(Source: PRNewswire-FirstCall)
BOSTON, Aug. 19 /PRNewswire-FirstCall/ -- Eaton Vance Corp. reported earnings per diluted share of $0.26 for the third quarter of fiscal 2009 compared to earnings per diluted share of $0.22 in the second quarter of fiscal 2009 and $0.40 in the third quarter of fiscal 2008. Third quarter fiscal 2009 earnings were reduced $3.3 million, or $0.02 per diluted share, by expenses associated with the $275.0 million initial public offering of Eaton Vance National Municipal Opportunities Trust in May, the largest public offering of a listed closed-end fund in the U.S. since 2007.
Net inflows of $3.9 billion into long-term funds and separate accounts in the third quarter of fiscal 2009 compare to net inflows of $0.8 billion in the second quarter of fiscal 2009 and $5.8 billion in the third quarter of fiscal 2008. Net inflows reflect a $0.2 billion increase in fund leverage in the third quarter of fiscal 2009 and a $0.9 billion reduction in fund leverage in the second quarter of fiscal 2009. The Company's annualized internal growth rate for the quarter was 12 percent. Assets under management on July 31, 2009 were $143.7 billion, an increase of $16.5 billion, or 13 percent, over the $127.2 billion of managed assets as of April 30, 2009.
"We are very pleased with the Company's growth in managed assets for the quarter, which reflects both strong internal growth and the pronounced rally in securities prices we have seen with an improving economic outlook," said Thomas E. Faust Jr., Chairman and Chief Executive Officer. "While our earnings remain below prior year's results, the sharp uptick in managed assets bodes well for future recovery."
The Company earned $0.68 per diluted share in the first nine months of fiscal 2009 compared to $1.28 per diluted share in the first nine months of fiscal 2008.
Comparison to Second Quarter of Fiscal 2009
Long-term fund net inflows of $1.7 billion in the third quarter of fiscal 2009 compare to $0.7 billion of net inflows in the second quarter of fiscal 2009 and reflect $5.8 billion of fund sales and other inflows, $4.3 billion of fund redemptions and a $0.2 billion increase in fund leverage. Institutional and high-net-worth separate account net inflows in the third quarter of fiscal 2009 were $1.2 billion, consisting of gross inflows of $2.3 billion offset by $1.1 billion of outflows. The strong results in institutional and high-net-worth separate accounts in the quarter reflect the funding of new institutional mandates at Eaton Vance Management and net inflows into high-net-worth and institutional accounts at Parametric Portfolio Associates and Atlanta Capital Management. In the second quarter of fiscal 2009, inflows of $1.6 billion in institutional and high net worth separate accounts were offset by outflows of $1.6 billion. Retail managed account net inflows increased to $1.0 billion in the third quarter of fiscal 2009 from $0.1 billion in the second quarter of fiscal 2009, primarily reflecting strong net sales of Eaton Vance Management's large cap value and tax-advantaged income products. Retail managed accounts gross inflows of $2.2 billion in the third quarter of fiscal 2009 were in line with the $2.2 billion of inflows in the second quarter of fiscal 2009, while outflows of $1.2 billion in the third quarter of fiscal 2009 were down significantly from outflows of $2.1 billion in the prior quarter. Tables 1-4 on page 7 summarize the Company's assets under management and asset flows by investment category.
Revenue in the third quarter of fiscal 2009 increased $30.0 million, or 15 percent, to $228.4 million from revenue of $198.4 million in the second quarter of fiscal 2009. Investment advisory and administration fees increased 14 percent to $175.2 million, reflecting a 12 percent increase in average assets under management and a modest increase in the Company's average effective investment advisory fee rate. Distribution and underwriter fees increased 16 percent due to an increase in average fund assets that pay these fees. Service fee revenue increased 16 percent due to an increase in average fund assets subject to service fees. Other revenue, which increased by $0.7 million over the prior quarter, included $0.4 million of net realized and unrealized gains on investments of consolidated funds recognized in the third quarter of fiscal 2009 compared to $0.3 million of net realized and unrealized losses on investments of consolidated funds in the second quarter of fiscal 2009.
Operating expenses increased $15.8 million, or 10 percent, to $169.1 million in the third quarter of fiscal 2009 from $153.3 million in the second quarter of fiscal 2009. Excluding the $3.3 million of expenses associated with the closed-end fund offering discussed above, operating expenses increased 8 percent. Compensation expense increased 15 percent, reflecting increases in bonus accruals, stock-based compensation and sales-based incentives, including $0.6 million of sales-based incentives in connection with the closed-end fund offering. Distribution expense increased 18 percent, reflecting $2.7 million in closed-end fund-related structuring fees paid to distribution partners and a 6 percent increase in other distribution expenses. Service fee expense increased 16 percent, in line with the increase in assets subject to service fees. Amortization of deferred sales commissions decreased 13 percent due to a decline in Class B and Class C fund share sales and assets. Fund expenses increased 19 percent sequentially, primarily reflecting an increase in subadvisory expenses. Other expenses decreased 4 percent due to decreases in facilities and depreciation, offset in part by increases in information technology and travel expense.
Operating income in the third quarter of fiscal 2009 was $59.2 million, up 31 percent from operating income of $45.1 million in the second quarter of fiscal 2009. The Company's operating margin improved to 25.9 percent in the third quarter of fiscal 2009 from 22.7 percent in the second quarter of fiscal 2009.
In evaluating operating performance, the Company considers operating income and net income, which are calculated on a basis consistent with accounting principles generally accepted in the United States of America ("GAAP"), as well as adjusted operating income, a non-GAAP performance measure. Adjusted operating income is defined as operating income excluding the results of consolidated funds and adding back closed-end structuring fees, stock-based compensation, write-offs of intangible assets and other items that we consider non-operating in nature. The Company believes that adjusted operating income is a key indicator of the Company's ongoing profitability and therefore uses this measure as the basis for calculating performance-based management incentives. Adjusted operating income is not, and should not be construed to be, a substitute for operating income computed in accordance with GAAP. However, in assessing the performance of the business, management and the Board of Directors look at adjusted operating income as a measure of underlying performance, since operating results of consolidated funds and amounts resulting from one-time events do not necessarily represent normal results of operations. In addition, when assessing performance, management and the Board look at performance both with and without stock-based compensation, a non-cash operating expense.
Adjusted operating income of $72.1 million in the third quarter of fiscal 2009 was 31 percent higher than the $55.0 million of adjusted operating income in the second quarter of fiscal 2009 and 30 percent below the $103.0 million of adjusted operating income in the third quarter of fiscal 2008. The Company's adjusted operating margin improved to 31.6 percent in the third quarter of fiscal 2009 from 27.7 percent in the second quarter of fiscal 2009.
The following table provides a reconciliation of operating income to adjusted operating income for the periods presented:
Reconciliation of Operating Income to Adjusted Operating Income --------------------------------------------------------------- For the Three Months Ended % Change -------------------------- ---------------- July April July Q3 2009 Q3 2009 31, 30, 31, to to (in thousands) 2009 2009 2008 Q2 2009 Q3 2008 ------------------------------------------------------------------------- Operating income $59,233 $45,123 $92,085 31% (36%) Closed-end fund structuring fees 2,677 - - NM NM Operating loss/ (income)of consolidated funds (620) 151 1,202 NM NM Stock-based compensation 10,796 9,682 9,707 12% 11% ------------------------------------------------------------------------- Adjusted operating income $72,086 $54,956 $102,994 31% (30%) =========================================================================
Interest income in the third quarter of fiscal 2009 increased 4 percent from the second quarter of fiscal 2009 due to higher effective interest rates earned on cash balances. In the third quarter of fiscal 2009, the Company recognized $3.1 million of net realized and unrealized gains on separate account investments and $0.4 million of impairment losses on investments in collateralized debt obligation entities. In the second quarter of fiscal 2009, the Company recognized $1.6 million of net realized and unrealized gains on separate account investments and $1.2 million of impairment losses on investments in collateralized debt obligation entities. The Company's effective tax rate, calculated as a percentage of income before non-controlling interest and equity in net income (loss) of affiliates, was 39.5 percent and 28.6 percent in the third quarter of fiscal 2009 and the second quarter of fiscal 2009, respectively. The increase in the Company's effective tax rate was due to the execution of a state tax voluntary disclosure agreement in the second quarter of fiscal 2009 that resulted in a $3.4 million net reduction in the Company's income tax expense.
Net income in the third quarter of fiscal 2009 was $31.2 million compared to net income of $25.8 million in the second quarter of fiscal 2009.
Comparison to Third Quarter of Fiscal 2008
Revenue in the third quarter of fiscal 2009 decreased $54.4 million, or 19 percent, to $228.4 million from revenue of $282.8 million in the third quarter of fiscal 2008.
