10-Q 1 v412322_10q.htm 10-Q

 

  

 

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 April 30, 2015

or

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

For the transition period from _____________ to ____________

 

Commission file no. 1-8100

 

EATON VANCE CORP.

(Exact name of registrant as specified in its charter)

 

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

 

Two International Place, Boston, Massachusetts 02110

(Address of principal executive offices) (zip code)

 

(617) 482-8260

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

Shares outstanding as of April 30, 2015:

Voting Common Stock – 429,005 shares

Non-Voting Common Stock – 117,508,478 shares

 

 

 

 
 

 

Eaton Vance Corp.

Form 10-Q

As of April 30, 2015 and for the

Three and Six Month Periods Ended April 30, 2015

 

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 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk 64
Item 4. Controls and Procedures 64
     
Part II Other Information  
Item 1. Legal Proceedings 64
Item 1A. Risk Factors 64
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
Item 6. Exhibits 66
     
Signatures   67

 

2
 

 

Part I - Financial Information

 

Item 1. Consolidated Financial Statements

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

   April 30,   October 31, 
(in thousands)  2015    2014  
         
Assets          
           
Cash and cash equivalents  $262,898   $385,215 
Investment advisory fees and other receivables   182,496    186,344 
Investments   699,781    624,605 
Assets of consolidated collateralized loan obligation ("CLO") entity:          
Cash and cash equivalents   5,259    8,963 
Bank loans and other investments   124,445    147,116 
Other assets   414    371 
Deferred sales commissions   21,449    17,841 
Deferred income taxes   38,954    46,099 
Equipment and leasehold improvements, net   45,693    45,651 
Intangible assets, net   60,511    65,126 
Goodwill   237,961    228,876 
Other assets   92,691    103,879 
Total assets  $1,772,552   $1,860,086 

 

See notes to Consolidated Financial Statements.

 

3
 

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

   April 30,   October 31, 
(in thousands, except share data)  2015   2014 
Liabilities, Temporary Equity and Permanent Equity          
           
Liabilities:          
           
Accrued compensation  $91,137   $181,064 
Accounts payable and accrued expenses   66,306    64,598 
Dividend payable   30,774    30,057 
Debt   573,733    573,655 
Liabilities of consolidated CLO entity:          
Senior and subordinated note obligations   125,913    151,982 
Other liabilities   273    298 
Other liabilities   113,141    93,485 
   Total liabilities   1,001,277    1,095,139 
           
Commitments and contingencies          
           
Temporary Equity:          
           
Redeemable non-controlling interests   135,090    107,466 
           
Permanent Equity:          
           
Voting Common Stock, par value $0.00390625 per share:          
Authorized, 1,280,000 shares 
Issued and outstanding, 429,005 and 415,078 shares, respectively
   2    2 
Non-Voting Common Stock, par value $0.00390625 per share:          
Authorized, 190,720,000 shares 
Issued and outstanding, 117,508,478 and 117,846,273 shares, respectively
   459    460 
Additional paid-in capital   -    - 
Notes receivable from stock option exercises   (9,179)   (8,818)
Accumulated other comprehensive loss   (32,372)   (17,996)
Appropriated retained earnings   3,808    2,467 
Retained earnings   671,909    679,061 
Total Eaton Vance Corp. shareholders' equity   634,627    655,176 
Non-redeemable non-controlling interests   1,558    2,305 
Total permanent equity   636,185    657,481 
Total liabilities, temporary equity and permanent equity  $1,772,552   $1,860,086 

 

See notes to Consolidated Financial Statements.

 

4
 

 

Eaton Vance Corp.

Consolidated Statements of Income (unaudited)

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2015   2014   2015   2014 
Revenue:                    
Investment advisory and administrative fees  $300,624   $300,136   $602,437   $604,849 
Distribution and underwriter fees   20,048    21,212    41,084    42,833 
Service fees   28,461    30,829    58,308    63,120 
Other revenue   2,531    1,884    4,765    3,520 
Total revenue   351,664    354,061    706,594    714,322 
Expenses:                    
Compensation and related costs   120,075    114,656    240,267    233,478 
Distribution expense   30,082    34,785    136,349    70,333 
Service fee expense   26,358    28,281    54,138    57,486 
Amortization of deferred sales commissions   3,692    4,354    7,420    9,324 
Fund-related expenses   8,932    8,455    17,638    16,908 
Other expenses   40,304    38,227    78,001    77,290 
Total expenses   229,443    228,758    533,813    464,819 
Operating income   122,221    125,303    172,781    249,503 
Non-operating income (expense):                    
Gains (losses) and other investment income, net   347    (738)   3,149    (325)
Interest expense   (7,337)   (7,404)   (14,673)   (14,804)
Other income (expense) of consolidated CLO entities:                    
Gains and other investment income, net   2,212    5,104    3,513    13,813 
Interest and other expense   (611)   (4,188)   (1,805)   (12,023)
Total non-operating expense   (5,389)   (7,226)   (9,816)   (13,339)
Income before income taxes and equity in net income of affiliates   116,832    118,077    162,965    236,164 
Income taxes   (43,896)   (45,249)   (60,666)   (89,891)
Equity in net income of affiliates, net of tax   2,957    5,219    6,103    8,504 
Net income   75,893    78,047    108,402    154,777 
Net income attributable to non-controlling and other beneficial interests   (5,509)   (3,146)   (9,015)   (8,518)
Net income attributable to Eaton Vance Corp. shareholders  $70,384   $74,901   $99,387   $146,259 
Earnings per share:                    
Basic  $0.61   $0.62   $0.85   $1.21 
Diluted  $0.58   $0.59   $0.82   $1.15 
Weighted average shares outstanding:                    
Basic   114,415    118,103    114,326    118,060 
Diluted   119,730    123,021    119,548    123,564 
Dividends declared per share  $0.25   $0.22   $0.50   $0.44 

 

See notes to Consolidated Financial Statements.

 

5
 

 

Eaton Vance Corp.

Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2015   2014   2015   2014 
                 
Net income  $75,893   $78,047   $108,402   $154,777 
                     
Other comprehensive income (loss):                    
Amortization of net gains on derivatives, net of tax   4    3    7    6 
Unrealized holding gains on available-for-sale investments and reclassification adjustments, net of tax   957    872    315    379 
Foreign currency translation adjustments, net of tax   8,753    2,155    (14,698)   (5,853)
                     
Other comprehensive income (loss), net of tax   9,714    3,030    (14,376)   (5,468)
                     
Total comprehensive income   85,607    81,077    94,026    149,309 
Comprehensive income attributable to non-controlling and other beneficial interests   (5,509)   (3,146)   (9,015)   (8,518)
Total comprehensive income attributable to Eaton Vance Corp. shareholders  $80,098   $77,931   $85,011   $140,791 

 

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, 2014  $2   $460   $-   $(8,818)  $(17,996)  $2,467   $679,061   $2,305   $657,481   $107,466 
Net income   -    -    -    -    -    1,341    99,387    1,918    102,646    5,756 
Other comprehensive loss   -    -    -    -    (14,376)   -    -    -    (14,376)   - 
Dividends declared ($0.50 per share)   -    -    -    -    -    -    (59,032)   -    (59,032)   - 
Issuance of Voting Common Stock   -    -    77    -    -    -    -    -    77    - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    6    32,542    (951)   -    -    -    -    31,597    - 
Under employee stock purchase plans   -    -    1,533    -    -    -    -    -    1,533    - 
Under employee stock purchase incentive plan   -    -    2,545    -    -    -    -    -    2,545    - 
Under restricted stock plan, net of forfeitures   -    5    -    -    -    -    -    -    5    - 
Stock-based compensation   -    -    33,785    -    -    -    -    -    33,785    - 
Tax benefit of stock option exercises   -    -    6,819    -    -    -    -    -    6,819    - 
Repurchase of Non-Voting Common Stock   -    (12)   (76,186)   -    -    -    (47,507)   -    (123,705)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    590    -    -    -    -    590    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (2,068)   (2,068)   2,244 
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    -    24,920 
Reclass to temporary equity   -    -    -    -    -    -    -    (597)   (597)   597 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    -    (7,008)
Other changes in non-controlling interests   -    -    (1,115)   -    -    -    -    -    (1,115)   1,115 
Balance, April 30, 2015  $2   $459   $-   $(9,179)  $(32,372)  $3,808   $671,909   $1,558   $636,185   $135,090 

 

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
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   -    -    -    -    -    (1,095)   146,259    2,733    147,897    6,880 
Other comprehensive loss   -    -    -    -    (5,468)   -    -    -    (5,468)   - 
Dividends declared ($0.44 per share)   -    -    -    -    -    -    (53,497)   -    (53,497)   - 
Issuance of Voting Common Stock   -    -    59    -    -    -    -    -    59    - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    5    29,964    (1,922)   -    -    -    -    28,047    - 
Under employee stock purchase plans   -    -    1,909    -    -    -    -    -    1,909    - 
Under employee stock purchase incentive plans   -    -    2,493    -    -    -    -    -    2,493    - 
Under restricted stock plan, net of forfeitures   -    5    -    -    -    -    -    -    5    - 
Stock-based compensation   -    -    29,489    -    -    -    -    -    29,489    - 
Tax benefit of stock option exercises   -    -    11,206    -    -    -    -    -    11,206    - 
Repurchase of Voting Common Stock   -    -    (77)   -    -    -    -    -    (77)   - 
Repurchase of Non-Voting Common Stock   -    (14)   (135,319)   -    -    -    -    -    (135,333)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    1,570    -    -    -    -    1,570    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (2,576)   (2,576)   (2,734)
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    -    (745)
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   -    -    (12,557)   -    -    -    -    -    (12,557)   12,557 
Balance, April 30, 2014  $2   $470   $52,004   $(7,474)  $(5,645)  $9,154   $634,283   $1,560   $684,354   $94,262 

 

See notes to Consolidated Financial Statements.

 

8
 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Six Months Ended 
   April 30, 
(in thousands)  2015   2014 
         
Cash Flows From Operating Activities:          
Net income  $108,402   $154,777 
Adjustments to reconcile net income to net cash provided by (used for) operating activities:          
Depreciation and amortization   10,857    11,096 
Amortization of deferred sales commissions   7,426    9,366 
Stock-based compensation   33,785    29,489 
Deferred income taxes   6,784    11,123 
Net losses on investments and derivatives   3,170    2,909 
Equity in net income of affiliates, net of amortization   (6,419)   (10,422)
Dividends received from affiliates   5,891    8,338 
Consolidated CLO entities' operating activities:          
Net gains on bank loans, other investments and note obligations   (914)   (853)
Amortization   (67)   (665)
Net increase (decrease) in other assets and liabilities, including cash   3,435    (140,520)
Changes in operating assets and liabilities:          
Investment advisory fees and other receivables   3,980    (2,112)
Investments in trading securities   (86,651)   (178,504)
Deferred sales commissions   (11,031)   (8,116)
Other assets   7,981    8,054 
Accrued compensation   (89,830)   (72,785)
Accounts payable and accrued expenses   1,161    8,507 
Other liabilities   21,493    15,051 
Net cash provided by (used for) operating activities   19,453    (155,267)
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (5,261)   (4,226)
Net cash paid in acquisition   (9,085)   - 
Proceeds from sale of investments   39,021    63,843 
Purchase of investments   (4,044)   (20,813)
Consolidated CLO entities' investing activities:          
Proceeds from sales and maturities of bank loans and other investments   24,140    332,652 
Purchase of bank loans and other investments   (1,730)   (247,649)
Net cash provided by investing activities   43,041    123,807 

 

See notes to Consolidated Financial Statements.

 

9
 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Six Months Ended 
   April 30, 
(in thousands)  2015   2014 
Cash Flows From Financing Activities:          
Purchase of additional non-controlling interest   (18,602)   (26,872)
Proceeds from issuance of Voting Common Stock   77    59 
Proceeds from issuance of Non-Voting Common Stock   35,680    32,454 
Repurchase of Voting Common Stock   -    (77)
Repurchase of Non-Voting Common Stock   (123,705)   (135,333)
Principal repayments on notes receivable from stock option exercises   590    1,570 
Excess tax benefit of stock option exercises   6,819    11,206 
Dividends paid   (58,399)   (53,566)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   176    (5,310)
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   (25,944)   (63,780)
Net cash used for financing activities   (183,308)   (117,856)
Effect of currency rate changes on cash and cash equivalents   (1,503)   (651)
Net decrease in cash and cash equivalents   (122,317)   (149,967)
Cash and cash equivalents, beginning of period   385,215    461,906 
Cash and cash equivalents, end of period  $262,898   $311,939 
Supplemental Cash Flow Information:          
Cash paid for interest  $14,183   $13,916 
Cash paid for interest by consolidated CLO entities   1,829    4,094 
Cash paid for income taxes, net of refunds   48,676    51,609 
Supplemental Disclosure of Non-Cash Information:          
Increase in equipment and leasehold improvements due to non-cash additions  $705   $28 
Exercise of stock options through issuance of notes receivable   951    1,922 
Acquisition of non-controlling interests through issuance of subsidiary equity   -    9,935 
Net Consolidations (Deconsolidations) of Sponsored Investment Funds:          
Increase (decrease) in investments  $25,297   $(776)
Increase (decrease) in non-controlling interests   24,920    (745)

 

See notes to Consolidated Financial Statements.

 

10
 

 

Eaton Vance Corp.

Notes to Consolidated Financial Statements (unaudited)

 

1.Summary of Significant Accounting Policies

 

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.

 

Payments to end certain closed-end fund service and additional compensation arrangements

During the first quarter of fiscal 2015, the Company made a one-time payment of $73.0 million to terminate certain closed-end fund service and additional compensation arrangements with a significant distribution partner.  The payment was included as a component of distribution expense in the Company’s Consolidated Statement of Income for the six months ended April 30, 2015.

 

2.New Accounting Standards Not Yet Adopted

 

Consolidation

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Amendments to the Consolidation Analysis, which amends the consolidation requirements in Accounting Standards Codification (“ASC”) 810, Consolidation. Under the amendments in this ASU, all entities, including limited partnerships and similar legal entities, are now within the scope of ASC 810, unless a scope exception applies. The presumption that a general partner controls a limited partnership has been eliminated. In addition, fees paid to decision makers that meet certain conditions no longer cause the decision makers to consolidate variable interest entities (“VIEs”) in certain instances, with the amendments placing more emphasis on variable interests other than fee arrangements in the consolidation evaluation. This ASU also eliminates the deferral under ASU 2010-10, Consolidation - Amendments for Certain Investment Funds, and, as such, the Company must evaluate any entities that qualified for the deferral to determine whether these entities are VIEs and whether they should be consolidated. The new guidance is effective for annual periods, and interim periods within those annual periods, for the Company’s fiscal year that begins on November 1, 2016 and allows for either a full retrospective or a modified retrospective adoption approach. Early adoption is allowed, but the guidance must be applied as of the beginning of the annual period containing the adoption date. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.

 

Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in the balance sheet. The new guidance requires that debt issuance costs be presented as a deduction from the carrying amount of the related debt rather than being presented as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2016 and requires retrospective application for each prior period presented. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the impact on its Consolidated Financial Statements.

 

11
 

 

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance about whether a cloud computing arrangement includes a software license. The guidance does not change the current treatment for accounting for software licenses or service contracts. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2016. Early adoption is permitted. The update allows for either prospective or retrospective adoption. The Company is currently evaluating the transition methods and the potential impact on its Consolidated Financial Statements and related disclosures.

 

Revenue from Contracts with Customers

In April 2015, the FASB proposed a one year delay in the effective date of ASU 2014-09, Revenue From Contracts with Customers. ASU 2014-09 currently becomes effective for the Company on November 1, 2017. The Company is currently evaluating the potential impact of this new guidance as well as the available transition methods.

 

3.Consolidated Sponsored Funds

 

The following table sets forth the balances related to consolidated sponsored funds at April 30, 2015 and October 31, 2014, as well as the Company’s net interest in these funds:

 

(in thousands)  April 30,
2015
   October 31,
2014
 
Investments  $320,992   $172,413 
Other assets    14,883    19,474 
Other liabilities   (55,912)   (32,559)
Redeemable non-controlling interests   (41,299)   (8,983)
Net interest in consolidated sponsored funds(1)  $238,664   $150,345 

 

(1)Excludes the Company's investment in its consolidated CLO entity, which is discussed in Note 8.

 

The Company did not deconsolidate any sponsored funds during the six months ended April 30, 2015. During the six months ended April 30, 2014, the Company deconsolidated one sponsored fund.

 

4.Investments

 

The following is a summary of investments at April 30, 2015 and October 31, 2014:

 

12
 

 

(in thousands)  April 30,
2015
   October 31,
2014
 
Investment securities, trading:          
Short-term debt  $120,069   $156,972 
Consolidated sponsored funds   320,992    172,413 
Separately managed accounts   64,913    51,660 
Total investment securities, trading   505,974    381,045 
Investment securities, available-for-sale   23,683    30,167 
Investments in non-consolidated CLO entities   7,849    4,033 
Investments in equity method investees   159,267    206,352 
Investments, other   3,008    3,008 
Total investments(1)  $699,781   $624,605 

 

(1)Excludes the Company's investment in its consolidated CLO entity, which is discussed in Note 8.

 

Investment securities, trading

 

The following is a summary of the fair value of investments classified as trading at April 30, 2015 and October 31, 2014:

 

(in thousands)  April 30,
2015
   October 31,
2014
 
Short-term debt  $120,069   $156,972 
Other debt - consolidated sponsored funds and separately managed accounts   176,821    83,824 
Equity securities - consolidated sponsored funds and separately managed accounts   209,084    140,249 
Total investment securities, trading  $505,974   $381,045 

 

During the six months ended April 30, 2015, the Company seeded investments in five sponsored funds and ten separately managed accounts. During the six months ended April 30, 2014, the Company seeded investments in three sponsored funds. The Company did not seed any separately managed accounts during the six months ended April 30, 2014.

 

The Company recognized gains related to trading securities still held at the reporting date of $7.4 million and $6.9 million for the three months ended April 30, 2015 and 2014, respectively, and $1.2 million and $1.9 million for the six months ended April 30, 2015 and 2014, 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 April 30, 2015 and October 31, 2014:

 

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April 30, 2015      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $13,974   $9,833   $(124)  $23,683 

 

October 31, 2014      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $21,032   $9,159   $(24)  $30,167 

 

Net unrealized holding gains on investment securities classified as available-for-sale included in other comprehensive income (loss), net of tax, were $1.1 million and $1.5 million for the three months ended April 30, 2015 and 2014, respectively, and $0.1 million and $0.7 million for the six months ended April 30, 2015 and 2014, respectively.

 

The Company evaluated gross unrealized losses of $0.1 million as of April 30, 2015 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 $4.3 million at April 30, 2015. No investment with a gross unrealized loss has been in a loss position for greater than one year.

 

The following is a summary of the Company’s realized gains and losses upon disposition of investments classified as available-for-sale for the three and six months ended April 30, 2015 and 2014:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2015   2014   2015   2014 
Gains  $607   $129   $657   $562 
Losses   (310)   (528)   (316)   (898)
Net realized gains (losses)  $297   $(399)  $341   $(336)

 

Investments in equity method investees

 

The Company has a 49 percent interest in Hexavest Inc. (“Hexavest”), a Montreal, Canada-based investment adviser. The carrying value of this investment was $154.4 million and $166.0 million at April 30, 2015 and October 31, 2014, respectively. At April 30, 2015, the Company’s investment in Hexavest consisted of $6.1 million of equity in the net assets of Hexavest, intangible assets of $30.2 million and goodwill of $126.2 million, net of a deferred tax liability of $8.1 million. At October 31, 2014, the Company’s investment in Hexavest consisted of $5.9 million of equity in the net assets of Hexavest, intangible assets of $33.5 million and goodwill of $135.6 million, net of a deferred tax liability of $9.0 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 has a 7 percent equity interest in a private equity partnership managed by a third party that invests in companies in the financial services industry. The Company’s investment in the partnership was $4.9 million and $4.2 million at April 30, 2015 and October 31, 2014, respectively.

 

At April 30, 2015, the Company did not account for any Eaton Vance-sponsored funds under the equity method. The Company had equity method investments in the following Eaton Vance-sponsored funds as of October 31, 2014:

 

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   Equity
Ownership
Interest (%)
   Carrying Value ($)(1) 
   October 31,   October 31,  
(dollar amounts in thousands)  2014   2014   
Eaton Vance Real Estate Fund   34%  $11,953 
Eaton Vance Focused Growth Opportunities Fund   33%   9,559 
Eaton Vance Focused Value Opportunities Fund   32%   7,588 
Eaton Vance Tax-Advantaged Bond Strategies Long Term Fund   27%   6,105 
Eaton Vance Currency Income Advantage Fund   43%   973 
Total       $36,178 

 

(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.

 

The Company did not recognize any impairment losses related to its investments in equity method investees during the three and six months ended April 30, 2015 and 2014, respectively.

 

During the six months ended April 30, 2015 and 2014, the Company received dividends of $5.9 million and $8.3 million, respectively, from its investments in equity method investees.

 

5.Fair Value Measurements

 

The following tables summarize financial assets and liabilities measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy at April 30, 2015 and October 31, 2014:

 

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April 30, 2015                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                     
Financial assets:                         
Cash equivalents  $17,826   $10,899   $-   $-   $28,725 
Investments:                         
Investment securities, trading:                         
Short-term debt   -    120,069    -    -    120,069 
Other debt - consolidated sponsored funds and separately managed accounts   25,481    151,340    -    -    176,821 
Equity - consolidated sponsored funds and separately managed accounts   143,778    65,306    -    -    209,084 
Investment securities, available-for-sale   16,819    6,864    -    -    23,683 
Investments in non-consolidated CLO entities(1)   -    -    -    7,849    7,849 
Investments in equity method investees(2)   -    -    -    159,267    159,267 
Investments, other(3)   -    61    -    2,947    3,008 
Derivative instruments   -    1,278    -    -    1,278 
Assets of consolidated CLO entity:                         
Cash equivalents   1,542    -    -    -    1,542 
Bank loans and other investments   -    124,402    43    -    124,445 
Total financial assets  $205,446   $480,219   $43   $170,063   $855,771 
                          
Financial liabilities:                         
Derivative instruments  $-   $7,624   $-   $-   $7,624 
Securities sold, not yet purchased   -    4,448    -    -    4,448 
Liabilities of consolidated CLO entity:                         
Senior and subordinated note obligations   -    2,682    123,231    -    125,913 
Total financial liabilities  $-   $14,754   $123,231   $-   $137,985 

 

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October 31, 2014                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                     
Financial assets:                         
Cash equivalents  $19,599   $60,312   $-   $-   $79,911 
Investments:                         
Investment securities, trading:                         
Short-term debt   -    156,972    -    -    156,972 
Other debt - consolidated sponsored funds and separately managed accounts   10,799    73,025    -    -    83,824 
Equity - consolidated sponsored funds and separately managed accounts   86,504    53,745    -    -    140,249 
Investment securities, available-for-sale   23,600    6,567    -    -    30,167 
Investments in non-consolidated CLO entities(1)   -    -    -    4,033    4,033 
Investments in equity method investees(2)   -    -    -    206,352    206,352 
Investments, other(3)   -    61    -    2,947    3,008 
Derivative instruments   -    4,416    -    -    4,416 
Assets of consolidated CLO entity:                         
Cash equivalents   8,697    -    -    -    8,697 
Bank loans and other investments   -    146,315    801    -    147,116 
Total financial assets  $149,199   $501,413   $801   $213,332   $864,745 
                          
Financial liabilities:                         
Derivative instruments  $-   $2,618   $-   $-   $2,618 
Securities sold, not yet purchased   -    981    -    -    981 
Liabilities of consolidated CLO entity:                         
Senior and subordinated note obligations   -    2,672    149,310    -    151,982 
Total financial liabilities  $-   $6,271   $149,310   $-   $155,581 

 

(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 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, include investments carried at cost that are not measured at fair value in accordance with GAAP.

 

Valuation methodologies

 

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

 

17
 

 

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 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 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.

 

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Derivative instruments

Derivative instruments, which include foreign exchange contracts, stock index futures contracts, commodity futures contracts, interest rate futures contracts and total return swap 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, commodity futures contracts, interest rate futures contracts and total return swap 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 entity

Assets of the Company’s consolidated CLO entity include investments in bank loans, debt securities, money market funds, equity securities and warrants. Fair value is determined utilizing unadjusted quoted market prices when available. Investments in money market funds are valued using published net asset values and are classified as Level 1 within the fair value measurement hierarchy. Debt securities, equity 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 entity

Liabilities of the Company’s consolidated CLO entity 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.

 

Transfers in and 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 six months ended April 30, 2015 and 2014:

 

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   Three Months Ended
April 30,
   Six Months Ended
April 30,
 
(in thousands)  2015   2014   2015   2014 
Transfers from Level 1 into Level 2(1)  $1,201   $542   $5,981   $214 
Transfers from Level 2 into Level 1(2)   172    1,524    182    1,027 

 

(1)Transfers from Level 1 into Level 2 primarily represent debt and equity securities formerly classified as Level 1 for which unadjusted quoted market prices in active markets became unavailable in the current period.
(2)Transfers from Level 2 into Level 1 primarily represent debt and equity securities formerly classified as Level 2 for which unadjusted quoted market prices in active markets became available in the current period.

 

Level 3 assets and liabilities

 

The following table shows 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 six months ended April 30, 2015 and 2014:

 

   Three Months Ended   Three Months Ended 
   April 30, 2015   April 30, 2014 
(in thousands)  Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations of
consolidated
CLO entity
   Bank loans
and other
investments of
consolidated
CLO entities
   Senior and
subordinated
note
obligations
and
redeemable
preferred
shares of
consolidated
CLO entities
 
                 
Beginning balance  $47   $137,808   $7   $665,970 
Net gains (losses) on investments and note obligations included in net income(1)   (4)   163    -    1,026 
Amortization of original issue discount on senior notes   -    -    -    75 
Principal paydown   -    (14,740)   -    (33,912)
Ending balance  $43   $123,231   $7   $633,159 
Change in unrealized gains (losses) included in net income relating to assets and liabilities held  $(4)  $163   $-   $1,026 

 

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   Six Months Ended   Six Months Ended 
   April 30, 2015   April 30, 2014 
(in thousands)  Bank loans
and other
investments of
consolidated
CLO entity
   Senior and
subordinated
note
obligations of
consolidated
CLO entity
   Bank loans
and other
investments of
consolidated
CLO entities
   Senior and
subordinated
note
obligations
and
redeemable
preferred
shares of
consolidated
CLO entities
 
                 
Beginning balance  $801   $149,310   $1,245   $276,476 
Issuance of senior and subordinated notes and redeemable preferred shares   -    -    -    421,523 
Net gains (losses) on investments and note obligations included in net income(1)   (375)   (1,514)   (186)   (1,135)
Additions(2)   -    1,379    -    - 
Sales   -    -    (1,052)   - 
Amortization of original issue discount on senior notes   -    -    -    75 
Principal paydown   -    (25,944)   -    (63,780)
Transfers out of Level 3(3)   (383)   -    -    - 
Ending balance  $43   $123,231   $7   $633,159 
Change in unrealized gains (losses) included in net income relating to assets and liabilities held  $(375)  $(1,514)  $(9)  $(1,135)

 

(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) Represents the Company's subordinated interest, which was previously eliminated in consolidation.  The Company sold its interest in the first quarter of fiscal 2015.  Refer to Note 8.
(3) Transfers out of Level 3 into Level 2 of the fair value measurement hierarchy were due to an increase in the observability of inputs used in determining the fair value of certain investments.

 

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 entity at April 30, 2015 and October 31, 2014:

 

April 30, 2015      Valuation  Unobservable   Value/
($ in thousands)  Fair Value   Technique  Inputs(1)  Range
              
           Prepayment rate   30 percent
           Recovery rate   70 percent
          Default rate   200 bps
Senior and subordinated note obligations  $123,231   Income-approach  Discount rate   75-260 bps

 

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October 31, 2014      Valuation  Unobservable   Value/
($ in thousands)  Fair Value   Technique  Inputs(1)  Range
              
           Prepayment rate   30 percent
           Recovery rate   70 percent
          Default rate   200 bps
Senior and subordinated note obligations  $149,310   Income-approach  Discount rate   75-250 bps

 

(1) Discount rate refers to spread over LIBOR.  Lower spreads relate to the more senior tranches in the CLO note structure;  higher spreads relate to the less senior tranches.  The default rate refers to the constant annual default rate.  The recovery rate is  the expected recovery of defaulted amounts received through asset sales, 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 entity are issued in various tranches with different risk profiles. The notes are valued on a quarterly basis by the Company’s bank loan investment team utilizing an income-approach that projects the cash flows of the collateral assets using the team’s projected default rate, prepayment rate, recovery rate and discount rate, as well as observable assumptions about market yields, collateral reimbursement assumptions, callability and other market factors that vary based on the nature of the investments in the underlying collateral pool. Once the undiscounted cash flows of the collateral assets have been determined, the bank loan team applies appropriate discount rates that it believes a reasonable market participant would use to determine the discounted cash flow valuation of the notes. The bank loan team routinely monitors market conditions and model inputs for cyclical and secular changes in order to identify any material factors that could influence the Company’s valuation method. The bank loan team reports directly to the Chief Income Investment Officer.

 

Sensitivity to changes in significant unobservable inputs

For senior and subordinated notes issued by the Company’s consolidated CLO entity, 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.

 

6.Derivative Financial Instruments

 

Derivative financial instruments designated as cash flow hedges

 

During both the three months ended April 30, 2015 and 2014, the Company reclassified into interest expense $50,000 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 both the six months ended April 30, 2015 and 2014, the Company reclassified into interest expense $0.1 million of this deferred gain. At April 30, 2015, the remaining unamortized gain on this transaction was $1.6 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 both the three months ended April 30, 2015 and 2014, the Company reclassified into interest expense $56,000 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 both the six months ended April 30, 2015 and 2014, the Company reclassified into interest expense $0.1 million of deferred losses on this Treasury lock. At April 30, 2015, the remaining unamortized loss on this transaction was $0.5 million. During the next twelve months, the Company expects to reclassify approximately $0.2 million of the loss on the Treasury lock transaction into interest expense.

 

Other derivative financial instruments not designated for hedge accounting

 

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

 

At April 30, 2015 and October 31, 2014, excluding derivative financial instruments held in certain consolidated sponsored funds and separately managed accounts, the Company had 36 and 39 foreign exchange contracts outstanding with four counterparties with an aggregate notional value of $31.9 million and $16.8 million, respectively; 1,684 and 2,091 stock index futures contracts outstanding with one counterparty with an aggregate notional value of $158.4 million and $177.3 million, respectively; 361 and 566 commodity futures contracts outstanding with one counterparty with an aggregate notional value of $21.0 million and $32.3 million, respectively; and 52 and 122 interest rate futures contracts outstanding with one counterparty with an aggregate notional value of $5.4 million and $12.4 million, respectively. At April 30, 2015, the Company had three total return swap contracts outstanding with one counterparty with an aggregate notional value of $31.0 million. As of October 31, 2014, the Company did not have any total return swap contracts outstanding. The number of derivative contracts outstanding and the notional values they represent at April 30, 2015 and October 31, 2014 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 consolidated sponsored funds and separately managed accounts, not designated as hedging instruments as of April 30, 2015 and October 31, 2014:

 

April 30, 2015   
   Assets  Liabilities
(in thousands)  Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $266   Other liabilities  $813 
Stock index futures contracts  Other assets   341   Other liabilities   5,575 
Commodity futures contracts  Other assets   671   Other liabilities   867 
Interest rate futures contracts  Other assets   -   Other liabilities   39 
Total return swap contracts  Other assets   -   Other liabilities   330 
Total     $1,278      $7,624 

 

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October 31, 2014   
   Assets  Liabilities
(in thousands)  Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $289   Other liabilities  $290 
Stock index futures contracts  Other assets   2,685   Other liabilities   1,614 
Commodity futures contracts  Other assets   1,442   Other liabilities   631 
Interest rate futures contracts  Other assets   -   Other liabilities   83 
Total     $4,416      $2,618 

 

The following is a summary of the net gains (losses) recognized in income for the three and six months ended April 30, 2015 and 2014:

 

   Income Statement  Three Months Ended
April 30,
   Six Months Ended
April 30,
 
(in thousands)  Location  2015   2014   2015   2014 
Foreign exchange contracts  Gains (losses) and other investment income, net  $(111)  $(1,288)  $450   $138 
Stock index futures contracts  Gains (losses) and other investment income, net   (8,841)   (9,693)   (7,308)   (7,538)
Commodity futures contracts  Gains (losses) and other investment income, net   (289)   (1,338)   2,324    (1,323)
Interest rate futures contracts  Gains (losses) and other investment income, net   183    -    (258)   - 
Total return swap contracts  Gains (losses) and other investment income, net   (559)   -    (654)   - 
Total     $(9,617)  $(12,319)  $(5,446)  $(8,723)

 

7.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 April 30, 2015 and October 31, 2014:

 

   April 30, 2015   October 31, 2014 
(in thousands)  Carrying
Value
   Fair
Value
   Fair
Value
Level
   Carrying
Value
   Fair
Value
   Fair
Value
Level
 
Investments, other  $2,947   $2,947    3   $2,947   $2,947    3 
Other assets  $6,853   $6,853    3   $7,363   $7,363    3 
Debt  $573,733   $613,514    2   $573,655   $611,015    2 

 

Included in investments, other, is a non-controlling capital interest in Atlanta Capital Management Holdings, LLC (“ACM Holdings”) carried at $1.3 million at April 30, 2015 and October 31, 2014. The carrying value of this investment approximates fair value. Fair value of this investment is determined using

 

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a cash flow model that projects future cash flows based upon contractual obligations, to which 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 April 30, 2015 and October 31, 2014 is an option exercisable in 2017 to acquire an additional 26 percent interest in Hexavest carried at $6.9 million and $7.4 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.

 

8.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 3. 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 19.

 

Consolidated CLO entities

As of April 30, 2015, the Company deems itself to be the primary beneficiary of one non-recourse CLO entity, Eaton Vance CLO IX. In developing its initial conclusion that it is the primary beneficiary of Eaton Vance CLO IX, the Company determined that it had 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 exposed 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 November 13, 2014, the Company sold its residual 8 percent interest in Eaton Vance CLO IX to an unrelated third party and recognized a loss on disposal of $0.3 million. The Company continues to serve as collateral manager of the entity and continues to hold variable interests in the entity in the form of collateral management fees. The Company concluded that it remains the primary beneficiary of the entity due to the significance of the variable interest represented by the incentive collateral management fee and, as a result, continues to consolidate Eaton Vance CLO IX subsequent to the disposition of its residual interest.

 

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.

 

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The assets of the consolidated CLO entity are held solely as collateral to satisfy the obligations of the entity. The Company has no right to the benefits from, nor does the Company bear the risks associated with, the assets held by this CLO entity beyond the Company’s management fees generated therefrom. The note holders and other creditors of the CLO entity 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 entity.

 

Interest income and expense are recorded on an accrual basis and reported in gains and other investment income, net, and in interest and other expense, respectively, of the consolidated CLO entities in the Company’s Consolidated Statements of Income for the three and six months ended April 30, 2015 and 2014. 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 April 30, 2015 and October 31, 2014, the fair value of Eaton Vance CLO IX’s assets and liabilities that are subject to fair value accounting:

 

April 30, 2015            
   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  $120,849   $-   $142,281 
Unpaid principal balance over fair value   (1,761)   -    (16,368)
Fair value  $119,088   $-   $125,913 

 

October 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  $144,723   $500   $165,696 
Unpaid principal balance over fair value   (3,282)   (500)   (13,714)
Fair value  $141,441   $-   $151,982 

 

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Changes in the fair values of Eaton Vance CLO IX’s bank loans and other investments resulted in net gains (losses) of $1.2 million and $(0.7) million during the three months ended April 30, 2015 and 2014, respectively, while changes in the fair value of Eaton Vance CLO IX’s note obligations resulted in net losses of $0.2 million and $0.3 million, respectively. The combined net gains (losses) of $1.0 million and $(1.0) million for the three months ended April 30, 2015 and 2014, respectively, were recorded in gains and other investment income, net, of consolidated CLO entities on 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 $0.2 million during the six months ended April 30, 2015 and 2014, respectively, while changes in the fair value of Eaton Vance CLO IX’s note obligations resulted in net gains (losses) of $1.5 million and $(1.3) million, respectively. The combined net gains (losses) of $1.2 million and $(1.5) million for the six months ended April 30, 2015 and 2014, respectively, were recorded in gains and other investment income, net, of consolidated CLO entities on 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, ranging 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 six months ended April 30, 2015 and 2014, $25.9 million and $63.8 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 in the entity’s assets to repay the senior notes in full.

 

For the three months ended April 30, 2015 and 2014, the Company recorded net gains (losses) of $1.5 million and $(0.7) million, respectively, related to Eaton Vance CLO IX. The Company recorded net income (losses) attributable to other beneficial interests of $1.3 million and $(1.6) million for the three months ended April 30, 2015 and 2014, respectively. Net income attributable to Eaton Vance Corp. shareholders was $0.2 million and $0.9 million for the three months ended April 30, 2015 and 2014, respectively.

 

For the six months ended April 30, 2015 and 2014, the Company recorded net gains (losses) of $1.6 million (including the loss on disposal of its subordinated interest of $(0.3) million) and $(0.4) million, respectively, related to Eaton Vance CLO IX. The Company recorded net income (losses) attributable to other beneficial interests of $1.3 million and $(2.2) million for the six months ended April 30, 2015 and 2014, respectively. Net income attributable to Eaton Vance Corp. shareholders was $0.2 million and $1.7 million for the six months ended April 30, 2015 and 2014, respectively.

 

The following carrying amounts related to Eaton Vance CLO IX were included in the Company’s Consolidated Balance Sheets at April 30, 2015 and October 31, 2014:

 

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   April 30,   October 31, 
(in thousands)  2015   2014 
Assets:          
Cash and cash equivalents  $5,259   $8,963 
Bank loans and other investments   124,445    147,116 
Other assets   414    371 
Liabilities:          
Senior and subordinated note obligations   125,913    151,982 
Other liabilities   273    298 
Appropriated retained earnings   3,808    2,467 
Net interest in Eaton Vance CLO IX  $124   $1,703 

 

The Company had a subordinated interest in Eaton Vance CLO IX of $1.4 million as of October 31, 2014, which was eliminated in consolidation.

 

Eaton Vance CLO 2013-1

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, at which time the Company deconsolidated the entity.

 

During the six months ended April 30, 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.

 

Changes in the fair values of Eaton Vance CLO 2013-1’s bank loans and other investments resulted in net losses of $0.3 million and $39,000 during the three and six months ended April 30, 2014, respectively, while changes in the fair value of Eaton Vance CLO 2013-1’s note obligations resulted in net gains (losses) of $(0.8) million and $2.4 million during the three and six months ended April 30, 2014, respectively. The combined net gains (losses) of $(1.1) million and $2.4 million, respectively, for the three and six months ended April 30, 2014 were recorded in gains and other investment income, net, of consolidated CLO entities on the Company’s Consolidated Statement of Income.

 

For the three and six months ended April 30, 2014, the Company recorded net income of $1.5 million and $2.0 million, respectively, related to Eaton Vance CLO 2013-1. The Company recorded net income attributable to other beneficial interests of $0.8 million and $1.1 million for the three and six months ended April 30, 2014. Net income attributable to Eaton Vance Corp. shareholders was $0.7 million and $0.9 million for the three and six months ended April 30, 2014, respectively.

 

Investments in VIEs that are not consolidated

 

Sponsored funds

The Company classifies its investments in certain sponsored funds that are considered VIEs as either equity method investments (generally when the Company owns more than 20 percent but less than 50 percent of the fund) or as available-for-sale investments (generally when the Company owns less than 20 percent of the fund) when it is not considered the primary beneficiary of these VIEs. The Company provides aggregated disclosures with respect to these non-consolidated sponsored fund VIEs in Note 4.

 

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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 April 30, 2015, the Company holds a 16.7 percent subordinated interest in a warehouse stage CLO, Eaton Vance CLO 2015-1, which it has not consolidated at April 30, 2015. The Company has determined that it does not hold the power to direct the activities that most significantly impact Eaton Vance CLO 2015-1 at April 30, 2015 because that power is shared with the majority holder of the equity.

 

Non-consolidated CLO entities had total assets of $2.3 billion and $2.4 billion as of April 30, 2015 and October 31, 2014, 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 $7.8 million and $4.0 million as of April 30, 2015 and October 31, 2014, respectively. Collateral management fees receivable for these entities totaled $1.9 million and $2.6 million on April 30, 2015 and October 31, 2014, respectively. In the first six months of fiscal 2015, 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 April 30, 2015.

 

The Company’s investment in non-consolidated CLO entities is carried at amortized cost and is disclosed as a component of investments in Note 4. Income from these entities is recorded as a component of gains and other investment income, net, in the Company’s Consolidated Statements of Income, based upon projected investment yields.

 

Other entities

The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain sponsored privately offered equity funds with total assets of $12.0 billion and $11.3 billion as of April 30, 2015 and October 31, 2014, 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 $6.9 million and $6.6 million on April 30, 2015 and October 31, 2014, respectively, and investment advisory fees receivable totaling $0.6 million on both April 30, 2015 and October 31, 2014. In the first six months of fiscal 2015, 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

 

29
 

 

advisory fees receivable from, the entities as of April 30, 2015. 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 4. The Company records any change in fair value, net of income tax, in other comprehensive income (loss).

 

9.Acquisitions

 

Atlanta Capital Management, LLC (“Atlanta Capital”)

In the fourth quarter of fiscal 2014, the non-controlling interest holders of Atlanta Capital exercised a put option related to the original acquisition in fiscal 2001 requiring the Company to purchase an additional 1.3 percent profit interest and a 0.1 percent capital interest in Atlanta Capital for $6.6 million. The purchase price of this transaction was based on a multiple of Atlanta Capital’s earnings before taxes for the fiscal year ended October 31, 2014. The transaction settled in the first quarter of fiscal 2015.

 

Also in the fourth quarter of fiscal 2014, an Atlanta Capital employee executed a put right related to indirect profit units issued pursuant to the Atlanta Capital Management, LLC Long-term Equity Incentive Plan (the “Atlanta Capital Plan”), requiring the Company to purchase an additional 0.3 percent profit interest in Atlanta Capital for $0.3 million. The transaction settled in the first quarter of fiscal 2015.

 

Total profit interests in Atlanta Capital held by non-controlling interest holders, including direct profit interests related to the original acquisition as well as indirect profit interests issued pursuant to the Atlanta Capital Plan, were 13.3 percent on April 30, 2015, reflecting the put transactions described above as well as the grant of an additional 1.1 percent profit interest to employees of Atlanta Capital pursuant to the terms of the Atlanta Capital Plan in the first quarter of fiscal 2015. Non-controlling interest holders did not hold any capital interests in Atlanta Capital as of April 30, 2015.

 

Parametric Portfolio Associates (“Parametric”)

In the first quarter of fiscal 2015, certain non-controlling interest holders of Parametric exercised a put option and the Company exercised a call option related to non-controlling interests in Parametric issued in conjunction with the Clifton acquisition that resulted in the Company’s overall acquisition of an additional 0.5 percent profit interest and a 0.5 percent capital interest in Parametric for $6.7 million. These transactions settled in the first quarter of fiscal 2015.

 

In the fourth quarter of fiscal 2014, certain employees of Parametric executed a put right related to indirect profit units issued pursuant to the Parametric Portfolio Associates LLC Long-term Equity Incentive Plan (the “Parametric Plan”), requiring the Company to purchase an additional 0.5 percent profit interest in Parametric. The transaction settled in the first quarter of fiscal 2015 for $5.7 million.

 

Total profit and capital interests in Parametric held by non-controlling interest holders were 7.4 percent and 2.2 percent, respectively, as of April 30, 2015, reflecting the execution of the put and call transactions described above as well as the grant of an additional 0.5 percent profit interest to employees of Parametric pursuant to the terms of the Parametric Plan in the first quarter of fiscal 2015.

 

Tax Advantaged Bond Strategies (“TABS”)

In fiscal 2009, the Company acquired the TABS business of M.D. Sass Investors Services for cash and future consideration. During the second quarter of fiscal 2015, the Company made a contingent payment of $9.1 million to the selling group based upon prescribed multiples of TABS’s revenue for the twelve months ended December 31, 2014. The payment increased goodwill by $9.1 million as the acquisition was completed prior to the change in accounting for contingent purchase price consideration. The Company is

 

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obligated to make two additional annual contingent payments to the selling group based on prescribed multiples of TABS’s revenue for the twelve months ending December 31, 2015 and 2016. All future payments will be in cash and will result in an addition to goodwill. These payments are not contingent upon any member of the selling group remaining an employee of the Company.

 

10.Intangible Assets

 

The following is a summary of intangible assets at April 30, 2015 and October 31, 2014:

 

April 30, 2015

 

(in thousands)  Gross
carrying
amount
   Accumulated
amortization
   Net
carrying
amount
 
             
Amortizing intangible assets:               
 Client relationships acquired  $133,927   $(81,437)  $52,490 
 Intellectual property acquired   1,000    (287)   713 
 Trademark acquired   900    (300)   600 
                
Non-amortizing intangible assets:               
 Mutual fund management contracts acquired   6,708    -    6,708 
Total  $142,535   $(82,024)  $60,511 

 

October 31, 2014

 

(in thousands)  Gross
carrying
amount
  

Accumulated

amortization

   Net
carrying
amount
 
             
Amortizing intangible assets:               
Client relationships acquired  $133,927   $(76,918)  $57,009 
Intellectual property acquired   1,000    (255)   745 
Trademark acquired   900    (236)   664 
                
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   6,708    -    6,708 
Total  $142,535   $(77,409)  $65,126 

 

Amortization expense was $2.3 million and $2.4 million for the three months ended April 30, 2015 and 2014 respectively, and $4.6 million and $4.7 million for the six months ended April 30, 2015 and 2014, respectively. Estimated remaining amortization expense for fiscal 2015 and the next five fiscal years, on a straight-line basis, is as follows:

 

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Year Ending October 31,  Estimated
Amortization
 
(in thousands)  Expense 
Remaining 2015  $4,568 
2016   8,741 
2017   8,628 
2018   8,599 
2019   4,623 
2020   3,602 

 

11. Stock-Based Compensation Plans

 

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

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2015   2014   2015   2014 
Omnibus Incentive Plans:                    
Stock options  $4,085   $3,811   $8,629   $8,192 
Restricted shares   9,949    8,822    20,174    16,445 
Phantom stock units   72    57    149    114 
Employee Stock Purchase Plans   -    -    180    383 
Employee Stock Purchase Incentive Plans   344    185    402    279 
Atlanta Capital Plan   623    613    1,290    1,226 
Parametric Plan   1,551    1,243    3,110    2,964 
Total stock-based compensation expense  $16,624   $14,731   $33,934   $29,603 

 

The total income tax benefit recognized for stock-based compensation arrangements was $5.8 million and $4.6 million for the three months ended April 30, 2015 and 2014, respectively, and $11.5 million and $9.9 million for the six months ended April 30, 2015 and 2014, respectively.

 

Stock Options

Stock option transactions under the Company’s Omnibus Incentive Plans for the six months ended April 30, 2015 are summarized as follows.

 

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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   21,892   $30.49           
Granted   2,748    36.98           
Exercised   (1,274)   25.54           
Forfeited/expired   (57)   36.87           
Options outstanding, end of period   23,309   $31.51    5.0   $242,188 
Options exercisable, end of period   15,054   $30.67    3.3   $174,596 
Vested or expected to vest at April 30, 2015   23,258   $31.50    5.0   $241,953 

 

The Company received $31.6 million and $28.0 million related to the exercise of options for the six months ended April 30, 2015 and 2014, respectively.

 

As of April 30, 2015, there was $52.9 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 2.7 years.

 

Restricted Shares

A summary of the Company’s restricted share activity for the six months ended April 30, 2015 under the Company’s Omnibus Incentive Plans is as follows:

 

       Weighted- 
       Average 
       Grant 
       Date Fair 
(share figures in thousands)  Shares   Value 
Unvested, beginning of period   3,784   $32.08 
Granted   1,350    37.41 
Vested   (965)   29.91 
Forfeited   (60)   34.32 
Unvested, end of period   4,109   $34.31 

 

As of April 30, 2015, there was $111.0 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.2 years.

 

Phantom Stock Units

During the six months ended April 30, 2015, 6,980 phantom stock units were issued to non-employee Directors pursuant to the Company’s 2013 Omnibus Incentive Plan. As of April 30, 2015, there was $0.3 million of compensation cost related to unvested awards granted under the Omnibus Incentive Plans not yet recognized. That cost is expected to be recognized over a weighted-average period of 1.3 years.

 

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12.Common Stock Repurchases

 

The Company’s current Non-Voting Common Stock share repurchase program was announced on April 15, 2015. The Board authorized management to repurchase and retire up to 8.0 million shares of its Non-Voting Common Stock on the open market and in private transactions in accordance with applicable securities laws. The timing and amount of share purchases are subject to management’s discretion. The Company’s share repurchase program is not subject to an expiration date.

 

In the first six months of fiscal 2015, the Company purchased and retired approximately 0.4 million shares of its Non-Voting Common Stock under the current repurchase authorization and approximately 2.6 million shares under a previous repurchase authorization. Approximately 7.6 million additional shares may be repurchased under the current repurchase authorization as of April 30, 2015.

 

13.Non-operating Income (Expense)

 

The components of non-operating income (expense) for the three and six months ended April 30, 2015 and 2014 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2015   2014   2015   2014 
Non-operating income (expense):                    
Interest and other income  $3,201   $2,074   $5,680   $3,551 
Net losses on investments and derivatives   (2,538)   (2,420)   (3,170)   (2,909)
Net foreign currency gains (losses)   (316)   (392)   639    (967)
Gains (losses) and other investment income, net   347    (738)   3,149    (325)
Interest expense   (7,337)   (7,404)   (14,673)   (14,804)
                     
Other income (expense) of consolidated CLO entities:                    
Interest income   1,206    7,205    2,599    12,960 
Net gains (losses) on bank loans, other investments, note obligations and preferred shares   1,006    (2,101)   914    853 
Gains and other investment income, net   2,212    5,104    3,513    13,813 
Structuring and closing fees   -    -    -    (4,847)
Interest expense   (611)   (4,188)   (1,805)   (7,176)
Interest and other expense   (611)   (4,188)   (1,805)   (12,023)
Total non-operating expense  $(5,389)  $(7,226)  $(9,816)  $(13,339)

 

14.Income Taxes

 

The provision for income taxes was $43.9 million and $45.2 million, or 37.6 percent and 38.3 percent of pre-tax income, for the three months ended April 30, 2015 and 2014, respectively. The provision for income taxes was $60.7 million and $89.9 million, or 37.2 percent and 38.1 percent of pre-tax income, for the six months ended April 30, 2015 and 2014, respectively. The provision for income taxes in the three and six months ended April 30, 2015 and 2014 is comprised 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 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 April 30, 2015 or October 31, 2014.

 

The Company considers the undistributed earnings of its Canadian and Australian subsidiaries as of April 30, 2015 to be indefinitely reinvested in foreign operations. Accordingly, no U.S. income taxes have been provided thereon. As of April 30, 2015, the Company had approximately $27.1 million of undistributed earnings in our Canadian and Australian subsidiaries that are not available to fund domestic operations or to distribute to shareholders unless repatriated. Repatriation would require the Company to accrue and pay U.S. corporate income taxes. The unrecognized deferred income tax liability on this temporary difference is estimated to be $3.1 million. The Company does not have a current plan to repatriate these funds.

 

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.

 

15.Non-controlling and Other Beneficial Interests

 

The components of net income attributable to non-controlling and other beneficial interests for the three and six months ended April 30, 2015 and 2014 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2015   2014   2015   2014 
Consolidated sponsored funds  $(315)  $(413)  $199   $(217)
Majority-owned subsidiaries   (3,903)   (3,524)   (7,676)   (7,007)
Non-controlling interest value adjustments(1)   3    -    (197)   (2,389)
Consolidated CLO entities   (1,294)   791    (1,341)   1,095 
Net income attributable to non-controlling and other beneficial interests  $(5,509)  $(3,146)  $(9,015)  $(8,518)

 

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

 

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16.Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended April 30, 2015 and 2014 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 January 31, 2015  $664   $4,986   $(47,736)  $(42,086)
Other comprehensive income (loss) before reclassifications and tax   -    1,075    8,744    9,819 
Tax impact   -    (417)   9    (408)
Reclassification adjustments, before tax   6    489    -    495 
Tax impact   (2)   (190)   -    (192)
Net current period other comprehensive income   4    957    8,753    9,714 
Balance at April 30, 2015  $668   $5,943   $(38,983)  $(32,372)
                     
Balance at January 31, 2014  $651   $4,011   $(13,337)  $(8,675)
Other comprehensive income (loss) before reclassifications and tax   -    775    3,495    4,270 
Tax impact   -    (297)   (1,340)   (1,637)
Reclassification adjustments, before tax   5    640    -    645 
Tax impact   (2)   (246)   -    (248)
Net current period other comprehensive income   3    872    2,155    3,030 
Balance at April 30, 2014  $654   $4,883   $(11,182)  $(5,645)

 

The components of accumulated other comprehensive income (loss), net of tax, for the six months ended April 30, 2015 and 2014 are as follows:

 

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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, 2014  $661   $5,628   $(24,285)  $(17,996)
Other comprehensive income (loss) before reclassifications and tax   -    145    (14,603)   (14,458)
Tax impact   -    (66)   (95)   (161)
Reclassification adjustments, before tax   11    430    -    441 
Tax impact   (4)   (194)   -    (198)
Net current period other comprehensive income (loss)   7    315    (14,698)   (14,376)
Balance at April 30, 2015  $668   $5,943   $(38,983)  $(32,372)
                     
Balance at October 31, 2013  $648   $4,504   $(5,329)  $(177)
Other comprehensive income (loss) before reclassifications and tax   -    417    (9,550)   (9,133)
Tax impact   -    (176)   3,697    3,521 
Reclassification adjustments, before tax   10    239    -    249 
Tax impact   (4)   (101)   -    (105)
Net current period other comprehensive income (loss)   6    379    (5,853)   (5,468)
Balance at April 30, 2014  $654   $4,883   $(11,182)  $(5,645)

 

(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.

 

17.Earnings per Share

 

The following table sets forth the calculation of earnings per basic and diluted share for the three and six months ended April 30, 2015 and 2014 using the two-class method:

 

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   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2015   2014   2015   2014 
Net income attributable to Eaton Vance Corp. shareholders  $70,384   $74,901   $99,387   $146,259 
Less: Allocation of earnings to participating restricted shares   1,152    1,825    1,735    3,745 
Net income available to common shareholders  $69,232   $73,076   $97,652   $142,514 
Weighted-average shares outstanding – basic   114,415    118,103    114,326    118,060 
Incremental common shares   5,315    4,918    5,222    5,504 
Weighted-average shares outstanding – diluted   119,730    123,021    119,548    123,564 
Earnings per share:                    
Basic  $0.61   $0.62   $0.85   $1.21 
Diluted  $0.58   $0.59   $0.82   $1.15 

 

Antidilutive common shares related to stock options and unvested restricted stock excluded from the computation of earnings per diluted share were approximately 7.5 million and 5.0 million for the three months ended April 30, 2015 and 2014, respectively, and approximately 7.7 million and 5.0 million for the six months ended April 30, 2015 and 2014, respectively.

 

18.Commitments and Contingencies

 

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

 

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

 

The Company has entered into transactions in financial instruments in which it has sold securities, not yet purchased, as part of its corporate hedging program. As of April 30, 2015, the Company has $4.4 million included within other liabilities on its Consolidated Balance Sheet related to securities sold, not yet purchased.

 

19.Related Party Transactions

 

Sponsored Funds

 

The Company is an investment adviser 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

 

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directors. Revenues for services provided or related to these funds for the three and six months ended April 30, 2015 and 2014 are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2015   2014   2015   2014 
Investment advisory and administrative fees  $215,371   $219,650   $437,392   $444,896 
Distribution fees   18,233    19,058    37,140    38,867 
Service fees   28,461    30,829    58,308    63,120 
Shareholder services fees   585    634    1,417    1,239 
Other revenue   885    352    1,315    732 
Total  $263,535   $270,523   $535,572   $548,854 

 

For the three months ended April 30, 2015 and 2014, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $3.1 million and $2.8 million of investment advisory fees it was otherwise entitled to receive, respectively. For the six months ended April 30, 2015 and 2014, the Company waived $6.5 million and $5.5 million, respectively, of investment advisory fees it was otherwise entitled to receive.

 

Sales proceeds and net realized gains (losses) for three and six months ended April 30, 2015 and 2014 from investments in sponsored funds classified as available-for-sale, including sponsored funds accounted for under the equity method, are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2015   2014   2015   2014 
Proceeds from sales  $20,851   $48,307   $32,047   $63,851 
Net realized gains (losses)   297    (399)   341    (336)

 

The Company bears the non-advisory expenses of certain sponsored funds for which it earns an all-in management fee and provides subsidies to startup and other smaller sponsored funds to enhance their competitiveness. For the three months ended April 30, 2015 and 2014, expenses of $5.5 million and $5.0 million, respectively, were incurred by the Company pursuant to these arrangements. For the six months ended April 30, 2015 and 2014, expenses of $10.5 million and $10.3 million were incurred by the Company pursuant to these arrangements.

 

Included in investment advisory fees and other receivables at April 30, 2015 and October 31, 2014 are receivables due from sponsored funds of $92.7 million and $94.5 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 $9.2 million and $8.8 million at April 30, 2015 and October 31, 2014, 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” in 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, 2014.

 

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 highly functional 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. Through Parametric, we also provide portfolio implementation services, including tax-managed core and specialty index strategies and centralized portfolio management of multi-manager portfolios, and customized exposure management services. We also oversee the management of, and distribute, 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 April 30, 2015, we had $311.0 billion in consolidated assets under management.

 

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Our principal retail marketing strategy is to distribute funds and separately managed accounts principally through financial intermediaries in the advisory channel. We have a broad reach in this marketplace, with distribution partners including national and regional broker-dealers, independent broker-dealers, registered investment advisors, banks and insurance companies. We support these distribution partners with a team of approximately 130 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. For the second quarter and first six months of fiscal 2015, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 4.5% and 3.3%, 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 -0.8% and 2.1%, respectively.

 

Our ending consolidated assets under management increased by $15.4 billion, or 5 percent, from the end of the prior quarter to $311.0 billion on April 30, 2015, reflecting market appreciation and net inflows. Consolidated net inflows of $6.8 billion in the second quarter of fiscal 2015 represent a 9 percent annualized internal growth rate. For comparison, the Company had consolidated net outflows of $0.9 billion in the second quarter of fiscal 2014. Average consolidated assets under management increased from the prior quarter by 2 percent, or $5.9 billion, to $303.4 billion in the second quarter of fiscal 2015.

 

The primary drivers of our average effective fee rates are the mix of our assets by product, distribution channel and investment mandate, and the timing and amount of performance fees recognized. Shifts in managed assets among products, distribution channels and investment mandates with differing fee schedules can alter the average effective fee rates earned on our assets under management. Our overall average annualized effective fee rate decreased to 46 basis points and 47 basis points in the second quarter and first six months of fiscal 2015,

 

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respectively, from 50 basis points in both the second quarter and first six months of fiscal 2014. Our average annualized effective investment advisory and administrative fee rate similarly decreased to 40 basis points in both the second quarter and first six months of fiscal 2015 from 42 and 43 basis points in the second quarter and first six months of last year, respectively.

 

On December 2, 2014, the U.S. Securities and Exchange Commission (“SEC”) granted Eaton Vance exemptive relief to permit the offering of NextShares™, a proposed new type of actively managed exchange-traded product for which the Company is pursuing development. The Company’s commercialization plan includes the launch of a series of NextShares funds that substantially replicate the strategies of existing Eaton Vance mutual funds and licensing the associated intellectual property and providing related services to other fund sponsors to support their launch of NextShares funds. During the second quarter of fiscal 2015, the Company and its wholly owned subsidiary Navigate Fund Solutions LLC (“Navigate”) made progress advancing NextShares toward market introduction. In April 2015, the Company filed amended registration statements with the SEC for 18 initial Eaton Vance NextShares funds and the NASDAQ Stock Exchange LLC filed with the SEC a request to list and trade each of the 18 funds. Navigate has to date entered into preliminary licensing and service agreements with 11 fund advisers, including Eaton Vance. Conditional upon the timing of final regulatory approvals and market readiness, the Company is targeting launch of the initial NextShares funds in the second half of calendar 2015.

 

Consolidated Assets under Management

 

Consolidated assets under management of $311.0 billion on April 30, 2015 increased $25.2 billion, or 9 percent, from the $285.9 billion reported a year earlier. Fund net outflows of $5.3 billion over the last twelve months reflect gross inflows $32.9 billion offset by outflows of $38.2 billion. Institutional separate account net inflows were $13.8 billion, high-net-worth separate account net inflows were $1.5 billion and retail managed account net inflows were $2.9 billion over the past twelve months. Net price appreciation in managed assets increased assets under management by $12.3 billion over the last twelve months.

 

We report managed assets and flow data by investment mandate. In the first quarter of fiscal 2015, we provided an additional breakout of our assets and flows, separating “Exposure Management” from “Portfolio Implementation.” This separation better highlights the distinctive aspects of these growing business lines. The “Portfolio Implementation” category includes Parametric’s tax-managed core and specialty index strategies and centralized portfolio management services. The “Exposure Management” category includes Parametric’s futures and options-based overlay services.

 

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

 

   April 30,     
(in millions)  2015   % of Total   2014   % of Total   %
Change
 
Equity(3)  $97,167    31%  $93,733    33%   4%
Fixed income(4)   49,690    16%   44,094    15%   13%
Floating-rate income   38,269    12%   45,115    16%   -15%
Alternative   10,582    4%   12,112    4%   -13%
Portfolio implementation   52,879    17%   45,753    16%   16%
Exposure management(5)   62,459    20%   45,062    16%   39%
Total  $311,046    100%  $285,869    100%   9%

 

(1)Consolidated Eaton Vance Corp. See table on page 47 for managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(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 cash management accounts.
(5)Category includes amounts reclassified from portfolio implementation and equity categories for all periods presented.

 

Equity assets under management included $32.3 billion and $30.4 billion of assets managed for after-tax returns on April 30, 2015 and 2014, respectively. Portfolio implementation assets under management included $38.4 billion and $31.7 billion of assets managed for after-tax returns on April 30, 2015 and 2014, respectively. Fixed income assets included $29.0 billion and $25.5 billion of tax-exempt municipal bond assets on April 30, 2015 and 2014, respectively.

 

The following tables summarize our consolidated assets under management and asset flows by investment mandate and investment vehicle for the three and six months ended April 30, 2015 and 2014:

 

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Consolidated Net Flows by Investment Mandate(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %    April 30,   %  
(in millions)  2015   2014   Change    2015   2014   Change 
Equity assets - beginning of period(2)  $92,966   $90,765    2%  $96,379   $93,585    3%
Sales and other inflows   3,965    3,669    8%   8,479    7,454    14%
Redemptions/outflows   (4,432)   (5,015)   -12%   (9,504)   (10,636)   -11%
Net flows   (467)   (1,346)   -65%   (1,025)   (3,182)   -68%
Exchanges   24    20    20%   59    532    -89%
Market value change   4,644    4,294    8%   1,754    2,798    -37%
Equity assets - end of period  $97,167   $93,733    4%  $97,167   $93,733    4%
Fixed income assets - beginning of period(3)   47,417    43,550    9%   46,062    44,414    4%
Sales and other inflows   5,116    2,626    95%   8,628    5,077    70%
Redemptions/outflows   (2,511)   (2,756)   -9%   (4,946)   (6,037)   -18%
Net flows   2,605    (130)   NM(4)   3,682    (960)   NM 
Exchanges   5    62    -92%   79    (37)   NM 
Market value change   (337)   612    NM     (133)   677    NM 
Fixed income assets - end of period  $49,690   $44,094    13%  $49,690   $44,094    13%
Floating-rate income assets - beginning of period   38,648    44,073    -12%   42,009    41,821    0%
Sales and other inflows   2,387    4,170    -43%   4,689    8,956    -48%
Redemptions/outflows   (3,433)   (2,842)   21%   (8,388)   (5,547)   51%
Net flows   (1,046)   1,328    NM     (3,699)   3,409    NM 
Exchanges   (21)   (49)   -57%   (126)   5    NM 
Market value change   688    (237)   NM     85    (120)   NM 
Floating-rate income assets - end of period  $38,269   $45,115    -15%  $38,269   $45,115    -15%
Alternative assets - beginning of period   10,805    13,171    -18%   11,241    15,212    -26%
Sales and other inflows   782    767    2%   1,629    1,856    -12%
Redemptions/outflows   (1,069)   (1,967)   -46%   (2,207)   (4,956)   -55%
Net flows   (287)   (1,200)   -76%   (578)   (3,100)   -81%
Exchanges   (4)   (20)   -80%   (18)   (68)   -74%
Market value change   68    161    -58%   (63)   68    NM 
Alternative assets - end of period  $10,582   $12,112    -13%  $10,582   $12,112    -13%
Portfolio implementation assets - beginning of period   48,538    43,296    12%   48,008    42,992    12%
Sales and other inflows   3,435    2,086    65%   6,098    4,000    52%
Redemptions/outflows   (1,799)   (1,812)   -1%   (3,364)   (3,458)   -3%
Net flows   1,636    274    497%   2,734    542    404%
Exchanges   -    (5)   NM     -    (458)   NM 
Market value change   2,705    2,188    24%   2,137    2,677    -20%
Portfolio implementation assets - end of period  $52,879   $45,753    16%  $52,879   $45,753    16%
Exposure management assets - beginning of period(5)   57,294    43,714    31%   54,036    42,645    27%
Sales and other inflows   14,523    9,463    53%   31,556    24,970    26%
Redemptions/outflows   (10,196)   (9,293)   10%   (24,482)   (23,657)   3%
Net flows   4,327    170    NM     7,074    1,313    439%
Market value change   838    1,178    -29%   1,349    1,104    22%
Exposure management assets - end of period  $62,459   $45,062    39%  $62,459   $45,062    39%
Total fund and separate account assets - beginning of period   295,668    278,569    6%   297,735    280,669    6%
Sales and other inflows   30,208    22,781    33%   61,079    52,313    17%
Redemptions/outflows   (23,440)   (23,685)   -1%   (52,891)   (54,291)   -3%
Net flows   6,768    (904)   NM     8,188    (1,978)   NM 
Exchanges   4    8    -50%   (6)   (26)   -77%
Market value change   8,606    8,196    5%   5,129    7,204    -29%
Total assets under management - end of period  $311,046   $285,869    9%  $311,046   $285,869    9%

 

(1)Consolidated Eaton Vance Corp. See table on page 47 for managed assets and flows of 49 percent-owned Hexavest Inc. which are not included in the table above.
(2)Includes assets in balanced accounts holding income securities.
(3)Includes assets in cash management accounts.
(4)Not meaningful ("NM").
(5)Category includes amounts reclassified from portfolio implementation and equity categories for all periods presented.

 

44
 

 

Consolidated Net Flows by Investment Vehicle(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2015   2014   Change   2015   2014   Change 
Fund assets - beginning of period(2)  $129,552   $132,195    -2%  $134,564   $133,401    1%
Sales and other inflows   7,755    8,684    -11%   16,369    18,918    -13%
Redemptions/outflows   (8,390)   (8,751)   -4%   (19,129)   (19,013)   1%
Net flows   (635)   (67)   848%   (2,760)   (95)   NM 
Exchanges   4    81    -95%   185    47    294%
Market value change   3,240    2,910    11%   172    1,766    -90%
Fund assets - end of period  $132,161   $135,119    -2%  $132,161   $135,119    -2%
Institutional separate account assets - beginning of period(3)   107,547    94,869    13%   106,443    95,724    11%
Sales and other inflows   17,860    11,101    61%   35,915    27,903    29%
Redemptions/outflows   (12,501)   (12,249)   2%   (28,899)   (29,721)   -3%
Net flows   5,359    (1,148)   NM    7,016    (1,818)   NM 
Exchanges   -    (96)   NM    (173)   (96)   80%
Market value change   3,036    2,939    3%   2,656    2,754    -4%
Institutional separate account assets - end of period  $115,942   $96,564    20%  $115,942   $96,564    20%
High-net-worth separate account assets - beginning of period   22,594    19,374    17%   22,235    19,699    13%
Sales and other inflows   1,166    968    20%   2,626    1,682    56%
Redemptions/outflows   (792)   (988)   -20%   (1,413)   (2,092)   -32%
Net flows   374    (20)   NM    1,213    (410)   NM 
Exchanges   (1)   402    NM    (95)   402    NM 
Market value change   1,259    1,212    4%   873    1,277    -32%
High-net-worth separate account assets - end of period  $24,226   $20,968    16%  $24,226   $20,968    16%
Retail managed account assets - beginning of period   35,975    32,131    12%   34,493    31,845    8%
Sales and other inflows   3,427    2,028    69%   6,169    3,810    62%
Redemptions/outflows   (1,757)   (1,697)   4%   (3,450)   (3,465)   0%
Net flows   1,670    331    405%   2,719    345    688%
Exchanges   1    (379)   NM    77    (379)   NM 
Market value change   1,071    1,135    -6%   1,428    1,407    1%
Retail managed account assets - end of period  $38,717   $33,218    17%  $38,717   $33,218    17%
Total fund and separate account assets - beginning of period   295,668    278,569    6%   297,735    280,669    6%
Sales and other inflows   30,208    22,781    33%   61,079    52,313    17%
Redemptions/outflows   (23,440)   (23,685)   -1%   (52,891)   (54,291)   -3%
Net flows   6,768    (904)   NM    8,188    (1,978)   NM 
Exchanges   4    8    -50%   (6)   (26)   -77%
Market value change   8,606    8,196    5%   5,129    7,204    -29%
Total assets under management - end of period  $311,046   $285,869    9%  $311,046   $285,869    9%

 

(1)Consolidated Eaton Vance Corp. See table on page 47 for managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes assets in cash management funds.
(3)Includes assets in cash management separate accounts.

 

45
 

 

The following table summarizes our consolidated assets under management by investment affiliate as of April 30, 2015 and 2014:

 

Consolidated Assets under Management by Investment Affiliate (1)

 

   April 30,   % 
(in millions)  2015   2014   Change 
Eaton Vance Management (2)  $142,930   $144,930    -1%
Parametric   149,656    122,524    22%
Atlanta Capital   18,460    18,415    0%
Total  $311,046   $285,869    9%

 

(1)Consolidated Eaton Vance Corp. See table on page 47 for managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes managed assets of wholly owned subsidiaries, as well as certain Eaton Vance-sponsored funds and accounts managed by Hexavest and unaffiliated third-party advisors under Eaton Vance supervision.

 

As of April 30, 2015, 49 percent-owned affiliate Hexavest Inc. (“Hexavest”) managed $15.6 billion of client assets, a decrease of 8 percent from the $17.1 billion of managed assets on April 30, 2014. 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 six months ended April 30, 2015 and 2014:

 

46
 

 

Hexavest Assets under Management and Net Flows

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2015   2014   Change   2015   2014   Change 
Eaton Vance distributed:                              
Eaton Vance sponsored funds - beginning of period(1)  $234   $212    10%  $227   $211    8%
Sales and other inflows   3    12    -75%   19    42    -55%
Redemptions/outflows   (4)   (17)   -76%   (10)   (42)   -76%
Net flows   (1)   (5)   -80%   9    -    NM 
Market value change   14    14    0%   11    10    10%
Eaton Vance sponsored funds - end of period  $247   $221    12%  $247   $221    12%
Eaton Vance distributed separate accounts - beginning of period(2)   1,999    1,383    45%   2,367    1,574    50%
Sales and other inflows   284    307    -7%   384    383    0%
Redemptions/outflows   (3)   (74)   -96%   (435)   (79)   451%
Net flows   281    233    21%   (51)   304    NM 
Exchanges   -    624    NM    -    389    NM 
Market value change   121    114    6%   85    87    -2%
Eaton Vance distributed separate accounts - end of period  $2,401   $2,354    2%  $2,401   $2,354    2%
Total Eaton Vance distributed - beginning of period   2,233    1,595    40%   2,594    1,785    45%
Sales and other inflows   287    319    -10%   403    425    -5%
Redemptions/outflows   (7)   (91)   -92%   (445)   (121)   268%
Net flows   280    228    23%   (42)   304    NM 
Exchanges   -    624    NM    -    389    NM 
Market value change   135    128    5%   96    97    -1%
Total Eaton Vance distributed - end of period  $2,648   $2,575    3%  $2,648   $2,575    3%
Hexavest directly distributed - beginning of period(3)   12,749    14,543    -12%   14,101    15,136    -7%
Sales and other inflows   180    355    -49%   425    795    -47%
Redemptions/outflows   (683)   (681)   0%   (2,024)   (1,641)   23%
Net flows   (503)   (326)   54%   (1,599)   (846)   89%
Exchanges   -    (624)   NM    -    (389)   NM 
Market value change   753    884    -15%   497    576    -14%
Hexavest directly distributed - end of period  $12,999   $14,477    -10%  $12,999   $14,477    -10%
Total Hexavest assets - beginning of period   14,982    16,138    -7%   16,695    16,921    -1%
Sales and other inflows   467    674    -31%   828    1,220    -32%
Redemptions/outflows   (690)   (772)   -11%   (2,469)   (1,762)   40%
Net flows   (223)   (98)   128%   (1,641)   (542)   203%
Market value change   888    1,012    -12%   593    673    -12%
Total Hexavest assets - end of period  $15,647   $17,052    -8%  $15,647   $17,052    -8%

 

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

 

47
 

 

Consolidated Ending Assets under Management by Asset Class(1)

 

   April 30,     
(in millions)  2015   % of
Total
   2014   % of
Total
   %
Change
 
Open-end funds:                         
Class A  $25,180    8%  $29,571    10%   -15%
Class B   368    0%   568    0%   -35%
Class C   9,295    3%   9,648    3%   -4%
Class I(2)   41,848    13%   42,138    15%   -1%
Class N   1,632    1%   2,023    1%   -19%
Class R   491    0%   413    0%   19%
Other   1,660    1%   1,910    1%   -13%
Total open-end funds   80,474    26%   86,271    30%   -7%
Private funds(3)   26,465    8%   23,428    8%   13%
Closed-end funds   25,222    8%   25,420    9%   -1%
Total fund assets   132,161    42%   135,119    47%   -2%
Institutional account assets(4)   115,942    37%   96,564    34%   20%
High-net-worth account assets   24,226    8%   20,968    7%   16%
Retail managed account assets   38,717    13%   33,218    12%   17%
Total separate account assets   178,885    58%   150,750    53%   19%
Total  $311,046    100%  $285,869    100%   9%

 

(1)Consolidated Eaton Vance Corp. See page 47 for directly managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes Class R6 shares.
(3)Includes privately offered equity, fixed income and floating-rate bank loan funds and CLO entities.
(4)Includes assets in institutional cash management separate accounts.

 

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

 

48
 

 

Consolidated Average Assets under Management by Asset Class(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %    April 30,   % 
(in millions)  2015   2014   Change    2015   2014   Change 
Open-end funds:                              
Class A  $25,347   $29,780    -15%  $25,859   $29,889    -13%
Class B   388    593    -35%   408    616    -34%
Class C   9,279    9,678    -4%   9,328    9,717    -4%
Class I(2)   41,052    42,145    -3%   41,242    42,245    -2%
Class N   1,573    2,075    -24%   1,623    2,155    -25%
Class R   473    402    18%   464    393    18%
Other   1,788    1,693    6%   1,874    1,624    15%
Total open-end funds   79,900    86,366    -7%   80,798    86,639    -7%
Private funds(3)   26,283    22,655    16%   26,214    22,370    17%
Closed-end funds   25,212    25,314    0%   25,258    25,236    0%
Total fund assets   131,395    134,335    -2%   132,270    134,245    -1%
Institutional account assets(4)   110,882    96,850    14%   109,227    97,037    13%
High-net-worth account assets   23,562    20,226    16%   23,129    20,056    15%
Retail managed account assets   37,575    33,011    14%   36,504    32,700    12%
Total separate account assets   172,019    150,087    15%   168,860    149,793    13%
Total  $303,414   $284,422    7%  $301,130   $284,038    6%

 

(1)Assets under management attributable to acquisitions that closed during the relevant periods are included on a weighted average basis for the period from their respective closing dates.
(2)Includes Class R6 shares.
(3)Includes privately offered equity, fixed income and floating-rate bank loan funds and CLO entities.
(4)Includes assets in institutional cash management separate accounts.

 

Results of Operations

 

In evaluating operating performance, we consider net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share, which are calculated on a basis consistent with U.S. GAAP, as well as adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, both of which are internally derived non-U.S. GAAP performance measures.

 

We define adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share as net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share, respectively, adjusted to exclude changes in the estimated redemption value of non-controlling interests redeemable at other than fair value (“non-controlling interest value adjustments”), closed-end fund structuring fees, payments to end service and additional compensation arrangements in place for certain Eaton Vance closed-end funds and other items management deems non-recurring (such as the impact of special dividends, costs associated with the extinguishment of debt and tax settlements) or non-operating in nature. Adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share should not be construed to be a substitute for, or superior to, net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share computed in accordance with U.S. GAAP. We provide disclosures of adjusted net income attributable to

 

49
 

 

Eaton Vance Corp. shareholders and adjusted earnings per diluted share to reflect the fact that our management and Board of Directors consider these adjusted numbers a measure of the Company’s underlying operating performance.

 

The following table provides a reconciliation of net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share to adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, respectively, for the three and six months ended April 30, 2015 and 2014:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands, except per share data)  2015   2014   Change   2015   2014   Change 
Net income attributable to Eaton Vance Corp. shareholders  $70,384   $74,901    -6%  $99,387   $146,259    -32%
Non-controlling interest value adjustments(1)   (3)   -    NM    197    2,389    -92%
Payments to end certain closed-end fund service and additional compensation arrangements, net of tax(2)   -    -    -    44,895    -    NM 
Adjusted net income attributable to Eaton Vance Corp. shareholders  $70,381   $74,901    -6%  $144,479   $148,648    -3%
                               
Earnings per diluted share  $0.58   $0.59    -2%  $0.82   $1.15    -29%
Non-controlling interest value adjustments(1)   -    -    -    -    0.02    NM 
Payments to end certain closed-end fund service and additional compensation arrangements, net of tax(2)   -    -    -    0.37    -        NM 
Adjusted earnings per diluted share  $0.58   $0.59    -2%  $1.19   $1.17    2%

 

(1)Please see page 58, "Net Income Attributable to Non-controlling and Other Beneficial Interests," for a further discussion of the non-controlling interest value adjustments referenced above.
(2)Reflects a $73.0 million payment, net of tax, to end certain fund service and additional compensation arrangements for certain Eaton Vance closed-end funds.

 

We reported net income attributable to Eaton Vance Corp. shareholders of $70.4 million, or $0.58 per diluted share, in the second quarter of fiscal 2015 compared to net income attributable to Eaton Vance Corp. shareholders of $74.9 million, or $0.59 per diluted share, in the second quarter of fiscal 2014. We reported adjusted net income attributable to Eaton Vance Corp. shareholders of $70.4 million, or $0.58 per diluted share, in the second quarter of fiscal 2015 compared to adjusted net income attributable to Eaton Vance Corp. shareholders of $74.9 million, or $0.59 per diluted share, in the second quarter of fiscal 2014. The change in net income attributable to Eaton Vance Corp. shareholders can be primarily attributed to the following:

 

·A decrease in revenue of $2.4 million, or 1 percent, primarily reflecting a decrease in our annualized effective fee rate to 46 basis points from 50 basis points due to a shift in product mix, partially offset by a 7 percent increase in average assets under management.
·Substantially unchanged expenses, reflecting increases in compensation, fund-related and other operating expenses, offset by lower distribution and service fee expenses and reduced amortization of deferred sales commissions.

 

50
 

 

·A $1.1 million improvement in gains (losses) and other investment income, net, primarily reflecting an increase in interest income.

·A $0.7 million improvement in income (expense) of the Company’s consolidated collateralized loan obligation (“CLO”) entities, reflecting a decrease in interest and other expense, offset by a decrease in gains and other investment income, net.
·A decrease in income taxes of $1.4 million, or 3 percent, reflecting a decrease in the Company’s income before taxes. Consolidated CLO entity income that is allocated to other beneficial interest holders is not subject to tax in the Company’s provision.
·A decrease in equity in net income of affiliates, net of tax, of $2.3 million, primarily reflecting a decrease in the Company’s proportionate net interest of sponsored funds accounted for under the equity method.
·A $2.4 million increase in net income attributable to non-controlling and other beneficial interest holders, primarily reflecting an increase in net income attributable to non-controlling interest holders of the Company’s CLO entities.

 

Weighted average diluted shares outstanding decreased by 3.3 million shares, or 3 percent, from the second quarter of fiscal 2014. The change primarily reflects the impact of share repurchases over the last twelve months.

 

We reported net income attributable to Eaton Vance Corp. shareholders of $99.4 million, or $0.82 per diluted share, in the first six months of fiscal 2015 compared to net income attributable to Eaton Vance Corp. shareholders of $146.3 million, or $1.15 per diluted share, in the first six months of fiscal 2014. We reported adjusted net income attributable to Eaton Vance Corp. shareholders of $144.5 million, or $1.19 adjusted earnings per diluted share, in the first six months of fiscal 2015 compared to adjusted net income attributable to Eaton Vance Corp. shareholders of $148.6 million, or $1.17 adjusted earnings per diluted share, in the first six months of fiscal 2014. The change in net income attributable to Eaton Vance Corp. shareholders can be primarily attributed to the following:

 

·A decrease in revenue of $7.7 million, or 1 percent, primarily reflecting a decrease in our annualized effective fee rate to 47 basis points from 50 basis points due to a shift in product mix, partially offset by a 6 percent increase in average assets under management.
·An increase in expenses of $69.0 million, or 15 percent, primarily reflecting the payment of $73 million to terminate certain closed-end fund service and additional compensation arrangements in the first quarter of fiscal 2015. Excluding this payment, expenses decreased $4.0 million, or 1 percent, reflecting decreases in distribution and service fees and reduced amortization of deferred sales commissions, offset by increases in compensation, fund-related expenses and other corporate expenses.
·A positive change of $3.5 million in gains (losses) and other investment income, net, primarily due to an increase in interest income and foreign currency gains.
·A decrease in income taxes of $29.2 million, or 33 percent, reflecting a decrease in the Company’s income before taxes.
·A decrease in equity in net income of affiliates, net of tax, of $2.4 million, primarily reflecting a decrease in the Company’s proportionate net interest in earnings of sponsored funds accounted for under the equity method.
·An increase in net income attributable to non-controlling and other beneficial interest holders of $0.5 million, primarily reflecting an increase in net income attributable to non-controlling interest holders of the Company’s CLO entities, offset by a decrease in the annual adjustment made to the estimated redemption value of non-controlling interests in the Company’s majority-owned subsidiaries and a decrease in net income attributable to non-controlling interest holders in the Company’s consolidated funds.

 

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Weighted average diluted shares outstanding decreased by 4.0 million shares, or 3 percent, in the first six months of fiscal 2015 over the first six months of fiscal 2014. The change primarily reflects the impact of share repurchases.

 

Revenue

 

Our overall average annualized effective fee rate (total revenue, excluding other revenue, as a percentage of average assets under management) was 46 basis points and 47 basis points in the second quarter and first six months of fiscal 2015, respectively, compared to 50 basis points in both the second quarter and first six months of fiscal 2014. The decrease in our overall average effective fee rate can be primarily attributed to the strong growth of our portfolio implementation and exposure management businesses, which operate at fee rates well below corporate averages. Product mix continues to be the most significant determinant of our overall average effective fee rate.

 

The following table shows our investment advisory and administrative fees, distribution and underwriter fees, service fees and other revenue for the three and six months ended April 30, 2015 and 2014:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)  2015   2014   Change   2015   2014   Change 
Investment advisory and administrative fees  $300,624   $300,136    0%  $602,437   $604,849    0%
Distribution and underwriter fees   20,048    21,212    -5%   41,084    42,833    -4%
Service fees   28,461    30,829    -8%   58,308    63,120    -8%
Other revenue   2,531    1,884    34%   4,765    3,520    35%
Total revenue  $351,664   $354,061    -1%  $706,594   $714,322    -1%

  

Investment advisory and administrative fees

Investment advisory and administrative fees were substantially unchanged in the second quarter and first six months of fiscal 2015 versus the same periods a year, earlier primarily reflecting a 7 percent and 6 percent increase in average assets under management, respectively, offset by a decline in our average effective fee rates. The decrease in our average annualized effective investment advisory and administrative fee rate to 40 basis points in both the second quarter and first six months of fiscal 2015 from 42 basis points and 43 basis points in the second quarter and first six months of fiscal 2014, respectively, can be primarily attributed to the impact of a shift in product mix from higher-fee to lower-fee mandates. Performance fees were negligible in the second quarter of fiscal 2015 and $1.0 million in the second quarter of fiscal 2014. Performance fees totaled $0.1 million and $1.1 million in the first six months of fiscal 2015 and fiscal 2014, respectively.

 

Distribution and underwriter fees

The following table shows the total distribution payments with respect to our Class A, Class B, Class C, Class N, Class R and private equity funds for the three and six months ended April 30, 2015 and 2014:

 

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   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)  2015   2014   Change   2015   2014   Change 
Class A  $207   $320    -35%  $485   $652    -26%
Class B   562    911    -38%   1,206    1,928    -37%
Class C   15,972    16,531    -3%   32,534    33,718    -4%
Class N   33    66    -50%   83    141    -41%
Class R   290    245    18%   575    486    18%
Private funds   1,169    985    19%   2,257    1,943    16%
Total distribution plan payments  $18,233   $19,058    -4%  $37,140   $38,868    -4%

 

Underwriter fees and other distribution income were $1.8 million in the second quarter of fiscal 2015, a decrease of 16 percent, or $0.3 million, from the second quarter of fiscal 2014, primarily reflecting a decrease of $0.4 million in contingent deferred sales charges received on certain Class A share redemptions.

 

Underwriter fees and other distribution income were $3.9 million in the first six months of fiscal 2015, a decrease of 1 percent, from the same period a year earlier, primarily reflecting a decrease of $0.1 million in contingent deferred sales charges received on certain Class A share redemptions.

 

Service fees

Service fee revenue decreased 8 percent in both the second quarter and first six months of fiscal 2015 from the same periods a year earlier, primarily reflecting a decrease in average assets under management in funds and certain classes of funds subject to service fees.

 

Other revenue

Other revenue, which consists primarily of sub-transfer agent fees, miscellaneous dealer income, custody fees, Hexavest-related distribution and service revenue, and sub-lease income, increased by $0.6 million and $1.2 million in the second quarter and first six months of fiscal 2015, respectively, from the same periods a year earlier, primarily reflecting an increase in Hexavest-related revenue.

 

Expenses

 

Operating expenses were substantially unchanged in the second quarter of fiscal 2015 from the same period a year earlier, reflecting increases in compensation, fund-related expenses and other operating expenses, offset by decreased distribution and service fee expenses and reduced amortization of deferred sales commissions. Expenses in connection with the Company’s NextShares initiative totaled approximately $1.8 million in the second quarter of fiscal 2015, an increase of 128 percent from $0.8 million in the second quarter of fiscal 2014.

 

Operating expenses increased by 15 percent, or $69.0 million, in the first six months of fiscal 2015 from the same period a year earlier, reflecting increases in compensation, distribution expense, fund-related expenses and other operating expenses, offset by decreased service fee expenses and reduced amortization of deferred sales commissions. Included in distribution expense for the first six months of fiscal 2015 is a one-time payment of $73.0 million to terminate certain closed-end fund service and additional compensation arrangements with a significant distribution partner. Expenses in connection with the Company’s NextShares initiative totaled approximately $3.1 million in the first six months of fiscal 2015, an increase of 84 percent from $1.7 million in the first six months of fiscal 2014.

 

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The following table shows our operating expenses for the three and six months ended April 30, 2015 and 2014:

 

   Three Months Ended       Six Months Ended     
   April 30,   %