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EPHC > SEC Filings for EPHC > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for EPOCH HOLDING CORP

Form 10-Q for EPOCH HOLDING CORP


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Set forth on the following pages is management's discussion and analysis of our financial condition and results of operations for the three months ended September 30, 2012 and 2011. Such information should be read in conjunction with our unaudited condensed consolidated financial statements together with the notes to the unaudited condensed consolidated financial statements. When we use the terms "Company," "Firm," "management," "we," "us," and "our," we mean Epoch Holding Corporation, a Delaware corporation, and its consolidated subsidiaries.

Forward-Looking Statements

Certain information included or incorporated by reference in this Quarterly Report on Form 10-Q and other materials filed or to be filed by Epoch Holding Corporation ("Epoch" or the "Company") with the United States Securities and Exchange Commission (the "SEC") contain statements that may be considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," or "continue" and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about our Company, may include projections of our future financial performance based on our anticipated growth strategies and trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by our forward-looking statements. In particular, you should consider the risks and uncertainties outlined in "Factors Which May Affect Future Results."

These risks and uncertainties are not exhaustive. Other sections of this Quarterly Report on Form 10-Q may include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q, nor to conform our prior statements to actual results or revised expectations, and we do not intend to do so.

Forward-looking statements include, but are not limited to, statements about our:

business environment,

expectations with respect to the economy, securities markets, the market for asset management activity and other industry trends,

competitive position,

business strategy,

strategic relationships,

investment products,

recruitment and retention of employees,

possible or assumed future results of operations and operating cash flows,

potential operating performance, achievements, technological changes,

expected tax rates, and

the effect of future legislation and regulation.

Available Information

Reports we file electronically with the SEC via the SEC's Electronic Data Gathering, Analysis and Retrieval system ("EDGAR") may be accessed through the internet. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at www.sec.gov. In addition, the public may read and copy any material that we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.


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We maintain a website which contains current information on operations and other matters. Our website address is www.eipny.com. Through the Investor Relations section of our website, and the "Financial Information" tab therein, we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our Annual Proxy Statement, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, we post on our website within the Investors Relations section, and the "Corporate Governance" tab therein, our Code of Ethics and Business Conduct, as well as charters for the Audit, Nominating/Corporate Governance, and the Compensation Committees of our Board of Directors. We also make our financial statement information from our periodic SEC filings available on our website in the form of XBRL data files that may be used to facilitate computer-assisted investor analysis. The information on our website is not, and shall not be deemed to be a part hereof or incorporated into this or any other filings with the SEC.

Factors Which May Affect Future Results

There are numerous factors which may affect our future results of operations. These include, but are not limited to, the ability to attract and retain clients, performance of the financial markets and invested assets we manage, retention of key employees and members of management, and significant changes in regulations.

In addition, our ability to expand or alter our investment strategy offerings and distribution network, whether through acquisitions or internal development, is critical to our long-term success and has inherent risks. This success is dependent on the ability to identify and fund those developments or acquisitions on terms which are favorable to us. There can be no assurance that any of these operating factors or acquisitions can be achieved or, if undertaken, will be successful.

Other risks and uncertainties that we do not presently consider to be material or of which we are not presently aware may become important factors that affect us in the future.

These and other risks related to our Company are discussed in detail under Part I, Item 1A., "Risk Factors" beginning on page 13 in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Critical Accounting Estimates

Our significant accounting estimates are described in Note 2 of the Notes to the Consolidated Financial Statements, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, and have not changed from those described therein.


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Overview

We are a global asset management firm with accomplished and experienced professionals. Our professional investment staff averages over 20 years of industry experience. Headquartered in New York City, we had approximately $24.2 billion in assets under management ("AUM") as of September 30, 2012. We remain debt-free and continue to have substantial capital resources available to fund current operations and implement our long-term growth strategy.

Investment Philosophy

Our investment philosophy is focused on achieving superior long-term, total and risk-adjusted returns by investing in companies that generate free cash flow, appropriately allocate cash to create returns for shareholders, have understandable business models, possess transparent financial statements, and are undervalued relative to our investment team's value determinations. Risk management is integrated into each step of our investment process. Our portfolio construction process is designed to minimize stock-specific risk and manage volatility.

Distribution Channels

Our operating subsidiary, Epoch Investment Partners, Inc. ("EIP"), is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"). Our sole line of business is to provide investment advisory and investment management services to our clients including corporations, public pension funds, retirement plans, foundations, endowments, financial institutions, and high net worth individuals. These services are provided through both separately managed accounts and commingled vehicles, such as sub-advised mutual funds and our proprietary private investment funds. Our investment strategies are primarily distributed through three distribution channels. These channels and the relative percentage of managed assets at September 30, 2012 are: institutional (52%), sub-advisory (47%) and high net worth (1%).

All of the assets we manage are invested utilizing our investment strategies. We do not invest assets of our clients in any investment strategies of third parties.

Nearly all the assets we manage for our institutional and high net worth clients are managed as separate accounts. To the extent that any of our institutional or high net worth clients are invested in mutual funds for which we serve as sub-advisor or proprietary investment funds for which we serve as investment advisor, the assets are included in the reported AUM of the respective fund. In particular, mutual funds for which we serve as investment sub-advisor are reported as 'Sub-advisory' and our proprietary funds are reported as 'Institutional'. For those assets that are invested in funds that we manage, the fees are assessed strictly at the fund level, as part of the contractual management fee or related sub-advisory fee of the respective fund. There is no additional management fee.

Revenue

We earn revenues from managing client accounts under investment advisory and sub-advisory agreements. These agreements specify, among other things, the investment strategy for the account and the management fees to be paid, and are generally terminable by either party on relatively short notice. Fees vary by investment strategy, account size and servicing requirements. Fees are generally higher for international or global equity investment strategies than for U.S. investment strategies. Agreements remain in effect indefinitely, with the exception of sub-advised funds which are typically subject to annual approval by the respective fund's board of directors.

Revenues are generally derived as a percentage of AUM. The majority of accounts pay us management fees pursuant to a tiered fee schedule in which the fee rate declines as the amount of AUM increases. The fees we earn on institutional and high net worth separate accounts are typically based on the value of AUM at the end of the quarter. Our institutional separate account investment advisory agreements generally provide for fees ranging from 45 to 100 basis points of AUM annually, and our high net worth investment advisory agreements generally provide for fees ranging from 100 to 125 basis points of AUM annually. Fees earned from services to mutual funds under sub-advisory agreements are typically calculated based on the average of the daily net asset value of the fund. Due to the generally reduced client distribution and servicing requirements and the typically larger account size, the average advisory fees we earn on sub-advisory accounts as a percentage of AUM are lower than the advisory fees we earn on our institutional accounts, and generally range from 35 to 85 basis points of AUM annually. Fees earned for services provided to our proprietary funds (i.e. limited liability companies) are calculated based upon net asset values at the end of the month, and range from 80 to 150 basis points of AUM annually. Accordingly, notwithstanding an increase or decrease in AUM from quarter-end to quarter-end, significant fluctuations in asset values within a given quarter may have a more pronounced impact on revenues generated from sub-advised mutual funds than on revenues generated from separate accounts or our proprietary funds. Under some circumstances, particularly in connection with the introduction of a new proprietary fund, we may waive a portion of a fund's management fee and/or pay some expenses of the fund. Our proprietary funds currently represent approximately 1% of our AUM.


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Some of the institutional client accounts and proprietary funds we manage provide for performance fees according to the performance of the account or fund relative to certain agreed-upon benchmarks, which typically results in a lower base fee, but may permit us to earn higher fees if the relevant investment strategy outperforms the agreed-upon benchmark. Generally, if an agreement includes a performance fee, the performance fee ranges from 10% to 20% of the investment performance in excess of the relative benchmark. Several of our accounts with performance fees include a high-watermark provision which generally provides that if the account underperforms relative to its performance target, it must gain back such underperformance before we can collect future performance-based fees. The period in which performance fees are recognized may vary by account, based upon the particular client arrangement (i.e. quarterly or annual measurement period), commencement date of the agreement, and performance criteria.

Typically, investment advisory agreements may not be assigned (including as a result of transactions, such as a direct or indirect change of control of the asset manager that would constitute an assignment under the Investment Advisers Act or other applicable regulatory requirements) without the prior consent of the client. When the asset management client is a U.S. registered mutual fund or closed end fund, the fund's board of directors generally must annually approve the investment management contract, and any material changes to the contract, and the board and fund shareholders must approve any assignment of the contract (including as a result of transactions that would constitute an assignment under the Investment Company Act of 1940).

Investment advisory agreements are generally terminable upon thirty or fewer days notice. Our clients may elect to terminate their relationships with us, reduce the aggregate amount of assets under our management, or shift their funds to other types of investment strategies with different fee structures.

As revenues are derived as a percentage of AUM, among other factors, they are dependent upon:

performance of financial markets,

performance of our investment strategies,

our ability to retain existing clients and attract new ones, and

changes in the composition of AUM.

Expenses

Our most significant operating expense is employee compensation and benefits, comprising fixed salaries, variable incentive compensation, share-based compensation, and employee benefits. Variable incentive compensation is based upon our operating results, including AUM growth, investment performance, and operating income. Our level of compensation reflects our plan to maintain competitive compensation levels to retain key personnel. Other operating expenses include occupancy and technology costs, professional fees and services, general and administrative costs, and distribution and servicing fees.

AUM Fair Value Measurement

AUM consists of actively traded securities. The fair value of these securities that comprise our AUM, and materially impacts the determination of revenue, is measured using Level 1 inputs as defined by the Fair Value Topic in the Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC"), which are publicly available, unadjusted, quoted prices in active markets. These prices are obtained from an independent pricing service. We substantiate the values obtained with another independent pricing service to confirm that all prices are valid. There is no estimation involved in the calculation of AUM that materially impacts our revenue recognition.


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Key Performance Indicators

We monitor a variety of key performance indicators when evaluating our business results. The charts that follow depict our quarterly growth in certain key financial performance measures over the past five quarters:

(1) Ending AUM

(2) Average AUM

(3) Operating Revenues vs. Operating Expenses

(4) Operating Margin*

* Defined as operating income divided by total operating revenues.

[[Image Removed: LOGO]]


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Financial Highlights

During the three months ended September 30, 2012, favorable market performance led to an increase in our operating revenues and operating margin. Some highlights were as follows:

Our AUM was $24.2 billion at September 30, 2012, an increase of $1.0 billion, or 4%, from June 30, 2012. AUM increased by $8.2 billion, or 51%, from September 30, 2011.

AUM outflows slightly outpaced inflows by $70 million.

More than half of our investment strategies met or exceeded their respective benchmarks for the three and five-year periods ended September 30, 2012 and since investment strategy inception.

Our operating margin was approximately 49%, compared with 43% for the comparable period a year ago, as we continue to benefit from revenue growth and our operating leverage.

Basic earnings per share increased to $0.33 for the three months ended September 30, 2012, compared to $0.19 for the same period a year ago.

Our balance sheet remains strong. Cash flows from operations were $8.3 million. At September 30, 2012, working capital was $53.5 million, while cash and cash equivalents and accounts receivable were $60.0 million. We remain debt-free.

Following September 30, 2012, our Board approved an increase in the quarterly dividend from $0.08 to $0.10 per share, as a result of our strong financial position and anticipated future growth.

The following table presents key operating and financial indicators for the three months ended September 30, 2012 and 2011, respectively:

                                                Sept. 30,         Sept. 30,               Change
                                                  2012              2011             Amt            %
Operating Indicators ($ in millions):
AUM at end of period                           $    24,173       $    15,972       $  8,201           51 %
Average AUM for the period                     $    23,900       $    16,154       $  7,746           48 %
Net client flows                               $       (70 )     $     1,555       $ (1,625 )       (105 %)

Financial Indicators ($ in thousands,
except share data):
Operating Revenue                              $    27,623       $    19,009       $  8,614           45 %
Operating Income                               $    13,513       $     8,098       $  5,415           67 %
Net Income                                     $     7,894       $     4,418       $  3,476           79 %
Earnings Per Share:
Basic                                          $      0.33       $      0.19       $   0.14           74 %
Diluted                                        $      0.33       $      0.19       $   0.14           74 %
Operating Margin(1)                                     49 %              43 %            6 %          N M

NM Not meaningful.

(1) Defined as operating income divided by total operating revenues.

Business Environment

As an investment management and advisory firm, our results are impacted by the prevailing global economic climate, including such factors as corporate profitability, investor confidence, and interest rates. These factors can directly affect investor sentiment and global equity markets, and accordingly, our investment returns and AUM.

During the three months ended September 30, 2012, global equity markets posted solid gains despite weakening global economic activity and investor uncertainty. Markets were driven largely by central bank action which promoted investor confidence, with the European Central Bank declaring support for the sovereign bond markets of troubled nations and the U.S. Federal Reserve's latest round of quantitative easing. The economic environment in which we operate continues to be challenging.


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Investment returns for select broad market indices were as follows:

                                                     Period Ended
                                                  September 30, 2012
           Index(1)                           3 Months         12 Months
           Dow Jones Industrial Average(2 )         5.0 %            23.1 %
           NASDAQ Composite(2 )                     6.2 %            29.0 %
           S&P 500(2)                               6.4 %            30.2 %
           MSCI World (net)(2)                      6.7 %            21.6 %

(1) Assumes dividend re-investment.

(2) Indices are trademarks of Dow Jones & Company, NASDAQ Stock Market, Inc., McGraw-Hill Companies, Inc. and MSCI Inc., respectively, which are not affiliated with Epoch.

Assets under Management ("AUM")

The graph below depicts our quarterly AUM and revenue growth over the past eight quarters.

[[Image Removed: LOGO]]


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AUM and Flows

The following table sets forth the changes in our AUM for the periods presented
(dollars in millions):



                                                    Three Months Ended
                                                       September 30,
                                                    2012           2011
          Institutional
          Beginning of period AUM                 $ 12,096       $  8,140

          Inflows                                      466            980
          Outflows                                    (482 )          (48 )

          Net inflows/(outflows)                       (16 )          932
          Market appreciation/(depreciation)           536         (1,313 )

          Net change                                   520           (381 )

          End of period AUM                         12,616          7,759


          Sub-advisory
          Beginning of period AUM                   10,848          8,680

          Inflows                                      410            900
          Outflows                                    (464 )         (268 )

          Net inflows/(outflows)                       (54 )          632
          Market appreciation/(depreciation)           488         (1,335 )

          Net change                                   434           (703 )

          End of period AUM                         11,282          7,977


          High net worth
          Beginning of period AUM                      264            267

          Inflows                                        2             -
          Outflows                                      (2 )           (9 )

          Net inflows/(outflows)                        -              (9 )
          Market appreciation/(depreciation)            11            (22 )

          Net change                                    11            (31 )

          End of period AUM                            275            236


          Total
          Beginning of period AUM                   23,208         17,087

          Inflows(1)                                   878          1,880
          Outflows(1)                                 (948 )         (325 )

          Net inflows/(outflows)                       (70 )        1,555
          Market appreciation/(depreciation)(2)      1,035         (2,670 )

          Net change                                   965         (1,115 )

          End of period AUM                       $ 24,173       $ 15,972


          Percent change in total AUM                  4.2 %         (6.5 %)
          Net inflows/Beginning of period AUM         (0.3 %)         9.1 %

(1) Inflows include new client accounts and additional assets into existing client accounts. Outflows include closed accounts and withdrawals of assets from existing client accounts. For the Sub-advisory channel, inflows also include mutual fund distributions which are reinvested and outflows include mutual fund distributions which are not reinvested. Such mutual fund distributions are not a material portion of the gross flows.

(2) Market appreciation/(depreciation) includes the impact of foreign currency fluctuations.


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For the Three Months Ended September 30, 2012

AUM increased to $24.2 billion at September 30, 2012 from $23.2 billion at June 30, 2012. This increase was attributable to market appreciation. AUM outflows slightly outpaced inflows by $70 million.

Gross inflows into our Institutional distribution channel were approximately $0.5 billion and gross outflows were approximately $0.5 billion. Market appreciation on assets in our Institutional channel was approximately $0.5 billion. Inflows into the Institutional channel included approximately $0.3 billion of new accounts in our U.S. All Cap strategy as well as inflows into our Global Choice strategy.

Gross inflows into our Sub-advisory distribution channel were approximately $0.4 billion and gross outflows were approximately $0.5 billion. Market appreciation on assets in our Sub-advisory channel was approximately $0.5 billion. Inflows into our Global Shareholder Yield and U.S. Choice strategies were offset by outflows from our U.S. Value and U.S. All Cap Value strategies.

As of September 30, 2012, more than half of our strategies had met or outperformed their respective benchmarks for the 3-year and 5-year periods as well as since inception. For the three month period ended September 30, 2012, all of our investment strategies had positive returns ranging from approximately 3% in U.S. All Cap Value to 10% in International Small Cap. Global Equity Shareholder Yield comprised the majority of the total market appreciation as a result of its proportionate share of total AUM during the period. For further . . .

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