| Balance Sheet
As of June 30, 2011, Legg Mason’s cash position was $1.2 billion. Total debt was $1.4 billion and stockholders' equity was $5.7 billion. The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 19.0%, down from 20.0% in the prior quarter. The improvement includes the retiring of $103.0 million in debt related to the Equity Units on June 30 by the issuance of 1.8 million shares pursuant to the terms of the units.
In the quarter, the company completed additional open market purchases of 6.0 million shares, which reduced weighted average shares by 1.9 million.
In May 2010, Legg Mason announced a plan to streamline its business model to drive increased profitability and growth that includes: 1) transitioning certain shared services to its investment affiliates which are closer to actual client relationships; and 2) sharing in affiliate revenue with its global distribution group. This plan involves headcount reductions in operations, technology, and other administrative areas, which may be partially offset by headcount increases at the affiliates, and will enable Legg Mason to eliminate a portion of its corporate office space that was primarily dedicated to operations and technology employees. Legg Mason expects the initiative to be substantially complete in fiscal 2012.
The company continues to expect these initiatives to result in annual cost savings of approximately $130.0–$150.0 million, contributing 6.0–8.0% in margin improvement by 4Q12. These expense savings consist of approximately $75.0 million in compensation and benefits cost reductions from eliminating positions in certain corporate shared services functions as a result of transitioning such functions to the affiliates, and charging affiliates for other centralized services that will continue to be provided to them without any corresponding adjustment in revenue sharing or other compensation arrangements; approximately $50.0 million in non-compensation costs from eliminating and streamlining activities in corporate and distribution business units, including savings associated with consolidating office space; and approximately $15.0 million from global distribution group sharing in affiliate revenues from retail assets under management without any corresponding adjustment in revenue sharing or other compensation arrangements.
The initiative involves approximately $125.0 million to $135.0 million in transition-related costs that primarily include charges for employee termination benefits and incentives to retain employees during the transition period. The transition-related costs will also include charges for consolidating leased office space, early contract terminations, asset disposals and professional fees. During 1Q12, transition-related costs totaled $13.7 million, which, net of related cost savings, reduced operating income by approximately $5.0 million. Cumulative transition-related costs incurred through June 30, 2011 totaled $68.2 million. Substantially all of the remaining costs will be accrued during the remainder of fiscal 2012, with approximately $15.0 million expected to be accrued during 2Q12.
On June 30, 2011, Legg Mason concluded a significant phase of business streamlining initiative, which included the substantial completion of the transition of shared services to affiliates. Additionally, on July 1, 2011, the company completed second major reduction-in-force, which resulted in the largest reduction in headcount under the streamlining initiative. Due to the completion of these activities, in fiscal 2Q12 management expects to have achieved total estimated transition-related savings of approximately $25.0 million. Further, it anticipates the amount of total quarterly savings to increase to approximately $35.0 million in 4Q12.
Outlook: Firms believe Legg Mason will continue to experience outflows until the company delivers more consistent relative fund performance. Furthermore, with the company streamlining the relationship with its affiliates, the near-term impact should be higher expenses in 2H11-12. While the company expects the streamlining process to positively affect margin, they believe there is some uncertainty about how the affiliate businesses will be able to fit the additional costs into their respective budgets.
Assets under Management (AUM)
AUM decreased to $662.5 billion as of June 30, 2011 from $677.6 billion as of March 31, 2011, primarily driven by dispositions of $19.4 billion and client outflows of $3.7 billion, which more than offset market appreciation. AUM was up 3.0% from $645.4 billion as of June 30, 2010.
• Equity outflows were $5.8 billion, while fixed income and liquidity inflows were $0.1 billion and $2.0 billion, respectively, for the quarter ended on June 30, 2011.
• The dispositions of $19.4 billion include $18.1 billion of liquidity AUM transferred to Morgan Stanley Smith Barney and the divestiture of Barrett Associates of $1.3 billion.
• As of June 30, 2011, fixed income represented 55.0% of AUM, while equity represented 27.0% and liquidity represented 18.0%.
• By client domicile, 64.0% of AUM was in the Americas division and 36.0% was in the International division.
• Average AUM during the quarter was $670.8 billion compared with $673.5 billion in 4Q11 and $668.3 billion in 1Q11.
Business Developments in 1Q12
Product
• Legg Mason raised $599.0 million for the ClearBridge Energy MLP Opportunity Fund Inc., a closed-end fund which seeks to invest primarily in master limited partnerships in the energy sector.
• Western Asset was named Best Long-Term Manager 2010 by the Korea Investment Corporation in its inaugural KIC External Fund Manager Award. As the sole winner of this year's award, Western Asset was selected among a pool of both fixed-income and equity managers for its exceptional performance, consistency and dedicated client service over a three-year period.
• Legg Mason has so far generated $135.0 million into a new Royce Smaller Companies Fund that was added to the cross-border UCITS range in May.
Performance
On June 30, 2011:
• Of Legg Mason’s long-term U.S. mutual fund assets, 56.0% beat their Lipper category averages for the 1-year period; 70.0% for the 3-year period; 71.0% for the 5-year period and 70.0% for the 10-year period.
• Of Legg Mason’s long-term U.S. mutual fund assets, 53.0% were rated 4- or 5-star by Morningstar, including 82.0% of Royce’s fund assets and 51.0% of Western’s fund assets.
• Seven of 8 funds of the Western Asset institutional fund family outperformed their benchmarks for the one-year period; 6 out of 8 outperformed their benchmarks for the three-year period; 4 out of 7 outperformed for the five-year period and 4 out of 5 funds outperformed for the ten-year period.
• Nine out of 25 funds managed by Royce outperformed their benchmarks for the one-year period; 14 out of 22 for the three-year period; 14 out of 17 outperformed for the five-year period and all 11 outperformed for the ten-year period.
• None of the funds managed by Legg Mason Capital Management outperformed their benchmarks for the 1-year period, 2 out of 5 funds outperformed for the 3-year period and none outperformed for the 5- and 10-year periods.
• Five of the 11 funds managed by ClearBridge Advisors outperformed their benchmarks in the 1-year period; 4 out of 11 funds outperformed for the 3-year period, 6 out of 11 for the 5-year period and 4 out of 11 outperformed for the 10-year period.
Dividend
On July 28, 2011, the Board of Directors declared a quarterly cash dividend on its common stock in the amount of $0.08 per share. The dividend is payable on October 24, 2011 to shareholders of record as of October 6, 2011.
On April 11, 2011, Legg Mason paid a quarterly cash dividend on its common stock in the amount of $0.06 per share to shareholders of record as of March 10, 2011.
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