Eaton Vance Corp. Report for the Three Month Period Ended January 31, 2021

BOSTON, Feb. 24, 2021 /PRNewswire/ -- Eaton Vance Corp. (NYSE: EV) today reported earnings of $0.74 per diluted share for the first quarter of fiscal 2021, which compares to earnings of $0.91 per diluted share in the first quarter of fiscal 2020 and $(0.31) per diluted share in the fourth quarter of fiscal 2020.

The Company reported record quarterly adjusted earnings^([1]) of $0.94 per diluted share for the first quarter of fiscal 2021, an increase of 11 percent from $0.85 of adjusted earnings per diluted share in the first quarter of fiscal 2020 and an increase of 7 percent from $0.88 of adjusted earnings per diluted share in the fourth quarter of fiscal 2020.

In the first quarter of fiscal 2021, adjusted earnings exceeded earnings under U.S. generally accepted accounting principles (U.S. GAAP) by $0.20 per diluted share, reflecting the reversal of $70.6 million of compensation expenses and other costs recognized in connection with the proposed acquisition of Eaton Vance by Morgan Stanley announced on October 8, 2020, the reversal of $27.3 million of net excess tax benefits related to stock–based compensation awards, the reversal of $20.1 million of net gains of consolidated sponsored funds and consolidated collateralized loan obligation (CLO) entities (collectively, consolidated investment entities) and the Company's other seed capital investments, and the add-back of $2.2 million of management fees and expenses of consolidated investment entities. Earnings under U.S. GAAP exceeded adjusted earnings by $0.06 per diluted share in the first quarter of fiscal 2020, reflecting the reversal of $4.9 million of net excess tax benefits related to stock-based compensation awards, the reversal of $3.6 million of net gains of consolidated investment entities and other seed capital investments, and the add-back of $2.4 million of management fees and expenses of consolidated investment entities. In the fourth quarter of fiscal 2020, adjusted earnings exceeded earnings under U.S. GAAP by $1.19 per diluted share, reflecting the reversal of $114.9 million of compensation expenses and other costs recognized in connection with the proposed acquisition of Eaton Vance by Morgan Stanley, the reversal of a $21.8 million impairment loss recognized on the Company's investment in Hexavest Inc. (Hexavest), the reversal of $2.9 million of net excess tax benefits related to stock–based compensation awards, the reversal of $1.8 million of net losses of consolidated investment entities and other seed capital investments, and the add-back of $1.7 million of management fees and expenses of consolidated investment entities.

In the first quarter of fiscal 2021, the Company had record quarterly consolidated net inflows of $20.0 billion, representing 16 percent annualized internal growth in managed assets (consolidated net flows divided by beginning of period consolidated assets under management). This compares to net inflows of $6.1 billion and 5 percent annualized internal growth in managed assets in the first quarter of fiscal 2020 and net inflows of $5.2 billion and 4 percent annualized internal growth in managed assets in the fourth quarter of fiscal 2020. Excluding Parametric overlay services, the Company had net inflows of $6.9 billion and 7 percent annualized internal growth in managed assets in the first quarter of fiscal 2021, net inflows of $5.0 billion and 5 percent annualized internal growth in managed assets in the first quarter of fiscal 2020, and net inflows of $4.8 billion and 5 percent annualized internal growth in managed assets in the fourth quarter of fiscal 2020.

The Company's 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 8 percent in the first quarter of fiscal 2021 and 5 percent in both the first quarter and the fourth quarter of fiscal 2020.

Consolidated assets under management were a record $584.2 billion on January 31, 2021, up 13 percent from $518.2 billion of consolidated managed assets on January 31, 2020 and $515.7 billion of consolidated managed assets on October 31, 2020. The year-over-year increase in consolidated assets under management reflects $18.6 billion of net inflows, $45.1 billion of price appreciation in managed assets and $2.3 billion of new managed assets gained in the acquisition of the business assets of WaterOak Advisors, LLC (WaterOak) on October 16, 2020. The sequential increase in consolidated assets under management in the first quarter of fiscal 2021 reflects $20.0 billion of quarterly net inflows and $48.5 billion of price appreciation in managed assets.

"In what we expect will be Eaton Vance's last quarterly reporting period as an independent public company, the Company set new records for consolidated net inflows, consolidated ending assets under management, adjusted operating income and adjusted earnings per diluted share," said Thomas E. Faust Jr., Chairman and Chief Executive Officer. "We approach the Company's acquisition by Morgan Stanley with strong momentum across our businesses, and look forward to building on that strength as part of Morgan Stanley Investment Management."

Average consolidated assets under management were $562.2 billion in the first quarter of fiscal 2021, up 10 percent from $509.9 billion in the first quarter of fiscal 2020 and up 9 percent from $516.7 billion in the fourth quarter of fiscal 2020.

Attachments 5 and 6 summarize the Company's consolidated assets under management and net flows by investment mandate and investment vehicle reporting categories. Among investment mandate reporting categories, consolidated net inflows in the first quarter of fiscal 2021 were $13.1 billion for Parametric overlay services, $3.5 billion for fixed income, $2.4 billion for Parametric custom portfolios, $608 million for floating-rate income, $214 million for equity and $191 million for alternative mandates. Annualized internal growth in managed assets for the first quarter of fiscal 2021 was 55 percent for Parametric overlay services, 19 percent for fixed income, 10 percent for alternative, 8 percent for floating-rate income, 6 percent for Parametric custom portfolios and 1 percent for equity mandates. Annualized internal growth in management fee revenue for the first quarter of fiscal 2021 was 51 percent for Parametric overlay services, 21 percent for fixed income, 11 percent for Parametric custom portfolios, 10 percent for alternative, 6 percent for floating-rate income and -1 percent for equity mandates.

By investment affiliate, consolidated net inflows in the first quarter of fiscal 2021 were $14.9 billion for Parametric, $4.0 billion for Eaton Vance Management (EVM), $1.6 billion for Calvert and $(517) million for Atlanta Capital. Annualized internal growth in managed assets for the first quarter of 2021 was 24 percent for Calvert, 19 percent for Parametric, 10 percent for EVM and -8 percent for Atlanta Capital. Annualized internal growth in management fee revenue for the first quarter of fiscal 2021 was 26 percent for Calvert, 9 percent for EVM, 7 percent for Parametric and -13 percent for Atlanta Capital.

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.

As of January 31, 2021, managed assets of the Company's 49 percent-owned affiliate Hexavest were $4.3 billion, down 67 percent from $13.0 billion of managed assets on January 31, 2020 and down 26 percent from $5.8 billion of managed assets on October 31, 2020. Hexavest had net outflows of $2.2 billion in the first quarter of fiscal 2021, $0.5 billion in the first quarter of fiscal 2020 and $0.9 billion in the fourth quarter of fiscal 2020. 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 2021 vs. First Quarter Fiscal 2020 

In the first quarter of fiscal 2021, revenue increased 8 percent to $488.9 million from $452.6 million in the first quarter of fiscal 2020. Management fees were up 9 percent, as a 10 percent increase in average consolidated assets under management more than offset a 1 percent decrease in the Company's consolidated average annualized management fee rate. Performance fees were $0.2 million in both the first quarter of fiscal 2021 and the first quarter of fiscal 2020. Distribution and service fee revenues in the first quarter of fiscal 2021 were collectively up 2 percent from the first quarter of fiscal 2020, reflecting higher average managed assets in fund share classes that are subject to these fees.

Operating expenses increased 29 percent to $409.4 million in the first quarter of fiscal 2021 from $317.8 million in the first quarter of fiscal 2020, reflecting increases in compensation expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses, partially offset by a decrease in distribution expense. The increase in compensation expense primarily reflects $39.6 million of stock-based and other compensation costs and associated payroll taxes recognized in the first quarter of fiscal 2021 in connection with the proposed acquisition of Eaton Vance by Morgan Stanley. The increase in compensation expense further reflects higher salary and benefit expense associated with increases in headcount, higher operating income-based and investment performance-based bonus accruals, and higher sales-based incentive compensation, partially offset by lower severance expenses. The increase in service fee expense reflects higher private fund and Class A 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. The increase in fund-related expenses reflects higher sub-advisory fees paid, partially offset by a reduction in fund expenses borne by the Company. Other operating expenses increased 69 percent, primarily reflecting higher professional service expenses driven by proxy solicitation fees and other legal and consulting costs associated with the proposed acquisition of Eaton Vance by Morgan Stanley, and an increase in information technology spending, partially offset by lower travel expenses. The decline in distribution expense reflects lower Class C distribution fee payments, up-front sales commission expense, promotional costs and finder's fees, partially offset by higher intermediary marketing support payments. Excluding expenses in connection with the proposed acquisition of Eaton Vance by Morgan Stanley and other adjustments as shown in Attachment 2, operating expenses in the first quarter of fiscal 2021 were $327.5 million, an increase of 3 percent from operating expenses of $316.5 million in the first quarter of fiscal 2020.

Operating income decreased to $79.5 million in the first quarter of fiscal 2021 from $134.7 million in the first quarter of fiscal 2020, primarily reflecting $81.0 million of compensation expense and other costs recognized in the first quarter of fiscal 2021 in connection with the proposed acquisition of Eaton Vance by Morgan Stanley. The Company's operating margin decreased to 16.3 percent in the first quarter of fiscal 2021 from 29.8 percent in the first quarter of fiscal 2020.

As shown in Attachment 2, the Company's operating income on an adjusted basis was a quarterly record of $163.5 million in the first quarter of fiscal 2021, an increase of 19 percent from $137.9 million of adjusted operating income in the first quarter of fiscal 2020. The Company's adjusted operating margin increased to 33.3 percent in the first quarter of fiscal 2021 from 30.3 percent in the first quarter of fiscal 2020.

Non-operating income totaled $41.2 million in the first quarter of fiscal 2021 and $8.4 million in the first quarter of fiscal 2020. The year-over-year increase reflects a $25.1 million improvement in net income (expense) of consolidated CLO entities, primarily driven by gains realized upon the sale of the Company's interests in four CLO entities that the Company no longer consolidates, but continues to manage, and a $7.7 million increase in net gains and other investment income of consolidated sponsored funds and the Company's investments in other sponsored strategies.

The Company's effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 7.5 percent in the first quarter of fiscal 2021 and 22.8 percent in the first quarter of fiscal 2020. The Company's effective tax rate is discussed in greater detail under "Taxation" below.

Equity in net income of affiliates was $0.6 million and $2.3 million in the first quarters of fiscal 2021 and 2020, 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 $22.4 million in the first quarter of fiscal 2021 and $8.9 million in the first quarter of fiscal 2020. The year-over-year change primarily reflects an increase in income earned by consolidated sponsored funds.

The Company's weighted average basic shares outstanding were 116.2 million in the first quarter of fiscal 2021 and 109.4 million in the first quarter of fiscal 2020, an increase of 6 percent. The year-over-year increase reflects 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 122.3 million in the first quarter of fiscal 2021 and 114.7 million in the first quarter of fiscal 2020, an increase of 7 percent. The change in weighted average diluted shares outstanding further reflects an increase in the dilutive effect of in-the-money options due to higher market prices of the Company's non-voting common stock, partially offset by a decrease in the dilutive effect of restricted stock awards due to the accelerated vesting of restricted stock awards in the fourth quarter of fiscal 2020 in connection with the proposed acquisition of Eaton Vance by Morgan Stanley.

First Quarter Fiscal 2021 vs. Fourth Quarter Fiscal 2020

In the first quarter of fiscal 2021, revenue increased 8 percent to $488.9 million from $451.1 million in the fourth quarter of fiscal 2020. Management fees were up 9 percent, primarily reflecting a 9 percent increase in average consolidated assets under management. Performance fees were $0.2 million in the first quarter of fiscal 2021, versus $1.5 million in the fourth quarter of fiscal 2020. Distribution and service fee revenues in the first quarter of fiscal 2021 were collectively up 7 percent from the fourth quarter of fiscal 2020, reflecting higher average managed assets in fund share classes that are subject to these fees.

Operating expenses decreased 12 percent to $409.4 million in the first quarter of fiscal 2021 from $464.7 million in the fourth quarter of fiscal 2020, reflecting lower compensation expense, partially offset by increases in distribution expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses. The decrease in compensation expense primary reflects a reduction in stock-based compensation expense due to the acceleration of $146.0 million of expense recognized in the fourth quarter of fiscal 2020 in connection with the proposed acquisition of Eaton Vance by Morgan Stanley, partially offset by $39.6 million of stock-based and other compensation costs and associated payroll taxes recognized in the first quarter of fiscal 2021 in connection with the proposed acquisition. The decrease in compensation expense further reflects lower operating income-based bonus accruals, partially offset by higher sales-based incentive compensation, higher performance-based bonus accruals and higher salary and benefit expense associated with year-end compensation increases for continuing employees and slightly higher headcount, and seasonal increases in benefit costs and payroll taxes. The increase in distribution expense reflects higher intermediary marketing support payments, partially offset by a decrease in promotion costs and lower Class C distribution fee payments. The increase in service fee expense reflects higher private fund and Class A service fee payments. The increase in fund-related expenses reflects higher sub-advisory fees paid. Other operating expenses increased 52 percent, primarily reflecting higher professional service expenses driven by increases in proxy solicitation fees and other legal costs associated with the proposed acquisition of Eaton Vance by Morgan Stanley. Excluding expenses in connection with the proposed acquisition of Eaton Vance by Morgan Stanley and other adjustments as shown in Attachment 2, operating expenses in the first quarter of fiscal 2021 were $327.5 million, an increase of 6 percent from operating expenses of $309.3 million in the fourth quarter of fiscal 2020.

Operating income (loss) increased to $79.5 million in the first quarter of fiscal 2021 from $(13.7) million in the fourth quarter of fiscal 2020. The sequential change primarily reflects a $73.4 million decrease in compensation expense and other costs recognized in connection with the proposed acquisition of Eaton Vance by Morgan Stanley. The Company's operating margin increased to 16.3 percent in the first quarter of fiscal 2021 from (3.0) percent in the fourth quarter of fiscal 2020.

As shown in Attachment 2, the Company's $163.5 million of adjusted operating income in the first quarter of fiscal 2021 compared to $143.1 million of adjusted operating income in the fourth quarter of fiscal 2020, an increase of 14 percent. The Company's adjusted operating margin increased to 33.3 percent in the first quarter of fiscal 2021 from 31.6 percent in the fourth quarter of fiscal 2020.

Non-operating income totaled $41.2 million in the first quarter of fiscal 2021 versus $7.1 million of non-operating expense in the fourth quarter of fiscal 2020. The sequential change reflects a $28.6 million improvement in net income (expense) of consolidated CLO entities, primarily driven by gains realized upon the sale of the Company's interests in four CLO entities that the Company no longer consolidates, but continues to manage, and a $19.8 million increase in net gains and other investment income of consolidated sponsored funds and the Company's investments in other sponsored strategies.

The Company's effective tax rate, calculated as a percentage of income (loss) before income taxes and equity in net income of affiliates, was 7.5 percent in the first quarter of fiscal 2021 and 36.6 percent in the fourth quarter of fiscal 2020. The Company's effective tax rate is discussed in greater detail under "Taxation" below.

Equity in net income (loss) of affiliates was $0.6 million in the first quarter of fiscal 2021 and $(20.8) million in the fourth quarter of fiscal 2020, respectively. In both the first quarter of fiscal 2021 and the fourth quarter of fiscal 2020, substantially all of the Company's equity in net income of affiliates related to the Company's investment in Hexavest. Equity in net income (loss) of affiliates in the fourth quarter of fiscal 2020 included a $21.8 million impairment loss recognized on the Company's investment in Hexavest.

As detailed in Attachment 3, net income attributable to non-controlling and other beneficial interests was $22.4 million in the first quarter of fiscal 2021 and $2.0 million in the fourth quarter of fiscal 2020. The sequential change primarily reflects an increase in income earned by consolidated sponsored funds.

The Company's weighted average basic shares outstanding were 116.2 million in the first quarter of fiscal 2021 and 110.7 million in the fourth quarter of fiscal 2020, an increase of 5 percent. The increase reflects 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 122.3 million in the first quarter of fiscal 2021 and 115.9 million in the fourth quarter of fiscal 2020, an increase of 6 percent. The change in weighted average diluted shares outstanding further reflects an increase in the dilutive effect of in-the-money options due to higher market prices of the Company's non-voting common stock, partially offset by a decrease in the dilutive effect of restricted stock awards due to the accelerated vesting of restricted stock awards in the fourth quarter of fiscal 2020 in connection with the proposed acquisition of Eaton Vance by Morgan Stanley.

Taxation

The following table reconciles the U.S. statutory federal income tax rate to the Company's effective income tax rate: 

The net loss experienced by the Company in the fourth quarter of fiscal 2020 resulted in a tax benefit being recognized during the quarter.

The Company's income tax provision was reduced by net excess tax benefits related to stock-based compensation awards totaling $27.3 million in the first quarter of fiscal 2021, $4.9 million in the first quarter of fiscal 2020 and $2.9 million in the fourth quarter of fiscal 2020. The Company's income tax provision is also impacted by other items, which include non-deductible executive compensation, prior period adjustments primarily related to the filing of tax returns and other differences in the treatment of certain items for book and tax purposes.

As shown in Attachment 2, the Company's calculations of adjusted net income and adjusted earnings per diluted share remove compensation expenses and other costs related to the proposed acquisition of Eaton Vance by Morgan Stanley, remove the impairment losses recognized in the fourth quarter of fiscal 2020 on the Company's investment in 49 percent-owned affiliate Hexavest, exclude gains (losses) and other investment income (expense) of consolidated investment entities and other seed capital investments, add back the management fees and expenses of consolidated investment entities and exclude the tax impact of stock-based compensation shortfalls or windfalls. On this basis, the Company's adjusted effective tax rate was 25.8 percent in the first quarter of fiscal 2021, 27.6 percent in the first quarter of fiscal 2020 and 26.2 percent in the fourth quarter of fiscal 2020.

Balance Sheet Information

As of January 31, 2021, the Company held cash and cash equivalents of $606.1 million and its investments included $20.4 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.

Proposed Acquisition of Eaton Vance by Morgan Stanley

As described above, Eaton Vance and Morgan Stanley announced on October 8, 2020 that they have entered into a definitive agreement for Morgan Stanley to acquire Eaton Vance. Under the terms of the merger agreement, Eaton Vance shareholders will receive $28.25 per share in cash and 0.5833 shares of Morgan Stanley common stock per share of Eaton Vance common stock held. The merger agreement contains an election procedure whereby each Eaton Vance shareholder may elect to receive the merger consideration all in cash or all in stock, subject to proration and adjustment.

The merger agreement also provides for Eaton Vance shareholders to receive a special cash dividend of $4.25 per share of Eaton Vance common stock held. On November 23, 2020, the Eaton Vance Board of Directors declared the $4.25 per share special dividend, which was paid on December 18, 2020 to shareholders of record on December 4, 2020.

Eaton Vance and Morgan Stanley currently expect to complete the proposed transaction no later than early in the second quarter of 2021. Subject to the satisfaction of customary closing conditions, including receipt of necessary regulatory approvals and client consents, the transaction could close as soon as March 1, 2021.

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, 2021, Eaton Vance had consolidated assets under management of $584.2 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, the scope and duration of the COVID-19 pandemic and its impact on the global economy or capital markets, the completion of the proposed transaction with Morgan Stanley and the anticipated terms and timing, including obtaining required regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the combined company's operations and other conditions to the completion of the acquisition, 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.

Attachment 2

Non-U.S. GAAP Information and Reconciliations

Management believes that certain non-U.S. GAAP financial measures, specifically, adjusted operating income, 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, operating income, 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 debt repayments and tax settlements, the tax impact of stock-based compensation shortfalls or windfalls, impairment charges, costs in connection with the proposed acquisition of Eaton Vance by Morgan Stanley and other acquisition-related items, and non-recurring charges for the effect of tax law changes. Adjustments to operating income also include the add-back of management fee revenue received from consolidated sponsored funds and consolidated collateralized loan obligation (CLO) entities (collectively, consolidated investment entities) that are eliminated in consolidation and the non-management expenses of consolidated sponsored funds recognized in consolidation. Adjustments to net income attributable to Eaton Vance Corp. shareholders include the after-tax impact of these adjustments to operating income and the elimination of gains (losses) and other investment income (expense) of consolidated investment entities and other seed capital investments included in non-operating income (expense), as determined net of tax and non-controlling and other beneficial interests. Management and our Board of Directors, as well as certain of our outside investors, consider the adjusted numbers a measure of the Company's underlying operating performance. Management believes adjusted operating income, 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.

Effective in the second quarter of fiscal 2020, the Company's calculation of non-U.S. GAAP financial measures was revised to reflect the treatment of consolidated investment entities and other seed capital investments described in the previous paragraph. All prior period non-U.S. GAAP financial measures have been updated to reflect this change.

SOURCE Eaton Vance Corp.

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