 
$
425,466

Accounts payable and accrued expenses
 
223,035

 
214,819

Current portion of long-term debt
 

 
438

Contingent consideration
 
23,258

 

Other
 
100,800

 
91,586

Debt and other current liabilities of consolidated investment vehicles
 
5,212

 
88,936

Total Current Liabilities
 
711,121

 
821,245

Deferred compensation
 
52,238

 
49,618

Deferred income taxes
 
344,191

 
265,583

Contingent consideration
 
90,830

 
29,553

Other
 
174,899

 
136,656

Long-term debt
 
1,056,215

 
1,038,826

TOTAL LIABILITIES
 
2,429,494

 
2,341,481

 
 
 
 
 
Commitments and Contingencies (Note 9)
 
 
 
 
 
 
 
 
 
REDEEMABLE NONCONTROLLING INTERESTS
 
73,090

 
45,144

 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
Common stock, par value $.10; authorized 500,000,000 shares; issued 112,992,118 shares in December 2014 and 117,173,639 shares in March 2014
 
11,299

 
11,717

Additional paid-in capital
 
2,924,002

 
3,148,396

Employee stock trust
 
(30,844
)
 
(29,922
)
Deferred compensation employee stock trust
 
30,844

 
29,922

Retained earnings
 
1,624,328

 
1,526,662

Accumulated other comprehensive income, net
 
(18,983
)
 
37,949

TOTAL STOCKHOLDERS' EQUITY
 
4,540,646

 
4,724,724

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
7,043,230

 
$
7,111,349

See Notes to Consolidated Financial Statements

2



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2014
 
2013
 
2014
 
2013
OPERATING REVENUES
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
Separate accounts
 
$
210,177

 
$
197,295

 
$
619,686

 
$
579,974

Funds
 
388,589

 
381,020

 
1,159,454

 
1,124,170

Performance fees
 
29,134

 
50,748

 
59,430

 
90,115

Distribution and service fees
 
90,053

 
88,299

 
274,250

 
259,380

Other
 
1,031

 
2,730

 
3,940

 
6,722

Total Operating Revenues
 
718,984

 
720,092

 
2,116,760

 
2,060,361

OPERATING EXPENSES
 
 
 
 
 
 
 
 
Compensation and benefits
 
319,746

 
322,553

 
929,130

 
912,936

Distribution and servicing
 
147,492

 
148,801

 
451,300

 
474,131

Communications and technology
 
47,109

 
38,702

 
133,683

 
117,069

Occupancy
 
33,212

 
30,904

 
82,879

 
82,635

Amortization of intangible assets
 
669

 
4,170

 
2,028

 
11,418

Other
 
51,388

 
53,310

 
148,471

 
150,620

Total Operating Expenses
 
599,616

 
598,440

 
1,747,491

 
1,748,809

OPERATING INCOME
 
119,368

 
121,652

 
369,269

 
311,552

OTHER NON-OPERATING INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest income
 
1,680

 
1,681

 
5,885

 
4,691

Interest expense
 
(12,183
)
 
(12,690
)
 
(44,216
)
 
(38,617
)
Other income (expense), net, including $107,074 debt extinguishment loss in July 2014
 
7,441

 
14,622

 
(94,467
)
 
24,369

Other non-operating income of consolidated investment vehicles, net
 
1,759

 
690

 
4,687

 
5,698

Total Other Non-Operating Income (Expense)
 
(1,303
)
 
4,303

 
(128,111
)
 
(3,859
)
INCOME BEFORE INCOME TAX PROVISION
 
118,065

 
125,955

 
241,158

 
307,693

Income tax provision
 
38,017

 
46,004

 
82,477

 
90,949

NET INCOME
 
80,048

 
79,951

 
158,681

 
216,744

Less: Net income (loss) attributable to noncontrolling interests
 
3,012


(1,783
)

4,560


907

NET INCOME ATTRIBUTABLE TO LEGG MASON, INC.
 
$
77,036

 
$
81,734

 
$
154,121

 
$
215,837

 
 
 
 
 
 
 
 
 
NET INCOME PER SHARE ATTRIBUTABLE TO LEGG MASON, INC. SHAREHOLDERS:
 
 
 
 
 
 
 
 
Basic
 
$
0.67

 
$
0.68

 
$
1.33

 
$
1.76

Diluted
 
$
0.67

 
$
0.67

 
$
1.32

 
$
1.75

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
114,439

 
120,583

 
115,783

 
122,920

Diluted
 
115,692

 
121,126

 
116,952

 
123,236

 
 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
 
$
0.16

 
$
0.13

 
$
0.48

 
$
0.39

See Notes to Consolidated Financial Statements

3



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)

 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2014
 
2013
 
2014
 
2013
NET INCOME
 
$
80,048

 
$
79,951

 
$
158,681

 
$
216,744

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(31,266
)
 
(9,943
)
 
(52,790
)
 
(25,035
)
Unrealized losses on investment securities:
 
 
 
 
 
 
 
 
Unrealized holding losses, net of tax benefit of $0, $(40), $(3) and $(139), respectively
 

 
(60
)
 
(5
)
 
(208
)
Reclassification adjustment for losses included in net income
 

 
4

 
5

 
15

Net unrealized losses on investment securities
 

 
(56
)
 

 
(193
)
Net actuarial losses on defined benefit pension plan, net of tax benefit of $(1,007)
 
(4,028
)
 

 
(4,028
)
 

Unrealized gains on reverse treasury rate lock, net of tax provision of $233
 

 

 
405

 

Reclassification for realized gain on termination of reverse treasury rate lock, net of tax provision of $(233)
 

 

 
(405
)
 

Reclassification to assets held for sale
 

 

 
(114
)
 

Total other comprehensive loss
 
(35,294
)
 
(9,999
)
 
(56,932
)
 
(25,228
)
COMPREHENSIVE INCOME
 
44,754

 
69,952

 
101,749

 
191,516

Less: Comprehensive income (loss) attributable to noncontrolling interests
 
3,012

 
(1,783
)
 
4,560

 
907

COMPREHENSIVE INCOME ATTRIBUTABLE TO LEGG MASON, INC.
 
$
41,742

 
$
71,735

 
$
97,189

 
$
190,609

See Notes to Consolidated Financial Statements

4



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)

 
 
Nine Months Ended December 31,
 
 
2014
 
2013
COMMON STOCK
 
 
 
 
Beginning balance
 
$
11,717

 
$
12,534

Stock options and other stock-based compensation
 
67

 
67

Deferred compensation employee stock trust
 
4

 
5

Deferred compensation, net
 
91

 
104

Employee tax withholdings by settlement of net share transactions
 
(47
)
 
(44
)
Shares repurchased and retired
 
(533
)
 
(763
)
Ending balance
 
11,299

 
11,903

ADDITIONAL PAID-IN CAPITAL
 
 
 
 

Beginning balance
 
3,148,396

 
3,449,190

Stock options and other stock-based compensation
 
28,508

 
32,762

Deferred compensation employee stock trust
 
2,063

 
1,565

Deferred compensation, net
 
34,719

 
36,740

Employee tax withholdings by settlement of net share transactions
 
(21,879
)
 
(13,910
)
Shares repurchased and retired
 
(265,989
)
 
(269,233
)
Redeemable noncontrolling interest reclassification for management equity plan
 
(1,816
)
 
(1,816
)
Ending balance
 
2,924,002

 
3,235,298

EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
(29,922
)
 
(32,623
)
Shares issued to plans
 
(2,067
)
 
(1,570
)
Distributions and forfeitures
 
1,145

 
3,967

Ending balance
 
(30,844
)
 
(30,226
)
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
29,922

 
32,623

Shares issued to plans
 
2,067

 
1,570

Distributions and forfeitures
 
(1,145
)
 
(3,967
)
Ending balance
 
30,844

 
30,226

RETAINED EARNINGS
 
 
 
 

Beginning balance
 
1,526,662

 
1,304,259

Net Income Attributable to Legg Mason, Inc.
 
154,121

 
215,837

Dividends declared
 
(56,455
)
 
(46,963
)
Ending balance
 
1,624,328

 
1,473,133

APPROPRIATED RETAINED EARNINGS FOR CONSOLIDATED INVESTMENT VEHICLE
 
 
 
 

Beginning balance
 

 
4,829

Net income reclassified to appropriated retained earnings
 


(770
)
Ending balance
 

 
4,059

ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
 
 
 
 

Beginning balance
 
37,949

 
47,539

Net unrealized losses on investment securities
 

 
(193
)
Actuarial losses on defined benefit pension plan
 
(4,028
)
 

Reclassification to assets held for sale
 
(114
)
 

Foreign currency translation adjustment
 
(52,790
)
 
(25,035
)
Ending balance
 
(18,983
)
 
22,311

TOTAL STOCKHOLDERS’ EQUITY
 
$
4,540,646

 
$
4,746,704


See Notes to Consolidated Financial Statements

5



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 
 
Nine Months Ended December 31,
 
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
158,681

 
$
216,744

5.5% Senior Notes Due 2019:
 
 
 
 
Loss on extinguishment
 
107,074

 

Allocation of repurchase payment
 
(98,418
)
 

Adjustments to reconcile Net Income to net cash provided by operations:
 
 
 
 
Depreciation and amortization
 
41,107

 
48,243

Accretion and amortization of securities discounts and premiums, net
 
5,183

 
2,276

Stock-based compensation
 
49,384

 
49,143

Net gains on investments
 
(6,059
)
 
(19,898
)
Net gains of consolidated investment vehicles
 
(1,435
)
 
(4,066
)
Deferred income taxes
 
73,189

 
83,322

Other
 
(3,055
)
 
4,651

Decrease (increase) in assets:
 
 
 
 
Investment advisory and related fees receivable
 
(17,480
)
 
(31,678
)
Net sales (purchases) of trading and other investments
 
60,901

 
(29,646
)
Other receivables
 
11,789

 
9,689

Other assets
 
(17,744
)
 
(25,331
)
Other assets of consolidated investment vehicles
 
82,774

 
34,143

Increase (decrease) in liabilities:
 
 
 
 
Accrued compensation
 
(62,279
)
 
17,254

Deferred compensation
 
9,033

 
(8,545
)
Accounts payable and accrued expenses
 
8,032

 
(21,239
)
Other liabilities
 
(15,085
)
 
790

Other liabilities of consolidated investment vehicles
 
(4,545
)
 
(10,498
)
CASH PROVIDED BY OPERATING ACTIVITIES
 
381,047

 
315,354

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 

Payments for fixed assets
 
(34,894
)
 
(30,230
)
Business acquisitions, net of cash acquired of $29,830
 
(183,747
)
 

Proceeds from sale of businesses and assets
 
47,001

 
1,351

Change in restricted cash
 
(8,986
)
 
(13,196
)
Purchases of investment securities
 
(2,641
)
 
(3,030
)
Proceeds from sales and maturities of investment securities
 
2,688

 
2,902

Purchases of investments by consolidated investment vehicles
 

 
(17,328
)
Proceeds from sales and maturities of investments by consolidated investment vehicles
 

 
110,785

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
$
(180,579
)
 
$
51,254


6



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)


 
 
Nine Months Ended December 31,
 
 
2014
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Repayments of long-term debt
 
$
(645,780
)
 
$
(50,439
)
Repayment of long-term debt of consolidated investment vehicles
 
(79,179
)
 
(113,851
)
Proceeds from issuance of long-term debt
 
658,769

 

Debt issuance costs
 
(5,266
)
 

Issuances of common stock for stock-based compensation
 
21,752

 
20,120

Employee tax withholdings by settlement of net share transactions
 
(21,926
)
 
(13,954
)
Repurchases of common stock
 
(266,522
)
 
(269,996
)
Dividends paid
 
(52,763
)
 
(46,256
)
Net (redemptions/distributions paid to)/subscriptions received from noncontrolling interests
 
21,570


(3,444
)
CASH USED IN FINANCING ACTIVITIES
 
(369,345
)
 
(477,820
)
EFFECT OF EXCHANGE RATES ON CASH
 
(24,025
)
 
(16,486
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
 
(192,902
)
 
(127,698
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
858,022

 
933,036

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
665,120

 
$
805,338


See Notes to Consolidated Financial Statements
  


7



LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts or unless otherwise noted)
December 31, 2014
(Unaudited)

1. Interim Basis of Reporting

The accompanying unaudited interim consolidated financial statements of Legg Mason, Inc. and its subsidiaries (collectively “Legg Mason”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (the "SEC"). The interim consolidated financial statements have been prepared using the interim basis of reporting and, as such, reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of interim consolidated financial statements requires management to make assumptions and estimates that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates and the differences could have a material impact on the interim consolidated financial statements. Terms such as “we,” “us,” “our,” and “Company” refer to Legg Mason.

The nature of Legg Mason's business is such that the results of any interim period are not necessarily indicative of the results of a full year. Certain disclosures included in the Company's annual report are not required to be included on an interim basis in the Company's quarterly reports on Forms 10-Q. The Company has condensed or omitted these disclosures. Certain amounts in prior period financial statements, including Contingent consideration liabilities, have been reclassified to conform to the current period presentation.

The information contained in the interim consolidated financial statements should be read in conjunction with Legg Mason's latest Annual Report on Form 10-K filed with the SEC.

2. Significant Accounting Policies

Consolidation
In the normal course of its business, Legg Mason sponsors and manages various types of investment vehicles. For its services, Legg Mason is entitled to receive management fees and may be eligible, under certain circumstances, to receive additional subordinated management fees or other incentive fees. Legg Mason's exposure to risk in these entities is generally limited to any equity investment it has made or is required to make, and any earned but uncollected management fees. Legg Mason did not sell or transfer assets to any of these investment vehicles. In accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment vehicles, some of which are designated as consolidated investment vehicles (“CIVs”). The consolidation of investment vehicles has no impact on Net Income Attributable to Legg Mason, Inc. and does not have a material impact on Legg Mason's consolidated operating results. The change in the value of these CIVs, which is recorded in Other Non-Operating Income (Expense), is reflected in Net Income, net of amounts allocated to noncontrolling interests.

Certain investment vehicles Legg Mason sponsors and is the manager of are considered to be variable interest entities ("VIEs") (further described below) while others are considered to be voting rights entities (“VREs”) subject to traditional consolidation concepts based on ownership rights. Investment vehicles that are considered VREs are consolidated if Legg Mason has a controlling financial interest in the investment vehicle, absent substantive investor rights to replace the manager of the entity (kick-out rights). Legg Mason may also fund the initial cash investment in certain VRE investment vehicles to generate an investment performance track record in order to attract third-party investors in the product. Legg Mason's initial investment in a new product typically represents 100% of the ownership in that product. As further discussed below, these “seed capital investments” are consolidated as long as Legg Mason maintains a controlling financial interest in the product, but they are not designated as CIVs by Legg Mason unless the investment is longer-term. Legg Mason held a longer-term controlling financial interest in one sponsored investment fund VRE, which has third-party investors and was consolidated and included as a CIV as of December 31, 2014, March 31, 2014, and December 31, 2013.


8



A VIE is an entity which does not have adequate equity to finance its activities without additional subordinated financial support; or the equity investors, as a group, do not have the normal characteristics of equity for a potential controlling financial interest.

Investment Company VIEs
For most sponsored investment fund VIEs deemed to be investment companies, including money market funds, Legg Mason determines it is the primary beneficiary of a VIE if it absorbs a majority of the VIE's expected losses, or receives a majority of the VIE's expected residual returns, if any. Legg Mason's determination of expected residual returns excludes gross fees paid to a decision maker if certain criteria are met. In determining whether it is the primary beneficiary of an investment company VIE, Legg Mason considers both qualitative and quantitative factors such as the voting rights of the equity holders; economic participation of all parties, including how fees are earned and paid to Legg Mason; related party (including employees’) ownership; guarantees and implied relationships.

Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated a CIV) as of December 31, 2014, March 31, 2014, and December 31, 2013, despite significant third party investments in this product. As of December 31, 2014, and March 31, 2014, Legg Mason also concluded it was the primary beneficiary of 16 employee-owned funds it sponsors, which were consolidated and reported as CIVs.

Other VIEs
For other sponsored investment funds that do not meet the investment company criteria, Legg Mason determines it is the primary beneficiary of a VIE if it has both the power to direct the activities of a VIE that most significantly impact the entity's economic performance, the obligation to absorb losses, or the right to receive benefits, that potentially could be significant to a VIE.

As of December 31, 2014, Legg Mason had a variable interest in three collateralized loan obligations ("CLOs"). Legg Mason concluded it was not the primary beneficiary of these CLOs, which were not consolidated, as it holds no equity interest in these investment vehicles and their level of expected fees is insignificant. As of March 31, 2014 and December 31, 2013, Legg Mason had a variable interest in two of these CLOs, which also were not consolidated in either of these periods.

As of March 31, 2014 and December 31, 2013, Legg Mason concluded that it was the primary beneficiary of another CLO in which it held a variable interest. Although it held no equity interest in this investment vehicle, it had both the power to control and had a significant variable interest because of the level of its expected subordinated fees. As of March 31, 2014 and December 31, 2013, the balances related to this CLO were consolidated and reported as a CIV in the Company's consolidated financial statements. During the three months ended June 30, 2014, this CLO was substantially liquidated and therefore was not consolidated by Legg Mason as of, or subsequent to, June 30, 2014.

See Notes 4 and 12 for additional information regarding VIEs and VREs.

Noncontrolling Interests
For CIVs with third-party investors, the related noncontrolling interests are classified as redeemable noncontrolling interests if investors in these funds may request withdrawals at any time. Also included in redeemable noncontrolling interests are vested affiliate management equity plan interests. There were no nonredeemable noncontrolling interests as of December 31, 2014 or March 31, 2014. Net income attributable to noncontrolling interests in the Consolidated Statements of Income for the three and nine months ended December 31, 2013 also includes Net income reclassified to appropriated retained earnings for consolidated investment vehicle in the Consolidated Balance Sheet.


9



Net income attributable to noncontrolling interests for the three and nine months ended December 31, included the following amounts:


 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2014
 
2013
 
2014
 
2013
Net income attributable to redeemable noncontrolling interests
 
$
3,012


$
779

 
$
4,560

 
$
1,677

Net income reclassified to appropriated retained earnings for consolidated investment vehicle
 

 
(2,562
)
 

 
(770
)
Total
 
$
3,012

 
$
(1,783
)
 
$
4,560

 
$
907


Redeemable noncontrolling interests as of and for the nine months ended December 31, included the following amounts:
 
 
Nine Months Ended December 31,
 
 
2014
 
2013
Balance, beginning of period
 
$
45,144

 
$
21,009

Net income attributable to redeemable noncontrolling interests
 
4,560

 
1,677

Net (redemptions/distributions paid to)/subscriptions received from noncontrolling interests
 
21,570

 
(3,444
)
Management equity plan interests
 
1,816

 
1,816

Balance, end of period
 
$
73,090

 
$
21,058


Contingent Consideration Liabilities
In connection with business acquisitions, Legg Mason may be required to pay additional future consideration based on the achievement of certain designated financial metrics. Legg Mason estimates the fair value of these potential future obligations at the time a business combination is consummated and records a Contingent consideration liability in the Consolidated Balance Sheet.

Legg Mason accretes Contingent consideration liabilities to the expected payment amounts over the related earn-out terms until the obligations are ultimately paid, resulting in Interest expense in the Consolidated Statements of Income. If the expected payment amounts subsequently change, the Contingent consideration liabilities are (reduced) or increased in the current period, resulting in a (gain) or loss, which is reflected within Other operating expense in the Consolidated Statements of Income.

Accumulated Other Comprehensive Income
There were no significant amounts reclassified from Accumulated other comprehensive income to the Consolidated Statements of Income for the three or nine months ended December 31, 2014 or 2013, except for $405, net of income tax provision of $233, realized on the termination of a reverse treasury rate lock contract, as further described in Note 7.

Income Tax Provision
During the three months ended December 31, 2014, the net release of reserves for uncertain tax positions, due to audit settlements during the period, resulted in a tax benefit of approximately $4,300. The net release of reserves reduced the effective tax rate by 3.7 percentage points and 1.8 percentage points, for the three and nine months ended December 31, 2014, respectively.
  
In July 2013, the U.K. Finance Act 2013 was enacted, reducing the main U.K. corporate tax rate to 21% effective April 1, 2014, and to 20% effective April 1, 2015. The reductions in the U.K. corporate tax rate resulted in a tax benefit of $19,164, recognized in the three months ended September 30, 2013, as a result of the revaluation of existing deferred tax assets and liabilities at the new rates. As a result of the revaluation adjustments, the effective tax rate for the nine months ended December 31, 2013, was reduced by 6.2 percentage points.

Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) updated the guidance on revenue recognition. The updated guidance improves comparability and removes inconsistencies in revenue recognition practices across entities,

10



industries, jurisdictions, and capital markets. This update will be effective for Legg Mason in fiscal 2018 and Legg Mason is evaluating the impact of its adoption.

In August 2014, the FASB updated the guidance on measuring the financial assets and financial liabilities of consolidated collateralized financing entities. The update requires that an entity electing to apply the guidance should measure both the financial assets and financial liabilities using the fair value of the consolidated collateralized financing entity’s financial assets or financial liabilities, whichever is more observable. This update also requires certain disclosures by entities that apply its provisions and will be effective for Legg Mason in fiscal 2017, unless adopted earlier. Legg Mason is evaluating the impact of its adoption.

3. Acquisitions and Disposition

Martin Currie
On October 1, 2014, Legg Mason acquired all outstanding equity interests of Martin Currie (Holdings) Limited ("Martin Currie"), pursuant to a share purchase agreement dated July 24, 2014. Martin Currie is an international equity specialist based in the United Kingdom with approximately $9,500,000 in AUM on the date of acquisition. The acquisition required an initial payment of $202,577 (using the foreign exchange rate as of October 1, 2014 for the £125,000 contract amount), which was funded from existing cash. In addition, contingent consideration payments may be due March 31 following the first, second and third anniversaries of closing, aggregating up to approximately $506,000 (using the foreign exchange rate as of December 31, 2014 for the maximum £325,000 contract amount), inclusive of the payment of certain potential pension and other obligations, and dependent on the achievement of certain financial metrics, as specified in the share purchase agreement, at March 31, 2016, 2017, and 2018. The Contingent consideration liability established at closing had an acquisition date fair value of $75,211 (using the foreign exchange rate as of October 1, 2014). Actual payments to be made will also include amounts for certain potential pension and other obligations that are accounted for separately. As of December 31, 2014, the fair value of the Contingent consideration liability was $72,311, a decrease of $2,900 from October 1, 2014, substantially all of which is attributable to changes in the exchange rate, net of accretion, which is included in Accumulated other comprehensive income as Foreign currency translation adjustment. The Contingent consideration liability is included in non-current Contingent consideration in the Consolidated Balance Sheet at December 31, 2014.

A summary of the acquisition-date fair values of the assets acquired and liabilities assumed are as follows:
Purchase price
 
 
     Cash(1)
 
$
202,577

     Contingent consideration
 
75,211

Total Consideration
 
277,788

Identifiable assets and liabilities
 
 
     Cash
 
29,389

     Indefinite-life intangible fund management contracts
 
135,321

     Amortizable intangible asset management contracts
 
15,234

Fixed assets
 
784

     Liabilities, net(1)
 
(8,245
)
Pension liability
 
(32,433
)
Deferred tax liabilities
 
(30,111
)
Total identifiable assets and liabilities
 
109,939

Goodwill(1)
 
$
167,849

(1) Subject to adjustments for amounts ultimately realized, as provided in the share purchase agreement.

The fair value of the amortizable asset management contracts asset is being amortized over a period of 12 years. Goodwill is principally attributable to synergies expected to arise with Martin Currie. None of the acquired intangible assets or goodwill are deductible for U.K. tax purposes.

Management estimated the fair values of the indefinite-life fund management contracts and amortizable asset management contracts based upon discounted cash flow analyses, using unobservable market data inputs, which are Level 3 measurements.

11



The significant assumptions used in these analyses at acquisition including projected annual cash flows, AUM growth rates and discount rates, are summarized as follows:
 
 
Projected Cash Flow Growth
 
Discount Rate
Indefinite-life fund management contracts
 
0% to 25% (weighted-average - 11%)
 
15.0%
 
 
 
 
 
 
 
Projected AUM Growth (Attrition)
 
Discount Rate
Amortizable asset management contracts
 
6% / (17)%
 
15.0%

The fair value of the contingent consideration was measured using Monte Carlo simulation with various unobservable market data inputs, which are Level 3 measurements. The simulation considered variables, including AUM growth, performance fee levels and relevant product performance. Projected AUM, performance fees and earn-out payments were discounted as appropriate. A summary of various assumption values follows:
AUM growth rates
 
0% to 28% (weighted-average - 14%)
Performance fees growth rates
 
0% to 30% (weighted-average - 15%)
Discount rates:
 
 
   Projected AUM
 
13.0%
   Projected performance fees
 
15.0%
   Earn-out payments
 
1.3%

Significant increases (decreases) in projected AUM or performance fees would result in a significantly higher (lower) Contingent consideration liability fair value.

Martin Currie sponsors a defined benefit plan, with assets held in a separate trustee-administered fund. Plan assets, comprised of 57% equities (Level 1) and 43% bonds (Level 2), are measured at fair value. Assumptions used to determine the expected return on plan assets targets a 55% / 45% equity/bond allocation with reference to the 15-year FTSE U.K. Gilt yield for equities and U.K. long-dated bond yields for bonds. Plan liabilities are measured on an actuarial basis using the projected unit method and discounted at a rate equivalent to the current rate on a high quality bond in the local UK market and currency. The most recent actuarial valuation was performed as of May 31, 2013, which was updated through the acquisition and balance sheet dates. Accrual under the plan ceased on October 1, 2014.

The resulting net benefit obligation, comprised as follows, is included in the December 31, 2014 Consolidated Balance Sheet as Other non-current liabilities:
Fair value of plan assets (at 6.3% expected weighted-average long-term return)
 
$
58,208

Benefit obligation (at 3.7% discount rate)
 
(93,709
)
Unfunded status (excess of benefit obligation over plan assets)
 
$
(35,501
)

For the quarter ended December 31, 2014, a net periodic benefit cost of $817 was included in Compensation and benefits expense in the Consolidated Statement of Income and Net actuarial losses of $4,028, net of income tax benefits of $1,007, were included in Accumulated other comprehensive income in the Consolidated Balance Sheet at December 31, 2014. The contingent consideration provisions of the share purchase agreement require certain amounts from the earn-out payments, in aggregate up to the amount of the net benefit obligation, to be paid to fund Martin Currie's defined benefit plan.

The contingent consideration provisions of the share purchase agreement also require a designated percentage of the earn-out payments, net of any pension contribution, to be allocated to fund an incentive plan for Martin Currie's management. No payments to employees under the arrangement will be made until the end of the earn-out period. The estimated payment (adjusted quarterly) is being amortized over the earn-out term.

The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying Consolidated Statements of Income would not have been materially different. The financial results of Martin Currie included in Legg Mason's consolidated financial results for both the three and nine months ended

12



December 31, 2014, include revenues of $14,499 and did not have a material impact on Net Income Attributable to Legg Mason, Inc.

QS Investors, LLC
Effective May 31, 2014, Legg Mason acquired all of the outstanding equity interests of QS Investors, LLC ("QS Investors"), a customized solutions and global quantitative equities provider, in accordance with a purchase agreement entered into in March 2014. At the time of acquisition, QS Investors had approximately $5,000,000 in assets under management ("AUM") and nearly $100,000,000 in assets under advisement.

The initial purchase price was a cash payment of $11,000, funded from existing cash. In addition, contingent consideration of up to $10,000 and $20,000 for the second and fourth anniversary payments may be due in July 2016 and July 2018, respectively, dependent on the achievement of certain net revenue targets, and subject to a potential catch-up adjustment in the fourth anniversary payment for any second anniversary payment shortfall. The Contingent consideration liability established at closing had an acquisition date fair value of $13,370, which represented the present value of the contingent consideration expected to be paid. The Contingent consideration liability is included in non-current Contingent consideration in the Consolidated Balance Sheet at December 31, 2014 and has accreted to $13,514.

A summary of the acquisition-date fair values of the assets acquired and liabilities assumed, after certain measurement period adjustments, are as follows:
Purchase price
 
 
     Cash
 
$
11,000

     Contingent consideration
 
13,370

Total Consideration
 
24,370

Identifiable assets and liabilities
 
 
     Cash
 
441

Investments
 
3,281

     Receivables
 
2,699

     Amortizable intangible asset management contracts
 
7,060

Fixed assets
 
599

Liabilities, net
 
(6,620
)
Total identifiable assets and liabilities
 
7,460

Goodwill
 
$
16,910


The fair value of the amortizable asset management contracts is being amortized over a period of 10 years. Purchase price allocated to goodwill is expected to be deductible for U.S. tax purposes over a period of 15 years.

Management estimated the fair values of the amortizable asset management contracts based upon a discounted cash flow analysis, and the contingent consideration expected to be paid and discounted, based upon probability-weighted revenue projections, using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these analyses at acquisition including projected annual cash flows, revenues and discount rates, are summarized as follows:

 
 
Projected Cash Flow Attrition, Net
 
Discount Rate
Amortizable intangible asset management contracts
 
(10)%
 
15.0%
 
 
 
 
 
 
 
Projected Revenue Growth Rates
 
Discount Rates
Contingent consideration
 
0% to 10% (weighted-average - 6%)
 
1.2% / 2.1%

Goodwill is principally attributable to synergies expected to arise with QS Investors.

The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying Consolidated Statements of Income would not have been materially different. The financial results of QS Investors included in Legg Mason's consolidated financial results for the three and nine months ended December

13



31, 2014, include revenues of $4,169 and $9,973, respectively, and did not have a material impact on Net Income Attributable to Legg Mason, Inc.

Over time, Legg Mason plans to integrate two existing affiliates, QS Batterymarch Financial Management, Inc. ("Batterymarch") and QS Legg Mason Global Asset Allocation, LLC ("LMGAA"), into QS Investors to capture synergies and leverage the best capabilities of each entity. In connection with the integration, total charges for restructuring and transition costs of $36,907 have been recognized through December 31, 2014, which includes $12,767 and $34,349 for the three and nine months ended December 31, 2014, respectively, primarily recorded in Compensation and benefits in the Consolidated Statements of Income. These costs are primarily comprised of charges for employee termination benefits, including severance and retention incentives, as well as real estate related charges. Additional charges related to the integration are not expected to be material.

The table below presents a summary of changes in the restructuring and transition-related liability from March 31, 2013 through December 31, 2014 and cumulative charges incurred to date:

 
 
Compensation
 
Other
 
Total
Balance as of December 31, 2013
 
$

 
$

 
$

Accrued charges
 
2,161

 
111

 
2,272

Balance as of March 31, 2014
 
2,161

 
111

 
2,272

Accrued charges
 
22,505

 
9,043

(1)
31,548

Payments
 
(14,429
)
 
(2,611
)
 
(17,040
)
Balance as of December 31, 2014
 
$
10,237

 
$
6,543

 
$
16,780

 
 
 
 
 
 
 
Non-cash charges(2)
 
 
 
 
 
 
   Year ended March 31, 2014
 
$

 
$
286

 
$
286

Nine Months Ended December 31, 2014
 
1,231

 
1,570

 
2,801

Total
 
$
1,231

 
$
1,856

 
$
3,087

 
 
 
 
 
 
 
Cumulative charges incurred as of December 31, 2014
 
$
25,897

 
$
11,010

 
$
36,907

(1) Includes lease loss reserve of $6,760 for space permanently abandoned.
(2) Includes stock-based compensation expense and accelerated fixed asset depreciation.

Fauchier Partners Management, Limited
On March 13, 2013, The Permal Group Ltd. ("Permal"), a wholly-owned subsidiary of Legg Mason, completed the acquisition of all of the outstanding share capital of Fauchier Partners Management, Limited ("Fauchier"), a European based manager of funds-of-hedge funds, from BNP Paribas Investment Partners, S.A. in accordance with a sale and purchase agreement entered into in December 2012.

As of December 31, 2014, the fair value of the related Contingent consideration liability was $28,263, a decrease of $1,290 from March 31, 2014, all of which is attributable to changes in the exchange rate, net of accretion. The Contingent consideration liability is included in current and non-current Contingent consideration, for $23,258, related to the second anniversary payment, and $5,005, related to the fourth anniversary payment, respectively, in the Consolidated Balance Sheets as of December 31, 2014. Legg Mason has executed currency forwards to economically hedge the risk of movements in the exchange rate between the U.S. dollar and the British pound in which the estimated contingent liability payment amounts are denominated. See Note 11 for additional information regarding derivatives and hedging.

Legg Mason Investment Counsel & Trust
On November 7, 2014, Legg Mason completed the previously announced sale of all of its equity interests in Legg Mason Investment Counsel & Trust Company N.A. (subsequently renamed 1919 Investment Counsel & Trust) ("LMIC") for proceeds of $47,000 to Stifel Financial Corporation's Global Wealth Management segment. The sale did not have a material impact on Legg Mason's consolidated financial condition or results of operations.



14



4. Investments and Fair Value of Assets and Liabilities

The disclosures below include details of Legg Mason's financial assets and financial liabilities that are measured at fair value, excluding the financial assets and financial liabilities of CIVs. See Note 12, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value.

The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:
 
 
As of December 31, 2014
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable
inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents(1):
 
 
 
 
 
 
 
 
Money market funds
 
$
336,000

 
$

 
$

 
$
336,000

Time deposits and other
 

 
59,589

 

 
59,589

Total cash equivalents
 
336,000

 
59,589

 

 
395,589

Current investments:
 
 

 
 

 
 

 
 

Trading investments relating to long-term incentive compensation plans(2)
 
80,838

 

 

 
80,838

Trading investments of proprietary fund products and other trading investments(3)
 
236,798

 
97,719

 
181

 
334,698

Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5)
 
4,826

 
13,629

 

 
18,455

Total current investments
 
322,462

 
111,348

 
181

 
433,991

Investments in partnerships, LLCs and other(6)
 

 

 
17,211

 
17,211

Equity method investments in partnerships
     and LLCs(4)(6)
`

 

 
46,808

 
46,808

Derivative assets(7)
 
1,371

 
3,596

 

 
4,967

Other investments(6)
 

 

 
77

 
77

Total
 
$
659,833

 
$
174,533

 
$
64,277

 
$
898,643

Liabilities:
 
 
 
 
 
 
 
 
  Long-term debt(8)
 
$

 
$
(253,596
)
 
$

 
$
(253,596
)
  Contingent consideration liabilities(9)
 

 

 
(114,088
)
 
(114,088
)
Derivative liabilities(7)
 
(14,274
)
 

 

 
(14,274
)
Total
 
$
(14,274
)
 
$
(253,596
)
 
$
(114,088
)
 
$
(381,958
)


15



 
 
As of March 31, 2014
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable
inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents(1):
 
 
 
 
 
 
 
 
Money market funds
 
$
456,631

 
$

 
$

 
$
456,631

Time deposits and other
 

 
106,226

 

 
106,226

Total cash equivalents
 
456,631

 
106,226

 

 
562,857

Current investments:
 
 
 
 
 
 
 
 

Trading investments relating to long-term incentive compensation plans(2)
 
109,648

 

 

 
109,648

Trading investments of proprietary fund products and other trading investments(3)
 
260,251

 
75,015

 
190

 
335,456

Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5)
 
8,497

 
14,125

 

 
22,622

Total current investments
 
378,396

 
89,140

 
190

 
467,726

Available-for-sale investment securities(6)
 
2,048

 
10,024

 

 
12,072

Investments in partnerships, LLCs and other(6)
 

 
2,878

 
21,586

 
24,464

Equity method investments in partnerships and LLCs(4)(6)
 

 

 
62,973

 
62,973

Derivative assets(7)
 
3,584

 

 

 
3,584

Other investments(6)
 

 

 
90

 
90

Total
 
$
840,659

 
$
208,268

 
$
84,839

 
$
1,133,766

Liabilities:
 
 
 
 
 
 
 
 
  Contingent consideration liability(9)
 
$

 
$

 
$
(29,553
)
 
$
(29,553
)
Derivative liabilities(7)
 
(2,335
)
 

 

 
(2,335
)
Total
 
$
(2,335
)
 
$

 
$
(29,553
)
 
$
(31,888
)
(1)
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at net asset value ("NAV") and are classified as Level 1.  Cash investments in time deposits and other are measured at amortized cost, which approximates fair value because of the short time between the purchase of the instrument and its expected realization, and are classified as Level 2.
(2)
Primarily mutual funds where there is minimal market risk to the Company as any change in value is primarily offset by an adjustment to compensation expense and related deferred compensation liability.
(3)
Trading investments of proprietary fund products and other trading investments consist of approximately 65% and 35% in equity and debt securities, respectively, as of December 31, 2014, and approximately 53% and 47% in equity and debt securities, respectively, as of March 31, 2014.
(4)
Substantially all of Legg Mason's equity method investments are investment companies which record their underlying investments at fair value.  Fair value is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee.
(5)
Includes investments under the equity method (which approximate fair value) relating to long-term incentive compensation plans of $8,598 and $14,125 as of December 31, 2014 and March 31, 2014, respectively, and proprietary fund products and other investments of $9,857 and $8,497 as of December 31, 2014 and March 31, 2014, respectively, which are classified as Investment securities in the Consolidated Balance Sheets.
(6)
Amounts are included in Other non-current assets in the Consolidated Balance Sheets for each of the periods presented.
(7)
See Note 11.
(8)
See Note 7.
(9)
See Note 3.

Proprietary fund products include seed capital investments made by Legg Mason to fund new investment strategies and products. Legg Mason had investments in proprietary fund products, which totaled $359,268 and $405,918, as of December 31, 2014 and March 31, 2014, respectively, which are substantially comprised of investments in 50 funds and 46 funds,

16



respectively, that are individually greater than $1,000, with minimal third-party investment, and together comprise over 90% of the seed capital investments total in each period.
See Notes 2 and 12 for information regarding the determination of whether investments in proprietary fund products represent VIEs and consolidation.
Substantially all of the above financial instruments where valuation methods rely on other than observable market inputs as a significant input utilize the equity method, the cost method, or NAV practical expedient discussed below, such that measurement uncertainty has little relevance.
The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2014 and 2013, are presented in the tables below:
 
 
Value as of September 30, 2014
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2014
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading investments of proprietary fund products and other trading investments
 
$
170

 
$

 
$
(8
)
 
$

 
$

 
$
19

 
$
181

Investments in partnerships, LLCs and other
 
17,682

 

 

 
(134
)
 

 
(337
)
 
17,211

Equity method investments in partnerships and LLCs
 
55,857

 
1,023

 
(6,698
)
 
(2,332
)
 

 
(1,042
)
 
46,808

Other investments
 
85

 

 

 

 

 
(8
)
 
77

 
 
$
73,794

 
$
1,023

 
$
(6,706
)
 
$
(2,466
)
 
$

 
$
(1,368
)
 
$
64,277

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
(42,653
)
 
$
(75,211
)
 
$

 
$

 
$

 
$
3,776

 
$
(114,088
)

17



 
 
Value as of September 30, 2013
 
Purchases
 
Sales
 
Redemptions/Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2013
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading investments of proprietary fund products and other trading investments
 
$
209

 
$
1

 
$

 
$
(25
)
 
$

 
$
8

 
$
193

Investments in partnerships, LLCs and other
 
27,189

 

 

 
(883
)
 

 
(212
)
 
26,094

Equity method investments in partnerships and LLCs
 
63,639

 
1,598

 

 
(1,812
)
 

 
2,120

 
65,545

Other investments
 
107

 

 
(12
)
 

 

 
(7
)
 
88

 
 
$
91,144

 
$
1,599

 
$
(12
)
 
$
(2,720
)
 
$

 
$
1,909

 
$
91,920

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
(23,335
)
 
$

 
$

 
$

 
$

 
$
(5,542
)
 
$
(28,877
)


18



 
 
Value as of March 31, 2014
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2014
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading investments of proprietary fund products and other trading investments
 
$
190

 
$

 
$
(27
)
 
$

 
$

 
$
18

 
$
181

Investments in partnerships, LLCs and other
 
21,586

 

 
(24
)
 
(3,577
)
 

 
(774
)
 
17,211

Equity method investments in partnerships and LLCs
 
62,973

 
2,069

 
(13,536
)
 
(3,259
)
 

 
(1,439
)
 
46,808

Other investments
 
90

 

 

 

 

 
(13
)
 
77

 
 
$
84,839

 
$
2,069

 
$
(13,587
)
 
$
(6,836
)
 
$

 
$
(2,208
)
 
$
64,277

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
(29,553
)
 
$
(88,581
)
 
$

 
$

 
$

 
$
4,046

 
$
(114,088
)

 
 
Value as of March 31, 2013
 
Purchases
 
Sales
 
Redemptions/Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2013
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading investments of proprietary fund products and other trading investments
 
$
246

 
$
1

 
$

 
$
(69
)
 
$

 
$
15

 
$
193

Investments in partnerships, LLCs and other
 
27,762

 
800

 
(617
)
 
(1,047
)
 

 
(804
)
 
26,094

Equity method investments in partnerships and LLCs
 
66,338

 
4,364

 
(750
)
 
(7,500
)
 

 
3,093

 
65,545

Other investments
 
111

 

 
(12
)
 

 

 
(11
)
 
88

 
 
$
94,457

 
$
5,165

 
$
(1,379
)
 
$
(8,616
)
 
$

 
$
2,293

 
$
91,920

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
(21,900
)
 
$

 
$

 
$

 
$

 
$
(6,977
)
 
$
(28,877
)

19




Realized and unrealized gains and losses recorded for Level 3 investments are primarily included in Other Non-Operating Income (Expense) in the Consolidated Statements of Income. The change in unrealized gains (losses) for Level 3 investments and liabilities still held at the reporting date was $1,999 and $(156) for the three months ended December 31, 2014 and 2013, respectively. The change in unrealized gains (losses) for Level 3 investments and liabilities still held at the reporting date was $799 and $(2,553) for the nine months ended December 31, 2014 and 2013, respectively.

There were no significant transfers between Level 1 and Level 2 during the three or nine months ended December 31, 2014 and 2013.

As a practical expedient, Legg Mason relies on the NAV of certain investments as their fair value.  The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments as of the respective reporting dates.  The following table summarizes, as of December 31, 2014 and March 31, 2014, the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized:
 
 
 
 
Fair Value Determined Using NAV
 
As of December 31, 2014
Category of Investment
 
Investment Strategy
 
December 31, 2014
 
March 31, 2014
 
Unfunded Commitments
 
Remaining Term
Funds-of-hedge funds
 
Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge
 
$
24,904

(1)
$
34,771

(1)
n/a

 
n/a
Hedge funds
 
Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge
 
15,118

 
19,461

 
$
20,000

 
n/a
Private equity funds
 
Long/short equity
 
21,373

(2)
22,759

(2)
9,329

 
Up to 9 years
Other
 
Various
 
1,640

 
2,434

 
n/a

 
Various (3)
Total
 
 
 
$
63,035

(4)
$
79,425

(4)
$
29,329

 
 
n/a-not applicable
(1)
Liquidation restrictions: 15% monthly redemption and 85% quarterly redemption as of December 31, 2014. 40% monthly redemption and 60% quarterly redemption as of March 31, 2014.
(2)    Liquidations are expected over the remaining term.
(3)
Of this balance, 15% has a remaining term of less than one year and 85% has a remaining term of 19 years.
(4)
Comprised of 40% and 60% of Level 2 and Level 3 assets, respectively, as of December 31, 2014 and 31% and 69% of Level 2 and Level 3 assets, respectively, as of March 31, 2014.

There are no current plans to sell any of these investments held as of December 31, 2014.

5. Fixed Assets

Fixed assets consist of equipment, software and leasehold improvements. Equipment consists primarily of communications and technology hardware and furniture and fixtures. Software includes purchased software and internally developed software. Fixed assets are reported at cost, net of accumulated depreciation and amortization. The following table reflects the components of fixed assets as of:
 
 
December 31, 2014
 
March 31, 2014
Equipment
 
$
152,537

 
$
147,663

Software
 
264,109

 
249,368

Leasehold improvements
 
205,086

 
209,747

Total cost
 
621,732

 
606,778

Less: accumulated depreciation and amortization
 
(438,077
)
 
(417,537
)
Fixed assets, net
 
$
183,655

 
$
189,241



20



Depreciation and amortization expense related to fixed assets was $12,454 and $12,802 for the three months ended December 31, 2014 and 2013, respectively, and $39,080 and $36,825 for the nine months ended December 31, 2014 and 2013, respectively.

6. Intangible Assets and Goodwill

The following table reflects the components of intangible assets as of:
 
 
December 31, 2014
 
March 31, 2014
Amortizable asset management contracts
 
 

 
 

Cost
 
$
190,460

 
$
207,224

Accumulated amortization
 
(167,441
)
 
(197,255
)
Net
 
23,019

 
9,969

Indefinite–life intangible assets
 


 


U.S. domestic mutual fund management contracts
 
2,106,351

 
2,106,351

Permal/Fauchier funds-of-hedge fund management contracts
 
698,104

 
698,104

Other fund management contracts(1)
 
434,213

 
304,549

Trade names
 
52,800

 
52,800

 
 
3,291,468

 
3,161,804

Intangible assets, net
 
$
3,314,487

 
$
3,171,773

(1) Balance as of December 31, 2014, includes $130,104 related to the acquisition of Martin Currie.

In connection with the previously discussed sale of LMIC, amortizable asset management contracts with a cost of $36,864 and accumulated amortization of $30,205 were sold on November 7, 2014. Also, the October 1, 2014 acquisition of Martin Currie and May 31, 2014 acquisition of QS Investors included amortizable asset management contracts of $15,234 and $7,060, respectively. See Note 3 for additional information.

Legg Mason completed its annual impairment testing process of goodwill and indefinite-life intangible assets and determined that there was no impairment in the value of these assets as of December 31, 2014. As a result of uncertainty regarding future market conditions and economic results, assessing the fair value of the reporting unit and intangible assets requires management to exercise significant judgment. The current assessed fair value of the indefinite-life funds-of-hedge funds contracts asset related to the Permal and Fauchier acquisitions exceeds the combined carrying values by 13%. Should market performance, flows, or related assets under management levels decrease in the near term, or other factors change, such that cash flow projections deviate from current projections, it is reasonably possible that the assets could be deemed to be impaired by a material amount. The current assessed fair value of the indefinite-life domestic mutual funds contracts asset related to the Citigroup Asset Management acquisition exceeds the carrying value by 41%.

As of December 31, 2014, amortizable asset management contracts are being amortized over a weighted-average remaining life of 10.4 years.

Estimated amortization expense for each of the next five fiscal years is as follows:
Remaining 2015
 
$
525

2016
 
2,408

2017
 
2,408

2018
 
2,408

2019
 
2,408

Thereafter
 
12,862

Total
 
$
23,019



21



The change in the carrying value of goodwill is summarized below:
 
 
Gross Book Value
 
Accumulated Impairment
 
Net Book Value
Balance as of March 31, 2014
 
$
2,402,423

 
$
(1,161,900
)
 
$
1,240,523

Impact of excess tax basis amortization
 
(16,287
)
 

 
(16,287
)
Business acquisitions, net of $(9,271) relating to the sale of LMIC (See Note 3)
 
175,488

 

 
175,488

Changes in foreign exchange rates and other
 
(23,888
)
 

 
(23,888
)
Balance as of December 31, 2014
 
$
2,537,736

 
$
(1,161,900
)
 
$
1,375,836