10-Q 1 v346950_10q.htm 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
  For the quarterly period ended April 30, 2013

or

¨ Transition Report Pursuant to Section 13 or 15 (d) of The Securities Exchange Act of 1934
  For the transition period from _____________ to ____________

 

Commission file no. 1-8100

 

EATON VANCE CORP.

(Exact name of registrant as specified in its charter)

 

Maryland   04-2718215
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    

 

Two International Place, Boston, Massachusetts 02110

(Address of principal executive offices) (zip code)

 

(617) 482-8260

(Registrant's telephone number, including area code)

 

Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Shares outstanding as of April 30, 2013:

Voting Common Stock – 399,240 shares

Non-Voting Common Stock – 121,009,816 shares

 

 

 

 
 

 

Eaton Vance Corp.

Form 10-Q

As of April 30, 2013 and for the

Three and Six Month Periods Ended April 30, 2013

 

Table of Contents

 

Required
Information
  Page
Number
Reference
     
Part I Financial Information  
Item 1. Consolidated Financial Statements   3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 3. Quantitative and Qualitative Disclosures About Market Risk

65

Item 4. Controls and Procedures 65
     
Part II Other Information  
Item 1. Legal Proceedings 65
Item 1A. Risk Factors 65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 68
Item 6. Exhibits 69
     
Signatures   70

 

2
 

 

Part I - Financial Information

 

Item 1. Consolidated Financial Statements

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

   April 30,   October 31, 
(in thousands)  2013   2012 
           
Assets          
           
Cash and cash equivalents  $320,135   $462,076 
Investment advisory fees and other receivables   153,135    133,589 
Investments   542,058    486,933 
Assets of consolidated collateralized loan obligation ("CLO") entity:          
Cash and cash equivalents   61,244    36,758 
Bank loans and other investments   319,321    430,583 
Other assets   5,538    1,107 
Deferred sales commissions   19,261    19,336 
Deferred income taxes   54,637    51,234 
Equipment and leasehold improvements, net   51,657    54,889 
Intangible assets, net   79,251    59,228 
Goodwill   228,876    154,636 
Other assets   52,166    89,122 
Total assets  $1,887,279   $1,979,491 

 

See notes to Consolidated Financial Statements.

 

3
 

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

   April 30,   October 31, 
(in thousands, except share data)  2013   2012 
         
Liabilities, Temporary Equity and Permanent Equity          
           
Liabilities:          
           
Accrued compensation  $86,993   $145,338 
Accounts payable and accrued expenses   60,428    59,397 
Dividend payable   24,287    23,250 
Debt   500,000    500,000 
Liabilities of consolidated CLO entity:          
Senior and subordinated note obligations   368,127    446,605 
Other liabilities   489    766 
Other liabilities   72,905    91,785 
Total liabilities   1,113,229    1,267,141 
           
Commitments and contingencies          
           
Temporary Equity:          
           
Redeemable non-controlling interests   121,252    98,765 
           
Permanent Equity:          
           
Voting Common Stock, par value $0.00390625 per share:          
Authorized, 1,280,000 shares          
Issued and outstanding, 399,240 and 413,167 shares,  respectively   2    2 
Non-Voting Common Stock, par value $0.00390625 per share:          
Authorized, 190,720,000 shares          
Issued and outstanding, 121,009,816 and 115,878,384 shares, respectively   473    453 
Additional paid-in capital   129,282    26,730 
Notes receivable from stock option exercises   (7,278)   (4,155)
Accumulated other comprehensive income   1,251    3,923 
Appropriated retained earnings   15,466    18,699 
Retained earnings   512,038    566,420 
Total Eaton Vance Corp. shareholders' equity   651,234    612,072 
Non-redeemable non-controlling interests   1,564    1,513 
Total permanent equity   652,798    613,585 
Total liabilities, temporary equity and permanent equity  $1,887,279   $1,979,491 

 

See notes to Consolidated Financial Statements.

 

4
 

 

Eaton Vance Corp.

Consolidated Statements of Income (unaudited)

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2013   2012   2013   2012 
Revenue:                    
Investment advisory and administrative fees  $276,921   $248,888   $540,202   $488,340 
Distribution and underwriter fees   22,165    22,551    44,916    45,066 
Service fees   31,132    32,065    62,262    64,364 
Other revenue   1,474    1,266    2,829    2,606 
Total revenue   331,692    304,770    650,209    600,376 
Expenses:                    
Compensation and related costs   110,012    97,566    218,841    194,249 
Distribution expense   35,304    32,960    69,193    65,288 
Service fee expense   29,211    28,088    57,475    56,761 
Amortization of deferred sales commissions   4,752    5,533    9,535    11,353 
Fund-related expenses   8,074    6,590    15,498    13,241 
Other expenses   36,269    35,222    70,917    67,853 
Total expenses   223,622    205,959    441,459    408,745 
Operating income   108,070    98,811    208,750    191,631 
Non-operating income (expense):                    
Gains and other investment income, net   5,043    2,796    10,250    10,973 
Interest expense   (8,572)   (8,412)   (17,142)   (16,825)
Other income (expense) of consolidated CLO entity:                    
Gains and other investment income, net   4,384    8,895    6,177    19,175 
Interest expense   (3,051)   (4,134)   (7,272)   (8,445)
Total non-operating (expense) income   (2,196)   (855)   (7,987)   4,878 
Income before income taxes and equity in net income (loss) of affiliates   105,874    97,956    200,763    196,509 
Income taxes   (38,194)   (35,164)   (74,133)   (70,351)
Equity in net income (loss) of affiliates, net of tax   3,440    (22)   6,617    1,482 
Net income   71,120    62,770    133,247    127,640 
Net income attributable to non-controlling and other beneficial interests   (7,439)   (9,900)   (19,761)   (27,499)
Net income attributable to Eaton Vance Corp. shareholders  $63,681   $52,870   $113,486   $100,141 
Earnings per share:                    
Basic  $0.53   $0.46   $0.93   $0.87 
Diluted  $0.50   $0.44   $0.89   $0.84 
Weighted average shares outstanding:                    
Basic   117,102    112,418    115,900    112,541 
Diluted   123,330    115,881    121,235    115,324 
Dividends declared per share  $0.20   $0.19   $1.40   $0.38 

 

See notes to Consolidated Financial Statements.

 

5
 

 

Eaton Vance Corp.

Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months   Six Months 
   Ended   Ended 
   April 30,   April 30, 
(in thousands)  2013   2012   2013   2012 
                 
Net income  $71,120   $62,770   $133,247   $127,640 
                     
Other comprehensive income (loss):                    
Amortization of loss on derivatives, net of income taxes of $39, $40, $79 and $79, respectively   72    72    144    144 
Unrealized holding gains (losses) on available-for-sale investments, net of income taxes of $(373), $(587), $1,103 and $(1,027), respectively   607    949    (1,796)   1,682 
Foreign currency translation adjustments, net of income taxes of $627, $(66), $626 and $19, respectively   (1,024)   73    (1,020)   (69)
                     
Other comprehensive (loss) income, net of tax   (345)   1,094    (2,672)   1,757 
Total comprehensive income   70,775    63,864    130,575    129,397 
Comprehensive income attributable to non-controlling and other beneficial interests   (7,439)   (9,900)   (19,761)   (27,499)
Total comprehensive income attributable to Eaton Vance Corp. shareholders  $63,336   $53,964   $110,814   $101,898 

 

See notes to Consolidated Financial Statements.

 

6
 

 

Eaton Vance Corp.

Consolidated Statements of Shareholders' Equity (unaudited)

 

   Permanent Equity   Temporary
Equity
 
(in thousands)  Voting
Common
Stock
   Non-Voting
Common
Stock
   Additional
Paid-In
Capital
   Notes
Receivable
from Stock
Option
Exercises
   Accumulated
Other
Comprehensive
Income
   Appropriated
Retained
Earnings
   Retained
Earnings
   Non-
Redeemable
Non-
Controlling
Interests
   Total
Permanent
Equity
   Redeemable
Non-
Controlling
Interests
 
Balance, November 1, 2012  $2   $453   $26,730   $(4,155)  $3,923   $18,699   $566,420   $1,513   $613,585   $98,765 
Net income   -    -    -    -    -    (3,233)   113,486    2,536    112,789    20,458 
Other comprehensive loss   -    -    -    -    (2,672)   -    -    -    (2,672)   - 
Dividends declared   -    -    -    -    -    -    (167,868)   -    (167,868)   - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    16    88,190    (4,734)   -    -    -    -    83,472    - 
Under employee stock purchase plan   -    1    1,761    -    -    -    -    -    1,762    - 
Under employee incentive plan   -    -    1,296    -    -    -    -    -    1,296    - 
Under restricted stock plan, net of forfeitures   -    6    -    -    -    -    -    -    6    - 
Stock-based compensation   -    -    26,884    -    -    -    -    -    26,884    - 
Tax benefit of stock option exercises   -    -    13,118    -    -    -    -    -    13,118    - 
Repurchase of Voting Common Stock   -    -    (73)   -    -    -    -    -    (73)   - 
Repurchase of Non-Voting Common Stock   -    (3)   (22,720)   -    -    -    -    -    (22,723)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    1,611    -    -    -    -    1,611    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (2,261)   (2,261)   39,450 
Deconsolidation   -    -    -    -    -    -    -    -    -    (13,969)
Reclass to temporary equity   -    -    -    -    -    -    -    (224)   (224)   224 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    -    (43,507)
Issuance of subsidiary equity   -    -    -    -    -    -    -    -    -    13,927 
Other changes in non-controlling interests   -    -    (5,904)   -    -    -    -    -    (5,904)   5,904 
Balance, April 30, 2013  $2   $473   $129,282   $(7,278)  $1,251   $15,466   $512,038   $1,564   $652,798   $121,252 

 

See notes to Consolidated Financial Statements.

 

7
 

 

Eaton Vance Corp.

Consolidated Statements of Shareholders' Equity (unaudited) (continued)

 

   Permanent Equity   Temporary
Equity
 
(in thousands)  Voting
Common
Stock
   Non-Voting
Common
Stock
   Additional
Paid-In
Capital
   Notes
Receivable
from Stock
Option
Exercises
   Accumulated
Other
Comprehensive
Income
   Appropriated
Retained
(Deficit)
Earnings
   Retained
Earnings
   Non-
Redeemable
Non-
Controlling
Interests
   Total
Permanent
Equity
   Redeemable
Non-
Controlling
Interests
 
Balance, November 1, 2011  $2   $450   $-   $(4,441)  $1,340   $(3,867)  $466,931   $889   $461,304   $100,824 
Net income   -    -    -    -    -    8,861    100,141    1,776    110,778    16,862 
Other comprehensive income   -    -    -    -    1,757    -    -    -    1,757    - 
Dividends declared   -    -    -    -    -    -    (43,991)   -    (43,991)   - 
Issuance of Voting Common Stock   -    -    56    -    -    -    -    -    56    - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    2    8,458    (211)   -    -    -    -    8,249    - 
Under employee stock purchase plan   -    1    1,823    -    -    -    -    -    1,824    - 
Under employee incentive plan   -    -    1,609    -    -    -    -    -    1,609    - 
Under restricted stock plan, net of forfeitures   -    5    -    -    -    -    -    -    5    - 
Stock-based compensation   -    -    29,320    -    -    -    -    -    29,320    - 
Tax benefit of stock option exercises   -    -    1,162    -    -    -    -    -    1,162    - 
Repurchase of Non-Voting Common Stock   -    (8)   (39,556)   -    -    -    (12,105)   -    (51,669)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    481    -    -    -    -    481    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (1,436)   (1,436)   20,102 
Deconsolidation   -    -    -    -    -    -    -    -    -    (6,276)
Reclass to temporary equity   -    -    -    -    -    -    -    (132)   (132)   132 
Other changes in non-controlling interests   -    -    (2,872)   -    -    -    -    -    (2,872)   2,872 
Balance, April 30, 2012  $2   $450   $-   $(4,171)  $3,097   $4,994   $510,976   $1,097   $516,445   $134,516 

 

See notes to Consolidated Financial Statements.

 

8
 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Six Months Ended 
   April 30, 
(in thousands)  2013   2012 
         
Cash Flows From Operating Activities:          
Net income  $133,247   $127,640 
Adjustments to reconcile net income to net cash (used for) provided by operating activities:          
Depreciation and amortization   11,610    12,597 
Amortization of deferred sales commissions   9,591    11,372 
Stock-based compensation   26,884    29,320 
Deferred income taxes   (1,755)   (5,176)
Net gains on investments and derivatives   (6,226)   (7,680)
Equity in net income of affiliates, net of amortization   (8,127)   (2,383)
Dividends received from affiliates   10,163    10,534 
Consolidated CLO entity operating activities:          
Net losses (gains) on bank loans, other investments and note obligations   2,739    (7,963)
Amortization of investments   (403)   (532)
Net (decrease) increase in other assets and liabilities, including cash   (29,244)   7,012 
Changes in operating assets and liabilities:          
Investment advisory fees and other receivables   (13,692)   1,665 
Investments in trading securities   (127,402)   (58,759)
Deferred sales commissions   (9,516)   (5,494)
Other assets   32,715    (31,142)
Accrued compensation   (60,286)   (61,329)
Accounts payable and accrued expenses   (3,443)   1,949 
Other liabilities   (18,947)   26,727 
Net cash (used for) provided by operating activities   (52,092)   48,358 
           
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (2,158)   (2,479)
Net cash paid in acquisition   (86,429)   (12,335)
Cash paid for intangible assets   (300)   (200)
Proceeds from sales of investments   63,184    47,407 
Purchase of investments   (662)   (6,274)
Consolidated CLO entity investing activities:          
Proceeds from sales and maturities of bank loans and other investments   199,601    89,308 
Purchase of bank loans and other investments   (85,412)   (96,525)
Net cash provided by investing activities   87,824    18,902 

 

See notes to Consolidated Financial Statements.

 

9
 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Six Months Ended 
   April 30, 
(in thousands)  2013   2012 
         
Cash Flows From Financing Activities:          
Purchase of additional non-controlling interest   (43,507)   - 
Proceeds from issuance of subsidiary equity   1,092    - 
Proceeds from issuance of Voting Common Stock   -    56 
Proceeds from issuance of Non-Voting Common Stock   86,536    11,687 
Repurchase of Voting Common Stock   (73)   - 
Repurchase of Non-Voting Common Stock   (22,723)   (51,669)
Principal repayments on notes receivable from stock option exercises   1,611    481 
Excess tax benefit of stock option exercises   13,118    1,162 
Dividends paid   (166,980)   (43,982)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   37,189    18,666 
Consolidated CLO entity financing activities:          
Principal repayments of senior notes   (83,742)   - 
Net cash used for financing activities   (177,479)   (63,599)
Effect of currency rate changes on cash and cash equivalents   (194)   94 
Net (decrease) increase in cash and cash equivalents   (141,941)   3,755 
Cash and cash equivalents, beginning of period   462,076    510,913 
Cash and cash equivalents, end of period  $320,135   $514,668 
Supplemental Cash Flow Information:          
Cash paid for interest  $16,478   $16,320 
Cash paid for interest by consolidated CLO entity   7,920    8,715 
Cash paid for income taxes, net of refunds   61,016    86,090 
Supplemental Disclosure of Non-Cash Information:          
Increase in equipment and leasehold improvements due to non-cash additions   $-   $180 
Exercise of stock options through issuance of notes receivable       4,734         211  
Deconsolidations of Sponsored Investment Funds:          
Decrease in investments  $(14,461)  $(6,639)
Decrease in non-controlling interests   (13,969)   (6,276)

 

See notes to Consolidated Financial Statements.

 

10
 

 

Eaton Vance Corp.

Notes to Consolidated Financial Statements (unaudited)

 

1. Basis of Presentation

 

In the opinion of management, the accompanying unaudited interim Consolidated Financial Statements of Eaton Vance Corp. (“the Company”) include all adjustments necessary to present fairly the results for the interim periods in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures have been omitted pursuant to such rules and regulations. As a result, these financial statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s latest annual report on Form 10-K.

 

2. Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of the Company and its controlled affiliates. The Company consolidates any voting interest entity in which the Company’s ownership exceeds 50 percent or where the Company has control. In addition, the Company consolidates any variable interest entity (“VIE”) (including the collateralized loan obligation (“CLO”) entity referred to in Note 9) for which the Company is considered the primary beneficiary. The Company recognizes non-controlling and other beneficial interests in consolidated affiliates in which the Company’s ownership is less than 100 percent. All intercompany accounts and transactions have been eliminated in consolidation.

 

From time to time, the Company may maintain a controlling interest in an Eaton Vance open-end registered investment company (a “sponsored fund”). Upon consolidation, the Company retains the specialized accounting treatment of the sponsored fund. Under the specialized accounting guidance for investment companies, underlying investments held by consolidated sponsored funds are carried at fair value, with corresponding changes in fair value reflected in gains and other investment income, net, in the Company’s Consolidated Statements of Income.

 

With limited exceptions, each of the Company’s sponsored funds is organized as a separately managed component (or “series”) of a series trust. All assets of a series irrevocably belong to that series and are subject to the liabilities of that series; under no circumstances are the liabilities of one series payable by another series. Series trusts themselves have no equity investment at risk, but decisions regarding the trustees of the trust and certain key activities of each sponsored fund within the trust, such as appointment of each sponsored fund’s investment adviser, typically reside at the trust level. As a result, shareholders of a sponsored fund that is organized as a series of a series trust lack the ability to control the key decision-making processes that most directly affect the performance of the sponsored fund. Accordingly, the Company believes that each trust is a VIE and each sponsored fund is a silo of a VIE that also meets the definition of a VIE. Having concluded that each silo is a VIE, the primary beneficiary evaluation defaults to an analysis of economic interest. The Company typically holds the majority of the shares of a sponsored fund corresponding to a majority economic interest during the seed investment stage when the fund’s investment track record is being established or when the fund is in the early stages of soliciting third-party investors. The Company consolidates the fund as primary beneficiary during this period. While the sponsored fund is consolidated, fee revenue is recorded, but is eliminated in consolidation.

 

The Company regularly seeds new sponsored funds and therefore may consolidate a variety of sponsored funds during a given reporting period. Due to the similarity of risks related to the Company’s involvement with each sponsored fund, disclosures required under the VIE model are aggregated, such as those disclosures regarding

 

11
 

 

the carrying amount and classification of assets of the sponsored funds, and the gains and losses that the Company recognizes from the sponsored funds.

 

When the Company is no longer deemed to control a sponsored fund, typically when either the Company redeems its shares or shares held by third parties exceed the number of shares held by the Company, the Company deconsolidates the sponsored fund and removes the related assets, liabilities and non-controlling interests from balance sheet accounts and classifies the Company’s remaining investment as either an equity method investment or an available-for-sale investment as applicable. Because consolidated sponsored funds utilize fair-value measurements, there is no incremental gain or loss recognized upon deconsolidation.

 

The extent of the Company’s exposure to loss with respect to a consolidated sponsored fund is the amount of the Company’s investment in the sponsored fund. The Company is not obligated to provide financial support to sponsored funds, and the assets of sponsored funds can only be used to settle obligations of the sponsored funds. Beneficial interest holders of sponsored funds do not have recourse to the general credit of the Company.

 

3. New Accounting Standards Not Yet Adopted

 

Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity

In March 2013, the Financial Accounting Standards Board (“FASB”) issued new guidance on reporting a cumulative translation adjustment (“CTA”) with respect to foreign currency. The new guidance addresses the accounting for a CTA when a parent either sells a part of or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The Company is evaluating the impact of this change and will adopt the new guidance on November 1, 2014.

 

Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued new guidance on reporting amounts reclassified out of accumulated other comprehensive income (“AOCI”). The new guidance does not change the requirements for reporting net income or other comprehensive income in the financial statements, but requires new footnote disclosures regarding the reclassification of AOCI by component into net income. The Company will implement the new disclosure requirements in the first quarter of fiscal 2014.

 

4. Consolidated Funds

 

Underlying investments held by consolidated sponsored funds were included in investments on the Company’s Consolidated Balance Sheets and classified as investment securities, trading, at April 30, 2013 and October 31, 2012. Net investment income related to consolidated sponsored funds was included in gains and other investment income, net, on the Company’s Consolidated Statements of Income for all periods presented. Net investment income was partially offset by amounts attributable to non-controlling interest holders, which are recorded in net income attributable to non-controlling and other beneficial interest holders in the Company’s Consolidated Statements of Income for all periods presented.

 

The following table sets forth the balances related to consolidated sponsored funds that are included on the Company’s Consolidated Balance Sheets at April 30, 2013 and October 31, 2012 as well as the Company’s net interest in these funds:

 

12
 

 

(in thousands)  April 30,
2013
   October 31,
2012
 
Investments  $243,657   $157,405 
Other assets   7,329    5,594 
Other liabilities   (18,328)   (16,928)
Redeemable non-controlling interests   (55,114)   (20,072)
Net interest in consolidated sponsored funds(1)  $177,544   $125,999 

 

(1)Excludes the Company's investment in its consolidated CLO entity, which is discussed in Note 9.

 

During the six months ended April 30, 2013 and 2012, the Company deconsolidated a total of three sponsored funds in each period.

 

5. Investments

 

The following is a summary of investments at April 30, 2013 and October 31, 2012:

 

(in thousands)  April 30,
2013
   October 31,
2012
 
Investment securities, trading:          
Consolidated sponsored funds  $243,657   $157,405 
Separately managed accounts   41,364    32,848 
Total investment securities, trading   285,021    190,253 
Investment securities, available-for-sale   19,770    31,148 
Investment in non-consolidated CLO entity   314    350 
Investments in equity method investees   229,422    257,652 
Investments, other   7,531    7,530 
Total investments(1)  $542,058   $486,933 

 

(1)Excludes the Company's investment in its consolidated CLO entity, which is discussed in Note 9.

 

Investment securities, trading

 

Investment securities, trading, consist of debt and equity securities held in the portfolios of consolidated sponsored funds and separately managed accounts. A separately managed account seeded by the Company for product development purposes is not a legal entity subject to consolidation but rather an individual portfolio of securities in the Company’s name managed to establish an investment track record. As a result, the Company looks through the construct of the portfolio to the underlying debt and equity securities and treats these securities as trading investments for accounting and disclosure purposes. The following is a summary of the fair value of investments classified as trading at April 30, 2013 and October 31, 2012:

 

(in thousands)  April 30,
2013
   October 31,
2012
 
Debt securities  $98,225   $70,805 
Equity securities   186,796    119,448 
Total investment securities, trading  $285,021   $190,253 

 

The Company seeds new investment strategies on a regular basis as a means of establishing investment records that can be used in marketing those strategies to retail and institutional clients. New investment strategies may

 

13
 

 

be seeded as either sponsored funds or separately managed accounts. During the six months ended April 30, 2013, the Company seeded investments in 9 sponsored funds and 14 separately managed accounts; during the six months ended April 30, 2012, the Company seeded investments in 13 sponsored funds and 3 separately managed accounts.

 

The Company recognized trading gains related to trading securities still held at the reporting date of $6.4 million and $1.0 million for the three months ended April 30, 2013 and 2012, respectively, and $15.9 million and $6.8 million for the six months ended April 30, 2013 and 2012, respectively.

 

Investment securities, available-for-sale

 

Investment securities, available-for-sale, consist exclusively of seed investments in certain sponsored funds, privately offered equity funds and closed-end funds, where the company has less than a 20 percent interest in the fund. The following is a summary of the gross unrealized gains and (losses) included in accumulated other comprehensive income related to securities classified as available-for-sale at April 30, 2013 and October 31, 2012:

 

April 30, 2013      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $13,851   $5,931   $(12)  $19,770 

 

October 31, 2012      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $22,331   $8,835   $(18)  $31,148 

 

Net unrealized holding gains (losses) on investment securities, available-for-sale, included in other comprehensive (loss) income were $1.0 million and $1.5 million for the three months ended April 30, 2013 and 2012, respectively, and $(2.9) million and $2.7 million for the six months ended April 30, 2013 and 2012, respectively.

 

The Company reviewed gross unrealized losses of $12,000 as of April 30, 2013 and determined that these losses were not other-than-temporary, primarily because the Company has both the ability and intent to hold the investments for a period of time sufficient to recover such losses. The aggregate fair value of investments with unrealized losses was $0.9 million at April 30, 2013. No investment with a gross unrealized loss has been in a loss position for greater than one year.

 

The following is a summary of the Company’s realized gains and losses upon disposition of investments classified as available-for-sale for the three and six months ended April 30, 2013 and 2012:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2013   2012   2013   2012 
Gains  $342   $162   $5,251   $247 
Losses   -    (101)   -    (123)
Net realized gains  $342   $61   $5,251   $124 
14
 

 

Investments in equity method investees

 

On August 6, 2012, the Company completed the purchase of a 49 percent interest in Hexavest Inc. (“Hexavest”), a Montreal, Canada-based investment advisor that provides discretionary management of equity and tactical asset allocations using a predominantly top-down investment style. The Company accounted for the purchase using the equity method. As of April 30, 2013, the investment in Hexavest was comprised of $4.5 million of equity in the net assets of Hexavest, intangible assets of $41.2 million, goodwill of $145.7 million and a deferred tax liability of $11.1 million, for a total carrying value of $180.3 million. As of October 31, 2012, the investment in Hexavest was comprised of $3.4 million of equity in the net assets of Hexavest, intangible assets of $42.7 million, goodwill of $146.6 million and a deferred tax liability of $11.5 million, for a total carrying value of $181.2 million. The Company will be obligated to make two additional payments in respect of the acquired interest if Hexavest exceeds defined annual revenue thresholds in the first and second twelve-month periods following the closing. These payments, if made, will be considered goodwill and will be recorded as additions to the carrying amount of the equity method investment. The Company’s interest in finite-lived intangible assets acquired in the transaction is being amortized over an estimated useful life of seventeen years.

 

In connection with the transaction, the Company also acquired an option, executable in fiscal 2017, to purchase an additional 26 percent interest in Hexavest. As part of the purchase price allocation, a value of $8.3 million was assigned to this option. The option is included in other assets in the Company’s Consolidated Balance Sheet at April 30, 2013 and October 31, 2012.

 

The Company has a 7 percent equity interest in a private equity partnership managed by a third party that invests in companies in the financial services industry. The Company’s investment in the partnership was $5.3 million and $9.8 million at April 30, 2013 and October 31, 2012, respectively.

 

The Company had equity-method investments in the following sponsored funds as of April 30, 2013 and October 31, 2012:

 

15
 

 

   Equity Ownership Interest (%)   Carrying Value ($)(1) 
   April 30,   October 31,   April 30,   October 31, 
(dollar amounts in thousands)  2013   2012   2013   2012 
                 
Eaton Vance Real Estate Fund   39%   48%  $14,365   $16,494 
Eaton Vance Municipal Opportunities Fund   31%   -    11,240    - 
Eaton Vance Focused Value Opportunities Fund   41%   -    6,190    - 
Eaton Vance Tax-Advantaged Bond Strategies Long Term Fund   23%   31%   6,113    10,346 
Eaton Vance Focused Growth Opportunities Fund   41%   -    5,922    - 
Eaton Vance Richard Bernstein All Asset Strategy Fund   -    44%   -    23,341 
AGF Floating Rate Income Fund   -    21%   -    15,334 
Eaton Vance Parametric Structured Currency Fund   -    33%   -    1,043 
Total            $43,830   $66,558 

  

(1)The carrying value of equity method investments in Eaton Vance-managed funds is measured based on the funds’ net asset values. The Company has the ability to redeem its investments in these funds at any time. Not shown are Company investments in certain of the above-listed funds that were not accounted for as equity method investments as of the indicated date.

 

The Company did not recognize any impairment losses related to its investments in equity method investees during the three and six months ended April 30, 2013 and 2012, respectively.

 

During the six months ended April 30, 2013 and 2012, the Company received dividends of $10.2 million and $10.5 million, respectively, from its investments in equity method investees.

 

16
 

 

6. Fair Value Measurements

 

The following tables summarize financial assets and liabilities measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy at April 30, 2013 and October 31, 2012:

 

April 30, 2013                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                          
Financial assets:                         
Cash equivalents  $10,222   $126,947   $-   $-   $137,169 
Investments:                         
Investment securities, trading – debt   37,846    60,379    -    -    98,225 
Investment securities, trading – equity   124,808    61,988    -    -    186,796 
Investment securities, available-for-sale   14,686    5,084    -    -    19,770 
Investment in non-consolidated CLO entity(1)   -    -    -    314    314 
Investments in equity method investees(2)   -    -    -    229,422    229,422 
Investments, other(3)   -    61    -    7,470    7,531 
Derivative instruments   -    1,174    -    -    1,174 
Assets of consolidated CLO entity:                         
Cash equivalents   59,485    -    -    -    59,485 
Bank loans and other investments   -    316,502    2,819    -    319,321 
Total financial assets  $247,047   $572,135   $2,819   $237,206   $1,059,207 
                          
Financial liabilities:                         
Derivative instruments  $-   $6,453   $-   $-   $6,453 
Securities sold, not yet purchased   -    1,603    -    -    1,603 
Liabilities of consolidated CLO entity:                         
Senior and subordinated note obligations   -    2,667    365,460    -    368,127 
Total financial liabilities  $-   $10,723   $365,460   $-   $376,183 

 

17
 

 

October 31, 2012                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                     
Financial assets:                         
Cash equivalents  $16,390   $139,469   $-   $-   $155,859 
Investments:                         
Investment securities, trading – debt   4,512    66,293    -    -    70,805 
Investment securities, trading – equity   87,991    31,457    -    -    119,448 
Investment securities, available-for-sale   26,736    4,412    -    -    31,148 
Investment in non-consolidated CLO entity(1)       -         -         -         350         350  
Investments in equity method investees(2)   -    -    -    257,652    257,652 
Investments, other(3)   -    60    -    7,470    7,530 
Derivative instruments   -    2,229    -    -    2,229 
Assets of consolidated CLO entity:                         
Cash equivalents   34,561    -    -    -    34,561 
Bank loans and other investments   98    428,282    2,203    -    430,583 
Total financial assets  $170,288   $672,202   $2,203   $265,472   $1,110,165 
                          
Financial liabilities:                         
Derivative instruments  $-   $788   $-   $-   $788 
Securities sold, not yet purchased   -    26,142    -    -    26,142 
Liabilities of consolidated CLO entity:                         
Senior and subordinated note obligations   -    2,659    443,946    -    446,605 
Total financial liabilities  $-   $29,589   $443,946   $-   $473,535 

 

(1) The Company’s investment in this CLO entity is measured at fair value on a non-recurring basis using Level 3 inputs. The investment is carried at amortized cost unless facts and circumstances indicate that the investment has been  impaired, at which time the investment is written down to fair value. There was no re-measurement of this asset during  the six month period ended April 30, 2013 or the twelve month period ended October 31, 2012.
(2) Investments in equity method investees are not measured at fair value in accordance with GAAP.
(3) Investments, other include investments carried at cost that are not measured at fair value in accordance with GAAP.

 

Valuation methodologies

 

The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis as well as the general classification of those assets and liabilities pursuant to the valuation hierarchy:

 

Cash equivalents

Cash equivalents consist of investments in money market funds and agency securities. Money market funds are valued using published net asset values and are classified as Level 1 within the valuation hierarchy. Agency securities are valued based upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active, and inputs other than quoted prices that are observable or

 

18
 

 

corroborated by observable market data. Depending on the nature of the inputs, these assets are generally classified as Level 1 or 2 within the valuation hierarchy.

 

Investment securities, trading debt

Investment securities, trading – debt, consist of debt obligations held in the portfolios of consolidated sponsored funds and separately managed accounts. Debt obligations (including short-term obligations with a remaining maturity of more than sixty days) are generally valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker-dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. Short-term obligations purchased with a remaining maturity of sixty days or less (excluding those that are non-U.S. denominated, which typically are valued by a third-party pricing service or dealer quotes) are generally valued at amortized cost, which approximates market value. Depending upon the nature of the inputs, investment securities, trading – debt, are generally classified as Level 1 or 2 within the valuation hierarchy.

 

Investment securities, trading equity

Investment securities, trading – equity, consist of foreign and domestic equity securities held in the portfolios of consolidated sponsored funds and separately managed accounts. Equity securities listed on a U.S. securities exchange generally are valued at the last sale or closing price on the day of valuation or, if no sales took place on such date, at the mean between the closing bid and asked prices on the exchange where such securities are principally traded. Equity securities listed on the NASDAQ Global or Global Select market generally are valued at the NASDAQ official closing price. Unlisted or listed securities for which closing prices or closing quotations are not available are valued at the mean between the latest available bid and asked prices. When valuing foreign equity securities that meet certain criteria as established by our fair value pricing service, the portfolios use a fair value service that values such securities to reflect market trading that occurs after the close of the applicable foreign markets of comparable securities or other instruments that have a strong correlation to the fair-valued securities. The service utilizes a multi-factor model that considers such information as an issue’s local closing price and post-closing fluctuations in relevant general market and sector indices, currencies, depositary receipts and futures, as applicable. The size of the adjustment is determined by the observed changes in these factors since the close of the applicable foreign market. The pricing service uses a multiple regression methodology and back testing to validate the quality and correlations of their evaluations. In addition, the Company performs its own independent back test review of fair values versus the subsequent local market opening prices when available. Depending upon the nature of the inputs, investment securities, trading – equity are generally classified as Level 1 or 2 within the valuation hierarchy.

 

Investment securities, available-for-sale

Investment securities, available-for-sale, consist of investments in sponsored mutual funds and privately offered equity funds. Sponsored mutual funds that are listed on an active exchange are valued using published net asset values and are classified as Level 1 within the valuation hierarchy. Investments in sponsored privately offered equity funds and portfolios that are not listed on an active exchange but have net asset values that are comparable to mutual funds and have no redemption restrictions are classified as Level 2 within the valuation hierarchy.

 

Derivative instruments

Derivative instruments, which include foreign exchange contracts, stock index futures contracts and commodity futures contracts, are recorded as either other assets or other liabilities on the Company’s Consolidated Balance Sheets. Foreign exchange contracts are valued by interpolating a value using the spot foreign exchange rate and forward points, which are based on spot rate and currency interest rate differentials. Index futures contracts and

 

19
 

 

commodity futures contracts are valued using a third-party pricing service that determines fair value based on bid and ask prices. Derivative instruments are generally classified as Level 2 within the valuation hierarchy.

 

Assets of consolidated CLO entity

Assets of the consolidated CLO entity include investments in money market funds, equity securities, debt securities, bank loans and warrants. Fair value is determined utilizing unadjusted quoted market prices when available. Interests in senior floating-rate loans for which reliable market quotations are readily available are valued generally at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 1, 2 or 3 within the valuation hierarchy.

 

Securities sold, not yet purchased

Securities sold, not yet purchased, are recorded as other liabilities on the Company’s Consolidated Balance Sheets and are valued by a third-party pricing service that determines fair value based on bid and ask prices. Securities sold, not yet purchased, are generally classified as Level 2 within the valuation hierarchy.

 

Liabilities of consolidated CLO entity

Liabilities of the consolidated CLO entity include debt securities and senior and subordinated note obligations of the consolidated CLO entity. The debt securities are valued based upon quoted prices for identical or similar liabilities that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The senior and subordinated notes are valued based upon model-based valuation techniques in which one or more significant inputs are unobservable in the market. Depending on the nature of the inputs, these liabilities are classified as Level 2 or 3 within the valuation hierarchy.

 

Transfers in and/or out of Levels

 

The following table summarizes fair value transfers between Level 1 and Level 2 for the three and six months ended April 30, 2013 and 2012:

 

   Three Months Ended
April 30,
   Six Months Ended
April 30,
 
(in thousands)  2013   2012   2013   2012 
Transfers from Level 1 into Level 2(1)  $120   $-   $120   $7,204 
Transfers from Level 2 into Level 1(2)   137    2,620    1,743    - 

 

(1)Transfers from Level 1 into Level 2 primarily represent debt and equity securities that were valued based on prices of similar securities because unadjusted quoted market prices were not available in the current period.

(2)Transfers from Level 2 into Level 1 primarily represent debt and equity securities due to the availability of unadjusted quoted market prices in active markets.

 

Level 3 assets and liabilities

 

The following table shows a reconciliation of the beginning and ending fair value measurements of assets and liabilities that are valued on a recurring basis and classified as Level 3 for the three and six months ended April 30, 2013 and 2012:

 

20
 

 

   Three Months Ended   Three Months Ended 
   April 30, 2013   April 30, 2012 
(in thousands)  Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations of
consolidated
CLO entity
   Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations of
consolidated
CLO entity
 
                 
Beginning balance  $2,658   $408,924   $4,728   $480,345 
Net gains (losses) on investments and note obligations included in
net
income(1)
   57    1,671    (9)   5,301 
Principal paydown   -    (45,135)   -    - 
Transfers into Level 3(2)   104    -    15    - 
Transfers out of Level 3(3)   -    -    (2,584)   (2,584)
Ending balance  $2,819   $365,460   $2,150   $483,062 
Change in unrealized (losses) gains included in net income relating to assets and liabilities held  $57   $1,671   $(9)  $5,301 

 

   Six Months Ended   Six Months Ended 
   April 30, 2013   April 30, 2012 
(in thousands)  Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations of
consolidated
CLO entity
   Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations of
consolidated
CLO entity
 
                 
Beginning balance  $2,203   $443,946   $5,910   $477,699 
Net gains (losses) on investments and note obligations included in
net income(1)
21             5,256         (49 )         7,947    
Principal paydown   -    (83,742)   -    - 
Transfers into Level 3(2)   595    -    15    - 
Transfers out of Level 3(3)   -    -    (3,726)   (2,584)
Ending balance  $2,819   $365,460   $2,150   $483,062 
Change in unrealized (losses) gains included in net income relating to assets and liabilities held   $ 21         $   5,256         $   (49 )     $   7,947  

 

(1) Substantially all net gains and losses on investments and note obligations attributable to the assets and borrowings of the Company's  consolidated CLO entity are allocated to non-controlling and other beneficial interests on the Company's Consolidated Statements of Income.
(2) Transfers into Level 3 were the result of a reduction in the availability of significant observable inputs used in determining the fair value of a second lien term loan. Fair value was determined utilizing a discounted cash flow analysis.
(3) Transfers out of Level 3 into Level 2 were due to an increase in the observability of the inputs used in determining the fair value of certain  instruments.

 

21
 

 

The following table shows the valuation technique and significant unobservable inputs utilized in the fair value measurement of Level 3 liabilities at April 30, 2013 and October 31, 2012:

 

April 30, 2013      Valuation  Unobservable   
($ in thousands)  Fair Value   Technique  Inputs(1)  Range
              
Liabilities of consolidated CLO entity:              
               
           Prepayment rate  30 percent
           Recovery rate  70 percent
          Default rate  200 bps
Senior and subordinated note obligations  $365,460   Income approach  Discount rate  105-450 bps

 

October 31, 2012      Valuation  Unobservable   
($ in thousands)  Fair Value   Technique  Inputs(1)  Range
              
Liabilities of consolidated CLO entity:              
               
           Prepayment rate  30 percent
           Recovery rate  70 percent
           Default rate  200 bps
Senior and subordinated note obligations  $443,946   Income approach  Discount rate  135-700 bps

 

(1) Discount rate refers to spread over LIBOR. Lower spreads relate to the more senior tranches in the CLO note structure;  higher spreads relate to the less senior tranches. The default rate refers to the constant annual default rate. Prepayment rate  is the rate at which the underlying collateral is expected to repay principal. Recovery rate is the expected recovery of defaulted amounts received through asset sale or recovery through bankruptcy restructuring or other settlement processes.

 

Valuation process

The Company elected the fair value option for both the collateral assets held and senior and subordinated notes issued by its consolidated CLO entity upon consolidation to mitigate any accounting inconsistencies between the carrying value of the assets held to provide cash flows for the note obligations and the carrying value of those note obligations.

 

Senior and subordinated note obligations of the Company’s consolidated CLO entity are issued in various tranches with different risk profiles. The notes are valued on a quarterly basis by the Company’s bank loan investment team utilizing an income approach that projects the cash flows of the collateral assets using the team’s projected default rate, prepayment rate, recovery rate and discount rate, as well as observable assumptions about market yields, collateral reimbursement assumptions, callability and other market factors that vary based on the nature of the investments in the underlying collateral pool. Once the undiscounted cash flows of the collateral assets have been determined, the bank loan team applies appropriate discount rates that it believes a reasonable market participant would use to determine the discounted cash flow valuation of the notes. The bank loan team routinely monitors market conditions and model inputs for cyclical and secular changes in order to identify any material factors that could influence the Company’s valuation method. The bank loan team reports directly to the Chief Income Investment Officer.

 

22
 

 

Sensitivity to changes in significant unobservable inputs

For senior and subordinated notes issued by the Company’s consolidated CLO entity, a change in the assumption used for the probability of default is generally accompanied by a directionally similar change in the assumption used for discount rates. Significant increases in either of these inputs would result in a significantly lower measurement of fair value.

 

Although the Company believes the valuation methods described above are appropriate, the use of different methodologies or assumptions to determine fair value could result in a different estimate of fair value at the reporting date.

 

7. Derivative Financial Instruments

 

Derivative financial instruments designated as cash flow hedges

 

During the six months ended April 30, 2013 and 2012, the Company reclassified into interest expense $0.2 million of the loss on the Treasury lock transaction in connection with the Company’s issuance of ten-year senior notes in October 2007. At April 30, 2013, the remaining unamortized loss on this transaction was $2.0 million. During the next twelve months, the Company expects to reclassify approximately $0.4 million of the loss on the Treasury lock transaction into interest expense.

 

Other derivative financial instruments not designated for hedge accounting

 

The Company has entered into a series of foreign exchange contracts, stock index futures contracts and commodity futures contracts to hedge currency risk exposure and market risk associated with its investments in separately managed accounts and consolidated sponsored funds seeded for new product development purposes.

 

At April 30, 2013, the Company had 53 foreign exchange contracts outstanding with three counterparties with an aggregate notional value of $54.5 million; 2,264 stock index futures contracts outstanding with one counterparty with an aggregate notional value of $155.7 million; and 200 commodity futures contracts outstanding with one counterparty with an aggregate notional value of $11.1 million.

 

The following tables present the fair value of derivative instruments not designated as hedging instruments as of April 30, 2013 and October 31, 2012:

 

April 30, 2013      
   Assets  Liabilities
(in thousands)  Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $141   Other liabilities  $915 
Stock index futures contracts  Other assets   424   Other liabilities   5,361 
Commodity futures contracts  Other assets   609   Other liabilities   177 
Total     $1,174      $6,453 

 

23
 

 

October 31, 2012      
   Assets  Liabilities
(in thousands)  Balance Sheet Location  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $226   Other liabilities  $300 
Stock index futures contracts  Other assets   1,505   Other liabilities   367 
Commodity futures contracts  Other assets   498   Other liabilities   121 
Total     $2,229      $788 

 

The following is a summary of the net gains (losses) recognized in income for the three and six months ended April 30, 2013 and 2012:

 

   Income Statement  Three Months Ended
April 30,
   Six Months Ended
April 30,
 
(in thousands)  Location  2013   2012   2013   2012 
Foreign exchange contracts  Gains and other investment income, net  $848   $195   $1,194   $428 
                        
Stock index futures contracts  Gains and other investment income, net   (8,881)   (5,756)   (18,911)   (9,901)
                        
Commodity futures contracts  Gains and other investment income, net   1,043    519    694    1,013 
Total     $(6,990)  $(5,042)  $(17,023)  $(8,460)

 

8. Fair Value Measurements of Other Financial Instruments

 

Certain financial instruments are not carried at fair value. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at April 30, 2013 and October 31, 2012:

 

   April 30, 2013       October 31, 2012     
(in thousands)  Carrying
Value
   Fair
Value
   Fair
Value
Level
   Carrying
Value
   Fair
Value
   Fair
Value
Level
 
Investments, other  $7,470   $7,470    3   $7,470   $7,470    3 
Other assets  $8,254   $8,254    3   $8,307   $8,307    3 
Debt  $500,000   $602,672    2   $500,000   $604,316    2 

 

Included in investments, other, is a $6.6 million non-controlling capital interest in Atlanta Capital Management Holdings, LLC (“ACM Holdings”), a partnership that owns certain non-controlling interests of Atlanta Capital Management LLC (“Atlanta Capital”). The Company’s interest in ACM Holdings is non-voting and entitles the Company to receive $6.6 million when put or call options for certain non-controlling interests of Atlanta Capital are exercised. The carrying value of this investment approximates fair value. The fair value of the investment is determined using a cash flow model which projects future cash flows based upon contractual obligations. Once the undiscounted cash flows have been determined, the Company applies an appropriate discount rate. The inputs to the model are considered Level 3.

 

24
 

 

Included in other assets is a five-year option to acquire an additional 26 percent interest in Hexavest. The $8.3 million carrying value of this option approximates fair value. The fair value of the option is determined using a Monte Carlo model which simulates potential future market multiples of earnings before interest and taxes (“EBIT”) and compares this to the contractually fixed multiple of Hexavest’s EBIT at which the option can be exercised. The Monte Carlo model uses this array of simulated multiples and their difference from the contractual multiple times the projected EBIT for Hexavest to estimate the future exercise value of the option, which is then adjusted to present value. The inputs to the model are considered Level 3.

 

The fair value of the Company’s debt has been determined using publicly available market prices, which are considered Level 2 inputs.

 

9. VIEs

 

In the normal course of business, the Company maintains investments in sponsored CLO entities, sponsored funds and privately offered equity funds that are considered VIEs. These variable interests generally represent seed investments made by the Company, as collateral manager or investment advisor, to launch or market these vehicles. The Company receives management fees for the services it provides as collateral manager or investment advisor to these entities. These fees may also be considered variable interests.

 

To determine whether or not the Company should be treated as the primary beneficiary of a VIE, management must make significant estimates and assumptions regarding probable future cash flows of the VIE. These estimates and assumptions relate primarily to market interest rates, credit default rates, prepayment rates, discount rates, the marketability of certain securities and the probability of certain outcomes.

 

Investments in VIEs that are consolidated

 

Sponsored funds

From time to time the Company invests in investment companies that meet the definition of a VIE. Disclosure regarding such consolidated sponsored funds is included in Note 4. In the ordinary course of business the Company may elect to contractually waive investment advisory fees that it is entitled to receive from sponsored funds, and these waivers are disclosed in Note 19.

 

Consolidated CLO entity

The Company is the primary beneficiary of one CLO entity where it has, by design and in its role as collateral manager, the power to direct the activities that most significantly impact the economic performance of the entity. In developing its conclusion that it is the primary beneficiary of this entity, the Company determined that it has variable interests in the entity by virtue of both its residual interest in, and collateral management fees it receives from, the entity and that these variable interests may represent an obligation to absorb losses of or a right to receive benefits from the entity that could potentially be significant to the entity. Quantitative distinguishing factors supporting the Company’s qualitative conclusion included the relative size of the Company’s economic interest (approximately 8 percent, which is greater than the Company’s investment in the non-consolidated CLO entities in which the Company holds variable interests and serves as collateral manager) and the presence of an incentive management fee which, when combined with returns on the Company’s residual interest, may result in more than an insignificant economic interest in the total returns of the entity. In consideration of these factors, the Company concluded that it was the primary beneficiary of that CLO entity for consolidation accounting purposes.

 

The Company irrevocably elected the fair value option for all financial assets and liabilities of the consolidated CLO entity. Unrealized gains and losses on assets and liabilities for which the fair value option has been elected are reported in gains and other investment income, net, in the Company’s Consolidated Statements of Income. Although the subordinated note obligations of the CLO entity have certain equity characteristics, the Company

 

25
 

  

has determined that the subordinated notes should be recorded as liabilities in the Company’s Consolidated Balance Sheets.

 

The assets of this CLO entity are held solely as collateral to satisfy the obligations of the entity. The Company has no right to the benefits from, nor does the Company bear the risks associated with, the assets held by the entity beyond the Company’s minimal direct investment and beneficial interest therein and management fees generated from the entity. The note holders of the CLO entity have no recourse to the Company’s general assets. There are no explicit arrangements nor does the Company hold implicit variable interests that would require the Company to provide any ongoing financial support to the entity.

 

The following tables present, as of April 30, 2013 and October 31, 2012, the fair value of the consolidated CLO entity’s assets and liabilities subject to fair value accounting:

 

April 30, 2013            
   CLO Bank Loan Investments     
(in thousands)  Total CLO
bank loan
investments
   90 days or
more past
due
   Senior and
subordinated
note obligations
 
Unpaid principal balance  $312,301   $1,150   $387,811 
Unpaid principal balance (over) under fair value   541    (629)   (19,684)
Fair value  $312,842   $521   $368,127 

 

October 31, 2012            
   CLO Bank Loan Investments     
(in thousands)  Total CLO
bank loan
investments
   90 days or
more past
due
   Senior and
subordinated
note obligations
 
Unpaid principal balance  $425,153   $500   $471,546 
Unpaid principal balance over fair value   (863)   (485)   (24,941)
Fair value  $424,290   $15   $446,605 

 

During the three months ended April 30, 2013 and 2012, the changes in the fair values of the CLO entity’s bank loans and other investments resulted in net gains of $2.0 million and $8.5 million, respectively, while changes in the fair value of the CLO’s note obligations resulted in net losses of $1.7 million and $5.3 million, respectively. The combined net gains of $0.3 million and $3.2 million for the three months ended April 30, 2013 and 2012, respectively, were recorded as gains and other investment income, net, of the consolidated CLO entity in the Company’s Consolidated Statement of Income for those periods.

 

During the six months ended April 30, 2013 and 2012, the changes in the fair values of the CLO entity’s bank loans and other investments resulted in net gains of $2.5 million and $15.9 million, respectively, while changes in the fair value of the CLO’s note obligations resulted in net losses of $5.2 million and $7.9 million, respectively. The combined net losses of $2.7 million and net gains of $8.0 million for the six months ended April 30, 2013 and 2012, respectively, were recorded as gains and other investment income, net, of the consolidated CLO entity in the Company’s Consolidated Statement of Income for those periods.

 

26
 

 

Substantially all gains (losses) related to the CLO entity’s bank loans, other investments and note obligations recorded in earnings for the periods were attributable to changes in instrument-specific credit risk.

 

The CLO entity’s note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread, which ranges from 0.21 percent to 1.50 percent. The principal amounts outstanding of the note obligations issued by the CLO entity mature on April 20, 2019. It is expected that prepayments received will be used to pay down the entity’s note obligations. During the six months ended April 30, 2013, $83.7 million of prepayments were used to pay down the entity’s note obligations. The holders of a majority of the subordinated notes have the option to liquidate the CLO entity, provided there is sufficient value to repay the senior notes in full.

 

Interest income and expense are recorded on an accrual basis and reported as gains and other investment income, net and as interest expense in other income (expense) of the consolidated CLO entity in the Company’s Consolidated Statements of Income for the three and six months ended April 30, 2013 and 2012, respectively.

 

The following carrying amounts related to the consolidated CLO entity were included in the Company’s Consolidated Balance Sheets at April 30, 2013 and October 31, 2012:

 

   April 30,   October 31, 
(in thousands)  2013   2012 
Assets of consolidated CLO entity:          
Cash and cash equivalents  $61,244   $36,758 
Bank loans and other investments   319,321    430,583 
Other assets   5,538    1,107 
Liabilities of consolidated CLO entity:          
Senior and subordinated note obligations   368,127    446,605 
Other liabilities   489    766 
Appropriated retained earnings   15,466    18,699 
Net interest in consolidated CLO entity  $2,021   $2,378 

 

The Company had a subordinated interest in the consolidated CLO entity of $1.6 million and $1.9 million as of April 30, 2013 and October 31, 2012, respectively, which was eliminated in consolidation.

 

For the three months ended April 30, 2013 and 2012, the Company recorded net income of $1.2 million and $4.7 million, respectively, related to the consolidated CLO entity. The Company recorded net income attributable to other beneficial interests of $0.1 million and $3.9 million for three months ended April 30, 2013 and 2012, respectively, reflecting the interests of third-party note holders of the consolidated CLO entity. Net income attributable to Eaton Vance Corp. shareholders included $1.2 million and $0.8 million related to the consolidated CLO entity for each of the three months ended April 30, 2013 and 2012, respectively.

 

For the six months ended April 30, 2013 and 2012, the Company recorded a net loss of $1.3 million and net income of $10.5 million, respectively, related to the consolidated CLO entity. The Company recorded a $3.2 million net loss attributable to other beneficial interests and net income attributable to other beneficial interests of $8.9 million for the six months ended April 30, 2013 and 2012, respectively, reflecting the interests of third-party note holders of the consolidated CLO entity. Net income attributable to Eaton Vance Corp. shareholders included $1.9 million and $1.6 million related to the consolidated CLO entity for each of the six months ended April 30, 2013 and 2012, respectively.

 

27
 

 

Investments in VIEs that are not consolidated

 

Sponsored funds

The Company classifies its investments in certain sponsored funds that are considered VIEs as either equity method investments (generally when the Company owns more than 20 percent but less than 50 percent of the fund) or as available-for-sale investments (generally when the Company owns less than 20 percent of the fund), when it is not considered the primary beneficiary of those VIEs. The Company has provided aggregated disclosures with respect to these non-consolidated sponsored fund VIEs in Note 5.

 

Non-consolidated CLO entities

The Company is not deemed the primary beneficiary of several CLO entities in which it holds variable interests. In its role as collateral manager, the Company has the power to direct the activities of the CLO entities that most significantly impact the economic performance of these entities. In developing its conclusion that it is not the primary beneficiary of these entities, the Company determined that, although it has variable interests in each such entity by virtue of its residual interest therein and the collateral management fees it receives, its variable interests neither individually nor in the aggregate represent an obligation to absorb losses of or a right to receive benefits from any such entity that could potentially be significant to that entity. Quantitative factors supporting the Company’s qualitative conclusion in each case included the relative size of the Company’s residual interest (in each instance representing less than 6 percent of the residual interest tranche and less than 1 percent of the total capital of the entity) and the overall magnitude and design of the collateral management fees within each structure.

 

These non-consolidated entities had total assets of $1.8 billion as of April 30, 2013 and October 31, 2012. The Company’s investment in these entities totaled $0.3 million and $0.4 million as of April 30, 2013 and October 31, 2012, respectively, and collateral management fees receivable for these entities totaled $2.0 million on April 30, 2013 and October 31, 2012. In the first six months of fiscal 2013, the Company did not provide any financial or other support to these entities that it was not previously contractually required to provide. The Company’s risk of loss with respect to these entities is limited to the carrying value of its investments in, and collateral management fees receivable from, the CLO entities as of April 30, 2013.

 

The Company’s investment in non-consolidated CLO entities is carried at amortized cost and is disclosed as a component of investments in Note 5. Income from non-consolidated CLO entities is recorded as a component of gains and other investment income, net, in the Company’s Consolidated Statements of Income, based upon projected investment yields.

 

Other entities

The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain sponsored privately offered equity funds with total assets of $9.3 billion and $9.0 billion as of April 30, 2013 and October 31, 2012, respectively. The Company’s variable interests in these entities consist of the Company’s direct ownership in these entities and any investment advisory fees earned but uncollected. The Company held investments in these entities totaling $5.1 million and $4.4 million on April 30, 2013 and October 31, 2012, respectively, and investment advisory fees receivable totaling $0.4 million on April 30, 2013 and October 31, 2012. In the first six months of fiscal 2013, the Company did not provide any financial or other support to these entities that it was not previously contractually required to provide. The Company’s risk of loss with respect to these managed entities is limited to the carrying value of its investments in and investment advisory fees receivable from the entities as of April 30, 2013.

 

The Company’s investments in privately offered equity funds are carried at fair value and included in investment securities, available for sale, which are disclosed as a component of investments in Note 5. The Company records any change in fair value, net of income tax, in other comprehensive income (loss).

 

28
 

 

10. Acquisitions

 

The Clifton Group Investment Management Company (“Clifton”)

On December 31, 2012, the Company’s subsidiary, Parametric Portfolio Associates LLC (“Parametric”), acquired Clifton. The operating results of Clifton have been included in the Company’s consolidated statements since that date. Pro forma results of operations have not been presented because the results of operations would not have been materially different from those reported in the accompanying Consolidated Statements of Income. Clifton is a provider of futures- and options-based overlay services and risk management solutions for institutional investors based in Minneapolis, Minnesota. The Clifton acquisition complements and expands the range of engineered portfolio solutions offered by Parametric. The Company paid $72.3 million in cash and issued an indirect ownership interest in Parametric with a fair market value of $12.8 million to certain Clifton principals. These indirect interests are subject to certain put and call arrangements at fair value that may be executed over a five-year period. There are no future contingent payments to be made in connection with the acquisition. Upon closing, Clifton became a division of Parametric.

 

In conjunction with the purchase, the Company recorded $24.5 million of intangible assets, which consist primarily of client relationship intangible assets acquired. The client relationship intangible assets will be amortized over an eighteen-year period. The Company also recorded goodwill of $60.1 million, which is deductible for tax purposes. During the three months ended April 30, 2013, revenue and earnings from Clifton were $6.3 million and $1.7 million, respectively. During the six months ended April 30, 2013, revenue and earnings from Clifton were $8.4 million and $2.2 million, respectively.

 

Tax Advantaged Bond Strategies (“TABS”)

In fiscal 2009, the Company acquired the TABS business of M.D. Sass Investors Services, a privately held investment manager based in New York, New York for cash and future consideration. During the first quarter of fiscal 2013, the Company made a contingent payment of $14.1 million to the selling group based upon prescribed multiples of TABS’s revenue for the twelve months ended December 31, 2012. The payment increased goodwill by $14.1 million. The Company will be obligated to make three additional annual contingent payments to certain remaining members of the selling group based on prescribed multiples of TABS’s revenue for the twelve months ending December 31, 2014, 2015 and 2016. All future payments will be in cash and will result in an addition to goodwill. These payments are not contingent upon any member of the selling group remaining an employee of the Company.

 

Parametric

In December 2012, certain non-controlling interest holders of Parametric exercised their final put option pursuant to the terms of the original acquisition agreement requiring the Company to purchase an additional 3.4 percent capital and 5.7 percent profit interest in the entity. The $43.5 million exercise price of the put option was based on a multiple of estimated earnings before taxes for the calendar year ended December 31, 2012. The payment was treated as an equity transaction and reduced redeemable non-controlling interests at closing on December 20, 2012. Indirect profit interests granted to Parametric employees under a long-term equity incentive plan of that entity increased to 4.9 percent on April 30, 2013, reflecting a 0.76 percent profit interest granted on November 1, 2012 under the plan. Indirect capital and profit interests in Parametric held by the principals of Clifton totaled 1.9 percent on April 30, 2013, reflecting indirect interests issued in conjunction with the Clifton acquisition on December 31, 2012. Capital and profit interests in Parametric held by the Company increased to 98.1 percent and 93.3 percent, respectively, on April 30, 2013, reflecting the transactions described above.

 

29
 

 

11. Intangible Assets

 

The following is a summary of intangible assets at April 30, 2013 and October 31, 2012:

 

April 30, 2013            
(dollars in thousands)  Gross
carrying
amount
   Accumulated
amortization
   Net
carrying
amount
 
                
Amortizing intangible assets:               
Client relationships acquired  $133,927   $(63,083)  $70,844 
Intellectual property acquired   1,000    (158)   842 
Trademark acquired   900    (43)   857 
                
Non-amortizing intangible assets:               
Mutual fund management contract acquired   6,708    -    6,708 
Total  $142,535   $(63,284)  $79,251 

 

October 31, 2012            
(dollars in thousands)  Gross
carrying
amount
   Accumulated
amortization
   Net
carrying
amount
 
                
Amortizing intangible assets:               
Client relationships acquired  $110,327   $(58,681)  $51,646 
Intellectual property acquired   1,000    (126)   874 
                
Non-amortizing intangible assets:               
Mutual fund management contract acquired   6,708    -    6,708 
Total  $118,035   $(58,807)  $59,228 

 

Amortization expense was $2.4 million and $2.0 million for the three months ended April 30, 2013 and 2012 and $4.5 million and $4.0 million for the six months ended April 30, 2013 and 2012, respectively. Estimated remaining amortization expense for the next five fiscal years, on a straight-line basis, is as follows:

 

Year Ending October 31,  Estimated
Amortization
 
(in thousands)  Expense 
Remaining 2013  $4,717 
2014   9,408 
2015   9,183 
2016   8,741 
2017   8,628 
2018   8,188 

 

30
 

 

12. Stock-Based Compensation Plans

 

The Company recognized total compensation cost related to its stock-based compensation plans as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2013   2012   2013   2012 
2008 Plan:                
Stock options  $3,677   $6,260   $7,525   $15,443 
Restricted shares   8,008    5,892    16,437    12,007 
Phantom stock units   129    69    273    124 
Employee Stock Purchase Plan   -    -    376    108 
Incentive Plan – Stock Alternative   2    -    198    126 
Atlanta Capital Plan   352    232    703    463 
Parametric Plan   822    594    1,645    1,173 
Total stock-based compensation expense  $12,990   $13,047   $27,157   $29,444 

 

The total income tax benefit recognized for stock-based compensation arrangements was $5.0 million and $4.0 million for the three months ended April 30, 2013 and 2012, respectively, and $10.5 million and $9.2 million for the six months ended April 30, 2013 and 2012, respectively.

 

2008 Omnibus Incentive Plan (“2008 Plan”)

 

The 2008 Plan, which is administered by the Compensation Committee of the Board, allows for awards of stock options, restricted shares and phantom stock units to eligible employees and non-employee Directors. A total of 19.8 million shares of Non-Voting Common Stock have been reserved for issuance under the 2008 Plan. Through April 30, 2013, 6.0 million restricted shares and options to purchase 14.5 million shares have been issued pursuant to the 2008 Plan.

 

Stock Options

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to dividend yield, volatility, an appropriate risk-free interest rate and the expected life of the option. Many of these assumptions require management’s judgment. The Company’s stock volatility assumption is based upon its historical stock price fluctuations. The Company uses historical data to estimate option forfeiture rates and the expected term of options granted. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant.

 

The weighted-average fair value per share of stock options granted during the six months ended April 30, 2013 and 2012 using the Black-Scholes option pricing model were as follows:

 

31
 

  

   2013   2012 
Weighted-average grant date fair value of options granted  $7.68   $6.68 
           
Assumptions:          
Dividend yield   2.8% to 5.5%    2.9% to 3.1% 
Volatility   36%   36%
Risk-free interest rate   1.2% to 1.3%    1.5%
Expected life of options   7.1 years    7.2 years 

 

Stock option transactions under the 2008 Plan and predecessor plans for the six months ended April 30, 2013 are summarized in the below table.

 

(share and intrinsic value figures in thousands)  Shares   Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Term (in
years)
   Aggregate
Intrinsic
Value
 
Options outstanding, beginning of period   27,653   $26.90           
Granted   2,251    28.31           
Exercised   (4,207)   20.97           
Forfeited/expired   (207)   29.96           
Options outstanding, end of period   25,490   $27.98    5.1   $324,971 
Options exercisable, end of period   16,601   $28.77    3.6   $206,028 
Vested or expected to vest   25,135   $28.00    5.1   $320,213 

 

The number of shares subject to option and the weighted-average exercise price of options reflected in the table above have been adjusted pursuant to certain anti-dilution provisions of the Company’s 2008 Plan and predecessor plans to reflect the effect of a $1.00 per share special dividend declared and paid in December 2012.

 

The Company received $83.5 million and $8.2 million related to the exercise of options for the six months ended April 30, 2013 and 2012, respectively. Options exercised represent newly issued shares. The total intrinsic value of options exercised during the six months ended April 30, 2013 and 2012 was $56.6 million and $5.0 million, respectively. The total fair value of options that vested during the six months ended April 30, 2013 was $28.0 million.

 

As of April 30, 2013, there was $35.0 million of compensation cost related to unvested stock options granted not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.3 years.

 

Restricted Shares

Compensation expense related to restricted share grants is recorded over the forfeiture period of the restricted shares, as they are contingently forfeitable. As of April 30, 2013, there was $84.8 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.4 years.

 

A summary of the Company's restricted share activity for the six months ended April 30, 2013 under the 2008 Plan and predecessor plans is summarized in the below table:

 

32
 

 

       Weighted- 
       Average 
       Grant 
       Date Fair 
(share figures in thousands)  Shares   Value 
Unvested, beginning of period   3,233   $26.43 
Granted   1,601    29.11 
Vested   (756)   26.29 
Forfeited   (103)   28.15 
Unvested, end of period   3,975   $27.53 

 

The total fair value of restricted stock that vested during the six months ended April 30, 2013 and 2012 was $19.9 million and $12.2 million, respectively.

 

Phantom Stock Units

In the six months ended April 30, 2013, 9,465 phantom stock units were issued to non-employee Directors pursuant to the 2008 Plan. Because these units are contingently forfeitable, compensation expense is recorded over the forfeiture period. The total liability paid out associated with phantom stock during the six months ended April 30, 2013 and 2012 was $0.3 million and $0.2 million, respectively. As of April 30, 2013, there was $0.4 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 1.2 years.

 

13. Common Stock Repurchases

 

The Company’s current share repurchase program was announced on October 26, 2011. The Board authorized management to repurchase and retire up to 8.0 million shares of its Non-Voting Common Stock on the open market and in private transactions in accordance with applicable securities laws. The timing and amount of share purchases are subject to management’s discretion. The Company’s share repurchase program is not subject to an expiration date.

 

In the first six months of fiscal 2013, the Company purchased and retired approximately 0.7 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 3.2 million additional shares may be repurchased under the current authorization.

 

33
 

 

14. Non-operating Income (Expense)

 

The components of non-operating income (expense) for the three and six months ended April 30, 2013 and 2012 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2013   2012   2013   2012 
Non-operating income (expense):                    
Interest and other income  $3,423   $1,956   $4,027   $3,693 
Net gains on investments and derivatives   1,475    1,250    6,226    7,680 
Net foreign currency gains (losses)   145    (410)   (3)   (400)
Gains and other investment income, net   5,043    2,796    10,250    10,973 
Interest expense   (8,572)   (8,412)   (17,142)   (16,825)
                     
Other income (expense) of consolidated                    
CLO entity:                    
Interest income   4,071    5,668    8,916    11,212 
Net gains (losses) on bank loans,                    
other investments and note obligations   313    3,227    (2,739)   7,963 
Gains and other investment income, net   4,384    8,895    6,177    19,175 
Interest expense   (3,051)   (4,134)   (7,272)   (8,445)
Total non-operating (expense) income  $(2,196)  $(855)  $(7,987)  $4,878 

 

15. Income Taxes

 

The provision for income taxes was $38.2 million and $35.2 million, or 36.1 percent and 35.9 percent of pre-tax income, for the three months ended April 30, 2013 and 2012, respectively. The provision for income taxes was $74.1 million and $70.4 million, or 36.9 percent and 35.8 percent of pre-tax income, for the six months ended April 30, 2013 and 2012, respectively. The provision for income taxes in the three and six months ended April 30, 2013 and 2012 is comprised of federal, state, and foreign taxes. The primary differences between the Company’s effective tax rate and the statutory federal rate of 35.0 percent are state income taxes, income recognized by the consolidated CLO entity, other non-controlling interests and the tax benefit of disqualifying dispositions of incentive stock options.

 

The Company records a valuation allowance when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. There was no valuation allowance recorded as of April 30, 2013 or October 31, 2012.

 

The Company is currently under audit by several states. One state previously provided the Company with a draft position that may result in a proposed adjustment to the Company’s previously filed tax returns. During the six months ended April 30, 2013, this state provided additional background to the Company on the state’s draft position. The Company has evaluated this recent correspondence and determined that there is no new information that causes the Company to change its initial conclusion regarding the technical merits of its position. The Company intends to continue its discussions with the state on this matter. If an adjustment is proposed, the Company intends to vigorously defend its positions. It is possible the ultimate resolution of the proposed adjustment, if unfavorable, may be material to the results of operations in the period it occurs. Pending receipt of a formal assessment, an estimate of the range of the reasonably possible change in unrecognized tax benefits over the next twelve months cannot be made.

 

34
 

 

16. Non-controlling and Other Beneficial Interests

 

Net income attributable to non-controlling and other beneficial interest holders totaled $7.4 million and $9.9 million for the three months ended April 30, 2013 and 2012, respectively, and $19.8 million and $27.5 million for the six months ended April 30, 2013 and 2012, respectively.

 

The components of net income attributable to non-controlling and other beneficial interest holders for the three and six months ended April 30, 2013 and 2012 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2013   2012   2013   2012 
Consolidated sponsored funds  $(2,986)  $(1,182)  $(4,092)  $(2,328)
Majority-owned subsidiaries   (3,690)   (3,751)   (7,589)   (7,111)
Non-controlling interest value adjustments(1)   (666)   (1,097)   (11,313)   (9,199)
Consolidated CLO entity   (97)   (3,870)   3,233    (8,861)
Net income attributable to non-controlling and other beneficial interests  $(7,439)  $(9,900)  $(19,761)  $(27,499)

 

(1) Relates to non-controlling interests redeemable at other than fair value.

 

17. Earnings per Share

 

The following table sets forth the calculation of earnings per basic and diluted share for the three and six months ended April 30, 2013 and 2012 using the two-class method:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2013   2012   2013   2012 
Net income attributable to Eaton Vance Corp. shareholders  $63,681   $52,870   $113,486   $100,141 
Less: Allocation of earnings to participating restricted shares   2,094    1,524    5,445    2,792 
Net income available to common shareholders  $61,587   $51,346   $108,041   $97,349 
Weighted-average shares outstanding – basic    117,102    112,418    115,900    112,541  
Incremental common shares   6,228    3,463    5,335    2,783 
Weighted-average shares outstanding – diluted   123,330    115,881    121,235    115,324 
Earnings per share:                    
Basic  $0.53   $0.46   $0.93   $0.87 
Diluted  $0.50   $0.44   $0.89   $0.84 

 

Antidilutive common shares related to stock options excluded from the computation of earnings per diluted share were approximately 3.0 million and 14.5 million for the three months ended April 30, 2013 and 2012, respectively, and were approximately 3.1 million and 15.1 million for the six months ended April 30, 2013 and 2012, respectively.

 

35
 

 

18. Commitments and Contingencies

 

In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants, information technology agreements, distribution agreements and service agreements.  In certain circumstances, these indemnities in favor of third parties relate to service agreements entered into by investment funds managed and/or advised by Eaton Vance Management or Boston Management and Research, both wholly owned subsidiaries of the Company. The Company has also agreed to indemnify its directors, officers and employees in accordance with the Company’s Articles of Incorporation, as amended. Certain agreements do not contain any limits on the Company’s liability and, therefore, it is not possible to estimate the Company’s potential liability under these indemnities. In certain cases, the Company has recourse against third parties with respect to these indemnities. Further, the Company maintains insurance policies that may provide coverage against certain claims under these indemnities.

 

The Company and its subsidiaries are subject to various legal proceedings. In the opinion of management, after discussions with legal counsel, the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

 

In July 2006, the Company committed to invest $15.0 million in a private equity partnership that invests in companies in the financial services industry. The Company has invested $13.9 million of the total $15.0 million of committed capital at April 30, 2013. The Company believes the remaining $1.1 million will likely be invested by March 2015.

 

The Company has entered into transactions in financial instruments in which it has sold securities, not yet purchased as part of its corporate hedging program. As of April 30, 2013, the Company has $1.6 million included within other liabilities on its Consolidated Balance Sheet related to securities sold, not yet purchased.

 

19. Related Party Transactions

 

Funds

 

The Company is an investment advisor to, and has administrative agreements with, certain sponsored funds, privately offered equity funds and closed-end funds for which certain employees are officers and/or directors. Substantially all of the services to these entities for which the Company earns a fee, including investment advisory, distribution, shareholder and administrative, are provided under contracts that set forth the services to be provided and the fees to be charged. These contracts are subject to annual review and approval by the funds’ boards of directors or trustees. Revenue for services provided or related to these funds for the three and six months ended April 30, 2013 and 2012 are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2013   2012   2013   2012 
Investment advisory and administrative fees  $201,790   $188,669   $393,982   $372,153 
Distribution fees   19,845    20,298    39,918    40,775 
Service fees   31,132    32,065    62,262    64,364 
Shareholder services fees   548    630    1,088    1,227 
Other revenue   268    -    403    - 
Total  $253,583   $241,662   $497,653   $478,519 

 

36
 

 

For the three months ended April 30, 2013 and 2012, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $1.6 million and $2.1 million of investment advisory fees it was otherwise entitled to receive, respectively. For the six months ended April 30, 2013 and 2012, the Company waived $4.4 million and $4.5 million, respectively, of investment advisory fees it was otherwise entitled to receive.

 

Sales proceeds and net realized gains from investments in sponsored funds classified as available-for-sale for the three and six months ended April 30, 2013 and 2012 are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2013   2012   2013   2012 
Proceeds from sales  $18,474   $32,804   $39,290   $40,006 
Net realized gains   342    61    5,251    124 

 

The Company bears the non-advisory expenses of certain sponsored funds for which it earns an all-in management fee and provides subsidies to startup and other smaller sponsored funds to enhance their competitiveness. For the three months ended April 30, 2013 and 2012, expenses of $5.6 million and $4.3 million, respectively, were incurred by the Company pursuant to these arrangements. For the six months ended April 30, 2013 and 2012, expenses of $10.7 million and $8.7 million, respectively, were incurred by the Company pursuant to these arrangements.

 

Included in investment advisory fees and other receivables at April 30, 2013 and October 31, 2012 are receivables due from sponsored funds of $87.7 million and $84.4 million, respectively.

 

Employee Loan Program

 

The Company has established an Employee Loan Program under which a program maximum of $10.0 million is available for loans to officers (other than executive officers) and other key employees of the Company for purposes of financing the exercise of employee stock options. Loans are written for a seven-year period, at varying fixed interest rates (currently ranging from 0.9 percent to 5.0 percent), are payable in annual installments commencing with the third year in which the loan is outstanding, and are collateralized by the stock issued upon exercise of the option. Loans outstanding under this program, which are full recourse in nature, are reflected as notes receivable from stock option exercises in shareholders’ equity and amounted to $7.3 million and $4.2 million at April 30, 2013 and October 31, 2012, respectively.

 

37
 

 

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

 

This Item includes statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, intentions or strategies regarding the future. All statements, other than statements of historical facts, included in this Form 10-Q regarding our financial position, business strategy and other plans and objectives for future operations are forward-looking statements. The terms “may”, “will”, “could”, “anticipate”, “plan”, “continue”, “project”, “intend”, “estimate”, “believe”, “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that they will prove to have been correct or that we will take any actions that may now be planned. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of this Form 10-Q and Item 1A in our latest annual report on Form 10-K. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors. We do not assume any obligation to update any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

General

 

Our principal business is managing investment funds and providing investment management and advisory services to high-net-worth individuals and institutions. Our core strategy is to develop and sustain management expertise across a range of investment disciplines and to offer leading investment products and services through multiple distribution channels. In executing this strategy, we have developed broadly diversified investment management capabilities and a powerful marketing, distribution and customer service organization. Although we manage and distribute a wide range of investment products and services, we operate in one business segment, namely as an investment adviser to funds and separate accounts.

 

We are a market leader in a number of investment areas, including value equity, equity income, quality core and growth equity, systematic emerging market equity, floating-rate bank loan, municipal bond, investment grade, global and high-yield bond investing. Through our subsidiary Parametric Portfolio Associates LLC (“Parametric”) we offer a leading range of engineered portfolio implementation services, including tax-managed core and specialty index strategies, futures- and options-based portfolio overlays and centralized portfolio management of multi-manager portfolios. Our breadth of investment management capabilities supports a wide range of products and services offered to fund shareholders, retail managed account investors, institutional investors and high-net-worth clients. Our equity strategies encompass a diversity of investment objectives, risk profiles, income levels and geographic representation. Our income investment strategies cover a broad duration and credit quality range and encompass both taxable and tax-free investments. We offer a range of alternative investment strategies, including commodity-based investments and a spectrum of absolute return strategies. As of April 30, 2013, we had $260.3 billion in assets under management.

 

Our principal retail marketing strategy is to distribute funds and separately managed accounts through financial intermediaries in the advice channel. We have a broad reach in this marketplace, with distribution partners including national and regional broker-dealers, independent broker-dealers, independent financial advisory firms, banks and insurance companies. We support these distribution partners with a team of approximately 135 sales professionals covering U.S. and international markets.

 

We also commit significant resources to serving institutional and high-net-worth clients who access investment management services on a direct basis. Through our wholly owned affiliates and consolidated subsidiaries we manage investments for a broad range of clients in the institutional and high-net-worth global marketplace,

 

38
 

 

including corporations, sovereign wealth funds, endowments, foundations, family offices and public and private employee retirement plans.

 

Our revenue is derived primarily from investment advisory, administrative, distribution and service fees received from Eaton Vance funds and investment advisory fees received from separate accounts. Our fees are based primarily on the value of the investment portfolios we manage and fluctuate with changes in the total value and mix of assets under management. As a matter of course, investors in our sponsored open-end funds and separate accounts have the ability to redeem their shares or investments at any time, without prior notice, and there are no material restrictions that would prevent them from doing so. Our major expenses are employee compensation, distribution-related expenses, facilities expense and information technology expense.

 

Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to goodwill and intangible assets, income taxes, investments and stock-based compensation. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

 

Business Developments

 

The first six months of fiscal 2013 was a period of favorable market action, as reflected by the 14.4 percent total return of the S&P 500 Index. Over the last twelve months, the S&P 500 Index has returned 16.9 percent.

 

The Company’s ending consolidated assets under management increased by $60.8 billion, or 30 percent, in the first six months of fiscal 2013 to $260.3 billion on April 30, 2013, reflecting the acquisition of The Clifton Group Investment Management Company (“Clifton”) on December 31, 2012, strong net inflows into floating-rate income, alternative and implementation services mandates, and favorable market action. Average consolidated assets under management increased sequentially by $37.3 billion, or 17 percent, to $253.5 billion in the second quarter of fiscal 2013, reflecting a full quarter of Clifton ownership.

 

The Clifton acquisition, as anticipated, has had a significant impact on both our overall average effective fee rate and our average effective investment advisory and administrative fee rate in the first half of fiscal 2013. Upon acquisition, the Clifton business had an average effective fee rate of approximately 7 basis points. The acquisition reduced our overall average effective fee rate to 52 basis points and 55 basis points in the second quarter and first six months of fiscal 2013, respectively, from 62 basis points in both the second quarter and first six months of fiscal 2012. Our average effective investment advisory and administrative fee rate similarly decreased to 44 basis points and 46 basis points in the second quarter and first six months of fiscal 2013, respectively, from 51 basis points in both the second quarter and first six months of last year. The primary driver of our overall average effective fee rate continues to be the mix of assets by distribution channel and mandate.

 

Consolidated Assets under Management

 

Consolidated assets under management of $260.3 billion on April 30, 2013 were $62.8 billion, an increase of 32 percent over the $197.5 billion of managed assets reported a year earlier. Consolidated assets under management on April 30, 2013 included $127.0 billion in long-term funds, $84.7 billion in institutional separate accounts, $18.0 billion in high-net-worth separate accounts, $30.4 billion in retail managed accounts and $0.1 billion in cash management fund assets. Long-term fund net inflows of $6.9 billion over the last twelve months reflect gross inflows of $35.2 billion offset by outflows of $28.3 billion. Long-term fund net inflows include $0.2

 

39
 

 

billion raised in the initial public offering of Eaton Vance Municipal Income Term Trust in the second quarter of fiscal 2013. Institutional separate account net inflows were $3.9 billion, high-net-worth separate account net inflows were $1.2 billion and retail managed account net inflows were $0.8 billion over the past twelve months. Clifton assets acquired totaled $34.8 billion and net price appreciation in managed assets increased assets under management by $15.4 billion over the last twelve months. A decrease in cash management assets reduced assets under management by $0.2 billion.

 

We report managed assets and flow data by investment mandate. The “Alternative” category includes a range of absolute return strategies, as well as commodity- and currency-linked investments. In fiscal 2013, we added a new category, “Implementation Services,” to reflect the growing importance to our business of Parametric’s tax-managed core, centralized portfolio management and specialty index businesses and the former Clifton Group’s futures- and options-based overlay services.

 

Consolidated Assets under Management by Investment Mandate (1) (4)

 

   April 30,     
(in millions)  2013   % of
Total
   2012   % of
Total
   %
Change
 
Equity(2)  $89,534    35%  $86,040    43%   4%
Fixed income   49,949    19%   46,891    24%   7%
Floating-rate income   33,679    13%   24,847    13%   36%
Alternative   16,022    6%   10,517    5%   52%
Implementation services(3)   70,966    27%   28,852    15%   146%
Cash management   127    0%   340    0%   -63%
Total  $260,277    100%  $197,487    100%   32%

 

(1)Consolidated Eaton Vance Corp. See table on page 45 for directly managed assets and flows of 49 percent-owned Hexavest Inc.

(2)Balances include assets in balanced accounts holding income securities.

(3)Balances include amounts reclassified from equity for the prior year period.

(4)Assets under management for which we estimate fair value are not material to the total value of the assets we manage.

 

Equity and implementation services assets under management included $59.1 billion and $51.7 billion of assets managed for after-tax returns on April 30, 2013 and 2012, respectively. Fixed income assets included $29.6 billion and $27.9 billion of tax-exempt municipal bond assets on April 30, 2013 and 2012, respectively.

 

Net inflows totaled $6.6 billion in the second quarter of fiscal 2013 compared to net inflows of $0.6 billion in the second quarter of fiscal 2012. Long-term fund net inflows of $6.1 billion in the second quarter of fiscal 2013 reflect gross inflows of $12.6 billion, net of redemptions of $6.5 billion. Long-term fund net inflows in the second quarter of fiscal 2013 reflect the $0.2 billion initial public offering of Eaton Vance Municipal Income Term Trust. Long-term fund net outflows of $1.2 billion in the second quarter of fiscal 2012 reflect gross inflows of $6.6 billion, net of redemptions of $7.8 billion.

 

Separate account net inflows totaled $0.5 billion in the second quarter of fiscal 2013, compared to $1.7 billion in the second quarter of fiscal 2012. Institutional separate account net outflows totaled $1.0 billion in the second quarter of fiscal 2013 compared to net inflows of $0.5 billion in the second quarter of fiscal 2012, reflecting gross inflows of $8.1 billion and $3.3 billion in the second quarter of fiscal 2013 and 2012, respectively, net of redemptions of $9.1 billion and $2.8 billion, respectively. High-net-worth separate account net inflows of $0.9 billion in the second quarter of fiscal 2013 reflect gross inflows of $1.5 billion net of redemptions of $0.6

 

40
 

 

billion. In the second quarter of fiscal 2012 high-net-worth separate account gross inflows of $1.3 billion were offset by $0.5 billion of gross outflows. Retail managed account net inflows of $0.6 billion in the second quarter of fiscal 2013 reflect gross inflows of $2.4 billion, net of redemptions of $1.9 billion. In the second quarter of fiscal 2012, retail managed account gross inflows of $2.0 billion were offset by gross redemptions of $1.5 billion.

 

The following tables summarize our consolidated assets under management and asset flows by investment mandate and investment vehicle for the three and six months ended April 30, 2013 and 2012:

 

41
 

 

 

Consolidated Net Flows by Investment Mandate(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2013   2012   Change   2013   2012   Change 
Equity assets - beginning of period(2)  $86,518   $84,957    2%  $80,782   $84,281    -4%
Sales and other inflows   5,270    4,416    19%   9,766    9,192    6%
Redemptions/outflows   (4,990)   (6,998)   -29%   (9,949)   (13,472)   -26%
Net flows   280    (2,582)   NM(3)   (183)   (4,280)   -96%
Assets acquired(4)   -    -    NM    1,572    -    NM 
Exchanges   124    (5)   NM    116    (13)   NM 
Market value change   2,612    3,670    -29%   7,247    6,052    20%
Equity assets - end of period  $89,534   $86,040    4%  $89,534   $86,040    4%
Fixed income assets - beginning of period   49,679    45,514    9%   49,003    43,708    12%
Sales and other inflows   3,289    3,626    -9%   6,666    6,253    7%
Redemptions/outflows   (3,348)   (2,276)   47%   (6,723)   (4,729)   42%
Net flows   (59)   1,350    NM    (57)   1,524    NM 
Assets acquired(4)   -    -    NM    472    -    NM 
Exchanges   (59)   -    NM    (81)   40    NM 
Market value change   388    27    NM    612    1,619    -62%
Fixed income assets - end of period  $49,949   $46,891    7%  $49,949   $46,891    7%
Floating-rate income assets - beginning of period   28,656    24,376    18%   26,388    24,322    8%
Sales and other inflows   6,092    1,662    267%   9,352    3,122    200%
Redemptions/outflows   (1,153)   (1,451)   -21%   (2,512)   (2,740)   -8%
Net flows   4,939    211    NM    6,840    382    NM 
Exchanges   50    27    85%   83    19    337%
Market value change   34    233    -85%   368    124    197%
Floating-rate income assets - end of period  $33,679   $24,847    36%  $33,679   $24,847    36%
Alternative assets - beginning of period   14,345    10,462    37%   12,864    10,650    21%
Sales and other inflows   2,767    1,121    147%   4,576    2,227    105%
Redemptions/outflows   (960)   (1,036)   -7%   (2,015)   (2,238)   -10%
Net flows   1,807    85    NM    2,561    (11)   NM 
Assets acquired(4)   -    -    NM    650    -    NM 
Exchanges   (103)   (23)   348%   (116)   (62)   87%
Market value change   (27)   (7)   286%   63    (60)   NM 
Alternative assets - end of period  $16,022   $10,517    52%  $16,022   $10,517    52%
Implementation services assets - beginning of
period (5)
   68,420    25,864    165%   30,302    24,574    23%
Sales and other inflows   7,252    2,401    202%   13,731    3,928    250%
Redemptions/outflows   (7,576)   (898)   744%   (10,892)   (2,094)   420%
Net flows   (324)   1,503    NM    2,839    1,834    55%
Assets acquired(4)   -    -    NM    32,064    -    NM 
Exchanges   (15)   (1)   NM    (15)   (1)   NM 
Market value change   2,885    1,486    94%   5,776    2,445    136%
Implementation services assets - end of period  $70,966   $28,852    146%  $70,966   $28,852    146%
Long-term assets - beginning of period   247,618    191,173    30%   199,339    187,535    6%
Sales and other inflows   24,670    13,226    87%   44,091    24,722    78%
Redemptions/outflows   (18,027)   (12,659)   42%   (32,091)   (25,273)   27%
Net flows   6,643    567    NM    12,000    (551)   NM 
Assets acquired(4)   -    -    NM    34,758    -    NM 
Exchanges   (3)   (2)   50%   (13)   (17)   -24%
Market value change   5,892    5,409    9%   14,066    10,180    38%
Total long-term assets - end of period  $260,150   $197,147    32%  $260,150   $197,147    32%
Cash management fund assets - end of period   127    340    -63%   127    340    -63%
Total assets under management - end of period  $260,277   $197,487    32%  $260,277   $197,487    32%

  

(1) Consolidated Eaton Vance Corp. See table on page 45 for directly managed assets and flows of 49 percent-owned Hexavest Inc.

(2) Balances include assets in balanced accounts holding income securities.

(3) Not meaningful ("NM")

(4) Balances represent Clifton assets acquired on December 31, 2012.

(5) Balances include amounts reclassified from equity for fiscal 2012.

 

42
 

 

Consolidated Net Flows by Investment Vehicle(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2013   2012   Change   2013   2012   Change 
Long-term fund assets -                              
beginning of period  $119,162   $112,664    6%  $113,249   $111,705    1%
Sales and other inflows   12,629    6,648    90%   21,708    13,553    60%
Redemptions/outflows   (6,506)   (7,818)   -17%   (13,382)   (15,930)   -16%
Net flows   6,123    (1,170)   NM    8,326    (2,377)   NM 
Assets acquired(2)   -    -    NM    638    -    NM 
Exchanges   (3)   (2)   50%   (22)   (16)   38%
Market value change   1,732    2,537    -32%   4,823    4,717    2%
Long-term fund assets - end of period  $127,014   $114,029    11%  $127,014   $114,029    11%
Institutional separate account assets -                              
beginning of period   83,350    38,726    115%   43,338    38,003    14%
Sales and other inflows   8,102    3,261    148%   14,887    5,085    193%
Redemptions/outflows   (9,071)   (2,794)   225%   (12,892)   (5,009)   157%
Net flows   (969)   467    NM    1,995    76    NM 
Assets acquired(2)   -    -    NM    34,120    -    NM 
Exchanges   -    40    NM    5    11    -55%
Market value change   2,343    1,650    42%   5,266    2,793    89%
Institutional separate account assets - end of period  $84,724   $40,883    107%  $84,724   $40,883    107%
High-net-worth separate account assets -                              
beginning of period   16,245    13,255    23%   15,036    13,256    13%
Sales and other inflows   1,497    1,338    12%   2,876    2,359    22%
Redemptions/outflows   (573)   (534)   7%   (1,771)   (1,086)   63%
Net flows   924    804    15%   1,105    1,273    -13%
Exchanges   9    (42)   NM    (6)   (999)   -99%
Market value change   849    687    24%   1,892    1,174    61%
High-net-worth separate account  assets - end of period  $18,027   $14,704    23%  $18,027   $14,704    23%
Retail managed account assets -                              
beginning of period    28,861    26,528    9%   27,716    24,571    13%
Sales and other inflows   2,442    1,979    23%   4,620    3,725    24%
Redemptions/outflows   (1,877)   (1,513)   24%   (4,046)   (3,248)   25%
Net flows   565    466    21%   574    477    20%
Exchanges   (9)   2    NM    10    987    -99%
Market value change   968    535    81%   2,085    1,496    39%
Retail managed account assets - end of period  $30,385   $27,531    10%  $30,385   $27,531    10%
Total long-term assets - beginning of period   247,618    191,173    30%   199,339    187,535    6%
Sales and other inflows   24,670    13,226    87%   44,091    24,722    78%
Redemptions/outflows   (18,027)   (12,659)   42%   (32,091)   (25,273)   27%
Net flows   6,643    567    NM    12,000    (551)   NM 
Assets acquired(2)   -    -    NM    34,758    -    NM 
Exchanges   (3)   (2)   50%   (13)   (17)   -24%
Market value change   5,892    5,409    9%   14,066    10,180    38%
Total long-term assets - end of period  $260,150   $197,147    32%  $260,150   $197,147    32%
Cash management fund assets - end of period   127    340    -63%   127    340    -63%
Total assets under management - end of period  $260,277   $197,487    32%  $260,277   $197,487    32%

 

(1) Consolidated Eaton Vance Corp. See page 45 for directly managed assets and flows of 49 percent-owned Hexavest Inc.

(2) Balances represent Clifton assets acquired on December 31, 2012.

43
 

 

The following table summarizes our assets under management by investment affiliate as of April 30, 2013 and 2012:

 

Consolidated Assets under Management by Investment Affiliate (1)

 

   April 30,     
(in millions)  2013   2012   %
Change
 
Eaton Vance Management (2)  $142,211   $133,257    7%
Parametric   100,760    49,245    105%
Atlanta Capital   17,306    14,985    15%
Total  $260,277   $197,487    32%

 

(1)Consolidated Eaton Vance Corp. See page 45 for directly managed assets and flows of 49 percent-owned Hexavest Inc.
(2)Includes managed assets of wholly owned subsidiaries Eaton Vance Investment Counsel and Fox Asset Management LLC, as well as certain Eaton Vance-sponsored funds and accounts managed by Hexavest and unaffiliated third-party advisors under Eaton Vance supervision.

 

As of April 30, 2013, 49 percent-owned affiliate Hexavest Inc. (“Hexavest”) managed $15.3 billion of client assets, an increase of 26 percent from the $12.1 billion of managed assets on October 31, 2012. Net outflows from Hexavest-managed funds and separate accounts were $0.3 billion in the second quarter of fiscal 2013. Other than Eaton Vance-sponsored funds for which Hexavest is advisor or sub-advisor, the managed assets of Hexavest are not included in Eaton Vance consolidated totals. The following table summarizes assets under management and asset flow information for Hexavest for the three and six months ended April 30, 2013:

 

44
 

 

 

Hexavest Assets under Management and Net Flows

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in millions)  2013   2013 
Eaton Vance distributed:          
Eaton Vance sponsored funds - beginning of period(1)  $135   $37 
Sales and other inflows   17    111 
Redemptions/outflows   (1)   (6)
Net flows   16    105 
Market value change   10    19 
Eaton Vance sponsored funds - end of period  $161   $161 
Eaton Vance distributed separate accounts - beginning of period(2)  $1,185   $- 
Sales and other inflows   3    1,151 
Redemptions/outflows   -    - 
Net flows   3    1,151 
Market value change   95    132 
Eaton Vance distributed separate accounts - end of period  $1,283   $1,283 
Total Eaton Vance distributed - beginning of period  $1,320   $37 
Sales and other inflows   20    1,262 
Redemptions/outflows   (1)   (6)
Net flows   19    1,256 
Market value change   105    151 
Total Eaton Vance distributed - end of period  $1,444   $1,444 
Hexavest directly distributed - beginning of period(3)  $13,224   $12,073 
Sales and other inflows   298    1,218 
Redemptions/outflows   (570)   (833)
Net flows   (272)   385 
Market value change   879    1,373 
Hexavest directly distributed - end of period  $13,831   $13,831 
Total Hexavest assets - beginning of period  $14,544   $12,110 
Sales and other inflows   318    2,480 
Redemptions/outflows   (571)   (839)
Net flows   (253)   1,641 
Market value change   984    1,524 
Total Hexavest assets - end of period  $15,275   $15,275 

 

(1) Managed assets and flows of Eaton Vance-sponsored pooled investment vehicles for which Hexavest is advisor or sub-advisor. Eaton Vance receives management and/or distribution revenue on these assets, which are included in the Eaton Vance consolidated results.
   
(2) Managed assets and flows of Eaton Vance-distributed separate accounts managed by Hexavest. Eaton Vance receives distribution revenue, but not management revenue, on these assets, which are not included in the Eaton Vance consolidated results.
   
(3) Managed assets and flows of pre-transaction Hexavest clients and post-transaction Hexavest clients in Canada. Eaton Vance receives no management or distribution revenue on these assets, which are not included in the Eaton Vance consolidated results.

 

45
 

 

 

 

Consolidated Ending Assets under Management by Asset Class(1)

 

   April 30,     
(in millions)  2013   % of
Total
   2012   % of
Total
   %
Change
 
Open-end funds:                         
Class A  $32,035    13%  $32,110    16%   0%
Class B   847    0%   1,121    1%   -24%
Class C   10,077    4%   9,738    5%   3%
Class I   38,723    15%   29,066    15%   33%
Class R   331    0%   347    0%   -5%
Other(2)   812    0%   389    0%   109%
Total open-end funds   82,825    32%   72,771    37%   14%
Private funds(3)   19,910    8%   18,129    9%   10%
Closed-end funds   24,406    9%   23,469    12%   4%
Total fund assets   127,141    49%   114,369    58%   11%
Institutional account assets   84,724    32%   40,883    21%   107%
High-net-worth account assets   18,027    7%   14,704    7%   23%
Retail managed account assets   30,385    12%   27,531    14%   10%
Total separate account assets   133,136    51%   83,118    42%   60%
Total  $260,277    100%  $197,487    100%   32%

 

(1) Consolidated Eaton Vance Corp. See table on page 45 for directly managed assets and flows of 49 percent-owned Hexavest Inc.
(2) Includes other classes of Eaton Vance open-end funds.
(3) Includes privately offered equity, fixed income and floating-rate bank loan funds and CLO entities.

 

We currently sell our sponsored open-end mutual funds under four primary pricing structures: front-end load commission (“Class A”); level-load commission (“Class C”); institutional no-load (“Class I”); and retirement plan no-load (“Class R”). We waive the front-end sales load on Class A shares under certain circumstances. In such cases, the shares are sold at net asset value.

 

Fund assets represented 49 percent of total assets under management on April 30, 2013, down from 58 percent on April 30, 2012, while separate account assets, which include institutional, high-net-worth and retail managed account assets, increased to 51 percent of total assets under management on April 30, 2013 from 42 percent on April 30, 2012. Fund assets under management increased $13.7 billion, or 12 percent, from $113.4 billion on October 31, 2012, reflecting 14 percent organic growth, market appreciation of $4.8 billion and $0.6 billion of managed assets gained from the Clifton acquisition. Separate account assets under management increased $47.0 billion, or 55 percent, from $86.1 billion on October 31, 2012, reflecting $34.1 billion of managed assets gained from the Clifton acquisition, organic growth of 9 percent and market appreciation of $9.2 billion.

 

Average assets under management presented in the following table represent a monthly average by asset class. This table is intended to provide information useful in the analysis of our asset-based revenue and distribution expenses. With the exception of our separate account investment advisory fees, which are generally calculated as a percentage of either beginning, average or ending quarterly assets, our investment advisory, administrative, distribution and service fees, as well as certain expenses, are generally calculated as a percentage of average daily assets.

 

46
 

 

 

Consolidated Average Assets under Management by Asset Class(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2013   2012   Change   2013   2012   Change 
Open-end funds:                              
Class A  $31,587   $32,396    -2%  $31,074   $32,505    -4%
Class B   874    1,175    -26%   902    1,205    -25%
Class C   9,939    9,737    2%   9,825    9,663