Eaton Vance Corp. Report for the Three Months Ended January 31, 2012

BOSTON, Feb. 22, 2012 /PRNewswire/ -- Eaton Vance Corp. (NYSE: EV) earned $0.47 of adjusted earnings per diluted share(1) in the first quarter of fiscal 2012, an increase of 4 percent over the $0.45 of adjusted earnings per diluted share in the first quarter of fiscal 2011 and unchanged from the $0.47 of adjusted earnings per diluted share in the fourth quarter of fiscal 2011.

As determined under U.S. generally accepted accounting principles ("GAAP"), the Company earned $0.40 in the first quarter of fiscal 2012, $0.30 in the first quarter of fiscal 2011 and $0.40 in the fourth quarter of fiscal 2011.  Adjusted earnings differed from GAAP earnings due to adjustments in connection with increases in the estimated redemption value of non-controlling interests in our affiliates redeemable at other than fair value, which totaled $0.07, $0.15 and $0.07 per diluted share in the first quarter of fiscal 2012, the first quarter of fiscal 2011 and the fourth quarter of fiscal 2011, respectively.

Net outflows of $1.1 billion from long-term funds and separate accounts in the first quarter of fiscal 2012 compare to net inflows of $1.8 billion in the first quarter of fiscal 2011 and net outflows of $2.7 billion in the fourth quarter of fiscal 2011.  

Assets under management on January 31, 2012 were $191.7 billion, unchanged from January 31, 2011 and an increase of 2 percent from the $188.2 billion of managed assets as of October 31, 2011.  

"Eaton Vance experienced sequentially improved net flows and a rising trend of managed assets in the first quarter of fiscal 2012," said Thomas E. Faust, Jr., Chairman and Chief Executive Officer.  "For the balance of the year, we see both continuing challenges and growing opportunities."

Comparison to First Quarter of Fiscal 2011

Long-term fund net outflows of $1.2 billion in the first quarter of fiscal 2012 compare to $1.4 billion of long-term fund net inflows in the first quarter of fiscal 2011, and reflect $6.9 billion of fund sales and other inflows and $8.1 billion of fund redemptions and other outflows.  The $0.4 billion of institutional separate account net outflows in the first quarter of fiscal 2012 compare to $0.5 billion of institutional separate account net inflows in the first quarter of fiscal 2011, and reflect gross inflows of $1.8 billion and $2.2 billion of outflows.  The $0.5 billion of high-net-worth separate account net inflows in the first quarter of fiscal 2012 compare to $0.2 billion of high-net-worth separate account net inflows in the first quarter of fiscal 2011, and reflect gross inflows of $1.0 billion and $0.5 billion of outflows.  Retail managed account gross inflows of $1.7 billion were offset by $1.7 billion of outflows in the first quarter of fiscal 2012, while retail managed account net outflows totaled $0.1 billion in the first quarter of fiscal 2011.  Attachments 4 and 5 summarize the Company's assets under management and asset flows by investment mandate.

Revenue in the first quarter of fiscal 2012 decreased $13.0 million, or 4 percent, to $295.6 million from revenue of $308.6 million in the first quarter of fiscal 2011. Investment advisory and administration fees decreased 1 percent to $239.5 million, reflecting a slightly lower effective management fee rate as compared to the first quarter of fiscal 2011.  Distribution and underwriter fees decreased 18 percent due to a decrease in average fund assets to which distribution fees apply and a reduction in underwriter fees collected on Class A fund sales.  Service fee revenue decreased 14 percent due to a decrease in average fund assets subject to service fees.  

Operating expenses decreased $6.5 million, or 3 percent, to $202.8 million in the first quarter of fiscal 2012 compared to operating expenses of $209.3 million in the first quarter of fiscal 2011.  Compensation expense was substantially unchanged, as decreases in sales-based incentives offset compensation increases attributable to higher employee headcount and increases in base salaries, stock-based compensation and employee benefits.  Distribution expense was substantially unchanged from the prior fiscal year's first quarter, as increases in Class C distribution expense were offset by lower marketing support payments.  Service fee expense decreased 8 percent from the prior fiscal year's first quarter due to a decrease in assets subject to service fees.  Amortization of deferred sales commissions decreased 44 percent, as a result of declines in Class B, Class C and private fund amortization expense.  Fund expenses increased 46 percent from the first quarter of fiscal 2011 due to higher subadvisory expenses and fund subsidies.  Other expenses decreased 2 percent, reflecting lower information technology and professional service expenses.  

Operating income in the first quarter of fiscal 2012 was $92.8 million, a decrease of 7 percent from operating income of $99.3 million in the first quarter of fiscal 2011.  The Company's operating margin declined to 31.4 percent in the first quarter of fiscal 2012 from 32.2 percent in the first quarter of fiscal 2011.

Interest and other income decreased 16 percent in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 due to a decrease in average effective interest rates earned on the Company's cash balances and lower interest and dividend income of consolidated funds.  In the first quarter of fiscal 2012, the Company recognized $6.4 million of net investment gains, including a $2.4 million gain related to the Company's April 2011 sale of its equity interest in Lloyd George Management, for which additional settlement payments were received during the quarter, and gains recognized on the Company's seed capital investments.  The Company recognized $0.7 million of net investment losses in the first quarter of fiscal 2011.  Also included in other income and expenses for the first quarter of fiscal 2012 were net gains of $6.0 million associated with a consolidated collateralized loan obligation ("CLO") entity, primarily attributable to an increase in the fair market value of the investments held by the entity.  The CLO net gain included in other income and expenses was substantially offset by net gain attributable to non-controlling and other beneficial interests, as the consolidated CLO entity's gain is largely attributable to the CLO entity's outside investors rather than the Company.  Included in other income and expenses for the first quarter of fiscal 2011 were net gains of $0.3 million associated with the consolidation of the CLO entity, which amounts were again substantially offset by net gain attributable to non-controlling and other beneficial interests.  

The Company's effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 35.7 percent and 37.3 percent in the first quarter of fiscal 2012 and fiscal 2011, respectively.  

In the first quarter of fiscal 2012, net income attributable to non-controlling and other beneficial interests decreased $4.2 million from the first quarter of fiscal 2011, reflecting a $5.6 million increase in consolidated CLO entity gains attributable to other beneficial interest holders and a $0.3 million decrease in non-controlling beneficial interest associated with the Company's majority-owned subsidiaries and consolidated funds.  Also included in non-controlling and other beneficial interests in the first quarter of fiscal 2012 and 2011 are $7.9 million and $19.1 million, respectively, of non-controlling interest value adjustments that relate to the profit growth of our subsidiary Parametric Portfolio Associates over the respective preceding twelve months ended December 31.

Adjusted net income attributable to Eaton Vance Corp. shareholders(2) was $55.4 million in the first quarter of fiscal 2012 compared to $55.7 million in the first quarter of fiscal 2011, a decrease of 1 percent.  GAAP net income attributable to Eaton Vance Corp. shareholders was $47.3 million in the first quarter of fiscal 2012 and $37.5 million in the first quarter of fiscal 2011.  Adjusted net income attributable to Eaton Vance Corp. shareholders differed from GAAP net income attributable to Eaton Vance Corp. shareholders primarily due to the increases in the estimated redemption value of non-controlling interests in our subsidiary Parametric Portfolio Associates described in the preceding paragraph.  

Comparison to Fourth Quarter of Fiscal 2011

Long-term fund net outflows of $1.2 billion in the first quarter of fiscal 2012 compare to $3.1 billion of long-term fund net outflows in the fourth quarter of fiscal 2011. The $0.4 billion of institutional separate account net outflows in the first quarter of fiscal 2012 compare to institutional separate account net inflows of $0.5 billion in the fourth quarter of fiscal 2011.  The $0.5 billion of net inflows into high-net-worth separate accounts in the first quarter of fiscal 2012 compare to $0.1 billion of net inflows in the fourth quarter of fiscal 2011.  Retail managed account gross inflows of $1.7 billion were offset by $1.7 billion of outflows in the first quarter of fiscal 2012, while retail managed account net outflows totaled $0.2 billion in the fourth quarter of fiscal 2011.  Attachments 4 and 5 summarize the Company's assets under management and asset flows by investment mandate.

Revenue in the first quarter of fiscal 2012 decreased $1.7 million, or 1 percent, to $295.6 million from $297.3 million in the fourth quarter of fiscal 2011. Investment advisory and administration fees were substantially unchanged, as average assets under management and effective management fee rates did not change materially.  Distribution and underwriter fees decreased 2 percent and service fee revenue decreased 3 percent due to a decrease in average fund assets that pay these fees.  

Operating expenses increased $10.1 million, or 5 percent, to $202.8 million in the first quarter of fiscal 2012 from $192.7 million in the fourth quarter of fiscal 2011.  Compensation expense increased 19 percent from the fourth quarter of fiscal 2011, reflecting increases in bonus accruals, stock-based compensation, employee benefits, payroll taxes and base salaries.  Distribution expense decreased 1 percent from the prior fiscal quarter due to decreases in marketing support payments, offset by increases in marketing expenses. Service fee expense decreased 5 percent due to a decrease in assets subject to service fees.  Amortization expense decreased 20 percent from the prior fiscal quarter as a result of declines in Class B, Class C and private fund amortization expense.  Fund expenses decreased 13 percent from the fourth quarter of fiscal 2011 due to a decrease in subadvisory fees and fund subsidies.  Other expenses decreased 4 percent from the fourth quarter primarily due to decreases in information technology expenses.

Operating income in the first quarter of fiscal 2012 was $92.8 million, a decrease of 11 percent from operating income of $104.6 million in the fourth quarter of fiscal 2011. The Company's operating margin declined to 31.4 percent in the first quarter of fiscal 2012 from 35.2 percent in the fourth quarter of fiscal 2011.  

Interest and other income increased 481 percent in the first quarter of fiscal 2012 compared to the fourth quarter of fiscal 2011 due to an increase in interest and dividend income of consolidated funds. The $6.4 million of net investment gains recognized in the first quarter of fiscal 2012, which included the $2.4 million gain related to the Lloyd George Management sale discussed above, compare to $2.5 million of net investment losses in the fourth quarter of fiscal 2011.  Also included in other income and expenses for the first quarter of fiscal 2012 and fourth quarter of fiscal 2011 were consolidated CLO entity net gains of $6.0 million and net losses of $11.4 million, respectively, that are primarily attributable to changes in the fair market value of investments held by the entity.  The net gains and losses of the consolidated CLO entity recognized in other income and expenses for the respective periods were substantially offset by gain and loss attributable to non-controlling and other beneficial interests.

The Company's effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 35.7 percent and 45.5 percent in the first quarter of fiscal 2012 and fourth quarter of fiscal 2011, respectively.  The decrease in the Company's effective tax rate was due primarily to changes in the amount of consolidated CLO entity gains or losses recognized, which are not subject to current tax.

Net income attributable to non-controlling and other beneficial interests increased $18.8 million in the first quarter of fiscal 2012 from the prior quarter due primarily to a $17.4 million decrease in non-controlling beneficial interest associated with the consolidated CLO entity and a $2.2 million decrease in non-controlling beneficial interest associated with the Company's majority-owned subsidiaries and consolidated funds.  Also included in net income attributable to non-controlling and other beneficial interests for the first quarter of fiscal 2012 and the fourth quarter of fiscal 2011 are non-controlling interest value adjustments of $7.9 million and $8.5 million relating to our subsidiaries Parametric Portfolio Associates and Atlanta Capital Management that are attributable to their profit growth over the twelve months ended December 31, 2011 and October 31, 2011, respectively.  

Adjusted net income attributable to Eaton Vance Corp. shareholders was $55.4 million in the first quarter of fiscal 2012 compared to $55.7 million in the fourth quarter, a decrease of 1 percent.  GAAP net income attributable to Eaton Vance Corp. shareholders was $47.3 million in the first quarter of fiscal 2012 and $46.8 million in the fourth quarter of fiscal 2011.  First quarter fiscal 2012 and fourth quarter fiscal 2011 adjusted net income attributable to Eaton Vance Corp. shareholders differed from GAAP net income attributable to Eaton Vance Corp. shareholders primarily due to the increases in the estimated redemption value of non-controlling interests in our subsidiaries Parametric Portfolio Associates and Atlanta Capital Management described in the preceding paragraph.  

Cash and cash equivalents totaled $475.4 million on January 31, 2012 compared to $510.9 million on October 31, 2011.  There were no outstanding borrowings against the Company's $200.0 million credit facility on January 31, 2012.  During the first three months of fiscal 2012, the Company used $34.8 million to repurchase and retire approximately 1.4 million shares of its Non-Voting Common Stock under its repurchase authorization and paid $22.0 million of dividends to shareholders.  Over the twelve months ended January 31, 2012, the Company used $206.6 million to repurchase and retire approximately 7.9 million shares of its Non-Voting Common Stock and paid $85.9 million in dividends to shareholders.  Approximately 6.6 million shares of the current 8.0 million share repurchase authorization remains unused.

Eaton Vance Corp. is one of the oldest investment management firms in the United States, with a history dating back to 1924. 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 www.eatonvance.com.

This news release contains 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 from time to time in the Company's filings with the Securities and Exchange Commission.

(1) Adjusted earnings per diluted share reflects 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 structuring fees and other items management deems non-recurring or non-operating.  See reconciliation provided in Attachment 2 for more information on adjusting items.

(2) Adjusted net income attributable to Eaton Vance Corp. shareholders reflects 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, closed-end structuring fees and other items management deems non-recurring or non-operating.  See reconciliation provided in Attachment 2 for more information on adjusting items.

SOURCE Eaton Vance Corp.