10-Q 1 v441490_10q.htm 10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended April 30, 2016

or

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

For the transition period from _____________ to ____________

 

Commission file no. 1-8100

 

EATON VANCE CORP.

(Exact name of registrant as specified in its charter)

 

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

 

Two International Place, Boston, Massachusetts 02110

(Address of principal executive offices) (zip code)

 

(617) 482-8260

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

Shares outstanding as of April 30, 2016:

Voting Common Stock – 442,932 shares

Non-Voting Common Stock – 113,424,735 shares

 

 

 

 

 

Eaton Vance Corp.

Form 10-Q

As of April 30, 2016 and for the

Three and Six Month Periods Ended April 30, 2016

 

Table of Contents

 

Required
Information
      Page
Number
Reference
         
Part I   Financial Information    
Item 1.   Consolidated Financial Statements   3
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   40
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   64
Item 4.   Controls and Procedures   64
         
Part II   Other Information    
Item 1.   Legal Proceedings   65
Item 1A.   Risk Factors   65
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   65
Item 6.   Exhibits   66
         
Signatures       67

 

 2 

 

 

Part I - Financial Information

 

Item 1. Consolidated Financial Statements

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

   April 30,   October 31, 
(in thousands)  2016   2015 
         
Assets          
           
Cash and cash equivalents  $351,161   $465,558 
Investment advisory fees and other receivables   169,352    187,753 
Investments   532,413    507,020 
Assets of consolidated collateralized loan obligation ("CLO") entity:          
Cash and cash equivalents   16,009    162,704 
Bank loan investments   385,177    304,250 
Other assets   2,949    128 
Deferred sales commissions   25,782    25,161 
Deferred income taxes   31,659    42,164 
Equipment and leasehold improvements, net   46,002    44,943 
Intangible assets, net   51,084    55,433 
Goodwill   248,091    237,961 
Loan to affiliate   5,000    - 
Other assets   56,076    83,396 
Total assets  $1,920,755   $2,116,471 

 

See notes to Consolidated Financial Statements.

 

 3 

 

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

   April 30,   October 31, 
(in thousands, except share data)  2016   2015 
Liabilities, Temporary Equity and Permanent Equity          
           
Liabilities:          
           
Accrued compensation  $87,673   $178,875 
Accounts payable and accrued expenses   63,058    65,249 
Dividend payable   33,337    32,923 
Debt   573,889    573,811 
Liabilities of consolidated CLO entity:          
Senior and subordinated note obligations   384,224    397,039 
Other liabilities   8,253    70,814 
Other liabilities   67,089    86,891 
Total liabilities   1,217,523    1,405,602 
           
Commitments and contingencies (Note 18)          
           
Temporary Equity:          
           
Redeemable non-controlling interests   87,583    88,913 
           
Permanent Equity:          
           
Voting Common Stock, par value $0.00390625 per share:          
Authorized, 1,280,000 shares          
Issued and outstanding, 442,932 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, 113,424,735 and 115,470,485 shares, respectively   443    451 
Additional paid-in capital   -    - 
Notes receivable from stock option exercises   (10,391)   (11,143)
Accumulated other comprehensive loss   (40,856)   (48,586)
Appropriated retained earnings (deficit)   7,363    (5,338)
Retained earnings   657,386    684,845 
Total Eaton Vance Corp. shareholders' equity   613,947    620,231 
Non-redeemable non-controlling interests   1,702    1,725 
Total permanent equity   615,649    621,956 
Total liabilities, temporary equity and permanent equity  $1,920,755   $2,116,471 

 

See notes to Consolidated Financial Statements.

 

 4 

 

 

Eaton Vance Corp.

Consolidated Statements of Income (unaudited)

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2016   2015   2016   2015 
Revenue:                    
Investment advisory and administrative fees  $276,883   $300,624   $559,925   $602,437 
Distribution and underwriter fees   18,275    20,048    37,333    41,084 
Service fees   25,794    28,461    53,053    58,308 
Other revenue   2,338    2,531    4,535    4,765 
Total revenue   323,290    351,664    654,846    706,594 
Expenses:                    
Compensation and related costs   121,519    120,075    244,029    240,267 
Distribution expense   28,239    30,082    56,722    136,349 
Service fee expense   23,610    26,358    48,205    54,138 
Amortization of deferred sales commissions   3,957    3,692    8,001    7,420 
Fund-related expenses   8,031    8,932    17,194    17,638 
Other expenses   42,166    40,304    84,302    78,001 
Total expenses   227,522    229,443    458,453    533,813 
Operating income   95,768    122,221    196,393    172,781 
Non-operating income (expense):                    
Gains and other investment income, net   3,789    347    6,629    3,149 
Interest expense   (7,340)   (7,337)   (14,682)   (14,673)
Other income (expense) of consolidated CLO entities:                    
Gains and other investment income, net   13,908    2,212    17,187    3,513 
Interest expense   (2,878)   (611)   (4,714)   (1,805)
Total non-operating income (expense)   7,479    (5,389)   4,420    (9,816)
Income before income taxes and equity in net income of affiliates   103,247    116,832    200,813    162,965 
Income taxes   (36,169)   (43,896)   (73,012)   (60,666)
Equity in net income of affiliates, net of tax   2,377    2,957    4,886    6,103 
Net income   69,455    75,893    132,687    108,402 
Net income attributable to non-controlling and other beneficial interests   (14,488)   (5,509)   (19,334)   (9,015)
Net income attributable to Eaton Vance Corp. shareholders  $54,967   $70,384   $113,353   $99,387 
Earnings per share:                    
Basic  $0.50   $0.61   $1.02   $0.85 
Diluted  $0.48   $0.58   $0.99   $0.82 
Weighted average shares outstanding:                    
Basic   110,459    114,415    110,852    114,326 
Diluted   113,667    119,730    114,308    119,548 
Dividends declared per share  $0.265   $0.250   $0.530   $0.500 

 

See notes to Consolidated Financial Statements.

 

 5 

 

 

Eaton Vance Corp.

Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2016   2015   2016   2015 
                 
Net income  $69,455   $75,893   $132,687   $108,402 
                     
Other comprehensive income (loss):                    
Amortization of net gains (losses) on derivatives, net of tax   4    4    7    7 
Unrealized holding gains (losses) on available-for-sale investments and reclassification adjustments, net of tax   605    957    (53)   315 
Foreign currency translation adjustments, net of tax   21,841    8,753    7,776    (14,698)
                     
Other comprehensive income (loss), net of tax   22,450    9,714    7,730    (14,376)
                     
Total comprehensive income   91,905    85,607    140,417    94,026 
Comprehensive income attributable to non-controlling and other beneficial interests   (14,488)   (5,509)   (19,334)   (9,015)
Total comprehensive income attributable to Eaton Vance Corp. shareholders  $77,417   $80,098   $121,083   $85,011 

 

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
(Deficit)
   Retained
Earnings
   Non-
Redeemable
Non-
Controlling
Interests
   Total
Permanent
Equity
   Redeemable
Non-
Controlling
Interests
 
Balance, November 1, 2015  $2   $451   $-   $(11,143)  $(48,586)  $(5,338)  $684,845   $1,725   $621,956   $88,913 
Net income   -    -    -    -    -    12,701    113,353    1,863    127,917    4,770 
Other comprehensive income   -    -    -    -    7,730    -    -    -    7,730    - 
Dividends declared  ($0.530 per share)   -    -    -    -    -    -    (60,495)   -    (60,495)   - 
Issuance of Voting Common Stock   -    -    232    -    -    -    -    -    232    - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    3    22,056    (531)   -    -    -    -    21,528    - 
Under employee stock purchase plans   -    -    1,610    -    -    -    -    -    1,610    - 
Under employee stock purchase incentive plan   -    -    2,710    -    -    -    -    -    2,710    - 
Under restricted stock plan, net of forfeitures   -    6    -    -    -    -    -    -    6    - 
Stock-based compensation   -    -    36,607    -    -    -    -    -    36,607    - 
Tax benefit of stock option exercises   -    -    1,714    -    -    -    -    -    1,714    - 
Repurchase of Voting Common Stock   -    -    (77)   -    -    -    -    -    (77)   - 
Repurchase of Non-Voting Common Stock   -    (17)   (63,737)   -    -    -    (80,317)   -    (144,071)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    1,283    -    -    -    -    1,283    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (1,767)   (1,767)   (434)
Net consolidations (de-consolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    -    (698)
Reclass to temporary equity   -    -    -    -    -    -    -    (119)   (119)   119 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    -    (6,202)
Other changes in non-controlling interests   -    -    (1,115)   -    -    -    -    -    (1,115)   1,115 
Balance, April 30, 2016  $2   $443   $-   $(10,391)  $(40,856)  $7,363   $657,386   $1,702   $615,649   $87,583 

 

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, 2014  $2   $460   $-   $(8,818)  $(17,996)  $2,467   $679,061   $2,305   $657,481   $107,466 
Net income   -    -    -    -    -    1,341    99,387    1,918    102,646    5,756 
Other comprehensive loss   -    -    -    -    (14,376)   -    -    -    (14,376)   - 
Dividends declared ($0.500 per share)   -    -    -    -    -    -    (59,032)   -    (59,032)   - 
Issuance of Voting Common Stock   -    -    77    -    -    -    -    -    77    - 
Issuance of Non-Voting Common Stock:                                                  
On exercise of stock options   -    6    32,542    (951)   -    -    -    -    31,597    - 
Under employee stock purchase plans   -    -    1,533    -    -    -    -    -    1,533    - 
Under employee stock purchase incentive plan   -    -    2,545    -    -    -    -    -    2,545    - 
Under restricted stock plan, net of forfeitures   -    5    -    -    -    -    -    -    5    - 
Stock-based compensation   -    -    33,785    -    -    -    -    -    33,785    - 
Tax benefit of stock option exercises   -    -    6,819    -    -    -    -    -    6,819    - 
Repurchase of Non-Voting Common Stock   -    (12)   (76,186)   -    -    -    (47,507)   -    (123,705)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    590    -    -    -    -    590    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    -    (2,068)   (2,068)   2,244 
Net consolidations (de-consolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    -    24,920 
Reclass to temporary equity   -    -    -    -    -    -    -    (597)   (597)   597 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    -    (7,008)
Other changes in non-controlling interests   -    -    (1,115)   -    -    -    -    -    (1,115)   1,115 
Balance, April 30, 2015  $2   $459   $-   $(9,179)  $(32,372)  $3,808   $671,909   $1,558   $636,185   $135,090 

 

See notes to Consolidated Financial Statements.

 

 8 

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Six Months Ended 
   April 30, 
(in thousands)  2016   2015 
         
Cash Flows From Operating Activities:          
Net income  $132,687   $108,402 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   10,396    10,857 
Amortization of deferred sales commissions   8,006    7,426 
Stock-based compensation   36,607    33,785 
Deferred income taxes   10,551    6,784 
Net (gains) losses on investments and derivatives   (1,374)   3,170 
Equity in net income of affiliates, net of amortization   (4,996)   (6,419)
Dividends received from affiliates   5,785    5,891 
Consolidated CLO entities' operating activities:          
Net gains on bank loans, other investments and note obligations   (8,594)   (914)
Amortization   (269)   (67)
Net increase in other assets and liabilities, including cash and cash equivalents   82,263    3,435 
Changes in operating assets and liabilities:          
Investment advisory fees and other receivables   17,698    3,980 
Investments in trading securities   (24,446)   (86,651)
Deferred sales commissions   (8,621)   (11,031)
Other assets   13,135    7,981 
Accrued compensation   (91,086)   (89,830)
Accounts payable and accrued expenses   (3,738)   1,161 
Other liabilities   (157)   21,493 
Net cash provided by operating activities   173,847    19,453 
           
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (5,293)   (5,261)
Net cash paid in acquisition   (10,130)   (9,085)
Cash paid for intangible assets   (25)   - 
Issuance of loan to affiliate   (5,000)   - 
Proceeds from sale of investments   8,808    39,021 
Purchase of investments   (113)   (4,044)
Consolidated CLO entities' investing activities:          
Proceeds from sales and maturities of bank loans and other investments   33,141    24,140 
Purchase of bank loans and other investments   (118,289)   (1,730)
Net cash (used for) provided by investing activities   (96,901)   43,041 

 

See notes to Consolidated Financial Statements.

 

 9 

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Six Months Ended 
   April 30, 
(in thousands)  2016   2015 
Cash Flows From Financing Activities:          
Purchase of additional non-controlling interest   (15,580)   (18,602)
Proceeds from issuance of Voting Common Stock   232    77 
Proceeds from issuance of Non-Voting Common Stock   25,854    35,680 
Repurchase of Voting Common Stock   (77)   - 
Repurchase of Non-Voting Common Stock   (144,071)   (123,705)
Principal repayments on notes receivable from stock option exercises   1,283    590 
Excess tax benefit of stock option exercises   3,023    6,819 
Dividends paid   (60,201)   (58,399)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   (2,201)   176 
Consolidated CLO entities' financing activities:          
Principal repayments of senior note obligations   -    (25,944)
Net cash used for financing activities   (191,738)   (183,308)
Effect of currency rate changes on cash and cash equivalents   395    (1,503)
Net decrease in cash and cash equivalents   (114,397)   (122,317)
Cash and cash equivalents, beginning of period   465,558    385,215 
Cash and cash equivalents, end of period  $351,161   $262,898 
Supplemental Cash Flow Information:          
Cash paid for interest  $14,206   $14,183 
Cash paid for interest by consolidated CLO entity   -    1,829 
Cash paid for income taxes, net of refunds   47,040    48,676 
Supplemental Disclosure of Non-Cash Information:          
Increase in equipment and leasehold improvements due to non-cash additions  $1,651   $705 
Exercise of stock options through issuance of notes receivable   531    951 
Net Consolidations (De-consolidations) of Sponsored Investment Funds          
Increase (decrease) in investments  $(720)  $25,297 
Increase (decrease) in non-controlling interests   (698)   24,920 

 

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 distribution partner. The payment was included as a component of distribution expense in the Company’s Consolidated Statement of Income for the six months ended April 30, 2015.

 

2.New Accounting Standards Not Yet Adopted

 

Financial Instruments

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which revised entities’ accounting related to: (i) the classification and measurement of investments in equity securities; and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2018 and requires a modified retrospective approach to adoption. Early adoption is only permitted for the provision related to instrument-specific credit risk. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.

 

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2019 and requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered into after, the earliest comparative period presented in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.

 

Share-Based Payments

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments, including accounting for income taxes, forfeitures and statutory tax withholding requirements, and classification within the statement of cash flows. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2017 with early adoption permitted. The

 

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Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.

 

Equity Method Accounting

In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively to an investment that subsequently qualifies for such accounting as a result of obtaining significant influence. The Company will adopt the new guidance prospectively in its fiscal year that begins on November 1, 2017.

 

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 new guidance requires either a retrospective or a modified retrospective approach to adoption. The Company is currently evaluating the available transition methods and the potential impact on its Consolidated Financial Statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), which amends the principal-versus-agent implementation guidance in ASU 2014-09. The new guidance will impact whether an entity reports revenue on a gross or net basis. The Company is currently evaluating the impact of adopting ASU 2016-08, which is effective for the Company in conjunction with the adoption of ASU 2014-09.

 

In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which clarifies aspects of ASU 2014-09 pertaining to the identification of performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The Company is currently evaluating the impact of adopting ASU 2016-10, which is effective for the Company in conjunction with the adoption of ASU 2014-09.

 

In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which clarifies aspects of ASU 2014-09, including clarification of noncash consideration, and provides a practical expedient for reflecting contract modifications at transition. The Company is currently evaluating the impact of adopting ASU 2016-12, which is effective for the Company in conjunction with the adoption of ASU 2014-09.

 

3.Consolidated Sponsored Funds

 

The following table sets forth the balances related to consolidated sponsored funds at April 30, 2016 and October 31, 2015, as well as the Company’s net interest in these funds:

 

(in thousands)  April 30,
2016
   October 31,
2015
 
Investments  $219,855   $196,395 
Other assets   8,064    6,011 
Other liabilities   (16,081)   (25,729)
Redeemable non-controlling interests   (15,404)   (11,939)
Net interest in consolidated sponsored funds(1)  $196,434   $164,738 

 

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

 

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The Company de-consolidated one sponsored fund during the six months ended April 30, 2016. During the six months ended April 30, 2015, the Company did not de-consolidate any sponsored funds.

 

4.Investments

 

The following is a summary of investments at April 30, 2016 and October 31, 2015:

 

(in thousands)  April 30,
2016
   October 31,
2015
 
Investment securities, trading:          
Short-term debt  $81,517   $77,395 
Consolidated sponsored funds   219,855    196,395 
Separately managed accounts   57,200    56,859 
Total investment securities, trading   358,572    330,649 
Investment securities, available-for-sale   17,342    25,720 
Investments in non-consolidated CLO entities   4,718    4,363 
Investments in equity method investees   149,613    144,137 
Investments, other   2,168    2,151 
Total investments(1)  $532,413   $507,020 

 

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

 

Investment securities, trading

 

The following is a summary of the fair value of investments classified as trading at April 30, 2016 and October 31, 2015:

 

(in thousands)  April 30,
2016
   October 31,
2015
 
Short-term debt  $81,517   $77,395 
Other debt - consolidated sponsored funds and separately managed accounts   146,634    136,959 
Equity securities - consolidated sponsored funds and separately managed accounts   130,421    116,295 
Total investment securities, trading  $358,572   $330,649 

 

During the six months ended April 30, 2016, the Company seeded investments in seven sponsored funds and five separately managed accounts. During the six months ended April 30, 2015, the Company seeded investments in five sponsored funds and ten separately managed accounts.

 

The Company recognized gains related to trading securities still held at the reporting date of $17.6 million and $7.4 million for the three months ended April 30, 2016 and 2015, respectively, and $6.0 million and $1.2 million for the six months ended April 30, 2016 and 2015, respectively, within gains and other investment income, net, in the Company’s Consolidated Statements of Income.

 

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Investment securities, available-for-sale

 

The following is a summary of the gross unrealized gains (losses) included in accumulated other comprehensive loss related to securities classified as available-for-sale at April 30, 2016 and October 31, 2015:

 

April 30, 2016      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $11,314   $6,393   $(365)  $17,342 

 

October 31, 2015      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $19,586   $6,450   $(316)  $25,720 

 

Net unrealized holding gains (losses) on investment securities classified as available-for-sale included in other comprehensive income (loss) on the Company’s Consolidated Statements of Comprehensive Income were $1.1 million for both the three months ended April 30, 2016 and 2015, and $(23,000) and $0.1 million for the six months ended April 30, 2016 and 2015, respectively.

 

The Company evaluated gross unrealized losses of $0.4 million as of April 30, 2016 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 $5.1 million at April 30, 2016. 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 recognized upon disposition of investments classified as available-for-sale for the three and six months ended April 30, 2016 and 2015:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2016   2015   2016   2015 
Gains  $64   $607   $199   $657 
Losses   (37)   (310)   (37)   (316)
Net realized gains  $27   $297   $162   $341 

 

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 $147.2 million and $142.1 million at April 30, 2016 and October 31, 2015, respectively. At April 30, 2016, the Company’s investment in Hexavest consisted of $5.3 million of equity in the net assets of Hexavest, intangible assets of $27.2 million and goodwill of $122.0 million, net of a deferred tax liability of $7.3 million. At October 31, 2015, the Company’s investment in Hexavest consisted of $5.5 million of equity in the net assets of Hexavest, intangible assets of $27.0 million and goodwill of $116.9 million, net of a deferred tax liability of $7.3 million. The investment is denominated in Canadian dollars and is subject to foreign currency translation adjustments, which are recorded in accumulated other comprehensive loss.

 

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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 $2.4 million and $2.0 million at April 30, 2016 and October 31, 2015, respectively.

 

The Company did not account for any Eaton Vance-sponsored funds under the equity method as of April 30, 2016 and October 31, 2015.

 

The Company did not recognize any impairment losses related to its investments in equity method investees during the three and six months ended April 30, 2016 and 2015.

 

During the six months ended April 30, 2016 and 2015, the Company received dividends of $5.8 million and $5.9 million, respectively, from its investments in equity method investees.

 

5.Fair Value Measurements

 

The following tables summarize financial assets and liabilities measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy at April 30, 2016 and October 31, 2015:

 

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April 30, 2016                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                     
Financial assets:                         
Cash equivalents  $21,119   $35,991   $-   $-   $57,110 
Investments:                         
Investment securities, trading:                         
Short-term debt   -    81,517    -    -    81,517 
Other debt - consolidated sponsored funds and separately managed accounts   7,725    138,909    -    -    146,634 
Equity - consolidated sponsored funds and separately managed accounts   80,564    49,857    -    -    130,421 
Investment securities, available-for-sale   15,145    2,197    -    -    17,342 
Investments in non-consolidated CLO entities(1)   -    -    -    4,718    4,718 
Investments in equity method investees(2)   -    -    -    149,613    149,613 
Investments, other(3)   -    120    -    2,048    2,168 
Derivative instruments   -    227    -    -    227 
Assets of consolidated CLO entity:                         
Cash equivalents   16,009    -    -    -    16,009 
Bank loan investments   -    384,517    660    -    385,177 
Total financial assets  $140,562   $693,335   $660   $156,379   $990,936 
                          
Financial liabilities:                         
Derivative instruments  $-   $7,279   $-   $-   $7,279 
Liabilities of consolidated CLO entity:                         
Senior and subordinated note obligations   -    -    384,224    -    384,224 
Total financial liabilities  $-   $7,279   $384,224   $-   $391,503 

 

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October 31, 2015                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair
Value
   Total 
                     
Financial assets:                         
Cash equivalents  $14,599   $39,447   $-   $-   $54,046 
Investments:                         
Investment securities, trading:                         
Short-term debt   -    77,395    -    -    77,395 
Other debt - consolidated sponsored funds and separately managed accounts   20,822    116,137    -    -    136,959 
Equity - consolidated sponsored funds and separately managed accounts   71,535    44,760    -    -    116,295 
Investment securities, available-for-sale   23,544    2,176    -    -    25,720 
Investments in non-consolidated CLO entities(1)   -    -    -    4,363    4,363 
Investments in equity method investees(2)   -    -    -    144,137    144,137 
Investments, other(3)   -    103    -    2,048    2,151 
Derivative instruments   -    298    -    -    298 
Assets of consolidated CLO entity:                         
Bank loan investments   -    304,250    -    -    304,250 
Total financial assets  $130,500   $584,566   $-   $150,548   $865,614 
                          
Financial liabilities:                         
Derivative instruments  $-   $5,423   $-   $-   $5,423 
Securities sold, not yet purchased   -    3,034    -    -    3,034 
Liabilities of consolidated CLO entity:                         
Senior and subordinated note obligations   -    397,039    -    -    397,039 
Total financial liabilities  $-   $405,496   $-   $-   $405,496 

 

(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, 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. Government agency securities are valued based upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The carrying amounts of commercial paper are measured at amortized cost, which approximates fair value due to the

 

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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 are valued at the last sale, official close or, if there are no reported sales on the valuation date, at the mean between the latest available bid and ask prices on the primary exchange on which they are traded. 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 and total return swap contracts, are recorded as either other assets or other liabilities on the Company’s Consolidated Balance Sheets. Foreign exchange contracts are valued by interpolating a value using the spot foreign exchange rate and forward points, which are based on spot rate and currency interest rate differentials. Stock index futures contracts, commodity futures contracts 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 and money market funds. 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. 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 senior and subordinated note obligations. Senior and subordinated notes generally are valued utilizing an income-approach model in which one or more significant inputs are unobservable in the market. A full description of this valuation technique is included within the valuation process disclosure below. Depending on the nature of the inputs, these liabilities are classified as Level 2 or 3 within the fair value measurement hierarchy. As of October 31, 2015, the liabilities of Eaton Vance CLO 2015-1 include senior and subordinated notes issued at closing of the entity on October 29, 2015. As a result, these liabilities were valued as of October 31, 2015 based on the closing transaction price and were classified as Level 2 within the fair value measurement hierarchy.

 

Transfers in and out of Levels

 

The following table summarizes fair value transfers between Level 1 and Level 2 of the fair value measurement hierarchy for the three and six months ended April 30, 2016 and 2015:

 

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   Three Months Ended
April 30,
   Six Months Ended
April 30,
 
(in thousands)  2016   2015   2016   2015 
Transfers from Level 1 into Level 2(1)  $129   $1,201   $118   $5,981 
Transfers from Level 2 into Level 1(2)   86    172    102    182 

 

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

 

Level 3 assets and liabilities

 

The following table shows a reconciliation of the beginning and ending fair value measurements of assets and liabilities valued on a recurring basis and classified as Level 3 within the fair value measurement hierarchy for the three and six months ended April 30, 2016 and 2015:

 

   Three Months Ended   Three Months Ended 
   April 30, 2016   April 30, 2015 
(in thousands)  Bank loan
investments of
Eaton Vance
CLO 2015-1
   Senior and
subordinated
note
obligations of
Eaton Vance
CLO 2015-1
   Bank loans
and other
investments of
Eaton Vance
CLO IX
   Senior and
subordinated
note
obligations of
Eaton Vance
CLO IX
 
                 
Beginning balance  $700   $390,654   $47   $137,808 
Net gains (losses) on investments and note obligations included in net income(1)   (40)   (6,430)   (4)   163 
Principal paydown   -    -    -    (14,740)
Ending balance  $660   $384,224   $43   $123,231 
Change in unrealized gains (losses) included in net income relating to assets and liabilities held  $(40)  $(6,430)  $(4)  $163 

 

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   Six Months Ended   Six Months Ended 
   April 30, 2016   April 30, 2015 
(in thousands)  Bank loan
investments of
Eaton Vance
CLO 2015-1
   Senior and
subordinated
note
obligations of
Eaton Vance
CLO 2015-1
   Bank loans
and other
investments of
Eaton Vance
CLO IX
   Senior and
subordinated
note
obligations of
Eaton Vance
CLO IX
 
                 
Beginning balance  $-   $-   $801   $149,310 
Net losses on investments and note obligations included in net income(1)   (40)   (6,430)   (375)   (1,514)
Additions(2)   -    -    -    1,379 
Principal paydown   -    -    -    (25,944)
Transfers into Level 3(3)   700    390,654    -    - 
Transfers out of Level 3(4)   -    -    (383)   - 
Ending balance  $660   $384,224   $43   $123,231 
Change in unrealized losses included in net income relating to assets and liabilities held  $(40)  $(6,430)  $(375)  $(1,514)

 

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

 

As discussed more fully in Note 8, the Company de-consolidated Eaton Vance CLO IX on August 1, 2015. The following table shows the valuation technique and significant unobservable inputs utilized in the fair value measurement of Level 3 liabilities of Eaton Vance CLO 2015-1 at April 30, 2016:

 

April 30, 2016      Valuation  Unobservable  Value/
($ in thousands)  Fair Value   Technique  Inputs(1)  Range
              
             Prepayment rate  20 percent
             Recovery rate  70 percent
          Default rate  200 bps
Senior and subordinated note obligations  $384,224   Income-approach  Discount rate  160-1300 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

 

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team’s projected default rate, prepayment rate, recovery rate and discount rate, as well as observable assumptions about market yields, collateral reimbursement assumptions, callability and other market factors that vary based on the nature of the investments in the underlying collateral pool. Once the undiscounted cash flows of the collateral assets have been determined, the bank loan team applies appropriate discount rates that it believes a reasonable market participant would use to determine the discounted cash flow valuation of the notes. The bank loan team routinely monitors market conditions and model inputs for cyclical and secular changes in order to identify any material factors that could influence the Company’s valuation method. The bank loan team reports directly to the Chief Income Investment Officer.

 

Sensitivity to changes in significant unobservable inputs

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

 

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

 

6.Derivative Financial Instruments

 

Derivative financial instruments designated as cash flow hedges

 

During both the three months ended April 30, 2016 and 2015, the Company reclassified into interest expense $50,000 of deferred gains related to a forward-starting interest rate swap entered into in connection with the offering of its 3.625 percent unsecured senior notes due June 15, 2023 (“2023 Senior Notes”). During both the six months ended April 30, 2016 and 2015, the Company reclassified into interest expense $0.1 million of this deferred gain. At April 30, 2016, the remaining unamortized gain on this transaction was $1.4 million. During the next twelve months, the Company expects to reclassify approximately $0.2 million of the gain into interest expense.

 

During both the three months ended April 30, 2016 and 2015, the Company reclassified into interest expense $56,000 of deferred losses related to a Treasury lock transaction entered into in connection with the issuance of its 6.5 percent unsecured senior notes due October 2, 2017 (“2017 Senior Notes”). During both the six months ended April 30, 2016 and 2015, the Company reclassified into interest expense $0.1 million of deferred losses on this Treasury lock. At April 30, 2016, the remaining unamortized loss on this transaction was $0.3 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, total return swap contracts and interest rate futures 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.

 

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At April 30, 2016 and October 31, 2015, excluding derivative financial instruments held in certain consolidated sponsored funds and separately managed accounts, the Company had 47 and 28 foreign exchange contracts outstanding with three and four counterparties with an aggregate notional value of $25.3 million and $27.2 million, respectively; 1,616 and 1,366 stock index futures contracts outstanding with one counterparty with an aggregate notional value of $114.0 million and $97.2 million, respectively; and two total return swap contracts outstanding with one counterparty with an aggregate notional value of $39.0 million and $49.5 million, respectively. At October 31, 2015, the Company had 56 commodity futures contracts outstanding with one counterparty with an aggregate notional value of $3.1 million. As of April 30, 2016, the Company did not have any commodity futures contracts outstanding. While the Company had outstanding interest rate futures contracts for certain periods during fiscal 2015, as of October 31, 2015, the Company did not have any interest rate futures contracts outstanding. As of April 30, 2016, the Company did not have any interest rate futures contracts outstanding. The number of derivative contracts outstanding and the notional values they represent at April 30, 2016 and October 31, 2015 are indicative of derivative balances throughout each respective period.

 

The following tables present the fair value of derivative financial instruments, excluding derivative financial instruments held in certain consolidated sponsored funds and separately managed accounts, not designated as hedging instruments as of April 30, 2016 and October 31, 2015:

 

April 30, 2016              
   Assets  Liabilities
(in thousands)  Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $144   Other liabilities  $1,229 
Stock index futures contracts  Other assets   83   Other liabilities   4,582 
Total return swap contracts  Other assets   -   Other liabilities   1,468 
Total     $227      $7,279 

 

October 31, 2015              
   Assets  Liabilities
(in thousands)  Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
Foreign exchange contracts  Other assets  $133   Other liabilities  $540 
Stock index futures contracts  Other assets   53   Other liabilities   4,712 
Commodity futures contracts  Other assets   112   Other liabilities   43 
Total return swap contracts  Other assets   -   Other liabilities   128 
Total     $298      $5,423 

 

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The following is a summary of the net gains (losses) recognized in income for the three and six months ended April 30, 2016 and 2015:

 

   Income Statement  Three Months Ended
April 30,
   Six Months Ended
April 30,
 
(in thousands)  Location  2016   2015   2016   2015 
Foreign exchange contracts  Gains and other investment income, net  $(1,774)  $(111)  $(1,140)  $450 
Stock index futures contracts  Gains and other investment income, net   (8,062)   (8,841)   921    (7,308)
Total return swap contracts  Gains and other investment income, net   (3,209)   (559)   (439)   (654)
Commodity futures contracts  Gains and other investment income, net   -    (289)   -    2,324 
Interest rate futures contracts  Gains and other investment income, net   -    183    -    (258)
Total     $(13,045)  $(9,617)  $(658)  $(5,446)

 

7.Fair Value Measurements of Other Financial Instruments

 

Certain financial instruments are not carried at fair value, but their fair value is required to be disclosed. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at April 30, 2016 and October 31, 2015:

 

   April 30, 2016   October 31, 2015 
(in thousands)  Carrying
Value
   Fair
Value
   Fair
Value
Level
   Carrying
Value
   Fair
Value
   Fair
Value
Level
 
Loan to affiliate  $5,000   $5,000    3   $-   $-    - 
Other assets  $6,627   $6,627    3   $6,345   $6,345    3 
Debt  $573,889   $607,215    2   $573,811   $600,930    2 

 

As discussed in Note 19, on December 23, 2015, Eaton Vance Management Canada Ltd. (“EVMC”), a wholly owned subsidiary of the Company, loaned $5.0 million to Hexavest under a term loan agreement to seed a new investment strategy. The carrying value of the loan approximates fair value. The fair value 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 loan to affiliate falls within Level 3 of the fair value measurement hierarchy.

 

Included in other assets at April 30, 2016 and October 31, 2015 is an option exercisable in 2017 to acquire an additional 26 percent interest in Hexavest carried at $6.6 million and $6.3 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

 

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option, which is then adjusted to present value. The fair value of this option 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.Variable Interest Entities (“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 April 30, 2016, the Company deems itself to be the primary beneficiary of two non-recourse CLO entities, Eaton Vance CLO 2015-1 and Eaton Vance CLO IX. In developing its conclusion that it is the primary beneficiary of Eaton Vance CLO 2015-1, the Company determined that it has a more than insignificant economic interest in the entity by virtue of its 16 percent residual interest, which exposes the Company to a more than insignificant amount of the entity’s variability relative to its anticipated economic performance. In its role as collateral manager of the entity, the Company has the power to direct the activities that most significantly impact the economic performance of the entity. The Company’s variable interest represents an obligation to absorb losses of, or a right to receive benefits from, the entity that could potentially be significant to the entity. The Company determined that it is the primary beneficiary of Eaton Vance CLO IX due to the significance of its variable interest represented by the incentive collateral management fee. In consideration of these factors, the Company concluded that it is the primary beneficiary of Eaton Vance CLO 2015-1 and Eaton Vance CLO IX for consolidation accounting purposes.

 

In the first quarter of fiscal 2015, 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. 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 will remain the collateral manager of Eaton Vance CLO IX through resolution of the disposal of all remaining collateral assets. The Company is not a related party to the subordinated note holders of Eaton Vance CLO IX and 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. While the Company still deems itself to be the primary beneficiary of Eaton Vance CLO IX at April 30, 2016, the Company made the decision to de-consolidate Eaton Vance CLO IX in the fourth quarter of fiscal 2015, as the remaining net assets of Eaton Vance CLO IX are not material to the Company’s financial position.

 

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

 

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Interest income and expense are recorded on an accrual basis and reported as gains and other investment income, net, and as interest expense, respectively, of the consolidated CLO entities in the Company’s Consolidated Statements of Income for the three and six months ended April 30, 2016 and 2015. Substantially all ongoing gains (losses) related to the consolidated CLO entities’ bank loans, other investments and note obligations recorded in earnings for the periods presented are attributable to changes in instrument-specific credit considerations.

 

Eaton Vance CLO 2015-1

The following tables present, as of April 30, 2016 and October 31, 2015, the fair value of Eaton Vance CLO 2015-1’s assets and liabilities that were subject to fair value accounting:

 

April 30, 2016            
   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  $391,409   $947   $397,307 
Unpaid principal balance over fair value   (6,232)   (287)   (13,083)
Fair value  $385,177   $660   $384,224 

 

October 31, 2015            
   CLO Bank Loan Investments     
(in thousands)  Total CLO
bank loan
investments
   90 days or
more past
due
   Senior and
subordinated
note obligations
 
Unpaid principal balance  $306,483   $       -   $397,039 
Unpaid principal balance over fair value   (2,233)   -    - 
Fair value  $304,250   $-   $397,039 

 

Changes in the fair values of Eaton Vance CLO 2015-1’s bank loan investments resulted in net gains (losses) of $2.5 million and $(4.5) million for the three and six months ended April 30, 2016, respectively, while changes in the fair values of Eaton Vance CLO 2015-1’s note obligations resulted in net gains of $6.6 million and $13.1 million for the three and six months ended April 30, 2016, respectively. The combined net gains of $9.1 million and $8.6 million for the three and six months ended April 30, 2016, respectively, were recorded in gains and other investment income, net, of consolidated CLO entities on the Company’s Consolidated Statements of Income.

 

Eaton Vance CLO 2015-1 has note obligations that bear interest at a fixed rate of 4.0 percent, as well as note obligations that bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 1.5 percent to 8.1 percent. The principal amounts outstanding of the note obligations issued by Eaton Vance CLO 2015-1 mature on October 20, 2026. The CLO entity may elect to reinvest any prepayments received on bank loan investments prior to July 2020. Any subsequent prepayments received must be used to pay down its note obligations. The holders of a majority of the subordinated notes have the option to liquidate Eaton Vance CLO 2015-1, provided there is sufficient value of the entity’s assets to repay the senior notes in full.

 

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For the three and six months ended April 30, 2016, the Company recorded net income of $11.0 million and $12.4 million, respectively, related to Eaton Vance CLO 2015-1. The Company recorded net income attributable to other beneficial interests of $10.8 million and $12.7 million for the three and six months ended April 30, 2016, respectively. Net income (losses) attributable to Eaton Vance Corp. shareholders were $0.2 million and $(0.3) million for the three and six months ended April 30, 2016, respectively.

 

The following carrying amounts related to Eaton Vance CLO 2015-1 were included in the Company’s Consolidated Balance Sheets at April 30, 2016 and October 31, 2015:

 

   April 30,   October 31, 
(in thousands)  2016   2015 
Assets:          
Cash and cash equivalents  $16,009   $162,704 
Bank loan investments   385,177    304,250 
Other assets   2,949    128 
Liabilities:          
Senior and subordinated note obligations   384,224    397,039 
Other liabilities   8,253    70,814 
Appropriated retained earnings (deficit)   7,363    (5,338)
Net interest in Eaton Vance CLO 2015-1  $4,295   $4,567 

 

The Company had a subordinated interest in Eaton Vance CLO 2015-1 of $3.6 million and $4.6 million as of April 30, 2016 and October 31, 2015, respectively, which was eliminated in consolidation.

 

Eaton Vance CLO IX

As noted above, the Company de-consolidated Eaton Vance CLO IX on August 1, 2015 and removed the associated assets, liabilities and appropriated retained earnings from its Consolidated Balance Sheet as of that date, as the remaining balances are not material to the Company’s financial position.

 

Changes in the fair values of Eaton Vance CLO IX’s bank loans and other investments resulted in net gains (losses) of $1.2 million and $(0.3) million during the three and six months ended April 30, 2015, respectively, while changes in the fair values of Eaton Vance CLO IX’s note obligations resulted in net gains (losses) of $(0.2) million and $1.5 million during the three and six months ended April 30, 2015, respectively. The combined net gains of $1.0 million and $1.2 million for the three and six months ended April 30, 2015, respectively, were recorded in gains and other investment income, net, of consolidated CLO entities on the Company’s Consolidated Statements of Income.

 

During the six months ended April 30, 2015, $25.9 million of prepayments were used to pay down the entity’s note obligations.

 

For the three and six months ended April 30, 2015, the Company recorded net income of $1.5 million and $1.6 million (including the loss on disposal of its subordinated interest of $0.3 million), respectively, related to Eaton Vance CLO IX. The Company recorded net income attributable to other beneficial interests of $1.3 million for both the three and six months ended April 30, 2015. Net income attributable to Eaton Vance Corp. shareholders was $0.2 million for both the three and six months ended April 30, 2015.

 

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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 $2.0 billion and $2.1 billion as of April 30, 2016 and October 31, 2015, respectively. The Company’s variable interests in these entities consist of the Company’s direct ownership in these entities and any collateral management fees earned but uncollected. The Company’s investment in these entities totaled $4.7 million and $4.4 million as of April 30, 2016 and October 31, 2015, respectively. Collateral management fees receivable for these entities totaled $1.6 million and $1.8 million on April 30, 2016 and October 31, 2015, respectively. In the first six months of fiscal 2016, the Company did not provide any financial or other support to these entities that it was not previously contractually required to provide. The Company’s risk of loss with respect to these managed CLO entities is limited to the carrying value of its investments in, and collateral management fees receivable from, these entities as of April 30, 2016.

 

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 $12.7 billion on both April 30, 2016 and October 31, 2015. The Company has determined that these entities qualify for the deferral afforded by ASU 2010-10, Consolidation – Amendments for Certain Investment Funds, and thus assesses whether it is the primary beneficiary of these entities based on the Company’s exposure to the expected losses and expected residual returns of the entity. The Company’s variable interests in these entities consist of the Company’s direct ownership therein, which in each case is insignificant relative to the total ownership of the fund, and any investment advisory fees earned but uncollected. The Company held investments in these entities totaling $2.2 million on both April 30, 2016 and October 31, 2015, and investment advisory fees receivable totaling $0.7 million on both April 30, 2016 and October 31, 2015. In the first six months of fiscal 2016, 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

 

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carrying value of its investments in, and investment advisory fees receivable from, the entities as of April 30, 2016. The Company does not consolidate these VIEs because it does not hold the majority of the risks and rewards of ownership.

 

The Company’s investments in privately offered equity funds are carried at fair value and included in investment securities, available-for-sale, which are disclosed as a component of investments in Note 4. The Company records any change in fair value, net of income tax, in other comprehensive income (loss).

 

9.Acquisitions

 

Atlanta Capital Management, LLC (“Atlanta Capital”)

In the fourth quarter of fiscal 2015, the Company exercised a call option requiring the non-controlling interest holders of Atlanta Capital to sell a 1.1 percent profit interest in Atlanta Capital for $5.4 million pursuant to the terms of the original acquisition agreement, as amended. 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, 2015. The transaction settled in December 2015.

 

In the third quarter of fiscal 2015, the Company also purchased a 0.4 percent profit interest in Atlanta Capital for $0.5 million pursuant to the put and call provisions of the Atlanta Capital Management Company, LLC Long-term Equity Incentive Plan (the “Atlanta Capital Plan”). The transaction settled in November 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, decreased to 13 percent as of April 30, 2016 from 13.1 percent as of October 31, 2015, reflecting the transactions described above, and the grant of an additional 1.4 percent profit interest to employees of Atlanta Capital pursuant to the terms of the Atlanta Capital Plan in the first quarter of fiscal 2016. Non-controlling interest holders did not hold any capital interests in Atlanta Capital as of April 30, 2016.

 

Parametric Portfolio Associates LLC (“Parametric”)

In the first quarter of fiscal 2016, 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, resulting in the Company’s acquisition of an indirect 0.4 percent profit interest and a 0.4 percent capital interest in Parametric. The put settled in November 2015 for $4.1 million and the call settled in December 2015 for $2.1 million.

 

In the fourth quarter of fiscal 2015, the Company purchased a 0.5 percent profit interest in Parametric for $4.2 million pursuant to the put and call provisions of the Parametric Portfolio Associates LLC Long-term Equity Incentive Plan, as amended and restated (the “Parametric Plan”). The transaction settled in November 2015.

 

Total profit interests in Parametric held by non-controlling interest holders, including indirect profit interests issued pursuant to the Parametric Plan, decreased to 7.0 percent as of April 30, 2016 from 7.4 percent as of October 31, 2015, reflecting the transactions described above, and the grant of 0.5 percent profit interests to employees of Parametric pursuant to the terms of the Parametric Plan in the first quarter of fiscal 2016. Total capital interests in Parametric held by non-controlling interest holders decreased to 1.8 percent as of April 30, 2016 from 2.2 percent as of October 31, 2015.

 

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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 2016, the Company made a contingent payment of $10.1 million to the selling group based upon prescribed multiples of TABS’s revenue for the twelve months ended December 31, 2015. The payment increased goodwill by $10.1 million as the acquisition was completed prior to the change in accounting for contingent purchase price consideration. The Company is obligated to make one additional annual contingent payment to the selling group based on prescribed multiples of TABS’s revenue for the twelve months ending December 31, 2016. This future payment will be in cash and will result in an addition to goodwill. This payment is not contingent upon any member of the selling group remaining an employee of the Company.

 

10.Intangible Assets

 

The following is a summary of intangible assets at April 30, 2016 and October 31, 2015:

 

April 30, 2016            
(in thousands)  Gross
carrying
amount
   Accumulated
amortization
   Net
carrying
amount
 
             
Amortizing intangible assets:               
Client relationships acquired  $133,927   $(90,696)  $43,231 
Intellectual property acquired   1,025    (352)   673 
Trademark acquired   900    (428)   472 
                
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   6,708    -    6,708 
Total  $142,560   $(91,476)  $51,084 

 

October 31, 2015            
(in thousands)  Gross
carrying
amount
   Accumulated
amortization
   Net
carrying
amount
 
             
Amortizing intangible assets:               
Client relationships acquired  $133,927   $(86,419)  $47,508 
Intellectual property acquired   1,000    (319)   681 
Trademark acquired   900    (364)   536 
                
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   6,708    -    6,708 
Total  $142,535   $(87,102)  $55,433 

 

Amortization expense was $2.2 million and $2.3 million for the three months ended April 30, 2016 and 2015 respectively, and $4.4 million and $4.6 million for the six months ended April 30, 2016 and 2015, respectively. Estimated remaining amortization expense for fiscal 2016 and the next five fiscal years, on a straight-line basis, is as follows:

 

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Year Ending October 31,  Estimated
Amortization
 
(in thousands)  Expense 
Remaining 2016  $4,274 
2017   8,537 
2018   8,508 
2019   4,531 
2020   3,510 
2021   2,021 

 

11.Stock-Based Compensation Plans

 

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

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2016   2015   2016   2015 
Omnibus Incentive Plans:                    
Stock options  $4,590   $4,085   $9,729   $8,629 
Restricted shares   11,013    9,949    21,951    20,174 
Phantom stock units   97    72    124    149 
Employee Stock Purchase Plans   -    -    211    180 
Employee Stock Purchase Incentive Plan   328    344    360    402 
Atlanta Capital Plan   652    623    1,417    1,290 
Parametric Plan   1,790    1,551    2,939    3,110 
Total stock-based compensation expense  $18,470   $16,624   $36,731   $33,934 

 

The total income tax benefit recognized for stock-based compensation arrangements was $6.3 million and $5.8 million for the three months ended April 30, 2016 and 2015, respectively, and $12.3 million and $11.5 million for the six months ended April 30, 2016 and 2015, respectively.

 

Stock Options

Stock option transactions under the Company’s 2013 Omnibus Incentive Plan, as amended and restated (the “2013 Plan”) and predecessor plans for the six months ended April 30, 2016 are summarized as follows:

 

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(share and intrinsic value figures in thousands)  Shares   Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Term
(in years)
   Aggregate
Intrinsic
Value
 
Options outstanding, beginning of period   21,076   $32.23           
Granted   3,336    36.06           
Exercised   (790)   27.92           
Forfeited/expired   (210)   35.65           
Options outstanding, end of period   23,412   $32.89    5.2   $100,815 
Options exercisable, end of period   14,433   $31.55    3.3   $83,468 
Vested or expected to vest at April 30, 2016   23,349   $32.88    5.2   $100,770 

 

The Company received $21.5 million and $31.6 million related to the exercise of options for the six months ended April 30, 2016 and 2015, respectively.

 

As of April 30, 2016, there was $57.5 million of compensation cost related to unvested stock options granted not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.1 years.

 

Restricted Shares

A summary of the Company’s restricted share activity for the six months ended April 30, 2016 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   3,988   $34.43 
Granted   1,529    35.22 
Vested   (1,121)   31.66 
Forfeited   (122)   35.36 
Unvested, end of period   4,274   $35.41 

 

As of April 30, 2016, there was $112.0 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.2 years.

 

Phantom Stock Units

During the six months ended April 30, 2016, 7,740 phantom stock units were issued to non-employee Directors pursuant to the Company’s 2013 Plan. As of April 30, 2016, there was $0.3 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 1.3 years.

 

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12.Common Stock Repurchases

 

The Company’s current Non-Voting Common Stock share repurchase program was announced on January 13, 2016. The Board authorized management to repurchase and retire up to 8.0 million shares of its Non-Voting Common Stock on the open market and in private transactions in accordance with applicable securities laws. The timing and amount of share purchases are subject to management’s discretion. The Company’s share repurchase program is not subject to an expiration date.

 

In the first six months of fiscal 2016, the Company purchased and retired approximately 2.1 million shares of its Non-Voting Common Stock under the current repurchase authorization and approximately 2.2 million shares under a previous repurchase authorization. Approximately 5.9 million additional shares may be repurchased under the current authorization as of April 30, 2016.

 

13.Non-operating Income (Expense)

 

The components of non-operating income (expense) for the three and six months ended April 30, 2016 and 2015 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2016   2015   2016   2015 
Non-operating income (expense):                    
Interest and other income  $4,186   $3,201   $5,361   $5,680 
Net gains (losses) on investments and derivatives   789    (2,538)   1,374    (3,170)
Net foreign currency gains (losses)   (1,186)   (316)   (106)   639 
Gains and other investment income, net   3,789    347    6,629    3,149 
Interest expense   (7,340)   (7,337)   (14,682)   (14,673)
                     
Other income (expense) of consolidated CLO entities:                    
Interest income   4,850    1,206    8,593    2,599 
Net gains on bank loans, other investments and note obligations   9,058    1,006    8,594    914 
Gains and other investment income, net   13,908    2,212    17,187    3,513 
Interest expense   (2,878)   (611)   (4,714)   (1,805)
Total non-operating income (expense)  $7,479   $(5,389)  $4,420   $(9,816)

 

14.Income Taxes

 

The provision for income taxes was $36.2 million and $43.9 million, or 35.0 percent and 37.6 percent of pre-tax income, for the three months ended April 30, 2016 and 2015, respectively. The provision for income taxes was $73.0 million and $60.7 million, or 36.4 percent and 37.2 percent of pre-tax income, for the six months ended April 30, 2016 and 2015, respectively. The provision for income taxes in the three and six months ended April 30, 2016 and 2015 is comprised of federal, state, and foreign taxes. The differences between the Company’s effective tax rate and the statutory federal rate of 35.0 percent are state income taxes, income and losses recognized by the consolidated CLO entities and other non-controlling interests and equity-based compensation plans.

 

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The Company records a valuation allowance when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. There was no valuation allowance recorded as of April 30, 2016 or October 31, 2015.

 

The Company considers the undistributed earnings of certain of its foreign subsidiaries to be indefinitely reinvested in foreign operations as of April 30, 2016. Accordingly, no U.S. income taxes have been provided thereon. As of April 30, 2016, the Company had approximately $41.2 million of undistributed earnings in certain Canadian, United Kingdom and Australian foreign 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 these un-repatriated funds, or temporary difference, is estimated to be $5.0 million. The Company does not intend to repatriate these funds, has not previously repatriated funds from these entities and has the financial liquidity to permanently leave these funds offshore.

 

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 2012.

 

15.Non-controlling and Other Beneficial Interests

 

The components of net income attributable to non-controlling and other beneficial interests for the three and six months ended April 30, 2016 and 2015 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2016   2015   2016   2015 
Consolidated sponsored funds  $(493)  $(315)  $16   $199 
Majority-owned subsidiaries   (3,206)   (3,903)   (6,516)   (7,676)
Non-controlling interest value adjustments(1)   -    3    (133)   (197)
Consolidated CLO entities   (10,789)   (1,294)   (12,701)   (1,341)
Net income attributable to non-controlling and other beneficial interests  $(14,488)  $(5,509)  $(19,334)  $(9,015)

 

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

 

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16.Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended April 30, 2016 and 2015 are as follows:

 

(in thousands)  Unamortized
net gains
(losses) on
derivatives(1)
  

Net unrealized
holding gains

(losses) on
available-for-
sale
investments(2)

   Foreign
currency
translation
adjustments
   Total 
Balance at January 31, 2016  $677   $3,075   $(67,058)  $(63,306)
Other comprehensive income before reclassifications and tax   -    1,058    21,841    22,899 
Tax impact   -    (415)   -    (415)
Reclassification adjustments, before tax   6    (63)   -    (57)
Tax impact   (2)   25    -    23 
Net current period other comprehensive income   4    605    21,841    22,450 
Balance at April 30, 2016  $681   $3,680   $(45,217)  $(40,856)
                     
Balance at January 31, 2015  $664   $4,986   $(47,736)  $(42,086)
Other comprehensive income before reclassifications and tax   -    1,075    8,744    9,819 
Tax impact   -    (417)   9    (408)
Reclassification adjustments, before tax   6    489    -    495 
Tax impact   (2)   (190)   -    (192)
Net current period other comprehensive income   4    957    8,753    9,714 
Balance at April 30, 2015  $668   $5,943   $(38,983)  $(32,372)

 

The components of accumulated other comprehensive income (loss), net of tax, for the six months ended April 30, 2016 and 2015 are as follows:

 

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(in thousands)  Unamortized
net gains
(losses) on
derivatives(1)
   Net unrealized
holding gains
(losses) on
available-for-
sale
investments(2)
   Foreign
currency
translation
adjustments
   Total 
Balance at October 31, 2015  $674   $3,733   $(52,993)  $(48,586)
Other comprehensive income (loss) before reclassifications and tax   -    (23)   7,776    7,753 
Tax impact   -    12    -    12 
Reclassification adjustments, before tax   11    (83)   -    (72)
Tax impact   (4)   41    -    37 
Net current period other comprehensive income (loss)   7    (53)   7,776    7,730 
Balance at April 30, 2016  $681   $3,680   $(45,217)  $(40,856)
                     
Balance at October 31, 2014  $661   $5,628   $(24,285)  $(17,996)
Other comprehensive income (loss) before reclassifications and tax   -    145    (14,603)   (14,458)
Tax impact   -    (66)   (95)   (161)
Reclassification adjustments, before tax   11    430    -    441 
Tax impact   (4)   (194)   -    (198)
Net current period other comprehensive income (loss)   7    315    (14,698)   (14,376)
Balance at April 30, 2015  $668   $5,943   $(38,983)  $(32,372)

 

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

 

17.Earnings per Share

 

The following table sets forth the calculation of earnings per basic and diluted share for the three and six months ended April 30, 2016 and 2015:

 

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   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2016   2015   2016   2015 
Net income attributable to Eaton Vance Corp. shareholders  $54,967   $70,384   $113,353   $99,387 
Less: Allocation of earnings to participating restricted shares   -    1,152    -    1,735 
Net income available to common shareholders  $54,967   $69,232   $113,353   $97,652 
Weighted-average shares outstanding – basic   110,459    114,415    110,852    114,326 
Incremental common shares   3,208    5,315    3,456    5,222 
Weighted-average shares outstanding – diluted   113,667    119,730    114,308    119,548 
Earnings per share:                    
Basic  $0.50   $0.61   $1.02   $0.85 
Diluted  $0.48   $0.58   $0.99   $0.82 

 

During the three and six months ended April 30, 2015, the calculation of earnings per basic and diluted share included the allocation of earnings to participating securities using the two-class method.

 

Antidilutive common shares related to stock options and unvested restricted stock excluded from the computation of earnings per diluted share were approximately 12.2 million and 7.5 million for the three months ended April 30, 2016 and 2015, respectively, and approximately 13.1 million and 7.7 million for the six months ended April 30, 2016 and 2015, 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.

 

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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 directors. Revenues for services provided or related to these funds for the three and six months ended April 30, 2016 and 2015 are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2016   2015   2016   2015 
Investment advisory and administrative fees  $193,851   $215,371   $395,398   $437,392 
Distribution fees   16,506    18,233    33,939    37,140 
Service fees   25,794    28,461    53,053    58,308 
Shareholder services fees   629    585    1,217    1,417 
Other revenue   712    885    1,249    1,315 
Total  $237,492   $263,535   $484,856   $535,572 

 

For the three months ended April 30, 2016 and 2015, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $3.7 million and $3.1 million, respectively, of investment advisory fees it was otherwise entitled to receive. For the six months ended April 30, 2016 and 2015, the Company waived $7.5 million and $6.5 million, respectively, of investment advisory fees it was otherwise entitled to receive.

 

Sales proceeds and net realized gains for three and six months ended April 30, 2016 and 2015 from investments in sponsored funds classified as available-for-sale, including sponsored funds accounted for under the equity method, are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2016   2015   2016   2015 
Proceeds from sales  $214   $20,851   $8,298   $32,047 
Net realized gains   27    297    162    341 

 

The Company bears the non-advisory expenses of certain sponsored funds for which it earns an all-in management fee and provides subsidies to startup and other smaller sponsored funds to enhance their competitiveness. For the three months ended April 30, 2016 and 2015, expenses of $5.4 million and $5.5 million, respectively, were incurred by the Company pursuant to these arrangements. For the six months ended April 30, 2016 and 2015, expenses of $11.8 million and $10.5 million, respectively, were incurred by the Company pursuant to these arrangements.

 

Included in investment advisory fees and other receivables at April 30, 2016 and October 31, 2015 are receivables due from sponsored funds of $83.4 million and $89.2 million, respectively.

 

Loan to Affiliate

 

On December 23, 2015, EVMC, a wholly owned subsidiary of the Company, loaned $5.0 million to Hexavest under a term loan agreement to seed a new investment strategy. The loan renews automatically for an additional one-year period on each anniversary date unless written termination notice is provided by

 

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EVMC. The loan earns interest equal to the one-year Canadian Dollar Offered Rate plus 200 basis points, which is payable quarterly in arrears. Hexavest may prepay the loan in whole or in part at any time without penalty. During the three and six months ended April 30, 2016, the Company recorded interest income related to the loan in gains and other investment income, net, on the Company’s Consolidated Statement of Income of $36,000 and $52,000, respectively. As of April 30, 2016, the Company has included $12,000 of interest receivable on the loan within other assets on its Consolidated Balance Sheet.

 

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 $10.4 million and $11.1 million at April 30, 2016 and October 31, 2015, 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 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, 2015.

 

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 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 and overlay services, including tax-managed and non-tax managed custom core 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 unaffiliated third-party managers, including global, regional and sector equity, and asset allocation strategies. Our breadth of investment management capabilities supports a wide range of products and services offered to fund shareholders, retail managed account investors, institutional investors and high-net-worth clients. Our equity strategies encompass a diversity of investment objectives, risk profiles, income levels and geographic representation. Our income investment strategies cover a broad duration and credit quality range and encompass both taxable and tax-free investments. We also offer a range of alternative investment strategies, including commodity- and currency-based investments and a spectrum of absolute return strategies. As of April 30, 2016, we had $318.7 billion in consolidated assets under management.

 

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

 

Business Developments

 

Prevailing equity and income market conditions and investor sentiment affect the sales and redemptions of our investment products, managed asset levels, operating results and the recoverability of our investments. During the second quarter and first six months of fiscal 2016, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 6.4 percent and -0.7 percent, respectively, and the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of 2.0 percent and 2.8 percent, respectively. Over the same periods, the MSCI Emerging Market Index, a broad measure of emerging market equity performance, had total returns of 13.2 percent and -0.9 percent, respectively.

 

Our ending consolidated assets under management increased by $16.1 billion, or 5 percent, from the end of the prior quarter to $318.7 billion on April 30, 2016, reflecting net inflows and market price appreciation. Consolidated net inflows of $2.1 billion in the second quarter of fiscal 2016 represent a 3 percent annualized internal growth rate. For comparison, the Company had consolidated net inflows of $6.8 billion in the second quarter of fiscal 2015. Average consolidated assets under management increased from the prior quarter by $1.2 billion, to $309.5 billion in the second quarter of fiscal 2016.

 

The primary drivers of our overall and investment advisory and administrative 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

 

 41 

 

  

management. Our overall average annualized effective fee rate decreased to 41.5 basis points and 42.0 basis points in the second quarter and first six months of fiscal 2016, respectively, from 46.0 basis points and 46.6 basis points in the second quarter and first six months of fiscal 2015, respectively. Our average annualized effective investment advisory and administrative fee rate, excluding performance-based fees, similarly decreased to 35.8 basis points and 36.1 basis points, respectively, in the second quarter and first six months of fiscal 2016 from 39.6 basis points and 40.0 basis points in the second quarter and first six months of fiscal 2015, respectively.

 

In terms of strategic initiatives, we continue to make significant progress in advancing NextShares exchange-traded managed funds towards market introduction. In February 2016, the Company introduced Eaton Vance Stock NextShares as the first NextShares fund and subsequently introduced two additional NextShares funds, Eaton Vance Global Income Builder NextShares and Eaton Vance TABS 5-to-15 Year Laddered Municipal Bond NextShares, in March 2016. In April 2016, the Company and Interactive Brokers Group, Inc., an automated global electronic broker and market maker, announced plans for Interactive Brokers Group, Inc. to offer NextShares to retail investors and financial professionals through its investing and trading platforms. Ultimately, broad market adoption and commercial success requires the development of expanded distribution, the launch of NextShares by other fund sponsors and acceptance by market participants, which cannot be assured.

 

Consolidated Assets under Management

 

Consolidated assets under management of $318.7 billion on April 30, 2016 increased $7.6 billion, or 2 percent, from the $311.0 billion reported a year earlier. Fund net outflows of $2.9 billion over the last twelve months reflect gross inflows $30.9 billion offset by outflows of $33.8 billion. Institutional separate account net inflows were $12.0 billion, high-net-worth separate account net inflows were $1.2 billion and retail managed account net inflows were $5.6 billion over the past twelve months. Net price declines in managed assets decreased consolidated assets under management by $8.3 billion over the last twelve months.

 

The following tables summarize our consolidated assets under management by investment mandate, investment vehicle and investment affiliate as of April 30, 2016 and 2015. Within the investment mandate view, the “Portfolio Implementation” category consists of Parametric’s tax-managed and non-tax managed custom core strategies and centralized portfolio management services. The “Exposure Management” category consists of Parametric’s futures- and options-based customized exposure management services.

 

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

 

   April 30,     
(in millions)  2016   % of Total   2015   % of Total   %
Change
 
Equity(3)  $88,553    28%  $97,167    31%   -9%
Fixed income(4)   56,259    18%   49,690    16%   13%
Floating-rate income   32,773    10%   38,269    12%   -14%
Alternative   9,719    3%   10,582    4%   -8%
Portfolio implementation   66,132    21%   52,879    17%   25%
Exposure management   65,235    20%   62,459    20%   4%
Total  $318,671    100%  $311,046    100%   2%

 

(1)Consolidated Eaton Vance Corp. See table on page 47 for managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Assets under management for which we estimate fair value using significant unobservable inputs are not material to the total value of the assets we manage.
(3)Includes balanced and multi-asset mandates.
(4)Includes cash management mandates.

 

Equity assets under management included $30.7 billion and $32.3 billion of assets managed for after-tax returns on April 30, 2016 and 2015, respectively. Portfolio implementation assets under management included $44.1 billion and $35.0 billion of assets managed for after-tax returns on April 30, 2016 and 2015, respectively. Fixed income assets included $33.6 billion and $28.9 billion of municipal income assets on April 30, 2016 and 2015, respectively.

 

Consolidated Assets under Management by Investment Vehicle(1)

 

   April 30,     
(in millions)  2016   % of
Total
   2015   % of
Total
   %
Change
 
Open-end funds(2)  $72,486    23%  $80,474    26%   -10%
Private funds(3)   26,908    8%   26,465    9%   2%
Closed-end funds(4)   23,508    7%   25,222    8%   -7%
Institutional separate account assets   126,620    40%   115,942    37%   9%
High-net-worth separate account assets   24,565    8%   24,226    8%   1%
Retail managed separate account assets   44,584    14%   38,717    12%   15%
Total  $318,671    100%  $311,046    100%   2%

 

(1)Consolidated Eaton Vance Corp. See table on page 47 for directly managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes assets in NextShares funds.
(3)Includes privately offered equity, fixed income and floating-rate income loan funds and CLO entities.
(4)Includes unit investment trusts.

 

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Consolidated Assets under Management by Investment Affiliate (1)

 

   April 30,   % 
(in millions)  2016   2015   Change 
Eaton Vance Management (2)  $139,534   $142,930    -2%
Parametric   160,935    149,656    8%
Atlanta Capital   18,202    18,460    -1%
Total  $318,671   $311,046    2%

 

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

 

The following tables summarize our consolidated assets under management and asset flows by investment mandate and investment vehicle for the three and six months ended April 30, 2016 and 2015:

 

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Consolidated Net Flows by Investment Mandate(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2016   2015   Change   2016   2015   Change 
Equity assets - beginning of period(2)  $83,351   $92,966    -10%  $90,013   $96,379    -7%
Sales and other inflows   3,906    3,965    -1%   7,738    8,479    -9%
Redemptions/outflows   (4,170)   (4,432)   -6%   (8,563)   (9,504)   -10%
Net flows   (264)   (467)   -43%   (825)   (1,025)   -20%
Exchanges   (5)   24    NM(3)   8    59    -86%
Market value change   5,471    4,644    18%   (643)   1,754    NM 
Equity assets - end of period  $88,553   $97,167    -9%  $88,553   $97,167    -9%
Fixed income assets - beginning of period(4)   52,756    47,417    11%   52,373    46,062    14%
Sales and other inflows   5,675    5,116    11%   10,607    8,628    23%
Redemptions/outflows   (3,090)   (2,511)   23%   (7,266)   (4,946)   47%
Net flows   2,585    2,605    -1%   3,341    3,682    -9%
Exchanges   17    5    240%   47    79    -41%
Market value change   901    (337)   NM    498    (133)   NM 
Fixed income assets - end of period  $56,259   $49,690    13%  $56,259   $49,690    13%
Floating-rate income assets - beginning of period   32,676    38,648    -15%   35,619    42,009    -15%
Sales and other inflows   1,490    2,387    -38%   3,394    4,689    -28%
Redemptions/outflows   (2,719)   (3,433)   -21%   (6,148)   (8,388)   -27%
Net flows   (1,229)   (1,046)   17%   (2,754)   (3,699)   -26%
Exchanges   (14)   (21)   -33%   (50)   (126)   -60%
Market value change   1,340    688    95%   (42)   85    NM 
Floating-rate income assets - end of period  $32,773   $38,269    -14%  $32,773   $38,269    -14%
Alternative assets - beginning of period   9,730    10,805    -10%   10,173    11,241    -10%
Sales and other inflows   614    782    -21%   1,834    1,629    13%
Redemptions/outflows   (743)   (1,069)   -30%   (1,952)   (2,207)   -12%
Net flows   (129)   (287)   -55%   (118)   (578)   -80%
Exchanges   (1)   (4)   -75%   2    (18)   NM 
Market value change   119    68    75%   (338)   (63)   437%
Alternative assets - end of period  $9,719   $10,582    -8%  $9,719   $10,582    -8%
Portfolio implementation assets - beginning of period   58,920    48,538    21%   59,487    48,008    24%
Sales and other inflows   5,176    3,435    51%   10,944    6,098    79%
Redemptions/outflows   (2,379)   (1,799)   32%   (4,306)   (3,364)   28%
Net flows   2,797    1,636    71%   6,638    2,734    143%
Exchanges   (3)   -    NM    (14)   -    NM 
Market value change   4,418    2,705    63%   21    2,137    -99%
Portfolio implementation assets - end of period  $66,132   $52,879    25%  $66,132   $52,879    25%
Exposure management assets - beginning of period   65,146    57,294    14%   63,689    54,036    18%
Sales and other inflows   10,938    14,523    -25%   23,867    31,556    -24%
Redemptions/outflows   (12,626)   (10,196)   24%   (22,749)   (24,482)   -7%
Net flows   (1,688)   4,327    NM    1,118    7,074    -84%
Market value change   1,777    838    112%   428    1,349    -68%
Exposure management assets - end of period  $65,235   $62,459    4%  $65,235   $62,459    4%
Total fund and separate account assets - beginning of period   302,579    295,668    2%   311,354    297,735    5%
Sales and other inflows   27,799    30,208    -8%   58,384    61,079    -4%
Redemptions/outflows   (25,727)   (23,440)   10%   (50,984)   (52,891)   -4%
Net flows   2,072    6,768    -69%   7,400    8,188    -10%
Exchanges   (6)   4    NM    (7)   (6)   17%
Market value change   14,026    8,606    63%   (76)   5,129    NM 
Total assets under management - end of period  $318,671   $311,046    2%  $318,671   $311,046    2%

 

(1)Consolidated Eaton Vance Corp. See table on page 47 for managed assets and flows of 49 percent-owned Hexavest Inc. which are not included in the table above.
(2)Includes balanced and multi-asset mandates.
(3)Not meaningful ("NM").
(4)Includes cash management mandates.

 

 45 

 

  

Consolidated Net Flows by Investment Vehicle(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2016   2015   Change   2016   2015   Change 
Fund assets - beginning of period(2)  $117,788   $129,552    -9%  $125,934   $134,564    -6%
Sales and other inflows   6,977    7,755    -10%   15,235    16,369    -7%
Redemptions/outflows   (6,842)   (8,390)   -18%   (16,555)   (19,129)   -13%
Net flows   135    (635)   NM    (1,320)   (2,760)   -52%
Exchanges   (6)   4    NM    (60)   185    NM 
Market value change   4,985    3,240    54%   (1,652)   172    NM 
Fund assets - end of period  $122,902   $132,161    -7%  $122,902   $132,161    -7%
Institutional separate account assets - beginning of period   120,197    107,547    12%   119,987    106,443    13%
Sales and other inflows   15,109    17,860    -15%   31,840    35,915    -11%
Redemptions/outflows   (14,735)   (12,501)   18%   (26,847)   (28,899)   -7%
Net flows   374    5,359    -93%   4,993    7,016    -29%
Exchanges   436    -    NM    420    (173)   NM 
Market value change   5,613    3,036    85%   1,220    2,656    -54%
Institutional separate account assets - end of period  $126,620   $115,942    9%  $126,620   $115,942    9%
High-net-worth separate account assets - beginning of period   23,999    22,594    6%   24,516    22,235    10%
Sales and other inflows   1,417    1,166    22%   3,681    2,626    40%
Redemptions/outflows   (2,055)   (792)   159%   (3,194)   (1,413)   126%
Net flows   (638)   374    NM    487    1,213    -60%
Exchanges   (409)   (1)   NM    (339)   (95)   257%
Market value change   1,613    1,259    28%   (99)   873    NM 
High-net-worth separate account assets - end of period  $24,565   $24,226    1%  $24,565   $24,226    1%
Retail managed account assets - beginning of period   40,595    35,975    13%   40,917    34,493    19%
Sales and other inflows   4,296    3,427    25%   7,628    6,169    24%
Redemptions/outflows   (2,095)   (1,757)   19%   (4,388)   (3,450)   27%
Net flows   2,201    1,670    32%   3,240    2,719    19%
Exchanges   (27)   1    NM    (28)   77    NM 
Market value change   1,815    1,071    69%   455    1,428    -68%
Retail managed account assets - end of period  $44,584   $38,717    15%  $44,584   $38,717    15%
Total fund and separate account assets - beginning of period   302,579    295,668    2%   311,354    297,735    5%
Sales and other inflows   27,799    30,208    -8%   58,384    61,079    -4%
Redemptions/outflows   (25,727)   (23,440)   10%   (50,984)   (52,891)   -4%
Net flows   2,072    6,768    -69%   7,400    8,188    -10%
Exchanges   (6)   4    NM    (7)   (6)   17%
Market value change   14,026    8,606    63%   (76)   5,129    NM 
Total assets under management - end of period  $318,671   $311,046    2%  $318,671   $311,046    2%

 

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

 

As of April 30, 2016, the Company’s 49 percent-owned affiliate Hexavest Inc. (“Hexavest”) managed $14.2 billion of client assets, down 9 percent from $15.6 billion of managed assets on April 30, 2015. Other than Eaton Vance-sponsored funds for which Hexavest is adviser or sub-adviser, the managed assets of Hexavest are not included in Eaton Vance consolidated totals.

 

The following table summarizes assets under management and asset flow information for Hexavest for the three and six months ended April 30, 2016 and 2015:

 

 46 

 

  

Hexavest Assets under Management and Net Flows

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2016   2015   Change   2016   2015   Change 
Eaton Vance distributed:                              
Eaton Vance sponsored funds - beginning of period(1)  $205   $234    -12%  $229   $227    1%
Sales and other inflows   5    3    67%   11    19    -42%
Redemptions/outflows   (4)   (4)   0%   (25)   (10)   150%
Net flows   1    (1)   NM    (14)   9    NM 
Market value change   20    14    43%   11    11    0%
Eaton Vance sponsored funds - end of period  $226   $247    -9%  $226   $247    -9%
Eaton Vance distributed separate accounts - beginning of period(2)   2,344    1,999    17%   2,440    2,367    3%
Sales and other inflows   22    284    -92%   26    384    -93%
Redemptions/outflows   (25)   (3)   733%   (34)   (435)   -92%
Net flows   (3)   281    NM    (8)   (51)   -84%
Market value change   216    121    79%   125    85    47%
Eaton Vance distributed separate accounts - end of period  $2,557   $2,401    6%  $2,557   $2,401    6%
Total Eaton Vance distributed - beginning of period   2,549    2,233    14%   2,669    2,594    3%
Sales and other inflows   27    287    -91%   37    403    -91%
Redemptions/outflows   (29)   (7)   314%   (59)   (445)   -87%
Net flows   (2)   280    NM    (22)   (42)   -48%
Market value change   236    135    75%   136    96    42%
Total Eaton Vance distributed - end of period  $2,783   $2,648    5%  $2,783   $2,648    5%
Hexavest directly distributed - beginning of period(3)   10,533    12,749    -17%   11,279    14,101    -20%
Sales and other inflows   173    180    -4%   303    425    -29%
Redemptions/outflows   (442)   (683)   -35%   (771)   (2,024)   -62%
Net flows   (269)   (503)   -47%   (468)   (1,599)   -71%
Market value change   1,171    753    56%   624    497    26%
Hexavest directly distributed - end of period  $11,435   $12,999    -12%  $11,435   $12,999    -12%
Total Hexavest assets - beginning of period   13,082    14,982    -13%   13,948    16,695    -16%
Sales and other inflows   200    467    -57%   340    828    -59%
Redemptions/outflows   (471)   (690)   -32%   (830)   (2,469)   -66%
Net flows   (271)   (223)   22%   (490)   (1,641)   -70%
Market value change   1,407    888    58%   760    593    28%
Total Hexavest assets - end of period  $14,218   $15,647    -9%  $14,218   $15,647    -9%

 

(1)Managed assets and flows of Eaton Vance-sponsored pooled investment vehicles for which Hexavest is adviser or sub-adviser. Eaton Vance receives management revenue (and in some cases also distribution revenue) on these assets, which are included in the Eaton Vance consolidated assets and flows.
(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 assets and flows.
(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 assets and flows.

 

Consolidated average assets under management presented in the following tables are derived by averaging the beginning and ending assets of each month over the period. These tables are 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 Investment Mandate

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2016   2015   Change   2016   2015   Change 
Equity(1)  $85,896   $95,747    -10%  $87,252   $95,771    -9%
Fixed income(2)   54,307    48,296    12%   53,466    47,460    13%
Floating-rate income   32,475    38,467    -16%   33,409    39,552    -16%
Alternative   9,707    10,780    -10%   9,887    10,892    -9%
Portfolio implementation   62,134    51,063    22%   61,218    50,019    22%
Exposure management   65,003    59,061    10%   64,601    57,436    12%
Total  $309,522   $303,414    2%  $309,833   $301,130    3%

 

(1) Includes balanced and multi-asset mandates.
(2) Includes cash management mandates.

 

Consolidated Average Assets under Management by Investment Vehicle

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2016   2015   Change   2016   2015   Change 
Open-end funds(1)  $70,358   $79,900    -12%  $71,661   $80,798    -11%
Private funds(2)   26,116    26,283    -1%   26,294    26,214    0%
Closed-end funds(3)   23,223    25,212    -8%   23,669    25,258    -6%
Institutional account assets   123,123    110,882    11%   121,978    109,227    12%
High-net-worth account assets   24,190    23,562    3%   24,288    23,129    5%
Retail managed account assets   42,512    37,575    13%   41,943    36,504    15%
Total  $309,522   $303,414    2%  $309,833   $301,130    3%

 

(1) Includes NextShares funds.
(2) Includes privately offered equity, fixed income and floating-rate bank loan funds and CLO entities.
(3) Includes unit investment trusts.

 

Results of Operations

 

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

 

We define adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share as net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share, respectively, adjusted to exclude changes in the estimated redemption value of non-controlling interests in our affiliates redeemable at other than fair value (“non-controlling interest value adjustments”), closed-end fund structuring fees, payments to end service and additional compensation arrangements in place for certain Eaton Vance closed-end funds and other items management deems non-recurring or non-operating in nature, or otherwise

 

 48 

 

  

outside of the ordinary course of business (such as the impact of special dividends, costs associated with the extinguishment of debt and tax settlements) in each respective period, as applicable. Adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share should not be construed to be a substitute for, or superior to, net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share computed in accordance with U.S. GAAP. We provide disclosures of adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share to reflect the fact that our management and Board of Directors, as well as our outside investors, consider these adjusted numbers a measure of the Company’s underlying operating performance. Management believes adjusted net income and adjusted earnings per diluted share are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results, and may provide a better baseline for analyzing trends in our underlying business.

 

The following table provides a reconciliation of net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share to adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, respectively, for the three and six months ended April 30, 2016 and 2015:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands, except per share data)  2016   2015   Change   2016   2015   Change 
Net income attributable to Eaton Vance Corp. shareholders  $54,967   $70,384    -22%  $113,353   $99,387    14%
Non-controlling interest value adjustments(1)   -    (3)   NM    133    197    -32%
Payments to end certain closed-end fund service and additional compensation arrangements, net of tax(2)   -    -    -    -    44,895    NM 
Adjusted net income attributable to Eaton Vance Corp. shareholders  $54,967   $70,381    -22%  $113,486   $144,479    -21%
                               
Earnings per diluted share  $0.48   $0.58    -17%  $0.99   $0.82    21%
Payments to end certain closed-end fund service and additional compensation arrangements, net of tax(2)   -    -    -    -    0.37    NM 
Adjusted earnings per diluted share  $0.48   $0.58    -17%  $0.99   $1.19    -17%

 

(1)Please see page 58, "Net Income Attributable to Non-controlling and Other Beneficial Interests," for a further discussion of the non-controlling interest value adjustments referenced above.
(2)Reflects a $73.0 million payment to end certain fund service and additional compensation arrangements for certain Eaton Vance closed-end funds, net of the associated impact to taxes of $28.1 million. See page 54 for further discussion.

 

We reported net income attributable to Eaton Vance Corp. shareholders of $55.0 million, or $0.48 per diluted share, in the second quarter of fiscal 2016 compared to net income attributable to Eaton Vance Corp. shareholders of $70.4 million, or $0.58 per diluted share, in the second quarter of fiscal 2015. As outlined in the table above, adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share were consistent with GAAP earnings. The change in net income attributable to Eaton Vance Corp. shareholders can be primarily ascribed to the following:

 

 49 

 

  

·A decrease in revenue of $28.4 million, or 8 percent, primarily reflecting lower average managed assets in higher-fee floating-rate income, alternative and equity mandates, partially offset by growth in lower-fee exposure management, portfolio implementation and laddered bond mandates.
·A decrease in expenses of $1.9 million, or 1 percent, primarily reflecting decreases in distribution, service fee and fund-related expenses, offset by modest increases in compensation, amortization of deferred sales commissions and other operating expenses.
·A $3.4 million improvement in gains (losses) and other investment income, net, primarily reflecting increases in net gains recognized on our seed capital portfolio partially offset by an increase in foreign currency losses.
·A $9.4 million improvement in income (expense) of the Company’s consolidated collateralized loan obligation (“CLO”) entities, reflecting an increase in gains and other investment income offset by an increase in interest expense.
·A decrease in income taxes of $7.7 million, or 18 percent reflecting the decrease in the Company’s income before taxes. Consolidated CLO entity income that is allocated to other beneficial interest holders is not subject to tax in the Company’s provision.
·A decrease in equity in net income of affiliates, net of tax, of $0.6 million, primarily reflecting modest decreases in the Company’s net interest in the earnings of Hexavest and a private equity partnership.
·A $9.0 million increase in net income attributable to non-controlling and other beneficial interest holders, primarily reflecting an increase in net income of the Company’s consolidated CLO entities attributable to other beneficial interest holders.

 

Weighted average diluted shares outstanding decreased by 6.1 million shares, or 5 percent, in the second quarter of fiscal 2016 from the second quarter of fiscal 2015. The decrease primarily reflects shares repurchased over the last twelve months and a decrease in the dilutive effect of in-the-money options.

 

We reported net income attributable to Eaton Vance Corp. shareholders of $113.4 million, or $0.99 per diluted share, in the first six months of fiscal 2016 compared to net income attributable to Eaton Vance Corp. shareholders of $99.4 million, or $0.82 per diluted share, in the first six months of fiscal 2015. We reported adjusted net income attributable to Eaton Vance Corp. shareholders of $113.5 million, or $0.99 adjusted earnings per diluted share, in the first six months of fiscal 2016 compared to adjusted net income attributable to Eaton Vance Corp. shareholders of $144.5 million, or $1.19 adjusted earnings per diluted share, in the first six months of fiscal 2015. The change in net income attributable to Eaton Vance Corp. shareholders can be primarily attributed to the following:

 

·A decrease in revenue of $51.7 million, or 7 percent, primarily reflecting lower average managed assets in higher-fee floating-rate income, alternative and equity mandates, partially offset by growth in lower-fee exposure management, portfolio implementation and laddered bond mandates.
·A decrease in expenses of $75.4 million, or 14 percent, primarily reflecting the payment of $73.0 million to terminate certain closed-end fund service and additional compensation arrangements in the first quarter of fiscal 2015. Excluding this payment, expenses were substantially unchanged, reflecting decreases in distribution, service fee and fund-related expenses, offset by increases in compensation, amortization of deferred sales commissions and other operating expenses.
·A $3.5 million improvement in gains (losses) and other investment income, net, due to an improvement in gains recognized on our seed capital portfolio offset by a decrease in interest and other income and an increase in foreign currency losses.
·A $10.8 million improvement in income (expense) of the Company’s consolidated CLO entities, reflecting an increase in gains and other investment income offset by an increase in interest expense.
·An increase in income taxes of $12.3 million, or 20 percent, reflecting the increase in the Company’s income before taxes.

 

 50 

 

 

·A decrease in equity in net income of affiliates, net of tax, of $1.2 million, primarily reflecting a decrease in the Company’s proportionate net interest in earnings of sponsored funds accounted for under the equity method, a decrease in the Company’s net interest in the earnings of Hexavest and a decrease in the Company’s net income of a private equity partnership.
·An increase in net income attributable to non-controlling and other beneficial interest holders of $10.3 million, primarily reflecting an increase in net income attributable to non-controlling interest holders of the Company’s consolidated CLO entities.

 

Weighted average diluted shares outstanding decreased by 5.2 million shares, or 4 percent, in the first six months of fiscal 2016 over the first six months of fiscal 2015. The decrease primarily reflects shares repurchased over the last twelve months and a decrease in the dilutive effect of in-the-money options, partially offset by the exercise of employee stock options and the vesting of restricted stock.

 

Revenue

 

Our revenue declined by $28.4 million, or 8 percent, and by $51.7 million, or 7 percent, in the second quarter and first six months of fiscal 2016 from the same periods a year earlier, respectively, reflecting decreases in investment advisory and administrative fees, distribution and underwriter fees, service fees and other revenue. Investment advisory and administrative fees declined despite a 2 percent and 3 percent increase in average consolidated assets under management in the second quarter and first six months of fiscal 2016, respectively, as the revenue impact of growth in lower-fee rate exposure management, portfolio implementation and laddered bond mandates was more than offset by lower average assets in higher-fee floating-rate income, alternative and equity mandates.

 

The following table shows our investment advisory and administrative fees, distribution and underwriter fees, service fees and other revenue for the three and six months ended April 30, 2016 and 2015:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)  2016   2015   Change   2016   2015   Change 
Investment advisory and administrative fees  $276,883   $300,624    -8%  $559,925   $602,437    -7%
Distribution and underwriter fees   18,275    20,048    -9%   37,333    41,084    -9%
Service fees   25,794    28,461    -9%   53,053    58,308    -9%
Other revenue   2,338    2,531    -8%   4,535    4,765    -5%
Total revenue  $323,290   $351,664    -8%  $654,846   $706,594    -7%

 

Investment advisory and administrative fees

The decrease in investment advisory and administrative fees in the second quarter and first six months of fiscal 2016 from the same periods a year earlier can be primarily attributed to a shift in asset mix driven by the loss of assets in higher-fee investment mandates and growth in assets in lower-fee investment mandates. Our effective investment advisory and administrative fee rate, excluding performance-based fees, declined to 35.8 basis points and 36.1 basis points in the second quarter and first six months of fiscal 2016, respectively, from 39.6 basis points and 40.0 basis points in the second quarter and first six months of fiscal 2015, respectively.

 

Average annualized effective investment advisory and administrative fee rates, excluding performance-based fees, for the three and six months ended April 30, 2016 and 2015 by investment mandate were as follows:

 

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   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in basis points on average managed assets)  2016   2015   Change   2016   2015   Change 
Equity   62.5    63.6    -2%   62.3    63.8    -2%
Fixed income   39.6    42.8    -7%   40.2    43.4    -7%
Floating-rate income   51.4    52.3    -2%   51.7    52.9    -2%
Alternative   62.4    61.6    1%   62.8    62.8    0%
Portfolio implementation   14.9    17.1    -13%   15.1    15.8    -4%
Exposure management   5.4    5.5    -2%   5.3    5.4    -2%
Average effective investment advisory and administrative fee rate   35.8    39.6    -10%   36.1    40.0    -10%

 

Performance-based fees were negligible in both the second quarter of fiscal 2016 and 2015 and contributed $0.1 million in both the first six months of fiscal 2016 and 2015.

 

Distribution and underwriter fees

The following table shows the total distribution payments with respect to our Class A, Class B, Class C, Class N, Class R and private equity funds for the three and six months ended April 30, 2016 and 2015:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)  2016   2015   Change   2016   2015   Change 
Class A  $159   $207    -23%  $334   $485    -31%
Class B   340    562    -40%   737    1,206    -39%
Class C   14,527    15,972    -9%   29,856    32,534    -8%
Class N   21    33    -36%   46    83    -45%
Class R   316    290    9%   637    575    11%
Private funds   1,073    1,169    -8%   2,129    2,257    -6%
Total distribution plan payments  $16,436   $18,233    -10%  $33,739   $37,140    -9%

 

Distribution plan payments fluctuate with both the level of average assets under management and sales of sponsored funds and fund share classes that are subject to these fees.

 

Underwriter fees and other distribution income were $1.8 million in the second quarter of fiscal 2016, a decrease of 2 percent over the same period a year earlier, primarily reflecting a decrease in contingent deferred sales charges received on certain Class A share redemptions.

 

Underwriter fees and other distribution income were $3.4 million in the first six months of fiscal 2016, a decrease of 14 percent over the same period a year earlier, primarily reflecting a decrease of $0.4 million in contingent deferred sales charges received on certain Class A share redemptions.

 

Service fees

Service fee revenue decreased 9 percent in both the second quarter and first six months of fiscal 2016 from the same periods a year earlier, primarily reflecting a decrease in average assets under management in certain classes of funds subject to service fees.

 

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Other revenue

Other revenue, which consists primarily of sub-transfer agent fees, miscellaneous dealer income, custody fees, Hexavest-related distribution and service revenue, and sub-lease income, decreased 8 percent in the second quarter of fiscal 2016 over the second quarter of fiscal 2015 and decreased 5 percent in the first six months of fiscal 2016 over the same period a year earlier, primarily reflecting a decrease in Hexavest-related revenue.

 

Expenses

 

Operating expenses decreased by 1 percent, or $1.9 million, in the second quarter of fiscal 2016 from the same period a year earlier, reflecting increases in compensation, amortization of deferred sales commissions and other operating expenses, offset by decreased distribution, service fee and fund-related expenses. Expenses in connection with the Company’s NextShares initiative totaled approximately $1.9 million in the second quarter of fiscal 2016 compared to $1.8 million in the second quarter of fiscal 2015.

 

Operating expenses decreased by 14 percent, or $75.4 million, in the first six months of fiscal 2016 from the same period a year earlier, reflecting increases in compensation, amortization of deferred sales commissions and other operating expenses, offset by decreased distribution, service fee and fund-related expenses. Included in distribution expense for the first six months of fiscal 2015 is a one-time payment of $73.0 million to terminate certain closed-end fund service and additional compensation arrangements with a distribution partner. Expenses in connection with the Company’s NextShares initiative totaled approximately $3.6 million in the first six months of fiscal 2016 compared to $3.1 million in the first six months of fiscal 2015.

 

The following table shows our operating expenses for the three and six months ended April 30, 2016 and 2015:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)  2016   2015   Change   2016   2015   Change 
Compensation and related costs:                              
Cash compensation  $103,049   $103,451    0%  $207,298   $206,333    0%
Stock-based compensation   18,470    16,624    11%   36,731    33,934    8%
Total compensation and related costs 121,519 120,075 1 % 244,029 240,267 2 %
Distribution expense   28,239    30,082    -6%   56,722    136,349    -58%
Service fee expense   23,610    26,358    -10%   48,205    54,138    -11%
Amortization of deferred sales commissions 3,957 3,692 7 % 8,001 7,420 8 %
Fund-related expenses   8,031    8,932    -10%   17,194    17,638    -3%
Other expenses   42,166    40,304    5%   84,302    78,001    8%
Total expenses  $227,522   $229,443    -1%  $458,453   $533,813    -14%

 

Compensation and related costs

The following table shows our compensation and related costs for the three and six months ended April 30, 2016 and 2015:

 

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   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)  2016   2015   Change   2016   2015   Change 
Base salaries and employee benefits  $56,526   $53,907    5%  $113,183   $108,933    4%
Stock-based compensation   18,470    16,624    11%   36,731    33,934    8%
Operating income-based incentives   30,460    33,148    -8%   61,830    65,984    -6%
Sales incentives   14,510    15,607    -7%   28,480    30,018    -5%
Long-term performance-based incentives   (224)   -      NM    4    -      NM 
Other compensation expense   1,777    789    125%   3,801    1,398    172%
Total  $121,519   $120,075    1%  $244,029   $240,267    2%

 

The increase in base salaries and employee benefits in the second quarter of fiscal 2016 from the same period a year earlier primarily reflects an increase in base and stock-based compensation associated with a 3 percent increase in average headcount and annual merit increases, and the corresponding increases in employee benefits and payroll taxes. The decline in operating-income based incentives reflects a decrease in pre-bonus adjusted operating income offset by a modest increase in the bonus accrual rate. The decrease in sales incentives primarily reflects lower gross sales of products on which sales-based incentives are paid. The increase in other compensation is related to employee recruiting and terminations.

 

The increase in base salaries and employee benefits in the first six months of fiscal 2016 from the same period a year earlier primarily reflects an increase in base and stock-based compensation associated with a 3 percent increase in average headcount and annual merit increases and the corresponding increases in employee benefits and taxes. The decline in operating-income based incentives year-over-year reflects a decrease in pre-bonus adjusted operating income offset by a modest increase in the bonus accrual rates. Sales incentives decreased primarily due to a decrease in compensation-eligible sales. Other compensation expense increased due to an increase in employee recruiting and terminations.

 

Distribution expense

The following table shows our distribution expense for the three and six months ended April 30, 2016 and 2015:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)  2016   2015   Change   2016   2015   Change 
Class A share commissions  $451   $818    -45%  $996   $1,397    -29%
Class C share distribution fees   12,160    13,174    -8%   24,889    26,843    -7%
Payments to end certain fund service and additional compensation arrangements   -    -    -    -    73,000      NM 
Closed-end fund dealer compensation payments   923    1,025    -10%   1,911    4,519    -58%
Intermediary marketing support payments   9,483    10,429    -9%   19,180    21,378    -10%
NextShares distribution fees   15    -    NM    15    -    NM 
Discretionary marketing expenses   5,207    4,636    12%   9,731    9,212    6%
Total  $28,239   $30,082    -6%  $56,722   $136,349    -58%

 

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The decrease in Class A share commissions in the second quarter and first six months of fiscal 2016 from the same periods a year earlier reflects a decline in Class A fund sales on which we pay commissions. The decrease in Class C share distribution fees in the second quarter and first six months of fiscal 2016 reflects lower Class C share assets held more than one year. As noted above, distribution expense for the first six months of fiscal 2015 includes a one-time payment of $73.0 million to terminate certain closed-end fund service and additional compensation arrangements with a distribution partner pursuant to which we were obligated to make recurring payments over time based on the assets of the respective closed-end funds. The decrease in closed-end fund dealer compensation payments in the second quarter and first six months of fiscal 2016 compared to the same periods a year ago reflects the impact of the termination of the service and additional compensation arrangements described above. The decrease in marketing expenses associated with intermediary marketing support payments to our distribution partners reflects lower average assets subject to those arrangements. The increase in discretionary marketing expenses primarily reflects an increase in the use of outside agencies.

 

Service fee expense

Service fee expense decreased by 10 percent, or $2.7 million, in the second quarter of fiscal 2016 from the same quarter a year earlier, reflecting a decrease in average fund assets retained more than one year in funds and share classes that are subject to service fees. Service fee expense decreased 11 percent, or $5.9 million, in the first six months of fiscal 2016 versus the same period a year earlier for the same reason.

 

Amortization of deferred sales commissions

Amortization expense increased 7 percent, or $0.3 million, in the second quarter of fiscal 2016 from the same period a year earlier, reflecting decreases in Class B share and Class C share amortization expense offset by increases in private fund amortization expense. In the second quarter of fiscal 2016, 63 percent of total amortization related to Class C shares, 5 percent to Class B shares and 32 percent to private funds. In the second quarter of fiscal 2015, 70 percent of total amortization related to Class C shares, 9 percent to Class B shares and 21 percent to private funds.

 

Amortization expense increased 8 percent, or $0.6 million, in the first six months of fiscal 2016 compared to the same period a year earlier, reflecting a decrease in average Class B share and Class C share amortization expense offset by an increase in private fund share amortization expense.

 

Fund-related expenses

Fund-related expenses decreased 10 percent, or $0.9 million, in the second quarter of fiscal 2016 from the same period a year earlier and decreased 3 percent, or $0.4 million, in the first six months of fiscal 2016 from the same period a year earlier. The decrease in the second quarter of fiscal 2016, reflects a decrease in other expenses borne by the Company on funds in which it earns an all-in fee and a decrease in sub-advisory expenses related to Company-sponsored funds managed by unaffiliated sub-advisors, partially offset by an increase in fund subsidies. The decrease in the first six months of fiscal 2016 primarily reflects a decrease in sub-advisory expenses related to Company-sponsored funds managed by unaffiliated sub-advisers, offset by an increase in fund subsidies.

 

Other expenses

The following table shows our other expense for the three and six months ended April 30, 2016 and 2015:

 

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   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)  2016   2015   Change   2016   2015   Change 
Information technology  $17,467   $16,849    4%  $35,222   $33,009    7%
Facilities-related   10,116    9,839    3%   20,699    20,346    2%
Travel   4,296    3,893    10%   8,029    7,588    6%
Professional services   3,557