10-Q
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, 2015
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.
107,708,098 shares of common stock as of the close of business on January 28, 2016.




PART I. FINANCIAL INFORMATION

Item 1.      Financial Statements


LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
 
December 31, 2015
 
March 31, 2015
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
563,472

 
$
669,552

Cash and cash equivalents of consolidated investment vehicles
 
1,138

 
2,808

Restricted cash
 
16,776

 
32,114

Receivables:
 
 
 
 
Investment advisory and related fees
 
332,769

 
368,399

Other
 
62,746

 
118,850

Investment securities
 
498,017

 
454,735

Investment securities of consolidated investment vehicles
 
52,674

 
48,000

Deferred income taxes
 
167,355

 
169,706

Other
 
60,108

 
51,750

Other assets of consolidated investment vehicles
 
5,766

 
6,121

Total Current Assets
 
1,760,821

 
1,922,035

Fixed assets, net
 
167,741

 
179,606

Intangible assets, net
 
3,142,060

 
3,313,334

Goodwill
 
1,471,145

 
1,339,510

Deferred income taxes
 
175,479

 
161,978

Other
 
121,227

 
157,514

TOTAL ASSETS
 
$
6,838,473

 
$
7,073,977

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 

LIABILITIES
 
 

 
 

Current Liabilities
 
 

 
 

Accrued compensation
 
$
349,890

 
$
400,245

Accounts payable and accrued expenses
 
189,144

 
208,210

Short-term borrowings
 
40,000

 

Contingent consideration
 
2,694

 
22,276

Other
 
102,756

 
177,879

Other current liabilities of consolidated investment vehicles
 
4,087

 
6,436

Total Current Liabilities
 
688,571

 
815,046

Deferred compensation
 
64,641

 
51,706

Deferred income taxes
 
343,416

 
362,209

Contingent consideration
 
87,770

 
88,508

Other
 
153,528

 
167,998

Long-term debt
 
1,056,759

 
1,058,089

TOTAL LIABILITIES
 
2,394,685

 
2,543,556

 
 
 
 
 
Commitments and Contingencies (Note 9)
 
 
 
 
 
 
 
 
 
REDEEMABLE NONCONTROLLING INTERESTS
 
158,531

 
45,520

 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
Common stock, par value $.10; authorized 500,000,000 shares; issued 107,700,310 shares in December 2015 and 111,469,142 shares in March 2015
 
10,770

 
11,147

Additional paid-in capital
 
2,708,754

 
2,844,441

Employee stock trust
 
(27,321
)
 
(29,570
)
Deferred compensation employee stock trust
 
27,321

 
29,570

Retained earnings
 
1,643,842

 
1,690,055

Accumulated other comprehensive loss, net
 
(78,109
)
 
(60,742
)
TOTAL STOCKHOLDERS' EQUITY
 
4,285,257

 
4,484,901

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
6,838,473

 
$
7,073,977

See Notes to Consolidated Financial Statements

2


LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
OPERATING REVENUES
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
Separate accounts
 
$
208,501

 
$
210,177

 
$
621,760

 
$
619,686

Funds
 
345,501

 
388,589

 
1,089,717

 
1,159,454

Performance fees
 
9,175

 
29,134

 
35,730

 
59,430

Distribution and service fees
 
95,919

 
90,053

 
292,381

 
274,250

Other
 
461

 
1,031

 
1,705

 
3,940

Total Operating Revenues
 
659,557

 
718,984

 
2,041,293


2,116,760

OPERATING EXPENSES
 
 
 
 
 
 
 
 
Compensation and benefits
 
282,770

 
319,746

 
880,255

 
929,130

Distribution and servicing
 
132,860

 
147,492

 
421,078

 
451,300

Communications and technology
 
48,509

 
47,109

 
147,031

 
133,683

Occupancy
 
35,750

 
33,212

 
87,453

 
82,879

Amortization of intangible assets
 
1,580

 
669

 
2,907

 
2,028

Impairment charges
 
371,000

 

 
371,000

 

Other, net of $26,375 of contingent consideration fair value reduction in December 2015
 
27,733

 
51,388

 
114,641

 
148,471

Total Operating Expenses
 
900,202

 
599,616

 
2,024,365

 
1,747,491

OPERATING INCOME (LOSS)
 
(240,645
)
 
119,368

 
16,928

 
369,269

OTHER NON-OPERATING INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest income
 
1,377

 
1,680

 
3,923

 
5,885

Interest expense
 
(8,003
)
 
(12,183
)
 
(33,232
)
 
(44,216
)
Other income (expense), net, including $107,074 debt extinguishment loss in July 2014
 
6,520

 
7,441

 
(15,879
)
 
(94,467
)
Other non-operating income (expense) of consolidated investment vehicles, net
 
(1,510
)
 
1,759

 
(3,406
)
 
4,687

Total Other Non-Operating Income (Expense)
 
(1,616
)
 
(1,303
)
 
(48,594
)
 
(128,111
)
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
 
(242,261
)
 
118,065

 
(31,666
)
 
241,158

Income tax provision (benefit)
 
(103,651
)
 
38,017

 
(50,914
)
 
82,477

NET INCOME (LOSS)
 
(138,610
)
 
80,048

 
19,248

 
158,681

Less: Net income (loss) attributable to noncontrolling interests
 
16

 
3,012

 
(993
)

4,560

NET INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
 
$
(138,626
)
 
$
77,036

 
$
20,241

 
$
154,121

 
 
 
 
 
 
 
 
 
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO LEGG MASON, INC. SHAREHOLDERS:
 
 
 
 
 
 
 
 
Basic
 
$
(1.31
)
 
$
0.67

 
$
0.17

 
$
1.33

Diluted
 
$
(1.31
)
 
$
0.67

 
$
0.17

 
$
1.32

 
 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
 
$
0.20

 
$
0.16

 
$
0.60

 
$
0.48

See Notes to Consolidated Financial Statements

3


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

 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
NET INCOME (LOSS)
 
$
(138,610
)
 
$
80,048

 
$
19,248

 
$
158,681

Other comprehensive loss:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(5,169
)
 
(31,266
)
 
(21,681
)
 
(52,790
)
Unrealized losses on investment securities:
 
 
 
 
 
 
 
 
Unrealized holding losses, net of tax benefit of $(3)
 

 

 

 
(5
)
Reclassification adjustment for losses included in net income
 

 

 

 
5

Net unrealized losses on investment securities
 

 

 

 

Net actuarial gains (losses) on defined benefit pension plan
 
1,324

 
(4,028
)
 
4,314

 
(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 $(233)
 

 

 

 
(405
)
Reclassification of assets held for sale
 

 

 

 
(114
)
Total other comprehensive loss
 
(3,845
)
 
(35,294
)
 
(17,367
)
 
(56,932
)
COMPREHENSIVE INCOME (LOSS)
 
(142,455
)
 
44,754

 
1,881

 
101,749

Less: Comprehensive income (loss) attributable to noncontrolling interests
 
16

 
3,012

 
(993
)
 
4,560

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
 
$
(142,471
)
 
$
41,742

 
$
2,874

 
$
97,189

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,
 
 
2015
 
2014
COMMON STOCK
 
 
 
 
Beginning balance
 
$
11,147

 
$
11,717

Stock options exercised
 
26

 
67

Deferred compensation employee stock trust
 
2

 
4

Stock-based compensation
 
13

 
91

Employee tax withholdings by settlement of net share transactions
 
(41
)
 
(47
)
Shares repurchased and retired
 
(377
)
 
(533
)
Ending balance
 
10,770

 
11,299

ADDITIONAL PAID-IN CAPITAL
 
 
 
 

Beginning balance
 
2,844,441

 
3,148,396

Stock options exercised
 
8,091

 
19,618

Deferred compensation employee stock trust
 
377

 
2,063

Stock-based compensation
 
52,584

 
43,609

Additional tax benefit on Equity Unit exchange in fiscal 2010
 
9,173

 

Employee tax withholdings by settlement of net share transactions
 
(21,495
)
 
(21,879
)
Shares repurchased and retired
 
(182,601
)
 
(265,989
)
Redeemable noncontrolling interest reclassification for affiliate management equity plans
 
(1,816
)
 
(1,816
)
Ending balance
 
2,708,754

 
2,924,002

EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
(29,570
)
 
(29,922
)
Shares issued to plans
 
(379
)
 
(2,067
)
Distributions and forfeitures
 
2,628

 
1,145

Ending balance
 
(27,321
)
 
(30,844
)
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
29,570

 
29,922

Shares issued to plans
 
379

 
2,067

Distributions and forfeitures
 
(2,628
)
 
(1,145
)
Ending balance
 
27,321

 
30,844

RETAINED EARNINGS
 
 
 
 

Beginning balance
 
1,690,055

 
1,526,662

Net Income Attributable to Legg Mason, Inc.
 
20,241

 
154,121

Dividends declared
 
(65,781
)
 
(56,455
)
Reclassification for net increase in estimated redemption value of affiliate management equity plans
 
(673
)
 

Ending balance
 
1,643,842

 
1,624,328

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
 
 
 
 

Beginning balance
 
(60,742
)
 
37,949

Net actuarial gains (losses) on defined benefit pension plan
 
4,314

 
(4,028
)
Reclassification to assets held for sale
 

 
(114
)
Foreign currency translation adjustment
 
(21,681
)
 
(52,790
)
Ending balance
 
(78,109
)
 
(18,983
)
TOTAL STOCKHOLDERS’ EQUITY
 
$
4,285,257


$
4,540,646


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,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
19,248

 
$
158,681

5.5% Senior Notes Due 2019:
 
 
 
 
Loss on extinguishments
 

 
107,074

Allocation of redemption payments
 

 
(98,418
)
Adjustments to reconcile Net Income to net cash provided by operations:
 
 
 
 
Impairment of intangible assets
 
371,000

 

Depreciation and amortization
 
44,755

 
41,107

Accretion and amortization of securities discounts and premiums, net
 
2,149

 
5,183

Stock-based compensation
 
54,576

 
50,934

Net losses (gains) on investments
 
20,277

 
(6,059
)
Net losses (gains) of consolidated investment vehicles
 
2,145

 
(1,435
)
Deferred income taxes
 
(56,231
)
 
73,189

Contingent consideration fair value reduction
 
(26,375
)
 

Other
 
1,130

 
(4,605
)
Decrease (increase) in assets:
 
 
 
 
Investment advisory and related fees receivable
 
34,892

 
(17,480
)
Net sales (purchases) of trading and other investments
 
(63,015
)
 
60,901

Other receivables
 
(6,229
)
 
11,789

Other assets
 
(504
)
 
(17,744
)
Other assets of consolidated investment vehicles
 
(4,793
)
 
82,774

Increase (decrease) in liabilities:
 
 
 
 
Accrued compensation
 
(48,607
)
 
(62,279
)
Deferred compensation
 
12,935

 
9,033

Accounts payable and accrued expenses
 
(18,770
)
 
8,032

Other liabilities
 
(29,842
)
 
(15,085
)
Other liabilities of consolidated investment vehicles
 
(2,349
)
 
(4,545
)
CASH PROVIDED BY OPERATING ACTIVITIES
 
$
306,392

 
$
381,047











6



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


 
 
Nine Months Ended December 31,
 
 
2015
 
2014
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Payments for fixed assets
 
$
(29,912
)
 
$
(34,894
)
Business acquisition, net of cash acquired of $9,667 and $29,830, respectively
 
(209,053
)
 
(183,747
)
Proceeds from sale of businesses and assets
 

 
47,001

Change in restricted cash
 
23,734

 
(8,986
)
Purchases of investment securities
 

 
(2,641
)
Proceeds from sales and maturities of investments
 
8,512

 
2,688

CASH USED IN INVESTING ACTIVITIES
 
(206,719
)
 
(180,579
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net increase in short-term borrowings
 
40,000

 

Repayments of debt
 

 
(645,780
)
Payment of contingent consideration
 
(22,765
)
 

Repayment of long-term debt of consolidated investment vehicles
 

 
(79,179
)
Proceeds from issuance of long-term debt
 

 
658,769

Debt issuance costs
 
(2,664
)
 
(5,266
)
Issuances of common stock for stock-based compensation
 
8,496

 
21,752

Employee tax withholdings by settlement of net share transactions
 
(21,536
)
 
(21,926
)
Repurchases of common stock
 
(182,978
)
 
(266,522
)
Dividends paid
 
(62,282
)
 
(52,763
)
Net subscriptions received and other noncontrolling interests
 
49,880

 
21,570

CASH USED IN FINANCING ACTIVITIES
 
(193,849
)
 
(369,345
)
EFFECT OF EXCHANGE RATES ON CASH
 
(11,904
)
 
(24,025
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
 
(106,080
)
 
(192,902
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
669,552

 
858,022

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
563,472

 
$
665,120


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, 2015
(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 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 sponsored investment vehicles, including those designated as CIVs, has no impact on Net Income (Loss) 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 all consolidated sponsored investment vehicles, which is recorded in Other Non-Operating Income (Expense), is reflected in Net Income (Loss), 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") (as further described below) while others are considered to be voting rights entities (“VREs”) subject to traditional consolidation concepts based on ownership rights. Sponsored 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 prior to the quarter ended March 31, 2015. Prior to March 31, 2015, Legg Mason redeemed a significant portion of its investment in this fund and as a result no longer had a controlling financial interest in the fund; therefore, the fund was not included as a CIV as of or subsequent to March 31, 2015.

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 investors 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 the 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 relating to the fees 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 as a CIV) as of December 31, 2015, March 31, 2015, and December 31, 2014, despite significant third-party investments in this product. As of December 31, 2015, March 31, 2015, and December 31, 2014, Legg Mason also concluded it was the primary beneficiary of 14, 17, and 16 employee-owned funds it sponsors, respectively, 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 the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses, or the right to receive benefits, that potentially could be significant to the VIE.

As of December 31, 2015, 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 the level of fees they are expected to pay to Legg Mason is insignificant.

Prior to June 30, 2014, Legg Mason concluded that it was the primary beneficiary of another CLO in which it held a variable interest and balances related to this CLO were consolidated and reported as a CIV in the Company's consolidated financial statements. Although it held no equity interest in this investment vehicle, it had both the power to control the CLO and had a significant variable interest because of the level of its expected subordinated fees. 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 13 for additional information regarding VIEs and VREs.

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 (Loss). 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 (Loss). See Notes 3 and 9 for additional information regarding Contingent consideration liabilities.

Noncontrolling Interests
Noncontrolling interests include affiliate minority interests, third-party investor equity in consolidated investment vehicles, and vested management equity plan interests. For CIVs and other consolidated sponsored investment vehicles 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, including accretion of related estimated redemption values. There were no nonredeemable

9


noncontrolling interests as of December 31, 2015 or March 31, 2015. See Note 11 for additional information regarding noncontrolling interests.

Accumulated Other Comprehensive Income (Loss), Net
There were no significant amounts reclassified from Accumulated other comprehensive income (loss), net, to the Consolidated Statements of Income (Loss) for the nine months ended December 31, 2015 or 2014, except for $638 realized on the termination of a reverse treasury rate lock contract in July 2014, as further described in Note 7.

Income Tax Provision (Benefit)
During the three months ended December 31, 2015, Legg Mason recognized a cumulative income tax benefit of $55,842, primarily related to annualized tax benefits attributable to prior quarters due to $371,000 of non-cash impairment charges recognized in the current quarter in a lower tax rate jurisdiction. See Note 6 for additional information regarding the impairment charges. In November 2015, the U.K. Finance Bill 2015 was enacted, which reduced the main U.K. corporate tax rate from 20% to 19% effective April 1, 2017, and to 18% effective April 1, 2020. The reduction in the U.K. corporate tax rate resulted in a tax benefit of $8,361, recognized in the three months ended December 31, 2015, as a result of the revaluation of certain existing deferred tax assets and liabilities at the new rates. Also, in the three months ended December 31, 2015, Legg Mason recognized income tax benefits of $7,216 which resulted from reserve adjustments related to the effective settlement of tax positions in certain tax examinations. These benefits were offset in part by an increase in valuation allowances of $8,479 related to foreign tax credits, charitable contributions and certain state net operating loss carryforwards. In addition, during the three months ended September 30, 2015, Legg Mason recognized income tax benefits of $7,026 as a result of reserve adjustments related to the conclusion of certain tax examinations, and during the three months ended June 30, 2015, Legg Mason recognized an income tax benefit of $17,527 as a result of an increase in the value of deferred tax assets due to changes in the New York City tax code.

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.

Recent Accounting Developments
In November 2015, the Financial Accounting Standards Board (“FASB”) updated the guidance on balance sheet classification of deferred taxes.  The updated guidance requires that all deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet.  The guidance will be effective for Legg Mason in fiscal 2017, unless adopted earlier.  Legg Mason is evaluating the impact of its adoption.

In May 2015, the FASB updated the guidance on fair value measurement.  The updated guidance removes the requirement for all investments for which fair value is measured using the net asset value ("NAV") practical expedient to be categorized within the fair value hierarchy and related sensitivity disclosures.  The amount of such investments would instead be disclosed as a reconciling item between the fair value hierarchy table and the investment amounts reported on the balance sheet.  This guidance will be effective for Legg Mason in fiscal 2017, unless adopted earlier.  Legg Mason is evaluating the impact of its adoption.

In February 2015, the FASB updated the guidance for consolidation requirements. The updated guidance eliminates the presumption that a general partner should consolidate a limited partnership, and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or VREs. Additionally, the updated guidance affects the conclusion such that certain fees paid to decision makers are no longer variable interests, and certain related party relationships with a sponsored investment fund may no longer require its consolidation. The update also eliminates the deferral of accounting guidance that requires separate evaluation for investment company VIEs and other VIEs. This update will be effective for Legg Mason in fiscal 2017, unless adopted earlier. Legg Mason is evaluating the timing and impact of its adoption.

In May 2014, the FASB updated the guidance on revenue recognition. The updated guidance improves comparability and removes inconsistencies in revenue recognition practices across entities, industries, jurisdictions, and capital markets. This update has been deferred for an additional year and will now be effective for Legg Mason in fiscal 2019. Legg Mason is evaluating the impact of its adoption.



10


3. Acquisitions

The following table presents a summary of the acquisition-date fair values of the assets acquired and liabilities assumed for each of Legg Mason's significant recent acquisitions:
 
 
RARE Infrastructure Limited (1)
 
Martin Currie (Holdings) Limited
 
QS Investors Holdings, LLC
 
Fauchier Partners Management, Limited
Acquisition Date
 
October 21, 2015
 
October 1, 2014
 
May 30,
 2014
 
March 13,
 2013
 
 
 
 
 
 
 
 
 
Purchase price
 
 
 
 
 
 
 
 
     Cash
 
$
213,739

 
$
202,577

 
$
11,000

 
$
63,433

     Estimated contingent consideration
 
25,000

 
75,211

 
13,370

 
21,566

Total Consideration
 
238,739

 
277,788

 
24,370

 
84,999

Fair value of noncontrolling interest
 
61,067

 

 

 

Total
 
299,806

 
277,788

 
24,370

 
84,999

Identifiable assets and liabilities
 
 
 
 
 
 
 
 
     Cash
 
9,667

 
29,389

 
441

 
8,156

Investments
 

 

 
3,281

 

Receivables
 
6,612

 

 
2,699

 
12,174

Indefinite-life intangible fund management contracts
 
122,755

 
135,321

 

 
65,126

Amortizable intangible asset management contracts
 
67,877

 
15,234

 
7,060

 
2,865

Indefinite-life trade name
 
4,766

 
7,130

 

 

Fixed assets
 
673

 
784

 
599

 

Other current liabilities, net
 
(9,441
)


 

 
(16,667
)
     Liabilities, net
 
(3,948
)
 
(4,388
)
 
(6,620
)
 

Pension liability
 

 
(32,433
)
 

 

Deferred tax liabilities
 
(58,619
)
 
(31,537
)
 

 
(15,638
)
Total identifiable assets and liabilities
 
140,342

 
119,500

 
7,460

 
56,016

Goodwill
 
$
159,464

 
$
158,288

 
$
16,910

 
$
28,983

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

RARE Infrastructure Limited
On October 21, 2015, Legg Mason acquired a majority equity interest in RARE Infrastructure Limited ("RARE Infrastructure"). RARE Infrastructure specializes in global listed infrastructure investing, is headquartered in Sydney, Australia, and had approximately $6,800,000 in assets under management ("AUM") at the closing of the transaction. Under the terms of the related transaction agreements, Legg Mason effectively acquired a 75% ownership interest in the firm, the firm's management team retained a 15% equity interest and The Treasury Group, a continuing minority owner, retained 10%. The acquisition required an initial cash payment of $213,739 (using the foreign exchange rate as of October 21, 2015 for the 296,000 Australian dollar payment), which was funded with approximately $40,000 of net borrowings under the Company's previous revolving credit facility, as further discussed in Note 7, as well as existing cash resources. In August 2015, Legg Mason executed a currency forward contract to economically hedge the risk of movement in the exchange rate between the U.S. dollar and the Australian dollar in which the initial cash payment was denominated. This currency forward contract was closed in October 2015. See Note 12 for additional information regarding derivatives and hedging. In addition, contingent consideration may be due March 31, 2017 and 2018, aggregating up to $77,253 (using the foreign exchange rate as of December 31, 2015 for the maximum 106,000 Australian dollar amount per the related agreements), dependent on the achievement of certain net revenue targets, and subject to potential catch-up adjustments extending through March 31, 2019.


11


The noncontrolling interests can be put by the holders or called by Legg Mason for settlement at fair value, except for the non-management portion of the noncontrolling interests, which are callable at a pre-agreed formula, as specified in the agreements. The fair value of the noncontrolling interests reflects the total business enterprise value, after appropriate discounts for lack of marketability and control.

The fair value of the acquired amortizable intangible asset management contracts had a useful life of 12 years at acquisition. Purchase price allocated to intangible assets and goodwill is not deductible for Australian tax purposes. Goodwill is principally attributable to synergies expected to arise with RARE Infrastructure.

Management estimated the fair values of the indefinite-life intangible fund management contracts, indefinite-life trade name, and amortizable intangible asset management contracts based upon discounted cash flow analyses, using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these analyses at acquisition, including projected annual cash flows, projected AUM growth rates and discount rates, are summarized as follows:

 
 
Projected Cash Flow Growth
 
Discount Rate
Indefinite-life intangible fund management contracts and indefinite-life trade name
 
0% to 10% (weighted-average - 7%)
 
16.5%
 
 
 
 
 
 
 
Projected AUM Growth / (Attrition)
 
Discount Rate
Amortizable intangible asset management contracts
 
7% / (8)%
 
16.5%

The fair value of the contingent consideration was estimated using Monte Carlo simulation in a risk-neutral framework with various observable inputs, as well as, with various unobservable data inputs which are Level 3 measurements. The simulation considered variables, including AUM growth and performance fee levels. Consistent with risk-neutral framework, projected AUM and performance fees were dampened by a measure of risk referred to as 'market price of risk' to account for its market risk or systematic risk before calculating the earn-out payments. These earn-out payments were then discounted commensurate with their timing. A summary of various assumption values follows:

AUM growth rates
 
0% to 14% (weighted-average - 7%)
Performance fee growth rates
 
0% to 7% (weighted-average - 3%)
Projected AUM and performance fee market price of risk
 
6.5%
AUM volatility
 
20.0%
Earn-out payment discount rate
 
1.9%

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

The Contingent consideration liability established at closing had an acquisition date fair value of $25,000 (using the foreign exchange rate as of October 21, 2015). As of December 31, 2015, the fair value of the Contingent consideration liability was $25,232, which is included in non-current Contingent consideration in the Consolidated Balance Sheet. The increase of $232 from October 21, 2015, was attributable to changes in the exchange rate, which is included in Accumulated other comprehensive loss, net, as Foreign currency translation adjustment, net of accretion. The Contingent consideration liability is recorded at an entity with an Australian dollar functional currency, such that related changes in the exchange rate do not impact net income (loss).

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 (Loss) would not have been materially different. The financial results of RARE Infrastructure included in Legg Mason's consolidated financial results for both the three and nine months ended December 31, 2015, include revenues of $8,376, and did not have a material impact on Net Income (Loss) Attributable to Legg Mason, Inc.


12


Martin Currie (Holdings) Limited
On October 1, 2014, Legg Mason acquired all outstanding equity interests of Martin Currie (Holdings) Limited ("Martin Currie"), an international equity specialist based in the United Kingdom. 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 $478,687 (using the foreign exchange rate as of December 31, 2015 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 at March 31, 2016, 2017, and 2018, as specified in the share purchase agreement.
 
The fair value of the amortizable intangible 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. These acquired intangible assets and goodwill are not deductible for U.K. tax purposes.

Management estimated the fair values of the indefinite-life intangible fund management contracts, indefinite-life trade name, and amortizable intangible asset management contracts based upon discounted cash flow analyses, using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these analyses at acquisition, including projected annual cash flows, projected AUM growth rates and discount rates, are summarized as follows:

 
 
Projected Cash Flow Growth
 
Discount Rate
Indefinite-life intangible fund management contracts and indefinite-life trade name
 
0% to 25% (weighted-average - 11%)
 
15.0%
 
 
 
 
 
 
 
Projected AUM Growth / (Attrition)
 
Discount Rate
Amortizable intangible 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 fee growth rates
 
0% to 30% (weighted-average - 15%)
Discount rates:
 
 
   Projected AUM
 
13.0%
   Projected performance fees
 
15.0%
   Earn-out payments
 
1.3%
AUM volatility
 
18.8%

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

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 may also include amounts for certain potential pension and other obligations that are accounted for separately. As of December 31, 2015, the fair value of the Contingent consideration liability, which is included in non-current Contingent consideration in the Consolidated Balance Sheet, was $49,078, a decrease of $21,036 from March 31, 2015. During the quarter ended December 31, 2015, a decrease in projected AUM and performance fees resulted in a $21,361 reduction in the estimated Contingent consideration liability, recorded as a credit to Other operating expense in the Consolidated Statement of Income (Loss). Changes in the exchange rate of $325 for the nine months ended December 31, 2015, which is included in Accumulated other comprehensive loss, net, as Foreign currency translation adjustment, net of accretion, also impacted the Contingent consideration liability. The Contingent consideration liability is recorded at an entity with a British pound functional currency, such that related changes in the exchange rate do not impact net income (loss).

13


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

Martin Currie Defined Benefit Pension Plan
Martin Currie sponsors a retirement and death benefits plan, a defined benefit pension plan with assets held in a separate trustee-administered fund. Plan assets are measured at fair value and comprised of 60% equities (Level 1) and 40% bonds (Level 2) as of December 31, 2015 and 58% equities (Level 1) and 42% bonds (Level 2) as of March 31, 2015. 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 U.K. market and currency. As of December 31, 2015, there were no significant concentrations of risk in plan assets. The most recent actuarial valuation was performed as of May 31, 2013, which was updated through the acquisition and balance sheet dates. Accrual of service credit under the plan ceased on October 3, 2014.

The resulting net benefit obligation, comprised as follows, is included in the December 31, 2015 and March 31, 2015 Consolidated Balance Sheets as Other non-current liabilities:

 
 
December 31, 2015
 
March 31, 2015
Fair value of plan assets (at 5.2 % and 6.3%, respectively, expected weighted-average long-term return)
 
$
57,081

 
$
59,404

Benefit obligation (at 3.9% and 3.3%, respectively, discount rate)
 
(88,920
)
 
(98,110
)
Unfunded status (excess of benefit obligation over plan assets)
 
$
(31,839
)
 
$
(38,706
)
 
 
For the three and nine months ended December 31, 2015, a net periodic benefit cost of $23 and $70, respectively, was included in Compensation and benefits expense in the Consolidated Statements of Income (Loss), and Net actuarial losses of $5,281 and $9,595 were included in Accumulated other comprehensive loss, net, in the Consolidated Balance Sheets at December 31, 2015 and March 31, 2015, respectively.

The contingent consideration payments are expected to provide some, if not all, funding of the net plan benefit obligation, through a provision of the share purchase agreement requiring certain amounts to be paid to the plan. Any contingent consideration payments to the plan are based on determination of the plan benefit obligation under local technical provisions utilized by the plan trustees. Absent any such funding or any regulatory requirement, Martin Currie does not expect to contribute any additional amounts in fiscal 2016 to the plan in excess of the $2,361 contributed during the three months ended June 30, 2015.
 
 
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.

Other
In December 2015, Martin Currie acquired certain assets of PK Investment Management, LLP, a London based equity manager with approximately $171,000 of AUM, for an initial cash payment of $4,981 and an estimated contingent payment of $2,457 due on December 31, 2017. The amount of any ultimate contingent payment will be based on certain financial metrics. The initial cash payment was funded with existing cash resources. In connection with the acquisition, Legg Mason recognized indefinite-life intangible fund management contracts and goodwill of $6,619 and $827, respectively.


14


QS Investors Holdings, LLC
Effective May 31, 2014, Legg Mason acquired all of the outstanding equity interests of QS Investors Holdings, LLC ("QS Investors"), a customized solutions and global quantitative equities provider. 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 fair value of the amortizable intangible asset management contracts had a useful life of 10 years at acquisition. 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 intangible 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
 
(10.0)%
 
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 Contingent consideration liability established at closing had an acquisition date fair value of $13,370. As of December 31, 2015, the fair value of the Contingent consideration liability has accreted to $13,697, an increase of $144 from March 31, 2015. Of the $13,697, $2,694 relates to the second anniversary payment and is included in current Contingent consideration in the Consolidated Balance Sheet, with the remainder included in non-current Contingent consideration in the Consolidated Balance Sheet as of December 31, 2015.

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 (Loss) 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 31, 2014, include revenues of $4,169 and $9,973, respectively, and did not have a material impact on Net Income (Loss) Attributable to Legg Mason, Inc.
 
Fauchier Partners Management, Limited
On March 13, 2013, The Permal Group Ltd. ("Permal"), a wholly-owned subsidiary of Legg Mason, acquired all of the outstanding share capital of Fauchier Partners Management, Limited ("Fauchier"), a European based manager of funds-of-hedge funds. The initial purchase price was a cash payment of $63,433, which was funded from existing cash resources. In May 2015, Legg Mason paid contingent consideration of $22,765 (using the exchange rate as of May 5, 2015 for the maximum £15,000 payment amount) for the second anniversary payment. Additional contingent consideration of up to approximately $29,458 (using the exchange rate as of December 31, 2015 for the £20,000 maximum contract amount), may be due on or about the fourth anniversary of closing, dependent on achieving certain levels of revenue, net of distribution costs.

The fair value of the amortizable intangible asset management contracts is being amortized over a period of six years. These acquired intangible assets and goodwill are not deductible for U.K. tax purposes.


15


Management estimated the fair values of the indefinite-life intangible fund management contracts based upon discounted cash flow analyses, and the contingent consideration expected to be paid based upon probability-weighted revenue projections, using unobservable market data inputs, which are Level 3 measurements. As is typical with the acquisition of a portion of a business from a larger financial services firm with other related operations, Legg Mason expected some initial contraction in the acquired business. 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 Growth Rates
 
Discount Rate
Indefinite-life intangible fund management contracts
 
(35)% to 11% (weighted-average - 6% )
 
16.0%
 
 
 
 
 
 
 
Projected Revenue Growth Rates
 
Discount Rate
Contingent consideration
 
(16)% to 3% (weighted-average - (5)%)
 
2.0%

As of December 31, 2015, no Contingent consideration liability was included in the Consolidated Balance Sheet, while a liability of $27,117 was included as of March 31, 2015. During the three months ended December 31, 2015, due to lower actual and expected performance fees earned over the earn out period, the Contingent consideration liability was reduced by $5,014, recorded as a credit to Other operating expense in the Consolidated Statement of Income (Loss). The decrease of $27,117 from March 31, 2015, reflects this reduction and the payment discussed above, offset in part by changes in the exchange rate, net of accretion. In December 2015, Legg Mason closed the currency forward contracts that were previously executed 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 were denominated. See Note 12 for additional information regarding derivatives and hedging.



16


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 13 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, 2015
 
 
Quoted prices in active markets (Level 1)
 
Quoted prices in active markets (Level 2)
 
Quoted prices in active markets (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:(1)
 
 
 
 
 
 
 
 
Money market funds
 
$
310,363

 
$

 
$

 
$
310,363

Time deposits and other
 

 
39,358

 

 
39,358

Total cash equivalents
 
310,363

 
39,358

 

 
349,721

Trading investments of proprietary fund products and other trading investments:(2)
 
 
 
 
 
 
 
 

Seed capital investments
 
198,469

 
121,199

 
119

 
319,787

Other(3)
 
50,399

 
2,537

 

 
52,936

Trading investments relating to long-term incentive compensation plans(4)
 
107,523

 
655

 

 
108,178

Equity method investments relating to proprietary fund products and long-term incentive compensation plans:(5)
 
 
 
 
 
 
 


Seed capital investments
 
2,086

 
7,321

 

 
9,407

Investments related to long-term incentive compensation plans
 

 
7,709

 

 
7,709

Total current investments(6)
 
358,477

 
139,421

 
119

 
498,017

Equity method investments in partnerships
     and LLCs:(5)(7)
 
 
 
 
 
 
 
 
Seed capital investments
 

 

 
20,573

 
20,573

Investments related to long-term incentive compensation plans
 

 

 
7,260

 
7,260

Other
 

 

 
9,973

 
9,973

Investments in partnerships and LLCs(7)
 

 

 
8,130

 
8,130

Derivative assets(7)(8)
 
1,010

 
4,108

 

 
5,118

Other investments(7)
 

 

 
77

 
77

Total
 
$
669,850

 
$
182,887

 
$
46,132

 
$
898,869

Liabilities:
 
 
 
 
 
 
 
 
Long-term debt(9)
 
$

 
$
(253,721
)
 
$

 
$
(253,721
)
Contingent consideration liabilities(10)
 

 

 
(90,464
)
 
(90,464
)
Derivative liabilities(8)
 
(5,440
)
 

 

 
(5,440
)
Total
 
$
(5,440
)
 
$
(253,721
)
 
$
(90,464
)
 
$
(349,625
)


17


 
 
As of March 31, 2015
 
 
Quoted prices in active markets (Level 1)
 
Quoted prices in active markets (Level 2)
 
Quoted prices in active markets (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:(1)
 
 
 
 
 
 
 
 
Money market funds
 
$
353,265

 
$

 
$

 
$
353,265

Time deposits and other
 

 
47,035

 

 
47,035

Total cash equivalents
 
353,265

 
47,035

 

 
400,300

Trading investments of proprietary fund products and other trading investments:(2)
 
 
 
 
 
 
 
 
Seed capital investments
 
259,840

 
85,220

 
186

 
345,246

Other(3)
 
9,807

 
2,981

 

 
12,788

Trading investments relating to long-term incentive compensation plans(4)
 
80,529

 

 

 
80,529

Equity method investments relating to proprietary fund products and long-term incentive compensation plans:(5)
 
 
 
 
 
 
 
 
Seed capital investments
 
2,148

 
5,296

 

 
7,444

Investments related to long-term incentive compensation plans
 

 
8,728

 

 
8,728

Total current investments(6)
 
352,324


102,225

 
186

 
454,735

Equity method investments in partnerships
     and LLCs:(5)(7)
 
 
 
 
 
 
 
 
Seed capital investments
 

 

 
23,796

 
23,796

Investments related to long-term incentive compensation plans
 

 

 
5,595

 
5,595

Other
 

 

 
18,953

 
18,953

Investments in partnerships and LLCs(7)
 

 

 
14,511

 
14,511

Derivative assets(7)(8)
 
580

 
5,462

 

 
6,042

Other investments(7)
 

 

 
77

 
77

Total
 
$
706,169

 
$
154,722

 
$
63,118

 
$
924,009

Liabilities:
 
 
 
 
 
 
 
 
Long-term debt(9)
 
$

 
$
(255,462
)
 
$

 
$
(255,462
)
Contingent consideration liabilities(10)
 

 

 
(110,784
)
 
(110,784
)
Derivative liabilities(8)
 
(8,665
)
 

 

 
(8,665
)
Total
 
$
(8,665
)
 
$
(255,462
)
 
$
(110,784
)
 
$
(374,911
)
(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 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 purchase of the instrument and its expected realization, and are classified as Level 2.
(2)
Trading investments of proprietary fund products and other trading investments consist of approximately 67% and 33% of equity and debt securities, respectively, as of December 31, 2015, and approximately 63% and 37% of equity and debt securities, respectively, as of March 31, 2015.
(3)
Includes $41,831 in noncontrolling interests associated with consolidated seed investment products as of December 31, 2015.
(4)
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.
(5)
Substantially all of Legg Mason's equity method investments are investment companies which record 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.
(6)
Excludes seed capital investments of $14,355 and $15,553 related to Legg Mason's investments in CIVs as of December 31, 2015 and March 31, 2015, respectively.
(7)
Amounts are included in Other non-current assets in the Consolidated Balance Sheets for each of the periods presented.
(8)
See Note 12.
(9)
Long-term debt is the sum of the amortized cost of long-term debt and the fair value of an interest rate swap contract designated as a fair value hedge. See Note 7.
(10)
See Note 3.

18


The net realized and unrealized gain (loss) for investment securities classified as trading was $2,148 and $3,839 for the three months ended December 31, 2015 and 2014, respectively, and $(25,283) and $5,762 for the nine months ended December 31, 2015 and 2014, respectively.
The net unrealized gains (losses) relating to trading investments still held as of December 31, 2015 and 2014, were $7,028 and $470 for the three months ended December 31, 2015 and 2014, respectively, and $(36,137) and $(17,796) for the nine months ended December 31, 2015 and 2014, respectively.
Proprietary fund products include seed capital investments made by Legg Mason to fund new investment strategies and products. Legg Mason had seed capital investments in proprietary fund products, which totaled $364,122 and $392,039, as of December 31, 2015 and March 31, 2015, respectively, which are substantially comprised of investments in 63 funds and 52 funds, respectively, that are individually greater than $1,000, with minimal third-party investment, and together comprise over 90% of the total seed capital investments at each period end.
See Notes 2 and 13 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, 2015 and 2014, are presented in the tables below:
 
 
Value as of September 30, 2015
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2015
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading investments of seed capital investments in proprietary fund products
 
$
164

 
$
1

 
$
(38
)
 
$

 
$

 
$
(8
)
 
$
119

Investments in partnerships and LLCs
 
11,290

 

 

 
(2,875
)
 

 
(285
)
 
8,130

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
22,032

 
230

 

 
(907
)
 

 
(782
)
 
20,573

Investments related to long-term incentive compensation plans
 
7,041

 
219

 

 

 

 

 
7,260

Other
 
10,546

 

 
(258
)
 

 

 
(315
)
 
9,973

Other investments
 
77

 

 

 

 

 

 
77

 
 
$
51,150

 
$
450

 
$
(296
)
 
$
(3,782
)
 
$

 
$
(1,390
)
 
$
46,132

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
(90,219
)
 
$
(27,457
)
 
n/a

 
$

 
n/a

 
$
27,212

 
$
(90,464
)
n/a - not applicable

19



 
 
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 seed capital investments in proprietary fund products
 
$
170

 
$

 
$
(8
)
 
$

 
$

 
$
19

 
$
181

Investments in partnerships and LLCs
 
17,682

 

 

 
(134
)
 

 
(337
)
 
17,211

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
27,731

 
356

 
(5,535
)
 
(250
)
 

 
(390
)
 
21,912

Investments related to long-term incentive compensation plans
 
4,940

 
656

 

 

 

 

 
5,596

Other
 
23,186

 
11

 
(1,163
)
 
(2,082
)
 

 
(652
)
 
19,300

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
)
 
n/a

 
$

 
n/a

 
$
3,776

 
$
(114,088
)
n/a - not applicable


20


 
 
Value as of March 31, 2015
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2015
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading investments of seed capital investments in proprietary fund products
 
$
186

 
$
1

 
$
(80
)
 
$

 
$

 
$
12

 
$
119

Investments in partnerships and LLCs
 
14,511

 

 

 
(5,405
)
 

 
(976
)
 
8,130

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
23,796

 
678

 

 
(3,117
)
 

 
(784
)
 
20,573

Investments related to long-term incentive compensation plans
 
5,596

 
1,664

 

 

 

 

 
7,260

Other
 
18,952

 

 
(6,773
)
 
(1,876
)
 

 
(330
)
 
9,973

Other investments
 
77

 

 

 

 

 

 
77

 
 
$
63,118


$
2,343


$
(6,853
)

$
(10,398
)

$


$
(2,078
)
 
$
46,132

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
(110,784
)
 
$
(27,457
)
 
n/a

 
$
22,765

 
n/a

 
$
25,012

 
$
(90,464
)
n/a - not applicable


21


 
 
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 seed capital investments in proprietary fund products
 
$
190

 
$

 
$
(27
)
 
$

 
$

 
$
18

 
$
181

Investments in partnerships and LLCs
 
21,586

 

 
(24
)
 
(3,577
)
 

 
(774
)
 
17,211

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
33,510

 
746

 
(11,052
)
 
(874
)
 

 
(418
)
 
21,912

Investments related to long-term incentive compensation plans
 
4,284

 
1,312

 

 

 

 

 
5,596

Other
 
25,179

 
11

 
(2,484
)
 
(2,385
)
 

 
(1,021
)
 
19,300

Other investments
 
90

 

 

 

 

 
(13
)
 
77

 
 
$
84,839

 
$
2,069

 
$
(13,587
)
 
$
(6,836
)
 
$

 
$
(2,208
)
 
$
64,277

Liabilities: