10-Q 1 v388279_10q.htm QUARTERLY REPORT

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

xQuarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended July 31, 2014

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 July 31, 2014:

Voting Common Stock – 415,078 shares

Non-Voting Common Stock – 118,320,698 shares

 

 
 

 

Eaton Vance Corp.

Form 10-Q

As of July 31, 2014 and for the

Three and Nine Month Periods Ended July 31, 2014

 

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   42
Item 3. Quantitative and Qualitative Disclosures About Market Risk   67
Item 4. Controls and Procedures   67
       
Part II Other Information    
Item 1. Legal Proceedings   67
Item 1A. Risk Factors   67
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   69
Item 6. Exhibits   70
       
Signatures     71

 

2
 

 

Part I - Financial Information

 

Item 1. Consolidated Financial Statements

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

   July 31,   October 31, 
(in thousands)  2014   2013 
         
Assets          
           
Cash and cash equivalents  $362,017   $461,906 
Investment advisory fees and other receivables   171,403    170,220 
Investments   642,475    536,323 
Assets of consolidated collateralized loan obligation ("CLO") entities:          
Cash and cash equivalents   21,074    36,641 
Bank loans and other investments   166,025    685,681 
Other assets   2,179    5,814 
Deferred sales commissions   16,966    17,923 
Deferred income taxes   53,014    61,139 
Equipment and leasehold improvements, net   46,247    48,746 
Intangible assets, net   67,457    74,534 
Goodwill   228,876    228,876 
Other assets   58,355    79,446 
Total assets  $1,836,088   $2,407,249 

 

See notes to Consolidated Financial Statements.

3
 

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

   July 31,   October 31, 
(in thousands, except share data)  2014   2013 
Liabilities, Temporary Equity and Permanent Equity          
           
Liabilities:          
           
Accrued compensation  $142,147   $169,953 
Accounts payable and accrued expenses   69,022    58,529 
Dividend payable   26,547    26,740 
Debt   573,616    573,499 
Liabilities of consolidated CLO entities:          
Senior and subordinated note obligations   182,725    279,127 
Line of credit   -    247,789 
Redeemable preferred shares   -    64,952 
Other liabilities   389    124,305 
Other liabilities   72,437    115,960 
Total liabilities   1,066,883    1,660,854 
           
Commitments and contingencies          
           
Temporary Equity:          
           
Redeemable non-controlling interests   99,966    74,856 
           
Permanent Equity:          
           
Voting Common Stock, par value $0.00390625 per share:          
Authorized, 1,280,000 shares          
Issued and outstanding, 415,078 and 399,240 shares, respectively   2    2 
Non-Voting Common Stock, par value $0.00390625 per share:          
Authorized, 190,720,000 shares          
Issued and outstanding, 118,320,698 and 121,232,506 shares, respectively   462    474 
Additional paid-in capital   -    124,837 
Notes receivable from stock option exercises   (7,569)   (7,122)
Accumulated other comprehensive loss   (4,508)   (177)
Appropriated retained earnings   4,557    10,249 
Retained earnings   674,492    541,521 
Total Eaton Vance Corp. shareholders' equity   667,436    669,784 
Non-redeemable non-controlling interests   1,803    1,755 
Total permanent equity   669,239    671,539 
Total liabilities, temporary equity and permanent equity  $1,836,088   $2,407,249 

 

See notes to Consolidated Financial Statements.

 

4
 

 

Eaton Vance Corp.

Consolidated Statements of Income (unaudited)

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands, except per share data)  2014   2013   2014   2013 
Revenue:                    
Investment advisory and administrative fees  $311,756   $293,589   $916,605   $833,791 
Distribution and underwriter fees   21,548    22,681    64,381    67,597 
Service fees   31,977    32,259    95,097    94,521 
Other revenue   2,309    1,832    5,829    4,661 
Total revenue   367,590    350,361    1,081,912    1,000,570 
Expenses:                    
Compensation and related costs   117,632    115,379    351,110    334,220 
Distribution expense   35,591    35,452    105,924    104,645 
Service fee expense   29,780    29,013    87,266    86,488 
Amortization of deferred sales commissions   4,084    4,983    13,408    14,518 
Fund-related expenses   9,380    8,230    26,288    23,728 
Other expenses   39,945    38,454    117,235    109,371 
Total expenses   236,412    231,511    701,231    672,970 
Operating income   131,178    118,850    380,681    327,600 
Non-operating income (expense):                    
Gains (losses) and other investment income, net   2,917    (8,027)   2,592    2,223 
Interest expense   (7,443)   (9,167)   (22,247)   (26,309)
Loss on extinguishment of debt   -    (52,886)   -    (52,886)
Other income (expense) of consolidated CLO entities:                    
Gains and other investment income, net   1,434    1,704    15,247    7,881 
Interest and other expense   (1,758)   (2,939)   (13,781)   (10,211)
Total non-operating expense   (4,850)   (71,315)   (18,189)   (79,302)
Income before income taxes and equity in net income of affiliates   126,328    47,535    362,492    248,298 
Income taxes   (48,899)   (25,137)   (138,790)   (99,270)
Equity in net income of affiliates, net of tax   3,840    2,652    12,344    9,269 
Net income   81,269    25,050    236,046    158,297 
Net income attributable to non-controlling and other beneficial interests   (3,334)   (1,847)   (11,852)   (21,608)
Net income attributable to Eaton Vance Corp. shareholders  $77,935   $23,203   $224,194   $136,689 
Earnings per share:                    
Basic  $0.66   $0.19   $1.86   $1.12 
Diluted  $0.63   $0.18   $1.78   $1.07 
Weighted average shares outstanding:                    
Basic   116,145    117,594    117,248    116,399 
Diluted   121,013    123,872    122,550    122,155 
Dividends declared per share  $0.22   $0.20   $0.66   $1.60 

 

See notes to Consolidated Financial Statements.

5
 

 

Eaton Vance Corp.

Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2014   2013   2014   2013 
                 
Net income  $81,269   $25,050   $236,046   $158,297 
                     
Other comprehensive income (loss):                    
Change in unrealized gains on derivative instruments, net of tax   -    1,227    -    1,227 
Amortization of net gains (losses) on derivatives, net of tax   4    698    10    842 
Unrealized holding gains (losses) on available-for-sale investments and reclassification adjustments, net of tax   228    370    607    (1,426)
Foreign currency translation adjustments, net of tax   905    (2,860)   (4,948)   (3,880)
                     
Other comprehensive income (loss), net of tax   1,137    (565)   (4,331)   (3,237)
                     
Total comprehensive income   82,406    24,485    231,715    155,060 
Comprehensive income attributable to non-controlling and other beneficial interests   (3,334)   (1,847)   (11,852)   (21,608)
Total comprehensive income attributable to Eaton Vance Corp. shareholders  $79,072   $22,638   $219,863   $133,452 

 

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
Loss
   Appropriated
Retained
Earnings
   Retained
Earnings
   Non-
Redeemable
Non-
Controlling
Interests
   Total
Permanent
Equity
   Redeemable
Non-
Controlling
Interests
 
Balance, November 1, 2013  $2   $474   $124,837   $(7,122)  $(177)  $10,249   $541,521   $1,755   $671,539   $74,856 
Net income   -    -    -    -    -    (2,005)   224,194    4,396    226,585    9,461 
Other comprehensive loss   -    -    -    -    (4,331)   -    -    -    (4,331)   - 
Dividends declared   -    -    -    -    -    -    (79,626)   -    (79,626)   - 
Issuance of Voting Common Stock   -    -    162    -    -    -    -    -    162    - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    7    39,501    (2,216)   -    -    -    -    37,292    - 
Under employee stock purchase plans   -    -    3,709    -    -    -    -    -    3,709    - 
Under employee incentive plan   -    -    2,946    -    -    -    -    -    2,946    - 
Under restricted stock plan, net of forfeitures   -    4    -    -    -    -    -    -    4    - 
Stock-based compensation   -    -    46,492    -    -    -    -    -    46,492    - 
Tax benefit of stock option exercises   -    -    12,723    -    -    -    -    -    12,723    - 
Repurchase of Voting Common Stock   -    -    (77)   -    -    -    -    -    (77)   - 
Repurchase of Non-Voting Common Stock   -    (23)   (216,294)   -    -    -    (11,597)   -    (227,914)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    1,769    -    -    -    -    1,769    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (3,996)   (3,996)   2,313 
Deconsolidation   -    -    -    -    -    (3,687)   -    -    (3,687)   (4,111)
Reclass to temporary equity   -    -    -    -    -    -    -    (352)   (352)   352 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    -    (6,839)
Issuance of subsidiary equity   -    -    -    -    -    -    -    -    -    9,935 
Other changes in non-controlling interests   -    -    (13,999)   -    -    -    -    -    (13,999)   13,999 
Balance, July 31, 2014  $2   $462   $-   $(7,569)  $(4,508)  $4,557   $674,492   $1,803   $669,239   $99,966 

 

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
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   -    -    -    -    -    (5,592)   136,689    3,964    135,061    23,236 
Other comprehensive loss   -    -    -    -    (3,237)   -    -    -    (3,237)   - 
Dividends declared   -    -    -    -    -    -    (192,075)   -    (192,075)   - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    18    98,968    (4,734)   -    -    -    -    94,252    - 
Under employee stock purchase plan   -    1    3,516    -    -    -    -    -    3,517    - 
Under employee incentive plan   -    -    2,079    -    -    -    -    -    2,079    - 
Under restricted stock plan,  net of forfeitures   -    5    -    -    -    -    -    -    5    - 
Stock-based compensation   -    -    40,446    -    -    -    -    -    40,446    - 
Tax benefit of stock option exercises   -    -    15,682    -    -    -    -    -    15,682    - 
Repurchase of Voting Common Stock   -    -    (73)   -    -    -    -    -    (73)   - 
Repurchase of Non-Voting Common Stock   -    (5)   (48,157)   -    -    -    -    -    (48,162)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    2,028    -    -    -    -    2,028    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (3,922)   (3,922)   63,796 
Deconsolidation   -    -    -    -    -    -    -    -    -    (61,023)
Reclass to temporary equity   -    -    -    -    -    -    -    (224)   (224)   224 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    -    (46,601)
Issuance of subsidiary equity   -    -    -    -    -    -    -    -    -    13,927 
Other changes in non-controlling interests   -    -    (4,727)   -    -    -    -    -    (4,727)   4,727 
Balance, July 31, 2013  $2   $472   $134,464   $(6,861)  $686   $13,107   $511,034   $1,331   $654,235   $97,051 

 

See notes to Consolidated Financial Statements.

 

8
 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Nine Months Ended 
   July 31, 
(in thousands)  2014   2013 
Cash Flows From Operating Activities:          
Net income  $236,046   $158,297 
Adjustments to reconcile net income to net cash used for operating activities:          
Depreciation and amortization   15,822    19,673 
Unamortized gain on derivative instrument   -    2,015 
Amortization of deferred sales commissions   13,464    14,575 
Stock-based compensation   46,492    40,446 
Deferred income taxes   10,831    (4,117)
Net (gains) losses on investments and derivatives   2,789    (399)
Equity in net income of affiliates, net of amortization   (14,833)   (10,834)
Dividends received from affiliates   11,654    13,218 
Loss on extinguishment of debt   -    52,886 
Consolidated CLO entities' operating activities:          
Net (gains) losses on bank loans, other investments and note obligations   (592)   4,197 
Amortization   (715)   (584)
Net decrease in other assets and liabilities, including cash   (128,945)   (23,119)
Changes in operating assets and liabilities:          
Investment advisory fees and other receivables   (1,090)   (21,852)
Investments in trading securities   (181,897)   (194,121)
Deferred sales commissions   (12,510)   (14,098)
Other assets   11,376    28,424 
Accrued compensation   (27,871)   (13,547)
Accounts payable and accrued expenses   10,632    (4,587)
Other liabilities   5,376    (46,702)
Net cash used for operating activities   (3,971)   (229)
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (5,756)   (4,220)
Net cash paid in acquisition   -    (86,429)
Cash paid for intangible assets   -    (300)
Proceeds from sale of investments   77,739    71,414 
Purchase of investments   (21,724)   (747)
Consolidated CLO entities' investing activities:          
Proceeds from sales and maturities of bank loans and other investments   356,985    192,036 
Purchase of bank loans and other investments   (248,771)   (6,547)
Net cash provided by investing activities   158,473    165,207 

 

See notes to Consolidated Financial Statements.

 

9
 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Nine Months Ended 
   July 31, 
(in thousands)  2014   2013 
Cash Flows From Financing Activities:          
Purchase of additional non-controlling interest   (26,872)   (43,507)
Proceeds from issuance of subsidiary equity   -    1,092 
Debt issuance costs   -    (3,012)
Proceeds from issuance of debt   -    323,440 
Repayment of debt   -    (250,000)
Loss on extinguishment of debt   -    (52,886)
Proceeds from issuance of Voting Common Stock   162    - 
Proceeds from issuance of Non-Voting Common Stock   43,951    99,853 
Repurchase of Voting Common Stock   (77)   (73)
Repurchase of Non-Voting Common Stock   (227,914)   (48,162)
Principal repayments on notes receivable from stock option exercises   1,769    2,028 
Excess tax benefit of stock option exercises   12,723    15,682 
Dividends paid   (79,928)   (191,266)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   (1,683)   59,874 
Consolidated CLO entities' financing activities:          
Repayment of line of credit   (247,789)   - 
Repayment of redeemable preferred shares   (60,000)   - 
Issuance of senior and subordinated notes and preferred shares   429,582    - 
Principal repayments of senior note obligations   (97,769)   (159,942)
Net cash used for financing activities   (253,845)   (246,879)
Effect of currency rate changes on cash and cash equivalents   (546)   (761)
Net decrease in cash and cash equivalents   (99,889)   (82,662)
Cash and cash equivalents, beginning of period   461,906    462,076 
Cash and cash equivalents, end of period  $362,017   $379,414 
Supplemental Cash Flow Information:          
Cash paid for interest  $19,920   $20,473 
Cash paid for interest by consolidated CLO entities   5,943    11,069 
Cash paid for income taxes, net of refunds   107,048    115,502 
Supplemental Disclosure of Non-Cash Information:          
Increase in equipment and leasehold improvements due to non-cash additions  $249   $438 
Exercise of stock options through issuance of notes receivable   2,216    4,734 
Acquisition of non-controlling interests through issuance of subsidiary equity   9,935    - 
Non-controlling interest call option recorded in other liabilities   -    3,096 
Deconsolidation of CLO Entity:          
Decrease in other assets, net of other liabilities  $(19,210)  $- 
Decrease in investments   (411,897)   - 
Decrease in borrowings   (427,418)   - 
Deconsolidations of Sponsored Investment Funds:          
Decrease in investments  $(4,122)  $(59,889)
Decrease in non-controlling interests   (4,111)   (61,023)

 

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. New Accounting Standards Not Yet Adopted

 

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity, which provides a measurement alternative for an entity that consolidates collateralized financing entities (“CFE”). If elected, the alternative method results in the reporting entity measuring both the financial assets and financial liabilities of the CFE using the more observable of the two fair value measurements, which effectively removes measurement differences between the financial assets and financial liabilities of the CFE previously recorded as net income (loss) attributable to non-controlling and other beneficial interests and as an adjustment to appropriated retained earnings. The reporting entity continues to measure its own beneficial interests in the CFE (other than those that represent compensation for services) at fair value. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2016 and requires either a retrospective or modified retrospective approach to adoption, with early adoption permitted. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.

 

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2017 and interim periods within that fiscal year and requires either a retrospective or a modified retrospective approach to adoption. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures, as well as the available transition methods. Early adoption is prohibited.

 

3. Adoption of New Accounting Standards

 

The Company adopted the following accounting standard in fiscal 2014:

 

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

Effective November 1, 2013, the Company adopted ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The guidance provided in the ASU requires an entity to present separately, for each component of accumulated other comprehensive income, the current period reclassification of amounts into net income and identify each line item in the statement of net income that is affected by the reclassification. The adoption of the ASU was effective prospectively and did not have an impact on the Company’s results of operations, financial position or liquidity.

 

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4. Consolidated Sponsored Funds

 

The following table sets forth the balances related to consolidated sponsored funds at July 31, 2014 and October 31, 2013, as well as the Company’s net interest in these funds:

 

(in thousands)  July 31,
2014
   October 31,
2013
 
Investments  $143,220   $153,327 
Other assets   12,889    13,799 
Other liabilities   (25,544)   (31,008)
Redeemable non-controlling interests   (10,160)   (3,958)
Net interest in consolidated sponsored funds(1)  $120,405   $132,160 

 

(1)Excludes the Company's investments in consolidated CLO entities, which are discussed in Note 9.

 

During the nine months ended July 31, 2014 and 2013, the Company deconsolidated three and five sponsored funds, respectively.

 

5. Investments

 

The following is a summary of investments at July 31, 2014 and October 31, 2013:

 

(in thousands)  July 31,
2014
   October 31,
2013
 
Investment securities, trading:          
Short-term debt  $186,835   $20,116 
Consolidated sponsored funds   143,220    153,327 
Separately managed accounts   52,498    62,081 
Total investment securities, trading   382,553    235,524 
Investment securities, available-for-sale   18,353    22,727 
Investments in non-consolidated CLO entities   4,020    5,378 
Investments in equity method investees   233,760    269,683 
Investments, other   3,789    3,011 
Total investments(1)  $642,475   $536,323 

 

(1)Excludes the Company's investments in consolidated CLO entities, which are discussed in Note 9.

 

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Investment securities, trading

 

The following is a summary of the fair value of investments classified as trading at July 31, 2014 and October 31, 2013:

 

(in thousands)  July 31,
2014
   October 31,
2013
 
Short-term debt  $186,835   $20,116 
Other debt - consolidated sponsored funds and separately managed accounts   70,052    97,650 
Equity securities - consolidated sponsored funds and separately managed accounts   125,666    117,758 
Total investment securities, trading  $382,553   $235,524 

 

During the nine months ended July 31, 2014, the Company seeded investments in nine sponsored funds. The Company did not seed any separately managed accounts during the nine months ended July 31, 2014. During the nine months ended July 31, 2013, the Company seeded investments in 10 sponsored funds and 15 separately managed accounts.

 

The Company recognized gains (losses) related to trading securities still held at the reporting date of $(0.8) million and $(5.0) million for the three months ended July 31, 2014 and 2013, respectively, and $1.1 million and $10.9 million for the nine months ended July 31, 2014 and 2013, respectively.

 

Investment securities, available-for-sale

 

The following is a summary of the gross unrealized gains (losses) included in accumulated other comprehensive loss related to securities classified as available-for-sale at July 31, 2014 and October 31, 2013:

 

July 31, 2014      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $10,058   $8,326   $(31)  $18,353 
                     

 

October 31, 2013      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $15,459   $7,306   $(38)  $22,727 

 

Net unrealized holding gains (losses) on investment securities classified as available-for-sale included in other comprehensive income (loss), net of tax, were $0.4 million and $0.6 million for the three months ended July 31, 2014 and 2013, respectively, and $1.0 million and $(2.3) million for the nine months ended July 31, 2014 and 2013, respectively.

 

The Company evaluated the gross unrealized losses of $31,000 as of July 31, 2014 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 $1.4 million at July 31, 2014. No investment with a gross unrealized loss has been in a loss position for greater than one year.

 

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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 nine months ended July 31, 2014 and 2013:

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2014   2013   2014   2013 
Gains  $108   $415   $670   $5,666 
Losses   -    (235)   (898)   (235)
Net realized gains (losses)  $108   $180   $(228)  $5,431 

 

Investments in equity method investees

 

The Company has a 49 percent interest in Hexavest Inc. (“Hexavest”), a Montreal, Canada-based investment advisor. The carrying value of this investment was $167.8 million and $175.5 million at July 31, 2014 and October 31, 2013, respectively. At July 31, 2014, the Company’s investment in Hexavest consisted of $6.2 million of equity in the net assets of Hexavest, intangible assets of $35.3 million and goodwill of $135.8 million, net of a deferred tax liability of $9.5 million. At October 31, 2013, the Company’s investment in Hexavest consisted of $5.5 million of equity in the net assets of Hexavest, intangible assets of $38.6 million and goodwill of $141.8 million, net of a deferred tax liability of $10.4 million. The investment is denominated in Canadian dollars and is subject to foreign currency translation adjustments, which are recorded in accumulated other comprehensive income (loss).

 

The Company will be obligated to make an additional payment in fiscal 2014 with respect to its investment in Hexavest if Hexavest’s annual revenue for the twelve-month period ending August 31, 2014 exceeds a defined threshold amount. The payment would be considered goodwill and would be recorded as an addition to the carrying amount of the equity method investment.

 

The Company has a seven 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 $4.7 million and $4.9 million at July 31, 2014 and October 31, 2013, respectively.

 

The Company had equity method investments in the following Eaton Vance-sponsored funds as of July 31, 2014 and October 31, 2013:

 

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   Equity Ownership Interest (%)   Carrying Value ($)(1) 
   July 31,   October 31,   July 31,   October 31, 
(dollar amounts in thousands)  2014   2013   2014   2013 
Eaton Vance Municipal Opportunities Fund   48%   33%  $28,240   $10,420 
Eaton Vance Real Estate Fund   35%   34%   11,174    9,820 
Eaton Vance Focused Value Opportunities Fund   33%   34%   7,438    6,826 
Eaton Vance Focused Growth Opportunities Fund   33%   34%   7,508    6,870 
Eaton Vance Tax-Advantaged Bond Strategies Long Term Fund   29%   30%   5,917    5,552 
Eaton Vance Currency Income Advantage Fund   44%   -    1,008    - 
Eaton Vance Atlanta Capital Select Equity Fund   -    28%   -    25,207 
Eaton Vance Hexavest Global Equity Fund   -    30%   -    24,592 
Total            $61,285   $89,287 

 

(1)The carrying value of equity method investments in Company-sponsored 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 nine months ended July 31, 2014 and 2013, respectively.

 

During the nine months ended July 31, 2014 and 2013, the Company received dividends of $11.7 million and $13.2 million, respectively, from its investments in equity method investees.

 

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 July 31, 2014 and October 31, 2013:

 

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July 31, 2014                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                     
Financial assets:                         
Cash equivalents  $19,027   $28,431   $-   $-   $47,458 
Investments:                         
Investment securities, trading:                         
Short-term debt   -    186,835    -    -    186,835 
Other debt - consolidated sponsored funds and separately managed accounts   1,501    68,551    -    -    70,052 
Equity - consolidated sponsored funds and separately managed accounts   65,347    60,319    -    -    125,666 
  Investment securities, available-for-sale   12,095    6,258    -    -    18,353 
Investments in non-consolidated CLO entities(1)   -    -    -    4,020    4,020 
Investments in equity method investees(2)   -    -    -    233,760    233,760 
Investments, other(3)   -    61    -    3,728    3,789 
Derivative instruments   -    2,448    -    -    2,448 
Assets of consolidated CLO entity:                         
Cash equivalents   20,809    -    -    -    20,809 
Bank loans and other investments   -    166,012    13    -    166,025 
Total financial assets  $118,779   $518,915   $13   $241,508   $879,215 
                          
Financial liabilities:                         
Derivative instruments  $-   $1,571   $-   $-   $1,571 
Liabilities of consolidated CLO entity:                         
Senior and subordinated note obligations   -    2,672    180,053    -    182,725 
Total financial liabilities  $-   $4,243   $180,053   $-   $184,296 

 

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October 31, 2013                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                     
Financial assets:                         
Cash equivalents  $104,261   $2,900   $-   $-   $107,161 
Investments:                         
Investment securities, trading:                         
Short-term debt   -    20,116    -    -    20,116 
Other debt - consolidated sponsored funds and separately managed accounts   7,053    90,597    -    -    97,650 
Equity - consolidated sponsored funds and separately managed accounts   61,615    56,143    -    -    117,758 
  Investment securities, available-for-sale   17,083    5,644    -    -    22,727 
Investments in non-consolidated CLO entities(1)   -    -    -    5,378    5,378 
Investments in equity method investees(2)   -    -    -    269,683    269,683 
Investments, other(3)   -    60    -    2,951    3,011 
Derivative instruments   -    334    -    -    334 
Assets of consolidated CLO entities:                         
Cash equivalents   29,970    -    -    -    29,970 
Bank loans and other investments   -    684,436    1,245    -    685,681 
Total financial assets  $219,982   $860,230   $1,245   $278,012   $1,359,469 
                          
Financial liabilities:                         
Derivative instruments  $-   $8,412   $-   $-   $8,412 
Securities sold, not yet purchased   -    687    -    -    687 
Liabilities of consolidated CLO entities:                         
Senior and subordinated note obligations   -    2,651    276,476    -    279,127 
Total financial liabilities  $-   $11,750   $276,476   $-   $288,226 

 

(1)The Company’s investments in these CLO entities are measured at fair value on a non-recurring basis using Level 3 inputs.

The investments are carried at amortized cost (or cost for warehouse stage entities) unless facts and circumstances indicate that the investments have been impaired, at which time the investments are written down to fair value.

(2)Investments in equity method investees are not measured at fair value in accordance with GAAP.
(3)Investments, other, includes investments carried at cost that are not measured at fair value in accordance with GAAP.

 

Valuation methodologies

 

The Company utilizes third-party pricing services to value investments in various asset classes, including debt obligations, interests in senior floating-rate loans, derivatives and certain foreign equity securities, as further discussed below. Valuations provided by the pricing services are subject to exception reporting that identifies securities with significant movements in valuation, as well as investments with no movements in valuation. These exceptions are reviewed by the Company on a daily basis. The Company compares the price of trades executed by the Company to the valuations provided by the third-party pricing services to identify and research

 

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significant variances. The Company periodically compares the pricing service valuations to valuations provided by a secondary independent source when available. Market data provided by the pricing services and other market participants, such as the Loan Syndication and Trading Association (“LSTA”) trade study, is reviewed by the Company to assess the reliability of the provided data. The Company’s Valuation Committee reviews the general assumptions underlying the methodologies used by the pricing services to value various asset classes at least annually. Throughout the year, members of the Company’s Valuation Committee or its designees meet with the service providers to discuss any significant changes to the service providers’ valuation methodologies or operational processes.

 

Cash equivalents

Cash equivalents include investments in money market funds, holdings of Treasury and government agency securities, and commercial paper with original maturities of less than three months. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1 within the fair value measurement hierarchy. Treasury and government 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 corroborated by observable market data. The carrying amounts of commercial paper are measured at amortized cost, which approximates fair value due to the short time between the purchase and expected maturity of the investments. Depending on the nature of the inputs, these assets are generally classified as Level 1 or 2 within the fair value measurement hierarchy.

 

Investment securities, trading short-term debt

Short-term debt securities include certificates of deposit, commercial paper and corporate debt obligations with remaining maturities from three months to 12 months. Short-term debt securities held 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 ask 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. Depending on the nature of the inputs, these assets are generally classified as Level 1 or 2 within the fair value measurement hierarchy.

 

Investment securities, trading other debt

Other debt securities classified as trading include debt obligations held in the portfolios of consolidated sponsored funds and separately managed accounts. Other debt securities held are generally valued on the basis of valuations provided by third-party pricing services as described above for investment securities, trading – short-term debt. Other debt securities purchased with a remaining maturity of 60 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 fair value. Depending upon the nature of the inputs, these assets are generally classified as Level 1 or 2 within the fair value measurement hierarchy.

 

Investment securities, trading equity

Equity securities classified as trading include 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 ask 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 ask prices. When valuing foreign equity securities that meet certain criteria, 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. In addition, the Company performs

 

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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, these assets generally are classified as Level 1 or 2 within the fair value measurement hierarchy.

 

Investment securities, available-for-sale

Investment securities classified as available-for-sale include 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 fair value measurement 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 fair value measurement 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. Stock index futures contracts and commodity futures contracts are valued using a third-party pricing service that determines fair value based on bid and ask prices. Derivative instruments generally are classified as Level 2 within the fair value measurement hierarchy.

 

Assets of consolidated CLO entities

Assets of consolidated CLO entities 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. Investments in actively traded money market funds are valued using published net asset values and are classified as Level 1 within the fair value measurement hierarchy. Equity securities, debt securities and warrants are valued using the same techniques as described above for trading securities. 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 fair value measurement 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, generally are classified as Level 2 within the fair value measurement hierarchy.

 

Liabilities of consolidated CLO entities

Liabilities of consolidated CLO entities include debt securities and senior and subordinated note obligations. 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. Senior and subordinated notes are valued utilizing an income approach model in which one or more significant inputs are unobservable in the market. A full description of the valuation technique is included below within the valuation process disclosure. Depending on the nature of the inputs, these liabilities are classified as Level 2 or 3 within the fair value measurement hierarchy.

 

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Transfers in and/or out of Levels

 

The following table summarizes fair value transfers between Level 1 and Level 2 of the fair value measurement hierarchy for the three and nine months ended July 31, 2014 and 2013:

 

   Three Months Ended
July 31,
   Nine Months Ended
July 31,
 
(in thousands)  2014   2013   2014   2013 
Transfers from Level 1 into Level 2(1)  $1,107   $237   $609   $43 
Transfers from Level 2 into Level 1(2)   257    149    843    1,332 

 

(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 that were valued using unadjusted quoted market prices in active markets that became available in the current period.

 

Level 3 assets and liabilities

 

As discussed more fully in Note 9, the Company deconsolidated Eaton Vance CLO 2013-1 on May 1, 2014. The following table presents a reconciliation of the beginning and ending fair value measurements of assets and liabilities valued on a recurring basis and classified as Level 3 within the fair value measurement hierarchy for the three and nine months ended July 31, 2014 and 2013:

 

   Three Months Ended   Three Months Ended 
   July 31, 2014   July 31, 2013 
(in thousands)  Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations
and
redeemable
preferred
shares of
consolidated
CLO entity
   Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations of
consolidated
CLO entity
 
Beginning balance  $7   $633,159   $2,819   $365,460 
Deconsolidation of senior and subordinated notes and redeemable preferred shares   -    (419,193)   -    - 
Net gains (losses) on investments and note obligations included in net income(1)   15    76    (101)   (720)
Sales   (9)   -    -    - 
Principal paydown   -    (33,989)   -    (76,200)
Transfers into Level 3(2)   -    -    327    - 
Ending balance  $13   $180,053   $3,045   $288,540 
Change in unrealized gains (losses) included in net income relating to assets and liabilities held  $-   $76   $(101)  $(720)

 

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   Nine Months Ended   Nine Months Ended 
   July 31, 2014   July 31, 2013 
(in thousands)  Bank loans
and other
investments of
consolidated
CLO entities
   Senior and
subordinated
note
obligations
and
redeemable
preferred
shares of
consolidated
CLO entities
   Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations of
consolidated
CLO entity
 
Beginning balance  $1,245   $276,476   $2,203   $443,946 
Issuance of senior and subordinated notes and redeemable preferred shares   -    421,523    -    - 
Deconsolidation of senior and subordinated notes and redeemable preferred shares   -    (419,193)   -    - 
Net gains (losses) on investments and note obligations included in net income(1)   (171)   (1,059)   (80)   4,536 
Sales   (1,061)   -    -    - 
Amortization of original issue discount on senior notes   -    75    -    - 
Principal paydown   -    (97,769)   -    (159,942)
Transfers into Level 3(2)   -    -    922    - 
Ending balance  $13   $180,053   $3,045   $288,540 
Change in unrealized gains (losses) included in net income relating to                    
assets and liabilities held  $-   $(1,346)  $(80)  $4,536 

 

(1)Substantially all net gains (losses) on investments and note obligations and redeemable preferred shares attributable to the assets and borrowings of the Company's consolidated CLO entities 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 the securities, including a loan that utilized a discount applied to the demanded yield.

 

The following table shows the valuation technique and significant unobservable inputs utilized in the fair value measurement of Level 3 liabilities of the consolidated CLO entities at July 31, 2014 and October 31, 2013:

 

July 31, 2014      Valuation  Unobservable  Value/
($ in thousands)  Fair Value   Technique  Inputs(1)  Range
              
           Prepayment rate  30 percent
           Recovery rate  70 percent
Senior and subordinated          Default rate  200 bps
note obligations  $180,053   Income approach  Discount rate  75-250 bps

 

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October 31, 2013      Valuation  Unobservable  Value/
($ in thousands)  Fair Value   Technique  Inputs(1)  Range
              
           Prepayment rate  30 percent
           Recovery rate  70 percent
Senior and subordinated          Default rate  200 bps
note obligations  $276,476   Income approach  Discount rate  105-375 bps

 

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

 

Valuation process

Senior and subordinated note obligations of the Company’s consolidated CLO entities 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.

 

Sensitivity to changes in significant unobservable inputs

For senior and subordinated notes issued by the Company’s consolidated CLO entities, increases (decreases) in discount rates, default rates or prepayment rates in isolation would result in lower (higher) fair value measurements, while increases (decreases) in recovery rates in isolation would result in higher (lower) fair value measurements. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for discount rates and a directionally opposite change in the assumptions used for prepayment and recovery rates.

 

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 different estimates of fair value at the reporting date.

 

7. Derivative Financial Instruments

 

Derivative financial instruments designated as cash flow hedges

 

During the three months ended July 31, 2014 and 2013, the Company reclassified into interest expense $50,000 and $25,000, respectively, of deferred gains related to a forward-starting interest rate swap entered into in connection with the offering of its 3.625 percent unsecured senior notes due June 15, 2023 (“2023 Senior Notes”). During the nine months ended July 31, 2014 and 2013, the Company reclassified into interest expense $0.2 million and $25,000, respectively, of this deferred gain. At July 31, 2014, the remaining unamortized gain on this transaction was $1.8 million. During the next twelve months, the Company expects to reclassify approximately $0.2 million of the gain into interest expense.

 

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During the three months ended July 31, 2014 and 2013, the Company reclassified into interest expense $56,000 and $1.0 million, respectively, of deferred losses related to a Treasury lock transaction entered into in connection with the issuance of its 6.5 percent unsecured senior notes due October 2, 2017 (“2017 Senior Notes”). During the nine months ended July 31, 2014 and 2013, the Company reclassified into interest expense $0.2 million and $1.3 million, respectively, of deferred losses on this Treasury lock. Amounts for the three and nine month periods ended July 31, 2013 include $0.9 million in interest expense related to the accelerated amortization of the treasury lock tied to the portion of the 2017 Senior Notes retired on June 28, 2013. At July 31, 2014, the remaining unamortized loss on this transaction was $0.7 million. During the next twelve months, the Company expects to reclassify approximately $0.2 million of the loss into interest expense.

 

Other derivative financial instruments not designated for hedge accounting

 

During the three months ended July 31, 2013, the Company entered into a reverse treasury lock in conjunction with the Company’s tender offer to purchase up to $250 million of its 2017 Senior Notes. The transaction effectively locked in the benchmark interest rate to be used in determining the premium above par to be paid to note holders in conjunction with the repurchase of the 2017 Senior Notes tendered. The reference U.S. Treasury rate increased during the time the reverse treasury lock was outstanding and the Company recognized a $3.1 million loss upon termination during the three months ended July 31, 2013. This loss was included in gains (losses) and other investment income, net in the Company’s Consolidated Statement of Income.

 

The Company has entered into a series of foreign exchange contracts, stock index futures contracts and commodity futures contracts to hedge currency risk and market risk associated with its investments in certain sponsored funds and separately managed accounts seeded for new product development purposes. Certain of these sponsored funds and separately managed accounts may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives.

 

At July 31, 2014 and October 31, 2013, excluding derivative financial instruments held in certain sponsored funds and separately managed accounts, the Company had 19 and 42 foreign exchange contracts outstanding with four and five counterparties with an aggregate notional value of $14.2 million and $59.1 million, respectively; 1,936 and 2,711 stock index futures contracts outstanding with one counterparty with an aggregate notional value of $141.2 million and $200.7 million, respectively; and 465 and 217 commodity futures contracts outstanding with one counterparty with an aggregate notional value of $30.1 million and $12.9 million, respectively. The number of derivative contracts outstanding and the notional values they represent at July 31, 2014 and October 31, 2013 are indicative of derivative balances throughout each respective period.

 

The following tables present the fair value of derivative financial instruments, excluding derivative financial instruments held in certain sponsored funds and separately managed accounts, not designated as hedging instruments as of July 31, 2014 and October 31, 2013:

 

July 31, 2014              
   Assets  Liabilities
(in thousands)  Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $62   Other liabilities  $75 
Stock index futures contracts  Other assets   1,470   Other liabilities   649 
Commodity futures contracts  Other assets   916   Other liabilities   847 
Total     $2,448      $1,571 

 

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October 31, 2013              
   Assets  Liabilities
(in thousands)  Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $34   Other liabilities  $981 
Stock index futures contracts  Other assets   81   Other liabilities   7,288 
Commodity futures contracts  Other assets   219   Other liabilities   143 
Total     $334      $8,412 

 

The following is a summary of the net gains (losses) recognized in income for the three and nine months ended July 31, 2014 and 2013:

 

   Income Statement  Three Months Ended
July 31,
   Nine Months Ended
July 31,
 
(in thousands)  Location  2014   2013   2014   2013 
Foreign exchange contracts  Gains (losses) and other investment income, net  $(103)  $1,212   $35   $2,406 
                        
Stock index futures contracts  Gains (losses) and other investment income, net   (3,772)   (3,028)   (11,310)   (21,939)
                        
Commodity futures contracts  Gains (losses) and other investment income, net   431    483    (892)   1,177 
                        
Interest rate contracts  Gains (losses) and other investment income, net   -    (3,075)   -    (3,075)
                        
Total     $(3,444)  $(4,408)  $(12,167)  $(21,431)

 

8. Fair Value Measurements of Other Financial Instruments

 

Certain financial instruments are not carried at fair value, but their fair value is required to be disclosed. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at July 31, 2014 and October 31, 2013:

 

   July 31, 2014       October 31, 2013    
(in thousands)  Carrying
Value
   Fair
Value
   Fair
Value
Level
   Carrying
Value
   Fair
Value
   Fair
Value
Level
Investments, other  $3,728   $3,728    3     $2,951   $2,951   3
Other assets  $7,625   $7,625    3     $7,960   $7,960   3
Debt  $573,616   $614,894    2     $573,499   $611,081   2

 

Included in investments, other, at July 31, 2014 and October 31, 2013 is a non-controlling capital interest in Atlanta Capital Management Holdings, LLC (“ACM Holdings”) carried at $2.0 million and $2.1 million, respectively. The carrying value of this investment approximates fair value. Fair value of the investment is determined using a cash flow model that projects future cash flows based upon contractual obligations, to which

 

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the Company then applies an appropriate discount rate. The fair value of this investment falls within Level 3 of the fair value measurement hierarchy.

 

Included in other assets at July 31, 2014 and October 31, 2013 is an option exercisable in 2017 to acquire an additional 26 percent interest in Hexavest carried at $7.6 million and $8.0 million, respectively. The carrying value of this option approximates fair value. The fair value of this 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 fair value of this investment falls within Level 3 of the fair value measurement hierarchy.

 

The fair value of the Company’s debt has been determined based on quoted prices in inactive markets and falls within Level 2 of the fair value measurement hierarchy.

 

Fair value measurements of other financial instruments of consolidated CLO entities

 

The Company did not elect the fair value option for the warehouse stage liabilities of Eaton Vance CLO 2013-1 upon initial consolidation in the fourth quarter of fiscal 2013, but did irrevocably elect the fair value option for the senior and subordinated note obligations and redeemable preferred shares that the entity issued at closing on November 13, 2013. As discussed in Note 9, the Company deconsolidated this CLO entity on May 1, 2014. The following is a summary of the carrying amounts and estimated fair values of the warehouse stage liabilities at October 31, 2013:

 

   October 31, 2013    
(in thousands)  Carrying
Value
   Fair
Value
   Fair
Value
Level
Line of credit  $247,789   $247,789   2
Redeemable preferred shares  $64,952   $64,952   3

 

The line of credit was a non-recourse revolving facility that was used to fund purchases of portfolio investments in floating-rate bank loans during the warehouse phase of the entity. Interest on the line of credit was calculated at a rate of one-month LIBOR plus a basis point spread. The LIBOR rate is considered a Level 2 observable input and the line of credit was classified within Level 2 of the fair value measurement hierarchy. Carrying value approximated fair value at October 31, 2013.

 

The redeemable preferred shares represent mandatorily redeemable first loss obligations of the entity and were classified within Level 3 of the fair value measurement hierarchy. At October 31, 2013, the redeemable preferred shares were carried at an estimated redemption value of $64.9 million, which approximated fair value.

 

9. Variable Interest Entities (“VIEs”)

 

Investments in VIEs that are consolidated

 

Sponsored funds

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. Such waivers are disclosed in Note 21.

 

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Consolidated CLO entities

As of July 31, 2014, the Company deems itself to be the primary beneficiary of one non-recourse CLO entity, Eaton Vance CLO IX. In developing its conclusion that it is the primary beneficiary of Eaton Vance CLO IX, the Company determined that it has a more than insignificant variable interest in the entity by virtue of its 8 percent residual interest and the presence of an incentive collateral management fee, which combined expose the Company to a more than insignificant amount of the entity’s variability relative to its anticipated economic performance. In its role as collateral manager of this entity, the Company has the power to direct the activities that most significantly impact the economic performance of the entity. The Company’s variable interest represents an obligation to absorb losses of, or a right to receive benefits from, the entity that could potentially be significant to the entity. In consideration of these factors, the Company concluded that it is the primary beneficiary of Eaton Vance CLO IX for consolidation accounting purposes.

 

On May 1, 2014, the Company sold its 20 percent residual interest in Eaton Vance CLO 2013-1, which it had initially consolidated on October 11, 2013. Although the Company continues to serve as collateral manager of the entity and therefore has the power to direct the activities that most significantly impact the economic performance of the entity, the Company concluded that it was no longer the primary beneficiary of the entity upon disposition of its 20 percent residual interest and deconsolidated the entity on May 1, 2014.

 

The significance of the Company’s variable interest in Eaton Vance CLO IX is greater than the significance of the Company’s investments in non-consolidated CLO entities in which the Company also holds variable interests and serves as collateral manager.

 

The assets of consolidated CLO entities are held solely as collateral to satisfy the obligations of the entities. The Company has no right to the benefits from, nor does the Company bear the risks associated with, the assets held by these CLO entities beyond the Company’s beneficial interest therein and management fees generated from the entities. The note holders and other creditors of the CLO entities have no recourse to the Company’s general assets. There are neither explicit arrangements nor does the Company hold implicit variable interests that would require the Company to provide any ongoing financial support to the entities.

 

Interest income and expense are recorded on an accrual basis and reported as gains and other investment income, net, and as interest expense in interest and other expense, respectively, of the consolidated CLO entities in the Company’s Consolidated Statements of Income for the three and nine months ended July 31, 2014 and 2013. Substantially all ongoing gains (losses) related to the consolidated CLO entities’ bank loans, other investments and note obligations and redeemable preferred shares recorded in earnings for the periods presented are attributable to changes in instrument-specific credit considerations.

 

Eaton Vance CLO IX

The Company irrevocably elected the fair value option for all financial assets and liabilities of Eaton Vance CLO IX upon its initial consolidation on November 1, 2010. The Company elected the fair value option to mitigate any accounting mismatches between the carrying value of the senior and subordinated note obligations of Eaton Vance CLO IX and the carrying value of the assets that are held to provide the cash flows supporting those note obligations. 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, of the consolidated CLO entities in the Company’s Consolidated Statements of Income. Although the subordinated note obligations of Eaton Vance CLO IX have certain equity characteristics, the Company has determined that the subordinated notes should be recorded as liabilities on the Company’s Consolidated Balance Sheets.

 

The following tables present, as of July 31, 2014 and October 31, 2013, the fair value of Eaton Vance CLO IX’s assets and liabilities that are subject to fair value accounting:

 

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July 31, 2014            
   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  $161,515   $500   $196,290 
Unpaid principal balance over fair value   (1,014)   (500)   (13,565)
Fair value  $160,501   $-   $182,725 

 

October 31, 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  $255,474   $500   $294,037 
Unpaid principal balance over fair value   (364)   (500)   (14,910)
Fair value  $255,110   $-   $279,127 

 

Changes in the fair values of Eaton Vance CLO IX’s bank loans and other investments resulted in net losses of $0.1 million and $2.2 million during the three months ended July 31, 2014 and 2013, respectively, while changes in the fair value of Eaton Vance CLO IX’s note obligations resulted in net losses of $0.1 million and net gains of $0.7 million, respectively. The combined net losses of $0.2 million and $1.5 million for the three months ended July 31, 2014 and 2013, respectively, were recorded as gains and other investment income, net, of consolidated CLO entities in the Company’s Consolidated Statements of Income for those periods.

 

Changes in the fair values of Eaton Vance CLO IX’s bank loans and other investments resulted in net losses of $0.3 million and net gains of $0.3 million during the nine months ended July 31, 2014 and 2013, respectively, while changes in the fair value of Eaton Vance CLO IX’s note obligations resulted in net losses of $1.4 million and $4.5 million, respectively. The combined net losses of $1.7 million and $4.2 million for the nine months ended July 31, 2014 and 2013, respectively, were recorded as gains and other investment income, net, of consolidated CLO entities in the Company’s Consolidated Statements of Income for those periods.

 

Eaton Vance CLO IX has note obligations that 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 Eaton Vance CLO IX mature on April 20, 2019. It is expected that prepayments received will be used to pay down the entity’s note obligations. During the nine months ended July 31, 2014 and 2013, $97.8 million and $159.9 million, respectively, 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 Eaton Vance CLO IX, provided there is sufficient value to repay the senior notes in full.

 

For the three months ended July 31, 2014 and 2013, the Company recorded net losses of $0.3 million and $1.3 million, respectively, related to Eaton Vance CLO IX. The Company recorded net losses attributable to other beneficial interests of $0.9 million and $2.4 million for the three months ended July 31, 2014 and 2013, respectively. Net income attributable to Eaton Vance Corp. shareholders was $0.6 million and $1.0 million for the three months ended July 31, 2014 and 2013, respectively.

 

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For the nine months ended July 31, 2014 and 2013, the Company recorded net losses of $0.7 million and $2.6 million, respectively, related to Eaton Vance CLO IX. The Company recorded net losses attributable to other beneficial interests of $3.0 million and $5.6 million for the nine months ended July 31, 2014 and 2013, respectively. Net income attributable to Eaton Vance Corp. shareholders was $2.3 million and $2.9 million for the nine months ended July 31, 2014 and 2013, respectively.

 

The following carrying amounts related to Eaton Vance CLO IX were included in the Company’s Consolidated Balance Sheets at July 31, 2014 and October 31, 2013:

 

   July 31,   October 31, 
(in thousands)  2014   2013 
Assets:          
Cash and cash equivalents  $21,074   $30,462 
Bank loans and other investments   166,025    261,529 
Other assets   2,179    514 
Liabilities:          
Senior and subordinated note obligations   182,725    279,127 
Other liabilities   389    4,046 
Appropriated retained earnings   4,557    7,618 
Net interest in Eaton Vance CLO IX  $1,607   $1,714 

 

The Company had subordinated interests in Eaton Vance CLO IX of $1.4 million and $1.5 million as of July 31, 2014 and October 31, 2013, respectively, which were eliminated in consolidation.

 

Eaton Vance CLO 2013-1

Eaton Vance CLO 2013-1 began as a warehouse stage CLO in December 2012. During the warehouse stage, all of the subordinated interests of the entity in the form of redeemable preferred shares were controlled by affiliates of an investment manager unrelated to the Company. The Company irrevocably elected the fair value option for measurement of substantially all financial assets of Eaton Vance CLO 2013-1 upon its initial consolidation on October 11, 2013, when the senior note obligations and redeemable preferred shares of the CLO were priced. At pricing, the Company entered into a trade commitment to acquire 20 percent of the redeemable preferred shares of the entity to be issued at closing on November 13, 2013, representing a variable, although not beneficial, interest in the entity as of October 31, 2013.

 

The Company did not elect the fair value option on the warehouse line of credit and redeemable preferred shares at pricing, as these liabilities were temporary in nature. The warehouse line of credit and the redeemable preferred shares were extinguished, and new senior note obligations and redeemable preferred shares were issued at closing on November 13, 2013. The Company irrevocably elected the fair value option for the senior note obligations and redeemable preferred shares of Eaton Vance CLO 2013-1 upon their issuance. Although the redeemable preferred shares of Eaton Vance CLO 2013-1 have certain equity characteristics, the Company has determined that the redeemable preferred shares should be recorded as liabilities on the Company’s Consolidated Balance Sheets.

 

The Company elected the fair value option in these instances to mitigate any accounting mismatches between the carrying value of the new senior note obligations and redeemable preferred shares of Eaton Vance CLO 2013-1 and the carrying value of the assets that are held to provide the cash flows for those beneficial interests. Unrealized gains and losses on assets and liabilities for which the fair value option was elected are reported in

 

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gains and other investment income, net, of the consolidated CLO entities in the Company’s Consolidated Statement of Income.

 

On May 1, 2014, the Company sold its residual 20 percent interest in redeemable preferred shares of Eaton Vance CLO 2013-1 to an unrelated third party. The Company continues to hold a $1.4 million beneficial interest in note obligations issued by Eaton Vance CLO 2013-1, which is carried at amortized cost. The Company considered the collateral management fees that it receives from CLO 2013-1 and determined that these fees are not significant to the VIE.

 

On May 1, 2014, the Company determined that it no longer had an obligation to absorb losses of the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE. In making this determination, the Company also considered consolidation accounting guidance regarding de facto agency relationships and determined that it is not the entity most closely associated with CLO 2013-1. Accordingly, the Company concluded that, as of May 1, 2014, it did not retain a controlling financial interest in CLO 2013-1 and consequently deconsolidated Eaton Vance CLO 2013-1 and derecognized the associated assets, liabilities and appropriated retained earnings from its Consolidated Balance Sheet as of that date. The Company recognized a loss of $19,000 on deconsolidation, which is included in gains (losses) and other investment income, net, on the Company’s Consolidated Statement of Income.

 

During the nine months ended July 31, 2014, approximately $4.8 million of organizational and structuring costs associated with the closing of Eaton Vance CLO 2013-1 were recorded in interest and other expense of consolidated CLO entities in the Company’s Consolidated Statement of Income.

 

The following table presents, as of October 31, 2013, the fair value of Eaton Vance CLO 2013-1’s assets and liabilities that were subject to fair value accounting:

 

October 31, 2013        
   CLO Bank Loan Investments 
(in thousands)  Total CLO
bank loan
investments
   90 days or
more past
due
 
Unpaid principal balance  $421,830   $- 
Unpaid principal balance under fair value   2,322    - 
Fair value  $424,152   $- 

 

Changes in the fair value of Eaton Vance CLO 2013-1’s bank loans and other investments resulted in net losses of $39,000 during the nine months ended July 31, 2014, while changes in the fair value of Eaton Vance CLO 2013-1’s note obligations resulted in net gains of $2.4 million during the nine months ended July 31, 2014. The combined net gains of $2.4 million, for the nine months ended July 31, 2014 were recorded as gains and other investment income, net, of consolidated CLO entities in the Company’s Consolidated Statements of Income.

 

For the nine months ended July 31, 2014, the Company recorded net income of $2.0 million related to Eaton Vance CLO 2013-1. The Company recorded net income attributable to other beneficial interests of $1.1 million for nine months ended July 31, 2014. Net income attributable to Eaton Vance Corp. shareholders was $0.9 million for the nine months ended July 31, 2014.

 

The following carrying amounts related to Eaton Vance CLO 2013-1 were included in the Company’s Consolidated Balance Sheet at October 31, 2013:

 

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   October 31, 
(in thousands)  2013 
Assets:     
Cash and cash equivalents  $6,179 
Bank loans and other investments   424,152 
Other assets   5,300 
Liabilities:     
Line of credit   247,789 
Redeemable preferred shares   64,952 
Other liabilities   120,259 
Appropriated retained earnings   2,631 
Net interest in Eaton Vance CLO 2013-1  $- 

 

As of October 31, 2013, other liabilities included $118.2 million due to brokers for collateral asset purchases.

 

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 at least 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 provides 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 often 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, for certain of these entities, although it has variable interests in each by virtue of its residual interests 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 all but one 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.

 

At October 31, 2013, the Company held a 16.7 percent subordinated interest in a warehouse stage CLO entity. The Company determined that it did not hold the power to direct the activities of this CLO entity during the warehouse stage, as that power was shared with the majority holder of the equity during this stage. As a result, the Company did not consolidate this entity during the warehouse stage during fiscal 2014, or as of October 31, 2013.

 

Pricing occurred on July 2, 2014, and the securitization stage CLO entity, Eaton Vance CLO 2014-1, closed on July 24, 2014. At closing, the Company redeemed its warehouse stage equity ownership and acquired a 4.6 percent subordinated equity interest in Eaton Vance CLO 2014-1. The Company has determined that as collateral manager, it has the power during the securitization stage to direct the activities of Eaton Vance CLO 2014-1 that most significantly impact the economic performance of the entity. The variable interests that the

 

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Company holds during the securitization stage with respect to Eaton Vance CLO 2014-1 do not represent an obligation to absorb losses of, or a right to receive benefits from, the entity that could potentially be significant to Eaton Vance CLO 2014-1. The Company also considered consolidation accounting guidance regarding de facto agency relationships and determined that it is not the entity most closely associated with Eaton Vance CLO 2014-1. As a result, the Company has not consolidated Eaton Vance CLO 2014-1 as of July 31, 2014.

 

Non-consolidated CLO entities had total assets of $2.6 billion and $1.9 billion as of July 31, 2014 and October 31, 2013, respectively. The Company’s variable interests in these entities consist of the Company’s direct ownership in these entities and any collateral management fees earned but uncollected. The Company’s investment in these entities totaled $4.0 million and $5.4 million as of July 31, 2014 and October 31, 2013, respectively. Collateral management fees receivable for these CLO entities totaled $2.3 million and $2.1 million on July 31, 2014 and October 31, 2013, respectively. In the first nine months of fiscal 2014, 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 CLO entities is limited to the carrying value of its investments in, and collateral management fees receivable from, these entities as of July 31, 2014.

 

The Company’s investments in non-consolidated CLO entities are disclosed as a component of investments in Note 5. Income from these entities is recorded as a component of gains (losses) 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 $10.6 billion and $9.8 billion as of July 31, 2014 and October 31, 2013, respectively. The Company has determined that these entities qualify for the deferral to certain provisions of FASB ASC Subtopic 810-10 – Consolidation Overall, afforded by ASU 2010-10, Consolidation – Amendments for Certain Investment Funds (the “Investment Company deferral”) and thus determines whether it is the primary beneficiary of these entities by virtue of its exposure to the expected losses and expected residual returns of the entity. The Company’s variable interests in these entities consist of the Company’s direct ownership therein, which in each case is insignificant relative to the total ownership of the fund and any investment advisory fees earned but uncollected. The Company held investments in these entities totaling $6.3 million and $5.6 million on July 31, 2014 and October 31, 2013, respectively, and investment advisory fees receivable totaling $0.6 million and $0.5 million on July 31, 2014 and October 31, 2013, respectively. In the first nine months of fiscal 2014, the Company did not provide any financial or other support to these entities that it was not 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 July 31, 2014. The Company does not consolidate these VIEs because it does not hold the majority of the risks and rewards of ownership.

 

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).

 

10. Acquisitions

 

Parametric Risk Advisors LLC (“Parametric Risk Advisors”)

On November 1, 2013, the non-controlling interest holders of Parametric Risk Advisors entered into a Unit Acquisition Agreement with Parametric Portfolio Associates (“Parametric”) to exchange their remaining ownership interests in Parametric Risk Advisors (representing a 20 percent ownership interest in the entity) for additional ownership interests in Parametric Portfolio LP (“Parametric LP”), whose sole asset is ownership interests in Parametric. The Parametric LP ownership interests acquired in the exchange contain put and call features that become exercisable over a four-year period starting in 2018. Indirect capital and profit interests in

 

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Parametric issued in connection with the transaction totaled 0.8 percent on July 31, 2014. As a result of this exchange, Parametric Risk Advisors became a wholly-owned subsidiary of Parametric.

 

Atlanta Capital

In fiscal 2013, the Company exercised a call option requiring the non-controlling interest holders of Atlanta Capital to sell a 3.4 percent profit interest and a 0.2 percent capital interest in Atlanta Capital to the Company for $12.8 million. In addition, the non-controlling interest holders of Atlanta Capital exercised a put option requiring the Company to purchase an additional 3.8 percent profit interest and a 0.3 percent capital interest in Atlanta Capital for $14.1 million. The purchase price of these transactions was based on a multiple of earnings before taxes based on the financial results of Atlanta Capital for the fiscal year ended October 31, 2013. Upon the execution of the call and put options, the Company reduced redeemable non-controlling interests and recorded a liability within other liabilities on its Consolidated Balance Sheet. The transactions settled in December 2013. As a result of these transactions and a 1.2 percent indirect profit interest granted to Atlanta Capital employees under a long-term equity incentive plan, the Company’s capital interests in Atlanta Capital increased to 99.9 percent and profit interests increased to 86.2 percent.

 

11. Intangible Assets

 

The following is a summary of intangible assets at July 31, 2014 and October 31, 2013:

 

July 31, 2014            
(dollars in thousands)  Gross
carrying
amount
   Accumulated
amortization
   Net
carrying
amount
 
             
Amortizing intangible assets:               
Client relationships acquired  $133,927   $(74,635)  $59,292 
Intellectual property acquired   1,000    (239)   761 
Trademark acquired   900    (204)   696 
                
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   6,708    -    6,708 
Total  $142,535   $(75,078)  $67,457 

 

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October 31, 2013            
(dollars in thousands)  Gross
carrying
amount
   Accumulated
amortization
   Net
carrying
amount
 
             
Amortizing intangible assets:               
Client relationships acquired  $133,927   $(67,703)  $66,224 
Intellectual property acquired   1,000    (191)   809 
Trademark acquired   900    (107)   793 
                
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   6,708    -    6,708 
Total  $142,535   $(68,001)  $74,534 

 

Amortization expense was $2.4 million for both the three months ended July 31, 2014 and 2013 and $7.1 million and $6.8 million for the nine months ended July 31, 2014 and 2013, respectively. Estimated remaining amortization expense for fiscal 2014 and the next five fiscal years, on a straight-line basis, is as follows:

 

Year Ending October 31,  Estimated
Amortization
 
(in thousands)  Expense 
Remaining 2014  $2,331 
2015   9,183 
2016   8,741 
2017   8,628 
2018   8,599 
2019   4,623 

 

12. Debt

 

Senior Notes due 2017

 

On June 14, 2013, the Company announced a tender offer to purchase for cash up to $250.0 million in aggregate principal amount of its outstanding 2017 Senior Notes and ultimately accepted for purchase $250.0 million of the 2017 Senior Notes (“Tendered Notes”) on June 28, 2013. Pursuant to the terms of the Indenture that governs the 2017 Senior Notes, the consideration paid to the holders of the Tendered Notes, which totaled $301.5 million, was calculated as the sum of the present values of the remaining scheduled payments of principal and interest through October 2, 2017, discounted to June 28, 2013 using a reference U.S. Treasury security rate (0.625 percent U.S. Treasury Notes due September 30, 2017) plus 30 basis points. The holders of the Tendered Notes were also paid $3.9 million in interest that accrued from April 2, 2013 (the last interest payment date) through June 28, 2013.

 

During the quarter ended July 31, 2013, the Company recognized a $52.9 million loss on extinguishment of debt, which includes the tender premium paid ($51.5 million excess of the Consideration Amount over the $250.0 million face amount of the 2017 Senior Notes tendered), acceleration of certain deferred financing costs and original issue discount associated with the Tendered Notes, and transaction costs associated with the tender offer.

 

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Senior Notes due 2023

 

On June 25, 2013, the Company issued $325.0 million in aggregate principal amount of 3.625 percent ten-year senior notes due June 15, 2023, resulting in net proceeds of approximately $321.3 million after underwriting discounts and transaction fees. Interest is payable semi-annually in arrears on June 15th and December 15th of each year. The 2023 Senior Notes are unsecured and unsubordinated obligations of the Company.

 

13. Stock-Based Compensation Plans

 

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

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2014   2013   2014   2013 
Omnibus Incentive Plans:                    
Stock options  $4,541   $3,316   $12,733   $10,841 
Restricted shares   10,606    8,102    27,051    24,539 
Phantom stock units   62    109    176    382 
Employee Stock Purchase Plan   224    859    607    1,235 
Incentive Plan – Stock Alternative   56    110    335    308 
Atlanta Capital Plan   579    352    1,805    1,055 
Parametric Plan   997    823    3,961    2,468 
Total stock-based compensation expense  $17,065   $13,671   $46,668   $40,828 

 

The total income tax benefit recognized for stock-based compensation arrangements was $5.5 million and $4.4 million for the three months ended July 31, 2014 and 2013, respectively, and $15.4 million and $14.9 million for the nine months ended July 31, 2014 and 2013, respectively.

 

Stock Options

 

Stock option transactions under the Company’s Omnibus Incentive Plans for the nine months ended July 31, 2014 are summarized in the table below.

 

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(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   23,911   $28.43           
Granted   1,810    41.62           
Exercised   (1,674)   23.60           
Forfeited/expired   (77)   29.04           
Options outstanding, end of period   23,970   $29.76    4.6   $175,800 
Options exercisable, end of period   16,005   $29.51    3.1   $125,357 
Vested or expected to vest   23,939   $29.75    4.6   $175,698 

 

The Company received $37.3 million and $94.3 million related to the exercise of options for the nine months ended July 31, 2014 and 2013, respectively.

 

As of July 31, 2014, there was $37.6 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 2.1 years.

 

Restricted Shares

 

The restricted shares activity for the nine months ended July 31, 2014 under the Company’s Omnibus Incentive Plans is summarized in the table below:

 

       Weighted- 
       Average 
       Grant 
       Date Fair 
(share figures in thousands)  Shares   Value 
Unvested, beginning of period   3,911   $27.60 
Granted   1,255    41.26 
Vested   (1,298)   27.50 
Forfeited   (56)   30.80 
Unvested, end of period   3,812   $32.09 

 

As of July 31, 2014, there was $87.7 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.0 years.

 

Phantom Stock Units

 

During the nine months ended July 31, 2014, 6,235 phantom stock units were issued to non-employee Directors pursuant to the Company’s 2013 Omnibus Incentive Plan. As of July 31, 2014, there was $0.2 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 1.0 years.

 

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14. Common Stock Repurchases

 

The Company’s current share repurchase program was announced on July 9, 2014. 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 nine months of fiscal 2014, the Company purchased and retired approximately 0.8 million shares of its Non-Voting Common Stock under the current repurchase authorization and approximately 5.2 million shares under previous repurchase authorizations. Approximately 7.2 million additional shares may be repurchased under the current authorization.

 

15. Non-operating Income (Expense)

 

The components of non-operating income (expense) for the three and nine months ended July 31, 2014 and 2013 were as follows:

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2014   2013   2014   2013 
Non-operating income (expense):                    
Interest and other income  $2,777   $909   $6,328   $4,936 
Net gains (losses) on investments and derivatives   120    (8,902)   (2,789)   (2,676)
Net foreign currency gains (losses)   20    (34)   (947)   (37)
Gains (losses) and other investment income, net   2,917    (8,027)   2,592    2,223 
Interest expense   (7,443)   (9,167)   (22,247)   (26,309)
Loss on extinguishment of debt   -    (52,886)   -    (52,886)
                     
Other income (expense) of consolidated CLO entities:                    
Interest income   1,695    3,162    14,655    12,078 
Net gains (losses) on bank loans, other investments, note obligations and preferred shares   (261)   (1,458)   592    (4,197)
Gains and other investment income, net   1,434    1,704    15,247    7,881 
Structuring and closing fees   -    -    (4,847)   - 
Interest expense   (1,758)   (2,939)   (8,934)   (10,211)
Interest and other expense   (1,758)   (2,939)   (13,781)   (10,211)
Total non-operating expense  $(4,850)  $(71,315)  $(18,189)  $(79,302)

 

16. Income Taxes

 

The provision for income taxes was $48.9 million and $25.1 million, or 38.7 percent and 52.9 percent of pre-tax income, for the three months ended July 31, 2014 and 2013, respectively. The provision for income taxes was $138.8 million and $99.3 million, or 38.3 percent and 40.0 percent of pre-tax income, for the nine months ended July 31, 2014 and 2013, respectively. The provision for income taxes in the three and nine months ended July 31, 2014 and 2013 is composed of federal, state, and foreign taxes. The differences between the Company’s effective tax rate and the statutory federal rate of 35.0 percent are primarily attributable to state income taxes, income and losses recognized by the consolidated CLO entities and other non-controlling interests, and the tax benefit of disqualifying dispositions of incentive stock options.

 

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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 July 31, 2014 or October 31, 2013.

 

During the quarter ended July 31, 2013, the tax authority of one state, which had challenged a tax position in the Company’s previously filed tax returns, presented the Company with a settlement offer, which the Company accepted and executed on July 30, 2013. The settlement agreement stipulated a lump sum payment of $19.6 million to settle all matters relating to the tax authority's audit of the fiscal years ended October 31, 2004 through October 31, 2009. The $19.6 million payment resulted in a net increase to income tax expense in the third quarter of fiscal 2013 of $6.7 million, equal to the amount of the payment less previously recorded reserves of $9.3 million and a federal tax benefit on the increased state tax of $3.6 million.

 

The Company is generally no longer subject to income tax examinations by U.S. federal, state, local or non-U.S. taxing authorities for fiscal years prior to fiscal 2010.

 

17. Non-controlling and Other Beneficial Interests

 

The components of net income attributable to non-controlling and other beneficial interests for the three and nine months ended July 31, 2014 and 2013 were as follows:

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2014   2013   2014   2013 
Consolidated sponsored funds  $(42)  $206   $(259)  $(3,886)
Majority-owned subsidiaries   (4,261)   (4,007)   (11,268)   (11,596)
Non-controlling interest value adjustments(1)   59    (405)   (2,330)   (11,718)
Consolidated CLO entities   910    2,359    2,005    5,592 
Net income attributable to non-controlling and other beneficial interests  $(3,334)  $(1,847)  $(11,852)  $(21,608)

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

 

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18. Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended July 31, 2014 and 2013 are as follows:

 

(in thousands)  Unamortized
net gains
(losses) on
derivatives (1)
   Net unrealized
holding gains
(losses) on
available-for-
sale
investments (2)
   Foreign
currency
translation
adjustments
   Total 
Balance at April 30, 2014  $654   $4,883   $(11,182)  $(5,645)
Other comprehensive income before reclassifications and tax   -    480    1,472    1,952 
Tax impact   -    (185)   (567)   (752)
Reclassification adjustments, before tax   6    (109)   -    (103)
Tax impact   (2)   42    -    40 
Net other comprehensive income   4    228    905    1,137 
Balance at July 31, 2014  $658   $5,111   $(10,277)  $(4,508)
                     
Balance at April 30, 2013  $(1,280)  $3,665   $(1,134)  $1,251 
Other comprehensive income (loss) before reclassifications and tax   2,015    758    (4,620)   (1,847)
Tax impact   (788)   (289)   1,760    683 
Reclassification adjustments, before tax   1,018    (159)   -    859 
Tax impact   (320)   60    -    (260)
Net other comprehensive income (loss)   1,925    370    (2,860)   (565)
Balance at July 31, 2013  $645   $4,035   $(3,994)  $686 

 

The components of accumulated other comprehensive income (loss), net of tax, for the nine months ended July 31, 2014 and 2013 are as follows:

 

(in thousands)  Unamortized
net gains
(losses) on
derivatives (1)
   Net unrealized
holding gains
(losses) on
available-for-
sale
investments (2)
   Foreign
currency
translation
adjustments
   Total 
Balance at October 31, 2013  $648   $4,504   $(5,329)  $(177)
Other comprehensive income (loss) before reclassifications and tax   -    897    (8,078)   (7,181)
Tax impact   -    (367)   3,130    2,763 
Reclassification adjustments, before tax   16    130    -    146 
Tax impact   (6)   (53)   -    (59)
Net other comprehensive income (loss)   10    607    (4,948)   (4,331)
Balance at July 31, 2014  $658   $5,111   $(10,277)  $(4,508)

 

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(in thousands)  Unamortized
net gains
(losses) on
derivatives (1)
   Net unrealized
holding gains
(losses) on
available-for-
sale
investments (2)
   Foreign
currency
translation
adjustments
   Total 
Balance at October 31, 2012  $(1,424)  $5,461   $(114)  $3,923 
Other comprehensive income (loss) before reclassifications and tax   2,015    2,701    (6,266)   (1,550)
Tax impact   (788)   (1,027)   2,386    571 
Reclassification adjustments, before tax   1,241    (5,001)   -    (3,760)
Tax impact   (399)   1,901    -    1,502 
Net other comprehensive income (loss)   2,069    (1,426)   (3,880)   (3,237)
Balance at July 31, 2013  $645   $4,035   $(3,994)  $686 

 

(1)Amounts reclassified from accumulated other comprehensive income (loss), net of tax, represent the amortization of net gains (losses) on interest rate swaps over the life of the Company's Senior Notes into interest expense on the Consolidated Statements of Income.
(2)Amounts reclassified from accumulated other comprehensive income (loss), net of tax, represent gains (losses) on disposal of available-for-sale securities and were recorded in gains (losses) and other investment income, net, on the Consolidated Statements of Income.

 

19.Earnings per Share

 

The following table sets forth the calculation of earnings per basic and diluted share for the three and nine months ended July 31, 2014 and 2013 using the two-class method:

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands, except per share data)  2014   2013   2014   2013 
Net income attributable to Eaton Vance Corp. shareholders  $77,935   $23,203   $224,194   $136,689 
Less: Allocation of earnings to participating restricted shares   1,882    793    5,678    6,258 
Net income available to common shareholders  $76,053   $22,410   $218,516   $130,431 
Weighted-average shares outstanding – basic   116,145    117,594    117,248    116,399 
Incremental common shares   4,868    6,278    5,302    5,756 
Weighted-average shares outstanding – diluted   121,013    123,872    122,550    122,155 
Earnings per share:                    
Basic  $0.66   $0.19   $1.86   $1.12 
Diluted  $0.63   $0.18   $1.78   $1.07 

 

Antidilutive common shares related to stock options excluded from the computation of earnings per diluted share were approximately 4.8 million and 3.0 million for the three months ended July 31, 2014 and 2013,

 

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respectively, and approximately 5.1 million and 3.0 million for the nine months ended July 31, 2014 and 2013, respectively.

 

20. 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 effect on the consolidated financial condition, results of operations or cash flows of the Company.

 

21. Related Party Transactions

 

Sponsored 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. Revenues for services provided or related to these funds for the three and nine months ended July 31, 2014 and 2013 are as follows:

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2014   2013   2014   2013 
Investment advisory and administrative fees  $229,099   $214,894   $673,995   $608,876 
Distribution fees   19,621    20,350    58,488    60,268 
Service fees   31,977    32,259    95,097    94,521 
Shareholder services fees   493    752    1,732    1,840 
Other revenue   835    442    1,567    845 
Total  $282,025   $268,697   $830,879   $766,350 

 

For the three months ended July 31, 2014 and 2013, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $3.1 million and $2.5 million of investment advisory fees it was otherwise entitled to receive, respectively. For the nine months ended July 31, 2014 and 2013, the Company waived $8.6 million and $6.9 million, respectively, of investment advisory fees it was otherwise entitled to receive.

 

Sales proceeds and net realized gains (losses) from investments in sponsored funds classified as available-for-sale for the three and nine months ended July 31, 2014 and 2013 are as follows:

 

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   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2014   2013   2014   2013 
Proceeds from sales  $682   $2,927   $64,533   $42,217 
Net realized gains (losses)   108    180    (228)   5,431 

 

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 July 31, 2014 and 2013, expenses of $5.8 million and $5.5 million, respectively, were incurred by the Company pursuant to these arrangements. For both the nine months ended July 31, 2014 and 2013, expenses of $16.2 million were incurred by the Company pursuant to these arrangements.

 

Included in investment advisory fees and other receivables at July 31, 2014 and October 31, 2013 are receivables due from sponsored funds of $96.9 million and $94.0 million, respectively.

 

Employee Loan Program

 

The Company has established an Employee Loan Program under which a program maximum of $20.0 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 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 $7.6 million and $7.1 million at July 31, 2014 and October 31, 2013, respectively.

 

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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.

 

The discussion and analysis below should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. Management has presumed that the readers of this interim financial information have read or have access to Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended October 31, 2013.

 

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.

 

Through our subsidiaries Eaton Vance Management (“EVM”) and Atlanta Capital Management, LLC (“Atlanta Capital”) and other affiliates, we manage active equity, income and alternative strategies across a range of investment styles and asset classes, including U.S. and global equities, floating-rate bank loans, municipal bonds, global income, high-yield and investment grade bonds. Through our subsidiary Parametric Portfolio Associates LLC (“Parametric”), we manage a range of engineered alpha strategies, including systematic equity, systematic alternatives and managed options strategies, and provide portfolio implementation services, including tax-managed core and specialty index strategies, futures- and options-based portfolio overlay, and centralized portfolio management of multi-manager portfolios. We also oversee the management of investment funds sub-advised by third-party managers, including global, regional and sector equity, commodity and asset allocation strategies. 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 also offer a range of alternative investment strategies, including commodity- and currency-based investments and a spectrum of absolute return strategies. As of July 31, 2014, we had $288.2 billion in consolidated assets under management.

 

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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 marketplace in the U.S. and internationally, 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 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

 

Prevailing equity and income market conditions and investor sentiment affect the sales and redemptions of our investment products, managed asset levels, operating results and the recoverability of our investments. During the third quarter and first nine months of our fiscal year, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 3.0% and 11.6%, respectively. Over the same periods, the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of 0.9% and 2.7%, respectively. Our ending consolidated assets under management increased by $2.3 billion, or 1 percent, in the third quarter to $288.2 billion on July 31, 2014, reflecting market appreciation partially offset by net outflows. Net outflows for the third quarter were concentrated in floating-rate income, high yield and large-cap value equity mandates. Average consolidated assets under management increased from the prior quarter by 2 percent, or $4.9 billion, to $289.3 billion in the third quarter.

 

The primary drivers of our overall and investment advisory effective fee rates are the mix of our assets by product structure, distribution channel and investment mandate, and the timing and amount of performance fees recognized. Shifts in managed assets among product structures, distribution channels and investment mandates with differing fee schedules can alter the total effective fee rate earned on our assets under management. Our overall average effective fee rate decreased to 51 basis points and 50 basis points in the third quarter and first nine months of fiscal 2014, respectively, from 53 basis points and 54 basis points in the third quarter and first nine months of fiscal 2013, respectively. Our average effective investment advisory and administrative fee rate

 

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similarly decreased to 43 basis points in both the third quarter and first nine months of fiscal 2014, from 44 basis points and 46 basis points in the third quarter and first nine months of last year, respectively.

 

Consolidated Assets under Management

 

Consolidated assets under management of $288.2 billion on July 31, 2014 increased $19.4 billion, or 7 percent, from the $268.8 billion reported a year earlier. Consolidated assets under management on July 31, 2014 included $135.0 billion in long-term funds, $98.4 billion in institutional separate accounts, $20.9 billion in high-net-worth separate accounts, $33.8 billion in retail managed accounts and $0.2 billion in cash management fund assets. Long-term fund net outflows of $0.1 billion over the last twelve months reflect gross inflows of $37.8 billion offset by outflows of $37.9 billion. Institutional separate account net inflows were $1.0 billion and high-net-worth separate account net outflows were $1.0 billion over the past twelve months. Retail managed account inflows of $7.4 billion were offset by $7.4 billion of outflows over the past twelve months. Net market appreciation in managed assets increased assets under management by $19.6 billion over the last twelve months.

 

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. The “Implementation Services” category includes Parametric’s tax-managed core, centralized portfolio management and specialty index business lines, as well as their futures- and options-based overlay and exposure management services.

 

Consolidated Assets under Management by Investment Mandate (1)(2)

 

   July 31,   % 
(in millions)  2014   % of Total   2013   % of Total   Change 
Equity(3)  $96,054    33%  $90,774    34%   6%
Fixed income(4)   44,287    16%   45,821    17%   -3%
Floating-rate income   43,752    15%   38,170    14%   15%
Alternative   11,691    4%   16,098    6%   -27%
Implementation services   92,223    32%   77,673    29%   19%
Cash management funds   187    0%   219    0%   -15%
Total  $288,194    100%  $268,755    100%   7%

 

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

(2)Assets under management for which we estimate fair value using significant unobservable inputs are not material to the total value of the assets we manage.

(3)Includes assets in balanced accounts holding income securities.

(4)Includes assets in institutional cash management separate accounts.

 

Equity and implementation services assets under management included $63.9 billion and $61.7 billion of assets managed for after-tax returns on July 31, 2014 and 2013, respectively. Fixed income assets included $26.2 billion and $26.7 billion of tax-exempt municipal bond assets on July 31, 2014 and 2013, respectively.

 

Net outflows for long-term funds and separate accounts totaled $2.0 billion in the third quarter of fiscal 2014 compared to net inflows of $8.8 billion in the third quarter of fiscal 2013. Long-term funds net outflows were $1.6 billion in the third quarter of fiscal 2014, reflecting gross inflows of $8.6 billion and redemptions of $10.2 billion. Net flows into long-term funds totaled $3.7 billion in the third quarter of fiscal 2013, reflecting gross inflows of $11.6 billion and redemptions of $7.9 billion.

 

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Separate account net outflows totaled $0.4 billion in the third quarter of fiscal 2014 compared to net inflows of $5.2 billion in the third quarter of fiscal 2013.

 

The following tables summarize our consolidated assets under management and asset flows by investment mandate and investment vehicle for the three and nine months ended July 31, 2014 and 2013:

 

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Consolidated Net Flows by Investment Mandate(1)

 

   Three Months Ended       Nine Months Ended     
   July 31,   %   July 31,   % 
(in millions)  2014   2013   Change   2014   2013   Change 
Equity assets - beginning of period(2)  $93,733   $ 89,534    5%  $93,585   $80,782    16%
Sales and other inflows   3,465    4,056    -15%   10,920    13,823    -21%
Redemptions/outflows   (4,129)   (4,185)   -1%   (14,766)   (14,135)   4%
Net flows   (664)   (129)   415%   (3,846)   (312)   NM(3)
Assets acquired(4)   -    -    -    -    1,572    NM 
Exchanges   468    46    917%   1,000    162    517%
Market value change   2,517    1,323    90%   5,315    8,570    -38%
Equity assets - end of period  $96,054   $90,774    6%  $96,054   90,774    6%
Fixed income assets - beginning of period(5)   43,917    49,949    -12%   44,211    49,003    -10%
Sales and other inflows   3,344    2,065    62%   8,420    8,732    -4%
Redemptions/outflows   (3,299)   (3,595)   -8%   (9,336)   (10,318)   -10%
Net flows   45    (1,530)   NM    (916)   (1,586)   -42%
Assets acquired(4)   -    -    -    -    472    NM 
Exchanges   59    (277)   NM    23    (358)   NM 
Market value change   266    (2,321)   NM    969    (1,710)   NM 
Fixed income assets - end of period  $44,287   45,821    -3%  $44,287   45,821    -3%
Floating-rate income assets - beginning of period   45,115    33,679    34%   41,821    26,388    58%
Sales and other inflows   4,139    6,636    -38%   13,094    15,987    -18%
Redemptions/outflows   (5,491)   (2,152)   155%   (11,037)   (4,664)   137%
Net flows   (1,352)   4,484    NM    2,057    11,323    -82%
Exchanges   (62)   169    NM    (57)   251    NM 
Market value change   51    (162)   NM    (69)   208    NM 
Floating-rate income assets - end of period  $43,752   38,170    15%  $43,752   38,170    15%
Alternative assets - beginning of period   12,112    16,022    -24%   15,212    12,864    18%
Sales and other inflows   774    2,348    -67%   2,630    6,925    -62%
Redemptions/outflows   (1,208)   (1,770)   -32%   (6,164)   (3,785)   63%
Net flows   (434)   578    NM    (3,534)   3,140    NM 
Assets acquired(4)   -    -    -    -    650    NM 
Exchanges   (15)   (22)   -32%   (84)   (138)   -39%
Market value change   28    (480)   NM    97    (418)   NM 
Alternative assets - end of period  $11,691   16,098    -27%  $11,691   16,098    -27%
Implementation services assets - beginning of period   90,815    70,966    28%   85,637    30,302    183%
Sales and other inflows   14,429    12,933    12%   43,399    26,663    63%
Redemptions/outflows   (14,053)   (7,504)   87%   (41,168)   (18,396)   124%
Net flows   376    5,429    -93%   2,231    8,267    -73%
Assets acquired(4)   -    -    -    -    32,064    NM 
Exchanges   (456)   -    NM    (913)   (14)   NM 
Market value change   1,488    1,278    16%   5,268    7,054    -25%
Implementation services assets - end of period  $92,223   77,673    19%  $92,223   77,673    19%
Total long-term fund and separate account assets - beginning of period   285,692    260,150    10%   280,466    199,339    41%
Sales and other inflows   26,151    28,038    -7%   78,463    72,130    9%
Redemptions/outflows   (28,180)   (19,206)   47%   (82,471)   (51,298)   61%
Net flows   (2,029)   8,832    NM    (4,008)   20,832    NM 
Assets acquired(4)   -    -    -    -    34,758    NM 
Exchanges   (6)   (84)   -93%   (31)   (97)   -68%
Market value change   4,350    (362)   NM    11,580    13,704    -15%
Total long-term fund and separate account assets - end of period  $288,007   268,536    7%  $288,007   268,536    7%
Cash management fund assets - end of period   187    219    -15%   187    219    -15%
Total assets under management - end of period  $288,194   $268,755    7%  $288,194   268,755    7%

 

(1)Consolidated Eaton Vance Corp. See table on page 49 for managed assets and flows of 49 percent-owned Hexavest Inc.
(2)Includes assets in balanced accounts holding income securities.
(3)Not meaningful ("NM").
(4)Represents assets gained in the acquisition of The Clifton Group Investment Management Company on December 31, 2012.
(5)Includes assets in institutional cash management separate accounts.

 

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Consolidated Net Flows by Investment Vehicle(1)

 

   Three Months Ended       Nine Months Ended     
   July 31,   %   July 31,   % 
(in millions)  2014   2013   Change   2014   2013   Change 
Long-term fund assets - beginning of period  $134,942   127,014    6%  $133,198   113,249    18%
Sales and other inflows   8,634    11,597    -26%   27,551    33,307    -17%
Redemptions/outflows   (10,272)   (7,932)   30%   (29,284)   (21,316)   37%
Net flows   (1,638)   3,665    NM    (1,733)   11,991    NM 
Assets acquired(2)   -    -    -    -    638    NM 
Exchanges   (6)   (241)   -98%   41    (262)   NM 
Market value change   1,671    (1,396)   NM    3,463    3,426    1%
Long-term fund assets - end of period  $134,969   129,042    5%  $134,969   129,042    5%
Institutional separate account assets - beginning of period(3)   96,564    84,724    14%   95,724    43,338    121%
Sales and other inflows   14,717    13,480    9%   42,620    28,366    50%
Redemptions/outflows   (14,912)   (8,901)   68%   (44,632)   (21,792)   105%
Net flows   (195)   4,579    NM    (2,012)   6,574    NM 
Assets acquired(2)   -    -    -    -    34,120    NM 
Exchanges   377    152    148%   280    157    78%
Market value change   1,647    18    NM    4,401    5,284    -17%
Institutional separate account assets - end of period  $98,393   89,473    10%  $98,393   89,473    10%
High-net-worth separate account assets - beginning of period   20,968    18,027    16%   19,699    15,036    31%
Sales and other inflows   794    1,055    -25%   2,476    3,931    -37%
Redemptions/outflows   (953)   (614)   55%   (3,045)   (2,385)   28%
Net flows   (159)   441    NM    (569)   1,546    NM 
Exchanges   (433)   (9)   NM    (30)   (16)   88%
Market value change   475    612    -22%   1,751    2,505    -30%
High-net-worth separate account assets - end of period  $20,851   19,071    9%  $20,851   19,071    9%
Retail managed account assets - beginning of period   33,218    30,385    9%   31,845    27,716    15%
Sales and other inflows   2,006    1,906    5%   5,816    6,526    -11%
Redemptions/outflows   (2,043)   (1,759)   16%   (5,510)   (5,805)   -5%
Net flows   (37)   147    NM    306    721    -58%
Exchanges   56    14    300%   (322)   24    NM 
Market value change   557    404    38%   1,965    2,489    -21%
Retail managed account assets - end of period  $33,794   30,950    9%  $33,794   30,950    9%
Total long-term fund and separate account assets - beginning of period   285,692    260,150    10%   280,466    199,339    41%
Sales and other inflows   26,151    28,038    -7%   78,463    72,130    9%
Redemptions/outflows   (28,180)   (19,206)   47%   (82,471)   (51,298)   61%
Net flows   (2,029)   8,832    NM    (4,008)   20,832    NM 
Assets acquired(2)   -    -    -    -    34,758    NM 
Exchanges   (6)   (84)   -93%   (31)   (97)   -68%
Market value change   4,350    (362)   NM    11,580    13,704    -15%
Total long-term fund and separate account assets - end of period  $288,007   268,536    7%  $288,007   268,536    7%
Cash management fund assets - end of period   187    219    -15%   187    219    -15%
Total assets under management - end of period  $288,194   268,755    7%  $288,194   268,755    7%

 

(1)Consolidated Eaton Vance Corp. See page 49 for managed assets and flows of 49 percent-owned Hexavest Inc.
(2)Represents assets gained in the acquisition of The Clifton Group Investment Management Company on December 31, 2012.
(3)Includes assets in institutional cash management separate accounts.

 

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The following table summarizes our assets under management by investment affiliate as of July 31, 2014 and 2013:

 

Consolidated Assets under Management by Investment Affiliate (1)

 

   July 31,   % 
(in millions)  2014   2013   Change 
Eaton Vance Management (2)  $143,337   $143,229    0%
Parametric   126,777    107,192    18%
Atlanta Capital   18,080    18,334    -1%
Total  $288,194   $268,755    7%

 

(1)Consolidated Eaton Vance Corp. See page 49 for 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 July 31, 2014, 49 percent-owned affiliate Hexavest Inc. (“Hexavest”) managed $17.0 billion of client assets, an increase of 8 percent from the $15.7 billion of managed assets on July 31, 2013. Other than Eaton Vance-sponsored funds for which Hexavest is adviser or sub-adviser, 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 nine months ended July 31, 2014 and 2013:

 

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Hexavest Assets under Management and Net Flows

 

   Three Months Ended       Nine Months Ended     
   July 31,   %   July 31,   % 
(in millions)  2014   2013   Change   2014   2013   Change 
Eaton Vance distributed:                              
Eaton Vance sponsored funds - beginning of period(1)  $221   161    37%  $211   37    470%
Sales and other inflows   6    19    -68%   49    130    -62%
Redemptions/outflows   (10)   (6)   67%   (53)   (12)   342%
Net flows   (4)   13    NM    (4)   118    NM 
Market value change   4    (1)   NM    14    18    -22%
Eaton Vance sponsored funds - end of period  $221   173    28%  $221   173    28%
Eaton Vance distributed separate accounts - beginning of period(2)   2,354    1,283    83%   1,574    -    NM 
Sales and other inflows   136    227    -40%   519    1,378    -62%
Redemptions/outflows   (122)   (1)   NM    (201)   (1)   NM 
Net flows   14    226    -94%   318    1,377    -77%
Exchanges   -    -    -    389    -    NM 
Market value change   29    6    383%   116    138    -16%
Eaton Vance distributed separate accounts - end of period  $2,397   1,515    58%  $2,397   1,515    58%
Total Eaton Vance distributed - beginning of period   2,575    1,444    78%   1,785    37    NM 
Sales and other inflows   142    246    -42%   568    1,508    -62%
Redemptions/outflows   (132)   (7)   NM    (254)   (13)   NM 
Net flows   10    239    -96%   314    1,495    -79%
Exchanges   -    -    -    389    -    NM 
Market value change   33    5    560%   130    156    -17%
Total Eaton Vance distributed - end of period  $2,618   1,688    55%  $2,618   1,688    55%
Hexavest directly distributed - beginning of period(3)   14,477    13,831    5%   15,136    12,073    25%
Sales and other inflows   597    785    -24%   1,392    2,003    -31%
Redemptions/outflows   (904)   (530)   71%   (2,546)   (1,363)   87%
Net flows   (307)   255    NM    (1,154)   640    NM 
Exchanges   -    -    -    (389)   -    NM 
Market value change   253    (40)   NM    830    1,333    -38%
Hexavest directly distributed - end of period  $14,423   14,046    3%  $14,423   14,046    3%
Total Hexavest assets - beginning of period   17,052    15,275    12%   16,921    12,110    40%
Sales and other inflows   739    1,031    -28%   1,960    3,511    -44%
Redemptions/outflows   (1,036)   (537)   93%   (2,800)   (1,376)   103%
Net flows   (297)   494    NM    (840)   2,135    NM 
Market value change   286    (35)   NM