10-Q 1 v419639_10q.htm FORM 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 July 31, 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 July 31, 2015:

Voting Common Stock – 429,005 shares

Non-Voting Common Stock –  116,214,971 shares

 

 

 

 

 

 

Eaton Vance Corp.

Form 10-Q

As of July 31, 2015 and for the

Three and Nine Month Periods Ended July 31, 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 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk 63
Item 4. Controls and Procedures 63
     
Part II Other Information  
Item 1. Legal Proceedings 63
Item 1A. Risk Factors 63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 64
Item 6. Exhibits 65
     
Signatures 66

 

2

 

 

Part I - Financial Information

 

Item 1.  Consolidated Financial Statements

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

   July 31,   October 31, 
(in thousands)  2015   2014 
Assets          
           
Cash and cash equivalents  $318,800   $385,215 
Investment advisory fees and other receivables   180,827    186,344 
Investments   637,368    624,605 
Assets of consolidated collateralized loan obligation (“CLO”) entity:          
Cash and cash equivalents   73    8,963 
Bank loans and other investments   1,559    147,116 
Other assets   3,549    371 
Deferred sales commissions   22,845    17,841 
Deferred income taxes   43,585    46,099 
Equipment and leasehold improvements, net   45,428    45,651 
Intangible assets, net   57,670    65,126 
Goodwill   237,961    228,876 
Other assets   76,230    103,879 
Total assets  $1,625,895   $1,860,086 

 

See notes to Consolidated Financial Statements.

 

3

 

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

   July 31,   October 31, 
(in thousands, except share data)  2015   2014 
Liabilities, Temporary Equity and Permanent Equity          
           
Liabilities:          
           
Accrued compensation  $135,615   $181,064 
Accounts payable and accrued expenses   64,943    64,598 
Dividend payable   30,931    30,057 
Debt   573,772    573,655 
Liabilities of consolidated CLO entity:          
Senior and subordinated note obligations   4,097    151,982 
Other liabilities   56    298 
Other liabilities   84,667    93,485 
Total liabilities   894,081    1,095,139 
           
Commitments and contingencies          
           
Temporary Equity:          
           
Redeemable non-controlling interests   111,694    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, 116,214,971 and 117,846,273 shares, respectively
   454    460 
Additional paid-in capital   -    - 
Notes receivable from stock option exercises   (8,360)   (8,818)
Accumulated other comprehensive loss   (47,192)   (17,996)
Appropriated retained earnings   1,028    2,467 
Retained earnings   672,538    679,061 
Total Eaton Vance Corp. shareholders’ equity   618,470    655,176 
Non-redeemable non-controlling interests   1,650    2,305 
Total permanent equity   620,120    657,481 
Total liabilities, temporary equity and permanent equity  $1,625,895   $1,860,086 

 

See notes to Consolidated Financial Statements.

 

4

 

 

Eaton Vance Corp.

Consolidated Statements of Income (unaudited)

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands, except per share data)  2015   2014   2015   2014 
Revenue:                    
Investment advisory and administrative fees  $303,625   $311,756   $906,062   $916,605 
Distribution and underwriter fees   20,285    21,548    61,369    64,381 
Service fees   29,265    31,977    87,573    95,097 
Other revenue   2,336    2,309    7,101    5,829 
Total revenue   355,511    367,590    1,062,105    1,081,912 
Expenses:                    
Compensation and related costs   124,400    117,632    364,667    351,110 
Distribution expense   31,300    35,591    167,649    105,924 
Service fee expense   26,978    29,780    81,116    87,266 
Amortization of deferred sales commissions   3,767    4,084    11,187    13,408 
Fund-related expenses   9,446    9,380    27,084    26,288 
Other expenses   42,887    39,945    120,888    117,235 
Total expenses   238,778    236,412    772,591    701,231 
Operating income   116,733    131,178    289,514    380,681 
Non-operating income (expense):                    
Gains (losses) and other investment income, net   (850)   2,917    2,299    2,592 
Interest expense   (7,344)   (7,443)   (22,017)   (22,247)
Other income (expense) of consolidated CLO entities:                    
Gains and other investment income, net   1,771    1,434    5,284    15,247 
Interest and other expense   (1,161)   (1,758)   (2,966)   (13,781)
Total non-operating expense   (7,584)   (4,850)   (17,400)   (18,189)
Income before income taxes and equity in net income of affiliates   109,149    126,328    272,114    362,492 
Income taxes   (43,435)   (48,899)   (104,101)   (138,790)
Equity in net income of affiliates, net of tax   3,260    3,840    9,363    12,344 
Net income   68,974    81,269    177,376    236,046 
Net income attributable to non-controlling and other beneficial interests   (265)   (3,334)   (9,280)   (11,852)
Net income attributable to Eaton Vance Corp. shareholders  $68,709   $77,935   $168,096   $224,194 
Earnings per share:                    
Basic  $0.60   $0.66   $1.45   $1.86 
Diluted  $0.57   $0.63   $1.39   $1.78 
Weighted average shares outstanding:                    
Basic   113,406    116,145    113,890    117,248 
Diluted   118,281    121,013    119,013    122,550 
Dividends declared per share  $0.25   $0.22   $0.75   $0.66 

 

See notes to Consolidated Financial Statements.

 

5

 

 

Eaton Vance Corp.

Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2015   2014   2015   2014 
Net income  $68,974   $81,269   $177,376   $236,046 
                     
Other comprehensive income (loss):                    
Amortization of net gains on derivatives, net of tax   3    4    10    10 
Unrealized holding gains (losses) on available-for-sale investments and reclassification adjustments, net of tax   (1,965)   228    (1,650)   607 
Foreign currency translation adjustments, net of tax   (12,858)   905    (27,556)   (4,948)
                     
Other comprehensive income (loss), net of tax   (14,820)   1,137    (29,196)   (4,331)
                     
Total comprehensive income   54,154    82,406    148,180    231,715 
Comprehensive income attributable to non-controlling and other beneficial interests   (265)   (3,334)   (9,280)   (11,852)
Total comprehensive income attributable to Eaton Vance Corp. shareholders  $53,889   $79,072   $138,900   $219,863 

 

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   -    -    -    -    -    (1,439)   168,096    3,056    169,713    7,663 
Other comprehensive loss   -    -    -    -    (29,196)   -    -    -    (29,196)   - 
Dividends declared  ($0.75 per share)   -    -    -    -    -    -    (88,110)   -    (88,110)   - 
Issuance of Voting Common Stock   -    -    77    -    -    -    -    -    77    - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    7    41,307    (1,182)   -    -    -    -    40,132    - 
Under employee stock purchase plans   -    -    3,324    -    -    -    -    -    3,324    - 
Under employee stock purchase incentive plan   -    -    3,131    -    -    -    -    -    3,131    - 
Under restricted stock plan, net of forfeitures   -    5    -    -    -    -    -    -    5    - 
Stock-based compensation   -    -    52,803    -    -    -    -    -    52,803    - 
Tax benefit of stock option exercises   -    -    7,834    -    -    -    -    -    7,834    - 
Repurchase of Non-Voting Common Stock   -    (18)   (105,708)   -    -    -    (86,509)   -    (192,235)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    1,640    -    -    -    -    1,640    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (3,114)   (3,114)   1,925 
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    -    (357)
Reclass to temporary equity   -    -    -    -    -    -    -    (597)   (597)   597 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    -    (8,368)
Other changes in non-controlling interests   -    -    (2,768)   -    -    -    -    -    (2,768)   2,768 
Balance, July 31, 2015  $2   $454   $-   $(8,360)  $(47,192)  $1,028   $672,538   $1,650   $620,120   $111,694 

 

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   -    -    -    -    -    (2,005)   224,194    4,396    226,585    9,461 
Other comprehensive loss   -    -    -    -    (4,331)   -    -    -    (4,331)   - 
Dividends declared ($0.66 per share)   -    -    -    -    -    -    (79,626)   -    (79,626)   - 
Issuance of Voting Common Stock   -    -    162    -    -    -    -    -    162    - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    7    39,501    (2,216)   -    -    -    -    37,292    - 
Under employee stock purchase plans   -    -    3,709    -    -    -    -    -    3,709    - 
Under employee stock purchase incentive plans   -    -    2,946    -    -    -    -    -    2,946    - 
Under restricted stock plan, net of forfeitures   -    4    -    -    -    -    -    -    4    - 
Stock-based compensation   -    -    46,492    -    -    -    -    -    46,492    - 
Tax benefit of stock option exercises   -    -    12,723    -    -    -    -    -    12,723    - 
Repurchase of Voting Common Stock   -    -    (77)   -    -    -    -    -    (77)   - 
Repurchase of Non-Voting Common Stock   -    (23)   (216,294)   -    -    -    (11,597)   -    (227,914)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    1,769    -    -    -    -    1,769    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (3,996)   (3,996)   2,313 
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    (3,687)   -    -    (3,687)   (4,111)
Reclass to temporary equity   -    -    -    -    -    -    -    (352)   (352)   352 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    -    (6,839)
Issuance of subsidiary equity   -    -    -    -    -    -    -    -    -    9,935 
Other changes in non-controlling interests   -    -    (13,999)   -    -    -    -    -    (13,999)   13,999 
Balance, July 31, 2014  $2   $462   $-   $(7,569)  $(4,508)  $4,557   $674,492   $1,803   $669,239   $99,966 

 

See notes to Consolidated Financial Statements.

 

8

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Nine Months Ended 
   July 31, 
(in thousands)  2015   2014 
Cash Flows From Operating Activities:          
Net income  $177,376   $236,046 
Adjustments to reconcile net income to net cash provided by (used for) operating activities:          
Depreciation and amortization   16,489    15,822 
Amortization of deferred sales commissions   11,195    13,464 
Stock-based compensation   52,803    46,492 
Deferred income taxes   3,219    10,831 
Net losses on investments and derivatives   5,342    2,789 
Equity in net income of affiliates, net of amortization   (9,920)   (14,833)
Dividends received from affiliates   13,092    11,654 
Consolidated CLO entities’ operating activities:          
Net gains on bank loans, other investments and note obligations   (1,654)   (592)
Amortization   (76)   (715)
Net increase (decrease) in other assets and liabilities, including cash   5,146    (128,945)
Changes in operating assets and liabilities:          
Investment advisory fees and other receivables   5,739    (1,090)
Investments in trading securities   (107,205)   (181,897)
Deferred sales commissions   (16,198)   (12,510)
Other assets   12,649    11,376 
Accrued compensation   (45,360)   (27,871)
Accounts payable and accrued expenses   216    10,632 
Other liabilities   34,995    5,376 
Net cash provided by (used for) operating activities   157,848    (3,971)
           
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (8,118)   (5,756)
Net cash paid in acquisition   (9,085)   - 
Proceeds from sale of investments   45,454    77,739 
Purchase of investments   (5,541)   (21,724)
Consolidated CLO entities’ investing activities:          
Proceeds from sales and maturities of bank loans and other investments   144,238    356,985 
Purchase of bank loans and other investments   (1,790)   (248,771)
Net cash provided by investing activities   165,158    158,473 

 

See notes to Consolidated Financial Statements.

 

9

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Nine Months Ended 
   July 31, 
(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    162 
Proceeds from issuance of Non-Voting Common Stock   46,592    43,951 
Repurchase of Voting Common Stock   -    (77)
Repurchase of Non-Voting Common Stock   (192,235)   (227,914)
Principal repayments on notes receivable from stock option exercises   1,640    1,769 
Excess tax benefit of stock option exercises   7,834    12,723 
Dividends paid   (87,374)   (79,928)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   (1,189)   (1,683)
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   (144,166)   (97,769)
Net cash used for financing activities   (387,423)   (253,845)
Effect of currency rate changes on cash and cash equivalents   (1,998)   (546)
Net decrease in cash and cash equivalents   (66,415)   (99,889)
Cash and cash equivalents, beginning of period   385,215    461,906 
Cash and cash equivalents, end of period  $318,800   $362,017 
Supplemental Cash Flow Information:          
Cash paid for interest  $20,169   $19,920 
Cash paid for interest by consolidated CLO entities   2,388    5,943 
Cash paid for income taxes, net of refunds   81,040    107,048 
Supplemental Disclosure of Non-Cash Information:          
Increase in equipment and leasehold improvements due to non-cash additions  $272   $249 
Exercise of stock options through issuance of notes receivable   1,182    2,216 
Acquisition of non-controlling interests through issuance of subsidiary equity   -    9,935 
Non-controlling interest call option exercise recorded in other liabilities   1,190    - 
Deconsolidation of CLO Entity:          
Decrease in other assets, net of other liabilities  $-   $(19,210)
Decrease in investments   -    (411,897)
Decrease in borrowings   -    (427,418)
Net Consolidations (Deconsolidations) of Sponsored Investment Funds:          
Increase (decrease) in investments  $(18,620)  $(4,122)
Increase (decrease) in other assets, net of other liabilities   (18,763)   - 
Increase (decrease) in non-controlling interests   (357)   (4,111)

 

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 nine months ended July 31, 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. Based on the guidance provided in this ASU, all entities are now within the scope of ASC 810, unless a specific scope exception applies. Additional amendments remove the presumption that a general partner controls a limited partnership and place more emphasis on variable interests other than fee arrangements in the consolidation evaluation of variable interest entities (“VIEs”). This ASU also eliminates the deferral under ASU 2010-10 for certain investment funds. 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.

 

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

 

11

 

 

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 August 2015, the FASB issued ASU 2015-14, Revenue From Contracts with Customers (Topic 606), Deferral of the Effective Date, which defers the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) to November 1, 2018 for the Company, with early adoption permitted as of its original effective date of 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 July 31, 2015 and October 31, 2014, as well as the Company’s net interest in these funds:

 

(in thousands)  July 31,
2015
   October 31,
2014
 
Investments  $248,345   $172,413 
Other assets   10,967    19,474 
Other liabilities   (31,284)   (32,559)
Redeemable non-controlling interests   (17,820)   (8,983)
Net interest in consolidated sponsored funds(1)  $210,208   $150,345 

 

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

 

During the nine months ended July 31, 2015 and 2014, the Company deconsolidated two and three sponsored funds, respectively.

 

4.  Investments

 

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

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(in thousands)  July 31,
2015
   October 31,
2014
 
Investment securities, trading:          
Short-term debt  $115,400   $156,972 
Consolidated sponsored funds   248,345    172,413 
Separately managed accounts   71,488    51,660 
Total investment securities, trading   435,233    381,045 
Investment securities, available-for-sale   18,035    30,167 
Investments in non-consolidated CLO entities   9,204    4,033 
Investments in equity method investees   172,019    206,352 
Investments, other   2,877    3,008 
Total investments(1)  $637,368   $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 July 31, 2015 and October 31, 2014:

 

(in thousands)  July 31,
2015
   October 31,
2014
 
Short-term debt  $115,400   $156,972 
Other debt - consolidated sponsored funds and separately managed accounts   142,141    83,824 
Equity securities - consolidated sponsored funds and separately managed accounts   177,692    140,249 
Total investment securities, trading  $435,233   $381,045 

 

During the nine months ended July 31, 2015, the Company seeded investments in nine consolidated sponsored funds and thirteen separately managed accounts. During the nine months ended July 31, 2014, the Company seeded investments in nine consolidated sponsored funds. The Company did not seed any separately managed accounts during the nine months ended July 31, 2014.

 

The Company recognized gains (losses) related to trading securities still held at the reporting date of $(15.0) million and $(0.8) million for the three months ended July 31, 2015 and 2014, respectively, and $(13.8) million and $1.1 million for the nine months ended July 31, 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 July 31, 2015 and October 31, 2014:

 

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July 31, 2015      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $11,538   $6,701   $(204)  $18,035 
                     
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 $0.2 million and $0.4 million for the three months ended July 31, 2015 and 2014, respectively, and $0.4 million and $1.0 million for the nine months ended July 31, 2015 and 2014, respectively.

 

The Company evaluated gross unrealized losses of $0.2 million as of July 31, 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 $5.4 million at July 31, 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 nine months ended July 31, 2015 and 2014:

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2015   2014   2015   2014 
Gains  $7,144   $108   $7,801   $670 
Losses   (3,569)   -    (3,885)   (898)
Net realized gains (losses)  $3,575   $108   $3,916   $(228)

 

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 $143.2 million and $166.0 million at July 31, 2015 and October 31, 2014, respectively.  At July 31, 2015, the Company’s investment in Hexavest consisted of $5.5 million of equity in the net assets of Hexavest, intangible assets of $27.6 million and goodwill of $117.5 million, net of a deferred tax liability of $7.4 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 seven percent equity interest in a private equity partnership managed by a third party that invests in companies in the financial services industry.  The Company’s investment in the partnership was $2.0 million and $4.2 million at July 31, 2015 and October 31, 2014, respectively.

 

The Company had equity method investments in the following Company-sponsored funds as of July 31, 2015 and October 31, 2014:

 

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   Equity Ownership Interest (%)   Carrying Value ($)(1) 
   July 31,   October 31,   July 31,   October 31, 
(dollar amounts in thousands)  2015   2014   2015   2014 
Eaton Vance Tax-Advantaged Bond Strategies 5-to-15 Year Laddered Municipal Bond Fund   42%   -   $26,850   $- 
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            $26,850   $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.  

 

During the nine months ended July 31, 2015 and 2014, the Company received dividends of $13.1 million and $11.7 million, respectively, from its investments in equity method investees. No impairment losses were recognized during either nine month period.

 

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 July 31, 2015 and October 31, 2014:

 

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July 31, 2015                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                     
Financial assets:                         
Cash equivalents  $15,918   $21,559   $-   $-   $37,477 
Investments:                         
Investment securities, trading:                         
Short-term debt   -    115,400    -    -    115,400 
Other debt - consolidated sponsored funds and separately managed accounts   1,814    140,327    -    -    142,141 
Equity - consolidated sponsored funds and separately managed accounts   110,347    67,345    -    -    177,692 
Investment securities, available-for-sale   15,848    2,187    -    -    18,035 
Investments in non-consolidated CLO entities(1)   -    -    -    9,204    9,204 
Investments in equity method investees(2)   -    -    -    172,019    172,019 
Investments, other(3)   -    103    -    2,774    2,877 
Derivative instruments   -    4,464    -    -    4,464 
Assets of consolidated CLO entity:                         
Bank loans and other investments   -    1,559    -    -    1,559 
Total financial assets  $143,927   $352,944   $-   $183,997   $680,868 
                          
Financial liabilities:                         
Derivative instruments  $-   $1,621   $-   $-   $1,621 
Securities sold, not yet purchased   -    6,999    -    -    6,999 
Liabilities of consolidated CLO entity:                         
Senior and subordinated note obligations   -    -    4,097    -    4,097 
Total financial liabilities  $-   $8,620   $4,097   $-   $12,717 

 

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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, interest rate swap 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 and interest rate swap 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 nine months ended July 31, 2015 and 2014:

 

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   Three Months Ended
July 31,
   Nine Months Ended
July 31,
 
(in thousands)  2015   2014   2015   2014 
Transfers from Level 1 into Level 2(1)  $21,538   $1,107   $6,001   $609 
Transfers from Level 2 into Level 1(2)   81    257    91    843 

 

(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 nine months ended July 31, 2015 and 2014:

 

   Three Months Ended   Three Months Ended 
   July 31, 2015   July 31, 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  $43   $123,231   $7   $633,159 
Deconsolidation of senior and subordinated notes and redeemable preferred shares   -    -    -    (419,193)
Net gains (losses) on investments and note obligations included in net income(1)   94    (912)   15    76 
Sales   (137)   -    (9)   - 
Principal paydown   -    (118,222)   -    (33,989)
Ending balance  $-   $4,097   $13   $180,053 
Change in unrealized gains (losses) included in net income relating to assets and liabilities held  $-   $(1,160)  $-   $76 

 

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   Nine Months Ended   Nine Months Ended 
   July 31, 2015   July 31, 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 
Deconsolidation of senior and subordinated notes and redeemable preferred shares   -    -    -    (419,193)
Net gains (losses) on investments and note obligations included in net income(1)   (281)   (2,426)   (171)   (1,059)
Additions(2)   -    1,379    -    - 
Sales   (137)   -    (1,061)   - 
Amortization of original issue discount on senior notes   -    -    -    75 
Principal paydown   -    (144,166)   -    (97,769)
Transfers out of Level 3(3)   (383)   -    -    - 
Ending balance  $-   $4,097   $13   $180,053 
Change in unrealized gains (losses) included in net income relating to assets and liabilities held  $-   $(2,689)  $-   $(1,346)

 

(1)Substantially all net gains (losses) on investments, note obligations and redeemable preferred shares attributable to the assets and borrowings of the Company’s consolidated CLO entity are allocated to non-controlling and other beneficial interests on the Company’s Consolidated Statements of Income.
(2)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.

 

As discussed in Note 8, the senior notes were paid down in full in the third quarter of fiscal 2015 in conjunction with a subordinated note holder vote to liquidate the consolidated CLO entity.

 

The fair value of the subordinated notes as of July 31, 2015 was determined based on the fair value of the net assets of the consolidated CLO entity as of that date, less the residual value attributable to the incentive collateral management fee. 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 October 31, 2014:

 

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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
Senior and subordinated          Default rate   200 bps
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 July 31, 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 nine months ended July 31, 2015 and 2014, the Company reclassified into interest expense $0.2 million of this deferred gain. At July 31, 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 July 31, 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 nine months ended July 31, 2015 and 2014, the Company reclassified into interest expense $0.2 million of deferred losses on this Treasury lock. At July 31, 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, total return swap contracts and interest rate swap contracts to hedge currency risk and market risk associated with its investments in certain consolidated 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 July 31, 2015 and October 31, 2014, excluding derivative financial instruments held in certain consolidated sponsored funds and separately managed accounts, the Company had 29 and 39 foreign exchange contracts outstanding with four counterparties with an aggregate notional value of $31.4 million and $16.8 million, respectively; 1,725 and 2,091 stock index futures contracts outstanding with one counterparty with an aggregate notional value of $151.2 million and $177.3 million, respectively; 289 and 566 commodity futures contracts outstanding with one counterparty with an aggregate notional value of $13.9 million and $32.3 million, respectively; and 55 and 122 interest rate futures contracts outstanding with one counterparty with an aggregate notional value of $5.6 million and $12.4 million, respectively. At July 31, 2015, the Company had seven total return swap contracts outstanding with one counterparty with an aggregate notional value of $41.7 million and one interest rate swap contract with one counterparty with an aggregate notional value of $2.9 million. As of October 31, 2014, the Company did not have any total return swap contracts or interest rate swap contracts outstanding. The number of derivative contracts outstanding and the notional values they represent at July 31, 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 July 31, 2015 and October 31, 2014:  

 

July 31, 2015              
   Assets    Liabilities  
(in thousands)  Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $897   Other liabilities  $278 
Stock index futures contracts  Other assets   2,217   Other liabilities   887 
Commodity futures contracts  Other assets   1,288   Other liabilities   362 
Interest rate futures contracts  Other assets   -   Other liabilities   46 
Total return swap contracts  Other assets   62   Other liabilities   40 
Interest rate swap contracts  Other assets   -   Other liabilities   8 
Total     $4,464      $1,621 

 

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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 nine months ended July 31, 2015 and 2014:

 

   Income Statement  Three Months Ended
July 31,
   Nine Months Ended
July 31,
 
(in thousands)  Location  2015   2014   2015   2014 
Foreign exchange contracts  Gains (losses) and other investment income, net  $1,039   $(103)  $1,489   $35 
Stock index futures contracts  Gains (losses) and other investment income, net   3,281    (3,772)   (4,027)   (11,310)
Commodity futures contracts  Gains (losses) and other investment income, net   866    431    3,190    (892)
Interest rate futures contracts  Gains (losses) and other investment income, net   135    -    (123)   - 
Total return swap contracts  Gains (losses) and other investment income, net   549    -    (105)   - 
Interest rate swap contracts  Gains (losses) and other investment income, net   (8)   -    (8)   - 
Total     $5,862   $(3,444)  $416   $(12,167)

 

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 July 31, 2015 and October 31, 2014:

 

   July 31, 2015       October 31, 2014     
(in thousands)  Carrying
Value
   Fair
Value
   Fair
Value
Level
   Carrying
Value
   Fair
Value
   Fair
Value
Level
 
Investments, other  $2,774   $2,774    3   $2,947   $2,947    3 
Other assets  $6,381   $6,381    3   $7,363   $7,363    3 
Debt  $573,772   $602,847    2   $573,655   $611,015    2 

 

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Included in investments, other, is a non-controlling capital interest in Atlanta Capital Management Holdings, LLC (“ACM Holdings”) carried at $1.1 million and $1.3 million at July 31, 2015 and October 31, 2014, respectively. The carrying value of this investment approximates fair value.  Fair value of this investment is determined using 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 July 31, 2015 and October 31, 2014 is an option exercisable in 2017 to acquire an additional 26 percent interest in Hexavest carried at $6.4 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

 

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 July 31, 2015, the Company deems itself to be the primary beneficiary of one non-recourse CLO entity, Eaton Vance CLO IX. 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.

 

During the third quarter of fiscal 2015, a majority of the holders of the subordinated notes elected to liquidate Eaton Vance CLO IX, with redemption occurring nearly in full on the scheduled July 20, 2015 payment date. The Company continues to manage the remaining collateral assets of Eaton Vance CLO IX.

 

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.

 

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Eaton Vance CLO IX

 

The following tables present, as of July 31, 2015 and October 31, 2014, the fair value of Eaton Vance CLO IX’s assets and liabilities that are subject to fair value accounting:

 

July 31, 2015            
   CLO Bank Loan Investments     
(in thousands)  Total CLO
bank loan
investments
   90 days or
more past
due
   Subordinated
note obligations
 
Unpaid principal balance  $1,832   $-   $21,358 
Unpaid principal balance over fair value   (781)   -    (17,261)
Fair value  $1,051   $-   $4,097 

 

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 

 

Changes in the fair values of Eaton Vance CLO IX’s bank loans and other investments resulted in net losses of $2.9 million and $0.1 million during the three months ended July 31, 2015 and 2014, respectively, while changes in the fair value of Eaton Vance CLO IX’s note obligations resulted in net gains (losses) of $3.6 million and $(0.1) million, respectively.  The combined net gains (losses) of $0.7 million and $(0.2) million for the three months ended July 31, 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 $3.2 million and $0.3 million during the nine months ended July 31, 2015 and 2014, respectively, while changes in the fair value of Eaton Vance CLO IX’s note obligations resulted in net gains (losses) of $5.1 million and $(1.4) million, respectively.  The combined net gains (losses) of $1.9 million and $(1.7) million for the nine months ended July 31, 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.  

 

During the nine months ended July 31, 2015 and 2014, $144.2 million and $97.8 million, respectively, of prepayments were used to pay down the entity’s senior and subordinated note obligations. The entity’s senior notes were paid down in full as a result of a majority of the holders of the subordinated notes electing to liquidate Eaton Vance CLO IX during the third quarter of fiscal 2015.

 

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For the three months ended July 31, 2015 and 2014, the Company recorded net gains (losses) of $0.4 million and $(0.3) million, respectively, related to Eaton Vance CLO IX. The Company recorded net losses attributable to other beneficial interests of $2.8 million and $0.9 million for the three months ended July 31, 2015 and 2014, respectively.  Net income attributable to Eaton Vance Corp. shareholders was $3.2 million and $0.6 million for the three months ended July 31, 2015 and 2014, respectively.

 

For the nine months ended July 31, 2015 and 2014, the Company recorded net gains (losses) of $2.0 million (including the loss on disposal of its subordinated interest of $(0.3) million) and $(0.7) million, respectively, related to Eaton Vance CLO IX. The Company recorded net losses attributable to other beneficial interests of $1.4 million and $3.0 million for the nine months ended July 31, 2015 and 2014, respectively.  Net income attributable to Eaton Vance Corp. shareholders was $3.4 million and $2.3 million for the nine months ended July 31, 2015 and 2014, respectively.

 

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

 

   July 31,   October 31, 
(in thousands)  2015   2014 
Assets:          
Cash and cash equivalents  $73   $8,963 
Bank loans and other investments   1,559    147,116 
Other assets   3,549    371 
Liabilities:          
Senior and subordinated note obligations   4,097    151,982 
Other liabilities   56    298 
Appropriated retained earnings   1,028    2,467 
Net interest in Eaton Vance CLO IX  $-   $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 nine months ended July 31, 2014, approximately $4.8 million of organizational and structuring costs associated with the closing of Eaton Vance CLO 2013-1 were recorded in interest and other expense of consolidated CLO entities in the Company’s Consolidated Statement of Income.

 

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

 

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

 

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.

 

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.

 

Non-consolidated CLO entities had total assets of $2.3 billion and $2.4 billion as of July 31, 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 $9.2 million and $4.0 million as of July 31, 2015 and October 31, 2014, respectively. Collateral management fees receivable for these entities totaled $1.9 million and $2.6 million on July 31, 2015 and October 31, 2014, respectively. In the first nine 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 July 31, 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 $12.3 billion and $11.3 billion as of July 31, 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, 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

 

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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 $2.2 million and $6.6 million on July 31, 2015 and October 31, 2014, respectively, and investment advisory fees receivable totaling $0.7 million and $0.6 million on July 31, 2015 and October 31, 2014, respectively. In the first nine 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 advisory fees receivable from, the entities as of July 31, 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 July 2015, the Company exercised a call option requiring the non-controlling interest holders of Atlanta Capital to sell a 0.2 percent profit interest in Atlanta Capital related to the original acquisition of the Company for $1.4 million. The transaction settled in August 2015. 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.

 

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 13.1 percent on July 31, 2015, reflecting the put and call transactions described above and 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 July 31, 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

 

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(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 July 31, 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 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 July 31, 2015 and October 31, 2014:

 

July 31, 2015            
(in thousands)  Gross
carrying
amount
   Accumulated
amortization
   Net
carrying
amount
 
             
Amortizing intangible assets:               
Client relationships acquired  $133,927   $(84,230)  $49,697 
Intellectual property acquired   1,000    (303)   697 
Trademark acquired   900    (332)   568 
                
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   6,708    -    6,708 
Total  $142,535   $(84,865)  $57,670 

 

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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 $2.8 million and $2.4 million for the three months ended July 31, 2015 and 2014 respectively, and $7.5 million and $7.1 million for the nine months ended July 31, 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:

 

Year Ending October 31,  Estimated
Amortization
 
(in thousands)  Expense 
Remaining 2015  $2,237 
2016   8,647 
2017   8,534 
2018   8,505 
2019   4,529 
2020   3,508 

 

11.  Stock-Based Compensation Plans

 

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

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2015   2014   2015   2014 
Omnibus Incentive Plans:                    
Stock options  $4,718   $4,541   $13,347   $12,733 
Restricted shares   11,637    10,606    31,811    27,051 
Phantom stock units   48    62    197    176 
Employee Stock Purchase Plans   444    224    624    607 
Employee Stock Purchase Incentive Plans   68    56    470    335 
Atlanta Capital Plan   601    579    1,891    1,805 
Parametric Plan   1,550    997    4,660    3,961 
Total stock-based compensation expense  $19,066   $17,065   $53,000   $46,668 

 

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The total income tax benefit recognized for stock-based compensation arrangements was $6.1 million and $5.5 million for the three months ended July 31, 2015 and 2014, respectively, and $17.6 million and $15.4 million for the nine months ended July 31, 2015 and 2014, respectively.

 

Stock Options 

Stock option transactions under the Company’s Omnibus Incentive Plans for the nine months ended July 31, 2015 are summarized as follows:

 

(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   2,782    36.99           
Exercised   (1,600)   25.82           
Forfeited/expired   (80)   35.74           
Options outstanding, end of period   22,994   $31.58    4.8   $187,798 
Options exercisable, end of period   14,736   $30.74    3.1   $138,416 
Vested or expected to vest at July 31, 2015   22,952   $31.58    4.8   $187,697 

 

The Company received $40.1 million and $37.3 million related to the exercise of options for the nine months ended July 31, 2015 and 2014, respectively.

 

As of July 31, 2015, there was $48.3 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 2.5 years.

 

Restricted Shares 

A summary of the Company’s restricted share activity for the nine months ended July 31, 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   1,420    37.45 
Vested   (1,056)   30.15 
Forfeited   (98)   34.43 
Unvested, end of period   4,050   $34.41 

 

As of July 31, 2015, there was $97.9 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 2.9 years.  

 

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Phantom Stock Units 

During the nine months ended July 31, 2015, 7,075 phantom stock units were issued to non-employee Directors pursuant to the Company’s 2013 Omnibus Incentive Plan. As of July 31, 2015, there was $0.2 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 1.1 years.

 

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 nine months of fiscal 2015, the Company purchased and retired approximately 2.1 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 5.9 million additional shares may be repurchased under the current repurchase authorization as of July 31, 2015.

 

13. Non-operating Income (Expense)

 

The components of non-operating income (expense) for the three and nine months ended July 31, 2015 and 2014 were as follows:

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2015   2014   2015   2014 
Non-operating income (expense):                    
Interest and other income  $2,090   $2,777   $7,770   $6,328 
Net gains (losses) on investments and derivatives   (2,172)   120    (5,342)   (2,789)
Net foreign currency gains (losses)   (768)   20    (129)   (947)
Gains (losses) and other investment income, net   (850)   2,917    2,299    2,592 
Interest expense   (7,344)   (7,443)   (22,017)   (22,247)
                     
Other income (expense) of consolidated CLO entities:                    
Interest income   1,031    1,695    3,630    14,655 
Net gains (losses) on bank loans, other investments, note obligations and preferred shares   740    (261)   1,654    592 
Gains and other investment income, net   1,771    1,434    5,284    15,247 
Structuring and closing fees   -    -    -    (4,847)
Interest expense   (1,161)   (1,758)   (2,966)   (8,934)
Interest and other expenses   (1,161)   (1,758)   (2,966)   (13,781)
Total non-operating expense  $(7,584)  $(4,850)  $(17,400)  $(18,189)

 

14.  Income Taxes

 

The provision for income taxes was $43.4 million and $48.9 million, or 39.8 percent and 38.7 percent of pre-tax income, for the three months ended July 31, 2015 and 2014, respectively.  The provision for income taxes was $104.1 million and $138.8 million, or 38.3 percent of pre-tax income, for both the nine months

 

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ended July 31, 2015 and 2014.  The provision for income taxes in the three and nine months ended July 31, 2015 and 2014 is comprised of federal, state, and foreign taxes. The difference between the Company’s effective tax rate and the statutory federal rate of 35.0 percent for each period presented reflects state income taxes, non-controlling interests and the tax benefit of disqualifying dispositions of incentive stock options.

 

The Company records a valuation allowance when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.  There was no valuation allowance recorded as of July 31, 2015 or October 31, 2014.

 

The Company considers the undistributed earnings of its Canadian and Australian subsidiaries as of July 31, 2015 to be indefinitely reinvested in foreign operations. Accordingly, no U.S. income taxes have been provided thereon. As of July 31, 2015, the Company had approximately $31.0 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 $3.6 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 2011.

 

15.  Non-controlling and Other Beneficial Interests

 

The components of net income attributable to non-controlling and other beneficial interests for the three and nine months ended July 31, 2015 and 2014 were as follows:

 

   Three Months Ended   Nine Months Ended 
   July 31,   July 31, 
(in thousands)  2015   2014   2015   2014 
Consolidated sponsored funds  $1,027   $(42)  $1,226   $(259)
Majority-owned subsidiaries   (4,066)   (4,261)   (11,742)   (11,268)
Non-controlling interest value adjustments(1)   (6)   59    (203)   (2,330)
Consolidated CLO entities   2,780    910    1,439    2,005 
Net income attributable to non-controlling and other beneficial interests  $(265)  $(3,334)  $(9,280)  $(11,852)

 

(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 July 31, 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 (3)
   Total 
Balance at April 30, 2015  $668   $5,943   $(38,983)  $(32,372)
Other comprehensive income (loss) before reclassifications and tax   -    210    (13,142)   (12,932)
Tax impact   -    (81)   -    (81)
Reclassification adjustments, before tax   5    (3,422)   463    (2,954)
Tax impact   (2)   1,328    (179)   1,147 
Net current period other comprehensive income (loss)   3    (1,965)   (12,858)   (14,820)
Balance at July 31, 2015  $671   $3,978   $(51,841)  $(47,192)
                     
Balance at April 30, 2014  $654   $4,883   $(11,182)  $(5,645)
Other comprehensive income (loss) before reclassifications and tax   -    480    1,472    1,952 
Tax impact   -    (185)   (567)   (752)
Reclassification adjustments, before tax   6    (109)   -    (103)
Tax impact   (2)   42    -    40 
Net current period other comprehensive income   4    228    905    1,137 
Balance at July 31, 2014  $658   $5,111   $(10,277)  $(4,508)

 

The components of accumulated other comprehensive income (loss), net of tax, for the nine months ended July 31, 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 (3)
   Total 
Balance at October 31, 2014  $661   $5,628   $(24,285)  $(17,996)
Other comprehensive income (loss) before reclassifications and tax   -    356    (27,745)   (27,389)
Tax impact   -    (133)   (95)   (228)
Reclassification adjustments, before tax   16    (2,992)   463    (2,513)
Tax impact   (6)   1,119    (179)   934 
Net current period other comprehensive income (loss)   10    (1,650)   (27,556)   (29,196)
Balance at July 31, 2015  $671   $3,978   $(51,841)  $(47,192)
                     
Balance at October 31, 2013  $648   $4,504   $(5,329)  $(177)
Other comprehensive income (loss) before reclassifications and tax   -    897    (8,078)   (7,181)
Tax impact   -    (367)   3,130    2,763 
Reclassification adjustments, before tax   16    130    -    146 
Tax impact   (6)   (53)   -    (59)
Net current period other comprehensive income (loss)   10    607    (4,948)   (4,331)
Balance at July 31, 2014  $658   $5,111   $(10,277)  $(4,508)

 

(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 that were recorded in gains (losses) and other investment income, net, on the Consolidated Statements of Income.
(3)Amounts reclassified from accumulated other comprehensive income (loss), net of tax, represent the realization of foreign currency translation losses on a consolidated sponsored fund denominated in Euros that was deconsolidated during the third quarter of fiscal 2015. These amounts 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 nine months ended July 31, 2015 and 2014 using the two-class method:

 

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   Three Months Ended  Nine Months Ended
   July 31,  July 31,
(in thousands, except per share data)  2015  2014  2015  2014
Net income attributable to Eaton Vance Corp. shareholders  $68,709   $77,935   $168,096   $224,194 
Less: Allocation of earnings to participating restricted shares   1,115    1,882    2,881    5,678 
Net income available to common shareholders  $67,594   $76,053   $165,215   $218,516 
Weighted-average shares outstanding – basic   113,406    116,145    113,890    117,248 
Incremental common shares   4,875    4,868    5,123    5,302 
Weighted-average shares outstanding – diluted   118,281    121,013    119,013    122,550 
Earnings per share:                    
Basic  $0.60   $0.66   $1.45   $1.86 
Diluted  $0.57   $0.63   $1.39   $1.78 

 

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 4.8 million for the three months ended July 31, 2015 and 2014, respectively, and approximately 7.8 million and 5.1 million for the nine months ended July 31, 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 July 31, 2015, the Company has $7.0 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 nine months ended July 31, 2015 and 2014 are as follows:

 

   Three Months Ended  Nine Months Ended
   July 31,  July 31,
(in thousands)  2015  2014  2015  2014
Investment advisory and administrative fees  $220,329   $229,099   $657,721   $673,995 
Distribution fees   18,538    19,621    55,678    58,488 
Service fees   29,265    31,977    87,573    95,097 
Shareholder services fees   599    493    2,016    1,732 
Other revenue  599    835    1,914   1,567 
Total  $269,330   $282,025   $804,902   $830,879 

 

For the three months ended July 31, 2015 and 2014, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $3.0 million and $3.1 million, respectively, of investment advisory fees it was otherwise entitled to receive. For the nine months ended July 31, 2015 and 2014, the Company waived $9.4 million and $8.6 million, respectively, of investment advisory fees it was otherwise entitled to receive.

 

Sales proceeds and net realized gains (losses) for three and nine months ended July 31, 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  Nine Months Ended
   July 31,  July 31,
(in thousands)  2015  2014  2015  2014
Proceeds from sales  $2,653   $682   $34,700   $64,533 
Net realized gains (losses)   3,575    108    3,916    (228)

 

The Company bears the non-advisory expenses of certain sponsored funds for which it earns an all-in management fee and provides subsidies to startup and other smaller sponsored funds to enhance their competitiveness. For the three months ended July 31, 2015 and 2014, expenses of $6.2 million and $5.8 million, respectively, were incurred by the Company pursuant to these arrangements. For the nine months ended July 31, 2015 and 2014, expenses of $16.7 million and $16.2 million were incurred by the Company pursuant to these arrangements.

 

Included in investment advisory fees and other receivables at July 31, 2015 and October 31, 2014 are receivables due from sponsored funds of $93.5 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 $8.4 million and $8.8 million at July 31, 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 July 31, 2015, we had $312.6 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 third quarter and first nine months of fiscal 2015, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of -0.2% and 4.3%, 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 -0.6% and 1.4%, respectively.

 

Our ending consolidated assets under management increased by $1.5 billion from the end of the prior quarter to $312.6 billion on July 31, 2015, reflecting net inflows partially offset by market declines. Consolidated net inflows of $3.9 billion in the third quarter of fiscal 2015 represent a 5 percent annualized internal growth rate. For comparison, the Company had consolidated net outflows of $2.0 billion in the third quarter of fiscal 2014. Average consolidated assets under management increased from the prior quarter by 2 percent, or $6.4 billion, to $309.8 billion in the third 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 impact the average effective fee rates earned on our assets under management. Our overall average annualized effective fee rate decreased to 46 basis points in both the third quarter and first nine months of fiscal 2015 from 51 basis

 

40

 

 

points in the third quarter of fiscal 2014 and 50 basis points in the first nine months of fiscal 2014. Our average annualized effective investment advisory and administrative fee rate similarly decreased to 39 and 40 basis points, respectively, in the third quarter and first nine months of fiscal 2015 from 43 basis points in both the third quarter and first nine months of fiscal 2014.

 

During the third quarter of fiscal 2015, the Company and its wholly owned subsidiary Navigate Fund Solutions LLC (“Navigate”) made further progress advancing NextShares toward market introduction. In July, the U.S. Securities and Exchange Commission (“SEC”) approved the listing and trading of the 18 initial Eaton Vance NextShares funds on the NASDAQ Stock Market LLC (“Nasdaq”). To date, 11 fund advisers, including Eaton Vance, have indicated their intent to offer NextShares funds by entering into preliminary agreements with Navigate and filing request for exemptive relief with the SEC. These 11 firms collectively manage approximately $500 billion in mutual fund assets. Following the end of the third quarter, Envestnet, Inc. announced an initiative to make NextShares available on its advisor platform. Envestnet is a leading provider of unified wealth management technology and services to financial advisors, supporting over 41,000 advisors.

 

Consolidated Assets under Management

 

Consolidated assets under management of $312.6 billion on July 31, 2015 increased $24.4 billion, or 8 percent, from the $288.2 billion reported a year earlier. Fund net outflows of $4.3 billion over the last twelve months reflect gross inflows $31.2 billion offset by outflows of $35.5 billion. Institutional separate account net inflows were $17.3 billion, high-net-worth separate account net inflows were $2.0 billion and retail managed account net inflows were $3.8 billion over the past twelve months. Net price appreciation in managed assets increased assets under management by $5.5 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)

 

   July 31,   
(in millions)  2015  % of Total  2014  % of Total  %
Change
Equity(3)  $93,366    30%  $95,668    33%   -2%
Fixed income(4)   51,266    16%   44,474    16%   15%
Floating-rate income   37,220    12%   43,752    15%   -15%
Alternative   10,333    3%   11,691    4%   -12%
Portfolio implementation   59,234    19%   46,954    16%   26%
Exposure management(5)   61,137    20%   45,655    16%   34%
Total  $312,556    100%  $288,194    100%   8%

 

(1)Consolidated Eaton Vance Corp. See table on page 46 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 the equity category for the period ended July 31, 2014.

 

Equity assets under management included $32.4 billion and $31.0 billion of assets managed for after-tax returns on July 31, 2015 and 2014, respectively. Portfolio implementation assets under management included $39.4 billion and $32.9 billion of assets managed for after-tax returns on July 31, 2015 and 2014, respectively. Fixed income assets included $29.5 billion and $26.2 billion of municipal income assets on July 31, 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 nine months ended July 31, 2015 and 2014:

 

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Consolidated Net Flows by Investment Mandate(1)

 

   Three Months Ended     Nine Months Ended   
   July 31,  %  July 31,  %
(in millions)  2015  2014  Change  2015  2014  Change
Equity assets - beginning of period(2)  $97,167   $93,733    4%  $96,379   $93,585    3%
Sales and other inflows   5,191    3,451    50%   13,670    10,905    25%
Redemptions/outflows   (8,371)   (4,052)   107%   (17,876)   (14,688)   22%
Net flows   (3,180)   (601)   429%   (4,206)   (3,783)   11%
Exchanges   (19)   16    NM(3)    40    548    -93%
Market value change   (602)   2,520    NM    1,153    5,318    -78%
Equity assets - end of period  $93,366   $95,668    -2%  $93,366   $95,668    -2%
Fixed income assets - beginning of period(4)   49,690    44,094    13%   46,062    44,414    4%
Sales and other inflows   5,370    3,344    61%   13,997    8,421    66%
Redemptions/outflows   (3,212)   (3,299)   -3%   (8,158)   (9,336)   -13%
Net flows   2,158    45    NM    5,839    (915)   NM 
Exchanges   (27)   59    NM    52    22    136%
Market value change   (555)   276    NM    (687)   953    NM 
Fixed income assets - end of period  $51,266   $44,474    15%  $51,266   $44,474    15%
Floating-rate income assets - beginning of period   38,269    45,115    -15%   42,009    41,821    0%
Sales and other inflows   2,032    4,139    -51%   6,720    13,095    -49%
Redemptions/outflows   (2,554)   (5,491)   -53%   (10,941)   (11,038)   -1%
Net flows   (522)   (1,352)   -61%   (4,221)   2,057    NM 
Exchanges   2    (62)   NM    (124)   (57)   118%
Market value change   (529)   51    NM    (444)   (69)   543%
Floating-rate income assets - end of period  $37,220   $43,752    -15%  $37,220   $43,752    -15%
Alternative assets - beginning of period   10,582    12,112    -13%   11,241    15,212    -26%
Sales and other inflows   721    774    -7%   2,351    2,630    -11%
Redemptions/outflows   (869)   (1,208)   -28%   (3,076)   (6,164)   -50%
Net flows   (148)   (434)   -66%   (725)   (3,534)   -79%
Exchanges   45    (15)   NM    27    (83)   NM 
Market value change   (146)   28    NM    (210)   96    NM 
Alternative assets - end of period  $10,333   $11,691    -12%  $10,333   $11,691    -12%
Portfolio implementation assets - beginning of period   52,879    45,753    16%   48,008    42,992    12%
Sales and other inflows   8,395    2,320    262%   14,493    6,320    129%
Redemptions/outflows   (1,988)   (2,061)   -4%   (5,352)   (5,519)   -3%
Net flows   6,407    259    NM    9,141    801    NM 
Exchanges   -    (4)   NM    -    (462)   NM 
Market value change   (52)   946    NM    2,085    3,623    -42%
Portfolio implementation assets - end of period  $59,234   $46,954    26%  $59,234   $46,954    26%
Exposure management assets - beginning of period(5)   62,459    45,062    39%   54,036    42,645    27%
Sales and other inflows   11,113    12,123    -8%   42,668    37,093    15%
Redemptions/outflows   (11,909)   (12,069)   -1%   (36,391)   (35,726)   2%
Net flows   (796)   54    NM    6,277    1,367    359%
Market value change   (526)   539    NM    824    1,643    -50%
Exposure management assets - end of period  $61,137   $45,655    34%  $61,137   $45,655    34%
Total fund and separate account assets - beginning of period   311,046    285,869    9%   297,735    280,669    6%
Sales and other inflows   32,822    26,151    26%   93,899    78,464    20%
Redemptions/outflows   (28,903)   (28,180)   3%   (81,794)   (82,471)   -1%
Net flows   3,919    (2,029)   NM    12,105    (4,007)   NM 
Exchanges   1    (6)   NM    (5)   (32)   -84%
Market value change   (2,410)   4,360    NM    2,721    11,564    -76%
Total assets under management - end of period  $312,556   $288,194    8%  $312,556   $288,194    8%

 

(1)Consolidated Eaton Vance Corp. See table on page 46 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)Not meaningful (“NM”).
(4)Includes assets in cash management accounts.
(5)Category includes amounts reclassified from the equity category for the three and nine months ended July 31, 2014.

 

43

 

 

Consolidated Net Flows by Investment Vehicle(1)

 

   Three Months Ended     Nine Months Ended   
   July 31,  %  July 31,  %
(in millions)  2015  2014  Change  2015  2014  Change
Fund assets - beginning of period(2)  $132,161   $135,119    -2%  $134,564   $133,401    1%
Sales and other inflows   7,016    8,634    -19%   23,385    27,552    -15%
Redemptions/outflows   (7,570)   (10,272)   -26%   (26,698)   (29,285)   -9%
Net flows   (554)   (1,638)   -66%   (3,313)   (1,733)   91%
Exchanges   1    (6)   NM    185    41    351%
Market value change   (1,397)   1,681    NM    (1,225)   3,447    NM 
Fund assets - end of period  $130,211   $135,156    -4%  $130,211   $135,156    -4%
Institutional separate account assets - beginning of period(3)   115,942    96,564    20%   106,443    95,724    11%
Sales and other inflows   21,764    14,717    48%   57,678    42,620    35%
Redemptions/outflows   (18,424)   (14,912)   24%   (47,323)   (44,633)   6%
Net flows   3,340    (195)   NM    10,355    (2,013)   NM 
Exchanges   (34)   377    NM    (207)   281    NM 
Market value change   (1,162)   1,647    NM    1,495    4,401    -66%
Institutional separate account assets - end of period  $118,086   $98,393    20%  $118,086   $98,393    20%
High-net-worth separate account assets - beginning of period   24,226    20,968    16%   22,235    19,699    13%
Sales and other inflows   1,177    794    48%   3,803    2,476    54%
Redemptions/outflows   (877)   (953)   -8%   (2,291)   (3,045)   -25%
Net flows   300    (159)   NM    1,512    (569)   NM 
Exchanges   -    (433)   NM    (94)   (31)   203%
Market value change   (34)   475    NM    839    1,752    -52%
High-net-worth separate account assets - end of period  $24,492   $20,851    17%  $24,492   $20,851    17%
Retail managed account assets - beginning of period   38,717    33,218    17%   34,493    31,845    8%
Sales and other inflows   2,865    2,006    43%   9,033    5,816    55%
Redemptions/outflows   (2,032)   (2,043)   -1%   (5,482)   (5,508)   0%
Net flows   833    (37)   NM    3,551    308    NM 
Exchanges   34    56    -39%   111    (323)   NM 
Market value change   183    557    -67%   1,612    1,964    -18%
Retail managed account assets - end of period  $39,767   $33,794    18%  $39,767   $33,794    18%
Total fund and separate account assets - beginning of period   311,046    285,869    9%   297,735    280,669    6%
Sales and other inflows   32,822    26,151    26%   93,899    78,464    20%
Redemptions/outflows   (28,903)   (28,180)   3%   (81,794)   (82,471)   -1%
Net flows   3,919    (2,029)   NM    12,105    (4,007)   NM 
Exchanges   1    (6)   NM    (5)   (32)   -84%
Market value change   (2,410)   4,360    NM    2,721    11,564    -76%
Total assets under management - end of period  $312,556   $288,194    8%  $312,556   $288,194    8%

 

(1)Consolidated Eaton Vance Corp. See table on page 46 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.

 

44

 

 

The following table summarizes our consolidated assets under management by investment affiliate as of July 31, 2015 and 2014:

 

Consolidated Assets under Management by Investment Affiliate (1)

 

   July 31,  %
(in millions)  2015  2014  Change
Eaton Vance Management (2)  $142,987   $143,373    0%
Parametric   150,983    126,741    19%
Atlanta Capital   18,586    18,080    3%
Total  $312,556   $288,194    8%

 

(1)Consolidated Eaton Vance Corp. See table on page 46 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 July 31, 2015, 49 percent-owned affiliate Hexavest Inc. (“Hexavest”) managed $14.8 billion of client assets, a decrease of 13 percent from the $17.0 billion of managed assets on July 31, 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 nine months ended July 31, 2015 and 2014:

 

45

 

 

Hexavest Assets under Management and Net Flows

 

   Three Months Ended     Nine Months Ended   
   July 31,  %  July 31,  %
(in millions)  2015  2014  Change  2015  2014  Change
Eaton Vance distributed:                              
Eaton Vance sponsored funds - beginning of period(1)  $247   $221    12%  $227   $211    8%
Sales and other inflows   2    6    -67%   21    49    -57%
Redemptions/outflows   (6)   (10)   -40%   (15)   (53)   -72%
Net flows   (4)   (4)   0%   6    (4)   NM 
Market value change   (4)   4    NM    6    14    -57%
Eaton Vance sponsored funds - end of period  $239   $221    8%  $239   $221    8%
Eaton Vance distributed separate accounts - beginning of period(2)   2,401    2,354    2%   2,367    1,574    50%
Sales and other inflows   11    136    -92%   395    519    -24%
Redemptions/outflows   (39)   (122)   -68%   (475)   (201)   136%
Net flows   (28)   14    NM    (80)   318    NM 
Exchanges   -    -    0%   -    389    NM 
Market value change   (11)   29    NM    75    116    -35%
Eaton Vance distributed separate accounts - end of period  $2,362   $2,397    -1%  $2,362   $2,397    -1%
Total Eaton Vance distributed - beginning of period   2,648    2,575    3%   2,594    1,785    45%
Sales and other inflows   13    142    -91%   416    568    -27%
Redemptions/outflows   (45)   (132)   -66%   (490)   (254)   93%
Net flows   (32)   10    NM    (74)   314    NM 
Exchanges   -    -    0%   -    389    NM 
Market value change   (15)   33    NM    81    130    -38%
Total Eaton Vance distributed - end of period  $2,601   $2,618    -1%  $2,601   $2,618    -1%
Hexavest directly distributed - beginning of period(3)   12,999    14,477    -10%   14,101    15,136    -7%
Sales and other inflows   286    597    -52%   711    1,392    -49%
Redemptions/outflows   (780)   (904)   -14%   (2,804)   (2,546)   10%
Net flows   (494)   (307)   61%   (2,093)   (1,154)   81%
Exchanges   -    -    0%   -    (389)   NM 
Market value change   (297)   253    NM    200    830    -76%
Hexavest directly distributed - end of period  $12,208   $14,423    -15%  $12,208   $14,423    -15%
Total Hexavest assets - beginning of period   15,647    17,052    -8%   16,695    16,921    -1%
Sales and other inflows   299    739    -60%   1,127    1,960    -43%
Redemptions/outflows   (825)   (1,036)   -20%   (3,294)   (2,800)   18%
Net flows   (526)   (297)   77%   (2,167)   (840)   158%
Market value change   (312)   286    NM    281    960    -71%
Total Hexavest assets - end of period  $14,809   $17,041    -13%  $14,809   $17,041    -13%

 

(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.

 

46

 

 

Consolidated Ending Assets under Management by Asset Class(1)

 

   July 31,   
(in millions)  2015  % of
Total
  2014  % of
Total
  %
Change
Open-end funds:                         
Class A  $24,746    8%  $28,644    10%   -14%
Class B   336    0%   529    0%   -36%
Class C   9,229    3%   9,567    3%   -4%
Class I(2)   41,049    13%   41,613    14%   -1%
Class N   1,518    0%   1,904    1%   -20%
Class R   518    0%   428    0%   21%
Other   1,536    1%   1,918    1%   -20%
Total open-end funds   78,932    25%   84,603    29%   -7%
Private funds(3)   26,202    9%   25,173    9%   4%
Closed-end funds   25,077    8%   25,380    9%   -1%
Total fund assets   130,211    42%   135,156    47%   -4%
Institutional account assets(4)   118,086    38%   98,393    34%   20%
High-net-worth account assets   24,492    8%   20,851    7%   17%
Retail managed account assets   39,767    12%   33,794    12%   18%
Total separate account assets   182,345    58%   153,038    53%   19%
Total  $312,556    100%  $288,194    100%   8%

 

(1)Consolidated Eaton Vance Corp. See page 46 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.

 

47

 

 

Consolidated Average Assets under Management by Asset Class(1)

 

   Three Months Ended     Nine Months Ended   
   July 31,  %  July 31,  %
(in millions)