Eaton Vance Corp. Report for the Three Month Period Ended January 31, 2020

Eaton Vance Corp. First Quarter Earnings Conference Call Webcast

Eaton Vance Corp. First Quarter Earnings Conference Call Presentation Slides

Press Release Tables

Summary of Results of Operations

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Net Income to EPS Reconciliation/ Operating Income to Adjusted Operating Income Reconciliation

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Net Income Attributable to Non-controlling Interests 

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Balance Sheet

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Asset Flows Table 1

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Asset Flows Table 2

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Asset Flows Table 3, 4 and 5

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Effective Fee Rates 

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Hexavest Table

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Contacts:
Laurie G. Hylton 617-672-8527
Eric Senay 617-672-6744

Eaton Vance Corp. Report for the Three Month Period Ended January 31, 2020

Boston, MA, February 26, 2020 – Eaton Vance Corp. (NYSE: EV) today reported earnings per diluted share of $0.91 for the first quarter of fiscal 2020, an increase of 21 percent from $0.75 of earnings per diluted share in the first quarter of fiscal 2019 and a decrease of 5 percent from $0.96 of earnings per diluted share in the fourth quarter of fiscal 2019.

The Company reported adjusted earnings per diluted share(1) of $0.86 for the first quarter of fiscal 2020, an increase of 18 percent from $0.73 of adjusted earnings per diluted share in the first quarter of fiscal 2019 and a decrease of 9 percent from $0.95 of adjusted earnings per diluted share in the fourth quarter of fiscal 2019. Earnings under U.S. generally accepted accounting principles (U.S. GAAP) exceeded adjusted earnings by $0.05 per diluted share in the first quarter of fiscal 2020, $0.02 per diluted share in the first quarter of fiscal 2019 and $0.01 per diluted share in the fourth quarter of fiscal 2019, reflecting the reversal of net excess tax benefits related to stock‐based compensation awards of $4.9 million, $2.9 million and $1.5 million, respectively.

On a combined basis, net gains and other investment income related to seed capital investments and other income and expense amounts related to consolidated collateralized loan obligation (CLO) entities contributed $0.03 to earnings per diluted share in the first quarter of fiscal 2020, reduced earnings by $0.02 per diluted share in the first quarter of fiscal 2019 and contributed $0.08 to earnings per diluted share in the fourth quarter of fiscal 2019.

Consolidated net inflows of $6.1 billion in the first quarter of fiscal 2020 represent 5 percent annualized internal growth in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management). This compares to net inflows of $1.5 billion and 1 percent annualized internal growth in managed assets in the first quarter of fiscal 2019 and net inflows of $9.8 billion and 8 percent annualized internal growth in managed assets in the fourth quarter of fiscal 2019. Excluding Parametric overlay services (formerly "exposure management”), the Company’s annualized internal growth in managed assets was 5 percent in the first quarter of fiscal 2020, 2 percent in the first quarter of fiscal 2019 and 3 percent in the fourth quarter of fiscal 2019.

The Company’s annualized internal management fee revenue growth (management fees attributable to consolidated inflows less management fees attributable to consolidated outflows, divided by beginning of period consolidated management fee revenue) was 5 percent in the first quarter of fiscal 2020, -4 percent in the first quarter of fiscal 2019 and 2 percent in the fourth quarter of fiscal 2019.

Consolidated assets under management were a record $518.2 billion on January 31, 2020, up 17 percent from $444.7 billion of consolidated managed assets on January 31, 2019 and up 4 percent from $497.4 billion of consolidated managed assets on October 31, 2019. The year-over-year increase in consolidated assets under management reflects net inflows of $28.6 billion and market price appreciation of $45.0 billion. The sequential quarterly increase in consolidated assets under management reflects net inflows of $6.1 billion and market price appreciation of $14.6 billion in the first quarter of fiscal 2020.

“Continuing strong net flows across equity, fixed income and Parametric custom portfolio mandates and much-improved floating-rate income and alternative category net flows combined to produce solid internal growth in management fee revenue for Eaton Vance in the first quarter of fiscal 2020,” said Thomas E. Faust Jr., Chairman and Chief Executive Officer. “Compared to asset management industry peers, our growth profile continues to stand apart.”

Average consolidated assets under management were $509.9 billion in the first quarter of fiscal 2020, up 17 percent from $437.4 billion in the first quarter of fiscal 2019 and up 4 percent from $488.9 billion in the fourth quarter of fiscal 2019.

As shown in Attachment 10, excluding performance-based fees, annualized management fee rates on consolidated assets under management averaged 30.8 basis points in the first quarter of fiscal 2020, down 4 percent from 32.0 basis points in the first quarter of fiscal 2019 and substantially unchanged from the fourth quarter of fiscal 2019. Changes in average annualized management fee rates for the compared periods primarily reflect shifts in the Company’s mix of business.

Attachments 5 and 6 summarize the Company’s consolidated assets under management and net flows by investment mandate and investment vehicle reporting categories. 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 management fee rates by investment mandate. Prior-period consolidated assets under management, net flows and average annualized management fee rates by investment mandate included in Attachments 5, 7 and 10 have been revised to reflect the reclassification of benchmark-based fixed income separate accounts from fixed income to Parametric custom portfolios. Prior-period consolidated assets under management by investment affiliate included in Attachment 9 have been revised to reflect the shift in management responsibilities for the Company’s systematically managed fixed income strategies from Eaton Vance Management to Parametric in the first quarter of fiscal 2020 and the adoption of a new policy to report the managed assets of investment portfolios overseen by multiple Eaton Vance affiliates based on the strategy’s primary identity. None of these reclassifications affected the Company’s overall consolidated assets under management, net flows or average annualized management fee rates for any of the reported periods.

As shown in Attachments 5 and 6, consolidated sales and other inflows were $46.3 billion in the first quarter of fiscal 2020, up 4 percent from $44.7 billion in the first quarter of fiscal 2019 and down 1 percent from $46.6 billion in the fourth quarter of fiscal 2019.

Consolidated redemptions and other outflows were $40.2 billion in the first quarter of fiscal 2020, down 7 percent from $43.2 billion in the first quarter of fiscal 2019 and up 9 percent from $36.8 billion in the fourth quarter of fiscal 2019.

As of January 31, 2020, the Company’s 49 percent-owned affiliate Hexavest Inc. (Hexavest) managed $13.0 billion of client assets, down 2 percent from $13.2 billion of managed assets on January 31, 2019 and down 3 percent from $13.4 billion of managed assets on October 31, 2019. Hexavest had net outflows of $0.5 billion in the first quarter of fiscal 2020, net outflows of $0.7 billion in the first quarter of fiscal 2019 and net outflows of $0.4 billion in the fourth quarter of fiscal 2019. Attachment 11 summarizes the assets under management and net flows of Hexavest. Other than Eaton Vance-sponsored funds for which Hexavest is the adviser or sub-adviser, the managed assets and flows of Hexavest are not included in our consolidated totals.

First Quarter Fiscal 2020 vs. First Quarter Fiscal 2019

In the first quarter of fiscal 2020, revenue increased 11 percent to $452.6 million from $406.4 million in the first quarter of fiscal 2019. Management fees were up 13 percent, as a 17 percent increase in average consolidated assets under management more than offset lower consolidated average management fee rates. Performance fees were $0.2 million in the first quarter of fiscal 2020 and $(0.3) million in the first quarter of fiscal 2019. Distribution and service fee revenues were collectively up 6 percent, reflecting higher managed assets in fund share classes that are subject to these fees.

Operating expenses increased 11 percent to $317.8 million in the first quarter of fiscal 2020 from $285.3 million in the first quarter of fiscal 2019, 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 reflects higher salaries and benefits associated with increases in headcount and higher operating income-based and investment performance-based bonus accruals, partially offset by lower sales-based incentive compensation. The increase in compensation also reflects higher stock-based compensation expense driven by accelerated vesting of restricted stock awards and accelerated recognition of employee stock option expense in connection with employee retirements in the first quarter of fiscal 2020. The increase in distribution expense primarily reflects higher marketing and promotion costs and an increase in up-front sales commission expense, partially offset by lower Class C distribution fee payments. The increase in service fee expense reflects higher Class A and private fund service fee payments, partially offset by lower Class C service fee payments. The increase in amortization of deferred sales commissions reflects higher private fund commission amortization, partially offset by lower Class C commission amortization. The increase in fund-related expenses reflects higher sub-advisory fees paid. Other operating expenses increased 11 percent, primarily reflecting increases in information technology spending, higher professional services expenses and higher travel expenses, partially offset by a decrease in amortization expense related to certain intangible assets that were fully amortized during the first quarter of fiscal 2019.

Operating income increased 11 percent to $134.7 million in the first quarter of fiscal 2020 from $121.1 million in the first quarter of fiscal 2019. The Company’s operating margin was 29.8 percent in both the first quarter of fiscal 2020 and the first quarter of fiscal 2019.

Non-operating income totaled $8.4 million in the first quarter of fiscal 2020 versus $3.2 million of non-operating expense in the first quarter of fiscal 2019. The year-over-year change primarily reflects a $10.3 million increase in net gains and other investment income from the Company’s investments in sponsored strategies, including consolidated sponsored funds, and a $1.1 million decrease in net expense contribution from consolidated CLO entities.

The Company’s effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 22.8 percent in the first quarter of fiscal 2020 and 23.4 percent in the first quarter of fiscal 2019. Adjusted to remove the effect of net excess tax benefits from stock-based compensation plans, the Company’s effective tax rate, calculated on the same basis, was 26.2 percent in the first quarter of fiscal 2020 and 25.9 percent in the first quarter of fiscal 2019. The Company’s effective tax rate is discussed in greater detail under “Taxation” below.

Equity in net income of affiliates was $2.3 million and $1.9 million in the first quarters of fiscal 2020 and 2019, 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 $8.9 million in the first quarter of fiscal 2020 and $5.5 million in the first quarter of fiscal 2019. The year-over-year change reflects an increase in income earned by consolidated sponsored funds and the Company’s accelerated repurchase of certain profit and capital interests in Parametric entities held by current and former employees, which settled at the end of the fourth quarter of fiscal 2019.

The Company’s weighted average basic shares outstanding were 109.4 million in the first quarter of fiscal 2020 and 112.3 million in the first quarter of fiscal 2019, a decrease of 3 percent. The year-over-year reduction reflects share repurchases in excess of new shares issued upon the vesting of restricted stock awards and the exercise of employee stock options. On a diluted basis, the Company’s weighted average shares outstanding were 114.7 million in the first quarter of fiscal 2020 and 115.5 million in the first quarter of fiscal 2019, a decrease of 1 percent. The change in weighted average diluted shares outstanding in the first quarter of fiscal 2020 also reflects an increase in the dilutive effect of in-the-money options and unvested restricted stock awards due to higher market prices of the Company’s shares.

First Quarter Fiscal 2020 vs. Fourth Quarter Fiscal 2019

In the first quarter of fiscal 2020, revenue increased 4 percent to $452.6 million from $433.7 million in the fourth quarter of fiscal 2019. Management fees were up 4 percent, reflecting a 4 percent increase in average consolidated assets under management and substantially unchanged average annualized management fee rates. Performance fees were $0.2 million in the first quarter of fiscal 2020 and $0.1 million in the fourth quarter of fiscal 2019. Distribution and service fee revenues were collectively up 4 percent, reflecting higher managed assets in fund share classes that are subject to these fees.

Operating expenses increased 7 percent to $317.8 million in the first quarter of fiscal 2020 from $298.3 million in the fourth quarter of fiscal 2019, reflecting increases in compensation, distribution expense, service fee expense, amortization of deferred sales commissions and other operating expenses. The increase in compensation reflects higher salary and benefit expenses associated with a slight increase in headcount, year-end compensation increases for continuing employees, higher performance-based and operating income-based bonus accruals, and seasonal increases in benefit costs and payroll taxes, partially offset by lower severance expenses. The increase in compensation also reflects higher stock-based compensation expense driven by accelerated vesting of restricted stock awards and accelerated recognition of employee stock option expense in connection with employee retirements in the first quarter of fiscal 2020. The increase in distribution expense reflects higher marketing and promotion costs and an increase in up-front sales commission expense. The increase in service fee expense reflects higher Class A and private fund service fee payments. The increase in amortization of deferred sales commissions reflects higher private fund commission amortization. Other operating expenses increased 9 percent, primarily reflecting increases in information technology spending, higher professional services expenses, higher travel expenses and increases in charitable contributions. Fund-related expenses in the first quarter of fiscal 2020 were substantially unchanged from the fourth quarter of fiscal 2019, reflecting higher sub-advisory fees paid and an offsetting decline in fund expenses borne by the Company.

Operating income decreased 1 percent to $134.7 million in the first quarter of fiscal 2020 from $135.4 million in the fourth quarter of fiscal 2019. The Company’s operating margin decreased to 29.8 percent in the first quarter of fiscal 2020 from 31.2 percent in the fourth quarter of fiscal 2019.

Non-operating income totaled $8.4 million in the first quarter of fiscal 2020 and $15.6 million in the fourth quarter of fiscal 2019. The sequential change reflects an $8.2 million decrease in income contribution from consolidated CLO entities, partially offset by a $0.9 million increase in net gains and other investment income from the Company’s investments in sponsored strategies, including consolidated sponsored funds. The decrease in income contribution from consolidated CLO entities is primarily attributable to the sale of the Company’s subordinated interests in a CLO entity in the first quarter of fiscal 2020, which resulted in the deconsolidation of the CLO entity.

The Company’s effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 22.8 percent in the first quarter of fiscal 2020 and 22.7 percent in the fourth quarter of fiscal 2019. Adjusted to remove the effect of net excess tax benefits from stock-based compensation plans, the Company’s effective tax rate, calculated on the same basis, was 26.2 percent in the first quarter of fiscal 2020 and 23.7 percent in the fourth quarter of fiscal 2019. The Company’s effective tax rate is discussed in greater detail under “Taxation” below.

Equity in net income of affiliates was $2.3 million in the first quarter of fiscal 2020 and $2.2 million in the fourth quarter of fiscal 2019, 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 $8.9 million in the first quarter of fiscal 2020 and $9.7 million in the fourth quarter of fiscal 2019. The sequential change reflects an increase in income earned by consolidated sponsored funds and the Company’s accelerated repurchase of certain profit and capital interests in Parametric entities held by current and former employees, which settled at the end of the fourth quarter of fiscal 2019.

The Company’s weighted average basic shares outstanding were 109.4 million in the first quarter of fiscal 2020 and 108.7 million in the fourth quarter of fiscal 2019, an increase of 1 percent. The sequential increase reflects new shares issued upon the vesting of restricted stock awards and the exercise of employee stock options in excess of share repurchases. On a diluted basis, the Company’s weighted average shares outstanding increased to 114.7 million in the first quarter of fiscal 2020 from 113.7 million in the fourth quarter of fiscal 2019, an increase of 1 percent. The increase in weighted average diluted shares outstanding further reflects an increase in the dilutive effect of in-the-money options and unvested restricted stock awards due to higher market prices of the Company’s shares.

The Company’s income tax provision for the first quarter of fiscal 2020, first quarter of fiscal 2019 and fourth quarter of fiscal 2019 includes $1.3 million, $0.6 million and $0.7 million, respectively, of charges associated with certain provisions of the Tax Cuts and Jobs Act that took effect for the Company in fiscal 2019, relating principally to limitations on the deductibility of executive compensation.

The Company’s income tax provision was reduced by net excess tax benefits related to stock-based compensation awards totaling $4.9 million in the first quarter of fiscal 2020, $2.9 million in the first quarter of fiscal 2019 and $1.5 million in the fourth quarter of fiscal 2019.

The Company’s calculations of adjusted net income and adjusted earnings per diluted share remove the tax impact of stock-based compensation shortfalls or windfalls. On this basis, the Company’s adjusted effective tax rate was 26.2 percent in the first quarter of fiscal 2020, 25.9 percent in the first quarter of fiscal 2019 and 23.7 percent in the fourth quarter of fiscal 2019. On the same adjusted basis, the Company estimates that its effective tax rate will be approximately 26.5 to 27.0 percent for the balance of fiscal 2020 and for the fiscal year as a whole. The Company’s actual adjusted effective tax rate for fiscal 2020 may vary from this estimate due to changes in the Company’s tax policy interpretations and assumptions, additional regulatory guidance that may be issued and other factors.

Balance Sheet Information

As of January 31, 2020, the Company held cash and cash equivalents of $544.1 million and its investments included $280.6 million of short-term debt securities with maturities between 90 days and one year. There were no outstanding borrowings under the Company’s $300 million credit facility at such date. During the first three months of fiscal 2020, the Company used $66.6 million to repurchase and retire approximately 1.4 million shares of its Non-Voting Common Stock under its repurchase authorizations. Of the current 8.0 million share repurchase authorization, approximately 4.9 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, 2020. To participate in the conference call, please dial 866-521-4909 (domestic) or 647-427-2311 (international) and refer to “Eaton Vance Corp. First Fiscal 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 3888396 when instructed.

About Eaton Vance Corp.

Eaton Vance Corp. (NYSE: EV) provides advanced investment strategies and wealth management solutions to forward-thinking investors around the world. Through principal investment affiliates Eaton Vance Management, Parametric, Atlanta Capital, Calvert and Hexavest, the Company offers a diversity of investment approaches, encompassing bottom-up and top-down fundamental active management, responsible investing, systematic investing and customized implementation of client-specified portfolio exposures. As of January 31, 2020, Eaton Vance had consolidated assets under management of $518.2 billion. Exemplary service, timely innovation and attractive returns across market cycles have been hallmarks of Eaton Vance since 1924. For more information, 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. GAAP, management believes that certain non-U.S. GAAP financial measures, specifically, adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, while not a substitute for U.S. GAAP financial measures, may be effective indicators of the Company’s performance over time. Non-U.S. GAAP financial measures should not be construed to be superior to U.S. GAAP measures. In calculating these non-U.S. 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, when applicable, the add back of closed-end fund structuring fees, costs associated with special dividends, debt repayments and tax settlements, the tax impact of stock-based compensation shortfalls or windfalls, and non-recurring charges for the effect of tax law changes. Management and our Board of Directors, as well as certain of 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 useful baseline for analyzing trends in our underlying business.

(2)Represents the Company’s effective income tax rate, excluding the tax impact of stock-based compensation shortfalls or windfalls. Management believes that the Company’s adjusted effective income tax rate is an important indicator of our operations because it excludes items that may not be indicative of, or are unrelated to, our core operating results, and may provide a useful baseline for analyzing trends in our underlying business.