UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
For the quarterly period ended July 31, 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 July 31, 2018 | |
Non-Voting Common Stock, $0.00390625 par value | 118,043,471 shares | |
Voting Common Stock, $0.00390625 par value | 422,935 shares |
Eaton Vance Corp.
Form 10-Q
As of July 31, 2018 and for the
Three and Nine Month Periods Ended July 31, 2018
Table of Contents
2
Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Eaton Vance Corp.
Consolidated Balance Sheets (unaudited)
July 31, | October 31, | |||||||
(in thousands) | 2018 | 2017 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 562,890 | $ | 610,555 | ||||
Management fees and other receivables | 218,955 | 200,453 | ||||||
Investments | 1,052,663 | 898,192 | ||||||
Assets of consolidated collateralized loan obligation (CLO) entities: | ||||||||
Cash | 88,020 | - | ||||||
Bank loans and other investments | 608,819 | 31,348 | ||||||
Other assets | 6,918 | - | ||||||
Deferred sales commissions | 47,517 | 36,423 | ||||||
Deferred income taxes | 40,697 | 67,100 | ||||||
Equipment and leasehold improvements, net | 51,056 | 48,989 | ||||||
Intangible assets, net | 83,102 | 89,812 | ||||||
Goodwill | 259,681 | 259,681 | ||||||
Loan to affiliate | 5,000 | 5,000 | ||||||
Other assets | 60,914 | 83,348 | ||||||
Total assets | $ | 3,086,232 | $ | 2,330,901 |
See notes to Consolidated Financial Statements.
3
Eaton Vance Corp.
Consolidated Balance Sheets (unaudited) (continued)
July 31, | October 31, | |||||||
(in thousands, except share data) | 2018 | 2017 | ||||||
Liabilities, Temporary Equity and Permanent Equity | ||||||||
Liabilities: | ||||||||
Accrued compensation | $ | 173,279 | $ | 207,330 | ||||
Accounts payable and accrued expenses | 83,652 | 68,115 | ||||||
Dividend payable | 46,109 | 44,634 | ||||||
Debt | 619,469 | 618,843 | ||||||
Liabilities of consolidated CLO entities: | ||||||||
Senior note obligations | 465,306 | - | ||||||
Line of credit | 145,709 | 12,598 | ||||||
Other liabilities | 31,982 | - | ||||||
Other liabilities | 105,581 | 116,298 | ||||||
Total liabilities | 1,671,087 | 1,067,818 | ||||||
Commitments and contingencies (Note 18) | ||||||||
Temporary Equity: | ||||||||
Redeemable non-controlling interests | 308,945 | 250,823 | ||||||
Permanent Equity: | ||||||||
Voting Common Stock, par value $0.00390625 per share: | ||||||||
Authorized, 1,280,000 shares | ||||||||
Issued and outstanding, 422,935 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, 118,043,471 and 118,077,872 shares, respectively | 461 | 461 | ||||||
Additional paid-in capital | 78,214 | 148,284 | ||||||
Notes receivable from stock option exercises | (9,343 | ) | (11,112 | ) | ||||
Accumulated other comprehensive loss | (50,110 | ) | (47,474 | ) | ||||
Retained earnings | 1,086,145 | 921,235 | ||||||
Total Eaton Vance Corp. shareholders' equity | 1,105,369 | 1,011,396 | ||||||
Non-redeemable non-controlling interests | 831 | 864 | ||||||
Total permanent equity | 1,106,200 | 1,012,260 | ||||||
Total liabilities, temporary equity and permanent equity | $ | 3,086,232 | $ | 2,330,901 |
See notes to Consolidated Financial Statements.
4
Eaton Vance Corp.
Consolidated Statements of Income (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue: | ||||||||||||||||
Management fees | $ | 374,553 | $ | 339,866 | $ | 1,101,929 | $ | 966,148 | ||||||||
Distribution and underwriter fees | 20,099 | 20,114 | 60,393 | 58,991 | ||||||||||||
Service fees | 31,260 | 30,515 | 91,935 | 89,493 | ||||||||||||
Other revenue | 4,690 | 3,251 | 12,018 | 8,705 | ||||||||||||
Total revenue | 430,602 | 393,746 | 1,266,275 | 1,123,337 | ||||||||||||
Expenses: | ||||||||||||||||
Compensation and related costs | 152,921 | 142,338 | 455,958 | 412,940 | ||||||||||||
Distribution expense | 35,045 | 37,160 | 105,219 | 100,284 | ||||||||||||
Service fee expense | 28,760 | 28,630 | 84,651 | 83,384 | ||||||||||||
Amortization of deferred sales commissions | 4,637 | 4,182 | 13,342 | 12,062 | ||||||||||||
Fund-related expenses | 15,857 | 14,029 | 46,036 | 36,752 | ||||||||||||
Other expenses | 51,118 | 46,376 | 150,319 | 133,528 | ||||||||||||
Total expenses | 288,338 | 272,715 | 855,525 | 778,950 | ||||||||||||
Operating income | 142,264 | 121,031 | 410,750 | 344,387 | ||||||||||||
Non-operating income (expense): | ||||||||||||||||
Gains and other investment income, net | 7,131 | 5,537 | 9,468 | 15,319 | ||||||||||||
Interest expense | (5,906 | ) | (6,180 | ) | (17,716 | ) | (21,592 | ) | ||||||||
Loss on extinguishment of debt | - | (5,396 | ) | - | (5,396 | ) | ||||||||||
Other income (expense) of consolidated CLO entities: | ||||||||||||||||
Gains and other investment income, net | 1,847 | - | 4,823 | - | ||||||||||||
Interest and other expense | (3,092 | ) | - | (3,630 | ) | - | ||||||||||
Total non-operating income (expense) | (20 | ) | (6,039 | ) | (7,055 | ) | (11,669 | ) | ||||||||
Income before income taxes and equity in net income of affiliates | 142,244 | 114,992 | 403,695 | 332,718 | ||||||||||||
Income taxes | (37,219 | ) | (42,462 | ) | (119,880 | ) | (123,864 | ) | ||||||||
Equity in net income of affiliates, net of tax | 2,750 | 2,323 | 8,877 | 7,973 | ||||||||||||
Net income | 107,775 | 74,853 | 292,692 | 216,827 | ||||||||||||
Net income attributable to non-controlling and other beneficial interests | (5,981 | ) | (7,492 | ) | (16,241 | ) | (16,780 | ) | ||||||||
Net income attributable to Eaton Vance Corp. shareholders | $ | 101,794 | $ | 67,361 | $ | 276,451 | $ | 200,047 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.89 | $ | 0.61 | $ | 2.40 | $ | 1.81 | ||||||||
Diluted | $ | 0.83 | $ | 0.58 | $ | 2.24 | $ | 1.73 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 114,610 | 111,284 | 115,157 | 110,540 | ||||||||||||
Diluted | 122,741 | 117,051 | 123,553 | 115,751 | ||||||||||||
Dividends declared per share | $ | 0.31 | $ | 0.28 | $ | 0.93 | $ | 0.84 |
See notes to Consolidated Financial Statements.
5
Eaton Vance Corp.
Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 107,775 | $ | 74,853 | $ | 292,692 | $ | 216,827 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized loss on cash flow hedges, net of tax | - | - | - | (413 | ) | |||||||||||
Amortization of net gains (losses) on cash flow hedges, net of tax | (25 | ) | 37 | (75 | ) | 46 | ||||||||||
Unrealized gains (losses) on available-for-sale investments and reclassification adjustments, net of tax | (1,027 | ) | 205 | 5 | 857 | |||||||||||
Foreign currency translation adjustments | (4,585 | ) | 18,208 | (2,566 | ) | 15,479 | ||||||||||
Other comprehensive income (loss), net of tax | (5,637 | ) | 18,450 | (2,636 | ) | 15,969 | ||||||||||
Total comprehensive income | 102,138 | 93,303 | 290,056 | 232,796 | ||||||||||||
Comprehensive (income) attributable to non-controlling and other beneficial interests | (5,981 | ) | (7,492 | ) | (16,241 | ) | (16,780 | ) | ||||||||
Total comprehensive income attributable to Eaton Vance Corp. shareholders | $ | 96,157 | $ | 85,811 | $ | 273,815 | $ | 216,016 |
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 | - | - | - | - | - | 276,451 | 2,241 | 278,692 | 14,000 | |||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (2,636 | ) | - | - | (2,636 | ) | - | |||||||||||||||||||||||||
Dividends declared ($0.93 per share) | - | - | - | - | - | (111,018 | ) | - | (111,018 | ) | - | |||||||||||||||||||||||||
Issuance of Non-Voting Common Stock: | ||||||||||||||||||||||||||||||||||||
On exercise of stock options | - | 7 | 55,706 | (1,060 | ) | - | - | - | 54,653 | - | ||||||||||||||||||||||||||
Under employee stock purchase plans | - | - | 3,168 | - | - | - | - | 3,168 | - | |||||||||||||||||||||||||||
Under employee stock purchase incentive plan | - | - | 4,347 | - | - | - | - | 4,347 | - | |||||||||||||||||||||||||||
Under restricted stock plan, net of forfeitures | - | 6 | - | - | - | - | - | 6 | - | |||||||||||||||||||||||||||
Stock-based compensation | - | - | 67,299 | - | - | - | - | 67,299 | - | |||||||||||||||||||||||||||
Tax benefit of non-controlling interest repurchases | - | - | 2,030 | - | - | - | - | 2,030 | - | |||||||||||||||||||||||||||
Repurchase of Voting Common Stock | - | - | (171 | ) | - | - | - | - | (171 | ) | - | |||||||||||||||||||||||||
Repurchase of Non-Voting Common Stock | - | (13 | ) | (186,091 | ) | - | - | - | - | (186,104 | ) | - | ||||||||||||||||||||||||
Principal repayments on notes receivable from stock option exercises | - | - | - | 2,829 | - | - | - | 2,829 | - | |||||||||||||||||||||||||||
Net subscriptions (redemptions/distributions) of non-controlling interest holders | - | - | - | - | - | - | (2,308 | ) | (2,308 | ) | 75,872 | |||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds and CLO entities | - | - | - | - | - | - | - | - | (40,310 | ) | ||||||||||||||||||||||||||
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 | - | - | (17,033 | ) | - | - | - | - | (17,033 | ) | 17,033 | |||||||||||||||||||||||||
Balance, July 31, 2018 | $ | 2 | $ | 461 | $ | 78,214 | $ | (9,343 | ) | $ | (50,110 | ) | $ | 1,086,145 | $ | 831 | $ | 1,106,200 | $ | 308,945 |
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 Income (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 | - | - | - | - | - | 200,047 | 2,892 | 202,939 | 13,888 | |||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 15,969 | - | - | 15,969 | - | |||||||||||||||||||||||||||
Dividends declared ($0.84 per share) | - | - | - | - | - | (97,180 | ) | - | (97,180 | ) | - | |||||||||||||||||||||||||
Issuance of Non-Voting Common Stock: | ||||||||||||||||||||||||||||||||||||
On exercise of stock options | - | 13 | 100,715 | (2,277 | ) | - | - | - | 98,451 | - | ||||||||||||||||||||||||||
Under employee stock purchase plans | - | - | 2,976 | - | - | - | - | 2,976 | - | |||||||||||||||||||||||||||
Under employee stock purchase incentive plan | - | - | 3,491 | - | - | - | - | 3,491 | - | |||||||||||||||||||||||||||
Under restricted stock plan, net of forfeitures | - | 6 | - | - | - | - | - | 6 | - | |||||||||||||||||||||||||||
Stock-based compensation | - | - | 60,395 | - | - | - | - | 60,395 | - | |||||||||||||||||||||||||||
Tax benefit of stock option exercises and vesting of restricted stock awards | - | - | 8,188 | - | - | - | - | 8,188 | - | |||||||||||||||||||||||||||
Tax benefit of non-controlling interest repurchases | - | - | 3,784 | - | - | - | - | 3,784 | - | |||||||||||||||||||||||||||
Repurchase of Non-Voting Common Stock | - | (9 | ) | (100,226 | ) | - | - | - | - | (100,235 | ) | - | ||||||||||||||||||||||||
Principal repayments on notes receivable from stock option exercises | - | - | - | 3,146 | - | - | - | 3,146 | - | |||||||||||||||||||||||||||
Net subscriptions (redemptions/distributions) of non-controlling interest holders | - | - | - | - | - | - | (2,851 | ) | (2,851 | ) | 142,542 | |||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | - | - | - | - | - | - | - | - | (70,682 | ) | ||||||||||||||||||||||||||
Reclass to temporary equity | - | - | - | - | - | - | (64 | ) | (64 | ) | 64 | |||||||||||||||||||||||||
Purchase of non-controlling interests | - | - | - | - | - | - | - | - | (7,310 | ) | ||||||||||||||||||||||||||
Changes in redemption value of non-controlling interests redeemable at fair value | - | - | (1,624 | ) | - | - | - | - | (1,624 | ) | 1,624 | |||||||||||||||||||||||||
Balance, July 31, 2017 | $ | 2 | $ | 454 | $ | 77,699 | $ | (11,205 | ) | $ | (41,614 | ) | $ | 875,867 | $ | 763 | $ | 901,966 | $ | 189,154 |
See notes to Consolidated Financial Statements.
8
Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended | ||||||||
July 31, | ||||||||
(in thousands) | 2018 | 2017 | ||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | 292,692 | $ | 216,827 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 18,417 | 14,128 | ||||||
Unamortized loss on derivative instrument | - | (684 | ) | |||||
Amortization of deferred sales commissions | 13,342 | 12,066 | ||||||
Stock-based compensation | 67,299 | 60,395 | ||||||
Deferred income taxes | 26,741 | 12,708 | ||||||
Net losses on investments and derivatives | 9,930 | 888 | ||||||
Loss on write-off of Hexavest option | 6,523 | - | ||||||
Equity in net income of affiliates, net of amortization | (8,877 | ) | (7,973 | ) | ||||
Dividends received from affiliates | 9,164 | 8,192 | ||||||
Loss on extinguishment of debt | - | 5,396 | ||||||
Consolidated CLO entities’ operating activities: | ||||||||
Net gains on bank loans, other investments and note obligations | 1,581 | - | ||||||
Net increase in other assets and liabilities, including cash | (33,939 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Management fees and other receivables | (18,620 | ) | (15,397 | ) | ||||
Investments in trading securities | (209,904 | ) | (222,063 | ) | ||||
Deferred sales commissions | (24,435 | ) | (19,989 | ) | ||||
Other assets | 20,612 | 10,348 | ||||||
Accrued compensation | (33,953 | ) | (22,476 | ) | ||||
Accounts payable and accrued expenses | 15,325 | 10,066 | ||||||
Other liabilities | (611 | ) | 36,468 | |||||
Net cash provided by operating activities | 151,287 | 98,900 | ||||||
Cash Flows From Investing Activities: | ||||||||
Additions to equipment and leasehold improvements | (12,811 | ) | (8,316 | ) | ||||
Net cash paid in acquisition | - | (63,605 | ) | |||||
Proceeds from sale of investments | 63,560 | 11,471 | ||||||
Purchase of investments | (86,019 | ) | (178 | ) | ||||
Consolidated CLO entities’ investing activities: | ||||||||
Proceeds from sales of bank loans and other investments | 99,621 | - | ||||||
Purchase of bank loans and other investments | (216,950 | ) | - | |||||
Net cash used for investing activities | (152,599 | ) | (60,628 | ) |
See notes to Consolidated Financial Statements.
9
Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited) (continued)
Nine Months Ended | ||||||||
July 31, | ||||||||
(in thousands) | 2018 | 2017 | ||||||
Cash Flows From Financing Activities: | ||||||||
Purchase of additional non-controlling interest | $ | (20,818 | ) | $ | (9,820 | ) | ||
Debt issuance costs | - | (2,761 | ) | |||||
Proceeds from issuance of debt | - | 298,896 | ||||||
Repayment of debt | - | (250,000 | ) | |||||
Loss on extinguishment of debt | - | (5,396 | ) | |||||
Proceeds from issuance of Non-Voting Common Stock | 62,174 | 104,924 | ||||||
Repurchase of Voting Common Stock | (171 | ) | - | |||||
Repurchase of Non-Voting Common Stock | (186,104 | ) | (100,235 | ) | ||||
Principal repayments on notes receivable from stock option exercises | 2,829 | 3,146 | ||||||
Dividends paid | (109,542 | ) | (94,216 | ) | ||||
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders | 73,632 | 139,838 | ||||||
Consolidated CLO entities’ financing activities: | ||||||||
Proceeds from line of credit | 133,111 | - | ||||||
Net cash provided by (used for) financing activities | (44,889 | ) | 84,376 | |||||
Effect of currency rate changes on cash and cash equivalents | (1,464 | ) | 3,349 | |||||
Net increase (decrease) in cash and cash equivalents | (47,665 | ) | 125,997 | |||||
Cash and cash equivalents, beginning of period | 610,555 | 424,174 | ||||||
Cash and cash equivalents, end of period | $ | 562,890 | $ | 550,171 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid for interest | $ | 17,221 | $ | 20,191 | ||||
Cash paid for interest upon repayment of debt | - | 1,354 | ||||||
Cash paid for interest by consolidated CLO entities | 1,421 | - | ||||||
Cash paid for income taxes, net of refunds | 96,218 | 96,915 | ||||||
Supplemental Disclosure of Non-Cash Information: | ||||||||
Increase in equipment and leasehold improvements due to non-cash additions | $ | 206 | $ | 895 | ||||
Exercise of stock options through issuance of notes receivable | 1,060 | 2,277 | ||||||
Increase (decrease) in non-controlling interest due to net consolidation (deconsolidation) of sponsored investment funds | (40,310 | ) | 86,129 | |||||
Increase in bank loans and other investments of consolidated CLO entities due to unsettled purchases | 26,317 | - | ||||||
Initial Consolidation of CLO Entities: | ||||||||
Increase in bank loans and other investments | 434,446 | - | ||||||
Increase in senior loan obligations | 464,347 | - |
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. Under this ASU, 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 of the ASU requires a prospective approach to adoption. During the three and nine months ended July 31, 2018, the Company recognized excess tax benefits of $1.3 million and $15.1 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 of the ASU. As a result, the excess tax benefit of $12.1 million recognized for the nine months ended July 31, 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 of the ASU 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 is reflected as an operating activity on the Company’s Consolidated Statements of Cash Flows. The withholding of shares of non-voting common stock for tax purposes upon the vesting of restricted share awards is reflected as a financing activity in the Company’s Consolidated Statements of Cash Flows.
New Accounting Standards Not Yet Adopted
Revenue recognition
In May 2014, the FASB issued new guidance for revenue recognition. The new guidance seeks to improve comparability by removing inconsistencies in revenue recognition practices. The core principle of the guidance requires companies to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. In addition, certain costs incurred to obtain and fulfill contracts with customers may need to be capitalized if they meet certain criteria. The guidance was further updated in March 2016 to clarify how companies should evaluate the principal-versus-agent aspects of the previously issued revenue guidance. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2018 and requires a modified retrospective approach or full retrospective approach to adoption. A decision on the adoption method has not been made as of the date of this report.
The Company is in the process of applying the five steps in the new revenue framework to revenue contracts covering a broad range of product and service offerings. Based upon the procedures performed to date, the Company does not anticipate any significant changes to the timing of recognition of revenue. The amended guidance will affect the presentation of certain revenue and expense balances. Specifically, the Company expects that fund subsidies, which are currently presented in fund-related expenses in the Consolidated Statements of Income, will be presented as a reduction to management fee revenue.
In applying the revised principal-versus-agent guidance to the Company’s various distribution service contracts, the Company expects that, for certain classes of shares in sponsored funds with a front-end load
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commission pricing structure, the entire front-end load commission (including both the underwriting commission retained by the Company and the sales charge paid to the selling broker-dealer) will be presented within distribution and underwriting fees revenue and the sales charge paid to the selling broker-dealer will be presented within distribution expense in the Consolidated Statements of Income. Currently, only the underwriting commission retained by the Company is presented within distribution and underwriting fees revenue.
2. | Consolidated Sponsored Funds |
The following table sets forth the balances related to consolidated sponsored funds at July 31, 2018 and October 31, 2017, as well as the Company’s interest in these funds:
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Investments | $ | 504,482 | $ | 401,726 | ||||
Other assets | 14,577 | 13,537 | ||||||
Other liabilities | (52,644 | ) | (50,314 | ) | ||||
Redeemable non-controlling interests | (204,597 | ) | (154,061 | ) | ||||
Interest in consolidated sponsored funds | $ | 261,818 | $ | 210,888 |
3. | Investments |
The following is a summary of investments at July 31, 2018 and October 31, 2017:
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Investment securities, trading: | ||||||||
Short-term debt securities | $ | 257,911 | $ | 213,537 | ||||
Consolidated sponsored funds | 504,482 | 401,726 | ||||||
Separately managed accounts | 98,880 | 93,113 | ||||||
Total investment securities, trading | 861,273 | 708,376 | ||||||
Investment securities, available-for-sale | 24,255 | 22,465 | ||||||
Investments in non-consolidated CLO entities | 2,935 | 3,609 | ||||||
Investments in equity method investees | 143,326 | 144,911 | ||||||
Investments, other | 20,874 | 18,831 | ||||||
Total investments(1) | $ | 1,052,663 | $ | 898,192 |
(1) Excludes bank loans and other investments held by consolidated CLO entities, which are discussed in Note 5.
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Investment securities, trading
The following is a summary of the fair value of investments classified as trading at July 31, 2018 and October 31, 2017:
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Short-term debt securities | $ | 257,911 | $ | 213,537 | ||||
Other debt securities | 412,268 | 313,351 | ||||||
Equity securities | 191,094 | 181,488 | ||||||
Total investment securities, trading | $ | 861,273 | $ | 708,376 |
The Company recognized gains (losses) related to trading securities still held at the reporting date of $(3.4) million and $6.8 million for the three months ended July 31, 2018 and 2017, respectively, and $(10.4) million and $15.5 million for the nine months ended July 31, 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 July 31, 2018 and October 31, 2017:
July 31, 2018 | Gross Unrealized | |||||||||||||||
(in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
Investment securities, available-for-sale | $ | 17,516 | $ | 6,763 | $ | (24 | ) | $ | 24,255 |
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 $0.5 million and $0.3 million for the three months ended July 31, 2018 and 2017, respectively, and $1.9 million and $1.4 million for the nine months ended July 31, 2018 and 2017, respectively.
The Company did not recognize any impairment losses on investment securities classified as available-for-sale during the three and nine months ended July 31, 2018 or 2017.
The aggregate fair value of available-for-sale investments in an unrealized loss position at July 31, 2018 was $0.5 million; unrealized losses related to these investments totaled $24,000. No investment with a gross unrealized loss has been in a material loss position for greater than one year.
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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 nine months ended July 31, 2018 and 2017:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Gains | $ | 2,066 | $ | 29 | $ | 2,071 | $ | 233 | ||||||||
Losses | - | - | (110 | ) | (1 | ) | ||||||||||
Net realized gains (losses) | $ | 2,066 | $ | 29 | $ | 1,961 | $ | 232 |
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 $139.7 million and $142.0 million at July 31, 2018 and October 31, 2017, respectively. At July 31, 2018, the Company’s investment in Hexavest consisted of $6.2 million of equity in the net assets of Hexavest, definite-lived intangible assets of $22.0 million and goodwill of $117.4 million, net of a deferred tax liability of $5.9 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.
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 July 31, 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 nine months ended July 31, 2018 or 2017.
During the nine months ended July 31, 2018 and 2017, the Company received dividends of $9.2 million and $8.2 million, respectively, from its investments in equity method investees.
Investments, other
Investments, other, which totaled $20.9 million and $18.8 million at July 31, 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. In June 2018, the Company invested an additional $2.0 million in SigFig. The carrying value of the Company’s investment in SigFig was $19.0 million and $17.0 million at July 31, 2018 and October 31, 2017, respectively.
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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 both the three months ended July 31, 2018 and 2017, the Company reclassified $17,000 of this deferred loss into interest expense. During the nine months ended July 31, 2018 and 2017, the Company reclassified $51,000 and $20,000, respectively, of this deferred loss into interest expense. The Company will reclassify the remaining $0.6 million of unamortized loss as of July 31, 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 $0.2 million of the deferred gain into interest expense during both the three and nine months ended July 31, 2018 and 2017, respectively, and will reclassify the remaining $1.0 million of unamortized gain as of July 31, 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.
Other derivative financial instruments not designated for hedge accounting
The Company utilizes stock index futures contracts, total return swap contracts, credit default 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.
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The Company was a party to the following derivative financial instruments at July 31, 2018 and October 31, 2017:
July 31, 2018 | October 31, 2017 | |||||||||||||||
Number of Contracts | Notional Value (in millions) | Number of Contracts | Notional Value (in millions) | |||||||||||||
Stock index futures contracts | 1,367 | $ | 118.2 | 1,470 | $ | 118.1 | ||||||||||
Total return swap contracts | 3 | $ | 106.5 | 2 | $ | 50.2 | ||||||||||
Credit default swap contracts | 1 | $ | 5.0 | - | $ | - | ||||||||||
Foreign exchange contracts | 20 | $ | 19.9 | 31 | $ | 28.1 | ||||||||||
Commodity futures contracts | 195 | $ | 9.1 | 213 | $ | 10.2 | ||||||||||
Currency futures contracts | 113 | $ | 12.4 | 131 | $ | 14.5 | ||||||||||
Interest rate futures contracts | 133 | $ | 27.5 | 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 July 31, 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 July 31, 2018 and October 31, 2017:
July 31, 2018 | October 31, 2017 | |||||||||||||||
(in thousands) | Other Assets | Other Liabilities | Other Assets | Other Liabilities | ||||||||||||
Stock index futures contracts | $ | 1,189 | $ | 832 | $ | 330 | $ | 3,021 | ||||||||
Total return swap contracts | - | 3,124 | - | 570 | ||||||||||||
Credit default swap contracts | 5 | - | - | - | ||||||||||||
Foreign exchange contracts | 79 | 254 | 650 | 60 | ||||||||||||
Commodity futures contracts | 239 | 368 | 63 | 120 | ||||||||||||
Currency futures contracts | 74 | 54 | 327 | 178 | ||||||||||||
Interest rate futures contracts | 3 | 108 | 48 | 226 | ||||||||||||
Total | $ | 1,589 | $ | 4,740 | $ | 1,418 | $ | 4,175 |
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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 nine months ended July 31, 2018 and 2017:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Stock index futures contracts | $ | (1,448 | ) | $ | (6,416 | ) | $ | (3,385 | ) | $ | (19,446 | ) | ||||
Total return swap contracts | (1,526 | ) | (1,108 | ) | (2,535 | ) | (3,083 | ) | ||||||||
Credit default swap contracts | 150 | - | 150 | - | ||||||||||||
Foreign exchange contracts | 302 | (593 | ) | (326 | ) | (990 | ) | |||||||||
Commodity futures contracts | (346 | ) | (72 | ) | (1,066 | ) | (74 | ) | ||||||||
Currency futures contracts | 70 | (91 | ) | 72 | (101 | ) | ||||||||||
Interest rate futures contracts | 174 | (436 | ) | 156 | (436 | ) | ||||||||||
Total | $ | (2,624 | ) | $ | (8,716 | ) | $ | (6,934 | ) | $ | (24,130 | ) |
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 July 31, 2018, the Company deems itself to be the primary beneficiary of two non-recourse CLO entities, namely, Eaton Vance CLO 2017-1 (CLO 2017-1) and Eaton Vance CLO 2014-1 (CLO 2014-1). As of October 31, 2017, the Company deemed itself to be the primary beneficiary of one non-recourse CLO entity, namely, CLO 2017-1.
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 July 31, 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 nine months ended July 31, 2018, the Company made additional capital contributions of $16.2 million in order to increase the level of funding available for borrowing under the 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
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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, 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 held by CLO 2017-1 and initially bears interest at a rate of daily LIBOR plus 1.25 percent per annum (with such interest rate increasing to daily LIBOR plus 2.0 percent per annum upon completion of the initial twelve-month warehousing period ending on August 24, 2018). The third-party lender does not have any recourse to the Company’s general credit.
The following table presents the balances attributable to CLO 2017-1 that were included in the Company’s Consolidated Balance Sheets at July 31, 2018 and October 31, 2017:
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Assets of consolidated CLO entities: | ||||||||
Cash | $ | 6,246 | $ | - | ||||
Bank loans and other investments | 196,659 | 31,348 | ||||||
Other assets | 2,116 | - | ||||||
Liabilities of consolidated CLO entities: | ||||||||
Line of credit | 145,709 | 12,598 | ||||||
Other liabilities | 20,967 | - | ||||||
Net interest in CLO 2017-1 | $ | 38,345 | $ | 18,750 |
The Company’s total capital contributions of $35.0 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.
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The following table presents the fair value of CLO 2017-1’s assets that are subject to fair value accounting as of July 31, 2018 and October 31, 2017:
CLO Bank Loan Investments | ||||||||
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Unpaid principal balance | $ | 195,821 | $ | 31,348 | ||||
Unpaid principal balance over fair value | 838 | - | ||||||
Fair value | $ | 196,659 | $ | 31,348 |
As of July 31, 2018 and October 31, 2017, 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 July 31, 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.
The following table presents the balances attributable to CLO 2017-1 that were included in the Company’s Consolidated Statements of Income for the three and nine months ended July 31, 2018:
(in thousands) | Three Months Ended July 31, 2018 | Nine Months Ended July 31, 2018 | ||||||
Other income (expense) of consolidated CLO entities: | ||||||||
Gains (losses) and other investment income, net | $ | 1,906 | $ | 4,882 | ||||
Interest and other expense | (998 | ) | (1,537 | ) | ||||
Net gain attributable to the Company | $ | 908 | $ | 3,345 |
Eaton Vance CLO 2014-1 (CLO 2014-1)
As of October 31, 2017, the Company held a 5 percent equity interest in CLO 2014-1 as an investment in non-consolidated CLO entities with a carrying value of $0.8 million. On May 22, 2018, the Company purchased all of the remaining equity interests in CLO 2014-1 for $24.3 million and reconsidered whether it was the primary beneficiary of CLO 2014-1 as of that date. As collateral manager, the Company has the power to direct the activities that most significantly impact the economic performance of the entity. The Company’s 100 percent equity interest provides 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 2014-1 as of May 22, 2018.
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The Company elected to apply the measurement alternative to ASC 820 for collateralized financing entities upon the initial consolidation and for the subsequent measurement of CLO 2014-1. The measurement alternative requires reporting entities to use the more observable of the fair value of the financial assets or the financial liabilities to measure both the financial assets and the financial liabilities of a collateralized financing entity. The Company determined that the fair value of the financial assets of CLO 2014-1 is more observable than the fair value of the financial liabilities. Through the application of the measurement alternative, the fair value of the financial liabilities of CLO 2014-1 are measured as the difference between the fair value of the financial assets and the fair value of the Company’s beneficial interests in CLO 2014-1, which include the equity interests held by the Company and any accrued management fees due to the Company. The fair value of the Company’s equity interest, which is eliminated in consolidation, is determined primarily based on an income approach, which projects the cash flows of the CLO assets using projected default, prepayment, recovery and discount rates, as well as observable assumptions about market yields, callability and other market factors. An appropriate discount rate is then applied to determine the discounted cash flow valuation of the equity interest.
The measurement alternative further requires any gain or loss resulting from its initial application to be reflected in earnings and attributable to the reporting entity. Accordingly, the Company recognized a gain of $0.4 million upon initial consolidation of CLO 2014-1, equal to the difference between the initial carrying value of the position upon consolidation and the fair value of the 5 percent equity interest which was held by the Company prior to May 22, 2018. This gain is included in gains and other investment income, net, on the Company’s Consolidated Statements of Income for the three and nine months ended July 31, 2018.
The following table presents the balances attributable to CLO 2014-1 that were included in the Company’s Consolidated Balance Sheet at July 31, 2018:
(in thousands) | July 31, 2018 | |||
Assets of consolidated CLO entities: | ||||
Cash | $ | 81,774 | ||
Bank loans and other investments | 412,160 | |||
Other assets | 4,802 | |||
Liabilities of consolidated CLO entities: | ||||
Senior note obligations | 465,306 | |||
Other liabilities | 11,015 | |||
Total beneficial interests in CLO 2014-1 | $ | 22,415 |
Although the Company’s beneficial interests in CLO 2014-1 are eliminated upon consolidation, the application of the measurement alternative results in the net amount shown above to be equivalent to the beneficial interests retained by the Company at July 31, 2018.
The note obligations of CLO 2014-1 have contractual recourse only to the related assets of CLO 2014-1. The Company has no right to receive the benefits from, nor does the Company bear the risks associated with, the commercial bank loan investments held by CLO 2014-1 beyond the Company’s beneficial interests previously described.
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The following table presents the fair value of CLO 2014-1’s assets that are subject to fair value accounting as of July 31, 2018:
CLO Bank Loan Investments | ||||
(in thousands) | July 31, 2018 | |||
Unpaid principal balance | $ | 412,928 | ||
Unpaid principal balance over fair value | (2,738 | ) | ||
Fair value | $ | 410,190 |
As of July 31, 2018, 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 July 31, 2018 is included in Note 6.
The following table presents the balances attributable to CLO 2014-1 that were included in the Company’s Consolidated Statements of Income for the three and nine months ended July 31, 2018:
(in thousands) | Three and Nine Months Ended July 31, 2018 | |||
Other income (expense) of consolidated CLO entities: | ||||
Gains (losses) and other investment income, net | $ | (60 | ) | |
Interest and other expense | (2,093 | ) | ||
Net loss attributable to the Company | $ | (2,153 | ) |
As summarized in the table below, the application of the measurement alternative results in the Company's earnings from CLO 2014-1 subsequent to initial consolidation, as shown above, to be equivalent to the Company's economic interests in CLO 2014-1:
(in thousands) | Three and Nine Months Ended July 31, 2018 | |||
Economic interests: | ||||
Distributions received and unrealized losses on the equity interest held by the Company | $ | (2,390 | ) | |
Management fees | 237 | |||
Total economic interests in CLO 2014-1 | $ | (2,153 | ) |
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
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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 nine months ended July 31, 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 Statement of Income for the nine months ended July 31, 2018. On May 11, 2018, the Company sold its remaining investments in the senior debt tranches of CLO 2015-1 with an aggregate par value of $12.3 million and received total proceeds of $12.3 million from the sale, consisting of principal and accrued interest. As of July 31, 2018, the Company maintains its remaining 5 percent equity interest in CLO 2015-1 as an investment in non-consolidated CLO entities.
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 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 July 31, 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 $0.1 million
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and $0.4 million on July 31, 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 $21.9 billion and $18.1 billion on July 31, 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 $3.0 million and $2.7 million on July 31, 2018 and October 31, 2017, respectively, and investment advisory fees receivable totaling $1.3 million and $1.1 million on July 31, 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 July 31, 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 July 31, 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 July 31, 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 July 31, 2018 and October 31, 2017:
July 31, 2018
(in thousands) | Level 1 | Level 2 | Level 3 | Other Assets Not Held at Fair Value | Total | |||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash equivalents | $ | 22,843 | $ | 153,715 | $ | - | $ | - | $ | 176,558 | ||||||||||
Investments: | ||||||||||||||||||||
Investment securities, trading: | ||||||||||||||||||||
Short-term debt securities | - | 257,911 | - | - | 257,911 | |||||||||||||||
Other debt securities | 12,863 | 399,405 | - | - | 412,268 | |||||||||||||||
Equity securities | 119,326 | 71,768 | - | - | 191,094 | |||||||||||||||
Investment securities, available-for-sale | 9,483 | 14,772 | - | - | 24,255 | |||||||||||||||
Investments in non-consolidated CLO entities(1) | - | - | - | 2,935 | 2,935 | |||||||||||||||
Investments in equity method investees(2) | - | - | - | 143,326 | 143,326 | |||||||||||||||
Investments, other(3) | - | - | - | 20,874 | 20,874 | |||||||||||||||
Derivative instruments | - | 1,589 | - | - | 1,589 | |||||||||||||||
Assets of consolidated CLO entities: | ||||||||||||||||||||
Bank loans and other investments | - | 606,431 | 2,388 | - | 608,819 | |||||||||||||||
Total financial assets | $ | 164,515 | $ | 1,505,591 | $ | 2,388 | $ | 167,135 | $ | 1,839,629 | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Derivative instruments | $ | - | $ | 4,740 | $ | - | $ | - | $ | 4,740 | ||||||||||
Liabilities of consolidated CLO entity: | ||||||||||||||||||||
Senior note obligations | - | 465,306 | - | - | 465,306 | |||||||||||||||
Total financial liabilities | $ | - | $ | 470,046 | $ | - | $ | - | $ | 470,046 |
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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 nine months ended July 31, 2018, the Company recognized $0.2 million of other-than-temporary impairment losses related to its investments in non-consolidated CLO entities. During the three and nine months ended July 31, 2017, the Company recognized $0.4 million of other-than-temporary impairment losses related to its investments in non-consolidated CLO entities. |
(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. At July 31, 2018 and October 31, 2017, there were no indicators of impairment on these investments. |
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.
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Investment securities, trading – short-term debt
Short-term debt securities include certificates of deposit, commercial paper and corporate debt obligations with remaining maturities from three months to 12 months. Short-term debt securities held are generally valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker-dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. 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, credit default 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
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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.
Assets of consolidated CLO entities
Consolidated CLO entity assets include investments in bank loans and equity securities. Fair value is determined utilizing unadjusted quoted market prices when available. Equity securities are valued using the same techniques as described above for trading securities. Interests in senior floating-rate loans for which reliable market quotations are readily available are valued generally at the average mid-point of bid and ask quotations obtained from a third-party pricing service. Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 2 or 3 within the fair value measurement hierarchy.
Liabilities of consolidated CLO entity
Consolidated CLO entity liabilities include senior note obligations. Fair value is determined using the measurement alternative to ASC 820 for collateralized financing entities as discussed further in Note 5. In accordance with the measurement alternative, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of (i) the fair value of the beneficial interests held by the Company and (ii) the carrying value of any beneficial interests that represent compensation for services. Although both Level 2 and Level 3 inputs were used to measure the fair value of the CLO liabilities, the senior note obligations are classified as Level 2 within the fair value measurement hierarchy as the Level 3 inputs used were not significant.
Transfers in and out of Levels
The following table summarizes fair value transfers between Level 1 and Level 2 of the fair value measurement hierarchy for the three and nine months ended July 31, 2018 and 2017:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Transfers from Level 1 into Level 2(1) | $ | 188 | $ | 136 | $ | 189 | $ | 532 | ||||||||
Transfers from Level 2 into Level 1(2) | 58 | 423 | 26 | 2 |
(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. |
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Level 3 assets and liabilities
The following table shows a reconciliation of the beginning and ending fair value measurements of assets and liabilities valued on a recurring basis and classified as Level 3 within the fair value measurement hierarchy for the three and nine months ended July 31, 2018:
Three and Nine Months Ended | ||||
July 31, 2018 | ||||
(in thousands) | Bank Loans and Other Investments of Eaton Vance CLO 2014-1 | |||
Beginning balance | $ | - | ||
Consolidation of CLO 2014-1(1) | 2,388 | |||
Ending balance | $ | 2,388 |
(1) | Represents Level 3 bank loans and other investments held by CLO 2014-1, which the Company began consolidating in the third quarter of fiscal 2018. |
7. | Fair Value Measurements of Other Financial Instruments |
Certain financial instruments are not carried at fair value, but their fair value is required to be disclosed. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at July 31, 2018 and October 31, 2017:
July 31, 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 | ||||||||||||||
Other assets | $ | - | $ | - | - | $ | 6,440 | $ | 6,440 | 3 | ||||||||||||||
Debt | $ | 619,469 | $ | 616,524 | 2 | $ | 618,843 | $ | 644,454 | 2 | ||||||||||||||
Consolidated CLO entity line of credit | $ | 145,709 | $ | 145,709 | 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 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
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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 $145.7 million and $12.6 million as of July 31, 2018 and October 31, 2017, respectively, approximates fair value.
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 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 nine months of fiscal 2018. The Company did not grant any indirect profit interests under the Atlanta Capital Plan during the first nine months of fiscal 2018.
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 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 were 11.6 percent on July 31, 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
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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 Parametric. This transaction settled in December 2017 for $8.4 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 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 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 nine months of fiscal 2018. The Company did not grant any indirect profit interests under the Parametric Plan during the first nine 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 July 31, 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 July 31, 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.
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9. | Intangible Assets |
The following is a summary of intangible assets at July 31, 2018 and October 31, 2017:
July 31, 2018
(in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Amortizing intangible assets: | ||||||||||||
Client relationships acquired | $ | 134,247 | $ | (109,537 | ) | $ | 24,710 | |||||
Intellectual property acquired | 1,025 | (502 | ) | 523 | ||||||||
Trademark acquired | 4,257 | (1,098 | ) | 3,159 | ||||||||
Research system acquired | 639 | (337 | ) | 302 | ||||||||
Non-amortizing intangible assets: | ||||||||||||
Mutual fund management contracts acquired | 54,408 | - | 54,408 | |||||||||
Total | $ | 194,576 | $ | (111,474 | ) | $ | 83,102 |
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 for both the three months ended July 31, 2018 and 2017, and $6.7 million and $6.8 million for the nine months ended July 31, 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 | $ | 2,217 | ||
2019 | 4,978 | |||
2020 | 3,807 | |||
2021 | 2,282 | |||
2022 | 2,154 | |||
2023 | 1,754 |
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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, 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 nine months ended July 31, 2018 and 2017 as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Omnibus Incentive Plans: | ||||||||||||||||
Stock options | $ | 5,931 | $ | 5,192 | $ | 18,337 | $ | 15,712 | ||||||||
Restricted shares | 13,897 | 13,165 | 39,974 | 36,788 | ||||||||||||
Phantom stock units | 49 | 165 | 978 | 391 | ||||||||||||
Employee Stock Purchase Plans | 312 | 540 | 793 | 716 | ||||||||||||
Employee Stock Purchase Incentive Plan | 129 | 111 | 818 | 660 | ||||||||||||
Atlanta Capital Plan | 743 | 855 | 2,227 | 2,565 | ||||||||||||
Parametric Plan | 794 | 940 | 2,383 | 2,820 | ||||||||||||
Parametric Phantom Incentive Plan | 842 | 378 | 2,343 | 1,134 | ||||||||||||
Atlanta Capital Phantom Incentive Plan | 143 | - | 424 | - | ||||||||||||
Total stock-based compensation expense | $ | 22,840 | $ | 21,346 | $ | 68,277 | $ | 60,786 |
The total income tax benefit recognized for stock-based compensation arrangements was $5.8 million and $7.7 million for the three months ended July 31, 2018 and 2017, respectively, and $16.7 million and $22.0 million for the nine months ended July 31, 2018 and 2017, respectively.
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Stock options
Stock option transactions under the Company’s 2013 Omnibus Incentive Plan (the 2013 Plan) and predecessor plans for the nine months ended July 31, 2018 were as follows:
(share and intrinsic value figures in thousands) | Shares | Weighted- Average Exercise Price | Weighted- (in years) | Aggregate Intrinsic Value | ||||||||||||
Options outstanding, beginning of period | 17,587 | $ | 32.63 | |||||||||||||
Granted | 1,747 | 50.71 | ||||||||||||||
Exercised | (1,884 | ) | 29.57 | |||||||||||||
Forfeited/expired | (42 | ) | 40.37 | |||||||||||||
Options outstanding, end of period | 17,408 | $ | 34.76 | 5.8 | $ | 319,864 | ||||||||||
Options exercisable, end of period | 8,721 | $ | 30.36 | 3.9 | $ | 198,591 |
The Company received $54.7 million and $98.5 million related to the exercise of options for the nine months ended July 31, 2018 and 2017, respectively.
As of July 31, 2018, there was $44.8 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 2.6 years.
Restricted shares
A summary of the Company’s restricted share activity for the nine months ended July 31, 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 | 1,407 | 50.96 | ||||||
Vested | (1,305 | ) | 36.15 | |||||
Forfeited | (92 | ) | 39.92 | |||||
Unvested, end of period | 4,575 | $ | 40.70 |
As of July 31, 2018, there was $127.2 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 2.9 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
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substantive service conditions for vesting of awards. Once the awards are granted, the non-employee Directors have the right to receive cash payments 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 nine months ended July 31, 2018, 14,230 phantom stock units were issued to non-employee Directors pursuant to the 2013 Plan. As of July 31, 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 three 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.
In the first nine months of fiscal 2018, the Company purchased and retired approximately 3.4 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 2.6 million additional shares may be repurchased under the current authorization as of July 31, 2018.
13. | Non-operating Income (Expense) |
The components of non-operating income (expense) for the three and nine months ended July 31, 2018 and 2017 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Interest and other income | $ | 10,247 | $ | 6,784 | $ | 26,616 | $ | 17,385 | ||||||||
Net losses on investments and derivatives(1) | (3,120 | ) | (436 | ) | (16,453 | ) | (889 | ) | ||||||||
Net foreign currency gains (losses) | 4 | (811 | ) | (695 | ) | (1,177 | ) | |||||||||
Gains and other investment income, net | 7,131 | 5,537 | 9,468 | 15,319 | ||||||||||||
Interest expense | (5,906 | ) | (6,180 | ) | (17,716 | ) | (21,592 | ) | ||||||||
Loss on extinguishment of debt | - | (5,396 | ) | - | (5,396 | ) | ||||||||||
Other income (expense) of consolidated CLO entities: | ||||||||||||||||
Interest income | 4,505 | - | 6,193 | - | ||||||||||||
Net losses on bank loans and other investments | (2,658 | ) | - | (1,370 | ) | - | ||||||||||
Gains and other investment income, net | 1,847 | - | 4,823 | - | ||||||||||||
Interest and other expense | (3,092 | ) | - | (3,630 | ) | - | ||||||||||
Total non-operating income (expense) | $ | (20 | ) | $ | (6,039 | ) | $ | (7,055 | ) | $ | (11,669 | ) |
(1) | For the nine months ended July 31, 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. |
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14. | Income Taxes |
The provision for income taxes was $37.2 million and $42.5 million, or 26.2 percent and 36.9 percent of pre-tax income, for the three months ended July 31, 2018 and 2017, respectively. The provision for income taxes was $119.9 million and $123.9 million, or 29.7 percent and 37.2 percent of pre-tax income, for the nine months ended July 31, 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 July 31, 2018 includes a non-recurring charge of $6,400 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 July 31, 2018 was decreased by the income tax benefit of $1.3 million related to the exercise of stock options and vesting of restricted stock during the period, and decreased by $1.7 million related to the net income attributable to redeemable non-controlling interests and other beneficial interests, which is not taxable to the Company.
The Company’s income tax provision for the first nine 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 nine months of fiscal 2018 resulting from this charge was partially offset by an income tax benefit of $15.1 million related to the exercise of stock options and vesting of restricted stock during the period, and $4.5 million 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 following table reconciles the statutory federal income tax rate to the Company’s effective tax rate for the three and nine months ended July 31, 2018:
Three Months Ended | Nine Months Ended | |||||||
July 31, 2018 | July 31, 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 | 4.4 | % | 4.3 | % | ||||
Net income attributable to non-controlling and other beneficial interests | -1.0 | % | -0.9 | % | ||||
Other items | 0.4 | % | 0.6 | % | ||||
Non-recurring impact of U.S. tax reform | 0.0 | % | 6.1 | % | ||||
Net excess tax benefits from stock-based compensation plans(2) | -0.9 | % | -3.7 | % | ||||
Effective income tax rate | 26.2 | % | 29.7 | % |
(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 U.S. Securities 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 July 31, 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 million was recorded during the nine months ended July 31, 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 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.
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15. | Non-controlling and Other Beneficial Interests |
The components of net income attributable to non-controlling and other beneficial interests for the three and nine months ended July 31, 2018 and 2017 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Consolidated sponsored funds | $ | (1,862 | ) | $ | (3,124 | ) | $ | (4,215 | ) | $ | (4,836 | ) | ||||
Majority-owned subsidiaries | (4,119 | ) | (4,365 | ) | (12,026 | ) | (12,015 | ) | ||||||||
Non-controlling interest value adjustments(1) | - | (3 | ) | - | 71 | |||||||||||
Net income attributable to non-controlling and other beneficial interests | $ | (5,981 | ) | $ | (7,492 | ) | $ | (16,241 | ) | $ | (16,780 | ) |
(1) | Relates to non-controlling interests redeemable at other than fair value. |
16. | Accumulated Other Comprehensive Income (Loss) |
The components of accumulated other comprehensive income (loss), net of tax, for the three months ended July 31, 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 April 30, 2018 | $ | 251 | $ | 5,160 | $ | (49,884 | ) | $ | (44,473 | ) | ||||||
Other comprehensive income (loss), before reclassifications and tax | - | 514 | (4,585 | ) | (4,071 | ) | ||||||||||
Tax impact | - | (114 | ) | - | (114 | ) | ||||||||||
Reclassification adjustments, before tax | (33 | ) | (1,861 | ) | - | (1,894 | ) | |||||||||
Tax impact | 8 | 434 | - | 442 | ||||||||||||
Net current period other comprehensive income (loss) | (25 | ) | (1,027 | ) | (4,585 | ) | (5,637 | ) | ||||||||
Balance at July 31, 2018 | $ | 226 | $ | 4,133 | $ | (54,469 | ) | $ | (50,110 | ) | ||||||
Balance at April 30, 2017 | $ | 283 | $ | 3,595 | $ | (63,942 | ) | $ | (60,064 | ) | ||||||
Other comprehensive income (loss), before reclassifications and tax | - | 329 | 18,208 | 18,537 | ||||||||||||
Tax impact | - | (124 | ) | - | (124 | ) | ||||||||||
Reclassification adjustments, before tax | 60 | - | - | 60 | ||||||||||||
Tax impact | (23 | ) | - | - | (23 | ) | ||||||||||
Net current period other comprehensive income (loss) | 37 | 205 | 18,208 | 18,450 | ||||||||||||
Balance at July 31, 2017 | $ | 320 | $ | 3,800 | $ | (45,734 | ) | $ | (41,614 | ) |
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The components of accumulated other comprehensive income (loss), net of tax, for the nine months ended July 31, 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 | - | 1,890 | (2,566 | ) | (676 | ) | ||||||||||
Tax impact | - | (458 | ) | - | (458 | ) | ||||||||||
Reclassification adjustments, before tax | (99 | ) | (1,861 | ) | - | (1,960 | ) | |||||||||
Tax impact | 24 | 434 | - | 458 | ||||||||||||
Net current period other comprehensive income (loss) | (75 | ) | 5 | (2,566 | ) | (2,636 | ) | |||||||||
Balance at July 31, 2018 | $ | 226 | $ | 4,133 | $ | (54,469 | ) | $ | (50,110 | ) | ||||||
Balance at October 31, 2016 | $ | 687 | $ | 2,943 | $ | (61,213 | ) | $ | (57,583 | ) | ||||||
Other comprehensive income (loss), before reclassifications and tax | (684 | ) | 1,396 | 15,479 | 16,191 | |||||||||||
Tax impact | 271 | (539 | ) | - | (268 | ) | ||||||||||
Reclassification adjustments, before tax | 74 | - | - | 74 | ||||||||||||
Tax impact | (28 | ) | - | - | (28 | ) | ||||||||||
Net current period other comprehensive income (loss) | (367 | ) | 857 | 15,479 | 15,969 | |||||||||||
Balance at July 31, 2017 | $ | 320 | $ | 3,800 | $ | (45,734 | ) | $ | (41,614 | ) |
(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. |
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17. | Earnings per Share |
The following table sets forth the calculation of earnings per basic and diluted share for the three and nine months ended July 31, 2018 and 2017:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income attributable to Eaton Vance Corp. shareholders | $ | 101,794 | $ | 67,361 | $ | 276,451 | $ | 200,047 | ||||||||
Weighted-average shares outstanding – basic | 114,610 | 111,284 | 115,157 | 110,540 | ||||||||||||
Incremental common shares | 8,131 | 5,767 | 8,396 | 5,211 | ||||||||||||
Weighted-average shares outstanding – diluted | 122,741 | 117,051 | 123,553 | 115,751 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.89 | $ | 0.61 | $ | 2.40 | $ | 1.81 | ||||||||
Diluted | $ | 0.83 | $ | 0.58 | $ | 2.24 | $ | 1.73 |
Antidilutive common shares related to stock options and unvested restricted stock excluded from the computation of earnings per diluted share were approximately 1.8 million and 3.0 million for the three months ended July 31, 2018 and 2017, respectively, and approximately 2.1 million and 3.9 million for the nine months ended July 31, 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.
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19. | Related Party Transactions |
Sponsored funds
The Company is an investment adviser to, and has administrative agreements with, certain sponsored funds, privately offered equity funds and closed-end funds for which employees of the Company are officers and/or directors. Revenues for services provided or related to these funds for the three and nine months ended July 31, 2018 and 2017 are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Management fees | $ | 263,027 | $ | 239,319 | $ | 772,032 | $ | 681,027 | ||||||||
Distribution fees | 19,369 | 19,225 | 58,096 | 56,504 | ||||||||||||
Service fees | 31,260 | 30,515 | 91,935 | 89,493 | ||||||||||||
Shareholder services fees | 1,672 | 1,126 | 4,540 | 3,099 | ||||||||||||
Other revenue | 190 | 293 | 473 | 645 | ||||||||||||
Total | $ | 315,518 | $ | 290,478 | $ | 927,076 | $ | 830,768 |
For the three months ended July 31, 2018 and 2017, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $4.4 million and $4.6 million, respectively, of management fees it was otherwise entitled to receive. For the nine months ended July 31, 2018 and 2017, the Company contractually waived $13.0 million and $12.7 million, respectively, of management fees it was otherwise entitled to receive.
Sales proceeds and net realized gains (losses) for the three and nine months ended July 31, 2018 and 2017 from investments in sponsored funds classified as available-for-sale are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Proceeds from sales | $ | (2,936 | ) | $ | 5,459 | $ | (7,812 | ) | $ | 9,193 | ||||||
Net realized gains (losses) | 2,066 | 14 | 1,961 | 217 |
The Company bears the non-advisory expenses of certain sponsored funds for which it earns an all-in management fee and provides subsidies to startup and other smaller sponsored funds to enhance their competitiveness. For the three months ended July 31, 2018 and 2017, expenses of $11.6 million and $10.4 million, respectively, were incurred by the Company pursuant to these arrangements. For the nine months ended July 31, 2018 and 2017, expenses of $33.6 million and $26.3 million, respectively, were incurred by the Company pursuant to these arrangements.
Included in management fees and other receivables at July 31, 2018 and October 31, 2017 are receivables due from sponsored funds of $105.9 million and $100.0 million, respectively. Included in accounts payable and accrued expenses at July 31, 2018 and October 31, 2017 are payables due to sponsored funds of $2.8 million and $1.7 million, respectively.
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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 July 31, 2018 and 2017, the Company recorded $50,000 and $38,000, 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 nine months ended July 31, 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 $17,000 and $13,000 at July 31, 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 $9.3 million and $11.1 million at July 31, 2018 and October 31, 2017, respectively.
20. | Geographic Information |
Revenues by principal geographic area for the three and nine months ended July 31, 2018 and 2017 are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue: | ||||||||||||||||
U.S. | $ | 413,076 | $ | 377,688 | $ | 1,214,225 | $ | 1,077,590 | ||||||||
International | 17,526 | 16,058 | 52,050 | 45,747 | ||||||||||||
Total | $ | 430,602 | $ | 393,746 | $ | 1,266,275 | $ | 1,123,337 |
Long-lived assets by principal geographic area as of July 31, 2018 and October 31, 2017 are as follows:
July 31, | October 31, | |||||||
(in thousands) | 2018 | 2017 | ||||||
Long-lived Assets: | ||||||||
U.S. | $ | 48,955 | $ | 46,804 | ||||
International | 2,101 | 2,185 | ||||||
Total | $ | 51,056 | $ | 48,989 |
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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
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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 July 31, 2018, we had $453.2 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 120 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.
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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) launching NextShares™ exchange-traded managed funds (NextShares) as a new exchange-traded product structure for investors in actively managed funds in the U.S; and (5) leveraging Calvert and Parametric’s customized separate account capabilities to lead the growth of responsible investing.
As of July 31, 2018, we had 65 U.S. mutual funds rated four or five stars by Morningstar™ for at least one class of shares, including 24 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 nine months of fiscal 2018, net flows into the Company’s active strategies totaled $9.7 billion.
In the first nine 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 nine months of fiscal 2018, net inflows into Parametric Custom Core equity and Eaton Vance laddered municipal and corporate bond strategies offered as retail managed accounts and high-net-worth separate accounts totaled $10.5 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 to advise 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 nine months of fiscal 2018, net inflows into funds and accounts managed for Eaton Vance clients outside the U.S. totaled $0.5 billion. Reflecting favorable market action and positive net flows for the fiscal year to date, assets managed for international clients increased to $25.5 billion at July 31, 2018 from $24.2 billion at October 31, 2017.
We launched the first NextShares funds in February 2016. As of the end of the third quarter of fiscal 2018, 18 NextShares funds from eight different fund families were listed for trading. Since introduction, the sales of NextShares have been constrained by lack of distribution access. In November 2017, NextShares became available for the first time to clients of a major broker-dealer when UBS Financial Services Inc. (UBS) began offering NextShares on its brokerage platforms and through UBS Strategic Advisor, a non-discretionary advisory program. With only modest sales of NextShares realized to date at UBS, we have redoubled efforts to pursue other paths to commercialization and to evaluate different strategic options for the NextShares initiative.
Our position in responsible investing continues to expand. In December 2016, we completed the purchase of substantially all of the business assets of Calvert Investment Management, Inc. (Calvert Investments). The
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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 or other responsible investment criteria. Since Calvert became part of Eaton Vance, we have made significant progress growing managed assets in Calvert-branded investment strategies and positioning Calvert as a center for excellence in environmental, social and governance (ESG) research and engagement. Including the Atlanta Capital-subadvised Calvert Equity Fund, assets under management in Calvert strategies have increased from $11.9 billion at the time of the transaction to $14.7 billion at the end of the third quarter of fiscal 2018. The 24 percent growth in Calvert managed assets over the 19 months of Eaton Vance’s ownership reflects net inflows of $800 million and market appreciation of $2.0 billion.
Separate from Calvert, Parametric manages over $21 billion of client assets based on client-directed responsible investment criteria, which assets are held in more than 2,000 Custom Core and other Parametric-managed separate accounts. Combined, we believe Eaton Vance is today one of the largest players in responsible investing, a position we are committed to growing in conjunction with the surging demand for investment strategies that incorporate ESG-integrated investment research and/or that are managed with a dual objective to achieve favorable investment returns and positive societal impact.
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 third quarter and first nine months of fiscal 2018, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 6.1 percent and 9.2 percent, respectively, and the MSCI Emerging Market Index, a broad measure of emerging market equity performance, had total returns of -6.5 percent and -3.7 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 -1.3 percent, respectively.
Consolidated assets under management of $453.2 billion on July 31, 2018 increased $47.6 billion, or 12 percent, from $405.6 billion on July 31, 2017. The year-over-year increase reflects net inflows of $23.2 billion and market price appreciation in managed assets of $24.4 billion.
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The following tables summarize our consolidated assets under management by investment mandate, investment vehicle and investment affiliate as of July 31, 2018 and 2017. Within the investment mandate table, the “Portfolio implementation” category is comprised 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)(2)
July 31, | ||||||||||||||||||||
(in millions) | 2018 | % of Total | 2017 | % of Total | % Change | |||||||||||||||
Equity(3) | $ | 122,466 | 27 | % | $ | 110,198 | 27 | % | 11 | % | ||||||||||
Fixed income(4) | 76,819 | 17 | % | 68,708 | 17 | % | 12 | % | ||||||||||||
Floating-rate income | 42,955 | 10 | % | 38,754 | 10 | % | 11 | % | ||||||||||||
Alternative | 13,465 | 3 | % | 11,877 | 3 | % | 13 | % | ||||||||||||
Portfolio implementation | 115,035 | 25 | % | 93,285 | 23 | % | 23 | % | ||||||||||||
Exposure management(2) | 82,443 | 18 | % | 82,763 | 20 | % | 0 | % | ||||||||||||
Total | $ | 453,183 | 100 | % | $ | 405,585 | 100 | % | 12 | % |
(1) | Consolidated Eaton Vance Corp. See table on page 55 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
(2) | Reported consolidated assets under management exclude client positions in exposure management mandates identified as transitory in nature. Such positions totaled $12.6 billion as of July 31, 2017. The Company did not manage any such client positions as of July 31, 2018. |
(3) | Includes balanced and other multi-asset mandates. |
(4) | Includes cash management mandates. |
Equity assets under management included $42.4 billion and $36.6 billion of assets managed for after-tax returns on July 31, 2018 and 2017, respectively. Portfolio implementation assets under management included $81.9 billion and $65.7 billion of assets managed for after-tax returns on July 31, 2018 and 2017, respectively. Fixed income assets included $43.9 billion and $39.2 billion of municipal income assets on July 31, 2018 and 2017, respectively.
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Consolidated Assets under Management by Investment Vehicle(1)(2)
July 31, | ||||||||||||||||||||
(in millions) | 2018 | % of Total | 2017 | % of Total | % Change | |||||||||||||||
Open-end funds(3) | $ | 104,898 | 23 | % | $ | 95,797 | 24 | % | 10 | % | ||||||||||
Closed-end funds | 24,947 | 5 | % | 24,648 | 6 | % | 1 | % | ||||||||||||
Private funds(4) | 38,933 | 9 | % | 32,289 | 8 | % | 21 | % | ||||||||||||
Institutional separate accounts(2) | 162,701 | 36 | % | 154,253 | 38 | % | 5 | % | ||||||||||||
High-net-worth separate accounts | 45,379 | 10 | % | 36,439 | 9 | % | 25 | % | ||||||||||||
Retail managed accounts | 76,325 | 17 | % | 62,159 | 15 | % | 23 | % | ||||||||||||
Total | $ | 453,183 | 100 | % | $ | 405,585 | 100 | % | 12 | % |
(1) | Consolidated Eaton Vance Corp. See table on page 55 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
(2) | Reported consolidated assets under management exclude client positions in exposure management mandates identified as transitory in nature. Such positions (held as institutional separate accounts) totaled $12.6 billion as of July 31, 2017. The Company did not manage any such client positions as of July 31, 2018. |
(3) | Includes assets in NextShares funds. |
(4) | Includes privately offered equity, fixed income and floating-rate income funds and CLO entities. |
Consolidated Assets under Management by Investment Affiliate(1)(2)
July 31, | % | |||||||||||
(in millions) | 2018 | 2017 | Change | |||||||||
Eaton Vance Management(3) | $ | 179,558 | $ | 160,570 | 12 | % | ||||||
Parametric(2) | 236,272 | 213,213 | 11 | % | ||||||||
Atlanta Capital(4) | 25,004 | 21,476 | 16 | % | ||||||||
Calvert(4) | 12,349 | 10,326 | 20 | % | ||||||||
Total | $ | 453,183 | $ | 405,585 | 12 | % |
(1) | Consolidated Eaton Vance Corp. See table on page 55 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
(2) | Reported consolidated assets under management exclude client positions in exposure management mandates identified as transitory in nature. Such positions (managed by Parametric) totaled $12.6 billion as of July 31, 2017. The Company did not manage any such client positions as of July 31, 2018. |
(3) | Includes managed assets of Eaton Vance-sponsored funds and separate accounts managed by Hexavest and unaffiliated third-party advisers under Eaton Vance supervision. |
(4) | Consistent with the Company's policies for reporting the managed assets and flows of investment portfolios for which multiple Eaton Vance affiliates have management responsibilities, the managed assets of Atlanta Capital indicated above include the assets of Calvert Equity 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 $14.7 billion and $12.5 billion as of July 31, 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 assets. Fund management, distribution and service fees, as well as certain expenses, are generally calculated as a percentage of average daily assets.
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Consolidated Average Assets under Management by Investment Mandate(1)(2)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Equity(3) | $ | 119,536 | $ | 107,017 | 12 | % | $ | 118,378 | $ | 101,117 | 17 | % | ||||||||||||
Fixed income(4) | 75,206 | 67,989 | 11 | % | 73,393 | 65,226 | 13 | % | ||||||||||||||||
Floating-rate income | 42,616 | 37,764 | 13 | % | 40,943 | 35,368 | 16 | % | ||||||||||||||||
Alternative | 13,522 | 11,629 | 16 | % | 13,268 | 11,107 | 19 | % | ||||||||||||||||
Portfolio implementation | 110,737 | 89,512 | 24 | % | 107,267 | 82,980 | 29 | % | ||||||||||||||||
Exposure management(2) | 84,424 | 81,276 | 4 | % | 85,872 | 76,224 | 13 | % | ||||||||||||||||
Total | $ | 446,041 | $ | 395,187 | 13 | % | $ | 439,121 | $ | 372,022 | 18 | % |
(1) | Consolidated Eaton Vance Corp. See table on page 55 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
(2) | Reported consolidated average assets under management exclude client positions in exposure management mandates identified as transitory in nature. |
(3) | Includes balanced and other multi-asset mandates. |
(4) | Includes cash management mandates. |
Consolidated Average Assets under Management by Investment Vehicle(1)(2)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Open-end funds(3) | $ | 103,066 | $ | 94,224 | 9 | % | $ | 101,228 | $ | 88,343 | 15 | % | ||||||||||||
Closed-end funds | 24,677 | 24,356 | 1 | % | 24,836 | 23,971 | 4 | % | ||||||||||||||||
Private funds(4) | 37,734 | 31,387 | 20 | % | 36,695 | 29,785 | 23 | % | ||||||||||||||||
Institutional separate accounts(2) | 163,326 | 150,847 | 8 | % | 162,919 | 143,368 | 14 | % | ||||||||||||||||
High-net-worth separate accounts | 43,535 | 34,637 | 26 | % | 42,434 | 31,518 | 35 | % | ||||||||||||||||
Retail managed accounts | 73,703 | 59,736 | 23 | % | 71,009 | 55,037 | 29 | % | ||||||||||||||||
Total | $ | 446,041 | $ | 395,187 | 13 | % | $ | 439,121 | $ | 372,022 | 18 | % |
(1) | Consolidated Eaton Vance Corp. See table on page 55 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
(2) | Reported consolidated average assets under management exclude client positions (held as institutional separate accounts) in exposure management mandates identified as transitory in nature. |
(3) | Includes assets in NextShares funds. |
(4) | Includes assets in privately offered equity, fixed income and floating-rate income funds and CLO entities. |
Consolidated Net Flows
Consolidated net inflows of $3.7 billion and $15.2 billion in the third quarter and first nine months of fiscal 2018, respectively, represent annualized internal growth in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management) of 3 percent and 5 percent over the same respective periods. Consolidated net inflows of $9.1 billion and $29.9 billion in the third quarter and the first nine months of fiscal 2017, respectively, represent annualized internal growth in managed assets of 9 percent
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and 12 percent over the same respective periods. Excluding exposure management mandates, the Company’s annualized internal growth rate in managed assets was 8 percent in both the third quarter and first nine months of fiscal 2018, and 11 percent in both the third quarter and first nine months of fiscal 2017. 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 5 percent and 6 percent in the third quarter and first nine months of fiscal 2018, respectively, and 6 percent in both the third quarter and first nine months of fiscal 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 nine months ended July 31, 2018 and 2017:
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Consolidated Assets under Management and Net Flows by Investment Mandate(1)(2)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Equity assets - beginning of period(3) | $ | 117,757 | $ | 104,666 | 13 | % | $ | 113,472 | $ | 89,981 | 26 | % | ||||||||||||
Sales and other inflows | 5,385 | 5,745 | -6 | % | 17,174 | 15,955 | 8 | % | ||||||||||||||||
Redemptions/outflows | (4,900 | ) | (4,259 | ) | 15 | % | (15,485 | ) | (14,317 | ) | 8 | % | ||||||||||||
Net flows | 485 | 1,486 | -67 | % | 1,689 | 1,638 | 3 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | (7) | - | 5,704 | -100 | % | ||||||||||||||||
Exchanges | 8 | 7 | 14 | % | 6 | 60 | -90 | % | ||||||||||||||||
Market value change | 4,216 | 4,039 | 4 | % | 7,299 | 12,815 | -43 | % | ||||||||||||||||
Equity assets - end of period | $ | 122,466 | $ | 110,198 | 11 | % | $ | 122,466 | $ | 110,198 | 11 | % | ||||||||||||
Fixed income assets - beginning of period(5) | 74,024 | 66,881 | 11 | % | 70,797 | 60,607 | 17 | % | ||||||||||||||||
Sales and other inflows(6) | 6,730 | 5,516 | 22 | % | 19,221 | 16,841 | 14 | % | ||||||||||||||||
Redemptions/outflows | (4,065 | ) | (4,178 | ) | -3 | % | (11,927 | ) | (13,006 | ) | -8 | % | ||||||||||||
Net flows | 2,665 | 1,338 | 99 | % | 7,294 | 3,835 | 90 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 4,170 | -100 | % | |||||||||||||||||
Exchanges | (16 | ) | (2 | ) | 700 | % | (5 | ) | (147 | ) | -97 | % | ||||||||||||
Market value change | 146 | 491 | -70 | % | (1,267 | ) | 243 | NM | ||||||||||||||||
Fixed income assets - end of period | $ | 76,819 | $ | 68,708 | 12 | % | $ | 76,819 | $ | 68,708 | 12 | % | ||||||||||||
Floating-rate income assets - beginning of period | 42,282 | 36,957 | 14 | % | 38,819 | 32,107 | 21 | % | ||||||||||||||||
Sales and other inflows | 3,387 | 3,567 | -5 | % | 10,222 | 12,874 | -21 | % | ||||||||||||||||
Redemptions/outflows | (2,438 | ) | (2,113 | ) | 15 | % | (6,298 | ) | (6,962 | ) | -10 | % | ||||||||||||
Net flows | 949 | 1,454 | -35 | % | 3,924 | 5,912 | -34 | % | ||||||||||||||||
Exchanges | 25 | (8 | ) | NM | 40 | 146 | -73 | % | ||||||||||||||||
Market value change | (301 | ) | 351 | NM | 172 | 589 | -71 | % | ||||||||||||||||
Floating-rate income assets - end of period | $ | 42,955 | $ | 38,754 | 11 | % | 42,955 | $ | 38,754 | 11 | % | |||||||||||||
Alternative assets - beginning of period | 13,506 | 11,212 | 20 | % | 12,637 | 10,687 | 18 | % | ||||||||||||||||
Sales and other inflows | 1,254 | 1,359 | -8 | % | 4,832 | 3,546 | 36 | % | ||||||||||||||||
Redemptions/outflows | (999 | ) | (666 | ) | 50 | % | (3,377 | ) | (2,351 | ) | 44 | % | ||||||||||||
Net flows | 255 | 693 | -63 | % | 1,455 | 1,195 | 22 | % | ||||||||||||||||
Exchanges | (20 | ) | - | NM | (28 | ) | (7 | ) | 300 | % | ||||||||||||||
Market value change | (276 | ) | (28 | ) | 886 | % | (599 | ) | 2 | NM | ||||||||||||||
Alternative assets - end of period | $ | 13,465 | $ | 11,877 | 13 | % | 13,465 | $ | 11,877 | 13 | % | |||||||||||||
Portfolio implementation assets - beginning of period | 107,170 | 86,376 | 24 | % | 99,615 | 71,426 | 39 | % | ||||||||||||||||
Sales and other inflows | 6,085 | 5,869 | 4 | % | 16,984 | 18,160 | -6 | % | ||||||||||||||||
Redemptions/outflows | (3,025 | ) | (2,790 | ) | 8 | % | (10,322 | ) | (9,260 | ) | 11 | % | ||||||||||||
Net flows | 3,060 | 3,079 | -1 | % | 6,662 | 8,900 | -25 | % | ||||||||||||||||
Exchanges | (1 | ) | 5 | NM | (16 | ) | 5 | NM | ||||||||||||||||
Market value change | 4,806 | 3,825 | 26 | % | 8,774 | 12,954 | -32 | % | ||||||||||||||||
Portfolio implementation assets - end of period | $ | 115,035 | $ | 93,285 | 23 | % | 115,035 | $ | 93,285 | 23 | % | |||||||||||||
Exposure management assets - beginning of period | 85,333 | 80,921 | 5 | % | 86,976 | 71,572 | 22 | % | ||||||||||||||||
Sales and other inflows | 15,131 | 17,734 | -15 | % | 52,866 | 56,293 | -6 | % | ||||||||||||||||
Redemptions/outflows | (18,814 | ) | (16,649 | ) | 13 | % | (58,657 | ) | (47,897 | ) | 22 | % | ||||||||||||
Net flows | (3,683 | ) | 1,085 | NM | (5,791 | ) | 8,396 | NM | ||||||||||||||||
Market value change | 793 | 757 | 5 | % | 1,258 | 2,795 | -55 | % | ||||||||||||||||
Exposure management assets - end of period(2) | $ | 82,443 | $ | 82,763 | 0 | % | 82,443 | $ | 82,763 | 0 | % | |||||||||||||
Total assets under management - beginning of period | 440,072 | 387,013 | 14 | % | 422,316 | 336,380 | 26 | % | ||||||||||||||||
Sales and other inflows(6) | 37,972 | 39,790 | -5 | % | 121,299 | 123,669 | -2 | % | ||||||||||||||||
Redemptions/outflows | (34,241 | ) | (30,655 | ) | 12 | % | (106,066 | ) | (93,793 | ) | 13 | % | ||||||||||||
Net flows | 3,731 | 9,135 | -59 | % | 15,233 | 29,876 | -49 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 9,874 | -100 | % | |||||||||||||||||
Exchanges | (4 | ) | 2 | NM | (3 | ) | 57 | NM | ||||||||||||||||
Market value change | 9,384 | 9,435 | -1 | % | 15,637 | 29,398 | -47 | % | ||||||||||||||||
Total assets under management - end of period | $ | 453,183 | $ | 405,585 | 12 | % | $ | 453,183 | $ | 405,585 | 12 | % |
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(1) | Consolidated Eaton Vance Corp. See table on page 55 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
(2) | Reported consolidated assets under management and net flows exclude client positions in exposure management mandates identified as transitory in nature. Such positions totaled $12.6 billion as of July 31, 2017. The Company did not manage any such client positions as of July 31, 2018. |
(3) | Includes balanced and other multi-asset mandates. |
(4) | 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, which is sub-advised by Atlanta Capital and previously included in the Company's consolidated assets under management. |
(5) | Includes cash management mandates. |
(6) | 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. |
(7) | Not meaningful (NM). |
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Consolidated Assets under Management and Net Flows by Investment Vehicle(1)(2)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Fund assets - beginning of period(3) | $ | 162,869 | $ | 147,341 | 11 | % | $ | 156,853 | $ | 125,722 | 25 | % | ||||||||||||
Sales and other inflows | 10,855 | 9,736 | 11 | % | 33,167 | 30,664 | 8 | % | ||||||||||||||||
Redemptions/outflows | (7,878 | ) | (7,641 | ) | 3 | % | (25,364 | ) | (24,946 | ) | 2 | % | ||||||||||||
Net flows | 2,977 | 2,095 | 42 | % | 7,803 | 5,718 | 36 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 9,821 | -100 | % | |||||||||||||||||
Exchanges(5) | 304 | 2 | NM | 305 | 2,186 | -86 | % | |||||||||||||||||
Market value change | 2,628 | 3,296 | -20 | % | 3,817 | 9,287 | -59 | % | ||||||||||||||||
Fund assets - end of period | $ | 168,778 | $ | 152,734 | 11 | % | $ | 168,778 | $ | 152,734 | 11 | % | ||||||||||||
Institutional separate accounts - beginning of period | 163,816 | 149,044 | -87 | % | 159,986 | 136,451 | 17 | % | ||||||||||||||||
Sales and other inflows(6) | 18,929 | 21,227 | NM | 64,566 | 66,452 | -3 | % | |||||||||||||||||
Redemptions/outflows | (22,293 | ) | (19,109 | ) | 17 | % | (67,360 | ) | (56,984 | ) | 18 | % | ||||||||||||
Net flows | (3,364 | ) | 2,118 | NM | (2,794 | ) | 9,468 | NM | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 40 | -100 | % | |||||||||||||||||
Exchanges(5) | (308 | ) | - | NM | 18 | (2,055 | ) | NM | ||||||||||||||||
Market value change | 2,557 | 3,091 | -17 | % | 5,491 | 10,349 | -47 | % | ||||||||||||||||
Institutional separate accounts - end of period(2) | $ | 162,701 | $ | 154,253 | 5 | % | $ | 162,701 | $ | 154,253 | 5 | % | ||||||||||||
High-net-worth separate accounts - beginning of period | 42,154 | 33,225 | 27 | % | 39,715 | 25,806 | 54 | % | ||||||||||||||||
Sales and other inflows | 2,654 | 3,103 | -14 | % | 6,949 | 9,827 | -29 | % | ||||||||||||||||
Redemptions/outflows | (1,297 | ) | (1,347 | ) | -4 | % | (4,212 | ) | (3,893 | ) | 8 | % | ||||||||||||
Net flows | 1,357 | 1,756 | -23 | % | 2,737 | 5,934 | -54 | % | ||||||||||||||||
Exchanges | 27 | 4 | 575 | % | (207 | ) | (31 | ) | 568 | % | ||||||||||||||
Market value change | 1,841 | 1,454 | 27 | % | 3,134 | 4,730 | -34 | % | ||||||||||||||||
High-net-worth separate accounts - end of period | $ | 45,379 | $ | 36,439 | 25 | % | $ | 45,379 | $ | 36,439 | 25 | % | ||||||||||||
Retail managed accounts - beginning of period | 71,233 | 57,403 | 24 | % | 65,762 | 48,401 | 36 | % | ||||||||||||||||
Sales and other inflows | 5,534 | 5,724 | -3 | % | 16,617 | 16,726 | -1 | % | ||||||||||||||||
Redemptions/outflows | (2,773 | ) | (2,558 | ) | 8 | % | (9,130 | ) | (7,970 | ) | 15 | % | ||||||||||||
Net flows | 2,761 | 3,166 | -13 | % | 7,487 | 8,756 | -14 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 13 | -100 | % | |||||||||||||||||
Exchanges | (27 | ) | (4 | ) | 575 | % | (119 | ) | (43 | ) | 177 | % | ||||||||||||
Market value change | 2,358 | 1,594 | 48 | % | 3,195 | 5,032 | -37 | % | ||||||||||||||||
Retail managed accounts - end of period | $ | 76,325 | $ | 62,159 | 23 | % | $ | 76,325 | $ | 62,159 | 23 | % | ||||||||||||
Total assets under management - beginning of period | 440,072 | 387,013 | 14 | % | 422,316 | 336,380 | 26 | % | ||||||||||||||||
Sales and other inflows(6) | 37,972 | 39,790 | -5 | % | 121,299 | 123,669 | -2 | % | ||||||||||||||||
Redemptions/outflows | (34,241 | ) | (30,655 | ) | 12 | % | (106,066 | ) | (93,793 | ) | 13 | % | ||||||||||||
Net flows | 3,731 | 9,135 | -59 | % | 15,233 | 29,876 | -49 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 9,874 | -100 | % | |||||||||||||||||
Exchanges | (4 | ) | 2 | NM | (3 | ) | 57 | NM | ||||||||||||||||
Market value change | 9,384 | 9,435 | -1 | % | 15,637 | 29,398 | -47 | % | ||||||||||||||||
Total assets under management - end of period | $ | 453,183 | $ | 405,585 | 12 | % | $ | 453,183 | $ | 405,585 | 12 | % |
(1) | Consolidated Eaton Vance Corp. See table on page 55 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
(2) | Reported consolidated assets under management and net flows exclude client positions in exposure management mandates identified as transitory in nature. Such positions (held as institutional separate accounts) totaled $12.6 billion as of July 31, 2017. The Company did not manage any such client positions as of July 31, 2018. |
(3) | Includes assets in cash management funds. |
(4) | 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, which is sub-advised by Atlanta Capital and previously included in the Company's consolidated assets under management. |
(5) | 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 Investments on December 30, 2016. |
(6) | 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. |
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As of July 31, 2018, the Company’s 49 percent-owned affiliate Hexavest managed $15.2 billion of client assets, down 1 percent from $15.4 billion of managed assets on July 31, 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 net flows of Hexavest for the three and nine months ended July 31, 2018 and 2017:
Hexavest Assets under Management and Net Flows
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Eaton Vance distributed: | ||||||||||||||||||||||||
Eaton Vance sponsored funds - beginning of period(1) | $ | 179 | $ | 262 | -32 | % | $ | 182 | $ | 231 | -21 | % | ||||||||||||
Sales and other inflows | 1 | 29 | -97 | % | 11 | 62 | -82 | % | ||||||||||||||||
Redemptions/outflows | (14 | ) | (147 | ) | -90 | % | (31 | ) | (174 | ) | -82 | % | ||||||||||||
Net flows | (13 | ) | (118 | ) | -89 | % | (20 | ) | (112 | ) | -82 | % | ||||||||||||
Market value change | 2 | 7 | -71 | % | 6 | 32 | -81 | % | ||||||||||||||||
Eaton Vance sponsored funds - end of period | $ | 168 | $ | 151 | 11 | % | $ | 168 | $ | 151 | 11 | % | ||||||||||||
Eaton Vance distributed separate accounts - beginning of period(2) | 3,087 | 2,138 | 44 | % | 3,092 | 2,492 | 24 | % | ||||||||||||||||
Sales and other inflows | 32 | 455 | -93 | % | 172 | 725 | -76 | % | ||||||||||||||||
Redemptions/outflows | (631 | ) | (23 | ) | NM | (849 | ) | (903 | ) | -6 | % | |||||||||||||
Net flows | (599 | ) | 432 | NM | (677 | ) | (178 | ) | 280 | % | ||||||||||||||
Market value change | 34 | 85 | -60 | % | 107 | 341 | -69 | % | ||||||||||||||||
Eaton Vance distributed separate accounts - end of period | $ | 2,522 | $ | 2,655 | -5 | % | $ | 2,522 | $ | 2,655 | -5 | % | ||||||||||||
Total Eaton Vance distributed - beginning of period | 3,266 | 2,400 | 36 | % | 3,274 | 2,723 | 20 | % | ||||||||||||||||
Sales and other inflows | 33 | 484 | -93 | % | 183 | 787 | -77 | % | ||||||||||||||||
Redemptions/outflows | (645 | ) | (170 | ) | 279 | % | (880 | ) | (1,077 | ) | -18 | % | ||||||||||||
Net flows | (612 | ) | 314 | NM | (697 | ) | (290 | ) | 140 | % | ||||||||||||||
Market value change | 36 | 92 | -61 | % | 113 | 373 | -70 | % | ||||||||||||||||
Total Eaton Vance distributed - end of period | $ | 2,690 | $ | 2,806 | -4 | % | $ | 2,690 | $ | 2,806 | -4 | % | ||||||||||||
Hexavest directly distributed - beginning of period(3) | 12,502 | 12,065 | 4 | % | 12,748 | 11,021 | 16 | % | ||||||||||||||||
Sales and other inflows | 440 | 249 | 77 | % | 916 | 850 | 8 | % | ||||||||||||||||
Redemptions/outflows | (587 | ) | (210 | ) | 180 | % | (1,572 | ) | (815 | ) | 93 | % | ||||||||||||
Net flows | (147 | ) | 39 | NM | (656 | ) | 35 | NM | ||||||||||||||||
Market value change | 198 | 534 | -63 | % | 461 | 1,582 | -71 | % | ||||||||||||||||
Hexavest directly distributed - end of period | $ | 12,553 | $ | 12,638 | -1 | % | $ | 12,553 | $ | 12,638 | -1 | % | ||||||||||||
Total Hexavest assets - beginning of period | 15,768 | 14,465 | 9 | % | 16,022 | 13,744 | 17 | % | ||||||||||||||||
Sales and other inflows | 473 | 733 | -35 | % | 1,099 | 1,637 | -33 | % | ||||||||||||||||
Redemptions/outflows | (1,232 | ) | (380 | ) | 224 | % | (2,452 | ) | (1,892 | ) | 30 | % | ||||||||||||
Net flows | (759 | ) | 353 | NM | (1,353 | ) | (255 | ) | 431 | % | ||||||||||||||
Market value change | 234 | 626 | -63 | % | 574 | 1,955 | -71 | % | ||||||||||||||||
Total Hexavest assets - end of period | $ | 15,243 | $ | 15,444 | -1 | % | $ | 15,243 | $ | 15,444 | -1 | % |
(1) | Managed assets and flows of Eaton Vance-sponsored pooled investment vehicles for which Hexavest is adviser or sub-adviser. Eaton Vance receives management fees (and in some cases also distribution fees) on these assets, which are included in Eaton Vance's consolidated assets under management and flows. |
(2) | Managed assets and flows of Eaton Vance-distributed separate accounts managed by Hexavest. Eaton Vance receives distribution fees, but not management fees, on these assets, which are not included in Eaton Vance's consolidated assets under management and flows. |
(3) | Managed assets and flows of pre-transaction Hexavest clients and post-transaction Hexavest clients in Canada. Eaton Vance receives no management fees or distribution fees on these assets, which are not included in Eaton Vance's consolidated assets under management and flows. |
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