Company Quick10K Filing
Quick10K
Eaton Vance
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$41.82 115 $4,830
10-Q 2019-01-31 Quarter: 2019-01-31
10-K 2018-10-31 Annual: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-K 2017-10-31 Annual: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-K 2016-10-31 Annual: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-K 2015-10-31 Annual: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-K 2014-10-31 Annual: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2019-01-16 Officers, Shareholder Vote, Exhibits
8-K 2018-12-13 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-27 Earnings, Exhibits
8-K 2018-10-26 Officers, Shareholder Vote, Exhibits
8-K 2018-08-29 Earnings, Exhibits
8-K 2018-07-11 Officers
8-K 2018-05-22 Earnings, Exhibits
8-K 2018-02-27 Earnings, Exhibits
8-K 2018-01-12 Officers, Shareholder Vote, Exhibits
MRCY Mercury Systems 3,230
GOSS Gossamer Bio 1,150
AEGN Aegion 617
SBFG SB Financial Group 119
AAC AgapeATP 43
PGTK Pacific Green Technologies 0
KIRY Kiewit Royalty Trust 0
TEHG Technovative Group 0
FSAC Federal Street Acquisition 0
YECO Yulong Eco-Materials 0
EV 2019-01-31
Part I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 tv515738_ex31-1.htm
EX-31.2 tv515738_ex31-2.htm
EX-32.1 tv515738_ex32-1.htm
EX-32.2 tv515738_ex32-2.htm

Eaton Vance Earnings 2019-01-31

EV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv515738_10q.htm FORM 10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended January 31, 2019

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 every Interactive Data File required to be submitted 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 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 ¨ 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 January 31, 2019
Non-Voting Common Stock, $0.00390625 par value    115,164,461 shares
Voting Common Stock, $0.00390625 par value   422,935 shares

 

 

   

 

 

Eaton Vance Corp.

Form 10-Q

As of January 31, 2019 and for the

Three Month Period Ended January 31, 2019

 

Table of Contents

Required
Information
  Page
Number
Reference
     
Part I Financial Information  
Item 1. Consolidated Financial Statements (unaudited) 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 46
Item 3. Quantitative and Qualitative Disclosures About Market Risk 72
Item 4. Controls and Procedures 72
     
Part II Other Information  
Item 1. Legal Proceedings 73
Item 1A. Risk Factors 73
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 73
Item 6. Exhibits 74
     
Signatures   75

 

 2 

 

 

Part I - Financial Information

 

Item 1. Consolidated Financial Statements (unaudited)

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

   January 31,   October 31, 
(in thousands)  2019   2018 
         
Assets          
           
Cash and cash equivalents  $449,157   $600,696 
Management fees and other receivables   223,898    236,736 
Investments   1,010,558    1,078,627 
Assets of consolidated collateralized loan obligation (CLO) entities:          
Cash   45,895    216,598 
Bank loans and other investments   1,046,102    874,304 
Other assets   4,241    4,464 
Deferred sales commissions   48,515    48,629 
Deferred income taxes   42,531    45,826 
Equipment and leasehold improvements, net   60,079    52,428 
Intangible assets, net   79,057    80,885 
Goodwill   259,681    259,681 
Loan to affiliate   5,000    5,000 
Other assets   61,391    95,454 
Total assets  $3,336,105   $3,599,328 

 

See notes to Consolidated Financial Statements.

 

 3 

 

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

   January 31,   October 31, 
(in thousands, except share data)  2019   2018 
         
Liabilities, Temporary Equity and Permanent Equity          
           
Liabilities:          
           
Accrued compensation  $77,280   $233,836 
Accounts payable and accrued expenses   80,028    91,410 
Dividend payable   48,887    51,731 
Debt   619,887    619,678 
Liabilities of consolidated CLO entities:          
Senior and subordinated note obligations   840,929    873,008 
Line of credit   68,458    - 
Other liabilities   94,259    154,185 
Other liabilities   111,044    131,952 
Total liabilities   1,940,772    2,155,800 
           
Commitments and contingencies (Note 17)          
           
Temporary Equity:          
           
Redeemable non-controlling interests   326,589    335,097 
Total temporary equity   326,589    335,097 
           
Permanent Equity:          
           
Voting Common Stock, par value $0.00390625 per share:          
Authorized, 1,280,000 shares          
Issued and outstanding, 422,935 and 422,935 shares, respectively   2    2 
Non-Voting Common Stock, par value $0.00390625 per share:          
Authorized, 190,720,000 shares          
Issued and outstanding, 115,164,641 and 116,527,845 shares, respectively   450    455 
Additional paid-in capital   -    17,514 
Notes receivable from stock option exercises   (7,875)   (8,057)
Accumulated other comprehensive loss   (55,933)   (53,181)
Retained earnings   1,131,094    1,150,698 
Total Eaton Vance Corp. shareholders' equity   1,067,738    1,107,431 
Non-redeemable non-controlling interests   1,006    1,000 
Total permanent equity   1,068,744    1,108,431 
Total liabilities, temporary equity and permanent equity  $3,336,105   $3,599,328 

 

See notes to Consolidated Financial Statements.

 

 4 

 

 

Eaton Vance Corp.

Consolidated Statements of Income (unaudited)

 

   Three Months Ended 
   January 31, 
(in thousands, except per share data)  2019   2018 
Revenue:        
Management fees  $350,750   $361,857 
Distribution and underwriter fees   23,090    24,947 
Service fees   29,360    30,361 
Other revenue   3,216    3,071 
Total revenue   406,416    420,236 
Expenses:          
Compensation and related costs   153,888    155,048 
Distribution expense   37,508    41,869 
Service fee expense   25,517    26,841 
Amortization of deferred sales commissions   5,547    4,277 
Fund-related expenses   9,645    9,162 
Other expenses   53,181    47,239 
Total expenses   285,286    284,436 
Operating income   121,130    135,800 
Non-operating income (expense):          
Gains and other investment income, net   5,833    2,598 
Interest expense   (6,131)   (5,907)
Other income (expense) of consolidated CLO entities:          
Gains and other investment income, net   5,441    1,717 
Interest and other expense   (8,336)   (94)
Total non-operating income (expense)   (3,193)   (1,686)
Income before income taxes and equity in net income of affiliates   117,937    134,114 
Income taxes   (27,625)   (48,617)
Equity in net income of affiliates, net of tax   1,948    3,014 
Net income   92,260    88,511 
Net income attributable to non-controlling and other beneficial interests   (5,459)   (10,455)
Net income attributable to Eaton Vance Corp. shareholders  $86,801   $78,056 
Earnings per share:          
Basic  $0.77   $0.68 
Diluted  $0.75   $0.63 
Weighted average shares outstanding:          
Basic   112,255    115,282 
Diluted   115,516    123,941 

 

See notes to Consolidated Financial Statements.

 

 5 

 

  

Eaton Vance Corp.

Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
         
Net income  $92,260   $88,511 
Other comprehensive income (loss):          
Amortization of net (losses) on cash flow hedges, net of tax   (24)   (25)
Unrealized gains on available-for-sale investments, net of tax   -    720 
Foreign currency translation adjustments   986    12,085 
Other comprehensive income, net of tax   962    12,780 
           
Total comprehensive income   93,222    101,291 
Comprehensive income attributable to non-controlling and other beneficial interests   (5,459)   (10,455)
Total comprehensive income attributable to Eaton Vance Corp. shareholders  $87,763   $90,836 

 

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, 2018  $2   $455   $17,514   $(8,057)  $(53,181)  $1,150,698   $1,000   $1,108,431   $335,097 
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)   -    -    -    -    (3,714)   3,714    -    -    - 
Net income   -    -    -    -    -    86,801    417    87,218    5,042 
Other comprehensive income, net of tax   -    -    -    -    962    -    -    962    - 
Dividends declared ($0.35 per share)   -    -    -    -    -    (40,386)   -    (40,386)   - 
Issuance of Non-Voting Common Stock:                                             
On exercise of stock options   -    1    2,980    (199)   -    -    -    2,782    - 
Under employee stock purchase plans   -    -    1,593    -    -    -    -    1,593    - 
Under employee stock purchase incentive plan   -    -    472    -    -    -    -    472    - 
Under restricted stock plan, net of forfeitures   -    6    -    -    -    -    -    6    - 
Stock-based compensation   -    -    22,659    -    -    -    -    22,659    - 
Tax benefit of non-controlling interest repurchases   -    -    992    -    -    -    -    992    - 
Repurchase of Non-Voting Common Stock   -    (12)   (45,288)   -    -    (69,733)   -    (115,033)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    381    -    -    -    381    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    (439)   (439)   41,221 
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    (51,701)
Reclass to temporary equity   -    -    -    -    -    -    28    28    (28)
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    (3,964)
Changes in redemption value of non-controlling interests redeemable at fair value   -    -    (922)   -    -    -    -    (922)   922 
January 31, 2019  $2   $450   $-   $(7,875)  $(55,933)  $1,131,094   $1,006   $1,068,744   $326,589 

 

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, 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   -    -    -    -    -    78,056    742    78,798    9,713 
Other comprehensive income, net of tax   -    -    -    -    12,780    -    -    12,780    - 
Dividends declared ($0.31 per share)   -    -    -    -    -    (37,276)   -    (37,276)   - 
Issuance of Non-Voting Common Stock:                                             
On exercise of stock options   -    6    42,690    (393)   -    -    -    42,303    - 
Under employee stock purchase plans   -    -    1,549    -    -    -    -    1,549    - 
Under employee stock purchase incentive plan   -    -    427    -    -    -    -    427    - 
Under restricted stock plan, net of forfeitures   -    5    -    -    -    -    -    5    - 
Stock-based compensation   -    -    23,729    -    -    -    -    23,729    - 
Tax benefit of non-controlling interest repurchases   -    -    2,118    -    -    -    -    2,118    - 
Repurchase of Non-Voting Common Stock   -    (3)   (36,340)   -    -    -    -    (36,343)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    987    -    -    -    987    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    (739)   (739)   52,244 
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    (488)
Reclass to temporary equity   -    -    -    -    -    -    34    34    (34)
Purchase of non-controlling interests   -    -    -    -    -    -    -    -    (8,439)
Changes in redemption value of non-controlling interests redeemable at fair value   -    -    (630)   -    -    -    -    (630)   630 
Balance, January 31, 2018  $2   $469   $182,502   $(10,518)  $(34,694)  $961,492   $901   $1,100,154   $304,449 

 

See notes to Consolidated Financial Statements.

 

 8 

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
         
Cash Flows From Operating Activities:          
Net income  $92,260   $88,511 
Adjustments to reconcile net income to net cash provided by (used by) operating activities:          
Depreciation and amortization   6,604    5,272 
Amortization of deferred sales commissions   5,547    4,277 
Stock-based compensation   22,659    23,730 
Deferred income taxes   4,268    30,820 
Net (gains) losses on investments and derivatives   3,646    (977)
Loss on expiration of Hexavest option   -    6,523 
Equity in net income of affiliates, net of tax   (1,948)   (3,014)
Dividends received from affiliates   2,895    2,875 
Consolidated CLO entities’ operating activities:          
Net gains on bank loans, other investments and note obligations   6,107    (894)
Amortization   (214)   - 
(Increase) decrease in other assets, net of other liabilities   8,258    (159)
Changes in operating assets and liabilities:          
Management fees and other receivables   12,937    (12,915)
Short-term debt securities   31,999    6,847 
Investments held by consolidated sponsored funds and separately managed accounts   (14,606)   (106,005)
Deferred sales commissions   (5,434)   (7,764)
Other assets   18,602    22,036 
Accrued compensation   (156,750)   (128,582)
Accounts payable and accrued expenses   (1,910)   4,742 
Other liabilities   (588)   5,460 
Net cash provided by (used by) operating activities   34,332    (59,217)
           
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (8,300)   (2,594)
Proceeds from sale of investments   4,307    - 
Purchase of investments(1)   (1,364)   (31)
Purchase of investments in CLO entity note obligations(1)   -    (20,295)
Consolidated CLO entities’ investing activities:          
Proceeds from sales of bank loans and other investments   83,389    13,921 
Purchase of bank loans and other investments   (361,121)   (37,973)
Net cash used for investing activities   (283,089)   (46,972)

 

(1)In the fourth quarter of fiscal 2018, the Company elected to present the investing cash flows related to the purchase and sale of investments in CLO entity note obligations separately from the purchase and sale of other investments. The prior year amount previously presented within the purchase of investments line item has been reclassified to purchase of investments in CLO entity note obligations for comparability purposes.

 

See notes to Consolidated Financial Statements.

 

 9 

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Cash Flows From Financing Activities:          
Purchase of additional non-controlling interest  $(18,098)  $(20,818)
Line of credit issuance costs   (930)   - 
Proceeds from issuance of Non-Voting Common Stock   4,853    44,284 
Repurchase of Non-Voting Common Stock   (128,169)   (36,343)
Principal repayments on notes receivable from stock option exercises   381    987 
Dividends paid   (43,230)   (37,499)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   41,772    51,461 
Consolidated CLO entities’ financing activities:          
Proceeds from line of credit   68,458    23,936 
Net cash provided by (used for) financing activities   (74,963)   26,008 
Effect of currency rate changes on cash and cash equivalents   1,134    3,722 
Net increase (decrease) in cash, cash equivalents and restricted cash   (322,586)   (76,459)
Cash, cash equivalents and restricted cash, beginning of period   866,075    649,863 
Cash, cash equivalents and restricted cash, end of period  $543,489   $573,404 
           
Supplemental Cash and Restricted Cash Flow Information:          
Cash paid for interest  $6,020   $5,985 
Cash paid for interest by consolidated CLO entities   -    77 
Cash paid for income taxes, net of refunds   13,737    13,841 
Supplemental Schedule of Non-Cash Investing and Financing Transactions:          
Increase in equipment and leasehold improvements due to non-cash additions  $4,978   $746 
Exercise of stock options through issuance of notes receivable   199    393 
Increase (decrease) in non-controlling interests due to net consolidations (deconsolidations) of sponsored investment funds   (51,701)   61,441 
Decrease in bank loans and other investments of consolidated CLO entities due to unsettled sales   (2,288)   (5,023)
Increase in bank loans and other investments of consolidated CLO entities due to unsettled purchases   84,033    25,284 

 

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 normal recurring 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 Annual Report on Form 10-K for the year ended October 31, 2018.

 

Adoption of new accounting standards

 

The Company adopted the following accounting standards as of November 1, 2018:

 

Revenue recognition – Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers
Financial instruments – ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities
Statement of cash flows – ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments
Statement of cash flows – ASU 2016-18, Restricted Cash

 

Revenue recognition

This guidance seeks to improve comparability by providing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance also changes the accounting for certain contract costs and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The Company adopted the new revenue recognition guidance using a full retrospective approach.

 

The adoption of this guidance did not result in any significant changes to the timing of recognition and measurement of revenue or recognition of costs incurred to obtain and fulfill revenue contracts; however, the presentation of certain revenue and expense balances was affected. Notably, fund subsidies of $5.7 million previously included as a component of fund-related expenses in the Consolidated Statements of Income for the three months ended January 31, 2018 are now presented as a contra-revenue component of management fees. Separately, in applying the revised principal-versus-agent guidance to the Company’s various distribution contracts, for certain classes of shares in sponsored funds with a front-end load 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) is now presented gross within distribution and underwriting fee revenue and the sales charge paid to the selling broker-dealer is now presented within distribution expense in the Consolidated Statements of Income. Prior to the adoption of ASU 2014-09, only the underwriting commission retained by the Company was presented within distribution and underwriting fee revenue as the sales charge paid to the selling broker-dealer was recorded net. Accordingly, distribution and underwriter fees and distribution expense

 

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increased by approximately $4.5 million for the three months ended January 31, 2018 as a result of this change. Lastly, contingent deferred sales charges received, which were previously recorded as a reduction of deferred sales commission assets, are now being recorded as revenue within the distribution and underwriting fees line item in the Consolidated Statements of Income.

 

The following table presents the effect of the changes in presentation made to prior periods which are attributable to the retrospective adoption of ASU 2014-09:

 

   Three Months Ended 
   January 31, 2018 
(in thousands) 

As

Previously
Reported

   Reclassification   As Restated 
Revenue:               
Management fees  $366,367   $(4,510)  $361,857 
Distribution and underwriter fees   20,493    4,454    24,947 
Service fees   30,844    (483)   30,361 
Other revenue   3,708    (637)   3,071 
Total revenue   421,412    (1,176)   420,236 
Expenses:               
Compensation and related costs   155,048    -    155,048 
Distribution expense   35,640    6,229    41,869 
Service fee expense   28,562    (1,721)   26,841 
Amortization of deferred sales commissions   4,277    -    4,277 
Fund-related expenses   14,846    (5,684)   9,162 
Other expenses   47,239    -    47,239 
Total expenses   285,612    (1,176)   284,436 
Operating Income  $135,800   $-   $135,800 

 

Financial instruments – recognition and measurement

This guidance requires substantially all equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) and with a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. The standard effectively eliminates the ability, at acquisition, to classify an equity investment as available-for-sale with holding gains and losses presented in other comprehensive income until realized. The Company adopted this provision of the new ASU using a modified retrospective approach.

 

The Company held $10.3 million of available-for-sale equity investments in non-consolidated sponsored funds at October 31, 2018. Upon adoption, the Company recognized a $3.7 million cumulative effect adjustment (increase) to retained earnings, net of related income tax effects, to reclassify unrealized holding gains attributable to these investments previously recognized in accumulated other comprehensive income (loss). Prior period investments in non-consolidated sponsored mutual funds and private open-end funds previously classified as trading and available-for-sale within the notes to the financial statements are now referred to as “equity securities”; the prior period treatment of gains or losses arising from changes in the fair value of investments was retained.

 

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The standard also provides for an election to measure certain investments without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (the cost method). The Company adopted this provision of the ASU using a prospective approach.

 

Statement of cash flows – classification

This standard clarifies how certain cash receipts and cash payments are classified and presented on the Consolidated Statement of Cash Flows. The Company adopted ASU 2016-15 using a retrospective approach. The adoption of this standard did not result in any changes to the classification of prior period activity on the Company’s Consolidated Statements of Cash Flows.

 

Statement of cash flows – restricted cash

This standard requires the inclusion of restricted cash and restricted cash equivalents (restricted cash) with cash and cash equivalents when reconciling the beginning and ending amounts on the Consolidated Statement of Cash Flows. Restricted cash includes cash held by consolidated sponsored funds and consolidated collateralized loan obligation (CLO) entities. The Company adopted this new guidance around the classification and presentation of restricted cash in the Consolidated Statement of Cash Flows using a retrospective approach. Accordingly, net changes in restricted cash of $0.8 million are no longer presented as a component of the Company’s net cash used by operating activities for the three months ended January 31, 2018. A reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s Consolidated Balance Sheets at January 31, 2019 and October 31, 2018 that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows in included in Note 2.

 

In addition to the standards described above, the Company also early adopted the portion of ASU 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement related to the removal of certain fair value disclosure requirements. The new fair value disclosures required to be added under this new guidance will be effective for the fiscal year that begins on November 1, 2020.

 

Where applicable, the Company’s significant accounting policies provided below have been updated to reflect the adoption of these new accounting standards as of November 1, 2018.

 

Restricted cash

 

Restricted cash includes cash collateral required for margin accounts established to support derivative positions and other segregated cash to comply with certain regulatory requirements. Such derivatives are used to hedge certain investments in consolidated sponsored funds and separately managed accounts seeded for business development purposes (consolidated seed investments). Cash and cash equivalents held by consolidated sponsored funds and consolidated CLO entities are not available to the Company for its general operations and also represent restricted cash or restricted cash equivalents.

 

Investments

 

Debt securities held at fair value

Debt securities held at fair value consist of short-term debt securities held directly by the Company comprised of certificates of deposit, commercial paper and corporate debt obligations with original (remaining) maturities to the Company ranging from three months to 12 months, as determined upon the

 

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purchase of each security, as well as investments in debt securities held in portfolios of consolidated sponsored mutual funds and private open-end funds (sponsored funds) and separately managed accounts. Debt securities are measured at fair value with net realized and unrealized holding gains or losses, and interest and dividend income reflected as a component of gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income. The specific identified cost method is used to determine the realized gains or losses on all debt securities sold.

 

Equity securities held at fair value

Equity securities primarily consist of domestic and foreign equity securities held in portfolios of consolidated sponsored funds and separately managed accounts and investments in non-consolidated sponsored or other funds. Equity securities and investments in non-consolidated sponsored or other mutual funds with readily determinable fair values are measured at fair value based on quoted market prices and published net asset values per share, respectively. Investments in non-consolidated sponsored private open-end funds without readily determinable fair values are measured at fair value based on the net asset value per share (or equivalent) of the investment as a practical expedient.

 

Equity investments without readily determinable fair values are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (the cost method). Investments held at cost are qualitatively evaluated for impairment each reporting period. If that qualitative assessment indicates that the investment held at cost is impaired, the fair value of the investment is estimated and an impairment loss is recognized equal to the difference between the fair value of the investment and its carrying amount. The cost method is no longer applied if the equity security subsequently has a readily determinable fair value or the Company irrevocably elects to measure the equity security at fair value.

 

Net realized and unrealized holding gains or losses on equity securities, any observable price changes and impairment losses attributable to investments held at cost, and dividend income are all reflected within gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income. The specific identified cost method is used to determine the realized gains or losses on all equity securities sold.

 

Investments in non-consolidated CLO entities

Investments in non-consolidated CLO entities are carried at amortized cost unless impaired. The excess of actual and anticipated future cash flows over the initial investment at the date of purchase is recognized in gains (losses) and other investment income, net, over the life of the investment using the effective yield method. The Company reviews cash flow estimates throughout the life of each non-consolidated CLO entity. If the updated estimate of future cash flows (taking into account both timing and amounts) is less than the last estimate, an impairment loss is recognized to the extent the carrying amount of the investment exceeds its fair value.

 

Investments in equity method investees

Investments in non-controlled affiliates in which the Company’s ownership ranges from 20 to 50 percent, or in instances in which the Company is able to exercise significant influence but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the Company’s share of the investee’s underlying net income or loss is recorded as equity in net income of affiliates, net of tax. Distributions received from investees reduce the Company’s investment balance and are classified as cash flows either from operating activities or investing activities in the Company’s Consolidated Statements of Cash Flows as determined using the cumulative earnings method. Investments

 

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in equity method investees are evaluated for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amounts of the impairment losses, if any.

 

Deferred sales commissions

 

Sales commissions paid to broker-dealers in connection with the sale of certain classes of shares of sponsored funds are generally deferred and amortized over the period during which redemptions by the purchasing shareholder are subject to a contingent deferred sales charge, which does not exceed five years from purchase. Distribution fees and contingent deferred sales charges received from these funds are recorded in revenue as earned. Should the Company lose its ability to recover such sales commissions through earning distribution fees, the value of its deferred sales commission asset would immediately decline, as would related future cash flows.

 

The Company evaluates the carrying value of its deferred sales commission asset for impairment on a quarterly basis. In its impairment analysis, the Company compares the carrying value of the deferred sales commission asset to the undiscounted cash flows expected to be generated by the asset in the form of distribution fees over its remaining useful life to determine whether impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value based on discounted cash flows. Impairment adjustments are recognized in operating income as a component of amortization of deferred sales commissions.

 

Revenue recognition

 

The Company primarily earns revenue from providing asset management services, distribution and underwriter services and shareholder services to its sponsored fund and separate account customers through various forms of contracts. Revenue is recognized for each distinct performance obligation identified in its contracts with customers when the performance obligation has been satisfied by transferring services to a customer either over time or at a point in time (which is when the customer obtains control of the service). Revenue is recognized in the amount of variable or fixed consideration allocated to the satisfied performance obligation that the Company expects to be entitled in exchange for transferring such services to a customer (the transaction price). Variable consideration is included in the transaction price only when it is probable that a significant reversal of such revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved (the constraint). The majority of the fees earned from providing asset management, distribution and shareholder services represent variable consideration as the revenue is largely dependent on the total value and composition of assets under management. The total value of assets under management fluctuate with the financial markets. These fees are constrained and excluded from the transaction price until the asset values on which our customer is billed are calculated and the value of consideration is measurable and no longer subject to financial market volatility.

 

The timing of when we bill our customers and related payment terms vary in accordance with the agreed-upon contractual terms. A majority of our clients are billed after the service is performed which results in the recording of accounts receivable and accrued revenue. Deferred revenue is recorded in instances where a client is billed in advance.

 

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Management fees

The Company is entitled to receive management fees in exchange for asset management services provided to sponsored funds and separate accounts established for retail clients (either directly or indirectly through various third-party financial intermediaries that sponsor various active asset management and model-based active asset management investment programs), high net worth clients and institutional clients. Asset management services consist of a series of distinct incremental days of investment advisory and administrative services provided to sponsored funds and investment advisory services provided to separate accounts. Control of asset management services is transferred to sponsored fund and separate account customers over time as these customers simultaneously receive and consume the benefits provided by these services. Management fees from sponsored funds are calculated principally as a percentage of average daily net assets, are earned daily, and are typically paid monthly from the assets of the fund. Management fees from separate accounts are calculated as a percentage of either beginning, average or ending monthly or quarterly net assets, are earned daily, and are typically paid either monthly or quarterly from the assets of the separate account. Performance fees are generated on certain fund and separate account management contracts when specific performance hurdles are met during the performance period.

 

Management fees are typically recognized as revenue at month-end or quarter-end when the value of consideration is measured. The Company may waive certain fees for asset management services provided to sponsored funds at its discretion. Separately, the Company may subsidize certain share classes of sponsored funds to ensure that specified operating expenses attributable to such share classes do not exceed a specified percentage. Fee waivers and fund subsidies impact the transaction price allocated to satisfied asset management services and are therefore recognized as a reduction to management fee revenue.

 

Distribution and underwriter fees

The Company is entitled to receive distribution fees and underwriter commissions in exchange for distribution services provided to sponsored funds. Distribution services consist of distinct sales and marketing activities that result in the sale of sponsored fund shares. Control of distribution services is transferred to the customer when sponsored fund shares are sold to the shareholder, at which time the shareholder is subject to the risks and rewards of share ownership, the funds are able to direct the use of invested assets and the Company has the right to receive payment.

 

Distribution fees for all share classes subject to these fees are calculated as a percentage of average daily net assets, and are typically paid monthly from the assets of the fund. Distribution fees are recognized as revenue at month-end when the value of consideration is measured.

 

Underwriting commissions for all share classes subject to these fees are calculated as a percentage of the amount invested and are deducted from the amount invested by the fund shareholder. These commissions represent fixed consideration that is not subject to the constraint. Therefore, underwriting commissions are recognized as revenue when the sponsored fund shares are sold to the shareholder. Underwriter commissions are waived or reduced on purchases of shares that exceed specified minimum amounts.

 

Service fees

The Company is entitled to receive service fees in exchange for shareholder services provided to sponsored funds. Shareholder services are comprised of a series of distinct incremental days of shareholder transaction processing and/or shareholder account maintenance services. Control of shareholder services is transferred to sponsored funds over time as the sponsored funds simultaneously

 

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receive and consume the benefits provided by these services. Service fees are calculated as a percentage of average daily net assets under management, are earned daily, and are typically paid monthly from the assets of the fund. Service fees are recognized as revenue at month-end when the value of consideration is measured.

 

Principal versus agent

The Company has contractual arrangements with third parties that are involved in providing various services primarily to sponsored fund customers, including sub-advisory, distribution and shareholder services. Management’s determination of whether related revenue should be recorded on a gross basis, without subtracting payments to third-party service providers, or net of payments to third-party service providers is based on management’s assessment of whether the Company is serving as the principal service provider or is acting as an agent. The Company is serving as the principal service provider (and should therefore record revenue on a gross basis) if it controls the service as a result of being primarily responsible for providing the service before it is transferred to the sponsored fund or separate account customer. Alternatively, the Company is acting as an agent (and therefore should record revenue net of payments to third-party service providers) when it does not control the service as in the case where it arranges for the service to be provided by a third-party.

 

The Company controls the right to asset management services performed by various third-party sub-advisers; therefore management fee revenue is recorded on a gross basis. Fees paid to sub-advisers are recognized as an expense when incurred and are included in fund-related expenses in the Company’s Consolidated Statements of Income. Separately, the Company also controls the right to distribution and shareholder services performed by various third-parties (including financial intermediaries); therefore distribution and underwriter fees and service fees are also recorded on a gross basis. Fees paid to third parties for distribution and shareholder services are recognized as an expense when incurred and are included in distribution expense and service fee expense, respectively, in the Company’s Consolidated Statements of Income.

 

Comprehensive income

 

The Company reports all changes in comprehensive income in its Consolidated Statements of Comprehensive Income. Comprehensive income includes net income, unrealized gains and losses on certain derivatives designated as cash flow hedges and related reclassification adjustments attributable to the amortization of net gains and losses on these derivatives and foreign currency translation adjustments, in each case net of tax. When the Company has established an indefinite reinvestment assertion for a foreign subsidiary, deferred income taxes are not provided on the related foreign currency translation.

 

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2.Cash, Cash Equivalents and Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s Consolidated Balance Sheets that sum to the total of the same such amounts presented in the Consolidated Statements of Cash Flows:

 

   January 31,   October 31, 
(in thousands)  2019   2018 
Cash and cash equivalents  $449,157   $600,696 
Restricted cash of consolidated sponsored funds included in investments   32,619    33,525 
Restricted cash included in assets of consolidated CLO entities, cash   45,895    216,598 
Restricted cash included in other assets   15,818    15,256 
Total cash, cash equivalents and restricted cash presented in the Consolidated Statement of Cash Flows  $543,489   $866,075 

 

3.Investments

 

The following is a summary of investments:

 

(in thousands) 

January 31,

2019

  

October 31,

2018

 
Investments held at fair value:          
Short-term debt securities  $241,367   $273,320 
Debt and equity securities held by consolidated sponsored funds   507,617    540,582 
Debt and equity securities held in separately managed accounts   86,532    89,121 
Non-consolidated sponsored funds and other   10,758    10,329 
Total investments held at fair value   846,274    913,352 
Investments held at cost   20,868    20,874 
Investments in non-consolidated CLO entities   2,898    2,895 
Investments in equity method investees   140,518    141,506 
Total investments(1)(2)  $1,010,558   $1,078,627 

 

(1)Excludes bank loans and other investments held by consolidated CLO entities, which are discussed in Note 4.
(2)Amounts at January 31, 2019 reflect the adoption of ASU 2016-01. Amounts at October 31, 2018 reflect accounting guidance prior to the adoption of ASU 2016-01. See Note 1 for further information.

 

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Investments held at fair value

 

The Company recognized gains (losses) related to debt and equity securities held at fair value within gains and other investment income, net on the Company’s Consolidated Statements of Income as follows:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Realized gains (losses) on securities sold  $(4,395)  $5,130 
Unrealized gains (losses) on investments held at fair value   3,305    7,266 
Net gains (losses) on investments held at fair value(1)  $(1,090)  $12,396 

 

(1)Amounts for the three months ended January 31, 2019 reflect the adoption of ASU 2016-01. The prior period gains and losses arising from changes in the fair value of investments reflect accounting guidance prior to the adoption of ASU 2016-01. See Note 1 for further information.

 

Investments held at cost

 

Investments held at cost primarily include the Company’s equity investment in a wealth management technology firm. At January 31, 2019 and October 31, 2018, there were no indicators of impairments related to investments carried at cost.

 

Investments in non-consolidated CLO entities

 

The Company provides investment management services for, and has made direct investments in, a number of CLO entities that it does not consolidate, as described further in Note 4. At both January 31, 2019 and October 31, 2018, combined assets under management in the pools of non-consolidated CLO entities were $0.8 billion.

 

The Company did not recognize any impairment losses related to the Company’s investments in non-consolidated CLO entities for the three months ended January 31, 2019 and 2018, respectively.

 

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 $137.0 million and $138.0 million at January 31, 2019 and October 31, 2018, respectively. At January 31, 2019, the Company’s investment in Hexavest consisted of $5.3 million of equity in the net assets of Hexavest, definite-lived intangible assets of $20.9 million and goodwill of $116.4 million, net of a deferred tax liability of $5.6 million. At October 31, 2018, the Company’s investment in Hexavest consisted of $6.0 million of equity in the net assets of Hexavest, definite-lived intangible assets of $21.3 million and goodwill of $116.4 million, net of a deferred tax liability of $5.7 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-over-year change in the carrying value of goodwill is entirely attributable to foreign currency translation adjustments.

 

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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. At both January 31, 2019 and October 31, 2018, the carrying value of this investment was $3.5 million.

 

The Company did not recognize any impairment losses related to its investments in equity method investees during the three months ended January 31, 2019 or 2018.

 

During both the three months ended January 31, 2019 and 2018, the Company received dividends of $2.9 million from its investments in equity method investees.

 

4.Variable Interest Entities (VIEs)

 

Investments in VIEs that are consolidated

 

In the normal course of business, the Company maintains investments in sponsored entities that are considered VIEs to support their launch and marketing. The Company consolidates these sponsored entities if it is the primary beneficiary of the VIE.

 

Consolidated sponsored funds

The Company invests in investment companies that meet the definition of a VIE. Underlying investments held by consolidated sponsored funds consist of debt and equity securities and are included in the reported amount of investments on the Company’s Consolidated Balance Sheets at January 31, 2019 and October 31, 2018. Net investment income or (loss) related to consolidated sponsored funds was included in gains and other investment income, net, on the Company’s Consolidated Statements of Income for all periods presented. The impact of consolidated sponsored funds’ net income or (loss) on net income attributable to Eaton Vance Corp. shareholders was reduced by amounts attributable to non-controlling interest holders, which are recorded in net income attributable to non-controlling and other beneficial interests on the Company’s Consolidated Statements of Income for all periods presented. The extent of the Company’s exposure to loss with respect to a consolidated sponsored fund is limited to the amount of the Company’s investment in the sponsored fund and any uncollected management and performance fees. The Company is not obligated to provide financial support to sponsored funds. Only the assets of a sponsored fund are available to settle its obligations. Beneficial interest holders of sponsored funds do not have recourse to the general credit of the Company.

 

The following table sets forth the balances related to consolidated sponsored funds as well as the Company’s net interest in these funds:

 

(in thousands)  January 31,
2019
   October 31,
2018
 
Investments  $507,617   $540,582 
Other assets   13,596    15,471 
Other liabilities   (44,059)   (57,286)
Redeemable non-controlling interests   (239,739)   (244,970)
Net interest in consolidated sponsored funds  $237,415   $253,797 

 

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Consolidated CLO entities

As of January 31, 2019, the Company deemed itself to be the primary beneficiary of two non-recourse securitized CLO entities, namely, Eaton Vance CLO 2018-1 (CLO 2018-1) and Eaton Vance CLO 2014-1R (CLO 2014-1R), and one non-recourse warehouse CLO entity, namely, Eaton Vance CLO 2019-1 (CLO 2019-1). As of October 31, 2018, the Company deemed itself to be the primary beneficiary of three non-recourse securitized CLO entities, namely, CLO 2018-1, CLO 2014-1R and Eaton Vance CLO 2014-1 (CLO 2014-1). In the first quarter of fiscal 2019, the Company received a final distribution from CLO 2014-1 of $1.9 million related to the residual assets held by the entity as of October 31, 2018.

 

The assets of consolidated CLO entities are held solely as collateral to satisfy the obligations of each entity. The Company has no right to receive benefits from, nor does the Company bear the risks associated with, the assets held by these CLO entities beyond the Company’s investment in these entities. In the event of default, recourse to the Company is limited to its investment in these entities. The Company has not provided any financial or other support to these entities that it was not previously contractually required to provide, and there are neither explicit arrangements nor does the Company hold implicit variable interests that could require the Company to provide any ongoing financial support to these entities. Other beneficial interest holders of consolidated CLO entities do not have any recourse to the Company’s general credit.

 

Eaton Vance CLO 2019-1

The Company established CLO 2019-1 on January 3, 2019. CLO 2019-1 was in the warehousing phase as of January 31, 2019. The Company contributed $10.0 million in capital at the inception of the warehouse entity and concurrently entered into a credit facility agreement with a third-party lender to provide CLO 2019-1 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 three months ended January 31, 2019, the Company made additional capital contributions of $20.0 million in order to increase the level of funding available for borrowing under the line of credit.

 

While in the warehousing phase, the Company, acting as collateral manager and subject to the approval of the third-party lender, will 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 line of credit is secured by the commercial bank loan investments held by the warehouse and initially bears interest at a rate of daily LIBOR plus 1.10 percent per annum, with such interest rate increasing to daily LIBOR plus 2.0 percent per annum in January 2020. The Company does not earn any collateral management fees from CLO 2019-1 during the warehousing phase and will continue to be the collateral manager of the CLO entity during the securitization phase.

 

As collateral manager, the Company has the unilateral ability to liquidate the CLO 2019-1 warehouse without cause, a right that, by definition, provides the Company with the power to direct the activities that most significantly affect the economic performance of the entity. The Company’s investment in the warehouse serves as first-loss protection to the third-party lender and provides the Company with an obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the entity. Accordingly, the Company deems itself to be the primary beneficiary of CLO 2019-1 as it has both power and economics and began consolidating the entity from establishment of the warehouse on January 3, 2019.

 

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Upon initial consolidation, the Company irrevocably elected to subsequently measure the bank loan investments held by CLO 2019-1 at fair value using the fair value option. The Company did not elect the fair value option for amounts outstanding under the revolving line of credit upon initial consolidation of the CLO 2019-1 warehouse as these liabilities are temporary in nature. Refer to Note 6 for additional disclosure regarding the fair value of the assets and liabilities of consolidated CLO entities.

 

Eaton Vance CLO 2018-1

CLO 2018-1 was securitized on October 24, 2018. As of January 31, 2019, the Company continues to hold approximately 93 percent of the subordinated notes that were issued by CLO 2018-1 at closing and is still serving as the collateral manager of the entity. The Company initially deemed itself to be the primary beneficiary of CLO 2018-1 upon acquiring 93 percent of the subordinated interests of the entity on October 24, 2018 and began consolidating CLO 2018-1 as of that date.

 

Eaton Vance CLO 2014-1R

CLO 2014-1R was securitized on August 23, 2018. As of January 31, 2019, the Company continues to hold 100 percent of the subordinated notes that were issued by CLO 2014-1R at closing and is still serving as the collateral manager of the entity. The Company initially deemed itself to be the primary beneficiary of CLO 2014-1R upon acquiring 100 percent of the subordinated interests of the entity on August 23, 2018 and began consolidating CLO 2014-1R as of that date.

 

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 the securitized CLO entities consolidated by the Company (collectively, the consolidated securitized CLO entities). The Company determined that the fair value of the financial assets of these entities 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 these entities are measured as the difference between the fair value of the financial assets and the fair value of the Company’s beneficial interests in these entities, which include the subordinated interests held by the Company and any accrued management fees due to the Company. The fair value of the subordinated notes held by the Company 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 subordinated notes. Aggregate disclosures for the securitized CLO entities consolidated by the Company as of January 31, 2019 and October 31, 2018 are provided below.

 

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The following table presents the balances attributable to the consolidated securitized CLO entities and the consolidated warehouse CLO entity that were included in the Company’s Consolidated Balance Sheets:

 

   January 31,   October 31, 
   2019   2018 
(in thousands)  Consolidated
Securitized
CLO Entities
   Consolidated
Warehouse
CLO Entity
   Consolidated
Securitized
CLO Entities
 
Assets of consolidated CLO entities:               
Cash  $42,850   $3,045   $216,598 
Bank loans and other investments   891,825    154,277    874,304 
Receivable for pending bank loan sales   2,288    -    2,535 
Other assets   1,850    103    1,929 
Liabilities of consolidated CLO entities:               
Senior and subordinated note obligations   840,929    -    873,008 
Line of credit   -    68,458    - 
Payable for pending bank loan purchases   25,929    58,104    152,152 
Other liabilities   10,136    90    2,033 
Total beneficial interests  $61,819   $30,773   $68,173 

 

Although the Company’s beneficial interests in the consolidated securitized CLO entities are eliminated upon consolidation, the application of the measurement alternative results in the Company’s total beneficial interests in these entities of $61.8 million and $68.2 million at January 31, 2019 and October 31, 2018, respectively, being equal to the net amount of the consolidated CLO entities’ assets and liabilities included on the Company’s Consolidated Balance Sheets, as shown above.

 

As of January 31, 2019 and October 31, 2018, there were no bank loan investments in default and no unpaid principal balances of such loans that were 90 days or more past due or in non-accrual status. Additional disclosure of the fair values of assets and liabilities of consolidated CLO entities that are measured at fair value on a recurring basis is included in Note 6.

 

The following table presents the balances attributable to the consolidated securitized CLO entities and the consolidated warehouse CLO entity that were included in the Company’s Consolidated Statement of Income:

 

   Three Months Ended     
   January 31, 2019     
(in thousands)  Consolidated
Securitized
CLO Entities
   Consolidated
Warehouse
CLO Entity
   Total 
Other income (expense) of consolidated CLO entities:               
Gains (losses) and other investment income, net   $4,578   $863   $5,441 
Interest and other expense   (8,246)   (90)   (8,336)
Net gain (loss) attributable to the Company   $(3,668)  $773   $(2,895)

 

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The amounts included in the Company’s Consolidated Statement of Income for the three months ended January 31, 2018 related entirely to the warehouse CLO entity consolidated by the Company during the first quarter of fiscal 2018.

 

As summarized in the table below, the application of the measurement alternative results in the Company's earnings from the consolidated securitized CLO entities subsequent to initial consolidation, as shown above, to be equivalent to the Company's own economic interests in these entities:

 

   Three Months Ended
January 31, 2019
 
(in thousands) 

Consolidated
Securitized
CLO Entities

 
Economic interests:     
Distributions received and unrealized gains (losses) on the subordinated interests held by the Company  $(4,575)
Management fees   907 
Total economic interests  $(3,668)

 

Other entity

As of October 31, 2018, the Company held variable interests in, and was deemed to be the primary beneficiary of, a privately offered equity fund that was seeded towards the end of fiscal 2018. The Company’s variable interests consisted of a $10,000 investment in the fund and a promissory note that enabled the fund to borrow up to $25.0 million from the Company. As of October 31, 2018, the Company’s risk of loss with respect to this entity was limited to the Company’s investment in the fund and the outstanding borrowings under the promissory note of $3.7 million. The Company invested an additional $10,000 upon launching of the fund in December 2018, at which time the total outstanding borrowings were repaid to the Company and the promissory note was canceled on January 14, 2019. As of January 31, 2019 the Company’s variable interest in the fund is limited to its $20,000 investment in the fund. The Company is no longer the primary beneficiary of the fund as it no longer has an obligation to absorb losses of, or the right to receive benefits from, the fund that could potentially be significant to the entity.

 

Investments in VIEs that are not consolidated

 

Sponsored funds

The Company classifies its investments in certain sponsored funds that are considered VIEs as equity securities when it is not considered the primary beneficiary of these VIEs. The Company provides aggregated disclosures with respect to these non-consolidated sponsored fund VIEs in Notes 3 and 6.

 

Non-consolidated CLO entities

The Company is not deemed the primary beneficiary of several CLO entities in which it holds variable interests. In developing its conclusion that it is not the primary beneficiary of these entities, the Company determined that although it has variable interests in each CLO by virtue of its beneficial ownership interests in the CLO entities, these 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.

 

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The Company’s maximum exposure to loss with respect to these non-consolidated CLO entities is limited to the carrying value of its investments in, and collateral management fees receivable from, these entities as of January 31, 2019. Collateral management fees receivable for these entities totaled $0.1 million on both January 31, 2019 and October 31, 2018. 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 fiscal years 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. Additional information regarding the Company’s investment in non-consolidated CLO entities, as well as the combined assets under management in the pools of non-consolidated CLO entities, is included in Note 3.

 

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 $22.1 billion and $21.8 billion on January 31, 2019 and October 31, 2018, 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’s maximum exposure to loss with respect to these managed entities is limited to the carrying value of its investments in, and investment advisory fees receivables from, the entities as of January 31, 2019. The Company held investments in these entities totaling $2.9 million and $2.7 million on January 31, 2019 and October 31, 2018, respectively, and investment advisory fees receivable totaling $1.2 million and $1.3 million on January 31, 2019 and October 31, 2018, 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 does not consolidate these VIEs because it does not have the obligation to absorb losses of, or the right to receive benefits from, these VIEs that could potentially be significant to these VIEs.

 

The Company’s investments in privately offered equity funds are carried at fair value and included in non-consolidated sponsored funds and other, which are disclosed as a component of investments in Note 3. The Company records any change in fair value, net of income 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 $3.5 million at both January 31, 2019 and October 31, 2018. 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 January 31, 2019. The Company does not consolidate this VIE because the Company does not hold the power to direct the activities that most significantly affect 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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5.Derivative Financial Instruments

 

Derivative financial instruments designated as cash flow hedges

 

In fiscal 2017, the Company entered into a Treasury lock transaction in connection with the offering of its 2027 Senior Notes. The Company concurrently designated the Treasury lock as a cash flow hedge to mitigate its exposure to variability in the forecasted semi-annual interest payments and recorded a loss of $0.4 million, net of tax, in other comprehensive income (loss). The Company reclassified approximately $17,000 of the loss into interest expense during both the three months ended January 31, 2019 and 2018 and will reclassify the remaining $0.6 million loss as of January 31, 2019 to earnings over the remaining term of the debt. During the next twelve months, the Company expects to reclassify approximately $68,000 of the unamortized loss.

 

In fiscal 2013, the Company entered into a forward-starting interest rate swap in connection with the offering of its 2023 Senior Notes and recorded a gain in other comprehensive income (loss), net of tax. The Company reclassified $50,000 of the gain into interest expense during both the three months ended January 31, 2019 and 2018, respectively, and will reclassify the remaining $0.9 million gain as of January 31, 2019 to earnings over the remaining term of the debt. During the next twelve months, the Company expects to reclassify approximately $0.2 million of the unamortized gain.

 

Other derivative financial instruments not designated for hedge accounting

 

The Company utilizes derivative financial instruments to hedge the market and currency risks associated with its investments in certain consolidated seed investments that are not designated as hedging instruments for accounting purposes.

 

Excluding derivative financial instruments held by consolidated sponsored funds, the Company was party to the following derivative financial instruments:

 

   January 31, 2019   October 31, 2018 
   Number of
Contracts
   Notional Value
(in millions)
   Number of
Contracts
   Notional Value
(in millions)
 
Stock index futures contracts   1,117   $98.2    1,007   $91.5 
Total return swap contracts   2   $106.5    3   $106.5 
Credit default swap contracts   1   $5.0    1   $5.0 
Foreign exchange contracts   17   $17.4    28   $23.0 
Commodity futures contracts   252   $10.8    253   $11.6 
Currency futures contracts   145   $15.8    165   $16.9 
Interest rate futures contracts   266   $36.4    282   $48.0 

 

The derivative contracts outstanding and notional values they represent at January 31, 2019 and October 31, 2018 are representative of derivative balances throughout each respective year.

 

The Company has not elected to offset fair value amounts related to derivative financial 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 table presents the fair value

 

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of derivative financial instruments not designated for hedge accounting and how they are reflected on the Company’s Consolidated Balance Sheets:

 

   January 31, 2019   October 31, 2018 
(in thousands)  Other
Assets
   Other
Liabilities
   Other
Assets
   Other
Liabilities
 
Stock index futures contracts  $248   $2,897   $5,055   $372 
Total return swap contracts   -    5,190    -    3,297 
Credit default swap contracts   -    106    -    10 
Foreign exchange contracts   14    317    329    202 
Commodity futures contracts   259    461    770    216 
Currency futures contracts   106    94    14    332 
Interest rate futures contracts   162    577    179    17 
Total  $789   $9,642   $6,347   $4,446 

 

The Company maintains collateral with certain counterparties to satisfy margin requirements for derivative positions. The collateral is classified as restricted cash and is included as a component of other assets on our Consolidated Balance Sheets. At January 31, 2019 and October 31, 2018, collateral balances were $14.4 million and $13.1 million, respectively.

 

The Company recognized the following gains (losses) on derivative financial instruments within gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Stock index futures contracts  $(216)  $(7,656)
Total return swap contracts   (2,185)   (625)
Credit default swap contracts   (83)   - 
Foreign exchange contracts   (284)   (899)
Commodity futures contracts   870    (403)
Currency futures contracts   36    (86)
Interest rate futures contracts   (511)   84 
Net gains (losses)  $(2,373)  $(9,585)

 

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.

 

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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:

 

January 31, 2019(1)

 

(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at Fair
Value
   Total 
Financial assets:                         
Cash equivalents  $19,464   $143,904   $-   $-   $163,368 
Investments held at fair value:                         
Debt securities:                         
Short-term   -    241,367    -    -    241,367 
Held by consolidated sponsored funds   -    306,219    -    -    306,219 
Held in separately managed accounts   -    61,745    -    -    61,745 
Equity securities:                         
Held by consolidated sponsored funds   75,067    126,331    -    -    201,398 
Held in separately managed accounts   24,396    391    -    -    24,787 
Non-consolidated sponsored funds and other   7,769    2,989    -    -    10,758 
Investments held at cost(2)   -    -    -    20,868    20,868 
Investments in non-consolidated CLO entities(3)   -    -    -    2,898    2,898 
Investments in equity method investees(2)   -    -    -    140,518    140,518 
Derivative instruments   -    789    -    -    789 
Assets of consolidated CLO entities:                         
Bank loans and other investments   -    1,044,740    1,362    -    1,046,102 
Total financial assets  $126,696   $1,928,475   $1,362   $164,284   $2,220,817 
                          
Financial liabilities:                         
Derivative instruments  $-   $9,642   $-   $-   $9,642 
Liabilities of consolidated CLO entities:                         
Senior and subordinated note obligations   -    840,929    -    -    840,929 
Total financial liabilities  $-   $850,571   $-   $-   $850,571 

 

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October 31, 2018(1)

 

(in thousands)  Level 1   Level 2   Level 3   Other
Assets Not
Held at Fair
Value
   Total 
Financial assets:                         
Cash equivalents  $23,262   $116,070   $-   $-   $139,332 
Investments held at fair value:                         
Debt securities:                         
Short-term   -    273,320    -    -    273,320 
Held by consolidated sponsored funds   12,834    392,139    -    -    404,973 
Held in separately managed accounts   521    64,539    -    -    65,060 
Equity securities:                         
Held by consolidated sponsored funds   73,291    62,318    -    -    135,609 
Held in separately managed accounts   23,642    419    -    -    24,061 
Non-consolidated sponsored funds and other   7,112    3,217    -    -    10,329 
Investments held at cost(2)   -    -    -    20,874    20,874 
Investments in non-consolidated CLO entities(3)   -    -    -    2,895    2,895 
Investments in equity method investees(2)   -    -    -    141,506    141,506 
Derivative instruments   -    6,347    -    -    6,347 
Assets of consolidated CLO entities:                         
Bank loans and other investments   -    872,757    1,547    -    874,304 
Total financial assets  $140,662   $1,791,126   $1,547   $165,275   $2,098,610 
                          
Financial liabilities:                         
Derivative instruments  $-   $4,446   $-   $-   $4,446 
Liabilities of consolidated CLO entities:                         
Senior and subordinated note obligations   -    873,008    -    -    873,008 
Total financial liabilities  $-   $877,454   $-   $-   $877,454 

 

(1)Amounts at January 31, 2019 reflect the adoption of ASU 2016-01. Amounts at October 31, 2018 reflect accounting guidance prior to the adoption of ASU 2016-01. See Note 1 for further information.
(2)These investments are not measured at fair value in accordance with U.S. GAAP.
(3)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.

 

A description of the valuation techniques and the inputs used in recurring fair value measurements is included immediately below. There have been no changes in the Company’s valuation techniques in the current reporting period.

 

Cash equivalents

Cash equivalents include investments in money market mutual funds, government agency securities, certificates of deposit and commercial paper with original (remaining) maturities to the Company of less than three months, as determined upon the purchase of each security. Cash investments in daily redeemable, actively traded money market mutual funds are valued using published net asset values and are categorized 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

 

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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 these investments. Depending on the categorization of the significant inputs, these assets are generally categorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.

 

Debt securities held at fair value

Debt securities held at fair value consist of short-term debt securities held directly by the Company comprised of certificates of deposit, commercial paper and corporate debt obligations with original (remaining) maturities to the Company ranging from three months to 12 months, as determined upon the purchase of each security, as well as investments in debt securities held in portfolios of consolidated sponsored funds and separately managed accounts.

 

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 categorized as Level 2 within the fair value measurement hierarchy.

 

Debt securities held in portfolios of consolidated sponsored funds and separately managed accounts are generally valued on the basis of valuations provided by third-party pricing services as described above for short-term debt securities. Debt securities purchased with an original (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 on the categorization of the significant inputs, debt securities held in portfolios of consolidated sponsored funds are generally categorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.

 

Equity securities held at fair value

Equity securities measured at fair value on a recurring basis consist of domestic and foreign equity securities held in portfolios of consolidated sponsored funds and separately managed accounts and investments in non-consolidated sponsored or other funds.

 

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 on the categorization of the significant inputs, these assets are generally categorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.

 

Equity investments in sponsored or other mutual funds are valued using the published net asset value per share and are classified as Level 1 within the fair value measurement hierarchy. Investments in sponsored private open-end funds are not listed on an active exchange but calculate a net asset value per share (or

 

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equivalent) as of the Company’s reporting date in a manner consistent with mutual funds. These investments do not have any redemption restrictions and are not probable of being sold at an amount different from their calculated net asset value per share (or equivalent). Accordingly, investments in sponsored private open-end funds are measured at fair value based on the net asset value per share (or equivalent) of the investment as a practical expedient and are categorized as Level 2 within the fair value measurement hierarchy. The Company does not have any unfunded commitments related to investments in sponsored private mutual funds at January 31, 2019 and October 31, 2018.

 

Derivative instruments

Derivative instruments, further discussed in Note 5, are recorded as either other assets or other liabilities on the Company’s Consolidated Balance Sheets. Future and swap contracts are valued using a third-party pricing service that determines fair value based on bid and ask prices. Foreign exchange contracts are valued by interpolating a value using the spot foreign exchange rate and forward points, which are based on spot rate and currency interest rate differentials. Derivative instruments generally are classified as Level 2 within the fair value measurement hierarchy.

 

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 held by consolidated CLO entities are valued using the same techniques as described above for equity 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 categorization of the significant inputs, these assets are generally categorized as Level 2 or 3 within the fair value measurement hierarchy.

 

Liabilities of consolidated CLO entities

Consolidated CLO entity liabilities include senior and subordinated note obligations. Fair value is determined using the measurement alternative to ASC 820 for collateralized financing entities. 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.

 

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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:

 

   Three Months Ended 
   January 31, 2019 
(in thousands)  Bank Loan Investments of
Consolidated CLO Entities
 
Beginning balance  $1,547 
Paydowns   (6)
Net losses included in net income   (179)
Ending balance  $1,362 

 

Financial Assets and Liabilities Not Measured at Fair Value

 

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:

 

   January 31, 2019   October 31, 2018 
(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 
Debt  $619,887   $620,890    2   $619,678   $607,391    2 
Consolidated CLO entity line of credit  $68,458   $68,458    2   $-   $-    - 

 

As discussed in Note 18, 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.

 

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

 

The Company established CLO 2019-1 on January 3, 2019 and deems itself to be the primary beneficiary of CLO 2019-1 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 2019-1. Additional information regarding CLO 2019-1, including the terms of the revolving line of credit, is included in Note 4. The carrying amount of the revolving line of credit of $68.5 million as of January 31, 2019 approximates fair value.

 

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7.Acquisitions

 

Atlanta Capital Management Company, LLC (Atlanta Capital)

 

In fiscal 2017, the Company exercised a series of call options through which it purchased the remaining 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 $3.2 million, of which $2.5 million settled in cash in the first quarter of fiscal 2018.

 

Atlanta Capital Plan

In fiscal 2018 and 2017, the Company exercised a series of call options through which it purchased $8.2 million and $4.2 million, respectively, 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). These transactions settled in cash in the first quarter of fiscal 2019 and 2018, respectively.

 

Total profit interests in Atlanta Capital held by non-controlling interest holders issued pursuant to the Atlanta Capital Plan were 9.8 percent as of January 31, 2019 and October 31, 2018. The estimated fair value of these interests was $26.7 million and $26.3 million at January 31, 2019 and October 31, 2018, respectively, and is included as a component of temporary equity on the Consolidated Balance Sheets.

 

Parametric Portfolio Associates LLC (Parametric)

 

Total profit interests in Parametric held by non-controlling interest holders decreased to 4.9 percent as of January 31, 2019 from 5.1 percent as of October 31, 2018, as described below. Total capital interests in Parametric held by non-controlling interest holders decreased to 0.6 percent as of January 31, 2019 from 0.8 percent as of October 31, 2018, as described below.

 

Clifton

In December 2012, Parametric acquired Clifton. As part of the transaction, the Company issued a 1.9 percent profit interest and a 1.9 percent capital interest in Parametric Portfolio LP (Parametric LP) to certain employees. In the first quarter of fiscal 2018, the Company exercised a series of call options through which it acquired the remaining 0.5 percent profit interest and 0.5 percent capital interests in Parametric held by non-controlling interest holders related to the Clifton acquisition for $8.4 million.

 

Parametric Risk Advisors

In November 2013, the non-controlling interest holders of Parametric Risk Advisors entered into a Unit Acquisition Agreement with Parametric to exchange their remaining 20 percent ownership interests in Parametric Risk Advisors for additional ownership interests in Parametric LP, whose sole asset is ownership interests in Parametric. As a result of this exchange, Parametric Risk Advisors became a wholly-owned subsidiary of Parametric. The Parametric LP ownership interests issued in the exchange represent a 0.8 percent profit interest and a 0.8 percent capital interest, and contain put and call features that become exercisable over a four-year period starting in fiscal 2019. In the first quarter of fiscal 2019, the Company exercised a series of call options through which it purchased a 0.2 percent profit interest and a 0.2 percent capital interest for $4.0 million.

 

Total profit interests and total capital interests in Parametric LP held by non-controlling interest holders were 0.6 percent and 0.8 percent as of January 31, 2019 and October 31, 2018. The estimated fair value of

 

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these interests was $11.9 million and $15.9 million at January 31, 2019 and October 31, 2018, respectively, and is included as a component of temporary equity on the Consolidated Balance Sheets.

 

Parametric Plan

In fiscal 2018 and 2017, the Company exercised a series of call options through which it purchased $5.9 million and $5.7 million, respectively, of 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). These transactions settled in cash in the first quarter of fiscal 2019 and 2018, respectively.

 

Total profit interests in Parametric held by non-controlling interest holders issued pursuant to the Parametric Plan were 4.3 percent as of January 31, 2019 and October 31, 2018. The estimated fair value of these interests was $48.2 million and $47.9 million at January 31, 2019 and October 31, 2018, respectively, and is included as a component of temporary equity on the Consolidated Balance Sheets.

 

8.Intangible Assets

 

The following is a summary of intangible assets:

 

January 31, 2019

 

(in thousands) 

Gross

Carrying

Amount

   Accumulated
Amortization
   Net Carrying
Amount
 
Amortizing intangible assets:               
Client relationships acquired  $134,247   $(113,258)  $20,989 
Intellectual property acquired   1,025    (536)   489 
Trademark acquired   4,257    (1,281)   2,976 
Research system acquired   639    (444)   195 
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   54,408    -    54,408 
Total  $194,576   $(115,519)  $79,057 

 

October 31, 2018

 

(in thousands)  Gross
Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
 
Amortizing intangible assets:               
Client relationships acquired  $134,247   $(111,591)  $22,656 
Intellectual property acquired   1,025    (519)   506 
Trademark acquired   4,257    (1,190)   3,067 
Research system acquired   639    (391)   248 
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   54,408    -    54,408 
Total  $194,576   $(113,691)  $80,885 

 

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Amortization expense was $1.8 million and $2.2 million for the three months ended January 31, 2019 and 2018, respectively. Estimated remaining amortization expense for fiscal 2019 and the next five fiscal years, on a straight-line basis, is as follows:

 

   Estimated 
Year Ending October 31,  Amortization 
(in thousands)  Expense 
Remaining 2019  $3,150 
2020   3,807 
2021   2,282 
2022   2,154 
2023   1,754 
2024   1,679 

 

9.Revenue

 

The following table disaggregates total revenue by source:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Management fees:          
Sponsored funds  $242,666   $251,255 
Separate accounts   108,084    110,602 
Total management fees   350,750    361,857 
Distribution and underwriter fees:          
Distribution fees   19,045    19,763 
Underwriter commissions   4,045    5,184 
Total distribution and underwriter fees   23,090    24,947 
Service fees   29,360    30,361 
Other revenue   3,216    3,071 
Total revenue  $406,416   $420,236 

 

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The following table disaggregates total management fee revenue by investment mandate:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Equity  $163,897   $174,690 
Fixed income   67,025    64,813 
Floating rate income   53,678    50,684 
Alternative   16,173    21,578 
Portfolio implementation   39,889    38,987 
Exposure management   10,088    11,105 
Total management fees  $350,750   $361,857 

 

The amount of management fees and other receivables reported in the Company’s Consolidated Balance Sheet includes $212.2 million and $221.4 million of receivables from contracts with customers at January 31, 2019 and October 31, 2018, respectively. The amount of deferred revenue reported in other liabilities in the Company’s Consolidated Balance Sheet was $4.5 million and $4.9 million at January 31, 2019 and October 31, 2018, respectively. The entire deferred revenue balance at the end of any given reporting period is expected to be recognized as management fee revenue in the immediate subsequent quarter.

 

10.Stock-Based Compensation Plans

 

The compensation cost recognized by the Company related to its stock-based compensation plans are as follows:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Omnibus Incentive Plans:          
Stock options  $5,440   $7,289 
Restricted shares   14,485    13,493 
Deferred stock units(1)   615    922 
Employee Stock Purchase Plans   176    481 
Employee Stock Purchase Incentive Plan   52    86 
Atlanta Capital Plan   570    742 
Atlanta Capital Phantom Incentive Plan   274    143 
Parametric Plan   740    794 
Parametric Phantom Incentive Plan   922    701 
Total stock-based compensation expense  $23,274   $24,651 

 

(1)In the fourth quarter of fiscal 2018, the Company changed the description of phantom stock units to deferred stock units. The change in the description had no impact on, nor does it constitute a restatement of, the Company's previously reported amounts attributable to these awards.

 

The total income tax benefit recognized for stock-based compensation arrangements was $5.2 million and $5.7 million for the three months ended January 31, 2019 and 2018, 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 three months ended January 31, 2019 were as follows:

 

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

Weighted-
Average
Remaining
Contractual
Term
(in years)

   Aggregate
Intrinsic
Value
 
Options outstanding, beginning of period   16,760   $35.23           
Granted   2,408    45.50           
Exercised   (106)   28.10           
Forfeited/expired   (50)   40.68           
Options outstanding, end of period   19,012   $36.55    6.0   $80,580 
Options exercisable, end of period   10,270   $32.70    4.3   $66,719 

 

The Company received $2.8 million and $42.3 million related to the exercise of options for the three months ended January 31, 2019 and 2018, respectively.

 

As of January 31, 2019, compensation cost of $55.5 million related to unvested stock options granted under the 2013 Plan and predecessor plans have not yet been recognized. That cost is expected to be recognized over a weighted-average period of 3.0 years.

 

Restricted shares

 

A summary of the Company’s restricted share activity for the three months ended January 31, 2019 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   4,544   $40.70 
Granted   1,533    45.47 
Vested   (1,078)   39.16 
Forfeited   (39)   42.28 
Unvested, end of period   4,960   $42.50 

 

As of January 31, 2019, there was $160.4 million of compensation cost related to unvested restricted shares granted under the 2013 Plan and predecessor plans not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.2 years.

 

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Deferred stock units

 

Deferred stock units issued to non-employee Directors under the 2013 Plan are accounted for as liability awards. Deferred stock units granted after November 1, 2017 are considered fully vested on the grant date and the entire fair value of these awards is recognized as compensation cost on the date of grant.

 

In the first quarter of fiscal 2019, 18,642 deferred stock units were issued to non-employee Directors pursuant to the 2013 Plan. The total liability attributable to deferred stock units included as a component of accrued compensation on the Company’s Consolidated Balance Sheet was $1.4 million and $1.3 million as of January 31, 2019 and October 31, 2018, respectively. The Company made cash payments of $0.5 million and $0.4 million, in the first quarters of fiscal 2019 and 2018, respectively, to settle deferred stock unit award liabilities.

 

11.Common Stock Repurchases

 

The Company’s current Non-Voting Common Stock share repurchase program was authorized on October 24, 2018. 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 three months of fiscal 2019, the Company purchased and retired approximately 3.1 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 4.3 million additional shares may be repurchased under the current authorization as of January 31, 2019.

 

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12.Non-operating Income (Expense)

 

The components of non-operating income (expense) were as follows:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Interest and other income  $9,820   $9,116 
Net losses on investments and derivatives(1)   (3,646)   (5,545)
Net foreign currency losses   (341)   (973)
Gains and other investment income, net   5,833    2,598 
Interest expense   (6,131)   (5,907)
Other income (expense) of consolidated CLO entities:          
Interest income   11,750    823 
Net gains (losses) on bank loans and other investments and note obligations   (6,309)   894 
Gains and other investment income, net   5,441    1,717 
Structuring and closing fees   (101)   - 
Interest expense   (8,235)   (94)
Interest and other expense   (8,336)   (94)
Total non-operating income (expense)  $(3,193)  $(1,686)

 

(1)The three months ended January 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 in Hexavest.

 

13.Income Taxes

 

The provision for income taxes was $27.6 million and $48.6 million, or 23.4 percent and 36.3 percent of pre-tax income, for the three months ended January 31, 2019 and 2018, respectively.

 

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The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate:

 

   Three Months Ended 
   January 31, 
   2019   2018 
Statutory U.S. federal income tax rate(1)   21.0%   23.3%
State and local income tax, net of federal income tax benefits   4.6%   4.3%
Net income attributable to non-controlling and other beneficial interests   -1.0%   -1.8%
Non-recurring impact of U.S. tax reform   0.0%   18.4%
Stock-based compensation   0.4%   0.0%
Net excess tax benefits from stock-based compensation plans(2)   -2.5%   -8.8%
Other items   0.9%   0.9%
Effective income tax rate   23.4%   36.3%

 

(1)The Company's statutory U.S. federal income tax rate for fiscal 2019 is 21 percent based on the Tax Cuts and Jobs Act (the 2017 Tax Act). The Company's statutory U.S. federal income tax rate for fiscal 2018 was 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 2017 Tax Act.
(2)Reflects the impact of the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which was adopted by the Company in the first quarter of fiscal 2018.

 

The Company’s income tax provision for the three months ended January 31, 2019 includes $0.6 million of charges associated with certain provisions of the 2017 Tax Act taking effect for the Company in fiscal 2019, relating principally to limitations on the deductibility of executive compensation.

 

The income tax provision was reduced by net excess tax benefits related to the exercise of employee stock options and vesting of restricted stock awards during the period totaling $2.9 million and $11.9 million for the three months ended January 31, 2019 and 2018, respectively. The Company’s income tax provision for the three months ended January 31, 2018 also included a non-recurring charge of $24.7 million to reflect the estimated effect of enactment of the 2017 Tax Act.

 

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

 

As of January 31, 2019, the Company considers the undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested in foreign operations. As of January 31, 2019, the Company had approximately $75.7 million of undistributed earnings primarily from Canadian and United Kingdom foreign corporations that are not available to fund domestic operations or to distribute to shareholders unless repatriated. As a result of the 2017 Tax Act and foreign exchange rates as of January 31, 2019, there is no future tax liability with respect to undistributed earnings.

 

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 2015.

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14.Non-controlling and Other Beneficial Interests

 

The components of net income attributable to non-controlling and other beneficial interests were as follows:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Consolidated sponsored funds  $(2,422)  $(6,300)
Majority-owned subsidiaries   (3,037)   (4,155)
Net income attributable to non-controlling and other beneficial interests  $(5,459)  $(10,455)

 

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15.Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, are as follows:

 

(in thousands)  Unamortized Net
Gains (Losses) on
Cash Flow
Hedges(1)
   Net Unrealized
Gains on
Available-for-Sale
Investments
   Foreign Currency
Translation
Adjustments
   Total 
Balance at October 31, 2018  $200   $3,714   $(57,095)  $(53,181)
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)(2)   -    (3,714)   -    (3,714)
Balance at November 1, 2018, as adjusted   200    -    (57,095)   (56,895)
Other comprehensive income, before reclassifications and tax   -    -    986    986 
Tax impact   -    -    -    - 
Reclassification adjustments, before tax   (33)   -    -    (33)
Tax impact   9    -    -    9 
Net current period other comprehensive income (loss)   (24)   -    986    962 
Balance at January 31, 2019  $176   $-   $(56,109)  $(55,933)
                     
Balance at October 31, 2017  $301   $4,128   $(51,903)  $(47,474)
Other comprehensive income, before reclassifications and tax   -    962    12,085    13,047 
Tax impact   -    (242)   -    (242)
Reclassification adjustments, before tax   (33)   -    -    (33)
Tax impact   8    -    -    8 
Net current period other comprehensive income (loss)   (25)   720    12,085    12,780 
Balance at January 31, 2018  $276   $4,848   $(39,818)  $       (34,694)

 

(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)Upon adoption of ASU 2016-01 on November 1, 2018, unrealized holding gains, net of related income tax effects, attributable to investments in non-consolidated sponsored funds and other previously classified as available-for-sale investments were reclassified from accumulated other comprehensive income (loss) to retained earnings.

 

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16.Earnings per Share

 

The following table sets forth the calculation of earnings per basic and diluted shares:

 

   Three Months Ended 
   January 31, 
(in thousands, except per share data)  2019   2018 
Net income attributable to Eaton Vance Corp. shareholders  $86,801   $78,056 
Weighted-average shares outstanding – basic   112,255    115,282 
Incremental common shares   3,261    8,659 
Weighted-average shares outstanding – diluted   115,516    123,941 
Earnings per share:          
Basic  $0.77   $0.68 
Diluted  $0.75   $0.63 

 

Antidilutive common shares related to stock options and unvested restricted stock excluded from the computation of earnings per diluted share were approximately 11.3 million and 1.8 million for the three months ended January 31, 2019 and 2018, respectively.

 

17.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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18.Related Party Transactions

 

Sponsored funds

 

Revenues for services provided or related to sponsored funds are as follows:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Management fees(1)  $242,666   $251,255 
Distribution and underwriter fees(1)   23,090    24,947 
Service fees(1)   29,360    30,361 
Shareholder services fees included in other revenue   1,583    1,391 
Total  $296,699   $307,954 

 

(1)Prior period amounts have been adjusted as a result of the retrospective adoption of ASU 2014-09. See Note 1, Summary of Significant Accounting Policies, for further information on the impact of the adoption of ASU 2014-09.

 

For the three months ended January 31, 2019 and 2018, the Company discretionarily waived management fees of $4.3 million and $4.4 million, respectively. Separately, for that same period, the Company provided subsidies to sponsored funds of $9.2 million and $5.7 million, respectively. Fee waivers and fund subsidies are recognized as a reduction to management fees revenue on the Consolidated Statements of Income.

 

Sales proceeds and net realized gains (losses) from investments in non-consolidated sponsored funds are as follows:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Proceeds from sales  $(4,282)  $- 
Net realized gains (losses)   24    5 

 

The Company pays all ordinary operating expenses of certain sponsored funds (excluding investment advisory and administrative fees) for which it earns an all-in-management fee. For the three months ended January 31, 2019 and 2018, expenses of $3.4 million and $3.5 million, respectively, were incurred by the Company pursuant to these arrangements.

 

Included in management fees and other receivables at January 31, 2019 and October 31, 2018 are receivables from service provided to or related to the funds of $97.7 million and $104.9 million, respectively. Included in accounts payable and accrued expenses at January 31, 2019 and October 31, 2018 mainly relates to payables due to funds subsides of $3.7 million and $3.2 million, respectively.

 

Loan to affiliate

 

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

 

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EVMC. Through October 31, 2018, the Company earned interest equal to the one-year Canadian Dollar Offered Rate plus 200 basis points. In November 2018, the Company amended the term loan agreement to reduce the market interest rate of the loan to be equal to the one-year Canadian Dollar Offered Rate plus 100 basis points. Hexavest may prepay the loan in whole or in part at any time without penalty. The Company recorded $45,000 of interest income related to the loan in gains (losses) and other investment income, net, on the Company’s Consolidated Statement of Income for both the three months ended January 31, 2019 and 2018. Interest due from Hexavest under this arrangement included in other assets on the Company’s Consolidated Balance Sheets was $15,000 and $16,151 at January 31, 2019 and October 31, 2018, 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 are written for a seven-year period, at varying fixed interest rates (currently ranging from 0.9 percent to 2.9 percent), are payable in annual installments commencing with the third year in which the loan is outstanding, and are collateralized by the stock issued upon exercise of the option. All loans under the program must be made on or before October 31, 2022. Loans outstanding under this program, which are full recourse in nature, are reflected as notes receivable from stock option exercises in shareholders’ equity and totaled $7.9 million and $8.1 million at January 31, 2019 and October 31, 2018, respectively.

 

19.Geographic Information

 

Revenues by principal geographic area are as follows:

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
Revenue:          
U.S.  $390,754   $404,165 
International   15,662    16,071 
Total  $406,416   $420,236 

 

Long-lived assets by principal geographic area are as follows:

 

   January 31,   October 31, 
(in thousands)  2019   2018 
Long-lived Assets:          
U.S.  $58,168   $50,459 
International   1,911    1,969 
Total  $60,079   $52,428 

 

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 be 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, 2018.

 

Overview

 

Eaton Vance Corp. provides advanced investment strategies and wealth management solutions to forward-thinking investors around the world. 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 strategies and services through multiple distribution channels. In executing our core 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, client satisfaction, 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, global income, high-yield and investment grade bonds. Through Parametric, we manage a range of systematic investment strategies, including systematic equity, systematic alternatives and managed options strategies. Through Parametric, we also provide custom

 

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portfolio implementation and overlay services, including tax-managed and non-tax-managed Custom Core equity strategies, centralized portfolio management of multi-manager portfolios and 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 strategies 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 absolute return strategies. Although we manage and distribute a wide range of investment strategies and services, we operate in one business segment, namely as an investment adviser to funds and separate accounts. As of January 31, 2019, we had $444.7 billion in consolidated assets under management.

 

We distribute our funds and retail managed accounts principally through financial intermediaries. We have broad market reach, with distribution partners including national and regional broker-dealers, independent broker-dealers, registered investment advisors, banks and insurance companies. We support these distribution partners with a team of approximately 130 sales professionals covering U.S. and international markets.

 

We also commit significant resources to serving institutional and high-net-worth clients who access investment management services on a direct basis and through investment consultants. Through our wholly 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, service fee expense, fund-related expenses, facilities expense and information technology expense.

 

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

 

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Current Developments

 

We are pursuing five primary strategic priorities to support business growth: (1) building upon and defending our leadership position in specialty strategies and services for high-net-worth and institutional investors; (2) capitalizing on the current interest environment to grow our market position in floating-rate and short-duration fixed income strategies; (3) expanding our leadership position in responsible investing; (4) increasing our global investment capabilities and distribution reach outside the United States; and (5) positioning Eaton Vance to profit from a changing environment for the asset management industry.

 

In the first quarter of fiscal 2019, we continued to experience strong growth in our Custom Beta strategies, which include Parametric’s Custom Core equity and Eaton Vance Management’s laddered municipal and corporate bond separate account strategies. These market-leading offerings combine the benefits of passive investing with the ability to customize portfolios to meet individual preferences and needs. Compared to index mutual funds and exchange-traded funds, Custom Core separate 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 other desired portfolio tilts and exclusions. In the first quarter of fiscal 2019, net inflows into our Custom Beta strategies offered as individual separate accounts totaled $3.9 billion, which equates to annualized internal growth in managed assets of 19 percent.

 

In a difficult environment for floating-rate bank loan investment strategies, we saw net outflows of $2.9 billion in the first quarter of fiscal 2019, as investors reduced their exposure to below investment grade credits. Our lineup of fixed income mutual funds positioned as short- or ultra-short duration, short-term or adjustable-rate, which invest primarily in investment-grade credit instruments, continued to demonstrate strong appeal to investors in the first quarter of fiscal 2019. Among our leading funds in this category are the highly rated Eaton Vance Short-Duration Government Income and Eaton Vance Short-Duration Municipal Opportunities Funds, which had combined net inflows of $1.8 billion in the first quarter of fiscal 2019.

 

Our leadership position in responsible investing continues to expand. The Calvert Funds are one of the largest and most diversified families of responsibly invested mutual funds, encompassing actively and passively managed equity, fixed and floating-rate income, and asset allocation strategies managed in accordance with the Calvert Principles for Responsible Investment 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 grew to $15.4 billion at January 31, 2019 from $14.7 billion at October 31, 2018, reflecting net inflows of $0.6 billion and market price appreciation of $0.1 billion. Calvert’s $0.6 billion of net inflows for the quarter equates to 17 percent annualized internal growth rate in managed assets, ranking as the best growth quarter since we acquired the Calvert business just over two years ago.

 

While Calvert is the centerpiece of our responsible investment strategy, our commitment to responsible investing does not end there. Eaton Vance Management continues to integrate consideration of responsible investing criteria into the firm’s fundamental research processes, capitalizing on Calvert’s proprietary ESG research. Atlanta Capital also maintains a significant focus on responsible investing, and Parametric manages over $20 billion of client assets based on client-directed responsible investment criteria. On an overall basis, Eaton Vance is one of the largest participants in responsible investing, a position we are committed to growing in conjunction with rising demand for investment strategies that incorporate ESG-integrated investment research and/or are managed with a dual objective to achieve favorable investment returns and positive societal impact.

 

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While change is a constant in the asset management industry, the pace of change appears to be accelerating. We see this in changing market conditions and demographic trends, shifts in investor sentiment and outlook, advances in information technology, changes in the business strategies of key intermediaries and gatekeepers, and new tax and regulatory initiatives. Through changing market conditions, we strive to anticipate the evolving needs of investors and to develop timely solutions to address their needs. Positioning the Company for continued success amid accelerating change is the primary focus of our strategic initiatives.

 

In the first quarter of fiscal 2019, Eaton Vance Management, together with Eaton Vance Exchange-Traded Fund Trust, filed an exemptive application to permit the offering of exchange-traded funds (ETFs) that would employ a novel method of supporting efficient secondary market trading of fund shares, which we call the Clearhedge Method. Because disclosure of current holdings would not be necessary under the Clearhedge Method, an ETF’s portfolio trading activity could remain confidential. In conjunction with filing the Clearhedge Method exemptive application, Eaton Vance formed a new wholly-owned subsidiary, Advanced Fund Solutions, to manage the development and commercialization of ETFs utilizing the Clearhedge Method and other fund-related intellectual property. Through licensing and services agreements, Eaton Vance and Advanced Fund Solutions seek to make the Clearhedge Method broadly available across the ETF industry, including actively managed and index-based ETFs. We believe the Clearhedge Method could benefit ETF investors by lowering the costs they pay to buy and sell shares, mitigating the performance impact of front-running and free-riding, and facilitating the introduction of proprietary active strategies not currently available as ETFs.

 

As of January 31, 2019, 68 of our U.S. mutual funds were rated 4 or 5 stars by MorningstarTM for at least one class of shares, including 30 five-star rated funds. A good source of performance-related information for our funds is our website, www.eatonvance.com. On our website, investors can also obtain other current information about our funds, including investment objective and principal investment policies, portfolio characteristics, expenses and Morningstar ratings.

 

Consolidated Assets under Management

 

Prevailing equity and income market conditions and investor sentiment affect the sales and redemptions of our investment offerings, managed asset levels, operating results and the recoverability of our investments. During the first quarter of fiscal 2019, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of -0.8 percent and the MSCI Emerging Market Index, a broad measure of emerging market equity performance, had total returns of 8.5 percent. Over the same period, the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of 3.4 percent.

 

Consolidated assets under management of $444.7 billion on January 31, 2019 decreased $4.6 billion, or 1 percent, from $449.2 billion of consolidated assets under management on January 31, 2018. The year-over-year decrease in consolidated assets under management reflects net inflows of $11.7 billion and market price declines in managed assets of $16.3 billion.

 

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The following tables summarize our consolidated assets under management by investment mandate, investment vehicle and investment affiliate as of January 31, 2019 and 2018. Within the investment mandate table, the “Portfolio implementation” category consists of Parametric Custom Core equity strategies and centralized portfolio management services, and the “Exposure management” category consists of Parametric’s futures- and options-based portfolio overlay services.

 

Consolidated Assets under Management by Investment Mandate(1)

 

   January 31,     
(in millions)  2019  

% of

Total

   2018  

% of

Total

  

%

Change

 
Equity(2)  $116,990    26%  $122,595    27%   -5%
Fixed income(3)   82,525    19%   72,663    16%   14%
Floating-rate income   40,943    9%   39,793    9%   3%
Alternative   9,991    2%   13,248    3%   -25%
Portfolio implementation   115,435    26%   110,442    25%   5%
Exposure management   78,768    18%   90,488    20%   -13%
Total  $444,652    100%  $449,229    100%   -1%

 

(1)Consolidated Eaton Vance Corp. See table on page 57 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Includes balanced and other multi-asset mandates.
(3)Includes cash management mandates.

 

Equity assets under management included $40.7 billion and $41.7 billion of assets managed for after-tax returns on January 31, 2019 and 2018, respectively. Portfolio implementation assets under management included $82.6 billion and $77.5 billion of assets managed for after-tax returns on January 31, 2019 and 2018, respectively. Fixed income assets included $46.0 billion and $41.5 billion of municipal income assets on January 31, 2019 and 2018, respectively.

 

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Consolidated Assets under Management by Investment Vehicle(1)

 

   January 31,     
(in millions)  2019  

% of

Total

   2018  

% of

Total

  

%

Change

 
Open-end funds(2)  $99,846    22%  $101,956    23%   -2%
Closed-end funds   23,633    5%   25,424    6%   -7%
Private funds(3)   39,271    9%   37,174    8%   6%
Institutional separate accounts   155,224    35%   169,406    37%   -8%
Individual separate accounts(4)   126,678    29%   115,269    26%   10%
Total  $444,652    100%  $449,229    100%   -1%

 

(1)Consolidated Eaton Vance Corp. See table on page 57 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Includes assets in NextShares funds.
(3)Includes privately offered equity, fixed income and floating-rate income funds and CLO entities.
(4)In the first quarter of fiscal 2019, the Company revised its classification of consolidated assets under management by investment vehicle to combine the formerly separate high-net-worth separate account and retail managed account categories into a single individual separate account category. The above presentation of prior year results has been revised for comparability purposes. The reclassification does not affect total consolidated assets under management for any period.

 

Consolidated Assets under Management by Investment Affiliate(1)

 

   January 31,   % 
(in millions)  2019   2018   Change 
Eaton Vance Management(2)  $178,261   $171,788    4%
Parametric   230,157    241,653    -5%
Atlanta Capital(3)   23,216    24,156    -4%
Calvert(3)   13,018    11,632    12%
Total  $444,652   $449,229    -1%

 

(1)Consolidated Eaton Vance Corp. See table on page 57 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Includes managed assets of Eaton Vance-sponsored funds and separate accounts managed by Hexavest and unaffiliated third-party advisers under Eaton Vance supervision.
(3)Consistent with the Company's policies for reporting the managed assets and flows of investment portfolios for which multiple Eaton Vance affiliates have management responsibilities, the managed assets of Atlanta Capital indicated above include the assets of Calvert Equity Fund, for which Atlanta Capital serves as sub-adviser. The total managed assets of Calvert, including assets sub- advised by other Eaton Vance affiliates, were $15.4 billion and $14.0 billion as of January 31, 2019 and 2018, 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)

 

   Three Months Ended     
   January 31,   % 
(in millions)  2019   2018   Change 
Equity(2)  $114,888   $117,444    -2%
Fixed income(3)   79,818    71,686    11%
Floating-rate income   42,702    39,200    9%
Alternative   11,013    12,833    -14%
Portfolio implementation   111,304    104,227    7%
Exposure management   77,685    88,104    -12%
Total  $437,410   $433,494    1%

 

(1)Consolidated Eaton Vance Corp. See table on page 57 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Includes balanced and other multi-asset mandates.
(3)Includes cash management mandates.

 

Consolidated Average Assets under Management by Investment Vehicle(1)

 

   Three Months Ended     
   January 31,   % 
(in millions)  2019   2018   Change 
Open-end funds(2)  $100,153   $99,412    1%
Closed-end funds   23,602    25,064    -6%
Private funds(3)   38,656    35,762    8%
Institutional separate accounts   153,135    163,392    -6%
Individual separate accounts(4)   121,864    109,864    11%
Total  $437,410   $433,494    1%

 

(1)Consolidated Eaton Vance Corp. See table on page 57 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Includes assets in NextShares funds.
(3)Includes privately offered equity, fixed income and floating-rate income funds and CLO entities.
(4)In the first quarter of fiscal 2019, the Company revised its classification of consolidated assets under management by investment vehicle to combine the formerly separate high-net-worth separate account and retail managed account categories into a single individual separate account category. The above presentation of prior year results has been revised for comparability purposes. The reclassification does not affect total consolidated average assets under management for any period.

 

Consolidated Net Flows

 

Consolidated net inflows of $1.5 billion in the first quarter of fiscal 2019, represent annualized internal growth in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management) of 1 percent. For comparison, the Company had consolidated net inflows of $7.1 billion in the first quarter of fiscal 2018, representing annualized internal growth in managed assets of 7 percent. Excluding exposure management mandates, which have lower fees and more variable flows than the rest of our business, the Company’s annualized internal growth rate in managed assets was 2 percent in the first quarter of fiscal 2019 and 7 percent in the first quarter of fiscal 2018. The Company’s annualized internal management

 

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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 -4 percent in the first quarter of fiscal 2019, as the management fee revenue lost from redemptions and other withdrawals exceeded the management fee revenue contribution from new sales and other inflows. The Company’s annualized internal management fee revenue growth rate was 4 percent in the first quarter of fiscal 2018, as the management fee revenue contribution from new sales and other inflows 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 months ended January 31, 2019 and 2018:

 

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

 

   Three Months Ended     
   January 31,   % 
(in millions)  2019   2018   Change 
Equity assets - beginning of period(2)  $115,772   $113,472    2%
Sales and other inflows   6,220    5,876    6%
Redemptions/outflows   (5,461)   (5,320)   3%
Net flows   759    556    37%
Exchanges   (108)   3    NM(5)
Market value change   567    8,564    -93%
Equity assets - end of period  $116,990   $122,595    -5%
Fixed income assets - beginning of period(3)   77,844    70,797    10%
Sales and other inflows(4)   9,222    6,327    46%
Redemptions/outflows   (6,053)   (3,937)   54%
Net flows   3,169    2,390    33%
Exchanges   326    18    NM 
Market value change   1,186    (542)   NM 
Fixed income assets - end of period  $82,525   $72,663    14%
Floating-rate income assets - beginning of period   44,837    38,819    16%
Sales and other inflows   3,566    2,274    57%
Redemptions/outflows   (6,478)   (1,655)   291%
Net flows   (2,912)   619    NM 
Exchanges   (266)   (3)   NM 
Market value change   (716)   358    NM 
Floating-rate income assets - end of period  $40,943   $39,793    3%
Alternative assets - beginning of period   12,139    12,637    -4%
Sales and other inflows   1,044    1,714    -39%
Redemptions/outflows   (3,264)   (1,034)   216%
Net flows   (2,220)   680    NM 
Exchanges   (27)   (6)   350%
Market value change   99    (63)   NM 
Alternative assets - end of period  $9,991   $13,248    -25%
Portfolio implementation assets - beginning of period   110,840    99,615    11%
Sales and other inflows   7,487    5,108    47%
Redemptions/outflows   (4,113)   (3,755)   10%
Net flows   3,374    1,353    149%
Exchanges   75    (16)   NM 
Market value change   1,146    9,490    -88%
Portfolio implementation assets - end of period  $115,435   $110,442    5%
Exposure management assets - beginning of period   77,871    86,976    -10%
Sales and other inflows   17,122    22,652    -24%
Redemptions/outflows   (17,808)   (21,155)   -16%
Net flows   (686)   1,497    NM 
Market value change   1,583    2,015    -21%
Exposure management assets - end of period  $78,768   $90,488    -13%
Total assets under management - beginning of period   439,303    422,316    4%
Sales and other inflows(4)   44,661    43,951    2%
Redemptions/outflows   (43,177)   (36,856)   17%
Net flows   1,484    7,095    -79%
Exchanges   -    (4)   -100%
Market value change   3,865    19,822    -81%
Total assets under management - end of period  $444,652   $449,229    -1%

  

(1)Consolidated Eaton Vance Corp. See table on page 57 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Whenever presented, Equity assets include balanced and other multi-asset mandates.

 

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(3)Whenever presented, Fixed Income assets include cash management mandates.
(4)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.
(5)Not meaningful (NM).

 

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

 

   Three Months Ended     
   January 31,   % 
(in millions)  2019   2018   Change 
Fund assets - beginning of period(2)  $164,968   $156,853    5%
Sales and other inflows   13,723    10,516    30%
Redemptions/outflows   (15,425)   (8,814)   75%
Net flows   (1,702)   1,702    NM 
Exchanges   (98)   (4)   NM 
Market value change   (418)   6,003    NM 
Fund assets - end of period  $162,750   $164,554    -1%
Institutional separate accounts - beginning of period   153,996    159,986    -87%
Sales and other inflows(3)   20,829    25,681    NM 
Redemptions/outflows   (22,329)   (23,334)   -4%
Net flows   (1,500)   2,347    NM 
Exchanges   98    80    23%
Market value change   2,630    6,993    -62%
Institutional separate accounts - end of period  $155,224   $169,406    -8%
Individual separate accounts - beginning of period(4)   120,339    105,477    14%
Sales and other inflows   10,109    7,754    30%
Redemptions/outflows   (5,423)   (4,708)   15%
Net flows   4,686    3,046    54%
Exchanges   -    (80)   -100%
Market value change   1,653    6,826    -76%
Individual separate accounts - end of period  $126,678   $115,269    10%
Total assets under management - beginning of period   439,303    422,316    4%
Sales and other inflows(3)   44,661    43,951    2%
Redemptions/outflows   (43,177)   (36,856)   17%
Net flows   1,484    7,095    -79%
Exchanges   -    (4)   -100%
Market value change   3,865    19,822    -81%
Total assets under management - end of period  $444,652   $449,229    -1%

 

(1)Consolidated Eaton Vance Corp. See table on page 57 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Whenever presented, Fund assets include assets of cash management funds.
(3)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.
(4)In the first quarter of fiscal 2019, the Company revised its classification of consolidated assets under management and net flows by investment vehicle to combine the formerly separate high-net-worth separate account and retail managed account categories into a single individual separate account category. The above presentation of prior year results has been revised for comparability purposes. The reclassification does not affect total consolidated assets under management or total consolidated net flows for any period.
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As of January 31, 2019, the Company’s 49 percent-owned affiliate Hexavest managed $13.2 billion of client assets, down 21 percent from $16.7 billion of managed assets on January 31, 2018. 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 months ended January 31, 2019 and 2018:

 

Hexavest Assets under Management and Net Flows

 

   Three Months Ended     
   January 31,   % 
(in millions)  2019   2018   Change 
Eaton Vance distributed:               
Eaton Vance sponsored funds - beginning of period(1)  $159   $182    -13%
Sales and other inflows   40    5    700%
Redemptions/outflows   (25)   (6)   317%
Net flows   15    (1)   NM 
Market value change   3    12    -75%
Eaton Vance sponsored funds - end of period  $177   $193    -8%
Eaton Vance distributed separate accounts - beginning of period(2)   2,169    3,092    -30%
Sales and other inflows   21    78    -73%
Redemptions/outflows   (140)   (115)   22%
Net flows   (119)   (37)   222%
Market value change   15    209    -93%
Eaton Vance distributed separate accounts - end of period  $2,065   $3,264    -37%
Total Eaton Vance distributed - beginning of period   2,328    3,274    -29%
Sales and other inflows   61    83    -27%
Redemptions/outflows   (165)   (121)   36%
Net flows   (104)   (38)   174%
Market value change   18    221    -92%
Total Eaton Vance distributed - end of period  $2,242   $3,457    -35%
Hexavest directly distributed - beginning of period(3)   11,467    12,748    -10%
Sales and other inflows   519    165    215%
Redemptions/outflows   (1,134)   (500)   127%
Net flows   (615)   (335)   84%
Market value change   136    858    -84%
Hexavest directly distributed - end of period  $10,988   $13,271    -17%
Total Hexavest assets - beginning of period   13,795    16,022    -14%
Sales and other inflows   580    248    134%
Redemptions/outflows   (1,299)   (621)   109%
Net flows   (719)   (373)   93%
Market value change   154    1,079    -86%
Total Hexavest assets - end of period  $13,230   $16,728    -21%

 

(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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Results of Operations

 

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

 

Management believes that certain non-U.S. GAAP financial measures, specifically, adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, while not a substitute for U.S. GAAP financial measures, may be effective indicators of the Company’s performance over time. Non-U.S. GAAP financial measures should not be construed to be superior to U.S. GAAP measures. In calculating these non-U.S. GAAP financial measures, net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share are adjusted to exclude items management deems non-operating or non-recurring in nature, or otherwise outside the ordinary course of business. These adjustments may include, when applicable, the add back of closed-end fund structuring fees, costs associated with special dividends, debt repayments and tax settlements, the tax impact of stock-based compensation shortfalls or windfalls, and non-recurring charges for the effect of the tax law changes. Management and our Board of Directors, as well as certain of our outside investors, consider these adjusted numbers a measure of the Company’s underlying operating performance. Management believes adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results, and may provide a useful baseline for analyzing trends in our underlying business.

 

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The following table provides a reconciliation of net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share to adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, respectively, for the three months ended January 31, 2019 and 2018:

 

   Three Months Ended     
   January 31,   % 
(in thousands, except per share figures)  2019   2018   Change 
Net income attributable to Eaton Vance Corp. shareholders  $86,801   $78,056    11%
Net excess tax benefit from stock-based compensation plans(1)   (2,949)   (11,862)   -75%
Revaluation of deferred tax amounts(2)   -    21,653    -100%
Repatriation of undistributed earnings of foreign subsidiaries(3)   -    3,014    -100%
Loss on write-off of Hexavest option, net of tax(4)   -    5,660    -100%
Adjusted net income attributable to Eaton Vance Corp. shareholders  $83,852   $96,521    -13%
                
Earnings per diluted share  $0.75   $0.63    19%
Net excess tax benefit from stock-based compensation plans   (0.02)   (0.09)   -78%
Revaluation of deferred tax amounts   -    0.17    -100%
Repatriation of undistributed earnings of foreign subsidiaries   -    0.02    -100%
Loss on write-off of Hexavest option, net of tax   -    0.05    -100%
Adjusted earnings per diluted share  $0.73   $0.78    -6%

 

(1)Reflects the impact of Accounting Standard Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, which was adopted in the first quarter of fiscal 2018.
(2)Reflects the revaluation of deferred tax assets and deferred tax liabilities resulting from the enactment of the Tax Cuts and Jobs Act (the 2017 Tax Act) on December 22, 2017.
(3)Reflects the recognition of incremental tax expense related to the deemed repatriation of foreign earnings considered to be indefinitely reinvested abroad and not previously subject to U.S. taxation.
(4)Reflects the $6.5 million loss recognized upon expiration of the Company's option to acquire an additional 26 percent ownership interest in Hexavest, net of the associated impact to taxes of $0.8 million.

 

The 11 percent increase in net income attributable to Eaton Vance Corp. shareholders in the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 is attributable primarily to the following:

 

·A decrease in revenue of $13.8 million, primarily reflecting a decrease in management fees.
·An increase in expenses of $0.9 million, reflecting higher amortization of deferred sales commissions, fund-related expenses and other operating expenses, partially offset by a decrease in compensation, distribution and service fee expenses.
·An increase in non-operating expense of $1.5 million, primarily reflecting a decrease in income allocation from our consolidated CLO entities, partially offset by an increase in net gains and other investment income.
·A decrease in income taxes of $21.0 million.
·A decrease in equity in net income of affiliates, net of tax, of $1.1 million.
·A decrease in net income attributable to non-controlling and other beneficial interests of $5.0 million.

 

Weighted average diluted shares outstanding decreased by 8.4 million shares, or 7 percent, in the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018, primarily reflecting an increase in share repurchases in excess of new shares issued upon the vesting of restricted stock awards and the exercise of employee stock options and a decrease in the dilutive effect of in-the-money options and unvested restricted stock awards due to lower market prices of the Company’s shares.

 

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Revenue

 

The following table shows the components of our revenue for the three months ended January 31, 2019 and 2018:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Management fees(1)  $350,750   $361,857    -3%
Distribution and underwriter fees(1)   23,090    24,947    -7%
Service fees(1)   29,360    30,361    -3%
Other revenue(1)   3,216    3,071    5%
Total revenue  $406,416   $420,236    -3%

 

(1)Prior period amounts have been restated to reflect the Company’s retrospective adoption of ASU 2014-09, Revenue from Contracts with Customers, on November 1, 2018. Fund subsidies previously included as a component of fund-related expenses are now presented as a contra-revenue component of management fees. In addition, certain front-end load sales commissions that were previously reported on a net basis as a component of distribution expense are now reported on a gross basis in distribution and underwriter fee revenue and distribution expense.

 

Management fees

The decrease in management fees in the first quarter of fiscal 2019 from the same period a year earlier is primarily attributable to a decrease in our consolidated average annualized management fee rates, partially offset by an increase in consolidated average assets under management. Consolidated average assets under management increased by 1 percent in the first quarter of fiscal 2019 from the same period a year earlier. Excluding performance-based fees, consolidated average annualized management fee rates decreased to 32.0 basis points in the first quarter of fiscal 2019 from 33.3 basis points in the first quarter of fiscal 2018. Performance-based fees, all associated with one fund, were $(0.3) million in the first quarter of fiscal 2019 and $(0.5) million in the first quarter of fiscal 2018. Changes in consolidated average annualized management fee rates for the compared period primarily reflect a shift in the Company’s mix of business towards lower-fee mandates.

 

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Consolidated average annualized management fee rates, excluding performance-based fees, for the three months ended January 31, 2019 and 2018 were as follows:

 

   Three Months Ended     
   January 31,   % 
(in basis points on average managed assets)  2019   2018   Change 
Equity(1)   56.9    59.4    -4%
Fixed income(1)   33.4    36.0    -7%
Floating-rate income   50.0    51.4    -3%
Alternative(1)   58.3    66.8    -13%
Portfolio implementation   14.3    15.0    -5%
Exposure management   5.2    5.0    4%
Consolidated average annualized management fee rates   32.0    33.3    -4%

 

(1)Prior period management fee rates have been restated to reflect the Company's retrospective adoption of ASU 2014-09 on November 1, 2018. Fund subsidies previously included as a component of fund-related expenses are now presented as a contra-revenue component of management fees.

 

Consolidated average assets under management by investment mandate to which these fee rates apply can be found in the table, “Consolidated Average Assets under Management by Investment Mandate,” on page 52.

 

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Distribution and underwriter fees

Fund distribution and underwriter fee revenue and other fund-related distribution income for the three months ended January 31, 2019 and 2018 were as follows:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Distribution fees:               
Class A  $866   $871    -1%
Class B   44    124    -65%
Class C   12,534    14,792    -15%
Class F   373    404    -8%
Class N   22    32    -31%
Class R   447    467    -4%
Private funds   2,498    2,007    24%
Total distribution fees   16,784    18,697    -10%
Underwriter commissions   4,045    5,184    -22%
Contingent deferred sales charges and other redemption fees   1,174    34    NM 
Other distribution income   1,087    1,032    5%
Total distribution and underwriter fees  $23,090   $24,947    -7%

 

(1)Prior period amounts have been restated to reflect the Company’s retrospective adoption of ASU 2014-09 on November 1, 2018. Certain front-end load sales commissions that were previously reported on a net basis as a component of distribution expense are now reported on a gross basis in distribution and underwriter fee revenue and distribution expense. In addition, contingent deferred sales commissions and other redemption fees that were previously recorded as a contra-asset component of deferred sales commissions are now recorded as a component of total distribution and underwriter fees.

 

Service fees

Fund service fee revenue decreased 3 percent in the first quarter of fiscal 2019 from the same period a year earlier, primarily reflecting a decrease in average assets in funds and fund share classes subject to service fees.

 

Other revenue

Other revenue, which consists primarily of fund shareholder servicing fees, miscellaneous dealer income, referral fees and consultancy fees, increased 5 percent in the first quarter of fiscal 2019 from the same period a year earlier, primarily reflecting an increase in shareholder servicing fees and miscellaneous dealer income.

 

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Expenses

 

The following table shows our operating expenses for the three months ended January 31, 2019 and 2018:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Compensation and related costs  $153,888   $155,048    -1%
Distribution expense(1)   37,508    41,869    -10%
Service fee expense(1)   25,517    26,841    -5%
Amortization of deferred sales commissions   5,547    4,277    30%
Fund-related expenses(1)   9,645    9,162    5%
Other expenses   53,181    47,239    13%
Total expenses  $285,286   $284,436    0%

 

(1)Prior period amounts have been restated to reflect the Company’s retrospective adoption of ASU 2014-09, on November 1, 2018. Fund subsidies previously included as a component of fund-related expenses are now presented as a contra-revenue component of management fees. In addition, certain front-end load sales commissions that were previously reported on a net basis as a component of distribution expense are now reported on a gross basis in distribution and underwriter fee revenue and distribution expense.

 

Compensation and related costs

The following table shows our compensation and related costs for the three months ended January 31, 2019 and 2018:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Base salaries and employee benefits  $74,591   $68,292    9%
Stock-based compensation   23,274    24,651    -6%
Operating income-based incentives   38,890    43,587    -11%
Sales-based incentives   17,034    17,876    -5%
Other compensation expense   99    642    -85%
Total  $153,888   $155,048    -1%

 

Compensation expense decreased by $1.2 million, or 1 percent, in the first quarter of fiscal 2019 from the same period a year earlier. The decrease was driven primarily by (i) a $1.4 million decrease in stock-based compensation expense; (ii) a $4.7 million decrease in operating income-based bonus accruals due to lower pre-bonus adjusted operating income and a modest decrease in bonus accrual rates; (iii) a $0.8 million decrease in sales-based incentive compensation resulting from a decrease in incentive rates; (iv) and a $0.6 million decrease in other compensation expense related to lower employee recruiting and termination costs. These decreases were partially offset by a $6.3 million increase in base salaries and employee benefits, reflecting higher headcount, fiscal year-end compensation increases and an increase in our corporate 401(k) match and profit contribution.

 

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Distribution expense

The following table shows our distribution expense for the three months ended January 31, 2019 and 2018:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Up-front sales commission expense(1)  $3,841   $4,935    -22%
Distribution fees(1)   13,939    16,320    -15%
Closed-end fund dealer compensation payments   910    982    -7%
Intermediary marketing support payments   11,954    12,534    -5%
Discretionary marketing expenses   4,846    4,977    -3%
Finder's fees   2,018    2,121    -5%
Total  $37,508   $41,869    -10%

 

(1)Prior period amounts have been restated to reflect the Company’s retrospective adoption of the ASU 2014-09 on November 1, 2018. Certain front-end load sales commissions that were previously reported on a net basis as a component of distribution expense are now reported on a gross basis in distribution and underwriter fee revenue and distribution expense. In addition, certain fees were reclassified from service fee expense to distribution expense due to the nature of the fees.

 

Distribution expense decreased $4.4 million, or 10 percent, in the first quarter of fiscal 2019, primarily reflecting lower distribution fee payments, a decrease in up-front sales commission expense, lower intermediary marketing support payments and discretionary marketing expenses.

 

Service fee expense

Service fee expense decreased $1.3 million, or 5 percent, in the first quarter of fiscal 2019 from the same period a year earlier, reflecting lower Class A and Class C service fee payments.

 

Amortization of deferred sales commissions

Amortization expense increased $1.3 million, or 30 percent, in the first quarter of fiscal 2019 from the same period a year earlier, reflecting higher Class C share and private fund commission amortization.

 

Fund-related expenses

Fund-related expenses increased $0.5 million, or 5 percent, in the first quarter of fiscal 2019 over the same period a year earlier, primarily reflecting an increase in sub-advisory fees paid.

 

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Other expenses

The following table shows our other expenses for the three months ended January 31, 2019 and 2018:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Information technology  $23,409   $21,347    10%
Facilities-related   13,306    10,691    24%
Travel   4,474    3,939    14%
Professional services   3,657    3,217    14%
Communications   1,522    1,412    8%
Amortization of intangible assets   1,828    2,239    -18%
Other corporate expense   4,985    4,394    13%
Total  $53,181   $47,239    13%

 

Other expenses increased 13 percent in the first quarter of fiscal 2019 from the same period a year earlier, primarily attributable to increases in information technology, facilities-related expenses, travel, professional services and other corporate expenses, partially offset by a decrease in amortization of intangible assets. The increase in information technology expense primarily reflects increases in costs associated with the consolidation of our trading platforms, enhancements to Calvert’s research system, ongoing system maintenance costs and software consulting services. The increase in facilities-related expenses can be primarily attributed to an increase in rent and the accelerated depreciation of leasehold improvements associated with new office space leased in Seattle.

 

Non-operating Income (Expense)

 

The main categories of non-operating income (expense) for the three months ended January 31, 2019 and 2018 are as follows:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Gains and other investment income, net  $5,833   $2,598    125%
Interest expense   (6,131)   (5,907)   4%
Other income (expense) of consolidated CLO entities:               
Gains and other investment income, net   5,441    1,717    217%
Interest and other expense   (8,336)   (94)   NM 
Total non-operating expense  $(3,193)  $(1,686)   89%

 

Gains and other investment income, net, increased by $3.2 million in the first quarter of fiscal 2019 compared to the same period a year ago, primarily reflecting a $0.7 million increase in interest and other income, a $1.9 million decrease in net investment losses primarily attributable to investments in sponsored strategies and associated hedges and a decrease in foreign currency losses of $0.6 million. Gains and other investment income in the first quarter of fiscal 2018 included a $6.5 million loss to reflect the expiration of the Company’s option to acquire an additional 26 percent ownership interest in Hexavest under the terms of the option agreement entered into when we acquired our Hexavest position in 2012.

 

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Interest expense increased by $0.2 million in the first quarter of fiscal 2019 compared to the same period a year earlier. The increase is attributable to the write-off of deferred financing costs associated with replacing the Company’s previous revolving credit facility with a new $300 million senior unsecured revolving credit facility on December 11, 2018. The new credit facility expires on December 11, 2023.

 

The change in other income (expense) of consolidated CLO entities in the first quarter of 2019 compared to the same period a year earlier reflects net expense from consolidated CLO entities of $2.9 million in the first quarter of fiscal 2019 and net contribution from a consolidated CLO entity of $1.6 million in the first quarter of fiscal 2018. The change is attributable to a decline in the fair value of our beneficial interest in the consolidated CLO entities.

 

Income Taxes

 

Our effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 23.4 percent in the first quarter of fiscal 2019 and 36.3 percent in the first quarter of fiscal 2018.

 

Our income tax provision for the three months ended January 31, 2019 includes $0.6 million of charges associated with certain provisions of the 2017 Tax Act taking effect in fiscal 2019, relating principally to limitations on the deductibility of executive compensation.

 

Our income tax provision was reduced by net excess tax benefits related to the exercise of employee stock options and vesting of restricted stock awards during the period totaling $2.9 million and $11.9 million for the three months ended January 31, 2019 and 2018, respectively. Our income tax provision for the three months ended January 31, 2018 also included a non-recurring charge of $24.7 million to reflect the estimated effect of enactment of the 2017 Tax Act.

 

Our calculations of adjusted net income and adjusted earnings per diluted share remove the effect of the net excess tax benefits recognized in connection with ASU 2016-09 and the non-recurring impact of the tax reform recognized during the first quarter of fiscal 2018. On this basis, our adjusted effective tax rate was 25.9 percent and 26.7 percent for the three months ended January 31, 2019 and 2018, respectively.

 

Equity in Net Income of Affiliates, Net of Tax

 

Equity in net income of affiliates, net of tax, primarily reflects our 49 percent equity interest in Hexavest and our seven percent minority equity interest in a private equity partnership managed by a third party.

 

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The following table summarizes the components of equity in net income of affiliates, net of tax, for the three months ended January 31, 2019 and 2018:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Investment in Hexavest, net of tax and amortization  $1,949   $2,804    -30%
Investment in private equity partnership, net of tax   (1)   210    NM 
Total  $1,948   $3,014    -35%

 

Net Income Attributable to Non-controlling and Other Beneficial Interests

 

The following table summarizes the components of net income attributable to non-controlling and other beneficial interests for the three months ended January 31, 2019 and 2018:

 

   Three Months Ended     
   January 31,   % 
(in thousands)  2019   2018   Change 
Consolidated sponsored funds  $(2,422)  $(6,300)   -62%
Majority-owned subsidiaries   (3,037)   (4,155)   -27%
Net income attributable to non-controlling and other beneficial interests  $(5,459)  $(10,455)   -48%

 

Net income attributable to non-controlling and other beneficial interests is not adjusted for taxes due to the underlying tax status of our consolidated majority-owned subsidiaries, which are treated as partnerships or other pass-through entities for tax purposes. Funds and the CLO entities we consolidate are registered investment companies or private funds that are also treated as pass-through entities for tax purposes.

 

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Changes in Financial Condition, Liquidity and Capital Resources

 

The assets and liabilities of our consolidated CLO entities do not affect our liquidity or capital resources. The collateral assets of our consolidated CLO entities are held solely to satisfy the obligations of these entities and we have no right to these assets beyond our direct investment in, and management fees generated from, these entities. The note holders and third-party creditors of these entities have no recourse to the general credit of the Company. As a result, the assets and liabilities of our consolidated CLO entities are excluded from the discussion of liquidity and capital resources below.

 

The following table summarizes certain key financial data relating to our liquidity and capital resources on January 31, 2019 and October 31, 2018 and the uses of cash for the three months ended January 31, 2019 and 2018:

 

Balance Sheet and Cash Flow Data        
   January 31,   October 31, 
(in thousands)  2019   2018 
         
Balance sheet data:          
Assets:          
Cash and cash equivalents  $449,157   $600,696 
Management fees and other receivables   223,898    236,736 
Total liquid assets  $673,055   $837,432 
           
Investments  $1,010,558   $1,078,627 
           
Liabilities:          
Debt(1)  $625,000   $625,000 

 

(1)Represents the principal amount of debt outstanding. The carrying value of the debt, including debt issuance costs, was $619.9 million and $619.7 million as of January 31, 2019 and October 31, 2018, respectively.

 

   Three Months Ended 
   January 31, 
(in thousands)  2019   2018 
         
Cash flow data:          
Operating cash flows(1)  $34,332   $(59,217)
Investing cash flows   (283,089)   (46,972)
Financing cash flows   (74,963)   26,008 

 

(1)Prior period operating cash flows have been restated to reflect the Company's retrospective adoption of ASU 2016-18, Restricted Cash, on November 1, 2018. Please see Note 1, "Summary of Significant Accounting Policies" in Item 1, "Consolidated Financial Statements (unaudited)," for further detail.

 

Liquidity and Capital Resources

 

Liquid assets consist of cash and cash equivalents and management fees and other receivables. Cash and cash equivalents consist of cash and short-term, highly liquid investments that are readily convertible to cash. Management fees and other receivables primarily represent receivables due from sponsored funds and

 

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separately managed accounts for investment advisory and distribution services provided. Excluding those assets identified as assets of consolidated CLO entities, liquid assets represented 30 percent and 33 percent of total assets on January 31, 2019 and October 31, 2018, respectively. Not included in the liquid asset amounts are $241.4 million and $273.3 million of highly liquid short-term debt securities with remaining maturities between three and 12 months at January 31, 2019 and October 31, 2018, respectively, which are included within investments on our Consolidated Balance Sheets. Our seed investments in consolidated funds and separate accounts are not treated as liquid assets because they may be longer term in nature.

 

On January 31, 2019, our debt consisted of $325 million in aggregate principal amount of 3.625 percent Senior Notes due in June 2023 and $300 million in aggregate principal amount of 3.5 percent Senior Notes due in April 2027.

 

We maintain a $300 million unsecured revolving credit facility with several banks that expires on December 11, 2023. The facility, which we entered into on December 11, 2018, provides that we may borrow at LIBOR-based rates of interest that vary depending on the level of usage of the facility and our credit ratings. The agreement contains financial covenants with respect to leverage and interest coverage and requires us to pay an annual commitment fee on any unused portion. We had no borrowings under our revolving credit facility at January 31, 2019 or at any point during the first three months of fiscal 2019. We were in compliance with all debt covenants as of January 31, 2019.

 

We continue to monitor our liquidity daily. We remain committed to growing our business and returning capital to shareholders. We expect that our main uses of cash will be paying dividends, acquiring shares of our Non-Voting Common Stock, making seed investments in new investment strategies, potential strategic acquisitions, enhancing our technology infrastructure and paying the operating expenses of our business. We believe that our existing liquid assets, cash flows from operations and borrowing capacity under our credit facility are sufficient to meet our current and forecasted operating cash needs. The risk exists, however, that if we need to raise additional capital or refinance existing debt in the future, resources may not be available to us in sufficient amounts or on acceptable terms. Our ability to enter the capital markets in a timely manner depends on a number of factors, including the state of global credit and equity markets, interest rates, credit spreads and our credit ratings. If we are unable to access capital markets to issue new debt, refinance existing debt or sell shares of our Non-Voting Common Stock as needed, or if we are unable to obtain such financing on acceptable terms, our business could be adversely affected.

 

Recoverability of our Investments

 

Our $1.0 billion of investments as of January 31, 2019 consisted of our 49 percent equity interest in Hexavest, positions in Company-sponsored funds and separate accounts entered into for investment and business development purposes, and certain other investments held directly by the Company. Investments in Company-sponsored funds and separate accounts and investments held directly by the Company are generally in liquid debt or equity securities and are carried at fair market value. We test our investments held at cost for impairment on a quarterly basis using qualitative factors. As of January 31, 2019 there were no indicators of impairment on our investments held at cost.

 

We test our investments in equity method investees, goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, or as facts and circumstances indicate that additional analysis is warranted. There have been no significant changes in financial condition in the first three months of fiscal 2019 that would indicate that an impairment loss exists at January 31, 2019.

 

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We periodically review our deferred sales commissions and amortizing identifiable intangible assets for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. There have been no significant changes in financial condition in the first three months of fiscal 2019 that would indicate that an impairment loss exists at January 31, 2019.

 

Operating Cash Flows

 

Cash provided by operating activities totaled $34.3 million in the first three months of fiscal 2019, compared to cash used for operating activities of $59.2 million in the first three months of fiscal 2018. The year-over-year change primarily reflects a decrease in net cash used for the purchase of short-term debt securities and investments held by consolidated sponsored funds and separately managed accounts, an increase in net cash provided by the operating activities of consolidated CLO entities and a net increase as a result of the timing differences in the cash settlements of our other assets and liabilities.

 

Investing Cash Flows

 

Cash used for investing activities totaled $283.1 million in the first three months of fiscal 2019 and $47.0 million in the first three months of fiscal 2018. The year-over-year change primarily reflects a $253.7 million increase in net purchases of bank loans and other investments by our consolidated CLO entities and a $5.7 million increase in additions to equipment and leasehold improvements, partially offset by a $20.3 million decrease in net purchases of investments made by the Company in CLO entity note obligations and a $3.0 million increase in net proceeds from sale of investments.

 

Financing Cash Flows

 

Cash used for financing activities totaled $75.0 million in the three months ended January 31, 2019. The Company used $128.2 million to repurchase and retire shares of our Non-Voting Common Stock under our current repurchase authorization, paid $18.1 million to acquire additional interests in Atlanta Capital and Parametric and received proceeds of $4.9 million related to the issuance of shares of our Non-Voting Common Stock in connection with the grant of restricted share awards, the exercise of stock options and other employee stock purchases. As of January 31, 2019, we had authorization to purchase an additional 4.3 million shares of our Non-Voting Common Stock under our current share repurchase authorization. We anticipate that repurchases of our Non-Voting Common Stock will continue to be an ongoing use of cash.

 

Our dividends declared per share were $0.35 in the first three months of fiscal 2019 and we paid an additional $5.7 million of dividends in the first quarter of fiscal 2019 versus the first quarter of fiscal 2018. We currently expect to declare and pay quarterly dividends on our Voting and Non-Voting Common Stock comparable to the dividend declared in the first quarter of fiscal 2019. Cash provided by financing activities of consolidated CLO entities totaled $68.5 million in the first quarter of fiscal 2019.

 

Contractual Obligations

 

We have future obligations under various contracts relating to debt, interest payments and operating leases. During the three months ended January 31, 2019, there were no material changes to our contractual obligations as previously reported in our Annual Report on Form 10-K for the year ended October 31, 2018, except as discussed below.

 

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We began consolidating a new CLO entity, CLO 2019-1, in the first quarter of fiscal 2019 that had borrowings under a non-recourse revolving line of credit as of January 31, 2019 of $68.5 million. For additional information, please see Notes 4 and 6 of our Notes to Consolidated Financial Statements contained in Part I, Item 1 of this Form 10-Q.

 

Non-controlling interests held by employees in Atlanta Capital and Parametric long-term equity incentive plans are not subject to mandatory redemption. The purchase of non-controlling interests is predicated on the exercise of a series of puts held by non-controlling interest holders and calls held by us. The puts provide the non-controlling interest holders the right to require us to purchase these retained interests at specific intervals over time, while the calls provide us with the right to require the non-controlling interest holders to sell their retained equity interests to us at specified intervals over time, as well as upon the occurrence of certain events such as death or permanent disability. These non-controlling interests are redeemable at fair value. There is significant uncertainty as to the timing and amount of any non-controlling interest purchase in the future. Although the timing and amounts of these purchases cannot be predicted with certainty, we anticipate that the purchase of non-controlling interests in our consolidated subsidiaries may be a significant use of cash in future years.

 

We have presented all redeemable non-controlling interests at redemption value on our Consolidated Balance Sheet as of January 31, 2019. We have recorded the current quarter change in the estimated redemption value of non-controlling interests redeemable at fair value as a component of additional paid-in capital. The estimated redemption value of our non-controlling interests totaled $326.6 million on January 31, 2019 compared to $335.1 million on October 31, 2018. These interests are all redeemable at fair value. Redeemable non-controlling interests as of January 31, 2019 consisted of profit interests granted under the long-term incentive plans of Parametric and Atlanta Capital of $48.2 million and $26.7 million, respectively, and non-controlling interests in Parametric issued in conjunction with the Parametric Risk Advisors LLC (Parametric Risk Advisors) final put option of $11.9 million. Additionally, redeemable non-controlling interests as of January 31, 2019 also included third-party investors’ ownership in consolidated sponsored funds of $239.8 million.

 

Foreign Subsidiaries

 

As of January 31, 2019, we consider the undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested in foreign operations. As of January 31, 2019, we had approximately $75.7 million of undistributed earnings primarily from Canadian and United Kingdom foreign corporations that are not available to fund domestic operations or to distribute to shareholders unless repatriated. As a result of the 2017 Tax Act and foreign exchange rates as of January 31, 2019, there is no future tax liability with respect to undistributed earnings.

 

Off-Balance Sheet Arrangements

 

We do not invest in any off-balance sheet vehicles that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected in our Consolidated Financial Statements.

 

Critical Accounting Policies

 

There have been no updates to our critical accounting policies from those disclosed in Management’s Discussion and Analysis of Financial Condition in our Form 10-K for the fiscal year ended October 31, 2018.

 

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Accounting Developments

 

On November 1, 2018, the Company fully adopted four new accounting standards. Please refer to Note 1, “Summary of Significant Accounting Policies,” in Item 1, “Consolidated Financial Statements (unaudited).”

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes in our Quantitative and Qualitative Disclosures About Market Risk from those previously reported in our Annual Report on Form 10-K for the year ended October 31, 2018.

 

Item 4. Controls and Procedures

 

We evaluated the effectiveness of our disclosure controls and procedures as of January 31, 2019. Disclosure controls and procedures are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rule and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Our CEO and CFO participated in this evaluation and concluded that, as of January 31, 2019, our disclosure controls and procedures were effective.

 

There have been no changes in our internal control over financial reporting that occurred during the first quarter of our fiscal year ended October 31, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II - Other Information

 

Item 1. Legal Proceedings

 

There have been no material developments in litigation previously reported in our SEC filings.

 

Item 1A. Risk Factors

 

There have been no material changes to our Risk Factors from those previously reported in our Annual Report on Form 10-K for the year ended October 31, 2018.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The table below sets forth information regarding purchases by the Company of our Non-Voting Common Stock on a monthly basis during the first quarter of fiscal 2019:

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

Period  (a) 
Total Number
of Shares
Purchased
   (b) 
Average
Price Paid
Per Share
   (c) 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)
   (d) 
Maximum Number
of Shares That May
Yet Be Purchased
Under the Plans or
Programs
 
November 1, 2018 through November 30, 2018   365,361   $45.47    365,361    6,982,414 
December 1, 2018 through December 31, 2018   1,475,120   $35.31    1,475,120    5,507,294 
January 1, 2019 through January 31, 2019   1,240,456   $37.36    1,240,456    4,266,838 
Total   3,080,937   $37.34    3,080,937    4,266,838 

 

(1)We announced a share repurchase program on October 24, 2018, which authorized the repurchase of up to 8,000,000 shares of our Non-Voting Common Stock in the open market and in private transactions in accordance with applicable securities laws. This repurchase plan is not subject to an expiration date.
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Item 6. Exhibits

 

(a)Exhibits

 

Exhibit No.   Description
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101   Materials from the Eaton Vance Corp. Quarterly Report on Form 10-Q for the quarter ended January 31, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related Notes to the Consolidated Financial Statements, tagged in detail.

 

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Signatures

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

  EATON VANCE CORP.
  (Registrant)
   
DATE: March 8, 2019 /s/Laurie G. Hylton
  (Signature)
  Laurie G. Hylton
  Chief Financial Officer
   
DATE: March 8, 2019 /s/Julie E. Rozen
  (Signature)
  Julie E. Rozen
  Chief Accounting Officer

 

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