10-Q 1 tv495702_10q.htm FORM 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended April 30, 2018

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 a 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. ¨

 

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, 2018
Non-Voting Common Stock, $0.00390625 par value    119,199,508 shares
Voting Common Stock, $0.00390625 par value   442,932 shares

 

 

 

  

 

  

Eaton Vance Corp.

Form 10-Q

As of April 30, 2018 and for the

Three and Six Month Periods Ended April 30, 2018

 

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 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk 67
Item 4. Controls and Procedures 67
     
Part II Other Information  
Item 1. Legal Proceedings 68
Item 1A. Risk Factors 68
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 68
Item 6. Exhibits 69
     
Signatures 70

 

 2 

 

 

Part I - Financial Information

 

Item 1.  Consolidated Financial Statements (unaudited)

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

     April 30,   October 31, 
(in thousands)    2018    2017 
         
Assets          
           
Cash and cash equivalents  $511,747   $610,555 
Management fees and other receivables   205,940    200,453 
Investments   1,090,360    898,192 
Assets of consolidated collateralized loan obligation (CLO) entity:          
Cash   1,573    - 
Bank loan investments   133,867    31,348 
Other assets   308    - 
Deferred sales commissions   43,520    36,423 
Deferred income taxes   37,394    67,100 
Equipment and leasehold improvements, net   50,264    48,989 
Intangible assets, net   85,334    89,812 
Goodwill   259,681    259,681 
Loan to affiliate   5,000    5,000 
Other assets   73,220    83,348 
Total assets  $2,498,208   $2,330,901 

 

See notes to Consolidated Financial Statements.

 3 

 

  

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

     April 30,   October 31, 
(in thousands, except share data)    2018    2017 
Liabilities, Temporary Equity and Permanent Equity          
Liabilities:          
Accrued compensation  $119,078   $207,330 
Accounts payable and accrued expenses   77,196    68,115 
Dividend payable   45,223    44,634 
Debt   619,261    618,843 
Liabilities of consolidated CLO entity:          
Line of credit   89,686    12,598 
Other liabilities   18,624    - 
Other liabilities   100,512    116,298 
Total liabilities   1,069,580    1,067,818 
           
Commitments and contingencies (Note 18)          
           
Temporary Equity:          
Redeemable non-controlling interests   335,301    250,823 
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, 119,199,508 and 118,077,872 shares, respectively   466    461 
Additional paid-in capital   124,814    148,284 
Notes receivable from stock option exercises   (9,376)   (11,112)
Accumulated other comprehensive loss   (44,473)   (47,474)
Retained earnings   1,021,041    921,235 
Total Eaton Vance Corp. shareholders’ equity   1,092,474    1,011,396 
Non-redeemable non-controlling interests   853    864 
Total permanent equity   1,093,327    1,012,260 
Total liabilities, temporary equity and permanent equity  $2,498,208   $2,330,901 

 

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)  2018   2017   2018   2017 
Revenue:                
  Management fees  $361,009   $321,629   $727,376   $626,282 
  Distribution and underwriter fees   19,801    19,918    40,294    38,877 
  Service fees   29,831    30,067    60,675    58,978 
  Other revenue   3,620    3,018    7,328    5,454 
    Total revenue   414,261    374,632    835,673    729,591 
Expenses:                    
  Compensation and related costs   147,989    135,467    303,037    270,602 
  Distribution expense   34,534    32,007    70,174    63,124 
  Service fee expense   27,329    27,827    55,891    54,754 
  Amortization of deferred sales commissions   4,428    4,026    8,705    7,880 
  Fund-related expenses   15,333    11,848    30,179    22,723 
  Other expenses   51,962    45,537    99,201    87,152 
    Total expenses   281,575    256,712    567,187    506,235 
Operating income   132,686    117,920    268,486    223,356 
Non-operating income (expense):                    
  Gains (losses) and other investment income, net   (261)   9,288    2,337    9,782 
  Interest expense   (5,903)   (8,065)   (11,810)   (15,412)
  Other income (expense) of consolidated CLO Entity:                    
     Gains and other investment income, net   1,259    -    2,976    - 
     Interest and other expense   (444)   -    (538)   - 
    Total non-operating income (expense)   (5,349)   1,223    (7,035)   (5,630)
Income before income taxes and equity in net income of affiliates   127,337    119,143    261,451    217,726 
Income taxes   (34,044)   (44,654)   (82,661)   (81,402)
Equity in net income of affiliates, net of tax   3,113    3,144    6,127    5,650 
Net income   96,406    77,633    184,917    141,974 
Net (income) loss attributable to non-controlling and other beneficial interests   195    (5,658)   (10,260)   (9,288)
Net income attributable to Eaton Vance Corp. shareholders  $96,601   $71,975   $174,657   $132,686 
Earnings per share:                    
  Basic  $0.84   $0.65   $1.51   $1.20 
  Diluted  $0.78   $0.62   $1.41   $1.15 
Weighted average shares outstanding:                    
  Basic   115,625    110,875    115,448    110,375 
  Diluted   123,779    115,962    123,912    115,188 
Dividends declared per share  $0.31   $0.28   $0.62   $0.56 

 

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)    2018    2017     2018    2017 
                 
Net income  $96,406   $77,633   $184,917   $141,974 
Other comprehensive income (loss):                    
Unrealized loss on cash flow hedges, net of tax   -    (413)   -    (413)
Amortization of net gains (losses) on cash flow hedges, net of tax   (25)   5    (50)   9 
Unrealized gains on available-for-sale investments and reclassification adjustments, net of tax   312    325    1,032    652 
Foreign currency translation adjustments, net of tax   (10,066)   (8,526)   2,019    (2,729)
Other comprehensive income (loss), net of tax   (9,779)   (8,609)   3,001    (2,481)
Total comprehensive income   86,627    69,024    187,918    139,493 
Comprehensive (income) loss attributable to non-controlling and other beneficial interests   195    (5,658)   (10,260)   (9,288)
Total comprehensive income attributable to Eaton Vance Corp. shareholders  $86,822   $63,366   $177,658   $130,205 

 

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
Income
(Loss)
   Retained
Earnings
   Non-
Redeemable
Non-
Controlling
Interests
   Total
Permanent
Equity
   Redeemable
Non-
Controlling
Interests
 
Balance, November 1, 2017  $2   $461   $148,284   $(11,112)  $(47,474)  $921,235   $864   $1,012,260   $250,823 
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-09)   -    -    675    -    -    (523)   -    152    - 
Net income   -    -    -    -    -    174,657    1,456    176,113    8,804 
Other comprehensive income   -    -    -    -    3,001    -    -    3,001    - 
Dividends declared ($0.62 per share)   -    -    -    -    -    (74,328)   -    (74,328)   - 
Issuance of Non-Voting Common Stock:                                             
On exercise of stock options   -    7    49,579    (775)   -    -    -    48,811    - 
Under employee stock purchase plans   -    -    1,549    -    -    -    -    1,549    - 
Under employee stock purchase incentive plan   -    -    3,349    -    -    -    -    3,349    - 
Under restricted stock plan, net of forfeitures   -    6    -    -    -    -    -    6    - 
Stock-based compensation   -    -    44,508    -    -    -    -    44,508    - 
Tax benefit of non-controlling interest repurchases   -    -    2,030    -    -    -    -    2,030    - 
Repurchase of Non-Voting Common Stock   -    (8)   (109,459)   -    -    -    -    (109,467)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    2,511    -    -    -    2,511    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    (1,501)   (1,501)   68,934 
Net consolidations (deconsolidations) of sponsored investment funds and CLO entities   -    -    -    -    -    -    -    -    (488)
Reclass to temporary equity   -    -    -    -    -    -    34    34    (34)
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    (8,439)
Changes in redemption value of non-controlling interests redeemable at fair value   -    -    (15,701)   -    -    -    -    (15,701)   15,701 
Balance, April 30, 2018  $2   $466   $124,814   $(9,376)  $(44,473)  $1,021,041   $853   $1,093,327   $335,301 

 

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
   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 ($0.56 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 and vesting of restricted stock awards           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)
Changes in redemption value of non-controlling interests at fair value   -    -    (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.

 

 8 

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Six Months Ended 
   April 30, 
(in thousands)  2018   2017 
         
Cash Flows From Operating Activities:          
Net income  $184,917   $141,974 
Adjustments to reconcile net income to net cash provided by operating activities:          
 Depreciation and amortization   12,439    10,328 
 Unamortized loss on derivative instrument   -    (684)
 Amortization of deferred sales commissions   8,705    7,884 
 Stock-based compensation   44,508    39,214 
 Deferred income taxes   29,935    8,823 
 Net losses on investments and derivatives   6,809    453 
 Loss on write-off of Hexavest option   6,523    - 
 Equity in net income of affiliates, net of amortization   (6,127)   (5,650)
 Dividends received from affiliates   6,080    5,100 
 Consolidated CLO entity’s operating activities:          
 Net gains on bank loans investments   (1,085)   - 
 Net increase in other assets, including cash   (1,881)   - 
Changes in operating assets and liabilities:          
 Management fees and other receivables   (5,491)   (5,083)
 Investments in trading securities   (185,054)   (162,692)
 Deferred sales commissions   (15,803)   (13,280)
 Other assets   18,758    8,406 
 Accrued compensation   (88,375)   (73,589)
 Accounts payable and accrued expenses   8,042    4,550 
 Other liabilities   (15,340)   55,129 
Net cash provided by operating activities   7,560    20,883 
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (7,707)   (6,066)
Net cash paid in acquisition   -    (63,605)
Proceeds from sale of investments   11,758    5,992 
Purchase of investments   (25,241)   (67)
Consolidated CLO entity’s investing activities:          
 Proceeds from sales of bank loan investments   32,953    - 
 Purchase of bank loan investments   (115,763)   - 
Net cash used for investing activities   (104,000)   (63,746)

 

See notes to Consolidated Financial Statements.

 9 

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Six Months Ended 
   April 30, 
(in thousands)  2018   2017 
         
Cash Flows From Financing Activities:          
Purchase of additional non-controlling interest   (20,818)   (9,451)
Debt issuance costs   -    (2,761)
Proceeds from issuance of debt   -    298,896 
Proceeds from issuance of Non-Voting Common Stock   53,715    45,421 
Repurchase of Non-Voting Common Stock   (109,467)   (78,984)
Principal repayments on notes receivable from stock option exercises   2,511    2,660 
Dividends paid   (73,740)   (63,005)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   67,501    88,859 
Consolidated CLO entity’s financing activities:          
 Proceeds from line of credit   77,088    - 
Net cash (used for) provided by financing activities   (3,210)   281,635 
Effect of currency rate changes on cash and cash equivalents   842    512 
Net increase (decrease) in cash and cash equivalents   (98,808)   239,284 
Cash and cash equivalents, beginning of period   610,555    424,174 
Cash and cash equivalents, end of period  $511,747   $663,458 
           
Supplemental Cash Flow Information:          
Cash paid for interest  $11,330   $14,205 
Cash paid for interest by consolidated CLO entity   493    - 
Cash paid for income taxes, net of refunds   66,553    40,367 
Supplemental Disclosure of Non-Cash Information:          
Increase in equipment and leasehold improvements due to non-cash additions  $968   $110 
Exercise of stock options through issuance of notes receivable   775    771 
Increase in non-controlling interest due to net consolidation (deconsolidation) of sponsored investment funds   77,768    73,843 
Increase in bank loan investments of consolidated CLO entity due to unsettled purchases   18,624    - 
Non-controlling interest call option exercise recorded in other liabilities   -    320 

 

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.

 

Adoption of new accounting standards

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which simplifies certain aspects of the accounting for share-based payment transactions. The Company adopted ASU 2016-09 as of November 1, 2017. One of the impacts of adoption is that excess tax benefits or tax deficiencies related to the exercise of stock options and vesting of restricted stock awards are no longer recognized in additional paid-in capital but rather as an income tax benefit or income tax expense in the period of vesting or settlement. This provision requires a prospective approach to adoption. During the three and six months ended April 30, 2018, the Company recognized excess tax benefits of $1.9 million and $13.7 million, respectively, attributable to the exercise of stock options and vesting of restricted stock awards in conjunction with the adoption of this ASU.

 

This guidance also requires that the excess tax benefits or tax deficiencies described above be classified as an operating cash flow within the Consolidated Statements of Cash Flows as opposed to a financing cash flow, as previously reported. The Company elected to use a retrospective approach to the adoption of this provision. As a result, the excess tax benefit of $8.2 million recognized for the six months ended April 30, 2017 was reclassified out of financing activities and into operating activities.

 

Finally, the guidance allows companies to elect to continue to account for forfeitures using an estimate or instead to elect to account for forfeitures as they occur. Upon adoption, the Company elected to account for forfeitures as they occur and adopted this provision using the modified retrospective approach. Therefore, upon adoption, the Company recognized a $0.5 million cumulative effect adjustment (reduction) to retained earnings, net of related income tax effects, to reflect the timing difference of when forfeitures are recognized in the measurement of stock-based compensation cost.

 

The Company’s accounting policy related to stock-based compensation has been amended to reflect the adoption of this new accounting standard and is summarized below.

 

 11 

 

 

Stock-based compensation

 

The Company accounts for stock-based compensation expense at fair value. Under the fair value method, stock-based compensation expense, which reflects the fair value of stock-based awards measured at grant date, is recognized on a straight-line basis over the relevant service period (generally five years) and is adjusted each period for forfeitures as they occur.

 

The fair value of each option award granted is estimated using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to dividend yield, expected volatility, an appropriate risk-free interest rate and the expected life of the option.

 

The fair value of profit interests granted under subsidiary long-term equity plans is estimated on the grant date by averaging fair value established using an income approach and fair value established using a market approach for each subsidiary.

 

The tax effect of the difference, if any, between the cumulative compensation expense recognized for a stock-based award for financial reporting purposes and the deduction for such award for tax purposes is recognized as income tax expense (for tax deficiencies) or benefit (for excess tax benefits) in the Company’s Consolidated Statements of Income in the period in which the tax deduction arises (generally in the period of vesting or settlement of a stock-based award, as applicable) and are reflected as an operating activity on the Company’s Consolidated Statements of Cash Flows. Shares of non-voting common stock withheld for tax withholding purposes upon the vesting of restricted share awards are reflected as a financing activity in the Company’s Consolidated Statements of Cash Flows.

 

2.Consolidated Sponsored Funds

 

The following table sets forth the balances related to consolidated sponsored funds at April 30, 2018 and October 31, 2017, as well as the Company’s interest in these funds:

 

(in thousands)  April 30,
2018
   October 31,
2017
 
Investments  $505,442   $401,726 
Other assets   9,831    13,537 
Other liabilities   (44,405)   (50,314)
Redeemable non-controlling interests   (231,829)   (154,061)
Interest in consolidated sponsored funds  $239,039   $210,888 

 

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3.Investments

 

The following is a summary of investments at April 30, 2018 and October 31, 2017:

 

(in thousands)  April 30,
2018
   October 31,
2017
 
Investment securities, trading:          
 Short-term debt securities  $279,723   $213,537 
 Consolidated sponsored funds   505,442    401,726 
 Separately managed accounts   100,486    93,113 
 Total investment securities, trading   885,651    708,376 
Investment securities, available-for-sale   23,897    22,465 
Investments in non-consolidated CLO entities   16,049    3,609 
Investments in equity method investees   145,889    144,911 
Investments, other   18,874    18,831 
Total investments(1)  $1,090,360   $898,192 

 

(1) Excludes bank loan investments held by a consolidated warehouse-stage CLO entity, which is discussed in Note 5.

 

Investment securities, trading

 

The following is a summary of the fair value of investments classified as trading at April 30, 2018 and October 31, 2017:

 

(in thousands)  April 30,
2018
   October 31,
2017
 
Short-term debt securities  $279,723   $213,537 
Other debt securities   389,230    313,351 
Equity securities   216,698    181,488 
Total investment securities, trading  $885,651   $708,376 

 

The Company recognized gains (losses) related to trading securities still held at the reporting date of $(14.2) million and $6.3 million for the three months ended April 30, 2018 and 2017, respectively, and $(7.0) million and $8.6 million for the six months ended April 30, 2018 and 2017, respectively, within gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income.

 

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, 2018 and October 31, 2017:

 

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April 30, 2018      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $15,811   $8,106   $(20)  $23,897 

 

October 31, 2017      Gross Unrealized     
(in thousands)  Cost   Gains   Losses   Fair Value 
Investment securities, available-for-sale  $15,755   $6,718   $(8)  $22,465 

 

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 $0.4 million and $0.5 million for the three months ended April 30, 2018 and 2017, respectively, and $1.4 million and $1.1 million for the six months ended April 30, 2018 and 2017, respectively.

 

The Company did not recognize any impairment losses on investment securities classified as available-for-sale during the three and six months ended April 30, 2018 or 2017.

 

The aggregate fair value of available-for-sale investments in an unrealized loss position at April 30, 2018 was $0.6 million; unrealized losses related to these investments totaled $20,000. 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, 2018 and 2017:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2018   2017   2018   2017 
Gains  $-   $-   $5   $204 
Losses   (110)   (1)   (110)   (1)
Net realized gains (losses)  $(110)  $(1)  $(105)  $203 

 

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 $142.3 million and $142.0 million at April 30, 2018 and October 31, 2017, respectively. At April 30, 2018, the Company’s investment in Hexavest consisted of $6.3 million of equity in the net assets of Hexavest, definite-lived intangible assets of $22.8 million and goodwill of $119.3 million, net of a deferred tax liability of $6.1 million. At October 31, 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 $23.7 million and goodwill of $118.6 million, net of a deferred tax liability of $6.4 million. The Company’s investment in Hexavest is denominated in Canadian dollars and is subject to foreign currency translation adjustments, which are recorded in accumulated other comprehensive income (loss). The year-to-date change in the carrying value of goodwill is entirely attributable to foreign currency translation adjustments.

 

 14 

 

  

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 $3.6 million and $2.9 million at April 30, 2018 and October 31, 2017, 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, 2018 or 2017.

 

During the six months ended April 30, 2018 and 2017, the Company received dividends of $6.1 million and $5.1 million, respectively, from its investments in equity method investees.

 

Investments, other

 

Investments, other, which totaled $18.9 million and $18.8 million at April 30, 2018 and October 31, 2017, respectively, primarily consists of investments carried at cost.

 

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 the Company’s investment in SigFig was $17.0 million at both April 30, 2018 and October 31, 2017.

 

4.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). 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 $125.0 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. During the three months ended April 30, 2018 and 2017, the Company reclassified $17,000 and $3,000, respectively, of this deferred loss into interest expense. During the six months ended April 30, 2018 and 2017, the Company reclassified $34,000 and $3,000, respectively, of this deferred loss into interest expense. The Company will reclassify the remaining $0.6 million of unamortized loss as of April 30, 2018 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 $68,000 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 reclassified $50,000 and $0.1 million of the deferred gain into interest expense during both the three and six months ended April 30, 2018 and 2017, respectively, and will reclassify the remaining $1.0 million of unamortized gain as of April 30, 2018 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.

 

 15 

 

  

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, currency futures contracts and interest rate futures contracts to hedge the market and currency risks associated with its investments in certain consolidated seed investments.

 

The Company was a party to the following derivative financial instruments at April 30, 2018 and October 31, 2017:

 

   April 30, 2018   October 31, 2017 
   Number of
Contracts
  

Notional
Value

(in millions)

   Number of
Contracts
  

Notional
Value

(in millions)

 
Stock index futures contracts   1,411   $117.8    1,470   $118.1 
Total return swap contracts   3   $106.5    2   $50.2 
Foreign exchange contracts   20   $19.4    31   $28.1 
Commodity futures contracts   183   $10.1    213   $10.2 
Currency futures contracts   143   $14.4    131   $14.5 
Interest rate futures contracts   121   $24.4    134   $25.6 

 

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, 2018 and October 31, 2017, 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, 2018 and October 31, 2017:

 

   April 30, 2018   October 31, 2017 
(in thousands)  Other
Assets
   Other
Liabilities
   Other
Assets
   Other
Liabilities
 
Stock index futures contracts  $1,756   $849   $330   $3,021 
Total return swap contracts   -    1,579    -    570 
Foreign exchange contracts   239    172    650    60 
Commodity futures contracts   130    84    63    120 
Currency futures contracts   185    165    327    178 
Interest rate futures contracts   40    138    48    226 
Total  $2,350   $2,987   $1,418   $4,175 

 

Changes in the fair value of derivative contracts are recognized in gains (losses) and other investment income, net (see Note 13). The Company recognized the following net gains (losses) on derivative financial instruments for the three and six months ended April 30, 2018 and 2017:

 

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   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2018   2017   2018   2017 
Stock index futures contracts  $5,719   $(7,097)  $(1,937)  $(13,030)
Total return swap contracts   (364)   (1,011)   (990)   (1,975)
Foreign exchange contracts   270    (369)   (629)   (397)
Commodity futures contracts   (317)   (2)   (720)   (2)
Currency futures contracts   89    (10)   3    (10)
Interest rate futures contracts   (103)   -    (18)   - 
Total  $5,294   $(8,489)  $(4,291)  $(15,414)

 

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.

 

5.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 2.

 

Consolidated CLO entities

As of April 30, 2018 and October 31, 2017, the Company deems itself to be the primary beneficiary of one non-recourse CLO entity, namely, Eaton Vance CLO 2017-1 (CLO 2017-1), a warehousing phase CLO entity.

 

Eaton Vance CLO 2017-1 (CLO 2017-1)

The Company established CLO 2017-1 on August 24, 2017. CLO 2017-1 was in the warehousing phase as of April 30, 2018 and October 31, 2017. The Company contributed $18.8 million in capital at the inception of the entity and concurrently entered into a credit facility agreement with a third-party lender to provide CLO 2017-1 with a $160.0 million non-recourse revolving line of credit. The credit facility agreement requires the Company to maintain certain levels of contributed capital relative to the total outstanding borrowings under the line of credit. During the second quarter of fiscal 2018, the Company made an additional capital contribution of $6.2 million in order to increase the level of funding available for borrowing under the line of credit. At April 30, 2018 and October 31, 2017, $89.7 million and $12.6 million, respectively, was outstanding under this revolving line of credit. As collateral manager, the Company has the unilateral ability to liquidate CLO 2017-1 without cause, a right that, by definition, provides the Company with the power to direct the activities that most significantly impact the economic performance of the entity. The Company’s investment in CLO 2017-1 serves as first-loss protection to the third-party lender and provides the Company with an obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the entity. Accordingly, the Company deems itself to be the primary beneficiary of CLO 2017-1 from establishment of the warehouse on August 24, 2017.

 

During the warehouse phase, the Company, acting as collateral manager and subject to the approval of the third-party lender, intends to use its capital contributions along with the proceeds from the revolving line of credit to accumulate a portfolio of commercial bank loan investments in open market purchases in an amount sufficient for eventual securitization. The Company has no right to receive the benefits from,

 

 17 

 

 

nor does the Company bear the risks associated with, the commercial bank loan investments held by CLO 2017-1 beyond the Company’s capital contributions. In the event of default, recourse to the Company is limited to its investment in the warehouse. The Company does not earn any collateral management fees from CLO 2017-1 during the warehousing phase. The Company will be the collateral manager of the CLO entity during the securitization phase.

 

The size of the non-recourse revolving line of credit can be increased subject to the occurrence of certain events and the mutual consent of the parties. The line of credit is secured by all of the commercial bank loan investments in CLO 2017-1 and initially bears interest at a rate of daily LIBOR plus 1.25 percent per annum (with such interest rate, upon completion of the initial twelve-month warehousing period, increasing to daily LIBOR plus 2.0 percent per annum). The third-party lender does not have any recourse to the Company’s general credit.

 

The Company’s total capital contributions of $25.0 million to CLO 2017-1 were eliminated in consolidation. Upon consolidation, the Company irrevocably elected to subsequently measure the commercial bank loan investments at fair value using the fair value option.

 

The following table presents, as of April 30, 2018, the fair value of CLO 2017-1’s assets that are subject to fair value accounting:

 

April 30, 2018        
    CLO Bank Loan Investments
(in thousands)  Total CLO
Bank Loan
Investments
   90 Days or
More Past
Due
 
Unpaid principal balance  $132,782   $- 
Unpaid principal balance over fair value   1,085    - 
Fair value  $133,867   $- 

 

As of October 31, 2017, the unpaid principal balance of the commercial bank loan investments approximated fair value, and there were no unpaid principal balances of such loans that were 90 days or more past due or in non-accrual status. Disclosure of the fair value of bank loan investments at April 30, 2018 and October 31, 2017, is included in Note 6.

 

The Company did not elect the fair value option for amounts outstanding under the revolving line of credit upon the initial consolidation of CLO 2017-1 as these liabilities are temporary in nature. Disclosure of the fair value of amounts outstanding under the revolving line of credit is included in Note 7. If the Company determines it is the primary beneficiary of CLO 2017-1 during the securitization phase, the Company intends to irrevocably elect the fair value option for the note obligations of CLO 2017-1 upon their issuance, mitigating any potential accounting mismatches between the carrying value of the note obligations to be issued during the securitization phase and the carrying value of the commercial bank loan investments held to provide the cash flows for those note obligations.

 

Changes in the fair values of CLO 2017-1’s bank loan investments resulted in net gains of $0.2 million and $1.1 million for the three and six months ended April 30, 2018, respectively. These amounts are recorded in gains and other investment income, net, of consolidated CLO entity on the Company’s Consolidated Statements of Income. For the three and six months ended April 30, 2018, the Company recorded net

 

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income of $0.8 million and $2.4 million, respectively, related to CLO 2017-1, all of which was recorded as net income attributable to Eaton Vance Corp. shareholders.

 

Eaton Vance CLO 2015-1 (CLO 2015-1)

On November 1, 2017, the Company purchased 100 percent of the equity interests in CLO 2015-1 for $26.7 million and reconsidered whether it was the primary beneficiary of CLO 2015-1 as of that date. As collateral manager, the Company had the power to direct the activities that most significantly impact the economic performance of the entity. The Company’s newly acquired equity interest provided it with an obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the entity. Accordingly, the Company deemed itself to be the primary beneficiary of CLO 2015-1 as of November 1, 2017. On December 8, 2017, the Company sold 95 percent of its equity interest in CLO 2015-1 for $24.7 million and recognized a loss on disposal of $0.6 million, which is included in gains and other investment income, net, on the Company’s Consolidated Statement of Income for the six months ended April 30, 2018. The transaction settled on December 22, 2017. 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 determined that it no longer has an obligation to absorb losses of, or the right to receive benefits that could potentially be significant to CLO 2015-1. As a result, the Company concluded that it is no longer the primary beneficiary and therefore deconsolidated CLO 2015-1 during the first quarter of fiscal 2018.

 

On April 13, 2018, the Company sold certain of its investments in the senior debt tranches of CLO 2015-1 with an aggregate par value of $6.7 million and received total proceeds of $6.6 million from the sale, consisting of principal and accrued interest. The Company recognized a loss of $0.1 million on the sale, which is included in gains and other investment income, net on the Company’s Consolidated Statements of Income for the three and six months ended April 30, 2018. The Company maintains its remaining 5 percent equity interest in CLO 2015-1 as an investment in non-consolidated CLO entities. In addition to the 5 percent equity interest, the Company holds $12.3 million in senior debt of the CLO, resulting in a total investment of $13.6 million in CLO 2015-1 as of April 30, 2018.

 

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 3.

 

Non-consolidated CLO entities

The Company is not deemed to be the primary beneficiary of several CLO entities in which it holds variable interests that consist of direct investments and management fees (including subordinated management fees) earned from managing the collateral of these CLO entities. In its role as collateral manager, the Company often has the power to direct the activities that most significantly impact the economic performance of these CLO entities. In developing its conclusion that it is not the primary beneficiary of these entities, the Company determined that for certain of these entities, although it has variable interests in each by virtue of its beneficial interests therein and the collateral management fees it receives, its variable interests neither individually nor in the aggregate represent an obligation to absorb losses of, or a right to receive benefits from, any such entity that could potentially be significant to that entity. Quantitative factors supporting the Company’s qualitative conclusion in each case included the relative

 

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size of the Company’s beneficial interest and the overall magnitude and design of the collateral management fees within each structure.

 

The Company’s maximum exposure to losses 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, 2018. Additional information regarding the Company’s investments in non-consolidated CLO entities is included in Note 3. Collateral management fees receivable for these entities totaled $0.2 million and $0.4 million on April 30, 2018 and October 31, 2017, respectively. Investors in these CLO entities have no recourse against the Company for any losses sustained in the CLO structures. The Company did not provide any financial or other support to these entities that it was not previously contractually required to provide in any of the periods presented. 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 $20.1 billion and $18.1 billion on April 30, 2018 and October 31, 2017, 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 these entities totaling $2.9 million and $2.7 million on April 30, 2018 and October 31, 2017, respectively, and investment advisory fees receivable totaling $1.2 million and $1.1 million on April 30, 2018 and October 31, 2017, respectively. 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 entities is limited to the carrying value of its investments in, and investment advisory fees receivable from, the entities as of April 30, 2018. The Company does not consolidate these VIEs because it does not have the obligation to absorb losses of the VIE’s that could potentially be significant to the VIEs 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 3. 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 $3.6 million and $2.9 million at April 30, 2018 and October 31, 2017, 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, 2018. 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 3 under the heading investments in equity method investees.

 

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6.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, 2018 and October 31, 2017:

 

April 30, 2018                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair Value
   Total 
Financial assets:                         
Cash equivalents  $22,848   $179,778   $-   $-   $202,626 
Investments:                         
Investment securities, trading:                         
Short-term debt securities   -    279,723    -    -    279,723 
Other debt securities   14,826    374,404    -    -    389,230 
Equity securities   143,910    72,788    -    -    216,698 
Investment securities, available-for-sale   9,450    14,447    -    -    23,897 
Investments in non-consolidated CLO entities(1)   -    -    -    16,049    16,049 
Investments in equity method investees(2)   -    -    -    145,889    145,889 
Investments, other(3)   -    189    -    18,685    18,874 
Derivative instruments   -    2,350    -    -    2,350 
Assets of consolidated CLO entity:                         
Bank loan investments   -    133,867    -    -    133,867 
Total financial assets  $191,034   $1,057,546   $-   $180,623   $1,429,203 
                          
Financial liabilities:                         
Derivative instruments  $-   $2,987   $-   $-   $2,987 
Total financial liabilities  $-   $2,987   $-   $-   $2,987 

  

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 October 31, 2017                    
(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at
Fair Value
   Total 
Financial assets:                         
Cash equivalents  $24,811   $97,571   $-   $-   $122,382 
Investments:                         
Investment securities, trading:                         
Short-term debt securities   -    213,537    -    -    213,537 
Other debt securities   17,255    296,096    -    -    313,351 
Equity securities   125,689    55,799    -    -    181,488 
Investment securities, available-for-sale   8,938    13,527    -    -    22,465 
Investments in non-consolidated CLO  entities(1)   -    -    -    3,609    3,609 
Investments in equity method investees(2)   -    -    -    144,911    144,911 
Investments, other(3)   -    146    -    18,685    18,831 
Derivative instruments   -    1,418    -    -    1,418 
Assets of consolidated CLO entity:                         
Bank loan investments   -    31,348    -    -    31,348 
Total financial assets  $176,693   $709,442   $-   $167,205   $1,053,340 
                          
Financial liabilities:                         
Derivative instruments  $-   $4,175   $-   $-   $4,175 
Total financial liabilities  $-   $4,175   $-   $-   $4,175 

 

(1)Investments in non-consolidated CLO entities are carried at amortized cost unless facts or circumstances indicate that the investments have been impaired, at which time the investments are written down to fair value as measured using level 3 inputs. During the three and six months ended April 30, 2018, the Company recognized $0.2 million of other-than-temporary impairment losses related to its investments in non-consolidated CLO entities. 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.
(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, 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. 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

 

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are generally valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker-dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. These assets are generally classified as Level 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, currency futures contracts and interest rate 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, currency futures contracts and interest rate 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.

  

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Assets of consolidated CLO entity

Consolidated CLO entity assets include investments in bank loans. Fair value is determined utilizing unadjusted quoted market prices when available. Interests in senior floating-rate loans for which reliable market quotations are readily available are valued generally at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 2 or 3 within the fair value measurement hierarchy.

 

Transfers in and out of Levels

 

The following table summarizes fair value transfers between Level 1 and Level 2 of the fair value measurement hierarchy for the three and six months ended April 30, 2018 and 2017:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
 (in thousands)  2018   2017   2018   2017 
 Transfers from Level 1 into Level 2(1)  $26   $48   $1   $457 
 Transfers from Level 2 into Level 1(2)   5    42    5    47 

 

(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 and six months ended April 30, 2018 or 2017.

 

7.Fair Value Measurements of Other Financial Instruments

 

Certain financial instruments are not carried at fair value, but their fair value is required to be disclosed. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at April 30, 2018 and October 31, 2017:

 

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   April 30, 2018   October 31, 2017 
(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  $18,695   $18,695    3   $18,685   $18,685    3 
Other assets  $-   $-    -   $6,440   $6,440    3 
Debt  $619,261   $618,149    2   $618,843   $644,454    2 
Consolidated CLO entity line of credit  $89,686   $89,686    2   $12,598   $12,598    2 

 

As discussed in Note 19, on December 23, 2015, Eaton Vance Management Canada Ltd. (EVMC), a wholly owned subsidiary of the Company, loaned $5.0 million to Hexavest under a term loan agreement to seed a new investment strategy. The carrying value of the loan approximates fair value. The fair value is determined 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, 2018 and October 31, 2017 (see Note 3). The carrying value of this investment approximates fair value, as there have been no events or changes in circumstances that would have had a significant effect on the value of this investment as of April 30, 2018.

 

Included in other assets at October 31, 2017 was an option to acquire an additional 26 percent interest in Hexavest carried at $6.4 million. The Company valued the option as of October 31, 2017 using a market approach and determined that the carrying value of the option was representative of fair value. The Company determined not to exercise the option, which expired unexercised on December 11, 2017. Upon expiration, the Company recognized a loss equal to the option’s carrying amount of $6.5 million as of December 11, 2017 within gains (losses) and other investment income, net, in the Company’s Consolidated Statement of Income.

 

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

 

The Company established CLO 2017-1 on August 24, 2017 and deems itself to be the primary beneficiary of CLO 2017-1 from that date. The Company did not elect the fair value option for amounts outstanding under the revolving line of credit upon the initial consolidation of CLO 2017-1. Additional information regarding CLO 2017-1, including the terms of the revolving line of credit, is included in Note 5. The carrying amount of the revolving line of credit of $89.7 million and $12.6 million as of April 30, 2018 and October 31, 2017, respectively, approximates fair value.

 

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8.Acquisitions

 

Atlanta Capital Management Company, LLC (Atlanta Capital)

 

In the first quarter of fiscal 2018, the Company paid $2.5 million to settle call options exercised during the fourth quarter of fiscal 2017 through which it purchased all of the remaining 0.45 percent direct profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the provisions of the original Atlanta Capital acquisition agreement, as amended.

 

In the second quarter of fiscal 2017, the Company exercised a call option through which it purchased 0.1 percent direct profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the provisions of the original Atlanta Capital acquisition agreement, as amended, for $0.4 million. The transaction settled in May 2017.

 

In the first quarter of fiscal 2018, the Company paid $4.2 million to settle call options exercised during the fourth quarter of fiscal 2017 through which it purchased 1.1 percent of indirect profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the provisions of the Atlanta Capital Management Company, LLC Long-term Equity Incentive Plan (the Atlanta Capital Plan). There were no puts or calls exercised in relation to indirect profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the terms of the Atlanta Capital Plan during the first six months of fiscal 2018. The Company did not grant any indirect profit interests under the Atlanta Capital Plan during the first six months of fiscal 2018.

 

In the first quarter of fiscal 2017, the Company paid $1.9 million to settle call options exercised during the fourth quarter of fiscal 2016 through which it purchased 0.9 percent of indirect profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the provisions of the Atlanta Capital Plan. Separately, the Company granted a 1.1 percent indirect profit interest to employees of Atlanta Capital pursuant to the terms of the Atlanta Capital Plan in the first quarter of fiscal 2017.

 

Total profit interests in Atlanta Capital held by non-controlling interest holders was 11.6 percent on April 30, 2018 and October 31, 2017, reflecting the transactions described above.

 

Calvert Research and Management (Calvert)

 

On December 30, 2016, the Company, through its newly formed subsidiary Calvert, acquired substantially all of the assets of Calvert Investment Management, Inc. (Calvert Investments) 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 mutual funds, encompassing actively and passively managed equity, fixed income and asset allocation strategies managed in accordance with the Calvert Principles for Responsible Investment or other responsible investment criteria.

 

Parametric Portfolio Associates LLC (Parametric)

 

In the first quarter of fiscal 2018, the Company exercised the final call option related to non-controlling interests in Parametric issued in conjunction with the Clifton acquisition, resulting in the Company’s acquisition of the remaining indirect 0.5 percent profit interests and 0.5 percent capital interests in

 

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Parametric. This transaction settled in December 2017 for $8.4 million. 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 interests and a 0.5 percent capital interests in Parametric. This transaction settled in January 2017 for $6.9 million.

 

In the first quarter of fiscal 2018, the Company paid $5.7 million to settle call options exercised in the fourth quarter of fiscal 2017 through which it purchased 0.5 percent indirect profit interests held by non-controlling interest holders of Parametric pursuant to the provisions of the Parametric Portfolio Associates LLC Long-term Equity Plan (the Parametric Plan). In the first quarter of fiscal 2017, the Company paid $0.6 million to settle call options exercised in the fourth quarter of fiscal 2016 through which it purchased 0.1 percent indirect profit interests held by non-controlling interest holders of Parametric pursuant to the provisions of the Parametric Plan. There were no puts or calls exercised in relation to indirect profit interests held by non-controlling interest holders of Parametric pursuant to the terms of the Parametric Plan during the first six months of fiscal 2018. The Company did not grant any indirect profit interests under the Parametric Plan during the first six months of fiscal 2018.

 

Total profit interests in Parametric held by non-controlling interest holders, including indirect profit interests issued pursuant to the Parametric Plan, decreased to 5.5 percent as of April 30, 2018 from 6.0 percent as of October 31, 2017, reflecting the transactions described above. Total capital interests in Parametric held by non-controlling interest holders decreased to 0.8 percent as of April 30, 2018 from 1.3 percent as of October 31, 2017.

 

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.

 

9.Intangible Assets

 

The following is a summary of intangible assets at April 30, 2018 and October 31, 2017:

 

April 30, 2018            
(in thousands)  Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
Amortizing intangible assets:               
 Client relationships acquired  $134,247   $(107,467)  $26,780 
 Intellectual property acquired   1,025    (486)   539 
 Trademark acquired   4,257    (1,005)   3,252 
 Research system acquired   639    (284)   355 
Non-amortizing intangible assets:               
 Mutual fund management contracts acquired   54,408    -    54,408 
Total  $194,576   $(109,242)  $85,334 

 

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October 31, 2017            
(in thousands)  Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
Amortizing intangible assets:               
 Client relationships acquired  $134,247   $(103,314)  $30,933 
 Intellectual property acquired   1,025    (452)   573 
 Trademark acquired   4,257    (821)   3,436 
 Research system acquired   639    (177)   462 
Non-amortizing intangible assets:               
 Mutual fund management contracts acquired   54,408    -    54,408 
Total  $194,576   $(104,764)  $89,812 

 

Amortization expense was $2.2 million and $4.5 million for both the three and six months ended 2018 and 2017, respectively. Estimated remaining amortization expense for fiscal 2018 and the next five fiscal years, on a straight-line basis, is as follows:

 

   Estimated 
Year Ending October 31,  Amortization 
(in thousands)  Expense 
Remaining 2018  $4,449 
2019   4,978 
2020   3,807 
2021   2,282 
2022   2,154 
2023   1,754 

 

10.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.

 

Redemption of 2017 Senior Notes

 

On May 6, 2017, the Company used the net proceeds from the 2027 Senior Notes to redeem the remaining $250.0 million aggregate principal amount of its 2017 Senior Notes. The Company paid total consideration of $256.8 million at redemption, which represented the sum of the aggregate principal amount then outstanding, the present value of the remaining scheduled payments of interest through the original maturity date and interest accrued to the date of redemption. The Company recognized a $5.4 million non-operating loss on the extinguishment of the 2017 Senior Notes during the third quarter of fiscal 2017,

 

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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.

 

11.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, 2018 and 2017 as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2018   2017   2018   2017 
Omnibus Incentive Plans:                    
 Stock options  $5,117   $4,818   $12,406   $10,520 
 Restricted shares   12,584    11,549    26,077    23,623 
 Phantom stock units   7    105    929    226 
Employee Stock Purchase Plans   -    -    481    176 
Employee Stock Purchase Incentive Plan   603    496    689    549 
Atlanta Capital Plan   742    855    1,484    1,710 
Parametric Plan   795    940    1,589    1,880 
Parametric Phantom Incentive Plan   800    378    1,501    756 
Atlanta Capital Phantom Incentive Plan   138    -    281    - 
Total stock-based compensation expense  $20,786   $19,141   $45,437   $39,440 

 

The total income tax benefit recognized for stock-based compensation arrangements was $5.2 million and $7.0 million for the three months ended April 30, 2018 and 2017, respectively, and $10.9 million and $14.3 million for the six months ended April 30, 2018 and 2017, respectively.

 

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, 2018 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   17,587   $32.63           
Granted   1,747    50.71           
Exercised   (1,663)   29.81           
Forfeited/expired   (42)   40.37           
Options outstanding, end of period   17,629   $34.67    6.0   $347,676 
Options exercisable, end of period   8,928   $30.28    4.1   $215,240 

 

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The Company received $48.8 million and $41.1 million related to the exercise of options for the six months ended April 30, 2018 and 2017, respectively.

 

As of April 30, 2018, there was $50.7 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 2.9 years.

 

Restricted shares

A summary of the Company’s restricted share activity for the six months ended April 30, 2018 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   4,565   $36.22 
Granted   1,398    50.94 
Vested   (1,229)   35.92 
Forfeited   (74)   39.45 
Unvested, end of period   4,660   $40.67 

 

As of April 30, 2018, there was $141.6 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 3.1 years.

 

Phantom stock units

Phantom stock units issued to non-employee Directors under the 2013 Plan are accounted for as liability awards. During 2017, the 2013 Plan was amended such that non-employee Directors no longer have substantive service conditions for vesting of awards. Once the awards are granted, the non-employee Directors have the right to receive cash payment related to such awards upon separation from the Company (other than for cause). As a result, phantom units granted on or after November 1, 2017 are considered fully vested on grant date and the entire grant date fair value of these awards is recognized as compensation cost on the date of grant.

 

During the six months ended April 30, 2018, 14,085 phantom stock units were issued to non-employee Directors pursuant to the 2013 Plan. As of April 30, 2018, there was $0.1 million of compensation cost related to unvested phantom stock units granted under the 2013 Plan prior to November 2017 not yet recognized. That cost is expected to be recognized over a weighted-average period of six months.

 

12.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.

 

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In the first six months of fiscal 2018, the Company purchased and retired approximately 2.0 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 4.1 million additional shares may be repurchased under the current authorization as of April 30, 2018.

 

13.Non-operating Income (Expense)

 

The components of non-operating income (expense) for the three and six months ended April 30, 2018 and 2017 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
 (in thousands)  2018   2017   2018   2017 
Interest and other income  $7,253   $5,958   $16,369   $10,601 
Net gains (losses) on investments and derivatives(1)   (7,788)   3,483    (13,333)   (453)
Net foreign currency gains (losses)   274    (153)   (699)   (366)
Gains (losses) and other investment income, net   (261)   9,288    2,337    9,782 
Interest expense   (5,903)   (8,065)   (11,810)   (15,412)
Other income (expense) of consolidated CLO entity:                    
Interest income   865    -    1,688    - 
Net gains on bank loans   394    -    1,288    - 
Gains and other investment income, net   1,259    -    2,976    - 
Interest and other expense   (444)   -    (538)   - 
Total non-operating income (expense)  $(5,349)  $1,223   $(7,035)  $(5,630)

   

(1)For the six months ended April 30, 2018, includes the $6.5 million loss associated with the Company’s determination not to exercise the option to acquire an additional 26 percent ownership interest in Hexavest.

 

14.Income Taxes

 

The provision for income taxes was $34.0 million and $44.7 million, or 26.7 percent and 37.5 percent of pre-tax income, for the three months ended April 30, 2018 and 2017, respectively. The provision for income taxes was $82.7 million and $81.4 million, or 31.6 percent and 37.4 percent of pre-tax income, for the six months ended April 30, 2018 and 2017, respectively.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into law in the U.S. Among other significant changes, the Tax Act reduced the statutory federal income tax rate for U.S. corporate taxpayers from a maximum of 35 percent to 21 percent and required the deemed repatriation of foreign earnings not previously subject to U.S. taxation. Because the lower federal income tax rate took effect two months into the Company’s fiscal year, a blended federal tax rate of 23.3 percent applies to the Company for fiscal 2018.

 

The Company’s income tax provision for the three months ended April 30, 2018 includes a non-recurring charge of $42,000 for the deemed repatriation of foreign-sourced net earnings not previously subject to U.S. taxation. The Company’s effective tax rate for the three months ended April 30, 2018 was decreased by the income tax benefit of $1.9 million related to the exercise of stock options and vesting of restricted stock during the period, and increased by $54,000 related to the net income attributable to redeemable non-controlling interests and other beneficial interests, which is not taxable to the Company.

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The Company’s income tax provision for the first six months of fiscal 2018 includes a non-recurring charge of approximately $24.8 million to reflect the estimated effect of the Tax Act. The non-recurring charge is considered to be a provisional estimate under the U.S. Securities and Exchange Commission Staff Accounting Bulletin 118 (SAB 118) and, based on current interpretation of the tax law changes, includes $21.7 million from the revaluation of the Company’s deferred tax assets and liabilities, and $3.1 million for the deemed repatriation of foreign-sourced net earnings not previously subject to U.S. taxation. The increase in the Company’s effective tax rate for the first six months of fiscal 2018 resulting from this charge was partially offset by an income tax benefit of $13.7 million related to the exercise of stock options and vesting of restricted stock during the period, and $2.8 million related to the net income attributable to redeemable non-controlling interests and other beneficial interests, which is not taxable to the Company. The following table reconciles the statutory federal income tax rate to the Company’s effective tax rate for the three and six months ended April 30, 2018:

 

   Three Months Ended   Six Months Ended 
   April 30, 2018   April 30, 2018 
Statutory U.S. federal income tax rate(1)   23.3%   23.3%
State income taxes for current year, net of federal income tax benefits   4.3%   4.3%
Net income attributable to non-controlling and other beneficial interests   0.1%   -0.9%
Other items   0.5%   0.7%
Non-recurring impact of U.S. tax reform   0.0%   9.5%
Net excess tax benefits from stock-based compensation plans(2)   -1.5%   -5.3%
Effective income tax rate   26.7%   31.6%

 

(1)Statutory U.S. federal income tax rate is a blend of 35 percent and 21 percent based on the number of days in the Company’s fiscal year before and after the January 1, 2018 effective date of the reduction in the federal corporate income tax rate pursuant to the Tax Act.
(2)This amount reflects the impact of Accounting Standard Update 2016-09, Improvements to Employee Share-Based Payment Accounting, which was adopted in the first quarter of fiscal 2018. The Company anticipates that the adoption of this guidance may cause fluctuations in the Company’s effective tax rate, particularly in the first quarter of each fiscal year, when most of the Company’s annual stock-based awards vest.

 

The Company continues to carefully evaluate the impact of the Tax Act, certain provisions of which will not take effect for the Company until fiscal 2019, including, but not limited to, the global intangible low-taxed income, foreign-derived intangible income and base erosion anti-abuse tax provisions. Under the guidance provided by the Security and Exchange Commission in SAB 118, no provisional estimate is required for these items until the accounting for these elements of the Tax Act is complete.

 

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

 

As of April 30, 2018, the Company considers the undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested in foreign operations; however, as a result of the Tax Act, an estimated tax of $3.1 was recorded during the six months ended April 30, 2018 on these earnings. The calculation of this non-recurring charge is based on the Tax Act, guidance issued by the Internal Revenue Service and our interpretation of this information. The Company anticipates additional guidance will be issued by the

 

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Internal Revenue Service and continues to monitor interpretative developments. As additional guidance becomes available, the Company may reconsider its repatriation policy and this estimated tax charge may change.

 

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 2014.

 

15.Non-controlling and Other Beneficial Interests

 

The components of net (income) loss attributable to non-controlling and other beneficial interests for the three and six months ended April 30, 2018 and 2017 were as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2018   2017   2018   2017 
Consolidated sponsored funds  $3,947   $(1,727)  $(2,353)  $(1,712)
Majority-owned subsidiaries   (3,752)   (3,932)   (7,907)   (7,650)
Non-controlling interest value adjustments(1)   -    1    -    74 
Net (income) loss attributable to non-controlling and other beneficial interests  $195   $(5,658)  $(10,260)  $(9,288)

 

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

 

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16.Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended April 30, 2018 and 2017 are as follows:

 

(in thousands)  Unamortized
Net Gains
(Losses) on
Cash Flow
Hedges(1)
   Net Unrealized
Gains (Losses)
on Available-
for-Sale
Investments(2)
   Foreign
Currency
Translation
Adjustments
   Total 
Balance at January 31, 2018  $276   $4,848   $(39,818)  $(34,694)
Other comprehensive income (loss), before reclassifications and tax   -    414    (10,066)   (9,652)
 Tax impact   -    (102)   -    (102)
Reclassification adjustments, before tax   (33)   -    -    (33)
 Tax impact   8    -    -    8 
Net current period other comprehensive income (loss)   (25)   312    (10,066)   (9,779)
Balance at April 30, 2018  $251   $5,160   $(49,884)  $(44,473)
                     
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)

  

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The components of accumulated other comprehensive income (loss), net of tax, for the six months ended April 30, 2018 and 2017 are as follows:

 

 (in thousands)  Unamortized
Net Gains
(Losses) on
Cash Flow
Hedges(1)
   Net Unrealized
Gains (Losses)
on Available-
for-Sale
Investments(2)
   Foreign
Currency
Translation
Adjustments
   Total 
Balance at October 31, 2017  $301   $4,128   $(51,903)  $(47,474)
Other comprehensive income, before reclassifications and tax   -    1,376    2,019    3,395 
 Tax impact   -    (344)   -    (344)
Reclassification adjustments, before tax   (66)   -    -    (66)
 Tax impact   16    -    -    16 
Net current period other comprehensive income (loss)   (50)   1,032    2,019    3,001 
Balance at April 30, 2018  $251   $5,160   $(49,884)  $(44,473)
                     
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)

 

(1)Amounts reclassified from accumulated other comprehensive income (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 that were recorded in gains (loss) and other investment income, net, on the Consolidated Statements of Income.

 

17.Earnings per Share

 

The following table sets forth the calculation of earnings per basic and diluted share for the three and six months ended April 30, 2018 and 2017:

 

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   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2018   2017   2018   2017 
Net income attributable to Eaton Vance Corp. shareholders  $96,601   $71,975  $174,657   $132,686 
Weighted-average shares outstanding – basic   115,625    110,875    115,448    110,375 
Incremental common shares   8,154    5,087    8,464    4,813 
Weighted-average shares outstanding – diluted   123,779    115,962    123,912    115,188 
Earnings per share:                    
Basic  $0.84   $0.65   $1.51   $1.20 
Diluted  $0.78   $0.62   $1.41   $1.15 

 

Antidilutive common shares related to stock options and unvested restricted stock excluded from the computation of earnings per diluted share were approximately 1.9 million and 3.6 million for the three months ended April 30, 2018 and 2017, respectively, and approximately 2.1 million and 4.1 million for the six months ended April 30, 2018 and 2017, respectively.

 

18.Commitments and Contingencies

 

In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants, information technology agreements, distribution agreements and service agreements. In certain circumstances, these indemnities in favor of third parties relate to service agreements entered into by investment funds advised by Eaton Vance Management, Boston Management and Research, or Calvert, all of which are direct or indirect 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.

 

19.Related Party Transactions

 

Sponsored funds

 

The Company is an investment adviser to, and has administrative agreements with, certain sponsored funds, privately offered equity funds and closed-end funds for which 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, 2018 and 2017 are as follows:

 

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   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2018   2017   2018   2017 
Management fees  $253,291   $226,959   $509,005   $441,708 
Distribution fees   18,940    18,998    38,727    37,279 
Service fees   29,831    30,067    60,675    58,978 
Shareholder services fees   1,477    1,271    2,868    1,973 
Other revenue   140    576    284    1,090 
Total  $303,679   $277,871   $611,559   $541,028 

 

For the three months ended April 30, 2018 and 2017, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $4.3 million and $4.0 million, respectively, of management fees it was otherwise entitled to receive. For the six months ended April 30, 2018 and 2017, the Company contractually waived $8.6 million and $7.7 million, respectively, of management fees it was otherwise entitled to receive.

 

Sales proceeds and net realized gains (losses) for the three and six months ended April 30, 2018 and 2017 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)  2018   2017   2018   2017 
Proceeds from sales  $-   $1   $-   $3,734 
Net realized gains (losses)   (110)   -    (105)   203 

 

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, 2018 and 2017, expenses of $11.0 million and $8.4 million, respectively, were incurred by the Company pursuant to these arrangements. For the six months ended April 30, 2018 and 2017, expenses of $22.0 million and $16.0 million, respectively, were incurred by the Company pursuant to these arrangements.

 

Included in management fees and other receivables at April 30, 2018 and October 31, 2017 are receivables due from sponsored funds of $101.1 million and $100.0 million, respectively. Included in accounts payable and accrued expenses at April 30, 2018 and October 31, 2017 are payables due to sponsored funds of $3.2 million and $1.7 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, 2018 and 2017, the Company recorded $48,000 and $39,000, respectively, of interest income related to the loan in gains (losses) and other investment income, net, on the Company’s Consolidated Statement of Income. During both the six months ended April 30,

 

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2018 and 2017, the Company recorded $0.1 million of interest income related to the loan. Interest due from Hexavest under this arrangement included in other assets on the Company’s Consolidated Balance Sheets was $16,000 and $13,000 at April 30, 2018 and October 31, 2017, respectively.

 

Employee loan program

 

The Company has established an Employee Loan Program under which a program maximum of $20.0 million is available for loans to officers (other than executive officers) and other key employees of the Company for purposes of financing the exercise of employee stock options. Loans outstanding under this program, which are full recourse in nature, are reflected as notes receivable from stock option exercises in shareholders’ equity and amounted to $9.4 million and $11.1 million at April 30, 2018 and October 31, 2017, respectively.

 

20.Geographic Information

 

Revenues by principal geographic area for the three and six months ended April 30, 2018 and 2017 are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2018   2017   2018   2017 
Revenue:                
 U.S.  $396,750   $359,342   $801,149   $699,902 
 International   17,511    15,290    34,524    29,689 
 Total  $414,261   $374,632   $835,673   $729,591 

 

Long-lived assets by principal geographic area as of April 30, 2018 and October 31, 2017 are as follows:

 

   April 30,   October 31, 
(in thousands)  2018   2017 
Long-lived Assets:          
 U.S.  $47,987   $46,804 
 International   2,277    2,185 
 Total  $50,264   $48,989 

 

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

 

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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, 2017.

 

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. We measure our success as a Company based on investment performance delivered, reputation in the marketplace, progress achieving strategic objectives, employee development and satisfaction, business and financial results, and shareholder value created.

 

We conduct our investment management and advisory business through wholly- and majority-owned investment affiliates, which include: Eaton Vance Management, Parametric Portfolio Associates LLC (Parametric), Atlanta Capital Management Company, LLC (Atlanta Capital) and Calvert Research and Management (Calvert). We also offer investment management advisory services through minority-owned affiliate Hexavest Inc. (Hexavest).

 

Through Eaton Vance Management, Atlanta Capital, Calvert and our 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, and global income, high-yield and investment grade bonds. Through 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

 

 39 

 

  

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, emerging market 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 geographic representation. Our income investment strategies cover a broad duration, geographic representation 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. 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. As of April 30, 2018, we had $440.1 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 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-and majority-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-, Parametric- and Calvert-branded 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, fund-related expenses, service fee expense, 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.

 

 40 

 

 

Business Developments

 

We are pursuing five primary strategic priorities to support our long-term growth. Those priorities are: (1) capitalizing on our investment performance leadership and distribution strengths to grow sales and gain market share in actively managed investment strategies; (2) extending the success we have had with our Custom Beta lineup of rules-based separately managed accounts; (3) becoming a more global company by building our investment and distribution capabilities outside the United States; (4) positioning NextShares™ exchange-traded managed funds (NextShares) to become the vehicle of choice for investors in actively managed funds in the U.S; and (5) leveraging our Calvert acquisition to lead the growth of responsible investing.

 

As of April 30, 2018, we had 67 U.S. mutual funds rated four or five stars by Morningstar™ for at least one class of shares, including 23 funds rated five stars for at least one class of shares. Although actively 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 2018, net flows into the Company’s active strategies totaled $7.0 billion.

 

In the first six months of fiscal 2018, we continued to experience growth in our Custom Beta Strategies, which include the Parametric Custom Core equity and Eaton Vance laddered municipal and corporate bond separate account offerings to the retail and high-net-worth markets. Compared to index mutual funds and exchange-traded funds, rules-based separately managed accounts can provide clients with the ability to tailor their market exposures to achieve better tax outcomes and to reflect client-specified responsible investing criteria, and desired portfolio tilts and exclusions. In the first six months of fiscal 2018, net inflows into Parametric Custom Core and Eaton Vance laddered municipal and corporate bond strategies offered as retail managed accounts and high-net-worth separate accounts totaled $6.4 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 January 31, 2018, Eaton Vance Management (International) Limited (EVMI) announced an agreement to hire a five-person global fixed-income team in Frankfurt, Germany, which advises approximately $0.8 billion in client mandates assumed by Eaton Vance upon the team’s hiring. In addition to providing portfolio advisory services for fixed-income accounts, EVMI’s Frankfurt branch provides sales and client service support for our European business. In the first six months of fiscal 2018, net inflows into funds and accounts managed for Eaton Vance clients outside the U.S. totaled $1.9 billion.

 

Over the past several years, we have committed significant resources towards achieving commercial success of our NextShares fund structure. On November 20, 2017, together with UBS Financial Services Inc., we announced the availability of NextShares through the UBS brokerage platforms and UBS Strategic Advisor, a non-discretionary advisory program, which the Company believes will stimulate growth in NextShares managed assets. As of the end of the second quarter of fiscal 2018, 17 NextShares funds from eight different fund families were listed for trading, with approximately half available for purchase at UBS and the balance undergoing their due diligence.

 

On December 30, 2016, we completed the purchase of substantially all of the business assets of Calvert Investments. The Calvert Funds are one of the largest and most diversified families of responsibly invested mutual funds, encompassing actively and passively managed equity, fixed and floating-rate income, and asset allocation strategies managed in accordance with the Calvert Principles for Responsible Investment (Calvert

 

 41 

 

  

Principles) or other responsible investment criteria. 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 offered through Eaton Vance Distributors, Inc. (EVD). In the first six months of fiscal 2018, net flows into Calvert Funds and Calvert-managed separate accounts totaled $0.9 billion. Excluding managed assets in Calvert Funds sub-advised by other Eaton Vance affiliates, Calvert’s assets under management increased to $11.8 billion at April 30, 2018 from $9.9 billion at acquisition on December 30, 2016, an increase of 19 percent. Please see page 43 “Consolidated Assets under Management by Investment Affiliate,” for further information related to Calvert’s assets under management.

 

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 2018, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of -6.2 percent and 2.7 percent, respectively, and the MSCI Emerging Market Index, a broad measure of emerging market equity performance, had total returns of -6.7 percent and 3.1 percent, respectively. Over the same periods, the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of -0.8 percent and -1.9 percent, respectively.

 

Consolidated assets under management of $440.1 billion on April 30, 2018 increased $53.1 billion, or 14 percent, from $387.0 billion on April 30, 2017. The year-over-year increase reflects net inflows of $28.6 billion and market price appreciation in managed assets of $24.5 billion.

 

The following tables summarize our consolidated assets under management by investment mandate, investment vehicle and investment affiliate as of April 30, 2018 and 2017. Within the investment mandate table, the “Portfolio implementation” category comprises 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)  2018  

% of

Total

   2017  

% of

Total

  

%

Change

 
Equity(2)  $117,757    27%  $104,666    27%   13%
Fixed income(3)   74,024    17%   66,881    17%   11%
Floating-rate income   42,282    10%   36,957    10%   14%
Alternative   13,506    3%   11,212    3%   20%
Portfolio implementation   107,170    24%   86,376    22%   24%
Exposure management   85,333    19%   80,921    21%   5%
Total  $440,072    100%  $387,013    100%   14%

 

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

 

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Equity assets under management included $41.2 billion and $34.9 billion of assets managed for after-tax returns on April 30, 2018 and 2017, respectively. Portfolio implementation assets under management included $88.1 billion and $60.2 billion of assets managed for after-tax returns on April 30, 2018 and 2017, respectively. Fixed income assets included $42.1 billion and $37.3 billion of municipal income assets on April 30, 2018 and 2017, respectively.

 

 Consolidated Assets under Management by Investment Vehicle(1)        
                     
   April 30,     
(in millions)  2018  

% of

Total

   2017  

% of

Total

  

%

Change

 
Open-end funds(2)  $101,682    23%  $92,441    24%   10%
Closed-end funds(3)   24,635    6%   24,119    6%   2%
Private funds(4)   36,552    8%   30,781    8%   19%
Institutional separate accounts   163,816    37%   149,044    38%   10%
High-net-worth separate accounts   42,154    10%   33,225    9%   27%
Retail managed accounts   71,233    16%   57,403    15%   24%
Total  $440,072    100%  $387,013    100%   14%

 

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

 

 Consolidated Assets under Management by Investment Affiliate(1)    
         
   April 30,   % 
(in millions)  2018   2017   Change 
Eaton Vance Management (2)  $173,269   $154,985    12%
Parametric   231,452    201,493    15%
Atlanta Capital (3)   23,593    20,631    14%
Calvert (3)   11,758    9,904    19%
Total  $440,072   $387,013    14%

 

(1)Consolidated Eaton Vance Corp. See table on page 49 for directly managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes managed assets of Eaton Vance-sponsored funds and separate accounts managed by Hexavest and unaffiliated third-party advisers under Eaton Vance supervision.
(3)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 Fund, for which Atlanta Capital serves as sub-adviser. The total managed assets of Calvert, including assets sub-advised by other Eaton Vance affiliates, were $14.0 billion and $12.1 billion as of April 30, 2018 and 2017, respectively.

 

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

 

 43 

 

 

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)  2018   2017   Change   2018   2017   Change 
Equity(2)  $119,051   $102,491    16%  $117,626   $98,156    20%
Fixed income(3)   73,261    65,967    11%   72,447    63,809    14%
Floating-rate income   41,062    35,534    16%   40,179    34,226    17%
Alternative   13,504    10,997    23%   13,157    10,823    22%
Portfolio implementation   107,607    83,689    29%   105,271    79,733    32%
Exposure management   86,108    77,812    11%   86,623    74,009    17%
Total  $440,593   $376,490    17%  $435,303   $360,756    21%

 

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

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

 

Consolidated Average Assets under Management by Investment Vehicle(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2018   2017   Change   2018   2017   Change 
Open-end funds(2)  $101,501   $91,030    12%  $100,244   $85,401    17%
Closed-end funds(3)   24,865    23,973    4%   24,898    23,772    5%
Private funds(4)   36,673    29,848    23%   36,081    29,011    24%
Institutional separate accounts   163,885    144,568    13%   162,814    139,904    16%
High-net-worth separate accounts   42,582    31,998    33%   41,765    29,980    39%
Retail managed accounts   71,087    55,073    29%   69,501    52,688    32%
Total  $440,593   $376,490    17%  $435,303   $360,756    21%

 

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

(2)Includes assets in NextShares funds.
(3)Includes assets in unit investment trusts.
(4)Includes assets in privately offered equity, fixed income and floating-rate income funds and CLO entities.

 

 44 

 

 

Consolidated Net Flows

 

Consolidated net inflows of $4.4 billion in the second quarter of fiscal 2018 represented 4 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 $12.9 billion in the second quarter of fiscal 2017, equal to 14 percent annualized internal growth in managed assets. The Company’s annualized internal management fee revenue growth rate (management fees attributable to consolidated inflows less management fees attributable to consolidated outflows divided by beginning of period consolidated management fee revenue) was 7 percent in the second quarter of both fiscal 2018 and 2017, as the management fee revenue contribution from new sales and other inflows during each period exceeded the management fee revenue lost from redemptions.

 

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, 2018 and 2017:

 

 45 

 

 

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

 

    Three Months Ended           Six Months Ended        
    April 30,     %     April 30,     %  
(in millions) 2018     2017     Change     2018       2017       Change    
Equity assets - beginning of period(2)   $ 122,595     $ 99,538       23 %   $ 113,472     $ 89,981       26 %  
Sales and other inflows     5,913       4,998       18 %     11,789       10,210       15 %  
Redemptions/outflows     (5,265 )     (4,203 )     25 %     (10,585 )     (10,058 )     5 %  
 Net flows     648       795       -18 %     1,204       152       692 %  
Assets acquired(3)     -       -       NM(6)       -       5,704       -100 %  
Exchanges     (5 )     9       NM       (2 )     53       NM    
Market value change     (5,481 )     4,324       NM       3,083       8,776       -65 %  
Equity assets - end of period   $ 117,757     $ 104,666       13 %   $ 117,757     $ 104,666       13 %  
Fixed income assets - beginning of period(4)     72,663       65,136       12 %     70,797       60,607       17 %  
Sales and other inflows(5)     6,164       5,633       9 %     12,491       11,325       10 %  
Redemptions/outflows     (3,925 )     (4,490 )     -13 %     (7,862 )     (8,828 )     -11 %  
 Net flows     2,239       1,143       96 %     4,629       2,497       85 %  
Assets acquired(3)     -       -       NM       -       4,170       -100 %  
Exchanges     (7 )     (38 )     -82 %     11       (145 )     NM    
Market value change     (871 )     640       NM       (1,413 )     (248 )     470 %  
Fixed income assets - end of period   $ 74,024     $ 66,881       11 %   $ 74,024     $ 66,881       11 %  
Floating-rate income assets - beginning of period     39,793       34,051       17 %     38,819       32,107       21 %  
Sales and other inflows     4,561       4,337       5 %     6,835       9,307       -27 %  
Redemptions/outflows     (2,205 )     (1,543 )     43 %     (3,860 )     (4,849 )     -20 %  
 Net flows     2,356       2,794       -16 %     2,975       4,458       -33 %  
Exchanges     18       34       -47 %     15       154       -90 %  
Market value change     115       78       47 %     473       238       99 %  
Floating-rate income assets - end of period   $ 42,282     $ 36,957       14 %   $ 42,282     $ 36,957       14 %  
Alternative assets - beginning of period     13,248       10,775       23 %     12,637       10,687       18 %  
Sales and other inflows     1,864       1,089       71 %     3,578       2,187       64 %  
Redemptions/outflows     (1,344 )     (745 )     80 %     (2,378 )     (1,685 )     41 %  
 Net flows     520       344       51 %     1,200       502       139 %  
Exchanges     (2 )     (5 )     -60 %     (8 )     (7 )     14 %  
Market value change     (260 )     98       NM       (323 )     30       NM    
Alternative assets - end of period   $ 13,506     $ 11,212       20 %   $ 13,506     $ 11,212       20 %  
Portfolio implementation assets - beginning of period     110,442       80,129       38 %     99,615       71,426       39 %  
Sales and other inflows     5,791       5,806       0 %     10,899       12,291       -11 %  
Redemptions/outflows     (3,542 )     (3,384 )     5 %     (7,297 )     (6,470 )     13 %  
 Net flows     2,249       2,422       -7 %     3,602       5,821       -38 %  
Exchanges     1       -       NM       (15 )     -       NM    
Market value change     (5,522 )     3,825       NM       3,968       9,129       -57 %  
Portfolio implementation assets - end of period   $ 107,170     $ 86,376       24 %   $ 107,170     $ 86,376       24 %  
Exposure management assets - beginning of period     90,488       74,110       22 %     86,976       71,572       22 %  
Sales and other inflows     15,083       17,103       -12 %     37,735       38,559       -2 %  
Redemptions/outflows     (18,688 )     (11,668 )     60 %     (39,843 )     (31,248 )     28 %  
 Net flows     (3,605 )     5,435       NM       (2,108 )     7,311       NM    
Market value change     (1,550 )     1,376       NM       465       2,038       -77 %  
Exposure management assets - end of period   $ 85,333     $ 80,921       5 %   $ 85,333     $ 80,921       5 %  
Total assets under management - beginning of period     449,229       363,739       24 %     422,316       336,380       26 %  
Sales and other inflows(5)     39,376       38,966       1 %     83,327       83,879       -1 %  
Redemptions/outflows     (34,969 )     (26,033 )     34 %     (71,825 )     (63,138 )     14 %  
 Net flows     4,407       12,933       -66 %     11,502       20,741       -45 %  
Assets acquired(3)     -       -       NM       -       9,874       -100 %  
Exchanges     5       -       NM       1       55       -98 %  
Market value change     (13,569 )     10,341       NM       6,253       19,963       -69 %  
Total assets under management - end of period   $ 440,072     $ 387,013       14 %   $ 440,072     $ 387,013       14 %  
                                                   

 

 46 

 

 

(1)Consolidated Eaton Vance Corp. See table on page 49 for directly managed assets and flows of 49 percent-owned Hexavest Inc., which are not included in the table above.
(2)Includes balanced and multi-asset mandates.
(3)Represents managed assets gained in the acquisition of the business assets of Calvert Investments on December 30, 2016. Equity assets acquired and total assets acquired exclude $2.1 billion of managed assets of Calvert Equity Fund, sub-advised by Atlanta Capital and previously included in the Company’s consolidated assets under management.
(4)Includes cash management mandates.
(5)Includes $0.8 billion of managed assets gained in assuming the fixed income business assets of the former Oechsle International Advisors, LLC on January 31, 2018.
(6)Not meaningful (NM).

 

 47 

 

  

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

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2018   2017   Change   2018   2017   Change 
Fund assets - beginning of period(2)  $164,554   $141,802    16%  $156,853   $125,722    25%
 Sales and other inflows   11,796    9,959    18%   22,312    20,928    7%
 Redemptions/outflows   (8,672)   (7,901)   10%   (17,486)   (17,305)   1%
  Net flows   3,124    2,058    52%   4,826    3,623    33%
 Assets acquired(3)   -    -    NM    -    9,821    -100%
 Exchanges(4)   5    69    -93%   1    2,184    -100%
 Market value change   (4,814)   3,412    NM    1,189    5,991    -80%
Fund assets - end of period  $162,869   $147,341    11%  $162,869   $147,341    11%
Institutional separate accounts - beginning of period   169,406    139,309    22%   159,986    136,451    17%
 Sales and other inflows(5)   19,956    20,592    -3%   45,637    45,225    1%
 Redemptions/outflows   (21,733)   (14,426)   51%   (45,067)   (37,875)   19%
  Net flows   (1,777)   6,166    NM    570    7,350    -92%
 Assets acquired(3)   -    -    NM    -    40    -100%
 Exchanges(4)   246    -    NM    326    (2,055)   NM 
 Market value change   (4,059)   3,569    NM    2,934    7,258    -60%
Institutional separate accounts -  end of period  $163,816   $149,044    10%  $163,816   $149,044    10%
High-net-worth separate accounts - beginning of period   43,693    30,514    43%   39,715    25,806    54%
 Sales and other inflows   2,232    2,161    3%   4,295    6,724    -36%
 Redemptions/outflows   (1,454)   (937)   55%   (2,915)   (2,546)   14%
  Net flows   778    1,224    -36%   1,380    4,178    -67%
 Exchanges   (197)   (49)   302%   (234)   (35)   569%
 Market value change   (2,120)   1,536    NM    1,293    3,276    -61%
High-net-worth separate accounts - end of period  $42,154   $33,225    27%  $42,154   $33,225    27%
Retail managed accounts - beginning of period   71,576    52,114    37%   65,762    48,401    36%
 Sales and other inflows   5,392    6,254    -14%   11,083    11,002    1%
 Redemptions/outflows   (3,110)   (2,769)   12%   (6,357)   (5,412)   17%
  Net flows   2,282    3,485    -35%   4,726    5,590    -15%
 Assets acquired(3)   -    -    NM    -    13    -100%
 Exchanges   (49)   (20)   145%   (92)   (39)   136%
 Market value change   (2,576)   1,824    NM    837    3,438    -76%
Retail managed accounts - end of period  $71,233   $57,403    24%  $71,233   $57,403    24%
Total assets under management - beginning of period   449,229    363,739    24%   422,316    336,380    26%
 Sales and other inflows(5)   39,376    38,966    1%   83,327    83,879    -1%
 Redemptions/outflows   (34,969)   (26,033)   34%   (71,825)   (63,138)   14%
  Net flows   4,407    12,933    -66%   11,502    20,741    -45%
 Assets acquired(3)   -    -    NM    -    9,874    -100%
 Exchanges   5    -    NM    1    55    -98%
 Market value change   (13,569)   10,341    NM    6,253    19,963    -69%
Total assets under management - end of period  $440,072   $387,013    14%  $440,072   $387,013    14%

  

(1)Consolidated Eaton Vance Corp. See table on page 49 for directly 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)Represents managed assets gained in the acquisition of the business assets of Calvert Investments on December 30, 2016. Fund assets acquired and total assets acquired exclude $2.1 billion of managed assets of Calvert Equity Fund, sub-advised by Atlanta Capital and previously included in the Company’s consolidated assets under management.
(4)Reflects the reclassification from institutional separate accounts to funds of $2.1 billion of managed assets of Calvert Equity Fund sub-advised by Atlanta Capital upon the Company’s acquisition of the business assets of Calvert on December 30, 2016.
(5)Includes $0.8 billion of managed assets gained in assuming the fixed income business assets of the former Oechsle International Advisors, LLC on January 31, 2018.

 

 48 

 

  

As of April 30, 2018, the Company’s 49 percent-owned affiliate Hexavest managed $15.8 billion of client assets, an increase of 9 percent from $14.5 billion of managed assets on April 30, 2017. Other than Eaton Vance-sponsored funds for which Hexavest is adviser or sub-adviser, the managed assets and flows of Hexavest are not included in Eaton Vance’s consolidated totals.

 

The following table summarizes assets under management and asset flow information for Hexavest for the three and six months ended April 30, 2018 and 2017:

 

Hexavest Assets under Management and Net Flows

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2018   2017   Change   2018   2017   Change 
Eaton Vance distributed:                              
Eaton Vance sponsored funds - beginning of period(1)  $193   $255    -24%  $182   $231    -21%
 Sales and other inflows   5    13    -62%   10    33    -70%
 Redemptions/outflows   (11)   (19)   -42%   (17)   (27)   -37%
  Net flows   (6)   (6)   0%   (7)   6    NM 
 Market value change   (8)   13    NM    4    25    -84%
Eaton Vance sponsored funds - end of period  $179   $262    -32%  $179   $262    -32%
Eaton Vance distributed separate accounts - beginning of period(2)   3,264    2,666    22%   3,092    2,492    24%
 Sales and other inflows   62    121    -49%   140    270    -48%
 Redemptions/outflows   (103)   (826)   -88%   (218)   (880)   -75%
  Net flows   (41)   (705)   -94%   (78)   (610)   -87%
 Market value change   (136)   177    NM    73    256    -71%
Eaton Vance distributed separate accounts - end of period  $3,087   $2,138    44%  $3,087   $2,138    44%
Total Eaton Vance distributed - beginning of period   3,457    2,921    18%   3,274    2,723    20%
 Sales and other inflows   67    134    -50%   150    303    -50%
 Redemptions/outflows   (114)   (845)   -87%   (235)   (907)   -74%
  Net flows   (47)   (711)   -93%   (85)   (604)   -86%
 Market value change   (144)   190    NM    77    281    -73%
Total Eaton Vance distributed - end of period  $3,266   $2,400    36%  $3,266   $2,400    36