Eaton Vance Corp. Report for the Three and Nine Month Periods Ended July 31, 2017

BOSTON, Aug. 23, 2017 /PRNewswire/ -- Eaton Vance Corp. EV today reported earnings per diluted share of $0.58 for the third quarter of fiscal 2017, an increase of 5 percent from $0.55 of earnings per diluted share in the third quarter of fiscal 2016 and a decrease of 6 percent from $0.62 of earnings per diluted share in the second quarter of fiscal 2017.

The Company reported adjusted earnings per diluted share⁽¹⁾ of $0.62 for the third quarter of fiscal 2017, up 11 percent from $0.56 of adjusted earnings per diluted share in the third quarter of fiscal 2016 and unchanged from $0.62 of adjusted earnings per diluted share in the second quarter of fiscal 2017. In the third quarter of fiscal 2017, adjusted earnings differed from earnings under U.S. generally accepted accounting principles (GAAP) by $0.03 per diluted share to reflect $5.4 million of costs associated with retiring $250 million aggregate principal amount of 6.5 percent senior notes due October 2, 2017 (2017 Senior Notes) and $0.01 per diluted share to reflect $3.5 million of structuring fees paid in connection with the $210 million initial public offering of Eaton Vance Floating-Rate 2022 Target Term Trust (2022 Target Term Trust) during the quarter. In the third quarter of fiscal 2016, adjusted earnings differed from GAAP earnings by $0.01 per diluted share to reflect $2.3 million of structuring fees paid in connection with the $215 million initial public offering of Eaton Vance High Income 2021 Target Term Trust (2021 Target Term Trust) in the third fiscal quarter of last year. Adjusted earnings per diluted share matched GAAP earnings per diluted share in the second quarter of fiscal 2017.

Net gains and other investment income related to seed capital investments contributed $0.01 to earnings per diluted share in the third quarters of fiscal 2017 and fiscal 2016, and $0.02 to earnings per diluted share in the second quarter of fiscal 2017. Costs in connection with employee terminations, special fund expense reimbursements and one-time legal and investigative costs as described below reduced earnings by $0.03 per diluted share in the third quarter of fiscal 2017 and $0.01 per diluted share in the third quarter of fiscal 2016. Such costs were negligible in the second quarter of fiscal 2017.

Consolidated net inflows of $9.1 billion in the third quarter of fiscal 2017 represent a 9 percent annualized internal growth rate in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management). This compares to net inflows of $7.1 billion and 9 percent annualized internal growth in the third quarter of fiscal 2016 and net inflows of $12.9 billion and annualized internal growth of 14 percent in the second quarter of fiscal 2017. On the basis of net contribution to management fee revenue, the Company's annualized internal revenue growth rate was 6 percent in the third quarter of fiscal 2017, 3 percent in the third quarter of fiscal 2016 and 7 percent in the second quarter of fiscal 2017.

Consolidated assets under management were $405.6 billion on July 31, 2017, up 21 percent from $334.4 billion of consolidated managed assets on July 31, 2016 and up 5 percent from $387.0 billion of consolidated managed assets on April 30, 2017. The year-over-year increase in consolidated assets under management reflects net inflows of $34.7 billion and market price appreciation of $26.5 billion over the twelve-month period and $9.9 billion of new managed assets gained in the acquisition of the business assets of Calvert Investment Management, Inc. (Calvert) on December 30, 2016. The sequential quarterly increase in consolidated assets under management reflects net inflows of $9.1 billion and market price appreciation of $9.4 billion in the third quarter of fiscal 2017.

"In the third quarter of fiscal 2017, Eaton Vance continued to deliver robust internal growth in managed assets and management fee revenue," said Thomas E. Faust Jr., Chairman and Chief Executive Officer. "Our distinctive capabilities and strong performance across leading strategies are important differentiators for the Company in what remains a challenging marketplace for investment management."

Average consolidated assets under management were $395.2 billion in the third quarter of fiscal 2017, up 22 percent from $324.9 billion in the third quarter of fiscal 2016 and up 5 percent from $376.5 billion in the second quarter of fiscal 2017.

Excluding performance-based fees, annualized management fee rates on consolidated assets under management averaged 34.2 basis points in the third quarter of fiscal 2017, down 4 percent from 35.6 basis points in the third quarter of fiscal 2016 and down 1 percent from 34.7 basis points in the second quarter of fiscal 2017. Changes in average management fee rates for the compared periods primarily reflect the ongoing shift in the Company's mix of business toward lower-fee mandates.

Attachments 5 and 6 summarize the Company's asset flows by investment mandate and investment vehicle. Attachments 7, 8 and 9 summarize the Company's ending consolidated assets under management by investment mandate, investment vehicle and investment affiliate. Attachment 10 shows the Company's average annualized effective management fee rates by investment mandate.

As shown in Attachments 5 and 6, consolidated sales and other inflows were $39.8 billion in the third quarter of fiscal 2017, up 26 percent from $31.6 billion in the third quarter of fiscal 2016 and up 2 percent from $39.0 billion in the second quarter of fiscal 2017.

Consolidated redemptions and other outflows were $30.7 billion in the third quarter of fiscal 2017, up 25 percent from $24.5 billion in the third quarter of fiscal 2016 and up 18 percent from $26.0 billion in the second quarter of fiscal 2017.

As of July 31, 2017, the Company's 49 percent-owned affiliate Hexavest, Inc. (Hexavest) managed $15.4 billion of client assets, up 7 percent from $14.4 billion of managed assets on July 31, 2016 and $14.5 billion of managed assets on April 30, 2017. Hexavest had net inflows of $0.4 billion in the third quarter of fiscal 2017 versus net outflows of $0.5 billion and $0.6 billion in the third quarter of fiscal 2016 and second quarter of fiscal 2017, respectively. Attachment 11 summarizes assets under management and asset flow information for Hexavest. Other than Eaton Vance-sponsored funds for which Hexavest is adviser or sub-adviser, the managed assets and flows of Hexavest are not included in Eaton Vance consolidated totals.

 

 

Third Quarter Fiscal 2017 vs. Third Quarter Fiscal 2016

In the third quarter of fiscal 2017, revenue increased 15 percent to $393.7 million from $341.2 million in the third quarter of fiscal 2016. Management fees were up 16 percent, as a 22 percent increase in average consolidated assets under management more than offset lower average management fee rates. Performance fees contributed $0.5 million in the third quarter of fiscal 2017 compared to $2.7 million in the third quarter of fiscal 2016. Distribution and service fee revenues collectively were up 10 percent, reflecting higher managed assets in fund share classes that are subject to these fees.

Operating expenses increased 16 percent to $272.7 million in the third quarter of fiscal 2017 from $234.4 million in the third quarter of fiscal 2016, reflecting increases in compensation, distribution expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses. The increase in compensation expense reflects higher sales-based and operating income-based bonus accruals, compensation expenses in connection with the Calvert acquisition, higher salaries and benefits associated with other increases in headcount, higher stock-based compensation and compensation costs associated with employee terminations. Costs associated with employee terminations totaled $3.0 million in the third quarter of fiscal 2017 versus $1.9 million in the third quarter of fiscal 2016. The increase in distribution expense reflects an increase in closed-end fund structuring fees and higher marketing and promotion costs, primarily driven by higher average managed assets and the acquisition of the Calvert business. The increase in service fee expense reflects higher average assets under management in fund share classes subject to service fee payments. The increase in amortization of deferred sales commissions reflects higher commission amortization for private funds, partially offset by lower Class B and Class C commission amortization. The increase in fund-related expenses reflects higher fund subsidies attributable primarily to the addition of the Calvert funds, higher sub-advisory fees paid, an increase in fund expenses borne by the Company on funds for which it earns an all-in fee and $1.9 million in one-time reimbursements made to the funds by the Company in the quarter. The increase in other operating expenses reflects higher travel, communications, information technology, professional services, facilities, charitable and other corporate expenses. Other operating expenses in the third quarter of fiscal 2017 included approximately $0.6 million of one-time legal and consulting costs in conjunction with investigating the fraudulent activities of a former Eaton Vance Management trader, as publically disclosed in April 2017.

Expenses in connection with the Company's NextShares™ exchange-traded managed funds (NextShares) initiative were $2.0 million in the third quarter of fiscal 2017 and $2.4 million in the third quarter of fiscal 2016.

Operating income was up 13 percent to $121.0 million in the third quarter of fiscal 2017 from $106.7 million in the third quarter of fiscal 2016. Operating margin decreased to 30.7 percent in the third quarter of fiscal 2017 from 31.3 percent in the third quarter of fiscal 2016. Adjusting to remove the $3.5 million and $2.3 million of closed-end fund structuring fees paid during the third quarters of fiscal 2017 and fiscal 2016, respectively, operating income was up 14 percent and operating margins decreased to 31.6 percent in the third quarter of fiscal 2017 from 32.0 percent in the third quarter of fiscal 2016.

Non-operating expense totaled $6.0 million in the third quarter of fiscal 2017 versus $4.1 million in the third quarter of fiscal 2016. The year-over-year change primarily reflects $5.4 million of costs incurred in connection with retiring the Company's 2017 Senior Notes in the third quarter of fiscal 2017, partially offset by a $1.2 million decrease in interest expense and a $2.4 million increase in net gains and other investment income from the Company's investments in sponsored products. The decrease in interest expense primarily reflects the May 2017 retirement of $250 million in aggregate principal amount of the Company's 6.5 percent 2017 Senior Notes and the April 2017 issuance of $300 million in aggregate principal amount of 3.5 percent senior notes due April 6, 2027 (2027 Senior Notes).

The Company's effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 36.9 percent in the third quarter of fiscal 2017 and 38.8 percent in the third quarter of fiscal 2016.

Equity in net income of affiliates was $2.3 million and $3.0 million in the third quarters of fiscal 2017 and fiscal 2016, respectively, substantially all relating to the Company's investment in Hexavest.

As detailed in Attachment 3, net income attributable to non-controlling and other beneficial interests was $7.5 million in the third quarter of fiscal 2017 and $2.9 million in the third quarter of fiscal 2016.

Third Quarter Fiscal 2017 vs. Second Quarter Fiscal 2017

In the third quarter of fiscal 2017, revenue increased 5 percent to $393.7 million from $374.6 million in the second quarter of fiscal 2017. Management fees were up 6 percent, as a 5 percent increase in average consolidated assets under management and three more fee days in the quarter more than offset lower average management fee rates. Performance fees contributed $0.5 million in the third quarter of fiscal 2017 and were negligible in the second quarter of fiscal 2017. Distribution and service fee revenues collectively were up 1 percent sequentially, reflecting higher managed assets in fund share classes that are subject to these fees.

Operating expenses increased 6 percent to $272.7 million in the third quarter of fiscal 2017 from $256.7 million in the second quarter of fiscal 2017, reflecting increases in compensation, distribution expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses. The increase in compensation expense reflects three more payroll days in the third quarter, higher operating income-based bonus accruals, higher salaries associated with an increase in headcount, higher stock-based compensation and other compensation costs associated with employee terminations. Costs associated with employee terminations totaled $3.0 million in the third quarter of fiscal 2017 versus $0.2 in the preceding fiscal quarter. The increase in distribution expense reflects $3.5 million of structuring fees paid in connection with the July 2017 initial public offering of the 2022 Target Term Trust and higher marketing and promotion costs, primarily driven by the increase in average managed assets. The increase in service fee expense reflects higher average assets under management in fund share classes subject to service fee payments. The increase in amortization of deferred sales commissions reflects higher private fund commission amortization, partially offset by lower Class B and Class C commission amortization. The increase in fund-related expenses primarily reflects higher fund expenses borne by the Company on funds for which it earns an all-in fee and $1.9 million in one-time reimbursements made to the funds by the Company in the quarter. Other operating expenses in the third fiscal quarter included approximately $0.6 million of one-time legal and consulting costs in conjunction with investigating the fraudulent activities of a former Eaton Vance Management trader as previously disclosed.

NextShares-related expenses were $2.0 million in the third quarter of fiscal 2017 and $1.8 million in the second quarter of fiscal 2017.

Operating income was up 3 percent to $121.0 million in the third quarter of fiscal 2017 from $117.9 million in the second quarter of fiscal 2017. Operating margin decreased to 30.7 percent in the third quarter from 31.5 percent in the second quarter. Adjusting to remove the $3.5 million of closed-end fund structuring fees paid during the third quarter of fiscal 2017, operating income was up 6 percent from the second quarter of fiscal 2016 and adjusted operating margin in the current quarter was 31.6 percent.

Non-operating expense totaled $6.0 million in the third quarter of fiscal 2017 versus $1.2 million of non-operating income in the second quarter of fiscal 2017. The sequential change primarily reflects $5.4 million of costs incurred in connection with retiring the Company's 2017 Senior Notes in the third quarter of fiscal 2017 and a $3.8 million decrease in net gains and other investment income from the Company's investments in sponsored products, partially offset by a $1.9 million decrease in interest expense. Net gains and other investment income in the second quarter of fiscal 2017 included a $1.9 million gain recognized upon the release from escrow of payments received in connection with the sale of the Company's equity interest in Lloyd George Management (BVI) Ltd. in fiscal 2011. The decrease in interest expense primarily reflects the May retirement of the Company's 6.5 percent 2017 Senior Notes and the April issuance of the Company's 3.5 percent 2027 Senior Notes.

The Company's effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 36.9 percent in the third quarter of fiscal 2017 and 37.5 percent in the second quarter of fiscal 2017.

Equity in net income of affiliates was $2.3 million in the third quarter of fiscal 2017 and $3.1 million in the second quarter of fiscal 2017. In the third quarter of fiscal 2017, substantially all equity in net income of affiliates related to the Company's investment in Hexavest. Equity in net income of affiliates in the second quarter of fiscal 2017 included $3.0 million from the Company's investment in Hexavest and $0.1 million from the Company's investment in a private equity partnership.

As detailed in Attachment 3, net income attributable to non-controlling and other beneficial interests was $7.5 million in the third quarter of fiscal 2017 and $5.7 million in the second quarter of fiscal 2017.

Balance Sheet Information

Cash and cash equivalents totaled $550.2 million on July 31, 2017, with no outstanding borrowings against the Company's $300 million credit facility. Included within investments is $84.5 million of holdings of short-term debt securities with maturities between 90 days and one year. During the first nine months of fiscal 2017, the Company used $100.2 million to repurchase and retire approximately 2.3 million shares of its Non-Voting Common Stock under its repurchase authorizations. Of the current 8.0 million share repurchase authorization, approximately 6.6 million shares remain available.

Conference Call Information

Eaton Vance Corp. will host a conference call and webcast at 11:00 AM eastern time today to discuss the financial results for the three and nine months ended July 31, 2017. To participate in the conference call, please dial 866-521-4909 (domestic) or 647-427-2311 (international) and refer to "Eaton Vance Corp. Third Quarter Earnings." A webcast of the conference call can also be accessed via Eaton Vance's website, eatonvance.com.

A replay of the call will be available for one week by calling 800-585-8367 (domestic) or 416-621-4642 (international) or by accessing Eaton Vance's website, eatonvance.com. To listen to the replay, enter the conference ID number 69359423 when instructed.

About Eaton Vance Corp.

Eaton Vance is a leading global asset manager whose history dates to 1924. With offices in North America, Europe, Asia and Australia, Eaton Vance and its affiliates offer individuals and institutions a broad array of investment strategies and wealth management solutions. The Company's long record of providing exemplary service, timely innovation and attractive returns through a variety of market conditions has made Eaton Vance the investment manager of choice for many of today's most discerning investors. For more information about Eaton Vance, visit eatonvance.com.

Forward-Looking Statements

This news release may contain statements that are not historical facts, referred to as "forward-looking statements." The Company's actual future results may differ significantly from those stated in any forward-looking statements, depending on factors such as changes in securities or financial markets or general economic conditions, client sales and redemption activity, the continuation of investment advisory, administration, distribution and service contracts, and other risks discussed in the Company's filings with the Securities and Exchange Commission.

                                                 
⁽¹⁾Although the Company reports its financial results in accordance with GAAP, management believes that certain non-GAAP financial measures, specifically, adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, while not a substitute for GAAP financial measures, may be effective indicators of the Company's performance over time. In calculating these non-GAAP financial measures, net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share are adjusted to exclude items management deems non-operating or non-recurring in nature or otherwise outside the ordinary course of business. These adjustments may include the add back of adjustments made in connection with changes in the estimated redemption value of non-controlling interests in our affiliates redeemable at other than fair value (non-controlling interest value adjustments), and, when applicable, other items such as closed-end fund structuring fees, special dividends, costs associated with retiring debt and tax settlements. Management and our Board of Directors, as well as our outside investors, consider these adjusted numbers a measure of the Company's underlying operating performance. Management believes adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results, and may provide a better baseline for analyzing trends in our underlying business.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SOURCE Eaton Vance Corp.