Company Quick10K Filing
Quick10K
Eaton Vance
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$39.01 116 $4,510
10-Q 2019-04-30 Quarter: 2019-04-30
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 2019-05-21 Earnings, Exhibits
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
CTAS Cintas 23,160
BIG Big Lots 1,510
NVEE NV5 Global 958
AMBC Ambac 857
AUDC Audiocodes 416
CLSD Clearside Biomedical 45
BHTG Biohitech Global 40
FSI Quanta 34
CASM CAS Medical Systems 0
CXKJ CX Network 0
EV 2019-04-30
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 tv523070_ex31-1.htm
EX-31.2 tv523070_ex31-2.htm
EX-32.1 tv523070_ex32-1.htm
EX-32.2 tv523070_ex32-2.htm

Eaton Vance Earnings 2019-04-30

EV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv523070_10q.htm FORM 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended April 30, 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)  
         

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Non-Voting Common Stock, $0.00390625 par value EV New York Stock Exchange

 

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 April 30, 2019
Non-Voting Common Stock, $0.00390625 par value   114,068,374 shares
Voting Common Stock, $0.00390625 par value  422,935 shares

 

 

 

 

 

 

Eaton Vance Corp.

Form 10-Q

As of April 30, 2019 and for the

Three and Six Month Periods Ended April 30, 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 51
Item 3. Quantitative and Qualitative Disclosures About  Market Risk 75
Item 4. Controls and Procedures 75
     
Part II Other Information  
Item 1. Legal Proceedings 76
Item 1A. Risk Factors 76
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 76
Item 6. Exhibits 77
     
Signatures   78

 

  2 

 

 

Part I - Financial Information

 

Item 1. Consolidated Financial Statements (unaudited)

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited)

 

   April 30,   October 31, 
(in thousands)  2019   2018 
         
Assets          
           
Cash and cash equivalents  $525,040   $600,696 
Management fees and other receivables   235,545    236,736 
Investments   975,177    1,078,627 
Assets of consolidated collateralized loan obligation (CLO) entities:          
Cash   61,694    216,598 
Bank loans and other investments   1,237,129    874,304 
Other assets   26,277    4,464 
Deferred sales commissions   49,492    48,629 
Deferred income taxes   40,017    45,826 
Equipment and leasehold improvements, net   70,153    52,428 
Intangible assets, net   78,007    80,885 
Goodwill   259,681    259,681 
Loan to affiliate   5,000    5,000 
Other assets   69,966    95,454 
Total assets  $3,633,178   $3,599,328 

 

See notes to Consolidated Financial Statements.

  3 

 

 

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)

 

   April 30,   October 31, 
(in thousands, except share data)  2019   2018 
         
Liabilities, Temporary Equity and Permanent Equity          
           
Liabilities:          
           
Accrued compensation  $121,571   $233,836 
Accounts payable and accrued expenses   87,844    91,410 
Dividend payable   49,612    51,731 
Debt   620,095    619,678 
Liabilities of consolidated CLO entities:          
Senior and subordinated note obligations   856,972    873,008 
Line of credit   151,838    - 
Other liabilities   207,228    154,185 
Other liabilities   107,810    131,952 
Total liabilities   2,202,970    2,155,800 
           
Commitments and contingencies (Note 17)          
           
Temporary Equity:          
           
Redeemable non-controlling interests   340,176    335,097 
Total temporary equity   340,176    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, 114,068,374 and 116,527,845 shares, respectively   446    455 
Additional paid-in capital   -    17,514 
Notes receivable from stock option exercises   (7,820)   (8,057)
Accumulated other comprehensive loss   (61,615)   (53,181)
Retained earnings   1,157,970    1,150,698 
Total Eaton Vance Corp. shareholders' equity   1,088,983    1,107,431 
Non-redeemable non-controlling interests   1,049    1,000 
Total permanent equity   1,090,032    1,108,431 
Total liabilities, temporary equity and permanent equity  $3,633,178   $3,599,328 

 

See notes to Consolidated Financial Statements.

 

  4 

 

 

Eaton Vance Corp.

Consolidated Statements of Income (unaudited)

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2019   2018   2019   2018 
                 
Revenue:                    
Management fees  $359,384   $356,076   $710,134   $717,933 
Distribution and underwriter fees   20,054    24,157    43,144    49,104 
Service fees   29,586    29,453    58,946    59,814 
Other revenue   2,837    3,014    6,053    6,085 
Total revenue   411,861    412,700    818,277    832,936 
Expenses:                    
Compensation and related costs   153,542    147,989    307,430    303,037 
Distribution expense   35,930    40,598    73,438    82,467 
Service fee expense   25,921    25,679    51,438    52,520 
Amortization of deferred sales commissions   5,571    4,428    11,118    8,705 
Fund-related expenses   9,960    9,358    19,605    18,520 
Other expenses   53,764    51,962    106,945    99,201 
Total expenses   284,688    280,014    569,974    564,450 
Operating income   127,173    132,686    248,303    268,486 
Non-operating income (expense):                    
Gains (losses) and other investment income, net   15,206    (261)   21,039    2,337 
Interest expense   (5,888)   (5,903)   (12,019)   (11,810)
Other income (expense) of consolidated CLO entities:                    
Gains and other investment income, net   21,794    1,259    27,235    2,976 
Interest and other expense   (10,821)   (444)   (19,157)   (538)
Total non-operating income (expense)   20,291    (5,349)   17,098    (7,035)
Income before income taxes and equity in net income of affiliates   147,464    127,337    265,401    261,451 
Income taxes   (37,069)   (34,044)   (64,694)   (82,661)
Equity in net income of affiliates, net of tax   2,735    3,113    4,683    6,127 
Net income   113,130    96,406    205,390    184,917 
Net (income) loss attributable to non-controlling and other beneficial interests   (11,323)   195    (16,782)   (10,260)
Net income attributable to Eaton Vance Corp. shareholders  $101,807   $96,601   $188,608   $174,657 
Earnings per share:                    
Basic  $0.92   $0.84   $1.69   $1.51 
Diluted  $0.89   $0.78   $1.64   $1.41 
Weighted average shares outstanding:                    
Basic   110,379    115,625    111,315    115,448 
Diluted   114,249    123,779    114,795    123,912 

 

See notes to Consolidated Financial Statements.

  5 

 

 

Eaton Vance Corp.

Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
                 
Net income  $113,130   $96,406   $205,390   $184,917 
Other comprehensive income (loss):                    
Amortization of net losses on cash flow hedges, net of tax   (26)   (25)   (50)   (50)
Unrealized gains on available-for-sale investments, net of tax   -    312    -    1,032 
Foreign currency translation adjustments   (5,656)   (10,066)   (4,670)   2,019 
Other comprehensive income (loss), net of tax   (5,682)   (9,779)   (4,720)   3,001 
                     
Total comprehensive income   107,448    86,627    200,670    187,918 
Comprehensive (income) loss attributable to non-controlling  and other beneficial interests   (11,323)   195    (16,782)   (10,260)
Total comprehensive income attributable to Eaton Vance  Corp. shareholders  $96,125   $86,822   $183,888   $177,658 

 

See notes to Consolidated Financial Statements.

  6 

 

 

 

Eaton Vance Corp.

Consolidated Statements of Shareholders' Equity (unaudited)

 

   Three Months Ended April 30, 2019 
   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, January 31, 2019  $2   $450   $-   $(7,875)  $(55,933)  $1,131,094   $1,006   $1,068,744   $326,589 
Net income   -    -    -    -    -    101,807    445    102,252    10,878 
Other comprehensive income (loss), net of tax   -    -    -    -    (5,682)   -    -    (5,682)   - 
Dividends declared ($0.35 per share)   -    -    -    -    -    (40,039)   -    (40,039)   - 
Issuance of Non-Voting Common Stock:                                             
On exercise of stock options   -    1    9,049    (49)   -    -    -    9,001    - 
Under employee stock purchase incentive plan   -    -    2,917    -    -    -    -    2,917    - 
Under restricted stock plan, net of forfeitures   -    1    -    -    -    -    -    1    - 
Stock-based compensation   -    -    21,888    -    -    -    -    21,888    - 
Tax benefit (expense) associated with non-controlling interests   -    -    (33)   -    -    -    -    (33)   - 
Repurchase of Non-Voting Common Stock   -    (6)   (33,599)   -    -    (34,892)   -    (68,497)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    104    -    -    -    104    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    (402)   (402)   2,698 
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    (211)
Changes in redemption value of non-controlling interests redeemable at fair value   -    -    (222)   -    -    -    -    (222)   222 
Balance, April 30, 2019  $2   $446   $-   $(7,820)  $(61,615)  $1,157,970   $1,049   $1,090,032   $340,176 

 

See notes to Consolidated Financial Statements.

 

  7 

 

 

Eaton Vance Corp.

Consolidated Statements of Shareholders' Equity (unaudited) (continued)

 

   Three Months Ended April 30, 2018 
   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, January 31, 2018  $2   $469   $182,502   $(10,518)  $(34,694)  $961,492   $901   $1,100,154   $304,449 
Net income   -    -    -    -    -    96,601    714    97,315    (909)
Other comprehensive income (loss), net of tax   -    -    -    -    (9,779)   -    -    (9,779)   - 
Dividends declared ($0.31 per share)   -    -    -    -    -    (37,052)   -    (37,052)   - 
Issuance of Non-Voting Common Stock:                                             
On exercise of stock options   -    1    6,889    (382)   -    -    -    6,508    - 
Under employee stock purchase incentive plan   -    -    2,922    -    -    -    -    2,922    - 
Under restricted stock plan, net of forfeitures   -    1    -    -    -    -    -    1    - 
Stock-based compensation   -    -    20,779    -    -    -    -    20,779    - 
Tax benefit (expense) associated with non-controlling interests   -    -    (88)   -    -    -    -    (88)   - 
Repurchase of Non-Voting Common Stock   -    (5)   (73,119)   -    -    -    -    (73,124)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    1,524    -    -    -    1,524    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    (762)   (762)   16,690 
Changes in redemption value of non-controlling interests redeemable at fair value   -    -    (15,071)   -    -    -    -    (15,071)   15,071 
Balance, April 30, 2018  $2   $466   $124,814   $(9,376)  $(44,473)  $1,021,041   $853   $1,093,327   $335,301 

 

See notes to Consolidated Financial Statements.

 

  8 

 

 

Eaton Vance Corp.

Consolidated Statements of Shareholders' Equity (unaudited) (continued)

 

   Six Months Ended April 30, 2019 
   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   -    -    -    -    -    188,608    862    189,470    15,920 
Other comprehensive income (loss), net of tax   -    -    -    -    (4,720)   -    -    (4,720)   - 
Dividends declared ($0.70 per share)   -    -    -    -    -    (80,425)   -    (80,425)   - 
Issuance of Non-Voting Common Stock:                                             
On exercise of stock options   -    2    12,029    (248)   -    -    -    11,783    - 
Under employee stock purchase plans   -    -    1,593    -    -    -    -    1,593    - 
Under employee stock purchase incentive plan   -    -    3,389    -    -    -    -    3,389    - 
Under restricted stock plan, net of forfeitures   -    7    -    -    -    -    -    7    - 
Stock-based compensation   -    -    44,547    -    -    -    -    44,547    - 
Tax benefit (expense) associated with non-controlling interests   -    -    959    -    -    -    -    959    - 
Repurchase of Non-Voting Common Stock   -    (18)   (78,887)   -    -    (104,625)   -    (183,530)   - 
Principal repayments on notes receivable from stock option exercises   -    -    -    485    -    -    -    485    - 
Net subscriptions (redemptions/distributions) of non-controlling interest holders   -    -    -    -    -    -    (841)   (841)   43,919 
Net consolidations (deconsolidations) of sponsored investment funds   -    -    -    -    -    -    -    -    (51,912)
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   -    -    (1,144)   -    -    -    -    (1,144)   1,144 
Balance, April 30, 2019  $2   $446   $-   $(7,820)  $(61,615)  $1,157,970   $1,049   $1,090,032   $340,176 

 

See notes to Consolidated Financial Statements.

 

  9 

 

 

Eaton Vance Corp.

Consolidated Statements of Shareholders' Equity (unaudited) (continued)

 

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

 

See notes to Consolidated Financial Statements.

 

  10 

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited)

 

   Six Months Ended 
   April 30, 
(in thousands)  2019   2018 
         
Cash Flows From Operating Activities:          
Net income  $205,390   $184,917 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   12,135    12,439 
Amortization of deferred sales commissions   11,112    8,705 
Stock-based compensation   44,547    44,508 
Deferred income taxes   6,568    29,935 
Net (gains) losses on investments and derivatives   (69)   6,809 
Loss on expiration of Hexavest option   -    6,523 
Equity in net income of affiliates, net of tax   (4,683)   (6,127)
Dividends received from affiliates   5,634    6,080 
Consolidated CLO entities’ operating activities:          
Net gains on bank loans, other investments and note obligations   (608)   (1,085)
Amortization of bank loan investments   (389)   - 
(Increase) decrease in other assets, net of other liabilities   10,128    (308)
Changes in operating assets and liabilities:          
Management fees and other receivables   1,194    (5,491)
Short-term debt securities   70,077    (65,963)
Investments held by consolidated sponsored funds and separately managed accounts   (28,356)   (121,678)
Deferred sales commissions   (11,975)   (15,803)
Other assets   23,281    22,983 
Accrued compensation   (112,399)   (88,375)
Accounts payable and accrued expenses   4,635    8,042 
Other liabilities   (16,566)   (15,340)
Net cash provided by operating activities   219,656    10,771 
           
Cash Flows From Investing Activities:          
Additions to equipment and leasehold improvements   (21,612)   (7,707)
Proceeds from sale of investments(1)   12,139    4,770 
Purchase of investments(1)   (1,452)   (4,946)
Proceeds from sale of investments in CLO entity note obligations(1)   -    6,988 
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   193,838    32,953 
Purchase of bank loans and other investments   (550,600)   (115,763)
Net cash used for investing activities   (367,687)   (104,000)

 

(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 amounts previously presented within the purchase and sale of investments line items have been reclassified to the purchase and sale of investments in CLO entity note obligations line items for comparability purposes.

 

See notes to Consolidated Financial Statements.

 

  11 

 

 

Eaton Vance Corp.

Consolidated Statements of Cash Flows (unaudited) (continued)

 

   Six Months Ended 
   April 30, 
(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   16,772    53,715 
Repurchase of Non-Voting Common Stock   (196,666)   (109,467)
Principal repayments on notes receivable from stock option exercises   485    2,511 
Dividends paid   (82,521)   (73,740)
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders   42,868    67,501 
Consolidated CLO entities’ financing activities:          
Proceeds from line of credit   151,838    77,088 
Net cash used for financing activities   (86,252)   (3,210)
Effect of currency rate changes on cash and cash equivalents   (527)   842 
Net decrease in cash, cash equivalents and restricted cash   (234,810)   (95,597)
Cash, cash equivalents and restricted cash, beginning of period   866,075    649,863 
Cash, cash equivalents and restricted cash, end of period  $631,265   $554,266 
           
Supplemental Cash and Restricted Cash Flow Information:          
Cash paid for interest  $11,362   $11,330 
Cash paid for interest by consolidated CLO entities   7,521    493 
Cash paid for income taxes, net of refunds   57,351    66,553 
Supplemental Schedule of Non-Cash Investing and Financing Transactions:          
Increase in equipment and leasehold improvements due to non-cash additions  $6,274   $968 
Exercise of stock options through issuance of notes receivable   248    775 
Increase (decrease) in non-controlling interests due to net consolidations (deconsolidations) of sponsored investment funds   (51,912)   77,768 
Decrease in bank loans and other investments of consolidated CLO entities due to unsettled sales   22,525    - 
Increase in bank loans and other investments of consolidated CLO entities due to unsettled purchases   193,244    18,624 

 

See notes to Consolidated Financial Statements.

 

  12 

 

 

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 $6.0 and $11.7 million previously included as a component of fund-related expenses in the Consolidated Statements of Income for the three and six months ended April 30, 2018, respectively, 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

 

  13 

 

 

distribution expense increased by approximately $4.4 million and $8.9 million for the three and six months ended April 30, 2018, respectively, 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 tables present 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 
   April 30, 2018 
(in thousands)  As
Previously
Reported
   Reclassification   As Restated 
Revenue:               
Management fees  $361,009   $(4,933)  $356,076 
Distribution and underwriter fees   19,801    4,356    24,157 
Service fees   29,831    (378)   29,453 
Other revenue   3,620    (606)   3,014 
Total revenue   414,261    (1,561)   412,700 
Expenses:               
Compensation and related costs   147,989    -    147,989 
Distribution expense   34,534    6,064    40,598 
Service fee expense   27,329    (1,650)   25,679 
Amortization of deferred sales commissions   4,428    -    4,428 
Fund-related expenses   15,333    (5,975)   9,358 
Other expenses   51,962    -    51,962 
Total expenses   281,575    (1,561)   280,014 
Operating income  $132,686   $-   $132,686 

 

  14 

 

 

   Six Months Ended 
   April 30, 2018 
(in thousands)  As
Previously
Reported
   Reclassification   As Restated 
Revenue:               
Management fees  $727,376   $(9,443)  $717,933 
Distribution and underwriter fees   40,294    8,810    49,104 
Service fees   60,675    (861)   59,814 
Other revenue   7,328    (1,243)   6,085 
Total revenue   835,673    (2,737)   832,936 
Expenses:               
Compensation and related costs   303,037    -    303,037 
Distribution expense   70,174    12,293    82,467 
Service fee expense   55,891    (3,371)   52,520 
Amortization of deferred sales commissions   8,705    -    8,705 
Fund-related expenses   30,179    (11,659)   18,520 
Other expenses   99,201    -    99,201 
Total expenses   567,187    (2,737)   564,450 
Operating income  $268,486   $-   $268,486 

 

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

 

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.

 

  15 

 

 

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 using a retrospective approach. Accordingly, net changes in restricted cash of $3.2 million are no longer presented as a component of the Company’s net cash provided by operating activities for the six months ended April 30, 2018. A reconciliation of cash, cash equivalents, and restricted cash for all balance sheet periods presented is 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 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 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.

 

  16 

 

 

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/or 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 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.

 

  17 

 

 

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 the Company bills its customers and related payment terms vary in accordance with the agreed-upon contractual terms. A majority of the Company’s 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.

 

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. Management fees from sponsored funds are calculated principally as a percentage of average daily

 

  18 

 

 

net assets, are earned daily upon completion of investment advisory and administrative service performance obligations, 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.

 

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 operating expenses attributable to such share classes do not exceed a specified percentage. Fee waivers and fund subsidies are 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 are earned upon the sale of sponsored fund shares. 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.

 

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 and 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. Service fees are calculated as a percentage of average daily net assets under management, are earned daily upon completion of shareholder services, and are typically paid monthly from the assets of the fund.

 

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. In instances where the Company has discretion to hire a third party to provide services to the Company’s clients, the Company is generally deemed to control the services before transferring them to the clients, and accordingly presents the revenues gross of the related third-party costs. 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.

 

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

 

  19 

 

 

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.

 

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:

 

   April 30,   October 31, 
(in thousands)  2019   2018 
Cash and cash equivalents  $525,040   $600,696 
Restricted cash of consolidated sponsored funds included in investments   23,414    33,525 
Restricted cash included in assets of consolidated CLO entities, cash   61,694    216,598 
Restricted cash included in other assets   21,117    15,256 
Total cash, cash equivalents and restricted cash presented in the Consolidated Statement of Cash Flows  $631,265   $866,075 

 

  20 

 

 

3.Investments

 

The following is a summary of investments:

 

(in thousands) 

April 30,

2019

  

October 31,

2018

 
Investments held at fair value:          
Short-term debt securities  $203,316   $273,320 
Debt and equity securities held by consolidated sponsored funds   525,162    540,582 
Debt and equity securities held in separately managed accounts   80,719    89,121 
Non-consolidated sponsored funds and other   4,926    10,329 
Total investments held at fair value   814,123    913,352 
Investments held at cost   20,904    20,874 
Investments in non-consolidated CLO entities   2,897    2,895 
Investments in equity method investees   137,253    141,506 
Total investments(1)(2)  $975,177   $1,078,627 

 

(1) Excludes bank loans and other investments held by consolidated CLO entities, which are discussed in Note 4.
(2) Amounts at April 30, 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.

 

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   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Realized gains (losses) on securities sold  $4,162   $994   $(233)  $6,124 
Unrealized gains (losses) on investments held at fair value   8,071    (14,240)   11,377    (6,975)
Net gains (losses) on investments held at fair value(1)  $12,233   $(13,246)  $11,144   $(851)

 

(1) Amounts for the three and six months ended April 30, 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 both April 30, 2019 and 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 April 30, 2019

 

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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 and six months ended April 30, 2019. During both the three and six months ended April 30, 2018, the Company recognized $0.2 million of other-than temporary impairment losses.

 

Investments in equity method investees

 

The Company has a 49 percent equity interest in Hexavest Inc. (Hexavest), a Montreal, Canada-based investment adviser. The carrying value of this investment consisted of the following:

 

(in millions) 

April 30,

2019

  

October 31,

2018

 
Equity in net assets of Hexavest  $5.5   $6.0 
Definite-lived intangible assets   19.9    21.3 
Goodwill   113.8    116.4 
Deferred tax liability   (5.4)   (5.7)
Total carrying value  $133.8   $138.0 

 

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.

 

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 April 30, 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 and six months ended April 30, 2019 or 2018.

 

During the six months ended April 30, 2019 and 2018, the Company received dividends of $5.6 million and $6.1 million, respectively, 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

 

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reported amount of investments on the Company’s Consolidated Balance Sheets at April 30, 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) 

April 30,

2019

  

October 31,

2018

 
Investments  $525,162   $540,582 
Other assets   9,684    15,471 
Other liabilities   (37,120)   (57,286)
Redeemable non-controlling interests   (252,731)   (244,970)
Net interest in consolidated sponsored funds  $244,995   $253,797 

 

Consolidated CLO entities

As of April 30, 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, a warehouse phase CLO entity, on January 3, 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-

 

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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 six months ended April 30, 2019, the Company made additional capital contributions of $30.0 million in order to increase the level of funding available for borrowing under the line of credit. CLO 2019-1 entered the securitization phase towards the end of the second quarter, but did not close prior to April 30, 2019.

 

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.

 

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 April 30, 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 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 April 30, 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 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

 

  24 

 

 

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 April 30, 2019 and October 31, 2018 are provided below.

 

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:

 

   April 30,   October 31, 
   2019   2018 
(in thousands)  Consolidated
Securitized
CLO Entities
   Consolidated
Warehouse
CLO Entity
   Consolidated
Securitized
CLO Entities
 
Assets of consolidated CLO entities:               
Cash  $59,762   $1,932   $216,598 
Bank loans and other investments   912,308    324,821    874,304 
Receivable for pending bank loan sales   19,009    3,516    2,535 
Other assets   3,311    441    1,929 
Liabilities of consolidated CLO entities:               
Senior and subordinated note obligations   856,972    -    873,008 
Line of credit   -    151,838    - 
Payable for pending bank loan purchases   59,674    133,570    152,152 
Other liabilities   12,752    1,232    2,033 
Total beneficial interests  $64,992   $44,070   $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 $65.0 million and $68.2 million at April 30, 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 April 30, 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.

 

  25 

 

 

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

 

   Three Months Ended     
   April 30, 2019     
(in thousands)  Consolidated
Securitized
CLO Entities
   Consolidated
Warehouse
CLO Entity
   Total 
Other income (expense) of consolidated CLO entities:               
Gains and other investment income, net  $17,355   $4,439   $21,794 
Interest and other expense   (9,680)   (1,141)   (10,821)
Net gain attributable to the Company  $7,675   $3,298   $10,973 

 

   Six Months Ended     
   April 30, 2019     
(in thousands)  Consolidated
Securitized
CLO Entities
   Consolidated
Warehouse
CLO Entity
   Total 
Other income (expense) of consolidated CLO entities:               
Gains and other investment income, net  $21,933   $5,302   $27,235 
Interest and other expense   (17,925)   (1,232)   (19,157)
Net gain attributable to the Company  $4,008   $4,070   $8,078 

 

The amounts included in the Company’s Consolidated Statements of Income for the three and six months ended April 30, 2018 related entirely to the warehouse CLO entity consolidated by the Company in 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:

 

(in thousands)  Three Months Ended
April 30, 2019
   Six Months Ended
April 30, 2019
 
Economic interests in Consolidated Securitized CLO Entities:          
Distributions received and unrealized gains on the subordinated interests held by the Company  $6,445   $1,871 
Management fees   1,230    2,137 
Total economic interests  $7,675   $4,008 

 

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Subsequent event – CLO 2019-1 securitization

The securitization of CLO 2019-1 closed on May 15, 2019. Upon closing, the proceeds from the issuance of senior and subordinated note obligations were used to purchase the warehouse bank loans, repay the third-party revolving line of credit and return the Company’s total capital contributions of $40 million. The Company acquired 100 percent of the subordinated notes issued by CLO 2019-1 at closing for $28.9 million and will provide collateral management services to this CLO entity in exchange for a collateral management fee. The Company deems itself to be the primary beneficiary of CLO 2019-1 as it has both power and economics and began consolidating the securitized entity upon closing.

 

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 April 30, 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.

 

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 April 30, 2019. Collateral management fees receivable for these entities totaled $0.1 million on both April 30, 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.

 

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Subsequent event – Eaton Vance CLO 2013-1 (CLO 2013-1)

On May 1, 2019, the Company purchased 100 percent of the subordinated interests of CLO 2013-1 for $25.4 million. As of April 30, 2019, the Company held 20 percent of the Class E senior notes of CLO 2013-1 as an investment in non-consolidated CLO entities with a carrying value of $1.4 million. The Company is the collateral manager of CLO 2013-1. Upon acquiring 100 percent of the subordinated interests of the entity on May 1, 2019, the Company deems itself to be the primary beneficiary of CLO 2013-1 as it has both power and economics. The Company began consolidating CLO 2013-1 as of that date.

 

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 $24.3 billion and $21.8 billion on April 30, 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 April 30, 2019. The Company held investments in these entities totaling $0.5 million and $2.7 million on April 30, 2019 and October 31, 2018, respectively, and investment advisory fees receivable totaling $1.4 million and $1.3 million on April 30, 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 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 April 30, 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 April 30, 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.

 

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 in other comprehensive income (loss), net of tax. The Company reclassified approximately $17,000 and

 

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$34,000 of the loss into interest expense during both the three and six months ended April 30, 2019 and 2018, respectively, and will reclassify the remaining $0.5 million loss as of April 30, 2019 to earnings over the remaining term of the debt. During the next 12 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 and $0.1 million of the gain into interest expense during both the three and six months ended April 30, 2019 and 2018, respectively, and will reclassify the remaining $0.8 million gain as of April 30, 2019 to earnings over the remaining term of the debt. During the next 12 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:

 

   April 30, 2019   October 31, 2018 
  

Number of

Contracts

  

Notional Value

(in millions)

  

Number of

Contracts

  

Notional Value

(in millions)

 
Stock index futures contracts   1,312   $98.0    1,007   $91.5 
Total return swap contracts   2   $106.5    3   $106.5 
Credit default swap contracts   1   $8.0    1   $5.0 
Foreign exchange contracts   17   $19.5    28   $23.0 
Commodity futures contracts   312   $11.4    253   $11.6 
Currency futures contracts   218   $22.9    165   $16.9 
Interest rate futures contracts   184   $28.8    282   $48.0 

 

The derivative contracts outstanding and notional values they represent at April 30, 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:

 

   April 30, 2019   October 31, 2018 
(in thousands) 

Other

Assets

  

Other

Liabilities

  

Other

Assets

  

Other

Liabilities

 
Stock index futures contracts  $282   $4,523   $5,055   $372 
Total return swap contracts   -    9,387    -    3,297 
Credit default swap contracts   334    -    -    10 
Foreign exchange contracts   211    45    329    202 
Commodity futures contracts   155    285    770    216 
Currency futures contracts   86    137    14    332 
Interest rate futures contracts   21    345    179    17 
Total  $1,089   $14,722   $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 the Consolidated Balance Sheets. At April 30, 2019 and October 31, 2018, collateral balances were $18.9 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   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Stock index futures contracts  $(5,681)  $5,719   $(5,897)  $(1,937)
Total return swap contracts   (4,197)   (364)   (6,382)   (990)
Credit default swap contracts   (64)   -    (147)   - 
Foreign exchange contracts   345    270    62    (629)
Commodity futures contracts   (410)   (317)   337    (720)
Currency futures contracts   (106)   89    (71)   3 
Interest rate futures contracts   (514)   (103)   (902)   (18)
Net gains (losses)  $(10,627)  $5,294   $(13,000)  $(4,291)

 

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:

 

April 30, 2019(1)                    
(in thousands)  Level 1   Level 2   Level 3  

Other

Assets Not

Held at Fair

Value

   Total 
Financial assets:                         
Cash equivalents  $19,561   $108,441   $-   $-   $128,002 
Investments held at fair value:                         
Debt securities:                         
Short-term   -    203,316    -    -    203,316 
Held by consolidated sponsored funds   -    320,127    -    -    320,127 
Held in separately managed accounts   -    60,699    -    -    60,699 
Equity securities:                         
Held by consolidated sponsored funds   74,939    130,096    -    -    205,035 
Held in separately managed accounts   19,797    223    -    -    20,020 
Non-consolidated sponsored funds and other   2,980    1,946    -    -    4,926 
Investments held at cost(2)   -    -    -    20,904    20,904 
Investments in non-consolidated CLO entities(3)   -    -    -    2,897    2,897 
Investments in equity method investees(2)   -    -    -    137,253    137,253 
Derivative instruments   -    1,089    -    -    1,089 
Assets of consolidated CLO entities:                         
Bank loans and other investments   -    1,235,991    1,138    -    1,237,129 
Total financial assets  $117,277   $2,061,928   $1,138   $161,054   $2,341,397 
                          
Financial liabilities:                         
Derivative instruments  $-   $14,722   $-   $-   $14,722 
Liabilities of consolidated CLO entities:                         
Senior and subordinated note obligations   -    856,972    -    -    856,972 
Total financial liabilities  $-   $871,694   $-   $-   $871,694 

 

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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 April 30, 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

 

  33 

 

 

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 April 30, 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:

 

  

Bank Loan Investments of

Consolidated CLO Entities

 
   Three Months Ended   Six Months Ended 
(in thousands)  April 30, 2019   April 30, 2019 
Beginning balance  $1,362   $1,547 
Paydowns   (6)   (12)
Net losses included in net income   (218)   (397)
Ending balance  $1,138   $1,138 

 

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:

 

   April 30, 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  $620,095   $635,652    2   $619,678   $607,391    2 
Consolidated CLO entity line of credit  $151,838   $151,838    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 $151.8 million as of April 30, 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 April 30, 2019 and October 31, 2018. The estimated fair value of these interests was $27.1 million and $26.3 million at April 30, 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 April 30, 2019 from 5.1 percent as of October 31, 2018. Total capital interests in Parametric held by non-controlling interest holders decreased to 0.6 percent as of April 30, 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 April 30, 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 April 30, 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 April 30, 2019 and October 31, 2018. The estimated fair value of these interests was $48.5 million and $47.9 million at April 30, 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:

 

April 30, 2019            
(in thousands) 

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Net Carrying

Amount

 
Amortizing intangible assets:               
Client relationships acquired  $134,247   $(114,146)  $20,101 
Intellectual property acquired   1,025    (552)   473 
Trademark acquired   4,257    (1,374)   2,883 
Research system acquired   639    (497)   142 
Non-amortizing intangible assets:               
Mutual fund management contracts acquired   54,408    -    54,408 
Total  $194,576   $(116,569)  $78,007 

 

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 $1.1 million and $2.2 million for the three months ended April 30, 2019 and 2018, respectively, and $2.9 million and $4.5 million for the six months ended April 30, 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  $2,100 
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   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Management fees:                    
Sponsored funds  $243,464   $248,408   $486,130   $499,662 
Separate accounts   115,920    107,668    224,004    218,271 
Total management fees   359,384    356,076    710,134    717,933 
Distribution and underwriter fees:                    
Distribution fees   14,806    18,990    33,851    38,753 
Underwriter commissions   5,248    5,167    9,293    10,351 
Total distribution and underwriter fees   20,054    24,157    43,144    49,104 
Service fees   29,586    29,453    58,946    59,814 
Other revenue   2,837    3,014    6,053    6,085 
Total revenue  $411,861   $412,700   $818,277   $832,936 

 

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

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Equity  $172,311   $171,346   $336,209   $346,036 
Fixed income   68,806    63,397    135,830    128,210 
Floating rate income   49,405    51,012    103,083    101,696 
Alternative   14,128    21,533    30,301    43,111 
Portfolio implementation   44,147    37,805    84,036    76,792 
Exposure management   10,587    10,983    20,675    22,088 
Total management fees  $359,384   $356,076   $710,134   $717,933 

 

The amount of management fees and other receivables reported in the Company’s Consolidated Balance Sheet includes $223.6 million and $221.4 million of receivables from contracts with customers at April 30, 2019 and October 31, 2018, respectively. The amount of deferred revenue reported in other liabilities in the Company’s Consolidated Balance Sheet was $5.1 million and $4.9 million at April 30, 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   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Omnibus Incentive Plans:                    
Stock options  $5,122   $5,117   $10,562   $12,406 
Restricted shares   14,015    12,584    28,500    26,077 
Deferred stock units(1)   124    7    739    929 
Employee Stock Purchase Plans   -    -    176    481 
Employee Stock Purchase Incentive Plan   325    603    377    689 
Atlanta Capital Plan   570    742    1,140    1,484 
Atlanta Capital Phantom Incentive Plan   265    138    539    281 
Parametric Plan   600    795    1,340    1,589 
Parametric Phantom Incentive Plan   991    800    1,913    1,501 
Total stock-based compensation expense  $22,012   $20,786   $45,286   $45,437 

 

(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.

 

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The total income tax benefit recognized for stock-based compensation arrangements was $5.1 million and $5.2 million for the three months ended April 30, 2019 and 2018, respectively, and $10.3 million and $10.9 million for the six months ended April 30, 2019 and 2018, respectively.

 

Stock options

 

Stock option transactions under the Company’s 2013 Omnibus Incentive Plan (the 2013 Plan) and predecessor plans for the six months ended April 30, 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   2,469    45.37           
Exercised   (411)   29.26           
Forfeited/expired   (54)   40.91           
Options outstanding, end of period   18,764   $36.68    5.9   $117,675 
Options exercisable, end of period   10,074   $32.82    4.1   $90,236 

 

The Company received $11.8 million and $48.8 million related to the exercise of options for the six months ended April 30, 2019 and 2018, respectively.

 

As of April 30, 2019, compensation cost of $51.0 million related to unvested stock options granted under the 2013 Plan and predecessor plans has not yet been recognized. That cost is expected to be recognized over a weighted-average period of 2.8 years.

 

Restricted shares

 

A summary of the Company’s restricted share activity for the six months ended April 30, 2019 under the 2013 Plan is as follows:

 

       Weighted- 
       Average 
       Grant Date 
(share figures in thousands)  Shares   Fair Value 
Unvested, beginning of period   4,544   $40.70 
Granted   1,738    44.88 
Vested   (1,240)   39.12 
Forfeited   (60)   42.37 
Unvested, end of period   4,982   $42.53 

 

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As of April 30, 2019, there was $153.8 million of compensation cost related to unvested restricted shares granted under the 2013 Plan not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.1 years.

 

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.

 

During the six months ended April 30, 2019, 19,125 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 $1.5 million and $1.3 million as of April 30, 2019 and October 31, 2018, respectively. The Company made cash payments of $0.5 million and $0.4 million, in the first quarter 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 six months of fiscal 2019, the Company purchased and retired approximately 4.7 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 2.6 million additional shares may be repurchased under the current authorization as of April 30, 2019.

 

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12.Non-operating Income (Expense)

 

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

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Interest and other income  $11,534   $7,253   $21,354   $16,369 
Net losses on investments and derivatives(1)   3,716    (7,788)   69    (13,333)
Net foreign currency gains (losses)   (44)   274    (384)   (699)
Gains (losses) and other investment income, net   15,206    (261)   21,039    2,337 
Interest expense   (5,888)   (5,903)   (12,019)   (11,810)
Other income (expense) of consolidated CLO entities:                    
Interest income   15,059    865    26,809    1,688 
Net gains on bank loans and other investments and note obligations   6,735    394    426    1,288 
Gains and other investment income, net   21,794    1,259    27,235    2,976 
Structuring and closing fees   (18)   -    (119)   - 
Interest expense   (10,803)   (444)   (19,038)   (538)
Interest and other expense   (10,821)   (444)   (19,157)   (538)
Total non-operating income (expense)  $20,291   $(5,349)  $17,098   $(7,035)

 

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

 

13.Income Taxes

 

The provision for income taxes was $37.1 million and $34.0 million, or 25.1 percent and 26.7 percent of pre-tax income, for the three months ended April 30, 2019 and 2018, respectively. The provision for income taxes was $64.7 million and $82.7 million, or 24.4 percent and 31.6 percent of pre-tax income, for the six months ended April 30, 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   Six Months Ended 
   April 30,   April 30, 
   2019   2018   2019   2018 
Statutory U.S. federal income tax rate(1)   21.0%   23.3%   21.0%   23.3%
State and local income tax, net of federal income tax benefits   4.5%   4.3%   4.5%   4.3%
Net income attributable to non-controlling and other beneficial interests   -0.9%   0.1%   -0.9%   -0.9%
Non-recurring impact of U.S. tax reform   -%   -%   -%   9.5%
Net excess tax benefits from stock-based compensation plans(2)   -0.2%   -1.5%   -1.2%   -5.3%
Other items   0.7%   0.5%   1.0%   0.7%
Effective income tax rate   25.1%   26.7%   24.4%   31.6%

 

(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 (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 April 30, 2019 includes $0.7 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 Company’s 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 $0.3 million and $1.9 million for the three months ended April 30, 2019 and 2018, respectively.

 

The Company’s income tax provision for the first six months of fiscal 2019 includes $1.3 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 increase in the effective tax rate resulting from this charge is offset by an income tax benefit of $3.2 million related to the exercise of employee stock options and vesting of restricted stock awards during the period, and $3.0 million related to the net income attributable to redeemable non-controlling interest and other beneficial interests, which is not taxable to the Company.

 

The Company’s income tax provision for the first six months of fiscal 2018 includes a non-recurring charge of approximately $24.8 million to reflect the effect of the 2017 Tax Act. The non-recurring charge was considered to be a provisional estimate under the U.S. Securities and Exchange Commission Staff Accounting Bulletin 118 (SAB 118) and included $21.7 million from the revaluation of the Company’s deferred tax assets and liabilities, and $3.1 million for the deemed repatriation of foreign-sourced net earnings not previously subject to U.S. taxation. The increase in the Company’s effective tax rate resulting from this charge was partially offset by an income tax benefit of $13.7 million related to the exercise of employee stock options and vesting of restricted stock awards during the period, and $2.8 million related

 

  43 

 

 

to the net income attributable to redeemable non-controlling interests and other beneficial interests, which is not taxable to the Company.

 

As of April 30, 2019 and October 31, 2018, no valuation allowance has been recorded for deferred tax assets, reflecting management’s belief that all deferred tax assets will be utilized.

 

As of April 30, 2019, the Company considers the undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested in foreign operations. The Company no longer considers the undistributed earnings of its Canadian subsidiary to be indefinitely reinvested in foreign operations. This change in assertion allowed the Canadian subsidiary to declare and pay a $65.2 million dividend to its U.S. parent company, which is a wholly-owned subsidiary of the Company, in April 2019. There was no financial statement impact related to this dividend as all previously undistributed earnings from the Canadian subsidiary were subject to taxation in fiscal 2018 due to the 2017 Tax Act. The dividend did, however, result in a tax expense reduction in the amount of $0.5 million due to a realized foreign exchange loss. As of April 30, 2019, the Company had approximately $12.4 million of undistributed earnings primarily from foreign operations in the United Kingdom 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 April 30, 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.

 

14.Non-controlling and Other Beneficial Interests

 

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

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Consolidated sponsored funds  $(8,141)  $3,947   $(10,563)  $(2,353)
Majority-owned subsidiaries   (3,182)   (3,752)   (6,219)   (7,907)
Net (income) loss attributable to non-controlling and other beneficial interests  $(11,323)  $195   $(16,782)  $(10,260)

 

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15.Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended April 30, 2019 and 2018 are as follows:

 

(in thousands) 

Unamortized

Net Gains on

Cash Flow

Hedges(1)

  

Net Unrealized

Gains on

Available-for-

Sale

Investments(2)

  

Foreign

Currency

Translation

Adjustments

   Total 
Balance at January 31, 2019  $176   $-   $(56,109)  $(55,933)
Other comprehensive income (loss), before reclassifications and tax   -    -    (5,656)   (5,656)
Tax impact   -    -    -    - 
Reclassification adjustments, before tax   (33)   -    -    (33)
Tax impact   7    -    -    7 
Net current period other comprehensive income (loss)   (26)   -    (5,656)   (5,682)
Balance at April 30, 2019  $150   $-   $(61,765)  $(61,615)
                     
Balance at January 31, 2018  $276   $4,848   $(39,818)  $(34,694)
Other comprehensive income (loss), before reclassifications and tax   -    414    (10,066)   (9,652)
Tax impact   -    (102)   -    (102)
Reclassification adjustments, before tax   (33)   -    -    (33)
Tax impact   8    -    -    8 
Net current period other comprehensive income (loss)   (25)   312    (10,066)   (9,779)
Balance at April 30, 2018  $251   $5,160   $(49,884)  $(44,473)

 

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The components of accumulated other comprehensive income (loss), net of tax, for the six months ended April 30, 2019 and 2018 are as follows:

 

(in thousands) 

Unamortized

Net Gains 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 (loss), before reclassifications and tax   -    -    (4,670)   (4,670)
Tax impact   -    -    -    - 
Reclassification adjustments, before tax   (67)   -    -    (67)
Tax impact   17    -    -    17 
Net current period other comprehensive income (loss)   (50)   -    (4,670)   (4,720)
Balance at April 30, 2019  $150   $-   $(61,765)  $(61,615)
                     
Balance at October 31, 2017  $301   $4,128   $(51,903)  $(47,474)
Other comprehensive income (loss), before reclassifications and tax   -    1,376    2,019    3,395 
Tax impact   -    (344)   -    (344)
Reclassification adjustments, before tax   (66)   -    -    (66)
Tax impact   16    -    -    16 
Net current period other comprehensive income (loss)   (50)   1,032    2,019    3,001 
Balance at April 30, 2018  $251   $5,160   $(49,884)  $(44,473)

 

(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   Six Months Ended 
   April 30,   April 30, 
(in thousands, except per share data)  2019   2018   2019   2018 
Net income attributable to Eaton Vance Corp. shareholders  $101,807   $96,601   $188,608   $174,657 
Weighted-average shares outstanding – basic   110,379    115,625    111,315    115,448 
Incremental common shares   3,870    8,154    3,480    8,464 
Weighted-average shares outstanding – diluted   114,249    123,779    114,795    123,912 
Earnings per share:                    
Basic  $0.92   $0.84   $1.69   $1.51 
Diluted  $0.89   $0.78   $1.64   $1.41 

 

Antidilutive common shares related to stock options and unvested restricted stock excluded from the computation of earnings per diluted share were approximately 7.5 million and 1.9 million for the three months ended April 30, 2019 and 2018, respectively, and approximately 8.8 million and 2.1 million for the six months ended April 30, 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   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018(1)   2019   2018(1) 
Management fees  $243,464   $248,408   $486,130   $499,662 
Distribution and underwriter fees   20,054    24,157    43,144    49,104 
Service fees   29,586    29,453    58,946    59,814 
Shareholder services fees included in other revenue     1,696       1,477       3,279       2,868  
Total  $294,800   $303,495   $591,499   $611,448 

 

(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 April 30, 2019 and 2018, the Company discretionarily waived management fees of $4.7 million and $4.2 million, respectively. Separately, for these same periods, the Company provided subsidies to sponsored funds of $7.9 million and $6.0 million, respectively. For the six months ended April 30, 2019 and 2018, the Company discretionarily waived management fees of $9.0 million and $8.6 million, respectively. Separately, for these same periods, the Company provided subsidies to sponsored funds of $17.2 million and $11.7 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   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Proceeds from sales  $2,349   $-   $6,625   $- 
Net realized gains (losses)   5,180    (110)   5,205    (105)

 

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 April 30, 2019 and 2018, expenses of $3.3 million and $3.2 million, respectively, were incurred by the Company pursuant to these arrangements. For the six months ended April 30, 2019 and 2018, expenses of $6.6 million and $6.7 million, respectively, were incurred by the Company pursuant to these arrangements.

 

Included in management fees and other receivables at April 30, 2019 and October 31, 2018 are receivables due from sponsored funds of $101.3 million and $104.9 million, respectively, for services provided. Included in accounts payable and accrued expenses at April 30, 2019 and October 31, 2018 are payables due to sponsored funds of $3.8 million and $3.2 million, respectively, relating primarily to fund subsidies.

 

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Loan to affiliate

 

On December 23, 2015, EVMC, a wholly owned subsidiary of the Company, loaned $5.0 million to Hexavest under a term loan agreement to seed a new investment strategy. The loan renews automatically for an additional one-year period on each anniversary date unless written termination notice is provided by EVMC. 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. For the three months ended April 30, 2019 and 2018, the Company recorded $43,000 and $48,000, respectively, of interest income related to the loan in gains (losses) and other investment income, net, on the Company’s Consolidated Statement of Income. For both the six months ended April 30, 2019 and 2018, the Company recorded $0.1 million of interest income related to the loan. Interest due from Hexavest under this arrangement included in other assets on the Company’s Consolidated Balance Sheets was $14,579 and $16,151 at April 30, 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 $7.8 million and $8.1 million at April 30, 2019 and October 31, 2018, respectively.

 

19.Geographic Information

 

Revenues by principal geographic area are as follows:

 

   Three Months Ended   Six Months Ended 
   April 30,   April 30, 
(in thousands)  2019   2018   2019   2018 
Revenue:                    
U.S.(1)  $396,370   $395,432   $787,124   $799,596 
International(1)   15,491    17,268    31,153    33,340 
Total  $411,861   $412,700   $818,277   $832,936 

 

(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.

 

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

 

   April 30,   October 31, 
(in thousands)  2019   2018 
Long-lived Assets:          
U.S.  $68,353   $50,459 
International   1,800    1,969 
Total  $70,153   $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 April 30, 2019, we had $469.9 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 rate 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 six months of fiscal 2019, we continued to experience strong growth in our Custom Beta strategies, which include Parametric Custom Core equity and Eaton Vance Management 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 six months of fiscal 2019, net inflows into our Custom Beta strategies offered as individual separate accounts totaled $7.8 billion, which equates to annualized internal growth in managed assets of 18 percent.

 

In our floating-rate bank loan strategies, we saw net outflows of $4.5 billion in the first six months of fiscal 2019, as investors reduced their exposure to floating-rate assets and below investment grade credits amid a changing economic outlook. Our lineup of fixed income mutual funds positioned as short- or ultra-short duration, short-term or adjustable-rate continued to demonstrate strong appeal to investors in the first six months 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 $2.5 billion in the first six months 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 in December 2016, 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 $17.1 billion at April 30, 2019 from $14.7 billion at October 31, 2018, reflecting net inflows of $1.5 billion and market price appreciation of $1.0 billion. Calvert’s $1.5 billion of net inflows for the first six months of fiscal 2019 equates to annualized internal growth in managed assets of 20 percent.

 

While Calvert is the centerpiece of our responsible investment strategy, our commitment to responsible investing extends to other investment affiliates. 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 $22 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 February 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, referred to as 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.

 

As of April 30, 2019, 67 Calvert, Eaton Vance and Parametric-branded mutual funds offered in the U.S. were rated 4 or 5 stars by MorningstarTM for at least one class of shares, including 28 five-star rated funds. A good source of performance-related information for our funds is their websites, available at www.calvert.com and www.eatonvance.com. On our funds’ websites, 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 second quarter and the first six months of fiscal 2019, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 9.5 percent and 9.8 percent, respectively, and the MSCI Emerging Market Index, a broad measure of emerging market equity performance, had total returns of 3.2 percent and 13.9 percent, respectively. Over the same periods, the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of 1.9 percent and 5.5 percent, respectively.

 

Consolidated assets under management of $469.9 billion on April 30, 2019 increased $29.8 billion, or 7 percent, from $440.1 billion of consolidated assets under management on April 30, 2018. The year-over-year increase in consolidated assets under management reflects net inflows of $11.9 billion and market price appreciation in managed assets of $17.9 billion.

 

The following tables summarize our consolidated assets under management by investment mandate, investment vehicle and investment affiliate. 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.

 

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Consolidated Assets under Management by Investment Mandate(1)

 

   April 30,     
(in millions)  2019  

% of

Total

   2018  

% of

Total

  

%

Change

 
Equity(2)  $125,869    27%  $117,757    27%   7%
Fixed income(3)   86,744    18%   74,024    17%   17%
Floating-rate income   39,750    8%   42,282    10%   -6%
Alternative   9,409    2%   13,506    3%   -30%
Portfolio implementation   125,391    27%   107,170    24%   17%
Exposure management   82,775    18%   85,333    19%   -3%
Total  $469,938    100%  $440,072    100%   7%

 

(1)Consolidated Eaton Vance Corp. See table on page 60 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 $43.7 billion and $41.2 billion of assets managed for after-tax returns on April 30, 2019 and 2018, respectively. Portfolio implementation assets under management included $90.5 billion and $88.1 billion of assets managed for after-tax returns on April 30, 2019 and 2018, respectively. Fixed income assets included $48.5 billion and $42.1 billion of municipal income assets on April 30, 2019 and 2018, respectively.

 

Consolidated Assets under Management by Investment Vehicle(1)

 

   April 30,     
(in millions)  2019  

% of

Total

   2018  

% of

Total

  

%

Change

 
Open-end funds  $104,367    22%  $101,682    23%   3%
Closed-end funds   24,503    5%   24,635    6%   -1%
Private funds(2)   42,092    9%   36,552    8%   15%
Institutional separate accounts   160,460    34%   163,816    37%   -2%
Individual separate accounts(3)   138,516    30%   113,387    26%   22%
Total  $469,938    100%  $440,072    100%   7%

 

(1)Consolidated Eaton Vance Corp. See table on page 60 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Includes privately offered equity, fixed income and floating-rate income funds and CLO entities.
(3)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.

 

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Consolidated Assets under Management by Investment Affiliate(1)

 

   April 30,   % 
(in millions)  2019   2018   Change 
Eaton Vance Management(2)  $184,603   $173,269    7%
Parametric   245,168    231,452    6%
Atlanta Capital(3)   25,766    23,593    9%
Calvert(3)   14,401    11,758    22%
Total  $469,938   $440,072    7%

 

(1)Consolidated Eaton Vance Corp. See table on page 60 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 $17.1 billion and $14.0 billion as of April 30, 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.

 

Consolidated Average Assets under Management by Investment Mandate(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2019   2018   Change   2019   2018   Change 
Equity(2)  $121,224   $119,051    2%  $118,208   $117,626    0%
Fixed income(3)   84,749    73,261    16%   82,249    72,447    14%
Floating-rate income   40,330    41,062    -2%   41,598    40,179    4%
Alternative   9,733    13,504    -28%   10,428    13,157    -21%
Portfolio implementation   120,163    107,607    12%   115,776    105,271    10%
Exposure management   80,011    86,108    -7%   78,859    86,623    -9%
Total  $456,210   $440,593    4%  $447,118   $435,303    3%

 

(1)Consolidated Eaton Vance Corp. See table on page 60 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.

 

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Consolidated Average Assets under Management by Investment Vehicle(1)

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2019   2018   Change   2019   2018   Change 
Open-end funds  $102,096   $101,501    1%  $101,307   $100,244    1%
Closed-end funds   24,052    24,865    -3%   23,855    24,898    -4%
Private funds(2)   40,580    36,673    11%   39,668    36,081    10%
Institutional separate accounts   157,032    163,885    -4%   155,064    162,814    -5%
Individual separate accounts(3)   132,450    113,669    17%   127,224    111,266    14%
Total  $456,210   $440,593    4%  $447,118   $435,303    3%

 

(1)Consolidated Eaton Vance Corp. See table on page 60 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above.
(2)Includes privately offered equity, fixed income and floating-rate income funds and CLO entities.
(3)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 $4.6 billion and $6.1 billion in the second quarter and first six months of fiscal 2019, respectively, represent annualized internal growth in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management) of 4 percent and 3 percent for the respective periods. For comparison, we had consolidated net inflows of $4.4 billion and $11.5 billion in the second quarter and first six months of fiscal 2018, respectively, representing annualized internal growth in managed assets of 4 percent and 5 percent for the respective periods. Excluding exposure management mandates, which have lower fees and more variable flows than the rest of our business, our annualized internal growth in managed assets was 3 percent in both the second quarter and first six months of fiscal 2019 and 9 percent and 8 percent in the second quarter and first six months of fiscal 2018, respectively.

 

The Company’s annualized internal management fee revenue growth rate (management fees attributable to consolidated inflows less management fees attributable to consolidated outflows, divided by beginning of period consolidated management fee revenue) was 1 percent in the second quarter of fiscal 2019, as the management fee revenue contribution from sales and other inflows exceeded the management fee revenue lost from redemptions and other outflows. The Company’s annualized internal management fee revenue growth rate was -1 percent in the first six months of fiscal 2019, as the management fee revenue lost from redemptions and other outflows exceeded the management fee revenue contribution from sales and other inflows. The Company’s annualized internal management fee revenue growth rate was 6 percent and 5 percent in the second quarter and first six months of fiscal 2018, respectively, as the management fee revenue contribution from sales and other inflows exceeded the management fee revenue lost from redemptions and other outflows.

 

The following tables summarize our consolidated assets under management and asset flows by investment mandate and investment vehicle:

 

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

 

   Three Months Ended       Six Months Ended     
   April 30,   %   April 30,   % 
(in millions)  2019   2018   Change   2019   2018   Change 
Equity assets - beginning of period(2)  $116,990   $122,595    -5%  $115,772   $113,472    2%
Sales and other inflows   5,050    5,913    -15%   11,270    11,789    -4%
Redemptions/outflows   (4,570)   (5,265)   -13%   (10,031)   (10,585)   -5%
Net flows   480    648    -26%   1,239    1,204    3%
Exchanges   150    (5)   NM(4)   42    (2)   NM 
Market value change   8,249    (5,481)   NM    8,816    3,083    186%
Equity assets - end of period  $125,869   $117,757    7%  $125,869   $117,757    7%
Fixed income assets - beginning of period(3)   82,525