Eaton Vance Corp. Report for the Three Month Period Ended January 31, 2017

BOSTON, Feb. 22, 2017 /PRNewswire/ -- Eaton Vance Corp. (NYSE: EV) today reported earnings per diluted share of $0.53 for the first quarter of fiscal 2017, an increase of 6 percent from $0.50 per diluted share in the first quarter of fiscal 2016 and a decrease of 7 percent from $0.57 per diluted share in the fourth quarter of fiscal 2016.

The Company had adjusted earnings per diluted share⁽¹⁾ of $0.53 in the first quarter of fiscal 2017, an increase of 4 percent from $0.51 of adjusted earnings per diluted share in the first quarter of fiscal 2016 and down 7 percent from $0.57 of adjusted earnings per diluted share in the fourth quarter of fiscal 2016. Adjusted earnings per diluted share differed from GAAP earnings per diluted share by $0.01 in the first quarter of fiscal 2016 due to an increase in the estimated redemption value of non-controlling interests in affiliates redeemable at other than fair value.

Gains (losses) and other investment income related to seed capital investments were negligible in the first quarter of fiscal 2017, and contributed $0.01 to earnings per diluted share in both the first quarter and fourth quarter of fiscal 2016.

Consolidated net inflows of $7.8 billion in the first quarter of fiscal 2017 are the third-highest in Company history and 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 $5.3 billion and 7 percent annualized internal growth in the first quarter of fiscal 2016 and net inflows of $4.8 billion and annualized internal growth of 6 percent in the fourth quarter of fiscal 2016.  On the basis of net contribution to management fee revenue, the Company's annualized organic growth rate was 7 percent in the first quarter of fiscal 2017, -1 percent in the first quarter of fiscal 2016 and 2 percent in the fourth quarter of fiscal 2016.    

Consolidated assets under management were $363.7 billion on January 31, 2017, an increase of 20 percent from $302.6 billion of consolidated managed assets on January 31, 2016 and up 8 percent from $336.4 billion of consolidated managed assets on October 31, 2016. Consolidated assets under management as of January 31, 2017 include $9.9 billion of new managed assets gained in the acquisition of the business assets of Calvert Investment Management, Inc. (Calvert Investments) on December 30, 2016 as detailed below.  The year-over-year increase in consolidated assets under management also reflects net inflows of $21.8 billion and market price appreciation of $29.5 billion over the twelve-month period. The sequential quarterly increase in consolidated assets under management reflects the managed assets gained in the Calvert Investments transaction and net inflows of $7.8 billion and market price appreciation of $9.6 billion in the first quarter of fiscal 2017.

"Strong net flows, positive market movements and successful completion of the Calvert Investments transaction combined to provide Eaton Vance with significant growth in managed assets and management fee revenue rate over the course of the first quarter of fiscal 2017," said Thomas E. Faust Jr., Chairman and Chief Executive Officer. "These set the stage for a favorable trend of earnings growth over the balance of the fiscal year."

Average consolidated assets under management were $344.9 billion in the first quarter of fiscal 2017, up 12 percent from $308.3 billion in the first quarter of fiscal 2016 and up 2 percent from $338.9 billion in the fourth quarter of fiscal 2016.

Excluding performance-based fees, annualized effective management fee rates on consolidated assets under management averaged 35.3 basis points in the first quarter of fiscal 2017, down 4 percent from 36.7 basis points in the first quarter of fiscal 2016 and up 1 percent from 35.1 basis points in the fourth quarter of fiscal 2016.  Changes in average management fee rates for the compared periods primarily reflect variations in the Company's mix of business.

On December 30, 2016, the Company announced completion of the purchase of substantially all of the business assets of Calvert Investments by Calvert Research and Management, a newly formed Eaton Vance subsidiary.  At acquisition, Calvert Investments had $11.9 billion of managed assets.  Of this, $2.1 billion was previously included in the Company's consolidated managed assets because Atlanta Capital Management Company, LLC (Atlanta Capital), a consolidated subsidiary of the Company, is sub-adviser to one of the Calvert-sponsored mutual funds (Calvert Funds).  The Calvert Funds are one of the largest and most diversified families of responsibly invested mutual funds, seeking to invest in companies that provide positive leadership in their business operations and overall activities that are material to improving societal outcomes.

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 $44.9 billion in the first quarter of fiscal 2017, up 47 percent from $30.6 billion in the first quarter of fiscal 2016 and up 28 percent from $35.1 billion in the fourth quarter of fiscal 2016.

Consolidated redemptions and other outflows were $37.1 billion in the first quarter of fiscal 2017, up 47 percent from $25.3 billion in the first quarter of fiscal 2016 and up 23 percent from $30.2 billion in the fourth quarter of fiscal 2016.

As of January 31, 2017, the Company's 49 percent-owned affiliate Hexavest, Inc. (Hexavest) managed $14.5 billion of client assets, up 11 percent from $13.1 billion of managed assets on January 31, 2016 and up 5 percent from $13.7 billion of managed assets on October 31, 2016. Hexavest net flows were negligible in the first quarter of fiscal 2017. Hexavest had net outflows of $0.2 billion in the first quarter of fiscal 2016 and $0.1 billion in the fourth quarter of fiscal 2016.  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.

First Quarter Fiscal 2017 vs. First Quarter Fiscal 2016

In the first quarter of fiscal 2017, revenue increased 7 percent to $355.0 million from $331.6 million in the first quarter of fiscal 2016. Management fees were up 8 percent, as a 12 percent increase in average consolidated assets under management more than offset lower average effective management fee rates. Performance fees contributed $0.2 million in the first quarter of fiscal 2017 and were negligible in the first quarter of fiscal 2016.  Distribution and service fee revenues collectively were up 3 percent, reflecting higher managed assets in fund share classes that are subject to these fees.

Operating expenses increased 8 percent to $249.5 million in the first quarter of fiscal 2017 from $230.9 million in the first quarter of fiscal 2016. Increases in compensation, distribution expense, service fee expense and fund-related expenses were partially offset by decreases in amortization of deferred sales commissions and other operating expenses. The increase in compensation expense reflects $6.3 million of higher sales-based incentive accruals driven by strong product sales, higher salaries and benefits associated with an increase in headcount, higher operating income-based accruals and higher stock-based compensation. The increase in distribution expense reflects higher marketing and promotion costs. The increase in service fee expense relates to higher average assets under management in fund share classes subject to service fee payments. The increase in fund-related expenses reflects higher sub-advisory fees paid and increased fund expenses borne by the Company on funds for which it earns an all-in fee.  The decrease in amortization of deferred sales commissions primarily reflects lower Class B and Class C commission amortization, partially offset by increased private fund commission amortization.  Other operating expenses were down 1 percent.

NextShares-related expenses increased 12 percent to $2.0 million in the first quarter of fiscal 2017 from $1.8 million in the first quarter of fiscal 2016.

Operating income was up 5 percent to $105.4 million in the first quarter of fiscal 2017 from $100.6 million in the first quarter of fiscal 2016.  Operating margin declined to 29.7 percent in the first quarter of fiscal 2017 from 30.3 percent in the first quarter of fiscal 2016. 

Non-operating expense totaled $6.9 million in the first quarter of fiscal 2017 versus $3.1 million in the first quarter of fiscal 2016. The year-over-year change primarily reflects a $2.3 million decrease in gains (losses) and other investment income related to the Company's investments in sponsored products and a $1.4 million decline in income contribution from the Company's consolidated Collateralized Loan Obligation (CLO) entity, which was deconsolidated at the end of fiscal 2016.

The Company's effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 37.3 percent in the first quarter of fiscal 2017 and 37.8 percent in the first quarter of fiscal 2016. 

Equity in net income of affiliates was $2.5 million in both the first quarter of fiscal 2017 and the first quarter of fiscal 2016.  Equity in net income of affiliates in the first quarter of fiscal 2017 included $2.4 million from the Company's investment in Hexavest and $0.1 million from a private equity partnership. Equity in net income of affiliates in the first quarter of fiscal 2016 was entirely attributable to the Company's investment in Hexavest.

As detailed in Attachment 3, net income attributable to non-controlling and other beneficial interests was $3.6 million in the first quarter of fiscal 2017 and $4.8 million in the first quarter of fiscal 2016.

First Quarter Fiscal 2017 vs. Fourth Quarter Fiscal 2016

In the first quarter of fiscal 2017, revenue increased 2 percent to $355.0 million from $346.8 million in the fourth quarter of fiscal 2016.  Management fees were up 2 percent, reflecting a 2 percent increase in average consolidated assets under management and modestly higher average effective management fee rates, partially offset by reduced performance fees.  Performance fees contributed $0.2 million in the first quarter of fiscal 2017 and $0.6 million in the fourth quarter of fiscal 2016.  Distribution and service fee revenues increased 4 percent on a sequential quarterly basis.

Operating expenses increased 6 percent in the first quarter of fiscal 2017 from the fourth quarter of fiscal 2016, reflecting increases in compensation, distribution expense, service fee expense, amortization of deferred sales commissions and fund-related expenses. The increase in compensation reflects $6.3 million of higher sales-based incentive accruals driven by strong sales in the quarter, higher salaries and benefits related to an increase in headcount, higher operating income-based accruals and higher stock-based compensation.  The increase in distribution expense primarily reflects increases in marketing and promotion expenses. 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 increases in Class C and private fund commission amortization, partially offset by lower Class B commission amortization. The increase in fund-related expenses primarily reflects increases in sub-advisory fees paid and higher expenses borne by the Company on funds for which it earns an all-in fee. Other operating expenses were substantially unchanged.

NextShares-related expenses were $2.0 million in both the first quarter of fiscal 2017 and the fourth quarter of fiscal 2016.

Operating income was down 5 percent to $105.4 million in the first quarter of fiscal 2017 from $111.2 million in the fourth quarter of fiscal 2016.  Operating margin decreased to 29.7 percent in the first quarter of fiscal 2017 from 32.0 percent in the fourth quarter of fiscal 2016.

Non-operating expense totaled $6.9 million in the first quarter of fiscal 2017 versus $6.5 million of non-operating expense in the fourth quarter of fiscal 2016, reflecting a $2.2 million decline in gains (losses) and other investment income related to the Company's investments in sponsored products offset by a $1.8 million decrease in other expense of the Company's consolidated CLO entity, which was deconsolidated at the end of fiscal 2016.

The Company's effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 37.3 percent in the first quarter of fiscal 2017 and 39.0 percent in the fourth quarter of fiscal 2016.

Equity in net income of affiliates was $2.5 million in the first quarter of fiscal 2017 and in the fourth quarter of fiscal 2016.  In the first quarter of fiscal 2017, $2.4 million of equity in net income of affiliates was from the Company's investment in Hexavest and $0.1 million from a private equity partnership. In the fourth quarter of fiscal 2016, $2.3 million of equity in net income of affiliates was from the Company's investment in Hexavest and $0.2 million from a private equity partnership.

As detailed in Attachment 3, net income attributable to non-controlling and other beneficial interests was $3.6 million in the first quarter of fiscal 2017 and $1.2 million in the fourth quarter of fiscal 2016.

Balance Sheet Information

Cash and cash equivalents totaled $320.1 million on January 31, 2017, with no outstanding borrowings against the Company's $300 million credit facility. Included within investments is $68.9 million of holdings of short-term debt securities with maturities between 90 days and one year. During the first quarter of fiscal 2017, the Company used $53.6 million to repurchase and retire approximately 1.3 million shares of its Non-Voting Common Stock under its repurchase authorizations. Of the current 8.0 million share repurchase authorization, approximately 7.6 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 months ended January 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. First 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 dialing 800-585-8367 (domestic) or 416-521-4642 (international) or by accessing Eaton Vance's website, eatonvance.com. To listen to the replay, enter the conference ID number 60505601 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 U.S. generally accepted accounting principles ("GAAP"), management believes that certain non-GAAP financial measures, while not a substitute for GAAP financial measures, may be effective indicators of the Company's performance over time. Adjusted net income and adjusted earnings per diluted share reflect the add back of adjustments 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"), closed-end fund structuring fees, payments to end closed-end fund service and additional compensation arrangements, and other items management deems non-recurring or non-operating, such as special dividends, costs associated with retiring debt and tax settlements. We provide disclosures of adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share to reflect the fact that our management and 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. See reconciliation provided in Attachment 2 for more information on adjusting items.