10-Q 1 v468366_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, 2017

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 Number: 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 (§232.405 of this chapter) 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ¨
Emerging growth company ¨    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ¨ No x

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class:   Outstanding as of April 30, 2017
Non-Voting Common Stock, $0.00390625 par value    114,981,808 shares
Voting Common Stock, $0.00390625 par value   442,932 shares

 

 

 

 

 

  

Eaton Vance Corp.

Form 10-Q

As of April 30, 2017 and for the

Three and Six Month Periods Ended April 30, 2017

 

Table of Contents

Required
Information
      Page
Number
Reference
         
Part I   Financial Information    
Item 1.   Consolidated Financial Statements (unaudited)   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   65
Item 4.   Controls and Procedures   65
         
Part II   Other Information    
Item 1.   Legal Proceedings   66
Item 1A.   Risk Factors   66
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   66
Item 6.   Exhibits   67
         
Signatures       68

 

 2 

 

  

Part I - Financial Information

 

Item 1. Consolidated Financial Statements (unaudited)

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

   April 30,   October 31, 
(in thousands)  2017   2016 
         
Assets          
           
Cash and cash equivalents  $663,458   $424,174 
Management fees and other receivables   191,284    186,172 
Investments   750,121    589,773 
Deferred sales commissions   32,474    27,076 
Deferred income taxes   67,996    73,295 
Equipment and leasehold improvements, net   46,341    44,427 
Intangible assets, net   94,290    46,809 
Goodwill   259,681    248,091 
Loan to affiliate   5,000    5,000 
Other assets   56,428    85,565 
Total assets  $2,167,073   $1,730,382 

 

See notes to Consolidated Financial Statements.

 

 3 

 

  

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

   April 30,   October 31, 
(in thousands, except share data)  2017   2016 
Liabilities, Temporary Equity and Permanent Equity          
           
Liabilities:          
           
Accrued compensation  $100,087   $173,485 
Accounts payable and accrued expenses   64,527    59,927 
Dividend payable   38,079    36,525 
Debt   868,272    571,773 
Other liabilities   107,504    75,069 
Total liabilities   1,178,469    916,779 
           
Commitments and contingencies (Note 19)          
           
Temporary Equity:          
           
Redeemable non-controlling interests   200,114    109,028 
           
Permanent Equity:          
           
Voting Common Stock, par value $0.00390625 per share:          
Authorized, 1,280,000 shares          
Issued and outstanding, 442,932 and 442,932 shares, respectively   2    2 
Non-Voting Common Stock, par value $0.00390625 per share:          
Authorized, 190,720,000 shares          
Issued and outstanding, 114,981,808 and 113,545,008 shares, respectively   449    444 
Additional paid-in capital   16,399    - 
Notes receivable from stock option exercises   (10,185)   (12,074)
Accumulated other comprehensive loss   (60,064)   (57,583)
Retained earnings   841,127    773,000 
Total Eaton Vance Corp. shareholders' equity   787,728    703,789 
Non-redeemable non-controlling interests   762    786 
Total permanent equity   788,490    704,575 
Total liabilities, temporary equity and permanent equity  $2,167,073   $1,730,382 

 

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)  2017   2016   2017   2016 
Revenue:                    
Management fees  $321,629   $276,883   $626,282   $559,925 
Distribution and underwriter fees   19,918    18,275    38,877    37,333 
Service fees   30,067    25,794    58,978    53,053 
Other revenue   3,018    2,338    5,454    4,535 
Total revenue   374,632    323,290    729,591    654,846 
Expenses:                    
Compensation and related costs   135,467    121,519    270,602    244,029 
Distribution expense   32,007    28,239    63,124    56,722 
Service fee expense   27,827    23,610    54,754    48,205 
Amortization of deferred sales commissions   4,026    3,957    7,880    8,001 
Fund-related expenses   11,848    8,031    22,723    17,194 
Other expenses   45,537    42,166    87,152    84,302 
Total expenses   256,712    227,522    506,235    458,453 
Operating income   117,920    95,768    223,356    196,393 
Non-operating income (expense):                    
Gains and other investment income, net   9,288    3,789    9,782    6,629 
Interest expense   (8,065)   (7,340)   (15,412)   (14,682)
Other income (expense) of consolidated collateralized loan obligation (CLO) entity:                    
Gains and other investment income, net   -    13,908    -    17,187 
Interest expense   -    (2,878)   -    (4,714)
Total non-operating income (expense)   1,223    7,479    (5,630)   4,420 
Income before income taxes and equity in net income of affiliates   119,143    103,247    217,726    200,813 
Income taxes   (44,654)   (36,169)   (81,402)   (73,012)
Equity in net income of affiliates, net of tax   3,144    2,377    5,650    4,886 
Net income   77,633    69,455    141,974    132,687 
Net income attributable to non-controlling and other beneficial interests   (5,658)   (14,488)   (9,288)   (19,334)
Net income attributable to Eaton Vance Corp. shareholders  $71,975   $54,967   $132,686   $113,353 
Earnings per share:                    
Basic  $0.65   $0.50   $1.20   $1.02 
Diluted  $0.62   $0.48   $1.15   $0.99 
Weighted average shares outstanding:                    
Basic   110,875    110,459    110,375    110,852 
Diluted   115,962    113,667    115,188    114,308 
Dividends declared per share  $0.280   $0.265   $0.560   $0.530 

 

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)  2017   2016   2017   2016 
                 
Net income  $77,633   $69,455   $141,974   $132,687 
Other comprehensive income (loss):                    
Change in unrealized losses on derivatives, net of tax   (413)   -    (413)   - 
Amortization of net gains on derivatives, net of tax   5    4    9    7 
Unrealized holding gains (losses) on available-for-sale investments and reclassification adjustments, net of tax   325    605    652    (53)
Foreign currency translation adjustments, net of tax   (8,526)   21,841    (2,729)   7,776 
                     
Other comprehensive income (loss), net of tax   (8,609)   22,450    (2,481)   7,730 
                     
Total comprehensive income   69,024    91,905    139,493    140,417 
Comprehensive income attributable to non-controlling and other beneficial interests   (5,658)   (14,488)   (9,288)   (19,334)
Total comprehensive income attributable to Eaton Vance Corp. shareholders  $63,366   $77,417   $130,205   $121,083 

 

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
   Retained
Earnings
   Non-
Redeemable
Non-
Controlling
Interests
   Total
Permanent
Equity
   Redeemable
Non-
Controlling
Interests
 
Balance, November 1, 2016  $2   $444   $-   $(12,074)  $(57,583)  $773,000   $786   $704,575   $109,028 
Net income   -    -    -    -    -    132,686    1,837    134,523    7,451 
Other comprehensive loss   -    -    -    -    (2,481)   -    -    (2,481)   - 
Dividends declared ($0.560 per share)   -    -    -    -    -    (64,559)   -    (64,559)   - 
Issuance of Non-Voting Common Stock:                                             
On exercise of stock options   -    6    41,873    (771)   -    -    -    41,108    - 
Under employee stock purchase plans   -    -    1,516    -    -    -    -    1,516    - 
Under employee stock purchase incentive plan   -    -    2,791    -    -    -    -    2,791    - 
Under restricted stock plan, net of forfeitures   -    6    -    -    -    -    -    6    - 
Stock-based compensation   -    -    39,214    -    -    -    -    39,214    - 
Tax benefit of stock option exercises   -    -    7,183    -    -    -    -    7,183    - 
Tax benefit of non-controlling interest repurchases   -    -    3,659    -    -    -    -    3,659    - 
Repurchase of Non-Voting Common Stock   -    (7)   (78,977)   -    -    -    -    (78,984)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    2,660    -    -    -    2,660    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    (1,797)   (1,797)   90,509 
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    (488)
Reclass to temporary equity   -    -    -    -    -    -    (64)   (64)   64 
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    (7,310)
Other changes in non-controlling interests   -    -    (860)   -    -    -    -    (860)   860 
Balance, April 30, 2017  $2   $449   $16,399   $(10,185)  $(60,064)  $841,127   $762   $788,490   $200,114 

 

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
(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 (deconsolidations) 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.

 

 8 

 

  

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Six Months Ended 
   April 30, 
(in thousands)  2017   2016 
         
Cash Flows From Operating Activities:          
Net income  $141,974   $132,687 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   10,328    10,396 
Unamortized loss on derivative instrument   (684)   - 
Amortization of deferred sales commissions   7,884    8,006 
Stock-based compensation   39,214    36,607 
Deferred income taxes   8,823    10,551 
Net losses (gains) on investments and derivatives   453    (1,374)
Equity in net income of affiliates, net of amortization   (5,650)   (4,996)
Dividends received from affiliates   5,100    5,785 
Consolidated CLO entity's operating activities:          
Net gains on bank loans, other investments and note obligations   -    (8,594)
Amortization   -    (269)
Net increase in other assets and liabilities, including cash and cash equivalents   -    82,263 
Changes in operating assets and liabilities:          
Management fees and other receivables   (5,083)   17,698 
Investments in trading securities   (162,692)   (24,446)
Deferred sales commissions   (13,280)   (8,621)
Other assets   8,406    13,135 
Accrued compensation   (73,589)   (91,086)
Accounts payable and accrued expenses   4,550    (3,738)
Other liabilities   46,947    (157)
Net cash provided by operating activities   12,701    173,847 
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (6,066)   (5,293)
Issuance of loan to affiliate   -    (5,000)
Net cash paid in acquisitions   (63,605)   (10,130)
Cash paid for intangible assets   -    (25)
Proceeds from sale of investments   5,992    8,808 
Purchase of investments   (67)   (113)
Consolidated CLO entity's investing activities:          
Proceeds from sales and maturities of bank loans and other investments   -    33,141 
Purchase of bank loans and other investments   -    (118,289)
Net cash used for investing activities   (63,746)   (96,901)

 

See notes to Consolidated Financial Statements.

 

 9 

 

  

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Six Months Ended 
   April 30, 
(in thousands)  2017   2016 
Cash Flows From Financing Activities:          
Purchase of additional non-controlling interest   (9,451)   (15,580)
Debt issuance costs   (2,761)   - 
Proceeds from issuance of debt   298,896    - 
Proceeds from issuance of Voting Common Stock   -    232 
Proceeds from issuance of Non-Voting Common Stock   45,421    25,854 
Repurchase of Voting Common Stock   -    (77)
Repurchase of Non-Voting Common Stock   (78,984)   (144,071)
Principal repayments on notes receivable from stock option exercises   2,660    1,283 
Excess tax benefit of stock option exercises   8,182    3,023 
Dividends paid   (63,005)   (60,201)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   88,859    (2,201)
Net cash provided by (used for) financing activities   289,817    (191,738)
Effect of currency rate changes on cash and cash equivalents   512    395 
Net increase (decrease) in cash and cash equivalents   239,284    (114,397)
Cash and cash equivalents, beginning of period   424,174    465,558 
Cash and cash equivalents, end of period  $663,458   $351,161 
           
Supplemental Cash Flow Information:          
Cash paid for interest  $14,205   $14,206 
Cash paid for income taxes, net of refunds   40,367    47,040 
Supplemental Disclosure of Non-Cash Information:          
Increase in equipment and leasehold improvements due to non-cash additions  $110   $1,651 
Exercise of stock options through issuance of notes receivable   771    531 
Non-controlling interest call option exercise recorded in other liabilities   320    - 
Net Consolidations (Deconsolidations) of Sponsored Investment Funds:          
Increase (decrease) in investments  $136,611   $(720)
Increase in other assets, net of other liabilities   22,073    - 
Increase (decrease) in non-controlling interests   73,843    (698)

 

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 (U.S. 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. 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.

 

During the first quarter of fiscal 2017, the Company changed the description of a line item in the Consolidated Statements of Income from investment advisory and administrative fees to management fees. The change in the description had no impact on the Company’s previously reported net income or financial position, and does not represent a restatement of previously reported financial results. Management fees are defined as including both investment advisory fees and administration fees for all periods presented.

 

Adoption of new accounting standards

 

The Company adopted the following accounting standards as of November 1, 2016:

 

·Consolidation - Accounting Standards Update (ASU) 2015-02, Amendments to the Consolidation Analysis
·Consolidation - ASU 2016-17, Interests Held through Related Parties That Are under Common Control
·Debt issuance costs - ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs

 

The adoption of the amendments to the consolidation guidance did not result in the consolidation of a previously unconsolidated legal entity or the deconsolidation of a previously consolidated entity. The amendment to the consolidation guidance that had the most significant impact on the Company’s consolidation analysis is the elimination of the deferral of accounting guidance that required separate evaluation for investment company variable interest entities (VIEs). The elimination of this deferral reduced the threshold used to evaluate whether the Company has a controlling financial interest in the Company’s sponsored funds in which the Company holds a seed investment from an ownership percentage of 50 percent to 10 percent. The amended guidance also impacted the Company’s evaluation of limited partnerships. Under the amended guidance, if limited partners with equity at risk in a limited partnership or similarly structured entity do not have either substantive kick-out rights over the general partner or substantive participation rights, the limited partnership is deemed to be a VIE. This update to the guidance resulted in the Company identifying that a private equity partnership managed by a third party that was previously considered a voting interest entity is now considered a VIE. The Company holds a variable interest in, but is not deemed to be the primary beneficiary of, this VIE. Refer to disclosure of this variable interest in Note 6, under the heading Other Entities.

 

 11 

 

  

The adoption of the new guidance related to debt issuance costs resulted in the Company changing the classification of certain debt issuance costs in its Consolidated Balance Sheets. All debt issuance costs were previously reported as a component of other assets. Debt issuance costs related to the Company’s term debt are now presented as a component of debt on the Company’s Consolidated Balance Sheets. Amounts for the comparative prior fiscal year have been restated to conform to the current year presentation. This reclassification had no impact on previously reported net income or previously reported financial results.

 

The following table presents the effects of the change in presentation of debt issuance costs on the Company’s previously reported Consolidated Balance Sheet:

 

October 31, 2016    
(in thousands)  As
Previously
Reported
   Reclassification   As Restated 
Other assets  $87,759   $(2,194)  $85,565 
Total assets   1,732,576    (2,194)   1,730,382 
Debt   573,967    (2,194)   571,773 
Total liabilities   918,973    (2,194)   916,779 
Total permanent equity   704,575    -    704,575 
Total liabilities, temporary equity and permanent equity   1,732,576    (2,194)   1,730,382 

 

In addition to the above updates, the Company adopted ASU 2017-01, Clarifying the Definition of a Business, in conjunction with the acquisition of the assets of Calvert Investment Management, Inc. (Calvert), which closed on December 30, 2016. This new standard provides for an up-front quantitative approach, which is referred to as a “screen,” to determine whether an entity is acquiring assets or a business. In applying the screen, the Company determined that substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset or group of similar assets and that the assets acquired, therefore, did not qualify as a business. Disclosure of the acquisition is included in Note 9.

 

The Company’s significant accounting policies related to each of the ASUs adopted as of November 1, 2016 are summarized below, as amended.

 

Principles of consolidation

 

With limited exceptions, each of the Company’s sponsored mutual funds is organized as a separately managed component (or series) of a series trust. All assets of a series irrevocably belong to that series and are subject to the liabilities of that series; under no circumstances are the liabilities of one series payable by another series. The Company’s series trusts have no equity investment at risk, rather, all equity is issued at the series level. However, decisions regarding the trustees of the trust and certain key activities of each series (i.e., sponsored fund) within the trust, such as appointment of each sponsored fund’s investment adviser, typically reside at the trust level. As a result, shareholders of a sponsored fund that is organized as a series of a series trust lack the ability to control the key decision-making processes that most directly affect the performance of the sponsored fund. Accordingly, the Company believes that each trust is a VIE and each sponsored fund within the trust is a silo that also meets the definition of a VIE. Having concluded that each silo is a VIE, the primary beneficiary evaluation is focused on an analysis of economic interests in the silo. The Company may hold a significant interest in the shares of a sponsored fund during the seed

 

 12 

 

  

investment stage when the sponsored fund’s investment track record is being established. The Company consolidates a sponsored fund when it has a controlling financial interest in the fund. Given that the fees earned from each sponsored fund are commensurate with the services provided and consistent with market-based terms, the Company has generally concluded that its asset management arrangements with sponsored funds represent variable interests that convey both power and economics to the Company in instances in which the Company holds a greater than 10 percent ownership interest in the fund.  Fee revenue earned on, as well as investments in, consolidated sponsored funds are eliminated in consolidation.

 

The Company regularly seeds new sponsored funds and may consolidate one or more sponsored funds during a given reporting period. Due to the similarity of risks related to the Company’s involvement with each sponsored fund, disclosures required under the VIE model, such as disclosures regarding the carrying amount and classification of assets of sponsored funds and the gains and losses that the Company recognizes from sponsored funds, are aggregated.

 

When the Company is no longer deemed to hold a controlling financial interest in a sponsored fund, the Company deconsolidates the sponsored fund and removes the related assets, liabilities and non-controlling interests from its balance sheet and classifies the Company’s remaining investment as available-for-sale. Because consolidated sponsored funds carry their assets and liabilities at fair value, there is no incremental gain or loss recognized upon deconsolidation.

 

The extent of the Company’s exposure to loss with respect to a consolidated sponsored fund is limited to the amount of the Company’s investment in the sponsored fund. The Company is not obligated to provide financial support to sponsored funds. Only the assets of a sponsored fund are available to settle its obligations. Beneficial interest holders of sponsored funds do not have recourse to the general credit of the Company.

 

Consolidation of VIEs

 

Accounting guidance provides a framework for determining whether an entity should be considered a VIE and, if so, whether a company’s involvement with the entity results in a variable interest in the entity. If the Company determines that it does have a variable interest in an entity, it must perform an analysis to determine whether it is the primary beneficiary of the VIE. If the Company determines it is the primary beneficiary of the VIE, it is required to consolidate the assets, liabilities, results of operations and cash flows of the VIE.

 

The Company’s evaluation of whether it qualifies as the primary beneficiary of a VIE is complex. The Company is the primary beneficiary of a VIE if it has a controlling financial interest in the VIE. A company is deemed to have a controlling financial interest in a VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

For collateralized loan obligation (CLO) entities, the Company must evaluate the relative size of the Company’s residual interest and the overall magnitude and design of the collateral fees within each structure. There is also judgment involved in assessing whether the Company has the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the entity.

 

 13 

 

  

While the Company believes its overall evaluation of VIEs is appropriate, future changes in estimates, judgments and assumptions, changes in the ownership interests of the Company in a VIE and/or future accounting pronouncements may affect the resulting consolidation, or deconsolidation, of the assets, liabilities, results of operations and cash flows of a VIE.

 

Debt issuance costs

 

Deferred debt issuance costs are amortized using the effective interest method over the related debt term. Debt issuance costs related to the Company’s term debt are included in debt in the Company’s Consolidated Balance Sheets. The amortization of deferred debt issuance costs is included in interest expense on the Company’s Consolidated Statements of Income.

 

2.New Accounting Standards Not Yet Adopted

 

Statement of cash flows – restricted cash

 

In November 2016, the Financial Accounting Standards Board (FASB) issued an amendment to existing guidance on the presentation and classification of restricted cash in the statement of cash flows. The amendment requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2018 and requires a retrospective approach to adoption. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.

 

Simplifying the test for goodwill impairment

 

In January 2017, the FASB issued amended guidance that simplifies the test for goodwill impairment. The standard eliminates Step 2 from the goodwill impairment test. Under the amended guidance, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2020 and requires a prospective approach to adoption. Early adoption is permitted for interim or annual goodwill impairment tests. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.

 

3.Consolidated Sponsored Funds

 

The following table sets forth the balances related to consolidated sponsored funds at April 30, 2017 and October 31, 2016, as well as the Company’s interest in these funds:

 

 14 

 

  

(in thousands)  April 30,
2017
   October 31,
2016
 
Investments  $424,440   $248,036 
Other assets   11,700    10,984 
Other liabilities   (46,599)   (23,947)
Redeemable non-controlling interests   (122,006)   (24,474)
Interest in consolidated sponsored funds  $267,535   $210,599 

 

4.Investments

 

The following is a summary of investments at April 30, 2017 and October 31, 2016:

 

(in thousands)  April 30,
2017
   October 31,
2016
 
Investment securities, trading:          
Short-term debt securities  $66,591   $85,822 
Consolidated sponsored funds   424,440    248,036 
Separately managed accounts   88,408    79,683 
Total investment securities, trading   579,439    413,541 
Investment securities, available-for-sale   10,712    13,312 
Investments in non-consolidated CLO entities   2,928    3,837 
Investments in equity method investees   137,911    139,929 
Investments, other   19,131    19,154 
Total investments  $750,121   $589,773 

 

Investment securities, trading

 

The following is a summary of the fair value of investments classified as trading at April 30, 2017 and October 31, 2016:

 

(in thousands)  April 30,
2017
   October 31,
2016
 
Short-term debt securities  $66,591   $85,822 
Other debt securities   299,248    191,688 
Equity securities   213,600    136,031 
Total investment securities, trading  $579,439   $413,541 

 

The Company recognized gains (losses) related to trading securities still held at the reporting date of $6.3 million and $17.6 million for the three months ended April 30, 2017 and 2016, respectively, and $8.6 million and $6.0 million for the six months ended April 30, 2017 and 2016, respectively, within net gains (losses) and other investment income in the Company’s Consolidated Statements of Income.

 

 15 

 

 

 

Investment securities, available-for-sale

 

The following is a summary of the gross unrealized gains and losses included in accumulated other comprehensive income (loss) related to securities classified as available-for-sale at April 30, 2017 and October 31, 2016:

 

April 30, 2017      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $4,861   $5,859   $(8)  $10,712 

 

October 31, 2016      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $8,528   $4,798   $(14)  $13,312 

 

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 $0.5 million and $1.1 million for the three months ended April 30, 2017 and 2016, respectively, and $1.1 million and $(23,000) for the six months ended April 30, 2017 and 2016, respectively.

 

The Company did not recognize any impairment losses on investment securities classified as available-for-sale during three and six months ended April 30, 2017 or 2016.

 

The aggregate fair value of available-for-sale investments in an unrealized loss position at April 30, 2017 was $0.2 million; unrealized losses related to these investments totaled $8,000. 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, 2017 and 2016:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2017   2016   2017   2016 
Gains  $-   $64   $204   $199 
Losses   (1)   (37)   (1)   (37)
Net realized gains (losses)  $(1)  $27   $203   $162 

 

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 $134.9 million and $137.3 million at April 30, 2017 and October 31, 2016, respectively. At April 30, 2017, the Company’s investment in Hexavest consisted of $6.1 million of equity in the net assets of Hexavest, definite-lived intangible assets of $23.2 million and goodwill of $111.8 million, net of a deferred tax liability of $6.2 million. At October 31, 2016, the Company’s investment in Hexavest consisted of $5.3 million of equity in the net assets of Hexavest, definite-lived intangible assets of $24.5 million and goodwill of $114.1 million, net of a deferred tax liability of $6.6

 

 16 

 

  

million. The investment is denominated in Canadian dollars and is subject to foreign currency translation adjustments, which are recorded in accumulated other comprehensive income (loss).

 

The Company has an option, exercisable later in 2017, to purchase an additional 26 percent interest in Hexavest. As part of the purchase price allocation at closing, a value of $8.3 million was assigned to this option. The option is included in other assets in the Company’s Consolidated Balance Sheets at April 30, 2017 and October 31, 2016.

 

The Company also 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 $3.0 million and $2.6 million at April 30, 2017 and October 31, 2016, respectively.

 

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, 2017 or 2016.

 

During the six months ended April 30, 2017 and 2016, the Company received dividends of $5.1 million and $5.8 million, respectively, from its investments in equity method investees.

 

Investments, other

 

Investments, other, consists of certain investments carried at cost totaling $19.1 million and $19.2 million at April 30, 2017 and October 31, 2016, respectively.

 

During the fiscal year ended October 31, 2016, the Company participated as lead investor in an equity financing in SigFig, an independent San Francisco-based wealth management technology firm. The carrying value of Company’s investment in SigFig was $17.0 million at both April 30, 2017 and October 31, 2016.

 

5.Derivative Financial Instruments

 

Derivative financial instruments designated as cash flow hedges

 

In April 2017, the Company issued $300.0 million in aggregate principal amount of 3.5 percent ten-year senior notes due April 6, 2027 (2027 Senior Notes). In anticipation of the offering, the Company entered into a Treasury lock transaction with a notional amount of $125.0 million and concurrently designated the Treasury lock as a cash flow hedge of its exposure to variability in the forecasted semi-annual interest payments on $125 million of principal outstanding on the 2027 Senior Notes. The benchmark U.S. Treasury rate declined from the time the Treasury lock was entered into until the time the 2027 Senior Notes were priced, and the Treasury lock was net settled for cash at a loss of $0.7 million. The Treasury lock was determined to be a highly effective cash flow hedge and the entire $0.7 million loss, net of the associated deferred tax benefit of $0.3 million, was recorded in other comprehensive income (loss), net of tax. The loss recorded in other comprehensive income (loss) will be reclassified to earnings as a component of interest expense over the term of the debt. During the three months ended April 30, 2017, approximately $3,000 of this deferred loss was reclassified into interest expense. During the next twelve months, the Company expects to reclassify approximately $0.1 million of the loss into interest expense.

 

In fiscal 2013, the Company entered into a forward-starting interest rate swap in connection with the offering of its 3.625 percent unsecured senior notes due June 15, 2023 (2023 Senior Notes) and recorded the unamortized gain on the swap in other comprehensive income (loss), net of tax. The Company

 

 17 

 

  

reclassified $50,000 and $0.1 million of the deferred gain into interest expense during both the three and six months ended April 30, 2017 and 2016, respectively, and will reclassify the remaining $1.2 million of unamortized gain as of April 30, 2017 to earnings as a component of interest expense over the remaining term of the debt. During the next twelve months, the Company expects to reclassify approximately $0.2 million of the gain into interest expense.

 

In fiscal 2007, the Company entered into a Treasury lock transaction in connection with the offering of its 6.5 percent unsecured senior notes due October 2, 2017 (2017 Senior Notes) and recorded the unamortized loss on the Treasury lock in other comprehensive income (loss), net of tax. The Company reclassified $56,000 and $0.1 million of the deferred loss into interest expense during both the three and six months ended April 30, 2017 and 2016, respectively, and will reclassify the remaining $0.1 million of unamortized loss to earnings as a component of interest expense in May 2017 concurrent with the redemption of the 2017 Senior Notes (see Note 11).

 

Other derivative financial instruments not designated for hedge accounting

 

The Company utilizes stock index futures contracts, total return swap contracts, foreign exchange contracts, commodity futures contracts and currency futures contracts to hedge the market and currency risks associated with its investments in certain consolidated sponsored funds and separately managed accounts seeded for new product development purposes (consolidated seed investments).

 

The Company was a party to the following derivative financial instruments at April 30, 2017 and October 31, 2016:

 

   April 30, 2017   October 31, 2016 
   Number of
contracts
   Notional
value
(in millions)
   Number of
contracts
   Notional
value
 (in millions)
 
Stock index futures contracts   1,799   $137.0    1,721   $125.4 
Total return swap contracts   5   $50.2    1   $40.0 
Foreign exchange contracts   28   $23.6    32   $18.7 
Commodity futures contracts   224   $19.4    -   $- 
Currency futures contracts   130   $13.1    -   $- 

 

The Company has not designated any of these derivative contracts as hedging instruments for accounting purposes. The derivative contracts outstanding, and the notional values they represent at April 30, 2017 and October 31, 2016, are representative of derivative balances throughout each respective period.

 

The Company has not elected to offset fair value amounts related to derivative instruments executed with the same counterparty under master netting arrangements; as a result, the Company records all derivative financial instruments as either other assets or other liabilities, gross, on its Consolidated Balance Sheets and measures them at fair value. The following tables present the fair value of derivative financial instruments not designated for hedge accounting and how they are reflected in the Company’s Consolidated Financial Statements as of April 30, 2017 and October 31, 2016:

 

 18 

 

  

   April 30, 2017   October 31, 2016 
(in thousands)  Other
assets
   Other
liabilities
   Other
assets
   Other
liabilities
 
Stock index futures contracts  $137   $3,297   $1,722   $130 
Total return swap contracts   -    1,085    -    418 
Foreign exchange contracts   124    564    350    267 
Commodity futures contracts   1    3    -    - 
Currency futures contracts   3    12    -    - 
Total  $265   $4,961   $2,072   $815 

 

Changes in the fair value of derivative contracts are recognized in gains and other investment income, net (see Note 14). The Company recognized the following net gains (losses) on derivative financial instruments for the three and six months ended April 30, 2017 and 2016:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)    2017    2016   2017   2016 
Stock index futures contracts  $(7,097)  $(8,062)  $(13,030)  $921 
Total return swap contracts   (1,011)   (3,209)   (1,975)   (439)
Foreign exchange contracts   (369)   (1,774)   (397)   (1,140)
Commodity futures contracts   (2)   -    (2)   - 
Currency futures contracts   (10)   -    (10)   - 
Total  $(8,489)  $(13,045)  $(15,414)  $(658)

 

In addition to the derivative contracts described above, certain consolidated seed investments may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives. See Note 3 for discussion of consolidated sponsored funds.

 

6.Variable Interest Entities

 

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.

 

Consolidated CLO entities

As of April 30, 2017 and October 31, 2016, the Company was not deemed to be the primary beneficiary of any CLO entities; accordingly, no CLO entities have been consolidated at April 30, 2017 and October 31, 2016.

 

Eaton Vance CLO 2015-1

On September 21, 2016, the Company sold its 16.1 percent subordinated interest in Eaton Vance CLO 2015-1 to an unrelated third party, recognizing a gain on disposal of $0.1 million. Although the Company continues to serve as collateral manager of the entity, and therefore has the power to direct the activities that most significantly impact the economic performance of the entity, the Company concluded that it was

 

 19 

 

  

no longer the primary beneficiary of the entity upon disposition of its 16.1 percent residual interest. As a result, the Company deconsolidated Eaton Vance CLO 2015-1 effective September 21, 2016.

 

Prior to the deconsolidation of Eaton Vance CLO 2015-1, changes in the fair values of 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 (losses) and other investment income, net, of consolidated CLO entities on the Company’s Consolidated Statements of Income.

 

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 was $0.2 million and $(0.3) million for three and six months ended April 30, 2016, respectively.

 

Investments in VIEs that are not consolidated

 

Sponsored funds

The Company classifies its investments in certain sponsored funds that are considered VIEs as available-for-sale investments when it is not considered the primary beneficiary of these VIEs (generally when the Company owns less than 10 percent of the fund). The Company provides aggregated disclosures with respect to these non-consolidated sponsored fund VIEs in Note 4.

 

Non-consolidated CLO entities

Non-consolidated CLO entities had total assets of $1.8 billion and $2.0 billion as of April 30, 2017 and October 31, 2016, respectively. The Company’s variable interests in these entities consist of the Company’s direct ownership in these entities and any subordinated management fees earned but uncollected. The Company’s investment in these entities totaled $2.9 million and $3.8 million as of April 30, 2017 and October 31, 2016, respectively. Collateral management fees receivable for these entities totaled $0.7 million and $1.4 million on April 30, 2017 and October 31, 2016, respectively. In the first six months of fiscal 2017, the Company did not provide any financial or other support to these entities that it was not contractually required to provide in any of the periods presented. 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, 2017.

 

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 (losses) and other investment income, net, in the Company’s Consolidated Statements of Income, based upon projected investment yields.

 

Other entities

The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain sponsored privately offered equity funds with total assets of $15.7 billion and $13.5 billion on April 30, 2017 and October 31, 2016, respectively. 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

 

 20 

 

  

these entities totaling $2.5 million and $2.2 million on April 30, 2017 and October 31, 2016, respectively, and investment advisory fees receivable totaling $1.0 million and $0.8 million on April 30, 2017 and October 31, 2016, respectively. In the first six months of fiscal 2017, the Company did not provide any financial or other support to these entities that it was not contractually required to provide. The Company’s risk of loss with respect to these managed entities is limited to the carrying value of its investments in, and investment advisory fees receivable from, the entities as of April 30, 2017. The Company does not consolidate these VIEs because it does not have the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE.

 

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 tax, in other comprehensive income (loss).

 

The Company also holds a variable interest in, but is not deemed to be the primary beneficiary of, a private equity partnership managed by a third party that invests in companies in the financial services industry. The Company’s variable interest in this entity consists of the Company’s direct ownership in the private equity partnership, equal to $3.0 million and $2.6 million at April 30, 2017 and October 31, 2016, respectively. The Company did not provide any financial or other support to this entity. The Company’s risk of loss with respect to the private equity partnership is limited to the carrying value of its investment in the entity as of April 30, 2017. The Company does not consolidate this VIE because the Company does not hold the power to direct the activities that most significantly impact the VIE.

 

The Company’s investment in the private equity partnership is accounted for as an equity method investment and disclosures related to this entity are included in Note 4 under the heading Investments in equity method investees.

 

7.Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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, 2017 and October 31, 2016:

 

 21 

 

  

April 30, 2017                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair Value
   Total 
                     
Financial assets:                         
Cash equivalents  $269,016   $37,488   $-   $-   $306,504 
Investments:                         
Investment securities, trading:                         
Short-term debt securities   -    66,591    -    -    66,591 
Other debt securities   22,754    276,494    -    -    299,248 
Equity securities   170,012    43,588    -    -    213,600 
Investment securities, available-for-sale   8,181    2,531    -    -    10,712 
Investments in non-consolidated CLO entities(1)   -    -    -    2,928    2,928 
Investments in equity method investees(2)   -    -    -    137,911    137,911 
Investments, other(3)   -    146    -    18,985    19,131 
Derivative instruments   -    265    -    -    265 
Total financial assets  $469,963   $427,103   $-   $159,824   $1,056,890 
                          
Financial liabilities:                         
Derivative instruments  $-   $4,961   $-   $-   $4,961 
Total financial liabilities  $-   $4,961   $-   $-   $4,961 

 

 22 

 

  

October 31, 2016                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair Value
   Total 
                     
Financial assets:                         
Cash equivalents  $21,875   $35,913   $-   $-   $57,788 
Investments:                         
Investment securities, trading:                         
Short-term debt securities   -    85,822    -    -    85,822 
Other debt securities   18,757    172,931    -    -    191,688 
Equity securities   93,491    42,540    -    -    136,031 
Investment securities, available-for-sale   11,051    2,261    -    -    13,312 
Investments in non-consolidated CLO entities(1)   -    -    -    3,837    3,837 
Investments in equity method investees(2)   -    -    -    139,929    139,929 
Investments, other(3)   -    120    -    19,034    19,154 
Derivative instruments   -    2,072    -    -    2,072 
Total financial assets  $145,174   $341,659   $-   $162,800   $649,633 
                          
Financial liabilities:                         
Derivative instruments  $-   $815   $-   $-   $815 
Total financial liabilities  $-   $815   $-   $-   $815 

 

(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. The Company did not recognize any impairment losses on investments in non-consolidated CLO entities during the three and six months ended April 30, 2017 or 2016.
(2)Investments in equity method investees are not measured at fair value in accordance with U.S. GAAP.
(3)Investments, other, include investments carried at cost that are not measured at fair value in accordance with U.S. GAAP.

 

Valuation methodologies

 

Cash equivalents

Cash equivalents include investments in money market funds, U.S. Treasury and government agency securities, certificates of deposit 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. U.S. Treasury and government agency securities are valued based upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value due to the short time between the purchase and expected maturity of the investments. Depending on the nature of the inputs, these assets are generally classified as Level 1 or 2 within the fair value measurement hierarchy.

 

Investment securities, trading short-term debt

Short-term debt securities include certificates of deposit, commercial paper and corporate debt obligations with remaining maturities from three months to 12 months. Short-term debt securities held are generally valued on the basis of valuations provided by third-party pricing services, as derived from

 

 23 

 

  

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 that are not listed on an active exchange but have net asset values that are comparable to mutual funds and have no redemption restrictions are classified as Level 2 within the fair value measurement hierarchy.

 

Derivative instruments

Derivative instruments, which include stock index futures contracts, total return swap contracts, foreign exchange contracts, commodity futures contracts and currency futures contracts, are recorded as either other assets or other liabilities on the Company’s Consolidated Balance Sheets. Stock index futures contracts, total return swap contracts, commodity futures contracts and currency futures contracts are valued using a third-party pricing service that determines fair value based on bid and ask prices. 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. Derivative instruments generally are classified as Level 2 within the fair value measurement hierarchy.

 

 24 

 

  

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, 2017 and 2016:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
 (in thousands)   2017   2016   2017   2016 
 Transfers from Level 1 into Level 2(1)  $48   $129   $457   $118 
 Transfers from Level 2 into Level 1(2)   42    86    47    102 

 

(1)Transfers from Level 1 into Level 2 represent securities for which unadjusted quoted market prices in active markets became unavailable.
(2)Transfers from Level 2 into Level 1 represent securities for which unadjusted quoted market prices in active markets became available.

 

Level 3 assets and liabilities

 

The Company did not hold any assets or liabilities valued on a recurring basis and classified as Level 3 within the fair value measurement hierarchy during the three or six months ended April 30, 2017. 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:

 

   Three Months Ended   Six Months Ended 
   April 30, 2016   April 30, 2016 
 (in thousands)  

Bank Loan
Investments
of Eaton
Vance
CLO 2015-1

   Senior and
Subordinated
Note
Obligations of
Eaton Vance
CLO 2015-1
  

Bank Loan
Investments
of Eaton
Vance
CLO 2015-1

   Senior and
Subordinated
Note
Obligations of
Eaton Vance
CLO 2015-1
 
Beginning balance  $700   $390,654   $-   $- 
Net losses on investments and note obligations included in net income(1)   (40)   (6,430)   (40)   (6,430)
Transfers into Level 3(2)   -    -    700    390,654 
Ending balance  $660   $384,224   $660   $384,224 
Change in unrealized losses included in net income relating to assets and liabilities held  $(40)  $(6,430)  $(40)  $(6,430)

 

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

 

As discussed more fully in Note 6, the Company deconsolidated Eaton Vance CLO 2015-1 on September 21, 2016.

 

 25 

 

 

 

8.Fair Value Measurements of Other Financial Instruments

 

Certain financial instruments are not carried at fair value, but their fair value is required to be disclosed. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at April 30, 2017 and October 31, 2016:

 

     April 30, 2017     October 31, 2016 
(in thousands)  Carrying
Value
   Fair
Value
   Fair
Value
Level
   Carrying
Value
   Fair
Value
   Fair
Value
Level
 
Loan to affiliate  $5,000   $5,000    3   $5,000   $5,000    3 
Investments, other  $18,985   $18,985    3   $19,034   $19,034    3 
Other assets  $6,071   $4,243    3   $6,194   $4,328    3 
Debt  $868,272   $893,127    2   $571,773   $603,625    2 

 

As discussed in Note 20, 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 annually using a cash flow model that projects future cash flows based upon contractual obligations, to which the Company then applies an appropriate discount rate.

 

Included in investments, other, is a non-controlling capital interest in SigFig carried at $17.0 million at both April 30, 2017 and October 31, 2016 (see Note 4). The carrying value of this investment approximates fair value, as the Company purchased this investment in the previous fiscal year and there have been no events or changes in circumstances that would have had a significant effect on the fair value of this investment at April 30, 2017.

 

Included in other assets at April 30, 2017 and October 31, 2016 is an option exercisable in 2017 to acquire an additional 26 percent interest in Hexavest carried at $6.1 million and $6.2 million, respectively. The fair value of this option is determined using a Monte Carlo model, which simulates potential future market multiples of earnings before interest and taxes (EBIT) and compares this to the contractually fixed multiple of Hexavest’s EBIT at which the option can be exercised. The Monte Carlo model uses this array of simulated multiples and their difference from the contractual multiple times the projected EBIT for Hexavest to estimate the future exercise value of the option, which is then adjusted to present value.

 

The fair value of the Company’s debt has been determined based on quoted prices in inactive markets.

 

9.Acquisitions

 

Atlanta Capital Management Company, LLC (Atlanta Capital)

 

In the second quarter of fiscal 2017, the Company exercised a call option requiring the non-controlling interest holders of Atlanta Capital to sell a 0.1 percent profit interest in Atlanta Capital for $0.4 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, 2016. The transaction settled in May 2017.

 

 26 

 

  

In the fourth quarter of fiscal 2016, the Company purchased a 0.9 percent profit interest in Atlanta Capital for $1.9 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 2016.

 

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, increased to 13.1 percent as of April 30, 2017 from 13.0 percent as of October 31, 2016, reflecting the transactions described above, and the grant of an additional 1.1 percent profit interest to employees of Atlanta Capital pursuant to the terms of the Atlanta Capital Plan in the first quarter of fiscal 2017. Non-controlling interest holders did not hold any capital interests in Atlanta Capital as of April 30, 2017.

 

Calvert

 

On December 30, 2016, the Company, through its newly formed subsidiary Calvert Research and Management, acquired substantially all of the assets of Calvert for cash. The transaction was accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable intangible asset related to acquired contracts to manage and distribute sponsored mutual funds (the Calvert Funds). The Calvert Funds are a diversified family of responsibly invested mutual funds, encompassing actively and passively managed equity, fixed income and asset allocation strategies managed in accordance with the Calvert Principles for Responsible Investment. See Note 10 for a summary of the acquired intangible assets.

 

Parametric Portfolio Associates LLC (Parametric)

 

In the first quarter of fiscal 2017, 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 0.5 percent profit interest and a 0.5 percent capital interest in Parametric. The transaction settled in January 2017 for $6.9 million.

 

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 0.5 percent profit interest and a 0.5 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 2016 the Company purchased a 0.1 percent profit interest in Parametric for $0.6 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 2016.

 

Total profit interests in Parametric held by non-controlling interest holders, including indirect profit interests issued pursuant to the Parametric Plan, decreased to 6.4 percent as of April 30, 2017 from 7.0 percent as of October 31, 2016, reflecting the transactions described above. Total capital interests in Parametric held by non-controlling interest holders decreased to 1.3 percent as of April 30, 2017 from 1.8 percent as of October 31, 2016.

 

 27 

 

  

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 2017, the Company made a final contingent payment of $11.6 million to the selling group based upon prescribed multiples of TABS’s revenue for the twelve months ended December 31, 2016. The payment increased goodwill by $11.6 million, as the acquisition was completed prior to the change in accounting for contingent purchase price consideration.

 

10.Intangible Assets

 

The following is a summary of intangible assets at April 30, 2017 and October 31, 2016:

 

April 30, 2017    
(in thousands)  Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
             
Amortizing intangible assets:               
Client relationships acquired  $134,247   $(99,159)  $35,088 
Intellectual property acquired   1,025    (419)   606 
Trademark acquired   4,257    (637)   3,620 
Research system   639    (71)   568 
                
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   54,408    -    54,408 
Total  $194,576   $(100,286)  $94,290 

 

October 31, 2016    
(in thousands)  Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
             
Amortizing intangible assets:               
Client relationships acquired  $133,927   $(94,873)  $39,054 
Intellectual property acquired   1,025    (385)   640 
Trademark acquired   900    (493)   407 
                
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   6,708    -    6,708 
Total  $142,560   $(95,751)  $46,809 

 

Amortization expense was $2.2 million for both the three months ended April 30, 2017 and 2016 and $4.5 million and $4.4 million for the six months ended April 30, 2017 and 2016, respectively. Estimated remaining amortization expense for fiscal 2017 and the next five fiscal years, on a straight-line basis, is as follows:

 

 28 

 

  

   Estimated 
Year Ending October 31,  Amortization 
(in thousands)  Expense 
Remaining 2017  $4,478 
2018   8,927 
2019   4,978 
2020   3,807 
2021   2,282 
2022   2,154 

 

Acquired intangible assets

 

The following is a summary of the intangible assets acquired in the first quarter of fiscal 2017:

 

April 30, 2017    
(in thousands) 

Weighted-
Average
Remaining
Amortization
Period
(in years)

   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
Amortizing intangible assets:                    
Client relationships acquired   14.7   $320   $(7)  $313 
Trademark acquired   13.7    3,357    (80)   3,277 
Research system   2.7    639    (71)   568 
Non-amortizing intangible assets:                    
Mutual fund management contracts acquired        47,700    -    47,700 
Total   12.3   $52,016   $(158)  $51,858 

 

Amortization expense was $0.1 million and $0.2 million for the three and six months ended April 30, 2017, respectively. Estimated remaining amortization expense for fiscal 2017 and the next five fiscal years, on a straight-line basis, is as follows:

 

   Estimated 
Year Ending October 31,  Amortization 
(in thousands)  Expense 
Remaining 2017  $237 
2018   474 
2019   474 
2020   297 
2021   261 
2022   261 

 

 29 

 

  

11.Debt

 

2027 Senior Notes

 

On April 6, 2017, the Company issued $300.0 million in aggregate principal amount of 3.5 percent ten-year senior notes due April 6, 2027, resulting in net proceeds of approximately $296.1 million after deducting the underwriting discount and offering expenses. Interest is payable semi-annually in arrears on April 6th and October 6th of each year, commencing on October 6, 2017. The 2027 Senior Notes are unsecured and unsubordinated obligations of the Company.

 

Subsequent event – Redemption of 2017 Senior Notes

 

On May 6, 2017, the Company used the net proceeds from the 2027 Senior Notes to redeem the remaining $250 million aggregate principal amount of its 2017 Senior Notes. The Company paid total consideration of $256.8 million to the holders of the 2017 Senior Notes at redemption, which was calculated pursuant to the terms of the Indenture that governs the notes at an amount equal to the sum of the aggregate principal amount outstanding, the present value of the remaining scheduled payments of interest through the original maturity date and the interest accrued to the date of redemption. The Company will recognize a $5.4 million non-operating loss on the extinguishment of the 2017 Senior Notes in the third quarter of fiscal 2017, representing the difference between the total consideration paid and the net carrying amount of the extinguished debt plus interest accrued to the date of redemption.

 

12.Stock-Based Compensation Plans

 

The Company recognized compensation cost related to its stock-based compensation plans for the three and six months ended April 30, 2017 and 2016 as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2017   2016   2017   2016 
Omnibus Incentive Plans:                    
Stock options  $4,818   $4,590   $10,520   $9,729 
Restricted shares   11,549    11,013    23,623    21,951 
Phantom stock units   105    97    226    124 
Employee Stock Purchase Plans   -    -    176    211 
Employee Stock Purchase Incentive Plan   496    328    549    360 
Atlanta Capital Plan   855    652    1,710    1,417 
Parametric Plan   940    1,790    1,880    2,939 
Parametric Phantom Incentive Plan   378    -    756    - 
Total stock-based compensation expense  $19,141   $18,470   $39,440   $36,731 

 

The total income tax benefit recognized for stock-based compensation arrangements was $7.0 million and $6.3 million for the three months ended April 30, 2017 and 2016, respectively, and $14.3 million and $12.3 million for the six months ended April 30, 2017 and 2016, respectively.

 

 30 

 

  

Stock options

Stock option transactions under the Company’s 2013 Omnibus Incentive Plan (the 2013 Plan) and predecessor plans for the six months ended April 30, 2017 were as follows:

 

(share and intrinsic value figures in thousands)  Shares   Weighted-
Average
Exercise
Price
  

Weighted-
Average
Remaining
Contractual
Term
(in years)

   Aggregate
Intrinsic
Value
 
Options outstanding, beginning of period   20,311   $33.52           
Granted   2,886    34.97           
Exercised   (1,566)   26.74           
Forfeited/expired   (9)   38.65           
Options outstanding, end of period   21,622   $34.20    5.5   $200,553 
Options exercisable, end of period   12,286   $32.84    3.5   $135,772 
Vested or expected to vest at April 30, 2017   21,561   $34.20    5.5   $200,115 

 

The Company received $41.1 million and $21.5 million related to the exercise of options for the six months ended April 30, 2017 and 2016, respectively.

 

As of April 30, 2017, there was $55.5 million of compensation cost related to unvested stock options granted under the 2013 Plan and predecessor plans 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, 2017 under the 2013 Plan and predecessor plans is as follows:

 

       Weighted- 
       Average 
       Grant Date 
(share figures in thousands)  Shares   Fair Value 
Unvested, beginning of period   4,157   $35.43 
Granted   1,685    35.93 
Vested   (1,148)   33.00 
Forfeited   (36)   35.84 
Unvested, end of period   4,658   $36.21 

 

As of April 30, 2017, there was $127.6 million of compensation cost related to unvested restricted shares granted under the 2013 Plan and predecessor plans not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.2 years.

 

 31 

 

 

Phantom stock units

During the six months ended April 30, 2017, 10,285 phantom stock units were issued to non-employee Directors pursuant to the 2013 Plan. As of April 30, 2017, there was $0.4 million of compensation cost related to unvested phantom stock units granted under the 2013 Plan not yet recognized. That cost is expected to be recognized over a weighted-average period of 1.3 years.

 

13.Common Stock Repurchases

 

The Company’s current Non-Voting Common Stock share repurchase program was announced on January 11, 2017. 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 2017, the Company purchased and retired approximately 1.0 million shares of its Non-Voting Common Stock under the current repurchase authorization and approximately 0.9 million shares under a previous repurchase authorization. Approximately 7.0 million additional shares may be repurchased under the current authorization as of April 30, 2017.

 

14.Non-operating Income (Expense)

 

The components of non-operating income (expense) for the three and six months ended April 30, 2017 and 2016 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2017   2016   2017   2016 
Interest and other income  $5,958   $4,186   $10,601   $5,361 
Net gains (losses) on investments and derivatives   3,483    789    (453)   1,374 
Net foreign currency losses   (153)   (1,186)   (366)   (106)
Gains and other investment income, net   9,288    3,789    9,782    6,629 
Interest expense   (8,065)   (7,340)   (15,412)   (14,682)
Other income (expense) of consolidated CLO entity:                    
Interest income   -    4,850    -    8,593 
Net gains on bank loans, other investments and note obligations   -    9,058    -    8,594 
Gains and other investment income, net   -    13,908    -    17,187 
Interest expense   -    (2,878)   -    (4,714)
Total non-operating income (expense)  $1,223   $7,479   $(5,630)  $4,420 

 

15.Income Taxes

 

The provision for income taxes was $44.7 million and $36.2 million, or 37.5 percent and 35.0 percent of pre-tax income, for the three months ended April 30, 2017 and 2016, respectively. The provision for income taxes was $81.4 million and $73.0 million, or 37.4 percent and 36.4 percent of pre-tax income, for the six months ended April 30, 2017 and 2016, respectively. The provision for income taxes in the three and six months ended April 30, 2017 and 2016 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 for

 

 32 

 

  

each period presented reflecting the impact of state income taxes, income and losses recognized by non-controlling and other beneficial interest holders of consolidated entities, equity-based compensation plans and other permanent items.

 

No valuation allowance has been recorded for deferred tax assets, reflecting management’s belief that all deferred tax assets will be utilized.

 

The Company considers the undistributed earnings of certain of its foreign corporations to be indefinitely reinvested in foreign operations as of April 30, 2017. Accordingly, no U.S. income taxes have been provided thereon. As of April 30, 2017, the Company had approximately $54.2 million of undistributed earnings in certain Canadian, United Kingdom, Australian and Japanese foreign corporations 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 $6.7 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 2013.

 

16.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, 2017 and 2016 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2017   2016   2017   2016 
Consolidated sponsored funds  $(1,727)  $(493)  $(1,712)  $16 
Majority-owned subsidiaries   (3,932)   (3,206)   (7,650)   (6,516)
Non-controlling interest value adjustments(1)   1    -    74    (133)
Consolidated CLO entities   -    (10,789)   -    (12,701)
Net income attributable to non-controlling and other beneficial interests  $(5,658)  $(14,488)  $(9,288)  $(19,334)

 

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

 

 33 

 

  

17.Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended April 30, 2017 and 2016 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, 2017  $691   $3,270   $(55,416)  $(51,455)
Other comprehensive income (loss), before reclassifications and tax   (684)   532    (8,526)   (8,678)
Tax impact   271    (207)   -    64 
Reclassification adjustments, before tax   8    -    -    8 
Tax impact   (3)   -    -    (3)
Net current period other comprehensive income (loss)   (408)   325    (8,526)   (8,609)
Balance at April 30, 2017  $283   $3,595   $(63,942)  $(60,064)
                     
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 (loss)   4    605    21,841    22,450 
Balance at April 30, 2016  $681   $3,680   $(45,217)  $(40,856)

 

 34 

 

  

The components of accumulated other comprehensive income (loss), net of tax, for the six months ended April 30, 2017 and 2016 are as follows:

 

(in thousands)  Unamortized
Net Gains
(Losses) on
Derivatives(1)
   Net Unrealized
Holding Gains
(Losses) on
Available-for-
Sale
Investments(2)
   Foreign
Currency
Translation
Adjustments
   Total 
Balance at October 31, 2016  $687   $2,943   $(61,213)  $(57,583)
Other comprehensive income (loss), before reclassifications and tax   (684)   1,068    (2,729)   (2,345)
Tax impact   271    (416)   -    (145)
Reclassification adjustments, before tax   14    -    -    14 
Tax impact   (5)   -    -    (5)
Net current period other comprehensive income (loss)   (404)   652    (2,729)   (2,481)
Balance at April 30, 2017  $283   $3,595   $(63,942)  $(60,064)
                     
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)

 

(1)Amounts reclassified from accumulated other comprehensive loss, net of tax, represent the amortization of net gains (losses) on qualifying derivative financial instruments designated as cash flow hedges 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.

 

18.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, 2017 and 2016:

 

 35 

 

  

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2017   2016   2017   2016 
Net income attributable to Eaton Vance Corp. shareholders  $71,975   $54,967   $132,686   $113,353 
                     
Weighted-average shares outstanding – basic   110,875    110,459    110,375    110,852 
Incremental common shares   5,087    3,208    4,813    3,456 
Weighted-average shares outstanding – diluted   115,962    113,667    115,188    114,308 
                     
Earnings per share:                    
Basic  $0.65   $0.50   $1.20   $1.02 
Diluted  $0.62   $0.48   $1.15   $0.99 

 

Antidilutive common shares related to stock options and unvested restricted stock excluded from the computation of earnings per diluted share were approximately 3.6 million and 12.2 million for the three months ended April 30, 2017 and 2016, respectively, and approximately 4.1 million and 13.1 million for the six months ended April 30, 2017 and 2016, respectively.

 

19.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, Boston Management and Research or Calvert Research and Management, all 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.

 

20.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 employees of the Company are officers and/or directors. Revenues for services provided or related to these funds for the three and six months ended April 30, 2017 and 2016 are as follows:

 

 36 

 

  

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2017   2016   2017   2016 
Management fees  $226,959   $193,851   $441,708   $395,398 
Distribution fees   18,998    16,506    37,279    33,939 
Service fees   30,067    25,794    58,978    53,053 
Shareholder services fees   1,271    629    1,973    1,217 
Other revenue   576    712    1,090    1,249 
Total  $277,871   $237,492   $541,028   $484,856 

 

For the three months ended April 30, 2017 and 2016, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $4.0 million and $3.7 million, respectively, of investment advisory fees it was otherwise entitled to receive. For the six months ended April 30, 2017 and 2016, the Company contractually waived $7.7 million and $7.5 million, respectively, of investment advisory fees it was otherwise entitled to receive.

 

Sales proceeds and net realized gains for the three and six months ended April 30, 2017 and 2016 from investments in sponsored funds classified as available-for-sale are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2017   2016   2017   2016 
Proceeds from sales  $1   $214   $3,734   $8,298 
Net realized gains   -    27    203    162 

 

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, 2017 and 2016, expenses of $8.4 million and $5.4 million, respectively, were incurred by the Company pursuant to these arrangements. For the six months ended April 30, 2017 and 2016, expenses of $16.0 million and $11.8 million, respectively, were incurred by the Company pursuant to these arrangements.

 

Included in management fees and other receivables at April 30, 2017 and October 31, 2016 are receivables due from sponsored funds of $93.4 million and $88.7 million, respectively, and payables to sponsored funds of $1.8 million and $1.6 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 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 months ended April 30, 2017 and 2016, the Company recorded $39,000 and $36,000, respectively, of interest income related to the loan in gains and other investment income, net, on the Company’s Consolidated Statement of Income. During the six months ended April 30, 2017 and 2016, the Company recorded $79,000 and $52,000, respectively, of interest income related to the loan. Interest

 

 37 

 

  

due from Hexavest under this arrangement included in other assets on the Company’s Consolidated Balance Sheets as of April 30, 2017 and October 31, 2016 was $13,000.

 

Hexavest agreements

 

The Company has an agreement with Hexavest whereby the Company compensates Hexavest for sub-advisory services and Hexavest reimburses the Company for a portion of fund subsidies related to certain investment companies for which the Company is the investment adviser. During the three months ended April 30, 2017 and 2016, the Company paid Hexavest $92,000 and $66,000, respectively, in sub-advisory fees, and the Company received from Hexavest $21,000 and $51,000, respectively, for reimbursement of fund subsidies. During the six months ended April 30, 2017 and 2016, the Company paid Hexavest $0.2 million and $0.1 million, respectively, in sub-advisory fees, and the Company received from Hexavest $71,000 and $0.1 million, respectively, for reimbursement of fund subsidies. The amount due to Hexavest under this arrangement included in other liabilities on the Company’s Consolidated Balance Sheets at April 30, 2017 and October 31, 2016 was $58,000 and $51,000, respectively. In addition, the Company has an agreement with Hexavest whereby the Company is reimbursed for costs related to the sale of certain institutional separately managed accounts. During each of the three months ended April 30, 2017 and 2016, the Company earned $0.5 million under this arrangement. During the six months ended April 30, 2017 and 2016, the Company earned $1.1 million and $1.0 million, respectively, under this arrangement. The amount due from Hexavest under this arrangement included in other assets on the Company’s Consolidated Balance Sheets at April 30, 2017 and October 31, 2016 was $0.2 million and $0.3 million, respectively.

 

Employee loan program

 

The Company has established an Employee Loan Program under which a program maximum of $20.0 million is available for loans to officers (other than executive officers) and other key employees of the Company for purposes of financing the exercise of employee stock options. Loans outstanding under this program, which are full recourse in nature, are reflected as notes receivable from stock option exercises in shareholders’ equity and amounted to $10.2 million and $12.1 million at April 30, 2017 and October 31, 2016, respectively.

 

21.Geographic Information

 

Revenues by principal geographic area for the three and six months ended April 30, 2017 and 2016 are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2017   2016   2017   2016 
Revenue:                    
U.S.  $359,342   $310,751   $699,902   $629,860 
International   15,290    12,539    29,689    24,986 
Total  $374,632   $323,290   $729,591   $654,846 

 

 38 

 

  

Long-lived assets by principal geographic area as of April 30, 2017 and October 31, 2016 are as follows:

 

   April 30,   October 31, 
(in thousands)  2017   2016 
Long-lived Assets:          
U.S.  $44,141   $42,153 
International   2,200    2,274 
Total  $46,341   $44,427 

 

International revenues and long-lived assets are attributed to countries based on the location in which revenues are earned.

 

 39 

 

  

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

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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, 2016.

 

Overview

 

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, Atlanta Capital Management Company, LLC (Atlanta Capital), Calvert Research and Management 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 equity strategies, 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 and regional 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

 

 40 

 

  

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, 2017, we had $387.0 billion in consolidated assets under management.

 

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 127 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 management, distribution and service fees received from Eaton Vance, Calvert and Parametric funds and management 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

 

The Company is pursuing five primary business growth initiatives: (1) capitalizing on the Company’s broad range of high-performing investment strategies to grow sales and gain market share in active management; (2) continuing to pursue the market opportunity for the Company’s Custom Beta lineup of rules-based separately managed account offerings; (3) further developing the Company’s global investment capabilities and international distribution and client service resources to address identified market opportunities outside the United States; (4) advancing NextShares™ exchange-traded managed funds toward commercial success; and (5) acquiring and integrating complementary investment management businesses in a period of potential industry consolidation.

 

As of April 30, 2017, the Company offered 70 U.S. mutual funds rated four or five stars by Morningstar™ for at least one class of shares, including 28 funds rated five stars for at least one class of shares. Although actively

 

 41 

 

  

managed strategies as a whole are losing share to passive investments, the Company believes that top-performing active strategies can continue to grow, particularly in asset classes where competition versus passive alternatives is less acute. In the first six months of fiscal 2017, net flows into the Company’s active strategies totaled $4.4 billion.

 

The Company continues to experience strong growth in its Custom Beta lineup of rules-based separately managed account strategies, which include Parametric-managed core equities and Eaton Vance Management-managed municipal bond and corporate bond ladders. Compared to index mutual funds and exchange-traded funds, Custom Beta separate accounts provide clients with greater ability to tailor their market exposures to achieve better tax outcomes and to reflect client-specified responsible investing criteria, factor tilts and portfolio exclusions. In the first six months of fiscal 2017, net inflows into the Company’s Custom Beta strategies offered as retail managed accounts and high-net-worth separate accounts totaled $9.9 billion.

 

Outside the United States, the Company continues to expand investment staff and commit additional client service and distribution resources to support business growth. On February 1, 2017, Eaton Vance Asia Pacific, Ltd. (Eaton Vance Asia Pacific) opened a Tokyo-based representative office to provide relationship management and client service support to clients in Japan and other parts of Asia. In the first six months of fiscal 2017, net inflows from clients outside the United States totaled $2.5 billion.

 

The Company’s NextShares initiative continues to progress toward broad market availability. As of the end of the second quarter of fiscal 2017, eight NextShares funds from three different fund families were available in the marketplace. Additional NextShares funds are currently in registration. UBS Financial Services has announced its intent to begin offering NextShares through its U.S. financial advisors network later in 2017, which the Company believes will stimulate growth in NextShares managed assets.

 

On December 30, 2016, Calvert Research and Management, a newly formed Eaton Vance subsidiary, completed the purchase of substantially all of the business assets of Calvert Investment Management, Inc. (Calvert). At acquisition, Calvert had $11.9 billion of managed assets. Of this, $2.1 billion was previously included in the Company’s consolidated managed assets because Atlanta Capital is sub-adviser to one of the Calvert-sponsored mutual funds (Calvert Funds). The Calvert Funds are one of the largest and most diversified families of responsibly invested mutual funds, encompassing actively and passively managed equity, fixed income and asset allocation strategies managed in accordance with the Calvert Principles for Responsible Investment. Responsible investing is a leading trend in asset management, appealing to the growing universe of investors who seek both financial returns and positive societal impact from their investments. The Calvert Funds are now being offered through Eaton Vance Distributors with greatly expanded market reach. From the close of the Calvert transaction through the end of the second quarter of fiscal 2017, net outflows from the Calvert Funds and Calvert-managed separate accounts totaled approximately $500 million, of which approximately $350 million was attributable to Calvert’s resignation as program manager of the DC 529 College Savings Program and withdrawals of seed capital investments by the Calvert Fund’s former adviser.

 

Consolidated Assets under Management

 

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 2017, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 4.6 percent and 12.9 percent, respectively, and the MSCI Emerging Market Index, a broad measure of emerging market equity performance had total returns of 7.1

 

 42 

 

  

percent and 8.4 percent, respectively. Over the same period, the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of 1.5 percent and -0.7 percent, respectively.

 

Consolidated assets under management increased by $68.3 billion, or 21 percent, to $387.0 billion on April 30, 2017 from the $318.7 billion reported a year earlier. The year-over-year increase in consolidated assets under management reflects net inflows of $32.6 billion and market appreciation in managed assets of $25.8 billion over the twelve-month period, and $9.9 billion of new managed assets gained in the acquisition of the business assets of Calvert.

 

The following tables summarize our consolidated assets under management by investment mandate, investment vehicle and investment affiliate as of April 30, 2017 and 2016. Within the investment mandate table, the “Portfolio Implementation” category consists of Parametric’s custom core equity strategies and centralized portfolio management services, and the “Exposure Management” category consists of Parametric’s futures- and options-based customized exposure management services.

 

Consolidated Assets under Management by Investment Mandate (1)

 

   April 30,     
(in millions)     2017    % of
Total
   2016   % of
Total
   %
Change
 
Equity(2)(3)  $104,666    27%  $88,540    28%   18%
Fixed income(3)(4)   66,881    17%   56,356    18%   19%
Floating-rate income(3)   36,957    10%   32,688    10%   13%
Alternative(3)   11,212    3%   9,720    3%   15%
Portfolio implementation   86,376    22%   66,132    21%   31%
Exposure management   80,921    21%   65,235    20%   24%
Total  $387,013    100%  $318,671    100%   21%

 

(1)Consolidated Eaton Vance Corp. See table on page 49 for managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes assets in balanced and multi-asset mandates.
(3)In the second quarter of fiscal 2017, the Company reclassified among investment mandates certain managed assets. The above presentation of prior period results has been revised for comparability purposes. The reclassification does not affect total consolidated assets under management for any period.
(4)Includes assets in cash management accounts.

 

Equity assets under management included $34.9 billion and $30.7 billion of assets managed for after-tax returns on April 30, 2017 and 2016, respectively. Portfolio implementation assets under management included $60.2 billion and $44.1 billion of assets managed for after-tax returns on April 30, 2017 and 2016, respectively. Fixed income assets included $37.3 billion and $33.6 billion of municipal income assets on April 30, 2017 and 2016, respectively.

 

 43 

 

   

Consolidated Assets under Management by Investment Vehicle(1)

 

   April 30,     
(in millions)     2017    % of
Total
   2016   % of
Total
   %
Change
 
Open-end funds(2)(3)  $92,441    24%  $72,486    23%   28%
Private funds(4)   30,781    8%   26,908    8%   14%
Closed-end funds(5)   24,119    6%   23,508    7%   3%
Institutional separate account assets(3)   149,044    38%   126,620    40%   18%
High-net-worth separate account assets   33,225    9%   24,565    8%   35%
Retail managed account assets   57,403    15%   44,584    14%   29%
Total  $387,013    100%  $318,671    100%   21%

  

(1)Consolidated Eaton Vance Corp. See table on page 49 for 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)Reflects the reclassification from institutional separate accounts to open-end funds of $2.1 billion of managed assets of Calvert Equity Portfolio, which is sub-advised by Atlanta Capital, upon the Company’s acquisition of the business assets of Calvert on December 30, 2016.
(4)Includes privately offered equity, fixed income and floating-rate income funds and CLO entities.
(5)Includes unit investment trusts.

 

Consolidated Assets under Management by Investment Affiliate (1)

 

    April 30,     %  
(in millions)   2017     2016     Change  
Eaton Vance Management (2)(3)   $ 154,985     $ 139,644       11 %
Parametric (3)     201,493       160,831       25 %
Atlanta Capital (3)(4)     20,631       18,196       13 %
Calvert Research and Management (4)     9,904       -       NM (5)
Total   $ 387,013     $ 318,671       21 %

 

(1)Consolidated Eaton Vance Corp. See table on page 49 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 advisers under Eaton Vance supervision.
(3)In the second quarter of fiscal 2017, the Company reclassified among investment affiliates certain managed assets. The above presentation of prior period results has been revised for comparability purposes. The reclassification does not affect total consolidated assets under management for any period.
(4)Consistent with the Company's policies for reporting the managed assets and flows of investment portfolios for which multiple Eaton Vance affiliates have management responsibilities, the managed assets of Atlanta Capital indicated above include the assets of Calvert Equity Portfolio, for which Atlanta Capital serves as sub-adviser. The total managed assets of Calvert, including assets sub-advised by other Eaton Vance affiliates, were $12.1 billion as of April 30, 2017.
(5)Not meaningful (NM).

 

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. The tables are intended to provide information useful in the analysis of our asset-based revenue and distribution expenses. Separate account management fees are generally calculated as a percentage of either beginning, average or ending quarterly

 

 44 

 

  

assets. Fund management, distribution and service fees, as well as certain expenses, are generally calculated as a percentage of average daily assets.

 

Consolidated Average Assets under Management by Investment Mandate(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)     2017    2016   Change     2017    2016   Change 
Equity(2)(3)  $102,491   $85,852    19%  $98,156   $87,181    13%
Fixed income(3)(4)   65,967    54,401    21%   63,809    53,560    19%
Floating-rate income(3)   35,534    32,391    10%   34,226    33,325    3%
Alternative(3)   10,997    9,741    13%   10,823    9,948    9%
Portfolio implementation   83,689    62,134    35%   79,733    61,218    30%
Exposure management   77,812    65,003    20%   74,009    64,601    15%
Total  $376,490   $309,522    22%  $360,756   $309,833    16%

 

(1)Consolidated Eaton Vance Corp. See table on page 49 for managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes assets in balanced and multi-asset mandates.
(3)The Company made classification changes between equity, fixed income, floating-rate income and alternative assets to better align the assets to each core investment mandate. Prior period amounts have been revised for comparability purposes. The changes have no impact on total assets under management.
(4)Includes assets in cash management accounts.

 

Consolidated Average Assets under Management by Investment Vehicle(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)   2017   2016   Change   2017   2016   Change 
Open-end funds(2)  $91,030   $70,358    29%  $85,401   $71,661    19%
Private funds(3)   29,848    26,116    14%   29,011    26,294    10%
Closed-end funds(4)   23,973    23,223    3%   23,772    23,669    0%
Institutional separate account assets   144,568    123,123    17%   139,904    121,978    15%
High-net-worth separate account assets   31,998    24,190    32%   29,980    24,288    23%
Retail managed account assets   55,073    42,512    30%   52,688    41,943    26%
Total  $376,490   $309,522    22%  $360,756   $309,833    16%

 

(1)Consolidated Eaton Vance Corp. See table on page 49 for 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 assets in privately offered equity, fixed income and floating-rate income funds and CLO entities.
(4)Includes assets in unit investment trusts.

 

 45 

 

  

Consolidated Net Flows

 

Consolidated net inflows of $12.9 billion in the second quarter of fiscal 2017 represented 14 percent annualized internal growth in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management). For comparison, the Company had consolidated net inflows of $2.1 billion in the second quarter of fiscal 2016, equating to 3 percent annualized internal growth in managed assets. On the basis of net contribution to management fee revenue, the Company’s annualized internal revenue growth rate (calculated as the management fees attributed to net new sales divided by management fees attributed to beginning of period assets under management) was 7 percent in the second quarter of fiscal 2017 and 1 percent in the second quarter of fiscal 2016, as the revenue contribution from new sales during each quarter exceeded the revenue lost from redemptions and other withdrawals.

 

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, 2017 and 2016:

 

 46 

 

  

Consolidated Assets under Management and Net Flows by Investment Mandate(1)

 

   Three Months Ended         Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2017   2016   Change   2017   2016   Change 
Equity assets - beginning of period(2)(3)  $99,538   $83,274    20%  $89,981   $89,890    0%
Sales and other inflows   4,998    3,904    28%   10,210    7,725    32%
Redemptions/outflows   (4,203)   (4,093)   3%   (10,058)   (8,436)   19%
Net flows   795    (189)   NM    152    (711)   NM  
Assets acquired(4)   -    -    0%   5,704    -    NM  
Exchanges   9    (5)   NM    53    8    563%
Market value change   4,324    5,460    -21%   8,776    (647)   NM  
Equity assets - end of period  $104,666   $88,540    18%  $104,666   $88,540    18%
Fixed income assets - beginning of period(3)(5)   65,136    52,849    23%   60,607    52,465    16%
Sales and other inflows   5,633    5,677    -1%   11,325    10,624    7%
Redemptions/outflows   (4,490)   (3,098)   45%   (8,828)   (7,280)   21%
Net flows   1,143    2,579    -56%   2,497    3,344    -25%
Assets acquired(4)   -    -    0%   4,170    -    NM  
Exchanges   (38)   17    NM    (145)   47    NM  
Market value change   640    911    -30%   (248)   500    NM  
Fixed income assets - end of period  $66,881   $56,356    19%  $66,881   $56,356    19%
Floating-rate income assets - beginning of period(3)   34,051    32,592    4%   32,107    35,534    -10%
Sales and other inflows   4,337    1,489    191%   9,307    3,390    175%
Redemptions/outflows   (1,543)   (2,718)   -43%   (4,849)   (6,145)   -21%
Net flows   2,794    (1,229)   NM    4,458    (2,755)   NM  
Exchanges   34    (14)   NM    154    (50)   NM  
Market value change   78    1,339    -94%   238    (41)   NM  
Floating-rate income assets - end of period  $36,957   $32,688    13%  $36,957   $32,688    13%
Alternative assets - beginning of period(3)   10,775    9,798    10%   10,687    10,289    4%
Sales and other inflows   1,089    615    77%   2,187    1,834    19%
Redemptions/outflows   (745)   (813)   -8%   (1,685)   (2,068)   -19%
Net flows   344    (198)   NM    502    (234)   NM  
Exchanges   (5)   (1)   400%   (7)   2    NM  
Market value change   98    121    -19%   30    (337)   NM  
Alternative assets - end of period  $11,212   $9,720    15%  $11,212   $9,720    15%
Portfolio implementation assets - beginning of period   80,129    58,920    36%   71,426    59,487    20%
Sales and other inflows   5,806    5,176    12%   12,291    10,944    12%
Redemptions/outflows   (3,384)   (2,379)   42%   (6,470)   (4,306)   50%
Net flows   2,422    2,797    -13%   5,821    6,638    -12%
Exchanges   -    (3)   NM    -    (14)   NM  
Market value change   3,825    4,418    -13%   9,129    21    NM  
Portfolio implementation assets - end of period  $86,376   $66,132    31%  $86,376   $66,132    31%
Exposure management assets - beginning of period   74,110    65,146    14%   71,572    63,689    12%
Sales and other inflows   17,103    10,938    56%   38,559    23,867    62%
Redemptions/outflows   (11,668)   (12,626)   -8%   (31,248)   (22,749)   37%
Net flows   5,435    (1,688)   NM    7,311    1,118    554%
Market value change   1,376    1,777    -23%   2,038    428    376%
Exposure management assets - end of period  $80,921   $65,235    24%  $80,921   $65,235    24%
Total assets under management - beginning of period   363,739    302,579    20%   336,380    311,354    8%
Sales and other inflows   38,966    27,799    40%   83,879    58,384    44%
Redemptions/outflows   (26,033)   (25,727)   1%   (63,138)   (50,984)   24%
Net flows   12,933    2,072    524%   20,741    7,400    180%
Assets acquired(4)   -    -    0%   9,874    -    NM  
Exchanges   -    (6)   NM    55    (7)   NM  
Market value change   10,341    14,026    -26%   19,963    (76)   NM  
Total assets under management - end of period  $387,013   $318,671    21%  $387,013   $318,671    21%

 

(1)Consolidated Eaton Vance Corp. See table on page 49 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.

 

 47 

 

  

(3)In the second quarter of fiscal 2017, the Company reclassified among investment mandates certain managed assets and flows. The above presentation of prior period results has been revised for comparability purposes. The reclassification does not affect total consolidated assets under management or total consolidated net flows for any period.
(4)Managed assets gained in the acquisition of the business assets of Calvert on December 30, 2016. Equity category and total acquired assets under management exclude $2.1 billion of managed assets of Calvert Equity Portfolio sub-advised by Atlanta Capital that were previously included in the Company’s consolidated managed assets as institutional separate account managed assets.
(5)Includes cash management mandates.

 

Consolidated Assets under Management and Net Flows by Investment Vehicle(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2017   2016   Change   2017   2016   Change 
Fund assets - beginning of period(2)  $141,802   $117,788    20%  $125,722   $125,934    0%
Sales and other inflows   9,959    6,977    43%   20,928    15,235    37%
Redemptions/outflows   (7,901)   (6,842)   15%   (17,305)   (16,555)   5%
Net flows   2,058    135    NM     3,623    (1,320)   NM 
Assets acquired(3)   -    -    0%   9,821    -    NM 
Exchanges(4)   69    (6)   NM     2,184    (60)   NM 
Market value change   3,412    4,985    -32%   5,991    (1,652)   NM 
Fund assets - end of period  $147,341   $122,902    20%  $147,341   $122,902    20%
Institutional separate account assets - beginning of period   139,309    120,197    16%   136,451    119,987    14%
Sales and other inflows   20,592    15,109    36%   45,225    31,840    42%
Redemptions/outflows   (14,426)   (14,735)   -2%   (37,875)   (26,847)   41%
Net flows   6,166    374    NM     7,350    4,993    47%
Assets acquired(3)   -    -    0%   40    -    NM 
Exchanges(4)   -    436    NM     (2,055)   420    NM 
Market value change   3,569    5,613    -36%   7,258    1,220    495%
Institutional separate account assets - end of period  $149,044   $126,620    18%  $149,044   $126,620    18%
High-net-worth separate account assets - beginning of period   30,514    23,999    27%   25,806    24,516    5%
Sales and other inflows   2,161    1,417    53%   6,724    3,681    83%
Redemptions/outflows   (937)   (2,055)   -54%   (2,546)   (3,194)   -20%
Net flows   1,224    (638)   NM     4,178    487    758%
Exchanges   (49)   (409)   -88%   (35)   (339)   -90%
Market value change   1,536    1,613    -5%   3,276    (99)   NM 
High-net-worth separate account assets - end of period  $33,225   $24,565    35%  $33,225   $24,565    35%
Retail managed account assets - beginning of period   52,114    40,595    28%   48,401    40,917    18%
Sales and other inflows   6,254    4,296    46%   11,002    7,628    44%
Redemptions/outflows   (2,769)   (2,095)   32%   (5,412)   (4,388)   23%
Net flows   3,485    2,201    58%   5,590    3,240    73%
Assets acquired(3)   -    -    0%   13    -    NM 
Exchanges   (20)   (27)   -26%   (39)   (28)   39%
Market value change   1,824    1,815    0%   3,438    455    656%
Retail managed account assets - end of period  $57,403   $44,584    29%  $57,403   $44,584    29%
Total fund and separate account assets - beginning of period   363,739    302,579    20%   336,380    311,354    8%
Sales and other inflows   38,966    27,799    40%   83,879    58,384    44%
Redemptions/outflows   (26,033)   (25,727)   1%   (63,138)   (50,984)   24%
Net flows   12,933    2,072    524%   20,741    7,400    180%
Assets acquired(3)   -    -    0%   9,874    -    NM 
Exchanges   -    (6)   NM     55    (7)   NM 
Market value change   10,341    14,026    -26%   19,963    (76)   NM 
Total assets under management - end of period  $387,013   $318,671    21%  $387,013   $318,671    21%

 

 48 

 

  

(1)Consolidated Eaton Vance Corp. See the table below for managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes assets in cash management funds.
(3)Managed assets gained in the acquisition of the business assets of Calvert on December 30, 2016. Fund category and total acquired assets under management exclude $2.1 billion of managed assets of Calvert Equity Portfolio sub-advised by Atlanta Capital that were previously included in the Company’s consolidated managed assets as institutional separate account managed assets.
(4)Reflects the reclassification from institutional separate accounts to funds of $2.1 billion of managed assets of Calvert Equity Portfolio sub-advised by Atlanta Capital upon the Company’s acquisition of the business assets of Calvert on December 30, 2016.

 

As of April 30, 2017, the Company’s 49 percent-owned affiliate Hexavest Inc. (Hexavest) managed $14.5 billion of client assets, up 2 percent from $14.2 billion of managed assets on April 30, 2016. 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, 2017 and 2016:

 

Hexavest Assets under Management and Net Flows

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2017   2016   Change   2017   2016   Change 
Eaton Vance distributed:                              
Eaton Vance sponsored funds - beginning of period(1)  $255   $205    24%  $231   $229    1%
Sales and other inflows   13    5    160%   33    11    200%
Redemptions/outflows   (19)   (4)   375%   (27)   (25)   8%
Net flows   (6)   1    NM    6    (14)   NM 
Market value change   13    20    -35%   25    11    127%
Eaton Vance sponsored funds - end of period  $262   $226    16%  $262   $226    16%
Eaton Vance distributed separate accounts - beginning of period(2)   2,666    2,344    14%   2,492    2,440    2%
Sales and other inflows   121    22    450%   270    26    938%
Redemptions/outflows   (826)   (25)   NM    (880)   (34)   NM 
Net flows   (705)   (3)   NM    (610)   (8)   NM 
Market value change   177    216    -18%   256    125    105%
Eaton Vance distributed separate accounts - end of period  $2,138   $2,557    -16%  $2,138   $2,557    -16%
Total Eaton Vance distributed - beginning of period   2,921    2,549    15%   2,723    2,669    2%
Sales and other inflows   134    27    396%   303    37    719%
Redemptions/outflows   (845)   (29)   NM    (907)   (59)   NM 
Net flows   (711)   (2)   NM    (604)   (22)   NM 
Market value change   190    236    -19%   281    136    107%
Total Eaton Vance distributed - end of period  $2,400   $2,783    -14%  $2,400   $2,783    -14%
Hexavest directly distributed - beginning of period(3)   11,538    10,533    10%   11,021    11,279    -2%
Sales and other inflows   274    173    58%   601    303    98%
Redemptions/outflows   (201)   (442)   -55%   (605)   (771)   -22%
Net flows   73    (269)   NM    (4)   (468)   -99%
Market value change   454    1,171    -61%   1,048    624    68%
Hexavest directly distributed - end of period  $12,065   $11,435    6%  $12,065   $11,435    6%
Total Hexavest assets - beginning of period   14,459    13,082    11%   13,744    13,948    -1%
Sales and other inflows   408    200    104%   904    340    166%
Redemptions/outflows   (1,046)   (471)   122%   (1,512)   (830)   82%
Net flows   (638)   (271)   135%   (608)   (490)   24%
Market value change   644    1,407    -54%   1,329    760    75%
Total Hexavest assets - end of period  $14,465   $14,218    2%  $14,465   $14,218    2%

 

(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 results.

 

 49 

 

  

(2)Managed assets and flows of Eaton Vance-distributed separate accounts managed by Hexavest. Eaton Vance receives distribution revenue, but not management fees, on these assets, which are not included in the Eaton Vance consolidated results.
(3)Managed assets and flows of pre-transaction Hexavest clients and post-transaction Hexavest clients in Canada. Eaton Vance receives no management fees or distribution revenue on these assets, which are not included in the Eaton Vance consolidated results.

 

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 adjusted to exclude items management deems non-operating or non-recurring in nature or otherwise outside the ordinary course of business. These adjustments may include the add back of adjustments made in connection with changes in the estimated redemption value of non-controlling interests in our affiliates redeemable at other than fair value (non-controlling interest value adjustments), and, when applicable, other items such as closed-end fund structuring fees, special dividends, costs associated with retiring debt and tax settlements. 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. Management and our Board of Directors, as well as our investors, consider these adjusted numbers a measure of the Company’s underlying operating performance. Management believes adjusted net income attributable to Eaton Vance Corp. shareholders 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, 2017 and 2016:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands, except per share data)    2017    2016   Change   2017   2016   Change 
Net income attributable to Eaton Vance Corp. shareholders  $71,975   $54,967    31%  $132,686   $113,353    17%
Non-controlling interest value adjustments(1)   (1)   -    NM    (74)   133    NM 
Adjusted net income attributable to Eaton Vance Corp. shareholders  $71,974   $54,967    31%  $132,612   $113,486    17%
                               
Earnings per diluted share  $0.62   $0.48    29%  $1.15   $0.99    16%
Non-controlling interest value adjustments   -    -    -    -    -    - 
Adjusted earnings per diluted share  $0.62   $0.48    29%  $1.15   $0.99    16%

 

(1)Please see page 59, "Net Income Attributable to Non-controlling and Other Beneficial Interests," for a further discussion of the non-controlling interest value adjustments referenced above.

 

 50 

 

  

The 31% increase in net income attributable to Eaton Vance Corp. shareholders in the second quarter of fiscal 2017 compared to the second quarter of fiscal 2016 can be primarily attributed to the following:

 

·An increase in revenue of $51.3 million, or 16 percent, primarily reflecting growth in managed assets, partially offset by lower average fee rates.
·An increase in expenses of $29.2 million, or 13 percent, primarily reflecting increases in compensation, distribution expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses, partially driven by the Calvert acquisition at the end of the 2016 calendar year.
·A $5.5 million increase in gains and other investment income, net, primarily related to the Company’s investments in sponsored funds. Gains and other investment income, net, also includes a $1.9 million gain recognized upon release from escrow of payments received in connection with the sale of the Company’s equity interest in Lloyd George Management (BVI) Ltd. (Lloyd George Management) in fiscal 2011.
·A $0.7 million increase in interest expense related to the issuance of $300 million in aggregate principal amount of 3.50 percent ten-year senior notes due April 6, 2027 (2027 Senior Notes).
·An $11.0 million decrease in income contribution from the Company’s consolidated CLO entities driven by deconsolidation of the Company’s formerly consolidated CLO entity in the fourth quarter of fiscal 2016.
·An increase in income taxes of $8.5 million, reflecting the increase in the Company’s income before taxes and an increase in the effective tax rate.
·An increase in equity in net income of affiliates, net of tax, of $0.8 million, reflecting an increase in the Company’s proportionate net interest in the earnings of Hexavest.
·A decrease in net income attributable to non-controlling and other beneficial interests of $8.8 million, primarily reflecting a decrease in the net income of consolidated CLOs attributable to other beneficial interest holders partially offset by an increase in net income attributable to non-controlling interest holders in the Company’s consolidated sponsored funds and majority owned subsidiaries.

 

Weighted average diluted shares outstanding increased by 2.3 million shares, or 2 percent, in the second quarter of fiscal 2017 from the second quarter of fiscal 2016, primarily reflecting an increase in the dilutive effect of in-the-money options and unvested restricted stock, an increase in employee option exercises and a decrease in the number of shares repurchased when compared to the same period a year earlier.

 

The 17% increase in net income attributable to Eaton Vance Corp. shareholders in the first six months of fiscal 2017 compared to the first six months of fiscal 2016 can be primarily attributed to the following:

 

·An increase in revenue of $74.7 million, or 11 percent, primarily reflecting growth in managed assets, partially offset by lower average fee rates.
·An increase in expenses of $47.8 million, or 10 percent, primarily reflecting increases in compensation, distribution expense, service fee expense, fund-related expenses and other operating expenses, partially driven by the Calvert acquisition at the end of the 2016 calendar year.
·A $3.2 million increase in gains and other investment income, net, primarily due to an increase in interest income partially offset by an increase in losses recognized on the Company’s investments in sponsored funds. Gains and other investment income, net, also includes a $1.9 million gain recognized upon release from escrow of payments received in connection with the sale of the Company’s equity interest in Lloyd George Management in fiscal 2011.
·A $0.7 million increase in interest expense related to the issuance of the 2027 Senior Notes.

 

 51 

 

  

·A $12.5 million decrease in income contribution from the Company’s consolidated CLO entities driven by deconsolidation of the Company’s final consolidated CLO entity in the fourth quarter of fiscal 2016.
·An increase in income taxes of $8.4 million, or 11 percent, reflecting the increase in the Company’s income before taxes and an increase in the effective tax rate.
·An increase in equity in net income of affiliates, net of tax, of $0.8 million, primarily reflecting an increase in the Company’s proportionate net interest in the earnings of Hexavest and a private equity partnership, both of which are accounted for under the equity method.
·A decrease in net income attributable to non-controlling and other beneficial interest holders of $10.0 million, primarily reflecting a decrease in the net income of consolidated CLOs attributable to other beneficial interest holders, partially offset by an increase in net income attributable to non-controlling interest holders in the Company’s consolidated sponsored funds and majority owned subsidiaries.

 

Weighted average diluted shares outstanding increased by 0.9 million shares, or 1 percent, in the first six months of fiscal 2017 over the first six months of fiscal 2016, primarily reflecting the impact of employee option exercises, vesting of restricted stock and share repurchases over the past twelve months as well as an increase in the dilutive effect of in-the-money options and unvested restricted stock.

 

Revenue

 

The primary drivers of our average annualized effective fee rates are the mix of our assets by product, distribution channel and investment mandate, and the timing and amount of performance fees recognized. Shifts in managed assets among products, distribution channels and investment mandates with differing fee schedules can alter the average fee rate earned on our consolidated assets under management. Our overall average annualized fee rate decreased to 39.5 basis points and 40.1 basis points in the second quarter and first six months of fiscal 2017, respectively, from 41.5 basis points and 42.0 basis points in the same periods a year earlier. Excluding performance-based fees, our overall average annualized management fee rate similarly decreased to 34.7 basis points and 34.9 basis points in the second quarter and first six months of fiscal 2017, respectively, from 36.1 basis and 36.3 basis points in the same periods a year earlier.

 

The following table shows our management fees, distribution and underwriter fees, service fees and other revenue for the three and six months ended April 30, 2017 and 2016:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)    2017    2016   Change     2017    2016   Change 
Management fees  $321,629   $276,883    16%  $626,282   $559,925    12%
Distribution and underwriter fees   19,918    18,275    9%   38,877    37,333    4%
Service fees   30,067    25,794    17%   58,978    53,053    11%
Other revenue   3,018    2,338    29%   5,454    4,535    20%
Total revenue  $374,632   $323,290    16%  $729,591   $654,846    11%

 

Management fees

The increase in management fees in the second quarter and first six months of fiscal 2017 from the same periods a year earlier can be primarily attributed to an increase in average consolidated assets under management, partially offset by a decline in our average annualized management fee rate. Average consolidated assets under management increased by 22 percent and 16 percent in the second quarter and first six months of fiscal 2017 from the same periods a year earlier, respectively. As noted above, our average

 

 52 

 

  

annualized management fee rate, excluding performance-based fees, decreased to 34.7 basis points and 34.9 basis points in the second quarter and first six months of fiscal 2017, respectively, from 36.1 basis points and 36.3 basis points in the second quarter and first six months of fiscal 2016, respectively. Changes in average annualized management fee rates for the compared periods primarily reflects the ongoing shift in the Company’s mix of business towards lower-fee mandates.

 

Average annualized management fee rates by investment mandate, excluding performance-based fees, for the three and six months ended April 30, 2017 and 2016 were as follows:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in basis points on average managed assets)  2017   2016   Change   2017   2016   Change 
Equity(1)(2)   62.1    63.1    -2%   62.4    62.4    0%
Fixed income(1)(2)   38.5    40.1    -4%   38.7    40.5    -4%
Floating-rate income(1)(2)   51.6    52.0    -1%   51.8    51.9    0%
Alternatives(1)(2)   63.2    63.2    0%   63.0    62.9    0%
Portfolio implementation(1)   14.5    14.9    -3%   14.6    15.1    -3%
Exposure management(1)   5.1    5.4    -6%   5.1    5.3    -4%
Consolidated average annualized  management fee rates(1)   34.7    36.1    -4%   34.9    36.3    -4%

 

(1)In the second quarter of fiscal 2017, the Company modified its methodology for calculating average annualized management fee rates for quarterly periods to remove the effect of variations in the number of days in a given quarter. The above presentation of prior period results has been revised for comparability purposes. The revised methodology does not affect the calculation or presentation of average management fee rates for fiscal year periods.
(2)In the second quarter of fiscal 2017, the Company reclassified among investment mandates certain managed assets. The above presentation of prior period results has been revised for comparability purposes. The reclassification does not affect overall average management fee rates for any period.

 

Average assets under management by investment mandate to which these fee rates apply can be found in the table “Consolidated Average Assets under Management by Investment Mandate” on page 45.

 

Performance-based fees were negligible in both the second quarter of fiscal 2017 and 2016 and contributed $0.1 million in both the first six months of fiscal 2017 and 2016.

 

Distribution and underwriter fees

Distribution fees, underwriter fees and other distribution income for the three and six months ended April 30, 2017 and 2016:

 

 53 

 

  

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)    2017    2016   Change     2017    2016   Change 
Distribution fees:                              
Class A  $177   $159    11%  $341   $334    2%
Class B   209    340    -39%   454    737    -38%
Class C   15,425    14,527    6%   30,561    29,856    2%
Class F   351    -    NM    474    -    NM 
Class N   17    21    -19%   32    46    -30%
Class R   389    316    23%   768    637    21%
Private funds   1,412    1,073    32%   2,657    2,129    25%
Total distribution fees   17,980    16,436    9%   35,287    33,739    5%
Underwriter fees   746    734    2%   1,304    1,351    -3%
Other distribution income   1,192    1,105    8%   2,286    2,243    2%
Total distribution and underwriter fees  $19,918   $18,275    9%  $38,877   $37,333    4%

 

Service fees

Service fee revenue increased 17 percent in the second quarter of fiscal 2017 and 11 percent in the first six months of fiscal 2017 from the same periods a year earlier, primarily reflecting an increase in average assets under management in certain classes of funds subject to service fees.

 

Other revenue

Other revenue, which consists primarily of shareholder servicing fees, miscellaneous dealer income and Hexavest-related distribution and service revenue, increased 29 percent in the second quarter of fiscal 2017 from the second quarter of fiscal 2016 and increased 20 percent in the first six months of fiscal 2017 from the same period a year earlier, primarily reflecting an increase in shareholder servicing fees and miscellaneous dealer income.

 

Expenses

 

Operating expenses increased by 13 percent, or $29.2 million, in the second quarter of fiscal 2017 from the same period a year earlier, reflecting increases in compensation, distribution expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses. Expenses in connection with the Company’s NextShares initiative totaled approximately $1.8 million in the second quarter of fiscal 2017 compared to $1.9 million in the second quarter of fiscal 2016.

 

Operating expenses increased by 10 percent, or $47.8 million, in the first six months of fiscal 2017 from the same period a year earlier, reflecting increases in compensation, distribution expense, service fee expense, fund-related expenses and other operating expenses, offset by a decrease in amortization of deferred sales commissions. Expenses in connection with the Company’s NextShares initiative totaled approximately $3.8 million in the first six months of fiscal 2017 compared to $3.6 million in the first six months of fiscal 2016.

 

The following table shows our operating expenses for the three and six months ended April 30, 2017 and 2016:

 

 54 

 

  

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)    2017    2016   Change     2017    2016   Change 
Compensation and related costs:                              
Cash compensation  $116,326   $103,049    13%  $231,162   $207,298    12%
Stock-based compensation   19,141    18,470    4%   39,440    36,731    7%
Total compensation and related costs   135,467    121,519    11%   270,602    244,029    11%
Distribution expense   32,007    28,239    13%   63,124    56,722    11%
Service fee expense   27,827    23,610    18%   54,754    48,205    14%
Amortization of deferred sales commissions   4,026    3,957    2%   7,880    8,001    -2%
Fund-related expenses   11,848    8,031    48%   22,723    17,194    32%
Other expenses   45,537    42,166    8%   87,152    84,302    3%
Total expenses  $256,712   $227,522    13%  $506,235   $458,453    10%

 

Compensation and related costs

The following table shows our compensation and related costs for the three and six months ended April 30, 2017 and 2016:

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in thousands)    2017    2016   Change     2017    2016   Change 
Base salaries and employee benefits  $60,434   $56,526    7%  $119,967   $113,183    6%
Stock-based compensation   19,141    18,470    4%   39,440    36,731    7%
Operating income-based incentives   37,371    30,236    24%   71,729    61,834    16%
Sales incentives   18,364