Company Quick10K Filing
Quick10K
Legg Mason
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.87 85 $2,810
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-K 2018-03-31 Annual: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-03-31 Annual: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-03-31 Annual: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-K 2015-03-31 Annual: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-K 2014-03-31 Annual: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-02-12 Regulation FD
8-K 2019-02-04
8-K 2018-10-24
8-K 2018-07-31 Shareholder Vote
8-K 2018-07-25
8-K 2018-06-12 Amend Bylaw, Exhibits
8-K 2018-04-25
8-K 2018-02-21 Amend Bylaw, Exhibits
8-K 2018-01-24
8-K 2018-01-09 Regulation FD
SENEA Seneca Foods 236
INAP Internap 126
VOXX VOXX 108
SVVC Firsthand Technology Value Fund 86
OGEN Oragenics 25
SGYP Synergy Pharmaceuticals 0
VSTR Valuesetters 0
ABLP Alliancebernstein 0
GLDW World Gold Trust 0
GLNS Golden Star Resource 0
LM 2018-12-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
EX-31.1 lm_exhibit311x12312018.htm
EX-31.2 lm_exhibit312x12312018.htm
EX-32.1 lm_exhibit321x12312018.htm
EX-32.2 lm_exhibit322x12312018.htm

Legg Mason Earnings 2018-12-31

LM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 lm_10qx12312018.htm 10-Q Document

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, 2018
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: 001-08529
imageleggmasona08.jpg
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 every Interactive Data File required to be submitted 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 such files). 
Yes
X
 
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
 
No
X

As of January 31, 2019, there were 85,540,068 shares of the registrant's common stock outstanding.



TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1.        Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
 
December 31, 2018
 
March 31, 2018
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
835,168

 
$
736,130

Cash and cash equivalents of consolidated investment vehicles
 
3,528

 
2,800

Restricted cash
 
22,336

 
30,428

Receivables:
 


 
 
Investment advisory and related fees
 
432,607

 
475,594

Other
 
61,396

 
77,024

Investment securities
 
331,588

 
399,370

Investment securities of consolidated investment vehicles
 
142,337

 
140,133

Other
 
76,185

 
65,010

Other current assets of consolidated investment vehicles
 
5,873

 
1,893

Total Current Assets
 
1,911,018

 
1,928,382

Fixed assets, net
 
150,230

 
148,406

Intangible assets, net
 
3,389,799

 
3,797,659

Goodwill
 
1,881,470

 
1,932,355

Deferred income taxes
 
189,867

 
202,068

Other
 
149,563

 
134,407

Other assets of consolidated investment vehicles
 
10,668

 
9,257

TOTAL ASSETS
 
$
7,682,615

 
$
8,152,534

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
LIABILITIES
 
 

 
 

Current Liabilities
 
 

 
 

Accrued compensation
 
$
522,363

 
$
476,061

Accounts payable and accrued expenses
 
203,881

 
175,583

Short-term borrowings
 

 
125,500

Current portion of long-term debt
 
250,636

 

Other
 
93,050

 
204,264

Other current liabilities of consolidated investment vehicles
 
11,351

 
634

Total Current Liabilities
 
1,081,281

 
982,042

Deferred compensation
 
81,957

 
92,422

Deferred income taxes
 
99,544

 
139,787

Other (including unfunded pension benefit obligation of $28,227 and $34,940, respectively)
 
119,069

 
132,042

Long-term debt, net
 
1,971,131

 
2,221,810

TOTAL LIABILITIES
 
3,352,982

 
3,568,103

Commitments and Contingencies (Note 7)
 
 
 
 
REDEEMABLE NONCONTROLLING INTERESTS
 
676,950

 
732,295

STOCKHOLDERS' EQUITY
 
 

 
 
Common stock, par value $0.10; authorized 500,000,000 shares; issued 85,533,667 shares for December 31, 2018 and 84,606,408 shares for March 31, 2018
 
8,553

 
8,461

Additional paid-in capital
 
2,028,586

 
1,976,364

Employee stock trust
 
(21,383
)
 
(21,996
)
Deferred compensation employee stock trust
 
21,383

 
21,996

Retained earnings
 
1,723,817

 
1,894,762

Accumulated other comprehensive loss, net
 
(135,767
)
 
(55,182
)
Total stockholders' equity attributable to Legg Mason, Inc.
 
3,625,189

 
3,824,405

Nonredeemable noncontrolling interest
 
27,494

 
27,731

TOTAL STOCKHOLDERS' EQUITY
 
3,652,683

 
3,852,136

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
7,682,615

 
$
8,152,534

See Notes to Consolidated Financial Statements

3




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,
 
 
2018
 
2017
 
2018
 
2017
OPERATING REVENUES
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
Separate accounts
 
$
256,657

 
$
255,696

 
$
778,119

 
$
758,870

Funds
 
361,173

 
395,370

 
1,128,660

 
1,170,633

Performance fees
 
12,619

 
58,926

 
68,529

 
181,284

Distribution and service fees
 
72,185

 
81,463

 
230,449

 
241,037

Other
 
1,688

 
1,635

 
4,897

 
3,446

Total Operating Revenues
 
704,322

 
793,090

 
2,210,654

 
2,355,270

OPERATING EXPENSES
 
 
 
 
 
 
 
 
Compensation and benefits
 
316,876

 
362,071

 
1,043,329

 
1,143,329

Distribution and servicing
 
108,842

 
124,254

 
339,959

 
370,237

Communications and technology
 
56,664

 
54,239

 
170,893

 
155,841

Occupancy
 
24,077

 
24,982

 
76,333

 
74,561

Amortization of intangible assets
 
6,089

 
6,071

 
18,371

 
18,492

Impairment of intangible assets
 
365,200

 
195,000

 
365,200

 
229,000

Contingent consideration fair value adjustments
 

 
739

 
571

 
(15,811
)
Other
 
63,001

 
53,067

 
171,021

 
155,330

Total Operating Expenses
 
940,749


820,423

 
2,185,677

 
2,130,979

OPERATING INCOME (LOSS)
 
(236,427
)
 
(27,333
)
 
24,977

 
224,291

NON-OPERATING INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest income
 
3,126

 
1,827

 
7,992

 
4,867

Interest expense
 
(28,770
)
 
(29,088
)
 
(88,547
)
 
(87,431
)
Other income (expense), net
 
(7,042
)
 
5,519

 
6,837

 
24,196

Non-operating income of consolidated investment vehicles, net
 
2,369

 
8,225

 
1,954

 
11,316

Total Non-Operating Income (Expense)
 
(30,317
)
 
(13,517
)
 
(71,764
)
 
(47,052
)
INCOME (LOSS) BEFORE INCOME TAX PROVISION
 
(266,744
)
 
(40,850
)
 
(46,787
)
 
177,239

Income tax provision (benefit)
 
(60,354
)
 
(209,396
)
 
165

 
(142,468
)
NET INCOME (LOSS)
 
(206,390
)
 
168,546

 
(46,952
)
 
319,707

Less: Net income attributable to noncontrolling interests
 
10,498

 
19,324

 
31,043


43,901

NET INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
 
$
(216,888
)
 
$
149,222

 
$
(77,995
)
 
$
275,806

 
 
 
 
 
 
 
 
 
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO LEGG MASON, INC. STOCKHOLDERS:
 
 
 
 
 
 
 
 
Basic
 
$
(2.55
)
 
$
1.59

 
$
(0.95
)
 
$
2.87

Diluted
 
(2.55
)
 
1.58

 
(0.95
)
 
2.86

See Notes to Consolidated Financial Statements

4


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,
 
 
2018
 
2017
 
2018
 
2017
NET INCOME (LOSS)
 
$
(206,390
)
 
$
168,546

 
$
(46,952
)
 
$
319,707

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(14,012
)
 
190

 
(82,032
)
 
32,303

Changes in defined benefit pension plan
 
354

 
123

 
1,447

 
363

Total other comprehensive income (loss)
 
(13,658
)

313


(80,585
)
 
32,666

COMPREHENSIVE INCOME (LOSS)
 
(220,048
)
 
168,859

 
(127,537
)
 
352,373

Less: Comprehensive income attributable to noncontrolling interests
 
11,425

 
19,634

 
36,052

 
42,401

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
 
$
(231,473
)
 
$
149,225

 
$
(163,589
)
 
$
309,972

See Notes to Consolidated Financial Statements

5



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
 
 
Nine Months Ended December 31,
 
 
2018
 
2017
STOCKHOLDERS' EQUITY ATTRIBUTABLE TO LEGG MASON, INC.
 
 
 
 
COMMON STOCK
 
 
 
 
Beginning balance
 
$
8,461

 
$
9,573

Stock options exercised
 
19

 
37

Deferred compensation employee stock trust
 
1

 
1

Stock-based compensation
 
112

 
94

Employee tax withholdings by settlement of net share transactions
 
(40
)
 
(35
)
Shares repurchased and retired
 

 
(1,221
)
Ending balance
 
8,553

 
8,449

ADDITIONAL PAID-IN CAPITAL
 
 
 
 

Beginning balance
 
1,976,365

 
2,385,726

Stock options exercised
 
5,814

 
10,593

Deferred compensation employee stock trust
 
468

 
419

Stock-based compensation
 
49,195

 
54,334

Employee tax withholdings by settlement of net share transactions
 
(15,507
)
 
(13,039
)
Shares repurchased and retired
 

 
(477,918
)
Redeemable noncontrolling interest reclassification for affiliate management equity plans and affiliate noncontrolling interest
 
12,251

 
(94
)
Ending balance
 
2,028,586

 
1,960,021

EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
(21,996
)
 
(24,057
)
Shares issued to plans
 
(469
)
 
(420
)
Distributions
 
1,082

 
2,617

Ending balance
 
(21,383
)
 
(21,860
)
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
21,996

 
24,057

Shares issued to plans
 
469

 
420

Distributions
 
(1,082
)
 
(2,617
)
Ending balance
 
21,383

 
21,860

RETAINED EARNINGS
 
 
 
 

Beginning balance
 
1,894,762

 
1,694,859

Net income (loss) attributable to Legg Mason, Inc.
 
(77,995
)
 
275,806

Dividends declared
 
(90,345
)
 
(80,442
)
Reclassification to noncontrolling interest for net increase in estimated redemption value of affiliate management equity plans and affiliate noncontrolling interests
 
(14,868
)
 
(3,071
)
Adoption of new revenue recognition guidance
 
12,263

 

Adoption of new stock-based compensation guidance
 

 
24,327

Ending balance
 
1,723,817

 
1,911,479

ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
 
 
 
 

Beginning balance
 
(55,182
)
 
(106,784
)
Changes in defined benefit pension plan
 
1,447

 
363

Foreign currency translation adjustment
 
(82,032
)
 
32,303

Ending balance
 
(135,767
)
 
(74,118
)
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO LEGG MASON, INC.
 
3,625,189


3,805,831

NONREDEEMABLE NONCONTROLLING INTEREST
 
 
 
 
Beginning balance
 
27,731

 
27,798

Net income attributable to noncontrolling interests
 
6,583

 
6,387

Distributions
 
(6,820
)
 
(6,524
)
Ending balance
 
27,494

 
27,661

TOTAL STOCKHOLDERS’ EQUITY
 
$
3,652,683

 
$
3,833,492

See Notes to Consolidated Financial Statements

6


LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
 
Nine Months Ended December 31,
 
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net Income (Loss)
 
$
(46,952
)
 
$
319,707

Adjustments to reconcile Net Income (Loss) to net cash provided by operations:
 
 
 
 

Impairments of intangible assets
 
365,200

 
229,000

Tax expense (benefit) for new Tax Law
 
2,164

(213,675
)
Depreciation and amortization
 
54,031

 
54,551

Accretion and amortization of securities discounts and premiums, net
 
1,591

 
2,255

Stock-based compensation
 
49,975

 
55,002

Net unrealized losses (gains) on investments
 
40,446

 
(21,841
)
Net gains and earnings on investments
 
(36,495
)
 
(2,874
)
Net gains of consolidated investment vehicles
 
(1,954
)
 
(11,316
)
Deferred income taxes
 
(19,634
)
 
46,650

Contingent consideration fair value adjustments
 
571

 
(15,811
)
Payment of contingent consideration
 

 
(739
)
Other
 
286

 
(196
)
Decrease (increase) in assets:
 
 
 
 

Investment advisory and related fees receivable
 
38,170

 
(47,603
)
Net sales of trading and other investments
 
20,375

 
38,622

Other receivables
 
(16,555
)
 
5,471

Other assets
 
(6,282
)
 
2,199

Assets of consolidated investment vehicles
 
(751
)
 
(50,974
)
Increase (decrease) in liabilities:
 
 
 
 

Accrued compensation
 
51,796

 
(97,419
)
Deferred compensation
 
(10,464
)
 
10,633

Accounts payable and accrued expenses
 
31,130

 
15,278

Other liabilities
 
(83,376
)
 
(24,853
)
Other liabilities of consolidated investment vehicles
 
10,717

 
(249
)
CASH PROVIDED BY OPERATING ACTIVITIES
 
$
443,989


$
291,818











7


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

 
 
Nine Months Ended December 31,
 
 
2018
 
2017
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Payments for fixed assets
 
$
(38,062
)
 
$
(24,540
)
Business investments
 

 
(2,950
)
Contingent payment from prior sale of businesses
 
923

 
2,561

Returns of capital and proceeds from sales and maturities of investments
 
10,211

 
12,565

CASH USED IN INVESTING ACTIVITIES
 
(26,928
)
 
(12,364
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends paid
 
(84,630
)
 
(76,000
)
Distributions to affiliate noncontrolling interests
 
(32,358
)
 
(43,477
)
Settlement of affiliate noncontrolling interest put
 
(16,528
)
 

Payment of contingent consideration
 
(4,319
)
 
(2,503
)
Net (redemptions) subscriptions attributable to noncontrolling interests
 
(36,328
)

44,708

Employee tax withholdings by settlement of net share transactions
 
(15,547
)
 
(13,074
)
Issuances of common stock for stock-based compensation
 
6,029

 
11,050

Increase (decrease) in short-term borrowings
 
(125,500
)
 
225,500

Repurchases of common stock
 

 
(479,139
)
CASH USED IN FINANCING ACTIVITIES
 
(309,181
)
 
(332,935
)
EFFECT OF EXCHANGE RATES
 
(16,470
)
 
5,641

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
91,410

 
(47,840
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
 
 
 
 
BEGINNING OF PERIOD
 
773,765

 
754,339

END OF PERIOD
 
$
865,175

 
$
706,499

Supplemental Disclosures
 
 
 
 
Cash paid for:
 
 
 
 

Income taxes, net of refunds of $251 and $9,471, respectively
 
$
30,542

 
$
16,770

Interest
 
69,748

 
67,482

 
 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
 
Cash and cash equivalents
 
$
835,168

 
$
680,322

Restricted cash:
 
 
 
 
Corporate restricted cash
 
22,336

 
17,605

Cash and cash equivalents of consolidated investment vehicles
 
3,528

 
4,325

Affiliate employee benefit trust cash included in Other non-current assets
 
4,143

 
4,247

Total cash, cash equivalents and restricted cash per consolidated statements of cash flows
 
$
865,175

 
$
706,499

See Notes to Consolidated Financial Statements

8


LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts or unless otherwise noted)
December 31, 2018
(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 (“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 Form 10-Q. The Company has condensed or omitted these disclosures. Certain amounts in prior period financial statements have been reclassified to conform to new guidance and/or the current period presentation, including the classification and presentation of restricted cash and certain distributions received from equity method investees in the Consolidated Statements of Cash Flows, as discussed below.

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
Legg Mason sponsors and manages various types of investment products. 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, except those for which total return swap arrangements have been executed, for which additional risks are discussed below. Legg Mason did not sell or transfer investment assets to any of these investment products. In accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment products, some of which are designated and reported as consolidated investment vehicles ("CIVs"). The consolidation of sponsored investment products, 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 products is recorded in Non-Operating Income (Expense) and reflected in Net income (loss) attributable to noncontrolling interests. The financial information of certain consolidated sponsored investment products is included in the Company's consolidated financial statements on a three-month lag based upon the availability of the investment product's financial information.

Certain of the investment products Legg Mason sponsors and manages 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. Legg Mason may fund the initial cash investment in certain VRE investment products 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 in Note 3, the products with “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. As of December 31, 2018, March 31, 2018, and December 31, 2017, no consolidated VREs were designated as CIVs.


9


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. Legg Mason must consolidate any VIE for which it is deemed to be the primary beneficiary.

Under consolidation accounting guidance, if limited partners or similar equity holders in a sponsored investment vehicle structured as a limited partnership or a similar entity do not have either substantive investor rights to replace the manager (kick-out rights) or substantive participation rights over the general partner, the entities are VIEs. As a sponsor and manager of an investment vehicle, Legg Mason may be deemed a decision maker under the accounting guidance. If the fees paid to a decision maker are market-based, such fees are not considered variable interests in a VIE. Market-based fees are those fees which are both customary and commensurate with the level of effort required for the services provided. Additionally, if employee interests in a sponsored investment vehicle are not made to circumvent the consolidation guidance and are not financed by the sponsor, they are not included in the variable interests assessment, and are not included in the primary beneficiary determination.

A decision maker is deemed to be a primary beneficiary of a VIE if it has the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or receive benefits from variable interests that could be significant to the VIE. In determining whether it is the primary beneficiary of a VIE, Legg Mason considers both qualitative and quantitative factors such as the voting rights of the equity holders, guarantees, and implied relationships. If a fee paid to a decision maker is not market-based, it will be considered in the primary beneficiary determination.

As of December 31, 2018, March 31, 2018 and December 31, 2017, Legg Mason concluded it was the primary beneficiary of certain VIEs, which were consolidated and designated as CIVs, because it held significant financial interests in the funds. In addition, Legg Mason has entered into various total return swap arrangements with financial intermediaries with respect to certain Legg Mason sponsored exchange traded funds ("ETFs"). Under the terms of the total return swaps, Legg Mason absorbs all of the related gains and losses on the underlying ETF investments of these financial intermediaries, and therefore has variable interests in the related funds and, if significant, may be deemed the primary beneficiary. As of December 31, 2018, March 31, 2018, and December 31, 2017, Legg Mason consolidated the ETFs with significant open total return swap arrangements, which were designated as CIVs. See Note 13 for additional information.

Revenue Recognition
Effective April 1, 2018, Legg Mason adopted updated accounting guidance on revenue recognition which provides a single, comprehensive revenue recognition model for all contracts with customers, improves comparability and removes inconsistencies in revenue recognition practices across entities, industries, jurisdictions, and capital markets. The guidance also specifies the accounting for certain costs to obtain or fulfill a contract with a customer and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The adoption of the updated guidance did not result in significant changes to Legg Mason’s prior revenue recognition practices, except for the timing of the recognition of certain performance and incentive fees, the capitalization and amortization of certain sales commissions for separate accounts, and the net presentation of certain fund expense reimbursements which were previously presented on a gross basis. Each of these changes to Legg Mason’s previous revenue recognition practices is further discussed below.
Legg Mason adopted the updated guidance on a modified retrospective basis for any contracts that were not complete as of April 1, 2018 and recognized the cumulative effect of initially applying the updated guidance for certain sales commissions as an adjustment to the opening balance of retained earnings totaling $12,263. There was no cumulative effect for performance and incentive fees or fund expense reimbursement accounting. The comparative information for prior periods has not been restated and continues to be reported under the prior accounting guidance in effect for those periods. A summary of the cumulative-effect changes to Legg Mason’s Consolidated Balance Sheet as of April 1, 2018 is included below.
Legg Mason primarily earns revenues by providing investment management services and distribution and shareholder services for its customers, which are generally investment funds or the underlying investors in separately managed accounts. As further discussed below, revenues are calculated based on the value of the investments under management and are recognized when obligations under the terms of contracts with customers are satisfied, which is generally over time as the services are rendered.

Legg Mason also has responsibility for the valuation of assets under management ("AUM"), substantially all of which is based on observable market data from independent pricing services, fund accounting agents, custodians or brokers.


10


Investment Advisory Fees
Legg Mason earns investment advisory fees on assets in separately managed accounts, investment funds, and other products managed for Legg Mason's clients. Generally, investment management services are a single performance obligation, as they include a series of distinct services that are substantially the same and are transferred to the customer over time using the same time-based measure of progress. Investment management services are satisfied over time as the customer simultaneously receives and consumes the benefits as the advisory services are performed.

Separate Account and Funds Advisory Fees
Separate account and funds advisory fees are variable consideration which is primarily based on predetermined percentages of the daily, monthly or quarterly average market value of the AUM, as defined in the investment management agreements. The average market value of AUM is subject to change based on fluctuations and volatility in financial markets, and as such, separate account and funds advisory fees are constrained until the end of the month or quarter when the actual average market value of the AUM is known and a significant revenue reversal is no longer probable. Therefore, separate account and funds advisory fees are included in the transaction price and allocated to the investment management services performance obligation at the end of each monthly or quarterly reporting period, as specified in the investment management contract. Payment for services under investment management contracts is due once the variable consideration is allocated to the transaction price, and generally within 30 days. Recognition of separate account and funds advisory fee revenue under the updated guidance is consistent with Legg Mason’s prior revenue recognition process.

Performance and Incentive Fees
Performance and incentive fees are variable consideration that may be earned on certain investment management contracts for exceeding performance benchmarks on a relative or absolute basis or for exceeding contractual return thresholds. Performance and incentive fees are estimated at the inception of a contract; however, a range of outcomes is possible due to factors outside the control of the investment manager, particularly market conditions. Performance and incentive fees are therefore excluded from the transaction price until it becomes probable that a significant reversal in the cumulative amount of revenue recognized will not occur. A portion of Legg Mason's performance and incentive fees are earned based on 12-month performance periods that end in differing quarters during the year, with a portion also based on quarterly performance periods. Legg Mason also earns performance and incentive fees on alternative and certain other products that lock at the earlier of the investor’s termination date or the liquidation of the fund or contract, in multiple-year intervals, or upon the occurrence of specific events, such as the sale of assets. For certain of these products, performance and incentive fees may be recognized as revenue earlier under the updated guidance than under prior revenue recognition practices, which deferred recognition until all contingencies were resolved. Any such performance fees recognized prior to the resolution of all contingencies are recorded as a contract asset in Other current assets or Other non-current assets in the Consolidated Balance Sheet, depending on the length of time until the contingencies are resolved.

Fee Waivers and Fund Expense Reimbursements
Legg Mason may waive certain fees for investors or may reimburse its investment funds for certain operating expenses when such expenses exceed a certain threshold. Fee waivers continue to be reported as a reduction in advisory fee revenue under the updated guidance. Under prior accounting guidance, fund expense reimbursements in excess of recognized revenue were recorded as Other expense in the Consolidated Statements of Income (Loss). Under the updated accounting guidance, these fund expense reimbursements that exceed the recognized revenue represent a change in the transaction price and are therefore reported as a reduction of Investment advisory fees - Funds in the Consolidated Statements of Income (Loss).

Distribution and Service Fees Revenue and Expense
Distribution and service fees represent fees earned from funds to reimburse the distributor for the costs of marketing and selling fund shares and are generally determined as a percentage of client assets. Reported amounts also include fees earned from providing client or shareholder servicing, including record keeping or administrative services to proprietary funds, and non-discretionary advisory services for assets under advisement. Distribution and service fees earned on company-sponsored investment funds are reported as revenue. Distribution services and marketing services are considered a single performance obligation as the success of selling the underlying shares is highly dependent upon the sales and marketing efforts. Ongoing shareholder servicing is a separate performance obligation as these services are not highly interrelated and interdependent on the sale of the shares. Fees earned related to distribution and shareholder serving are considered variable consideration because they are calculated based on the average market value of the fund. The average market value of the fund is subject to change based on fluctuations and volatility in financial markets, and as such, distribution and shareholder service fees are generally constrained until the end of the month or quarter when the actual market value of the fund is known and the related revenue is no longer subject to a significant reversal. Therefore, distribution and service fees are generally included in the

11


transaction price at the end of each monthly or quarterly reporting period and are allocated to the two performance obligations based on the amount specified in each agreement. While distribution services are largely satisfied at the inception of an investment, the ultimate amounts of revenue are subject to the variable consideration constraint. Accordingly, a portion of distribution and service revenue will be recognized in periods subsequent to the satisfaction of the performance obligation.

Certain fund share classes only charge for distribution services at the inception of the investment based on a fixed percentage of the share price. This fixed price is allocated to the performance obligation, which is substantially satisfied at the time of the initial investment.

Recognition of distribution and service fee revenue under the updated guidance is consistent with Legg Mason’s prior revenue recognition process.

When Legg Mason enters into arrangements with broker-dealers or other third parties to sell or market proprietary fund shares, distribution and servicing expense is accrued for the amounts owed to third parties, including finders' fees and referral fees paid to unaffiliated broker-dealers or introducing parties and is recorded as Distribution and servicing expense in the Consolidated Statements of Income (Loss). Distribution and servicing expense also includes payments to third parties for certain shareholder administrative services and sub-advisory fees paid to unaffiliated asset managers.

Contract Costs and Deferred Sales Commissions
Legg Mason incurs ordinary costs to obtain investment management contracts and for services provided to customers in accordance with investment management agreements. These costs include commissions paid to wholesalers, employees and third-party broker dealers and administration and placement fees. Depending on the type of services provided, these fees may be paid at the time the contract is obtained or on an ongoing basis. Under the updated guidance, costs to obtain a contract should be capitalized if the costs are incremental and would not have been incurred if the contract had not been obtained, and costs to fulfill the contract should be capitalized if they relate directly to a contract, the costs will generate or enhance resources of the entity that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered. Consistent with prior accounting procedures, fund launch costs, including organizational and underwriting costs, placement fees and commissions paid to employees, wholesalers and broker-dealers for sales of fund shares are expensed as incurred, as these costs would be incurred regardless of the investor. However, commissions paid to employees and retail wholesalers in connection with the sale of retail separate accounts are considered incremental, as these fees relate to obtaining a specific contract, are calculated based on specified rates and are recoverable through the management fees earned and are therefore capitalized under the updated accounting guidance. Such commissions were expensed as incurred under Legg Mason’s prior accounting practices. Capitalized sales commissions are amortized based on the transfer of services to which the assets relate, which averages four years. Legg Mason recorded a cumulative-effect adjustment on the Consolidated Balance Sheet as of April 1, 2018, as referenced below.

Commissions paid by Legg Mason to financial intermediaries in connection with sales of certain classes of company-sponsored mutual funds are generally capitalized as deferred sales commissions. The asset is amortized over periods not exceeding six years, which represent the periods during which commissions are generally recovered from distribution and service fee revenues and from contingent deferred sales charges ("CDSC") received from shareholders of those funds upon redemption of their shares. CDSC consideration is generally variable and is based on the timing of when investors redeem their investment. Therefore, the variable consideration is included in the transaction price once the investors redeem their shares and is satisfied at a point in time. CDSC receipts are recorded as distribution and service fee revenue when received and a reduction of the unamortized balance of deferred sales commissions, with a corresponding expense.

Management periodically tests the deferred sales commission asset for impairment by reviewing the changes in value of the related shares, the relevant market conditions and other events and circumstances that may indicate an impairment in value has occurred. If these factors indicate an impairment in value, management compares the carrying value to the estimated undiscounted cash flows expected to be generated by the asset over its remaining life. If management determines that the deferred sales commission asset is not fully recoverable, the asset will be deemed impaired and a loss will be recorded in the amount by which the recorded amount of the asset exceeds its estimated fair value. For the nine months ended December 31, 2018 and 2017, no impairment charges were recorded. Deferred sales commissions, included in Other non-current assets in the Consolidated Balance Sheets, were $1,380 and $4,047 at December 31, 2018 and March 31, 2018, respectively.

Under the updated accounting guidance, Legg Mason has elected to expense sales commissions related to certain fund share classes with amortization periods of one year or less as incurred. Legg Mason recorded a cumulative-effect adjustment on

12


the Consolidated Balance Sheet as of April 1, 2018, as referenced below, to reflect the expense associated with such commissions, which had previously been capitalized under Legg Mason's prior accounting practices.

Impact of the Adoption of Updated Revenue Recognition Accounting Guidance
The cumulative effect of the changes made to Legg Mason’s Consolidated Balance Sheet as of April 1, 2018 for the adoption of the updated revenue recognition accounting guidance were as follows:
 
 
 
 
Adjustment due to Adoption of Updated Accounting Guidance
 
 
Consolidated Balance Sheet
 
Balance as of March 31, 2018
 
Capitalized Sales Commissions
 
Deferred Sales Commissions
 
Total
 
Balance as of April 1, 2018
Assets
 
 
 
 
 
 
 
 
 
 
Other, current
 
$
65,010

 
$
9,615

 
$

 
$
9,615

 
$
74,625

Deferred income taxes
 
202,068

 
(1,148
)
 

 
(1,148
)
 
200,920

Other, non-current
 
134,407

 
10,316

 
(2,576
)
 
7,740

 
142,147

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred income taxes
 
$
139,787

 
$
3,944

 
$

 
$
3,944

 
$
143,731

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Retained Earnings
 
$
1,894,762

 
$
14,839

 
$
(2,576
)
 
$
12,263

 
$
1,907,025


The impact of the adoption of the updated revenue recognition accounting guidance on the Consolidated Balance Sheet and the Consolidated Statements of Income (Loss) was as follows:
 
 
December 31, 2018
 
 
 
 
Impact of the Adoption of Updated Accounting Guidance
 
 
Consolidated Balance Sheet
 
Balances Excluding the Adoption of Updated Accounting Guidance
 
Capitalized Sales Commissions
 
Deferred Sales Commissions
 
Total
 
As Reported
Assets
 
 
 
 
 
 
 
 
 
 
Other, current
 
$
68,136

 
$
8,049

 
$

 
$
8,049

 
$
76,185

Deferred income taxes
 
191,015

 
(1,148
)
 

 
(1,148
)
 
189,867

Other, non-current
 
140,740

 
10,429

 
(1,606
)
 
8,823

 
149,563

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred income taxes
 
$
95,600

 
$
3,944

 
$

 
$
3,944

 
$
99,544

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Retained Earnings
 
$
1,712,037

 
$
13,386

 
$
(1,606
)
 
$
11,780

 
$
1,723,817



13



Consolidated Statements of Income (Loss)
 
 
Three months ended December 31, 2018
 
 
 
 
Impact of the Adoption of Updated Accounting Guidance
 
 
 
 
Balances Excluding the Adoption of Updated Accounting Guidance
 
Capitalized Sales Commissions
 
Deferred Sales Commissions
 
Fund Expense Reimbursements
 
Total
 
As Reported
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
 
 
 
 
Funds
 
$
362,500

 
$

 
$

 
$
(1,327
)
 
$
(1,327
)
 
$
361,173

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
$
316,330

 
$
546

 
$

 
$

 
$
546

 
$
316,876

Distribution and servicing
 
108,926

 

 
(84
)
 

 
(84
)
 
108,842

Other
 
64,328

 

 

 
(1,327
)
 
(1,327
)
 
63,001


 
 
Nine months ended December 31, 2018
 
 
 
 
Impact of the Adoption of Updated Accounting Guidance
 
 
 
 
Balances Excluding the Adoption of Updated Accounting Guidance
 
Capitalized Sales Commissions
 
Deferred Sales Commissions
 
Fund Expense Reimbursements
 
Total
 
As Reported
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
 
 
 
 
Funds
 
$
1,132,311

 
$

 
$

 
$
(3,651
)
 
$
(3,651
)
 
$
1,128,660

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
$
1,041,876

 
$
1,453

 
$

 
$

 
$
1,453

 
$
1,043,329

Distribution and servicing
 
340,929

 

 
(970
)
 

 
(970
)
 
339,959

Other
 
174,672

 

 

 
(3,651
)
 
(3,651
)
 
171,021


Cash Flow Reporting    
Effective April 1, 2018, Legg Mason adopted updated accounting guidance on a retrospective basis which clarifies the classification and presentation of restricted cash, investment activity and other items in the statements of cash flows. The updated guidance requires entities to include restricted cash and restricted cash equivalents in the cash and cash equivalents balances on the consolidated statements of cash flows and to disclose a reconciliation between the balances on the consolidated statements of cash flows and the consolidated balance sheets. Legg Mason includes cash of consolidated investment vehicles and affiliate benefit trust cash in restricted cash. Legg Mason’s restricted cash balances at December 31, 2018 and 2017, were $30,007 and $26,177, respectively. The updated guidance also clarifies how distributions from equity method investees should be classified based on either the cumulative earnings or the nature of distribution approach. Legg Mason elected to apply the nature of distribution approach when classifying distributions received from equity method investees. As a result of adopting this aspect of the updated guidance, $4,928 was reclassified from Cash Provided by Operating Activities to Cash Used in Investing Activities in the Consolidated Statement of Cash Flows for the nine months ended December 31, 2017.


14


Financial Instruments
Effective April 1, 2018, Legg Mason adopted accounting guidance on a prospective basis which requires equity investments to be measured at fair value, with changes recognized in earnings. This guidance does not apply to investments accounted for under the equity method of accounting or underlying investments of consolidated products. The updated guidance also provides entities the option to elect to measure equity investments that do not have readily determinable fair values and do not qualify for the net asset value ("NAV") practical expedient at "adjusted cost". Under this adjusted cost method, investments are initially recorded at cost, and subsequently adjusted (increased or decreased) when there is an observable transaction involving the same investment, or similar investment from the same issuer. Adjusted cost investment carrying values are also adjusted for impairments, if any. Legg Mason has elected to measure certain investments under the adjusted cost approach. The adoption of this updated guidance did not have a material impact on Legg Mason’s consolidated financial statements.

Income Taxes
 
During the three months ended December 31, 2018, discrete tax expenses of approximately $14,100 related to uncertain federal, state and local tax positions (including those related to recent legislative changes), along with approximately $700 of other discrete tax expenses, reduced the effective income tax rate by 5.5 percentage points for the three months ended December 31, 2018. Also, during the three months ended September 30, 2018 and June 30, 2018, tax benefits totaling $2,800 related to the completion of a prior year tax audit along with $1,100 related to other discrete expenses were recognized. Together, the net impact of these discrete tax items reduced the effective income tax rate by 27.4 percentage points for the nine months ended December 31, 2018.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Law") became enacted law. The Tax Law is complex, materially changes the U.S. corporate income tax rate from 35% to 21% and includes various changes which impact Legg Mason. The reduction in the U.S. corporate tax rate resulted in a one-time, non-cash provisional tax benefit of $220,935, recognized in the three months ended December 31, 2017, due to the re-measurement of certain existing deferred tax assets and liabilities at the new income tax rate. In addition, a non-cash tax charge of $7,260 was provisionally provided in the three months ended December 31, 2017, for the effects on unremitted foreign earnings and other aspects of the Tax Law. Legg Mason’s re-measurement of its deferred tax assets and liabilities has been completed and no further adjustments are necessary. Further, Legg Mason's accounting for the tax on unremitted foreign earnings has also been completed and an adjustment in the amount of $2,164 additional expense, which is included in the discrete tax expense above, was recorded during the three months ended December 31, 2018. The Company has made an accounting policy election to record tax expense on global intangible low-taxed income inclusions as a period cost, if applicable, rather than recognizing deferred taxes for related basis differences expected to reverse.
While the EnTrustPermal intangible asset impairments discussed below potentially impact the effective income tax rate, such impact was not material for either the three or nine months ended December 31, 2018.  The impairment charges recognized in the three months ended December 31, 2017, resulted in income tax expense of $3,900, which reduced the effective tax rate by 9.5 percentage points and the effective tax benefit by 2.2 percentage points for the three and nine months ended December 31, 2017, respectively.

During the three months ended December 31, 2017, changes in apportionment on state deferred tax liabilities and changes in state law resulted in additional net tax expense of $3,255 and reduced the effective tax rate by 8.0 percentage points and the effective tax benefit by 1.8 percentage points for the three and nine months ended December 31, 2017, respectively.
Recent Accounting Developments
In August 2018, the Financial Accounting Standards Board ("FASB") updated the guidance to clarify accounting for implementation costs incurred for a cloud computing arrangement that is a service contract. The update conforms the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the accounting guidance that provides for capitalization of costs incurred to develop or obtain internal-use-software.  The updated guidance is effective for Legg Mason in fiscal 2021, unless adopted earlier.  Legg Mason is evaluating its adoption.

In August 2018, the FASB also updated the guidance for fair value measurements. The updated guidance modifies disclosure requirements based on the revised FASB Conceptual Framework for Financial Reporting finalized in August 2018 to improve effectiveness of financial statement disclosures. The updated guidance will be effective in fiscal 2021, unless adopted earlier. Legg Mason is evaluating its adoption.


15


In August 2017, the FASB updated the guidance on accounting for derivative hedging.  The updated guidance more closely aligns the results of cash flow and fair value hedging designations with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements.  The new guidance also simplifies the application of hedge accounting.  The updated guidance is effective for Legg Mason in fiscal 2020, unless adopted earlier.  Legg Mason uses accounting hedge designation from time-to-time and would only potentially be impacted if derivative transactions were designated for hedging.

In January 2017, the FASB updated the guidance to simplify the test for goodwill impairment.  The updated guidance still requires entities to perform annual goodwill impairment tests by comparing the fair value of a reporting unit with its related carrying amount, but it eliminates the requirement to potentially calculate the implied fair value of goodwill to determine the amount of impairment, if any.  Under the new guidance, an entity should recognize an impairment charge if the reporting unit's carrying amount exceeds the reporting unit’s fair value, in the amount of such excess.  The guidance will be effective in fiscal 2020, unless adopted earlier. Legg Mason is evaluating its adoption.

In February 2016, the FASB updated the guidance on accounting for leases.  The updated guidance requires that a lessee shall recognize the assets and liabilities that arise from lease transactions.  A lessee will recognize a right-of-use asset to use the underlying asset and a liability representing the lease payments.  The updated guidance also requires an evaluation at the inception of a service or other contract, to determine whether the contract is or contains a lease.  In July 2018, the FASB further updated the lease guidance to make certain targeted improvements, including allowing for the guidance to be adopted on a modified retrospective basis.  The guidance will be effective for Legg Mason in fiscal 2020.  Legg Mason expects to recognize right of use assets and liabilities upon its adoption of the new standard and is continuing to evaluate the full impact of adoption, including transition method and practical expedient elections.

  

16


3. 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 and NAV, 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, 2018
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Investments measured at NAV
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Cash equivalents:(1)
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
429,025

 
$

 
$

 
$

 
$
429,025

Time deposits and other
 

 
30,233

 

 

 
30,233

Total cash equivalents
 
429,025


30,233

 

 

 
459,258

Investments of proprietary fund products and other investments:(2)
 
 
 
 
 
 
 
 
 
 

Seed capital investments
 
75,069

 
22,116

 
1,266

 
1,629

 
100,080

Other(3)
 
21,193

 
2,140

 

 

 
23,333

Investments relating to long-term incentive compensation plans(4)
 
197,368

 

 

 

 
197,368

Equity method investments relating to long-term incentive compensation plans(5)
 

 

 

 
10,807

 
10,807

Total current investments(6)
 
293,630


24,256

 
1,266

 
12,436

 
331,588

Equity method investments in partnerships and LLCs:(5)(7)
 
 
 
 
 
 
 
 
 
 
Seed capital investments(6)
 

 

 
932

 
11,546

 
12,478

Seed capital investments in real estate funds
 

 

 
40,122

 

 
40,122

Other
 

 

 
1,821

 
10,772

 
12,593

Adjusted cost investments:(7)
 
 
 
 
 
 
 
 
 
 
Investments related to long-term incentive compensation plans
 

 

 
7,521

 

 
7,521

Other
 

 
74

 
4,451

 

 
4,525

Derivative assets(7)(8)
 
3,866

 

 

 

 
3,866

Total
 
$
726,521


$
54,563

 
$
56,113

 
$
34,754

 
$
871,951

Liabilities:
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities(9)
 
$

 
$

 
$
(1,900
)
 
$

 
$
(1,900
)
Derivative liabilities(8)
 
(9,326
)
 

 

 

 
(9,326
)
Total
 
$
(9,326
)
 
$

 
$
(1,900
)
 
$

 
$
(11,226
)

17


 
 
As of March 31, 2018
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Investments measured at NAV
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Cash equivalents:(1)
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
350,142

 
$

 
$

 
$

 
$
350,142

Time deposits and other
 

 
13,863

 

 

 
13,863

Total cash equivalents
 
350,142

 
13,863

 

 

 
364,005

Trading investments of proprietary fund products and other trading investments:(2)
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
131,715

 
37,598

 
1,242

 
3,225

 
173,780

Other(3)
 
29,051

 
2,565

 

 

 
31,616

Trading investments relating to long-term incentive compensation plans(4)
 
184,639

 

 

 
99

 
184,738

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

 

 

 
9,236

 
9,236

Total current investments(6)
 
345,405


40,163

 
1,242

 
12,560

 
399,370

Equity method investments in partnerships and LLCs:(5)(7)
 
 
 
 
 
 
 
 
 
 
Seed capital investments(6)
 

 

 
962

 
14,360

 
15,322

Seed capital investments in real estate funds
 

 

 
32,763

 

 
32,763

Other
 

 

 

 
11,915

 
11,915

Investments in partnerships and LLCs:(7)
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 

 

 

 
2,549

 
2,549

Investments related to long-term incentive compensation plans
 

 

 
6,458

 

 
6,458

Other
 

 
78

 
380

 

 
458

Derivative assets(7)(8)
 
4,904

 

 

 

 
4,904

Other investments(7)
 

 

 
113

 

 
113

Total
 
$
700,451

 
$
54,104

 
$
41,918

 
$
41,384

 
$
837,857

Liabilities:
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities(9)
 
$

 
$

 
$
(5,607
)
 
$

 
$
(5,607
)
Derivative liabilities(8)
 
(6,446
)
 

 

 

 
(6,446
)
Total
 
$
(6,446
)
 
$

 
$
(5,607
)
 
$

 
$
(12,053
)
(1)
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds 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)
Current investments of proprietary fund products and other investments consist of approximately 80% and 20% equity and debt securities, respectively, as of December 31, 2018, and approximately 81% and 19% equity and debt securities, respectively, as of March 31, 2018.
(3)
Includes $10,264 and $15,452 in noncontrolling interests associated with consolidated seed investment products as of December 31, 2018 and March 31, 2018, respectively.
(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)
Certain of Legg Mason's equity method investments are investment companies that record underlying investments at fair value. Therefore, the fair value of these investments 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. Other equity method investments not measured at fair value on a recurring basis of $27,929 and $27,660 as of December 31, 2018 and March 31, 2018, respectively, are excluded from the tables above.
(6)
Excludes $71,564 and $43,854 of seed capital as of December 31, 2018 and March 31, 2018, respectively, which is related to Legg Mason's investments in CIVs. See Note 13.
(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)
See Note 7.


18


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 $224,244 and $268,268 as of December 31, 2018 and March 31, 2018, respectively, which are substantially comprised of investments in 52 funds and 59 funds, respectively, that are individually greater than $1,000, and together comprise over 90% of the total seed capital investments at each period end.

The net realized and unrealized gains (losses) for investment securities classified as trading were $(34,793) and $9,382 for the three months ended December 31, 2018 and 2017, respectively, and $(25,246) and $32,184 for the nine months ended December 31, 2018 and 2017, respectively.
The net unrealized gains (losses) relating to trading investments still held as of the reporting dates were $(38,741) and $5,975 for the three months ended December 31, 2018 and 2017, respectively, and $(51,313) and $16,115 for the nine months ended December 31, 2018 and 2017, respectively.
The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) are presented in the tables below:
 
 
Balance as of September 30,
 2018
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Balance as of December 31, 2018
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of seed capital investments in proprietary fund products
 
$
1,394

 
$

 
$

 
$

 
$

 
$
(128
)
 
$
1,266

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
1,161

 

 

 

 

 
(229
)
 
932

Seed capital investments in real estate funds
 
35,859

 
5,516

 

 
(1,880
)
 

 
627

 
40,122

Other
 
1,840

 

 

 
(19
)
 

 

 
1,821

Adjusted cost investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments related to long-term incentive compensation plans
 
6,458

 
1,063

 

 

 

 

 
7,521

Other
 
4,448

 

 

 

 

 
3

 
4,451

 
 
$
51,160

 
6,579

 

 
(1,899
)
 

 
273

 
$
56,113

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
(1,900
)
 
n/a

 
n/a

 
$

 
n/a

 
$

 
$
(1,900
)



19


 
 
Balance as of September 30,
 2017
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Balance as of December 31, 2017
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity method investments relating to long-term incentive compensation plans
 
$
1,393

 
$
11

 
$

 
$
(11
)
 
$

 
$
38

 
$
1,431

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
851

 

 

 

 

 
40

 
891

Seed capital investments in real estate funds
 
27,382

 
868

 

 
(1,139
)
 

 
726

 
27,837

Investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments related to long-term incentive compensation plans
 
9,367

 

 

 

 

 

 
9,367

Other
 
485

 

 

 
(105
)
 

 

 
380

Other investments
 
114

 

 

 

 

 
(2
)
 
112

 
 
$
39,592

 
$
879

 
$

 
$
(1,255
)
 
$

 
$
802

 
$
40,018

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
(21,162
)
 
$
(1,900
)
 
n/a

 
$
3,242

 
n/a

 
$
(881
)
 
$
(20,701
)


20


 
 
Balance as of March 31, 2018
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Balance as of December 31, 2018
Assets: