UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
For the quarterly period ended JulyJanuary 31, 20182019
or
¨ | Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
For the transition period from _____________ to ____________
Commission File Number: 1-8100
EATON VANCE CORP.
(Exact name of registrant as specified in its charter)
Maryland | 04-2718215 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
Two International Place, Boston, Massachusetts 02110 | ||
(Address of principal executive offices) (zip code) | ||
(617) 482-8260 | ||
(Registrant's telephone number, including area code) |
Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx 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¨ Nox
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 | |
Non-Voting Common Stock, $0.00390625 par value | | |
Voting Common Stock, $0.00390625 par value | 422,935 shares |
Eaton Vance Corp.
Form 10-Q
As of JulyJanuary 31, 20182019 and for the
Three and Nine Month PeriodsPeriod Ended JulyJanuary 31, 20182019
Table of Contents
2 |
Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Eaton Vance Corp.
Consolidated Balance Sheets (unaudited)
July 31, | October 31, | January 31, | October 31, | |||||||||||||
(in thousands) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 562,890 | $ | 610,555 | $ | 449,157 | $ | 600,696 | ||||||||
Management fees and other receivables | 218,955 | 200,453 | 223,898 | 236,736 | ||||||||||||
Investments | 1,052,663 | 898,192 | 1,010,558 | 1,078,627 | ||||||||||||
Assets of consolidated collateralized loan obligation (CLO) entities: | ||||||||||||||||
Cash | 88,020 | - | 45,895 | 216,598 | ||||||||||||
Bank loans and other investments | 608,819 | 31,348 | 1,046,102 | 874,304 | ||||||||||||
Other assets | 6,918 | - | 4,241 | 4,464 | ||||||||||||
Deferred sales commissions | 47,517 | 36,423 | 48,515 | 48,629 | ||||||||||||
Deferred income taxes | 40,697 | 67,100 | 42,531 | 45,826 | ||||||||||||
Equipment and leasehold improvements, net | 51,056 | 48,989 | 60,079 | 52,428 | ||||||||||||
Intangible assets, net | 83,102 | 89,812 | 79,057 | 80,885 | ||||||||||||
Goodwill | 259,681 | 259,681 | 259,681 | 259,681 | ||||||||||||
Loan to affiliate | 5,000 | 5,000 | 5,000 | 5,000 | ||||||||||||
Other assets | 60,914 | 83,348 | 61,391 | 95,454 | ||||||||||||
Total assets | $ | 3,086,232 | $ | 2,330,901 | $ | 3,336,105 | $ | 3,599,328 |
See notes to Consolidated Financial Statements.
3 |
Eaton Vance Corp.
Consolidated Balance Sheets (unaudited) (continued)
July 31, | October 31, | January 31, | October 31, | |||||||||||||
(in thousands, except share data) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
Liabilities, Temporary Equity and Permanent Equity | ||||||||||||||||
Liabilities: | ||||||||||||||||
Accrued compensation | $ | 173,279 | $ | 207,330 | $ | 77,280 | $ | 233,836 | ||||||||
Accounts payable and accrued expenses | 83,652 | 68,115 | 80,028 | 91,410 | ||||||||||||
Dividend payable | 46,109 | 44,634 | 48,887 | 51,731 | ||||||||||||
Debt | 619,469 | 618,843 | 619,887 | 619,678 | ||||||||||||
Liabilities of consolidated CLO entities: | ||||||||||||||||
Senior note obligations | 465,306 | - | ||||||||||||||
Senior and subordinated note obligations | 840,929 | 873,008 | ||||||||||||||
Line of credit | 145,709 | 12,598 | 68,458 | - | ||||||||||||
Other liabilities | 31,982 | - | 94,259 | 154,185 | ||||||||||||
Other liabilities | 105,581 | 116,298 | 111,044 | 131,952 | ||||||||||||
Total liabilities | 1,671,087 | 1,067,818 | 1,940,772 | 2,155,800 | ||||||||||||
Commitments and contingencies (Note 18) | ||||||||||||||||
Commitments and contingencies (Note 17) | ||||||||||||||||
Temporary Equity: | ||||||||||||||||
Redeemable non-controlling interests | 308,945 | 250,823 | 326,589 | 335,097 | ||||||||||||
Total temporary equity | 326,589 | 335,097 | ||||||||||||||
Permanent Equity: | ||||||||||||||||
Voting Common Stock, par value $0.00390625 per share: | ||||||||||||||||
Authorized, 1,280,000 shares | ||||||||||||||||
Issued and outstanding, 422,935 and 442,932 shares, respectively | 2 | 2 | ||||||||||||||
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, 118,043,471 and 118,077,872 shares, respectively | 461 | 461 | ||||||||||||||
Issued and outstanding, 115,164,641 and 116,527,845 shares, respectively | 450 | 455 | ||||||||||||||
Additional paid-in capital | 78,214 | 148,284 | - | 17,514 | ||||||||||||
Notes receivable from stock option exercises | (9,343 | ) | (11,112 | ) | (7,875 | ) | (8,057 | ) | ||||||||
Accumulated other comprehensive loss | (50,110 | ) | (47,474 | ) | (55,933 | ) | (53,181 | ) | ||||||||
Retained earnings | 1,086,145 | 921,235 | 1,131,094 | 1,150,698 | ||||||||||||
Total Eaton Vance Corp. shareholders' equity | 1,105,369 | 1,011,396 | 1,067,738 | 1,107,431 | ||||||||||||
Non-redeemable non-controlling interests | 831 | 864 | 1,006 | 1,000 | ||||||||||||
Total permanent equity | 1,106,200 | 1,012,260 | 1,068,744 | 1,108,431 | ||||||||||||
Total liabilities, temporary equity and permanent equity | $ | 3,086,232 | $ | 2,330,901 | $ | 3,336,105 | $ | 3,599,328 |
See notes to Consolidated Financial Statements.
4 |
Eaton Vance Corp.
Consolidated Statements of Income (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue: | ||||||||||||||||
Management fees | $ | 374,553 | $ | 339,866 | $ | 1,101,929 | $ | 966,148 | ||||||||
Distribution and underwriter fees | 20,099 | 20,114 | 60,393 | 58,991 | ||||||||||||
Service fees | 31,260 | 30,515 | 91,935 | 89,493 | ||||||||||||
Other revenue | 4,690 | 3,251 | 12,018 | 8,705 | ||||||||||||
Total revenue | 430,602 | 393,746 | 1,266,275 | 1,123,337 | ||||||||||||
Expenses: | ||||||||||||||||
Compensation and related costs | 152,921 | 142,338 | 455,958 | 412,940 | ||||||||||||
Distribution expense | 35,045 | 37,160 | 105,219 | 100,284 | ||||||||||||
Service fee expense | 28,760 | 28,630 | 84,651 | 83,384 | ||||||||||||
Amortization of deferred sales commissions | 4,637 | 4,182 | 13,342 | 12,062 | ||||||||||||
Fund-related expenses | 15,857 | 14,029 | 46,036 | 36,752 | ||||||||||||
Other expenses | 51,118 | 46,376 | 150,319 | 133,528 | ||||||||||||
Total expenses | 288,338 | 272,715 | 855,525 | 778,950 | ||||||||||||
Operating income | 142,264 | 121,031 | 410,750 | 344,387 | ||||||||||||
Non-operating income (expense): | ||||||||||||||||
Gains and other investment income, net | 7,131 | 5,537 | 9,468 | 15,319 | ||||||||||||
Interest expense | (5,906 | ) | (6,180 | ) | (17,716 | ) | (21,592 | ) | ||||||||
Loss on extinguishment of debt | - | (5,396 | ) | - | (5,396 | ) | ||||||||||
Other income (expense) of consolidated CLO entities: | ||||||||||||||||
Gains and other investment income, net | 1,847 | - | 4,823 | - | ||||||||||||
Interest and other expense | (3,092 | ) | - | (3,630 | ) | - | ||||||||||
Total non-operating income (expense) | (20 | ) | (6,039 | ) | (7,055 | ) | (11,669 | ) | ||||||||
Income before income taxes and equity in net income of affiliates | 142,244 | 114,992 | 403,695 | 332,718 | ||||||||||||
Income taxes | (37,219 | ) | (42,462 | ) | (119,880 | ) | (123,864 | ) | ||||||||
Equity in net income of affiliates, net of tax | 2,750 | 2,323 | 8,877 | 7,973 | ||||||||||||
Net income | 107,775 | 74,853 | 292,692 | 216,827 | ||||||||||||
Net income attributable to non-controlling and other beneficial interests | (5,981 | ) | (7,492 | ) | (16,241 | ) | (16,780 | ) | ||||||||
Net income attributable to Eaton Vance Corp. shareholders | $ | 101,794 | $ | 67,361 | $ | 276,451 | $ | 200,047 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.89 | $ | 0.61 | $ | 2.40 | $ | 1.81 | ||||||||
Diluted | $ | 0.83 | $ | 0.58 | $ | 2.24 | $ | 1.73 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 114,610 | 111,284 | 115,157 | 110,540 | ||||||||||||
Diluted | 122,741 | 117,051 | 123,553 | 115,751 | ||||||||||||
Dividends declared per share | $ | 0.31 | $ | 0.28 | $ | 0.93 | $ | 0.84 |
Three Months Ended | ||||||||
January 31, | ||||||||
(in thousands, except per share data) | 2019 | 2018 | ||||||
Revenue: | ||||||||
Management fees | $ | 350,750 | $ | 361,857 | ||||
Distribution and underwriter fees | 23,090 | 24,947 | ||||||
Service fees | 29,360 | 30,361 | ||||||
Other revenue | 3,216 | 3,071 | ||||||
Total revenue | 406,416 | 420,236 | ||||||
Expenses: | ||||||||
Compensation and related costs | 153,888 | 155,048 | ||||||
Distribution expense | 37,508 | 41,869 | ||||||
Service fee expense | 25,517 | 26,841 | ||||||
Amortization of deferred sales commissions | 5,547 | 4,277 | ||||||
Fund-related expenses | 9,645 | 9,162 | ||||||
Other expenses | 53,181 | 47,239 | ||||||
Total expenses | 285,286 | 284,436 | ||||||
Operating income | 121,130 | 135,800 | ||||||
Non-operating income (expense): | ||||||||
Gains and other investment income, net | 5,833 | 2,598 | ||||||
Interest expense | (6,131 | ) | (5,907 | ) | ||||
Other income (expense) of consolidated CLO entities: | ||||||||
Gains and other investment income, net | 5,441 | 1,717 | ||||||
Interest and other expense | (8,336 | ) | (94 | ) | ||||
Total non-operating income (expense) | (3,193 | ) | (1,686 | ) | ||||
Income before income taxes and equity in net income of affiliates | 117,937 | 134,114 | ||||||
Income taxes | (27,625 | ) | (48,617 | ) | ||||
Equity in net income of affiliates, net of tax | 1,948 | 3,014 | ||||||
Net income | 92,260 | 88,511 | ||||||
Net income attributable to non-controlling and other beneficial interests | (5,459 | ) | (10,455 | ) | ||||
Net income attributable to Eaton Vance Corp. shareholders | $ | 86,801 | $ | 78,056 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.77 | $ | 0.68 | ||||
Diluted | $ | 0.75 | $ | 0.63 | ||||
Weighted average shares outstanding: | ||||||||
Basic | 112,255 | 115,282 | ||||||
Diluted | 115,516 | 123,941 |
See notes to Consolidated Financial Statements.
5 |
Eaton Vance Corp.
Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, | July 31, | January 31, | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Net income | $ | 107,775 | $ | 74,853 | $ | 292,692 | $ | 216,827 | $ | 92,260 | $ | 88,511 | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Unrealized loss on cash flow hedges, net of tax | - | - | - | (413 | ) | |||||||||||||||||||
Amortization of net gains (losses) on cash flow hedges, net of tax | (25 | ) | 37 | (75 | ) | 46 | ||||||||||||||||||
Unrealized gains (losses) on available-for-sale investments and reclassification adjustments, net of tax | (1,027 | ) | 205 | 5 | 857 | |||||||||||||||||||
Amortization of net (losses) on cash flow hedges, net of tax | (24 | ) | (25 | ) | ||||||||||||||||||||
Unrealized gains on available-for-sale investments, net of tax | - | 720 | ||||||||||||||||||||||
Foreign currency translation adjustments | (4,585 | ) | 18,208 | (2,566 | ) | 15,479 | 986 | 12,085 | ||||||||||||||||
Other comprehensive income (loss), net of tax | (5,637 | ) | 18,450 | (2,636 | ) | 15,969 | ||||||||||||||||||
Other comprehensive income, net of tax | 962 | 12,780 | ||||||||||||||||||||||
Total comprehensive income | 102,138 | 93,303 | 290,056 | 232,796 | 93,222 | 101,291 | ||||||||||||||||||
Comprehensive (income) attributable to non-controlling and other beneficial interests | (5,981 | ) | (7,492 | ) | (16,241 | ) | (16,780 | ) | ||||||||||||||||
Comprehensive income attributable to non-controlling and other beneficial interests | (5,459 | ) | (10,455 | ) | ||||||||||||||||||||
Total comprehensive income attributable to Eaton Vance Corp. shareholders | $ | 96,157 | $ | 85,811 | $ | 273,815 | $ | 216,016 | $ | 87,763 | $ | 90,836 |
See notes to Consolidated Financial Statements.
6
6 |
Eaton Vance Corp.
Consolidated Statements of Shareholders' Equity (unaudited)
Permanent Equity | Temporary Equity | 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 | 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 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | - | - | - | - | - | 276,451 | 2,241 | 278,692 | 14,000 | - | - | - | - | - | 86,801 | 417 | 87,218 | 5,042 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (2,636 | ) | - | - | (2,636 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($0.93 per share) | - | - | - | - | - | (111,018 | ) | - | (111,018 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 962 | - | - | 962 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($0.35 per share) | - | - | - | - | - | (40,386 | ) | - | (40,386 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Non-Voting Common Stock: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
On exercise of stock options | - | 7 | 55,706 | (1,060 | ) | - | - | - | 54,653 | - | - | 1 | 2,980 | (199 | ) | - | - | - | 2,782 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Under employee stock purchase plans | - | - | 3,168 | - | - | - | - | 3,168 | - | - | - | 1,593 | - | - | - | - | 1,593 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Under employee stock purchase incentive plan | - | - | 4,347 | - | - | - | - | 4,347 | - | - | - | 472 | - | - | - | - | 472 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Under restricted stock plan, net of forfeitures | - | 6 | - | - | - | - | - | 6 | - | - | 6 | - | - | - | - | - | 6 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 67,299 | - | - | - | - | 67,299 | - | - | - | 22,659 | - | - | - | - | 22,659 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax benefit of non-controlling interest repurchases | - | - | 2,030 | - | - | - | - | 2,030 | - | - | - | 992 | - | - | - | - | 992 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of Voting Common Stock | - | - | (171 | ) | - | - | - | - | (171 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of Non-Voting Common Stock | - | (13 | ) | (186,091 | ) | - | - | - | - | (186,104 | ) | - | - | (12 | ) | (45,288 | ) | - | - | (69,733 | ) | - | (115,033 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||
Principal repayments on notes receivable from stock option exercises | - | - | - | 2,829 | - | - | - | 2,829 | - | - | - | - | 381 | - | - | - | 381 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net subscriptions (redemptions/distributions) of non-controlling interest holders | - | - | - | - | - | - | (2,308 | ) | (2,308 | ) | 75,872 | - | - | - | - | - | - | (439 | ) | (439 | ) | 41,221 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds and CLO entities | - | - | - | - | - | - | - | - | (40,310 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | - | - | - | - | - | - | - | - | (51,701 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclass to temporary equity | - | - | - | - | - | - | 34 | 34 | (34 | ) | - | - | - | - | - | - | 28 | 28 | (28 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of non-controlling interests | - | - | - | - | - | - | - | - | (8,439 | ) | - | - | - | - | - | - | - | - | (3,964 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in redemption value of non-controlling interests redeemable at fair value | - | - | (17,033 | ) | - | - | - | - | (17,033 | ) | 17,033 | - | - | (922 | ) | - | - | - | - | (922 | ) | 922 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, July 31, 2018 | $ | 2 | $ | 461 | $ | 78,214 | $ | (9,343 | ) | $ | (50,110 | ) | $ | 1,086,145 | $ | 831 | $ | 1,106,200 | $ | 308,945 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
January 31, 2019 | $ | 2 | $ | 450 | $ | - | $ | (7,875 | ) | $ | (55,933 | ) | $ | 1,131,094 | $ | 1,006 | $ | 1,068,744 | $ | 326,589 |
See notes to Consolidated Financial Statements.
7 |
Eaton Vance Corp.
Consolidated Statements of Shareholders' Equity (unaudited) (continued)
Permanent Equity | Temporary Equity | |||||||||||||||||||||||||||||||||||
(in thousands) | Voting Common Stock | Non-Voting Common Stock | Additional Paid-In Capital | Notes Receivable from Stock Option Exercises | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non- Redeemable Non- Controlling Interests | Total Permanent Equity | Redeemable Non- Controlling Interests | |||||||||||||||||||||||||||
Balance, November 1, 2016 | $ | 2 | $ | 444 | $ | - | $ | (12,074 | ) | $ | (57,583 | ) | $ | 773,000 | $ | 786 | $ | 704,575 | $ | 109,028 | ||||||||||||||||
Net income | - | - | - | - | - | 200,047 | 2,892 | 202,939 | 13,888 | |||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 15,969 | - | - | 15,969 | - | |||||||||||||||||||||||||||
Dividends declared ($0.84 per share) | - | - | - | - | - | (97,180 | ) | - | (97,180 | ) | - | |||||||||||||||||||||||||
Issuance of Non-Voting Common Stock: | ||||||||||||||||||||||||||||||||||||
On exercise of stock options | - | 13 | 100,715 | (2,277 | ) | - | - | - | 98,451 | - | ||||||||||||||||||||||||||
Under employee stock purchase plans | - | - | 2,976 | - | - | - | - | 2,976 | - | |||||||||||||||||||||||||||
Under employee stock purchase incentive plan | - | - | 3,491 | - | - | - | - | 3,491 | - | |||||||||||||||||||||||||||
Under restricted stock plan, net of forfeitures | - | 6 | - | - | - | - | - | 6 | - | |||||||||||||||||||||||||||
Stock-based compensation | - | - | 60,395 | - | - | - | - | 60,395 | - | |||||||||||||||||||||||||||
Tax benefit of stock option exercises and vesting of restricted stock awards | - | - | 8,188 | - | - | - | - | 8,188 | - | |||||||||||||||||||||||||||
Tax benefit of non-controlling interest repurchases | - | - | 3,784 | - | - | - | - | 3,784 | - | |||||||||||||||||||||||||||
Repurchase of Non-Voting Common Stock | - | (9 | ) | (100,226 | ) | - | - | - | - | (100,235 | ) | - | ||||||||||||||||||||||||
Principal repayments on notes receivable from stock option exercises | - | - | - | 3,146 | - | - | - | 3,146 | - | |||||||||||||||||||||||||||
Net subscriptions (redemptions/distributions) of non-controlling interest holders | - | - | - | - | - | - | (2,851 | ) | (2,851 | ) | 142,542 | |||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | - | - | - | - | - | - | - | - | (70,682 | ) | ||||||||||||||||||||||||||
Reclass to temporary equity | - | - | - | - | - | - | (64 | ) | (64 | ) | 64 | |||||||||||||||||||||||||
Purchase of non-controlling interests | - | - | - | - | - | - | - | - | (7,310 | ) | ||||||||||||||||||||||||||
Changes in redemption value of non-controlling interests redeemable at fair value | - | - | (1,624 | ) | - | - | - | - | (1,624 | ) | 1,624 | |||||||||||||||||||||||||
Balance, July 31, 2017 | $ | 2 | $ | 454 | $ | 77,699 | $ | (11,205 | ) | $ | (41,614 | ) | $ | 875,867 | $ | 763 | $ | 901,966 | $ | 189,154 |
See notes to Consolidated Financial Statements.
Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended | ||||||||
July 31, | ||||||||
(in thousands) | 2018 | 2017 | ||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | 292,692 | $ | 216,827 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 18,417 | 14,128 | ||||||
Unamortized loss on derivative instrument | - | (684 | ) | |||||
Amortization of deferred sales commissions | 13,342 | 12,066 | ||||||
Stock-based compensation | 67,299 | 60,395 | ||||||
Deferred income taxes | 26,741 | 12,708 | ||||||
Net losses on investments and derivatives | 9,930 | 888 | ||||||
Loss on write-off of Hexavest option | 6,523 | - | ||||||
Equity in net income of affiliates, net of amortization | (8,877 | ) | (7,973 | ) | ||||
Dividends received from affiliates | 9,164 | 8,192 | ||||||
Loss on extinguishment of debt | - | 5,396 | ||||||
Consolidated CLO entities’ operating activities: | ||||||||
Net gains on bank loans, other investments and note obligations | 1,581 | - | ||||||
Net increase in other assets and liabilities, including cash | (33,939 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Management fees and other receivables | (18,620 | ) | (15,397 | ) | ||||
Investments in trading securities | (209,904 | ) | (222,063 | ) | ||||
Deferred sales commissions | (24,435 | ) | (19,989 | ) | ||||
Other assets | 20,612 | 10,348 | ||||||
Accrued compensation | (33,953 | ) | (22,476 | ) | ||||
Accounts payable and accrued expenses | 15,325 | 10,066 | ||||||
Other liabilities | (611 | ) | 36,468 | |||||
Net cash provided by operating activities | 151,287 | 98,900 | ||||||
Cash Flows From Investing Activities: | ||||||||
Additions to equipment and leasehold improvements | (12,811 | ) | (8,316 | ) | ||||
Net cash paid in acquisition | - | (63,605 | ) | |||||
Proceeds from sale of investments | 63,560 | 11,471 | ||||||
Purchase of investments | (86,019 | ) | (178 | ) | ||||
Consolidated CLO entities’ investing activities: | ||||||||
Proceeds from sales of bank loans and other investments | 99,621 | - | ||||||
Purchase of bank loans and other investments | (216,950 | ) | - | |||||
Net cash used for investing activities | (152,599 | ) | (60,628 | ) |
Permanent Equity | Temporary Equity | |||||||||||||||||||||||||||||||||||
(in thousands) | Voting Common Stock | Non-Voting Common Stock | Additional Paid-In Capital | Notes Receivable from Stock Option Exercises | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non- Redeemable Non- Controlling Interests | Total Permanent Equity | Redeemable Non- Controlling Interests | |||||||||||||||||||||||||||
Balance, November 1, 2017 | $ | 2 | $ | 461 | $ | 148,284 | $ | (11,112 | ) | $ | (47,474 | ) | $ | 921,235 | $ | 864 | $ | 1,012,260 | $ | 250,823 | ||||||||||||||||
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-09) | - | - | 675 | - | - | (523 | ) | - | 152 | - | ||||||||||||||||||||||||||
Net income | - | - | - | - | - | 78,056 | 742 | 78,798 | 9,713 | |||||||||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 12,780 | - | - | 12,780 | - | |||||||||||||||||||||||||||
Dividends declared ($0.31 per share) | - | - | - | - | - | (37,276 | ) | - | (37,276 | ) | - | |||||||||||||||||||||||||
Issuance of Non-Voting Common Stock: | ||||||||||||||||||||||||||||||||||||
On exercise of stock options | - | 6 | 42,690 | (393 | ) | - | - | - | 42,303 | - | ||||||||||||||||||||||||||
Under employee stock purchase plans | - | - | 1,549 | - | - | - | - | 1,549 | - | |||||||||||||||||||||||||||
Under employee stock purchase incentive plan | - | - | 427 | - | - | - | - | 427 | - | |||||||||||||||||||||||||||
Under restricted stock plan, net of forfeitures | - | 5 | - | - | - | - | - | 5 | - | |||||||||||||||||||||||||||
Stock-based compensation | - | - | 23,729 | - | - | - | - | 23,729 | - | |||||||||||||||||||||||||||
Tax benefit of non-controlling interest repurchases | - | - | 2,118 | - | - | - | - | 2,118 | - | |||||||||||||||||||||||||||
Repurchase of Non-Voting Common Stock | - | (3 | ) | (36,340 | ) | - | - | - | - | (36,343 | ) | - | ||||||||||||||||||||||||
Principal repayments on notes receivable from stock option exercises | - | - | - | 987 | - | - | - | 987 | - | |||||||||||||||||||||||||||
Net subscriptions (redemptions/distributions) of non-controlling interest holders | - | - | - | - | - | - | (739 | ) | (739 | ) | 52,244 | |||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | - | - | - | - | - | - | - | - | (488 | ) | ||||||||||||||||||||||||||
Reclass to temporary equity | - | - | - | - | - | - | 34 | 34 | (34 | ) | ||||||||||||||||||||||||||
Purchase of non-controlling interests | - | - | - | - | - | - | - | - | (8,439 | ) | ||||||||||||||||||||||||||
Changes in redemption value of non-controlling interests redeemable at fair value | - | - | (630 | ) | - | - | - | - | (630 | ) | 630 | |||||||||||||||||||||||||
Balance, January 31, 2018 | $ | 2 | $ | 469 | $ | 182,502 | $ | (10,518 | ) | $ | (34,694 | ) | $ | 961,492 | $ | 901 | $ | 1,100,154 | $ | 304,449 |
See notes to Consolidated Financial Statements.
8 |
9
Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended | ||||||||
January 31, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | 92,260 | $ | 88,511 | ||||
Adjustments to reconcile net income to net cash provided by (used by) operating activities: | ||||||||
Depreciation and amortization | 6,604 | 5,272 | ||||||
Amortization of deferred sales commissions | 5,547 | 4,277 | ||||||
Stock-based compensation | 22,659 | 23,730 | ||||||
Deferred income taxes | 4,268 | 30,820 | ||||||
Net (gains) losses on investments and derivatives | 3,646 | (977 | ) | |||||
Loss on expiration of Hexavest option | - | 6,523 | ||||||
Equity in net income of affiliates, net of tax | (1,948 | ) | (3,014 | ) | ||||
Dividends received from affiliates | 2,895 | 2,875 | ||||||
Consolidated CLO entities’ operating activities: | ||||||||
Net gains on bank loans, other investments and note obligations | 6,107 | (894 | ) | |||||
Amortization | (214 | ) | - | |||||
(Increase) decrease in other assets, net of other liabilities | 8,258 | (159 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Management fees and other receivables | 12,937 | (12,915 | ) | |||||
Short-term debt securities | 31,999 | 6,847 | ||||||
Investments held by consolidated sponsored funds and separately managed accounts | (14,606 | ) | (106,005 | ) | ||||
Deferred sales commissions | (5,434 | ) | (7,764 | ) | ||||
Other assets | 18,602 | 22,036 | ||||||
Accrued compensation | (156,750 | ) | (128,582 | ) | ||||
Accounts payable and accrued expenses | (1,910 | ) | 4,742 | |||||
Other liabilities | (588 | ) | 5,460 | |||||
Net cash provided by (used by) operating activities | 34,332 | (59,217 | ) | |||||
Cash Flows From Investing Activities: | ||||||||
Additions to equipment and leasehold improvements | (8,300 | ) | (2,594 | ) | ||||
Proceeds from sale of investments | 4,307 | - | ||||||
Purchase of investments(1) | (1,364 | ) | (31 | ) | ||||
Purchase of investments in CLO entity note obligations(1) | - | (20,295 | ) | |||||
Consolidated CLO entities’ investing activities: | ||||||||
Proceeds from sales of bank loans and other investments | 83,389 | 13,921 | ||||||
Purchase of bank loans and other investments | (361,121 | ) | (37,973 | ) | ||||
Net cash used for investing activities | (283,089 | ) | (46,972 | ) |
(1) | In the fourth quarter of fiscal 2018, the Company elected to present the investing cash flows related to the purchase and sale of investments in CLO entity note obligations separately from the purchase and sale of other investments. The prior year amount previously presented within the purchase of investments line item has been reclassified to purchase of investments in CLO entity note obligations for comparability purposes. |
See notes to Consolidated Financial Statements.
9 |
Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited) (continued)
Nine Months Ended | Three Months Ended | |||||||||||||||
July 31, | January 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
Cash Flows From Financing Activities: | ||||||||||||||||
Purchase of additional non-controlling interest | $ | (20,818 | ) | $ | (9,820 | ) | $ | (18,098 | ) | $ | (20,818 | ) | ||||
Debt issuance costs | - | (2,761 | ) | |||||||||||||
Proceeds from issuance of debt | - | 298,896 | ||||||||||||||
Repayment of debt | - | (250,000 | ) | |||||||||||||
Loss on extinguishment of debt | - | (5,396 | ) | |||||||||||||
Line of credit issuance costs | (930 | ) | - | |||||||||||||
Proceeds from issuance of Non-Voting Common Stock | 62,174 | 104,924 | 4,853 | 44,284 | ||||||||||||
Repurchase of Voting Common Stock | (171 | ) | - | |||||||||||||
Repurchase of Non-Voting Common Stock | (186,104 | ) | (100,235 | ) | (128,169 | ) | (36,343 | ) | ||||||||
Principal repayments on notes receivable from stock option exercises | 2,829 | 3,146 | 381 | 987 | ||||||||||||
Dividends paid | (109,542 | ) | (94,216 | ) | (43,230 | ) | (37,499 | ) | ||||||||
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders | 73,632 | 139,838 | 41,772 | 51,461 | ||||||||||||
Consolidated CLO entities’ financing activities: | ||||||||||||||||
Proceeds from line of credit | 133,111 | - | 68,458 | 23,936 | ||||||||||||
Net cash provided by (used for) financing activities | (44,889 | ) | 84,376 | (74,963 | ) | 26,008 | ||||||||||
Effect of currency rate changes on cash and cash equivalents | (1,464 | ) | 3,349 | 1,134 | 3,722 | |||||||||||
Net increase (decrease) in cash and cash equivalents | (47,665 | ) | 125,997 | |||||||||||||
Cash and cash equivalents, beginning of period | 610,555 | 424,174 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 562,890 | $ | 550,171 | ||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (322,586 | ) | (76,459 | ) | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 866,075 | 649,863 | ||||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 543,489 | $ | 573,404 | ||||||||||||
Supplemental Cash Flow Information: | ||||||||||||||||
Supplemental Cash and Restricted Cash Flow Information: | ||||||||||||||||
Cash paid for interest | $ | 17,221 | $ | 20,191 | $ | 6,020 | $ | 5,985 | ||||||||
Cash paid for interest upon repayment of debt | - | 1,354 | ||||||||||||||
Cash paid for interest by consolidated CLO entities | 1,421 | - | - | 77 | ||||||||||||
Cash paid for income taxes, net of refunds | 96,218 | 96,915 | 13,737 | 13,841 | ||||||||||||
Supplemental Disclosure of Non-Cash Information: | ||||||||||||||||
Supplemental Schedule of Non-Cash Investing and Financing Transactions: | ||||||||||||||||
Increase in equipment and leasehold improvements due to non-cash additions | $ | 206 | $ | 895 | $ | 4,978 | $ | 746 | ||||||||
Exercise of stock options through issuance of notes receivable | 1,060 | 2,277 | 199 | 393 | ||||||||||||
Increase (decrease) in non-controlling interest due to net consolidation (deconsolidation) of sponsored investment funds | (40,310 | ) | 86,129 | |||||||||||||
Increase (decrease) in non-controlling interests due to net consolidations (deconsolidations) of sponsored investment funds | (51,701 | ) | 61,441 | |||||||||||||
Decrease in bank loans and other investments of consolidated CLO entities due to unsettled sales | (2,288 | ) | (5,023 | ) | ||||||||||||
Increase in bank loans and other investments of consolidated CLO entities due to unsettled purchases | 26,317 | - | 84,033 | 25,284 | ||||||||||||
Initial Consolidation of CLO Entities: | ||||||||||||||||
Increase in bank loans and other investments | 434,446 | - | ||||||||||||||
Increase in senior loan obligations | 464,347 | - |
See notes to Consolidated Financial Statements.
10 |
Eaton Vance Corp.
Notes to Consolidated Financial Statements (unaudited)
1. | Summary of Significant Accounting Policies |
Basis of presentation
In the opinion of management, the accompanying unaudited interim Consolidated Financial Statements of Eaton Vance Corp. (the Company) include all 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 latest Annual Report on Form 10-K.10-K for the year ended October 31, 2018.
Adoption of new accounting standards
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which simplifies certain aspects of the accounting for share-based payment transactions. The Company adopted ASU 2016-09the following accounting standards as of November 1, 2017. Under this ASU, excess tax benefits or tax deficiencies related to the exercise of stock options and vesting of restricted stock awards are no longer recognized in additional paid-in capital but rather as an income tax benefit or income tax expense in the period of vesting or settlement. This provision of the ASU requires a prospective approach to adoption. During the three and nine months ended July 31, 2018, the Company recognized excess tax benefits of $1.3 million and $15.1 million, respectively, attributable to the exercise of stock options and vesting of restricted stock awards in conjunction with the adoption of this ASU.2018:
This guidance also requires that the excess tax benefits or tax deficiencies described above be classified as an operating cash flow within the Consolidated Statements of Cash Flows as opposed to a financing cash flow, as previously reported. The Company elected to use a retrospective approach to the adoption of this provision of the ASU. As a result, the excess tax benefit of $12.1 million recognized for the nine months ended July 31, 2017 was reclassified out of financing activities and into operating activities.
• | 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 |
Finally, the guidance allows companies to elect to continue to account for forfeitures using an estimate or instead to elect to account for forfeitures as they occur. Upon adoption, the Company elected to account for forfeitures as they occur and adopted this provision of the ASU using the modified retrospective approach. Therefore, upon adoption, the Company recognized a $0.5 million cumulative effect adjustment (reduction) to retained earnings, net of related income tax effects, to reflect the timing difference of when forfeitures are recognized in the measurement of stock-based compensation cost.
The Company’s accounting policy related to stock-based compensation has been amended to reflect the adoption of this new accounting standard and is summarized below.
Stock-based compensation
The Company accounts for stock-based compensation expense at fair value. Under the fair value method, stock-based compensation expense, which reflects the fair value of stock-based awards measured at grant date, is recognized on a straight-line basis over the relevant service period (generally five years) and is adjusted each period for forfeitures as they occur.
The fair value of each option award granted is estimated using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to dividend yield, expected volatility, an appropriate risk-free interest rate and the expected life of the option.
The fair value of profit interests granted under subsidiary long-term equity plans is estimated on the grant date by averaging fair value established using an income approach and fair value established using a market approach for each subsidiary.
The tax effect of the difference, if any, between the cumulative compensation expense recognized for a stock-based award for financial reporting purposes and the deduction for such award for tax purposes is recognized as income tax expense (for tax deficiencies) or benefit (for excess tax benefits) in the Company’s Consolidated Statements of Income in the period in which the tax deduction arises (generally in the period of vesting or settlement of a stock-based award, as applicable) and is reflected as an operating activity on the Company’s Consolidated Statements of Cash Flows. The withholding of shares of non-voting common stock for tax purposes upon the vesting of restricted share awards is reflected as a financing activity in the Company’s Consolidated Statements of Cash Flows.
New Accounting Standards Not Yet Adopted
Revenue recognition
In May 2014, the FASB issued new guidance for revenue recognition. The newThis guidance seeks to improve comparability by removing inconsistenciesproviding 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 practices. The core principle of the guidance requires companies to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. In addition, certain costs incurred to obtain and fulfill contracts with customers may need to be capitalized if they meet certain criteria. The guidance was further updated in March 2016 to clarify how companies should evaluate the principal-versus-agent aspects of the previously issued revenue guidance. The new guidance is effective for the Company’s fiscal year that begins on November 1, 2018 and requiresusing a modified retrospective approach or full retrospective approach to adoption. A decision on the adoption method has not been made as of the date of this report.approach.
The Company isadoption of this guidance did not result in the process of applying the five steps in the new revenue framework to revenue contracts covering a broad range of product and service offerings. Based upon the procedures performed to date, the Company does not anticipate any significant changes to the timing of recognition and measurement of revenue. The amended guidance will affectrevenue or recognition of costs incurred to obtain and fulfill revenue contracts; however, the presentation of certain revenue and expense balances. Specifically, the Company expects thatbalances was affected. Notably, fund subsidies which are currently presented inof $5.7 million previously included as a component of fund-related expenses in the Consolidated Statements of Income will befor the three months ended January 31, 2018 are now presented as a reduction tocontra-revenue component of management fee revenue.
Infees. Separately, in applying the revised principal-versus-agent guidance to the Company’s various distribution service contracts, the Company expects that, for certain classes of shares in sponsored funds with a front-end load
commission pricing structure, the entire front-end load commission (including both the underwriting commission retained by the Company and the sales charge paid to the selling broker-dealer) will beis now presented gross within distribution and underwriting feesfee revenue and the sales charge paid to the selling broker-dealer will beis now presented within distribution expense in the Consolidated Statements of Income. Currently,Prior to the adoption of ASU 2014-09, only the underwriting commission retained by the Company iswas presented within distribution and underwriting fee revenue as the sales charge paid to the selling broker-dealer was recorded net. Accordingly, distribution and underwriter fees and distribution expense
11 |
increased by approximately $4.5 million for the three months ended January 31, 2018 as a result of this change. Lastly, contingent deferred sales charges received, which were previously recorded as a reduction of deferred sales commission assets, are now being recorded as revenue within the distribution and underwriting fees line item in the Consolidated Statements of Income.
The following table presents the effect of the changes in presentation made to prior periods which are attributable to the retrospective adoption of ASU 2014-09:
Three Months Ended | ||||||||||||
January 31, 2018 | ||||||||||||
(in thousands) | As Previously | Reclassification | As Restated | |||||||||
Revenue: | ||||||||||||
Management fees | $ | 366,367 | $ | (4,510 | ) | $ | 361,857 | |||||
Distribution and underwriter fees | 20,493 | 4,454 | 24,947 | |||||||||
Service fees | 30,844 | (483 | ) | 30,361 | ||||||||
Other revenue | 3,708 | (637 | ) | 3,071 | ||||||||
Total revenue | 421,412 | (1,176 | ) | 420,236 | ||||||||
Expenses: | ||||||||||||
Compensation and related costs | 155,048 | - | 155,048 | |||||||||
Distribution expense | 35,640 | 6,229 | 41,869 | |||||||||
Service fee expense | 28,562 | (1,721 | ) | 26,841 | ||||||||
Amortization of deferred sales commissions | 4,277 | - | 4,277 | |||||||||
Fund-related expenses | 14,846 | (5,684 | ) | 9,162 | ||||||||
Other expenses | 47,239 | - | 47,239 | |||||||||
Total expenses | 285,612 | (1,176 | ) | 284,436 | ||||||||
Operating Income | $ | 135,800 | $ | - | $ | 135,800 |
Financial instruments – recognition and measurement
This guidance requires substantially all equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) and with a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. The standard effectively eliminates the ability, at acquisition, to classify an equity investment as available-for-sale with holding gains and losses presented in other comprehensive income until realized. The Company adopted this provision of the new ASU using a modified retrospective approach.
The Company held $10.3 million of available-for-sale equity investments in non-consolidated sponsored funds at October 31, 2018. Upon adoption, the Company recognized a $3.7 million cumulative effect adjustment (increase) to retained earnings, net of related income tax effects, to reclassify unrealized holding gains attributable to these investments previously recognized in accumulated other comprehensive income (loss). Prior period investments in non-consolidated sponsored mutual funds and private open-end funds previously classified as trading and available-for-sale within the notes to the financial statements are now referred to as “equity securities”; the prior period treatment of gains or losses arising from changes in the fair value of investments was retained.
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The standard also provides for an election to measure certain investments without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (the cost method). The Company adopted this provision of the ASU using a prospective approach.
Statement of cash flows – classification
This standard clarifies how certain cash receipts and cash payments are classified and presented on the Consolidated Statement of Cash Flows. The Company adopted ASU 2016-15 using a retrospective approach. The adoption of this standard did not result in any changes to the classification of prior period activity on the Company’s Consolidated Statements of Cash Flows.
Statement of cash flows – restricted cash
This standard requires the inclusion of restricted cash and restricted cash equivalents (restricted cash) with cash and cash equivalents when reconciling the beginning and ending amounts on the Consolidated Statement of Cash Flows. Restricted cash includes cash held by consolidated sponsored funds and consolidated collateralized loan obligation (CLO) entities. The Company adopted this new guidance around the classification and presentation of restricted cash in the Consolidated Statement of Cash Flows using a retrospective approach. Accordingly, net changes in restricted cash of $0.8 million are no longer presented as a component of the Company’s net cash used by operating activities for the three months ended January 31, 2018. A reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s Consolidated Balance Sheets at January 31, 2019 and October 31, 2018 that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows in included in Note 2.
In addition to the standards described above, the Company also early adopted the portion of ASU 2018-13,Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement related to the removal of certain fair value disclosure requirements. The new fair value disclosures required to be added under this new guidance will be effective for the fiscal year that begins on November 1, 2020.
Where applicable, the Company’s significant accounting policies provided below have been updated to reflect the adoption of these new accounting standards as of November 1, 2018.
Restricted cash
Restricted cash includes cash collateral required for margin accounts established to support derivative positions and other segregated cash to comply with certain regulatory requirements. Such derivatives are used to hedge certain investments in consolidated sponsored funds and separately managed accounts seeded for business development purposes (consolidated seed investments). Cash and cash equivalents held by consolidated sponsored funds and consolidated CLO entities are not available to the Company for its general operations and also represent restricted cash or restricted cash equivalents.
Investments
Debt securities held at fair value
Debt securities held at fair value consist of short-term debt securities held directly by the Company comprised of certificates of deposit, commercial paper and corporate debt obligations with original (remaining) maturities to the Company ranging from three months to 12 months, as determined upon the
13 |
purchase of each security, as well as investments in debt securities held in portfolios of consolidated sponsored mutual funds and private open-end funds (sponsored funds) and separately managed accounts. Debt securities are measured at fair value with net realized and unrealized holding gains or losses, and interest and dividend income reflected as a component of gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income. The specific identified cost method is used to determine the realized gains or losses on all debt securities sold.
Equity securities held at fair value
Equity securities primarily consist of domestic and foreign equity securities held in portfolios of consolidated sponsored funds and separately managed accounts and investments in non-consolidated sponsored or other funds. Equity securities and investments in non-consolidated sponsored or other mutual funds with readily determinable fair values are measured at fair value based on quoted market prices and published net asset values per share, respectively. Investments in non-consolidated sponsored private open-end funds without readily determinable fair values are measured at fair value based on the net asset value per share (or equivalent) of the investment as a practical expedient.
Equity investments without readily determinable fair values are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (the cost method). Investments held at cost are qualitatively evaluated for impairment each reporting period. If that qualitative assessment indicates that the investment held at cost is impaired, the fair value of the investment is estimated and an impairment loss is recognized equal to the difference between the fair value of the investment and its carrying amount. The cost method is no longer applied if the equity security subsequently has a readily determinable fair value or the Company irrevocably elects to measure the equity security at fair value.
Net realized and unrealized holding gains or losses on equity securities, any observable price changes and impairment losses attributable to investments held at cost, and dividend income are all reflected within gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income. The specific identified cost method is used to determine the realized gains or losses on all equity securities sold.
Investments in non-consolidated CLO entities
Investments in non-consolidated CLO entities are carried at amortized cost unless impaired. The excess of actual and anticipated future cash flows over the initial investment at the date of purchase is recognized in gains (losses) and other investment income, net, over the life of the investment using the effective yield method. The Company reviews cash flow estimates throughout the life of each non-consolidated CLO entity. If the updated estimate of future cash flows (taking into account both timing and amounts) is less than the last estimate, an impairment loss is recognized to the extent the carrying amount of the investment exceeds its fair value.
Investments in equity method investees
Investments in non-controlled affiliates in which the Company’s ownership ranges from 20 to 50 percent, or in instances in which the Company is able to exercise significant influence but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the Company’s share of the investee’s underlying net income or loss is recorded as equity in net income of affiliates, net of tax. Distributions received from investees reduce the Company’s investment balance and are classified as cash flows either from operating activities or investing activities in the Company’s Consolidated Statements of Cash Flows as determined using the cumulative earnings method. Investments
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in equity method investees are evaluated for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amounts of the impairment losses, if any.
Deferred sales commissions
Sales commissions paid to broker-dealers in connection with the sale of certain classes of shares of sponsored funds are generally deferred and amortized over the period during which redemptions by the purchasing shareholder are subject to a contingent deferred sales charge, which does not exceed five years from purchase. Distribution fees and contingent deferred sales charges received from these funds are recorded in revenue as earned. Should the Company lose its ability to recover such sales commissions through earning distribution fees, the value of its deferred sales commission asset would immediately decline, as would related future cash flows.
The Company evaluates the carrying value of its deferred sales commission asset for impairment on a quarterly basis. In its impairment analysis, the Company compares the carrying value of the deferred sales commission asset to the undiscounted cash flows expected to be generated by the asset in the form of distribution fees over its remaining useful life to determine whether impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value based on discounted cash flows. Impairment adjustments are recognized in operating income as a component of amortization of deferred sales commissions.
Revenue recognition
The Company primarily earns revenue from providing asset management services, distribution and underwriter services and shareholder services to its sponsored fund and separate account customers through various forms of contracts. Revenue is recognized for each distinct performance obligation identified in its contracts with customers when the performance obligation has been satisfied by transferring services to a customer either over time or at a point in time (which is when the customer obtains control of the service). Revenue is recognized in the amount of variable or fixed consideration allocated to the satisfied performance obligation that the Company expects to be entitled in exchange for transferring such services to a customer (the transaction price). Variable consideration is included in the transaction price only when it is probable that a significant reversal of such revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved (the constraint). The majority of the fees earned from providing asset management, distribution and shareholder services represent variable consideration as the revenue is largely dependent on the total value and composition of assets under management. The total value of assets under management fluctuate with the financial markets. These fees are constrained and excluded from the transaction price until the asset values on which our customer is billed are calculated and the value of consideration is measurable and no longer subject to financial market volatility.
The timing of when we bill our customers and related payment terms vary in accordance with the agreed-upon contractual terms. A majority of our clients are billed after the service is performed which results in the recording of accounts receivable and accrued revenue. Deferred revenue is recorded in instances where a client is billed in advance.
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Management fees
The Company is entitled to receive management fees in exchange for asset management services provided to sponsored funds and separate accounts established for retail clients (either directly or indirectly through various third-party financial intermediaries that sponsor various active asset management and model-based active asset management investment programs), high net worth clients and institutional clients. Asset management services consist of a series of distinct incremental days of investment advisory and administrative services provided to sponsored funds and investment advisory services provided to separate accounts. Control of asset management services is transferred to sponsored fund and separate account customers over time as these customers simultaneously receive and consume the benefits provided by these services. Management fees from sponsored funds are calculated principally as a percentage of average daily net assets, are earned daily, and are typically paid monthly from the assets of the fund. Management fees from separate accounts are calculated as a percentage of either beginning, average or ending monthly or quarterly net assets, are earned daily, and are typically paid either monthly or quarterly from the assets of the separate account. Performance fees are generated on certain fund and separate account management contracts when specific performance hurdles are met during the performance period.
Management fees are typically recognized as revenue at month-end or quarter-end when the value of consideration is measured. The Company may waive certain fees for asset management services provided to sponsored funds at its discretion. Separately, the Company may subsidize certain share classes of sponsored funds to ensure that specified operating expenses attributable to such share classes do not exceed a specified percentage. Fee waivers and fund subsidies impact the transaction price allocated to satisfied asset management services and are therefore recognized as a reduction to management fee revenue.
Distribution and underwriter fees
The Company is entitled to receive distribution fees and underwriter commissions in exchange for distribution services provided to sponsored funds. Distribution services consist of distinct sales and marketing activities that result in the sale of sponsored fund shares. Control of distribution services is transferred to the customer when sponsored fund shares are sold to the shareholder, at which time the shareholder is subject to the risks and rewards of share ownership, the funds are able to direct the use of invested assets and the Company has the right to receive payment.
Distribution fees for all share classes subject to these fees are calculated as a percentage of average daily net assets, and are typically paid monthly from the assets of the fund. Distribution fees are recognized as revenue at month-end when the value of consideration is measured.
Underwriting commissions for all share classes subject to these fees are calculated as a percentage of the amount invested and are deducted from the amount invested by the fund shareholder. These commissions represent fixed consideration that is not subject to the constraint. Therefore, underwriting commissions are recognized as revenue when the sponsored fund shares are sold to the shareholder. Underwriter commissions are waived or reduced on purchases of shares that exceed specified minimum amounts.
Service fees
The Company is entitled to receive service fees in exchange for shareholder services provided to sponsored funds. Shareholder services are comprised of a series of distinct incremental days of shareholder transaction processing and/or shareholder account maintenance services. Control of shareholder services is transferred to sponsored funds over time as the sponsored funds simultaneously
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receive and consume the benefits provided by these services. Service fees are calculated as a percentage of average daily net assets under management, are earned daily, and are typically paid monthly from the assets of the fund. Service fees are recognized as revenue at month-end when the value of consideration is measured.
Principal versus agent
The Company has contractual arrangements with third parties that are involved in providing various services primarily to sponsored fund customers, including sub-advisory, distribution and shareholder services. Management’s determination of whether related revenue should be recorded on a gross basis, without subtracting payments to third-party service providers, or net of payments to third-party service providers is based on management’s assessment of whether the Company is serving as the principal service provider or is acting as an agent. The Company is serving as the principal service provider (and should therefore record revenue on a gross basis) if it controls the service as a result of being primarily responsible for providing the service before it is transferred to the sponsored fund or separate account customer. Alternatively, the Company is acting as an agent (and therefore should record revenue net of payments to third-party service providers) when it does not control the service as in the case where it arranges for the service to be provided by a third-party.
The Company controls the right to asset management services performed by various third-party sub-advisers; therefore management fee revenue is recorded on a gross basis. Fees paid to sub-advisers are recognized as an expense when incurred and are included in fund-related expenses in the Company’s Consolidated Statements of Income. Separately, the Company also controls the right to distribution and shareholder services performed by various third-parties (including financial intermediaries); therefore distribution and underwriter fees and service fees are also recorded on a gross basis. Fees paid to third parties for distribution and shareholder services are recognized as an expense when incurred and are included in distribution expense and service fee expense, respectively, in the Company’s Consolidated Statements of Income.
Comprehensive income
The Company reports all changes in comprehensive income in its Consolidated Statements of Comprehensive Income. Comprehensive income includes net income, unrealized gains and losses on certain derivatives designated as cash flow hedges and related reclassification adjustments attributable to the amortization of net gains and losses on these derivatives and foreign currency translation adjustments, in each case net of tax. When the Company has established an indefinite reinvestment assertion for a foreign subsidiary, deferred income taxes are not provided on the related foreign currency translation.
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2. |
The following table sets forth the balances related to consolidated sponsored funds at July 31, 2018provides a reconciliation of cash, cash equivalents and October 31, 2017, as well asrestricted cash reported within the Company’s interestConsolidated Balance Sheets that sum to the total of the same such amounts presented in these funds:the Consolidated Statements of Cash Flows:
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Investments | $ | 504,482 | $ | 401,726 | ||||
Other assets | 14,577 | 13,537 | ||||||
Other liabilities | (52,644 | ) | (50,314 | ) | ||||
Redeemable non-controlling interests | (204,597 | ) | (154,061 | ) | ||||
Interest in consolidated sponsored funds | $ | 261,818 | $ | 210,888 |
January 31, | October 31, | |||||||
(in thousands) | 2019 | 2018 | ||||||
Cash and cash equivalents | $ | 449,157 | $ | 600,696 | ||||
Restricted cash of consolidated sponsored funds included in investments | 32,619 | 33,525 | ||||||
Restricted cash included in assets of consolidated CLO entities, cash | 45,895 | 216,598 | ||||||
Restricted cash included in other assets | 15,818 | 15,256 | ||||||
Total cash, cash equivalents and restricted cash presented in the Consolidated Statement of Cash Flows | $ | 543,489 | $ | 866,075 |
3. | Investments |
The following is a summary of investments at July 31, 2018 and October 31, 2017:investments:
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Investment securities, trading: | ||||||||
Short-term debt securities | $ | 257,911 | $ | 213,537 | ||||
Consolidated sponsored funds | 504,482 | 401,726 | ||||||
Separately managed accounts | 98,880 | 93,113 | ||||||
Total investment securities, trading | 861,273 | 708,376 | ||||||
Investment securities, available-for-sale | 24,255 | 22,465 | ||||||
Investments in non-consolidated CLO entities | 2,935 | 3,609 | ||||||
Investments in equity method investees | 143,326 | 144,911 | ||||||
Investments, other | 20,874 | 18,831 | ||||||
Total investments(1) | $ | 1,052,663 | $ | 898,192 |
(in thousands) | January 31, 2019 | October 31, 2018 | ||||||
Investments held at fair value: | ||||||||
Short-term debt securities | $ | 241,367 | $ | 273,320 | ||||
Debt and equity securities held by consolidated sponsored funds | 507,617 | 540,582 | ||||||
Debt and equity securities held in separately managed accounts | 86,532 | 89,121 | ||||||
Non-consolidated sponsored funds and other | 10,758 | 10,329 | ||||||
Total investments held at fair value | 846,274 | 913,352 | ||||||
Investments held at cost | 20,868 | 20,874 | ||||||
Investments in non-consolidated CLO entities | 2,898 | 2,895 | ||||||
Investments in equity method investees | 140,518 | 141,506 | ||||||
Total investments(1)(2) | $ | 1,010,558 | $ | 1,078,627 |
(1) Excludes bank loans and other investments held by consolidated CLO entities, which are discussed in Note 5.
(1) | Excludes bank loans and other investments held by consolidated CLO entities, which are discussed in Note 4. |
(2) | Amounts at January 31, 2019 reflect the adoption of ASU 2016-01. Amounts at October 31, 2018 reflect accounting guidance prior to the adoption of ASU 2016-01. See Note 1 for further information. |
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Investments held at fair value
Investment securities, trading
The following is a summary of the fair value of investments classified as trading at July 31, 2018 and October 31, 2017:
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Short-term debt securities | $ | 257,911 | $ | 213,537 | ||||
Other debt securities | 412,268 | 313,351 | ||||||
Equity securities | 191,094 | 181,488 | ||||||
Total investment securities, trading | $ | 861,273 | $ | 708,376 |
The Company recognized gains (losses) related to tradingdebt and equity securities still held at the reporting date of $(3.4) million and $6.8 million for the three months ended July 31, 2018 and 2017, respectively, and $(10.4) million and $15.5 million for the nine months ended July 31, 2018 and 2017, respectively,fair value within gains (losses) and other investment income, net on the Company’s Consolidated Statements of Income.Income as follows:
Three Months Ended | ||||||||
January 31, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Realized gains (losses) on securities sold | $ | (4,395 | ) | $ | 5,130 | |||
Unrealized gains (losses) on investments held at fair value | 3,305 | 7,266 | ||||||
Net gains (losses) on investments held at fair value(1) | $ | (1,090 | ) | $ | 12,396 |
(1) | Amounts for the three months ended January 31, 2019 reflect the adoption of ASU 2016-01. The prior period gains and losses arising from changes in the fair value of investments reflect accounting guidance prior to the adoption of ASU 2016-01. See Note 1 for further information. |
Investments held at cost
Investments held at cost primarily include the Company’s equity investment in a wealth management technology firm. At January 31, 2019 and October 31, 2018, there were no indicators of impairments related to investments carried at cost.
Investment securities, available-for-saleInvestments in non-consolidated CLO entities
The following isCompany provides investment management services for, and has made direct investments in, a summarynumber of the gross unrealized gains and losses includedCLO entities that it does not consolidate, as described further in accumulated other comprehensive income (loss) related to securities classified as available-for-sale at JulyNote 4. At both January 31, 20182019 and October 31, 2017:
July 31, 2018 | Gross Unrealized | |||||||||||||||
(in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
Investment securities, available-for-sale | $ | 17,516 | $ | 6,763 | $ | (24 | ) | $ | 24,255 |
October 31, 2017 | Gross Unrealized | |||||||||||||||
(in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
Investment securities, available-for-sale | $ | 15,755 | $ | 6,718 | $ | (8 | ) | $ | 22,465 |
Net unrealized holding gains (losses) on investment securities classified as available-for-sale included2018, combined assets under management in other comprehensive income (loss) on the Company’s Consolidated Statementspools of Comprehensive Incomenon-consolidated CLO entities were $0.5 million and $0.3 million for the three months ended July 31, 2018 and 2017, respectively, and $1.9 million and $1.4 million for the nine months ended July 31, 2018 and 2017, respectively.$0.8 billion.
The Company did not recognize any impairment losses on investment securities classified as available-for-sale duringrelated to the three and nine months ended July 31, 2018 or 2017.
The aggregate fair value of available-for-saleCompany’s investments in an unrealized loss position at July 31, 2018 was $0.5 million; unrealized losses related to these investments totaled $24,000. No investment with a gross unrealized loss has been in a material loss position for greater than one year.
The following is a summary of the Company’s realized gains and losses recognized upon disposition of investments classified as available-for-salenon-consolidated CLO entities for the three and nine months ended JulyJanuary 31, 2019 and 2018, and 2017:respectively.
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Gains | $ | 2,066 | $ | 29 | $ | 2,071 | $ | 233 | ||||||||
Losses | - | - | (110 | ) | (1 | ) | ||||||||||
Net realized gains (losses) | $ | 2,066 | $ | 29 | $ | 1,961 | $ | 232 |
Investments in equity method investees
The Company has a 49 percent interest in Hexavest Inc. (Hexavest), a Montreal, Canada-based investment adviser. The carrying value of this investment was $139.7$137.0 million and $142.0$138.0 million at JulyJanuary 31, 20182019 and October 31, 2017,2018, respectively. At JulyJanuary 31, 2018,2019, the Company’s investment in Hexavest consisted of $6.2$5.3 million of equity in the net assets of Hexavest, definite-lived intangible assets of $22.0$20.9 million and goodwill of $117.4$116.4 million, net of a deferred tax liability of $5.9$5.6 million. At October 31, 2017,2018, the Company’s investment in Hexavest consisted of $6.1$6.0 million of equity in the net assets of Hexavest, definite-lived intangible assets of $23.7$21.3 million and goodwill of $118.6$116.4 million, net of a deferred tax liability of $6.4$5.7 million. The Company’s investment in Hexavest is denominated in Canadian dollars and is subject to foreign currency translation adjustments, which are recorded in accumulated other comprehensive income (loss). The year-to-dateyear-over-year change in the carrying value of goodwill is entirely attributable to foreign currency translation adjustments.
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The Company also has a seven percent equity interest in a private equity partnership managed by a third party that invests in companies in the financial services industry. The Company’s investment in the partnership was $3.6 million and $2.9 million at JulyAt both January 31, 20182019 and October 31, 2017, respectively.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 nine months ended JulyJanuary 31, 20182019 or 2017.2018.
During both the ninethree months ended JulyJanuary 31, 20182019 and 2017,2018, the Company received dividends of $9.2$2.9 million and $8.2 million, respectively, from its investments in equity method investees.
Investments, other
Investments, other, which totaled $20.9 million and $18.8 million at July 31, 2018 and October 31, 2017, respectively, primarily consists of investments carried at cost.
During the fiscal year ended October 31, 2016, the Company participated as lead investor in an equity financing in SigFig, an independent San Francisco-based wealth management technology firm. In June 2018, the Company invested an additional $2.0 million in SigFig. The carrying value of the Company’s investment in SigFig was $19.0 million and $17.0 million at July 31, 2018 and October 31, 2017, respectively.
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4. |
Derivative financial instruments designated as cash flow hedges
In April 2017, the Company issued $300.0 million in aggregate principal amount of 3.5 percent ten-year senior notes due April 6, 2027 (2027 Senior Notes). The Company entered into a Treasury lock transaction with a notional amount of $125.0 million and concurrently designated the Treasury lock as a cash flow hedge of its exposure to variability in the forecasted semi-annual interest payments on $125.0 million of principal outstanding on the 2027 Senior Notes. The benchmark U.S. Treasury rate declined from the time the Treasury lock was entered into until the time the 2027 Senior Notes were priced, and the Treasury lock was net settled for cash at a loss of $0.7 million. The Treasury lock was determined to be a highly effective cash flow hedge and the entire $0.7 million loss, net of the associated deferred tax benefit of $0.3 million, was recorded in other comprehensive income (loss), net of tax. During both the three months ended July 31, 2018 and 2017, the Company reclassified $17,000 of this deferred loss into interest expense. During the nine months ended July 31, 2018 and 2017, the Company reclassified $51,000 and $20,000, respectively, of this deferred loss into interest expense. The Company will reclassify the remaining $0.6 million of unamortized loss as of July 31, 2018 to earnings as a component of interest expense over the remaining term of the debt. During the next twelve months, the Company expects to reclassify approximately $68,000 of the loss into interest expense.
In fiscal 2013, the Company entered into a forward-starting interest rate swap in connection with the offering of its 3.625 percent unsecured senior notes due June 15, 2023 (2023 Senior Notes) and recorded the unamortized gain on the swap in other comprehensive income (loss), net of tax. The Company reclassified $50,000 and $0.2 million of the deferred gain into interest expense during both the three and nine months ended July 31, 2018 and 2017, respectively, and will reclassify the remaining $1.0 million of unamortized gain as of July 31, 2018 to earnings as a component of interest expense over the remaining term of the debt. During the next twelve months, the Company expects to reclassify approximately $0.2 million of the gain into interest expense.
Other derivative financial instruments not designated for hedge accounting
The Company utilizes stock index futures contracts, total return swap contracts, credit default swap contracts, foreign exchange contracts, commodity futures contracts, currency futures contracts and interest rate futures contracts to hedge the market and currency risks associated with its investments in certain consolidated seed investments.
The Company was a party to the following derivative financial instruments at July 31, 2018 and October 31, 2017:
July 31, 2018 | October 31, 2017 | |||||||||||||||
Number of Contracts | Notional Value (in millions) | Number of Contracts | Notional Value (in millions) | |||||||||||||
Stock index futures contracts | 1,367 | $ | 118.2 | 1,470 | $ | 118.1 | ||||||||||
Total return swap contracts | 3 | $ | 106.5 | 2 | $ | 50.2 | ||||||||||
Credit default swap contracts | 1 | $ | 5.0 | - | $ | - | ||||||||||
Foreign exchange contracts | 20 | $ | 19.9 | 31 | $ | 28.1 | ||||||||||
Commodity futures contracts | 195 | $ | 9.1 | 213 | $ | 10.2 | ||||||||||
Currency futures contracts | 113 | $ | 12.4 | 131 | $ | 14.5 | ||||||||||
Interest rate futures contracts | 133 | $ | 27.5 | 134 | $ | 25.6 |
The Company has not designated any of these derivative contracts as hedging instruments for accounting purposes. The derivative contracts outstanding, and the notional values they represent at July 31, 2018 and October 31, 2017, are representative of derivative balances throughout each respective period.
The Company has not elected to offset fair value amounts related to derivative instruments executed with the same counterparty under master netting arrangements; as a result, the Company records all derivative financial instruments as either other assets or other liabilities, gross, on its Consolidated Balance Sheets and measures them at fair value. The following tables present the fair value of derivative financial instruments not designated for hedge accounting and how they are reflected in the Company’s Consolidated Financial Statements as of July 31, 2018 and October 31, 2017:
July 31, 2018 | October 31, 2017 | |||||||||||||||
(in thousands) | Other Assets | Other Liabilities | Other Assets | Other Liabilities | ||||||||||||
Stock index futures contracts | $ | 1,189 | $ | 832 | $ | 330 | $ | 3,021 | ||||||||
Total return swap contracts | - | 3,124 | - | 570 | ||||||||||||
Credit default swap contracts | 5 | - | - | - | ||||||||||||
Foreign exchange contracts | 79 | 254 | 650 | 60 | ||||||||||||
Commodity futures contracts | 239 | 368 | 63 | 120 | ||||||||||||
Currency futures contracts | 74 | 54 | 327 | 178 | ||||||||||||
Interest rate futures contracts | 3 | 108 | 48 | 226 | ||||||||||||
Total | $ | 1,589 | $ | 4,740 | $ | 1,418 | $ | 4,175 |
Changes in the fair value of derivative contracts are recognized in gains (losses) and other investment income, net (see Note 13). The Company recognized the following net gains (losses) on derivative financial instruments for the three and nine months ended July 31, 2018 and 2017:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Stock index futures contracts | $ | (1,448 | ) | $ | (6,416 | ) | $ | (3,385 | ) | $ | (19,446 | ) | ||||
Total return swap contracts | (1,526 | ) | (1,108 | ) | (2,535 | ) | (3,083 | ) | ||||||||
Credit default swap contracts | 150 | - | 150 | - | ||||||||||||
Foreign exchange contracts | 302 | (593 | ) | (326 | ) | (990 | ) | |||||||||
Commodity futures contracts | (346 | ) | (72 | ) | (1,066 | ) | (74 | ) | ||||||||
Currency futures contracts | 70 | (91 | ) | 72 | (101 | ) | ||||||||||
Interest rate futures contracts | 174 | (436 | ) | 156 | (436 | ) | ||||||||||
Total | $ | (2,624 | ) | $ | (8,716 | ) | $ | (6,934 | ) | $ | (24,130 | ) |
In addition to the derivative contracts described above, certain consolidated seed investments may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives.
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. Disclosure regarding suchUnderlying investments held by consolidated sponsored funds isconsist of debt and equity securities and are included in Note 2.the reported amount of investments on the Company’s Consolidated Balance Sheets at January 31, 2019 and October 31, 2018. Net investment income or (loss) related to consolidated sponsored funds was included in gains and other investment income, net, on the Company’s Consolidated Statements of Income for all periods presented. The impact of consolidated sponsored funds’ net income or (loss) on net income attributable to Eaton Vance Corp. shareholders was reduced by amounts attributable to non-controlling interest holders, which are recorded in net income attributable to non-controlling and other beneficial interests on the Company’s Consolidated Statements of Income for all periods presented. The extent of the Company’s exposure to loss with respect to a consolidated sponsored fund is limited to the amount of the Company’s investment in the sponsored fund and any uncollected management and performance fees. The Company is not obligated to provide financial support to sponsored funds. Only the assets of a sponsored fund are available to settle its obligations. Beneficial interest holders of sponsored funds do not have recourse to the general credit of the Company.
The following table sets forth the balances related to consolidated sponsored funds as well as the Company’s net interest in these funds:
(in thousands) | January 31, 2019 | October 31, 2018 | ||||||
Investments | $ | 507,617 | $ | 540,582 | ||||
Other assets | 13,596 | 15,471 | ||||||
Other liabilities | (44,059 | ) | (57,286 | ) | ||||
Redeemable non-controlling interests | (239,739 | ) | (244,970 | ) | ||||
Net interest in consolidated sponsored funds | $ | 237,415 | $ | 253,797 |
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Consolidated CLO entities
As of JulyJanuary 31, 2018, the Company deems itself to be the primary beneficiary of two non-recourse CLO entities, namely, Eaton Vance CLO 2017-1 (CLO 2017-1) and Eaton Vance CLO 2014-1 (CLO 2014-1). As of October 31, 2017,2019, 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 2017-1.2019-1 (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 2017-1 (CLO 2017-1)2019-1
The Company established CLO 2017-12019-1 on August 24, 2017.January 3, 2019. CLO 2017-12019-1 was in the warehousing phase as of JulyJanuary 31, 2018 and October 31, 2017.2019. The Company contributed $18.8$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 2017-12019-1 with a $160.0 million non-recourse revolving line of credit. The credit facility agreement requires the Company to maintain certain levels of contributed capital relative to the total outstanding borrowings under the line of credit. During the ninethree months ended JulyJanuary 31, 2018,2019, the Company made additional capital contributions of $16.2$20.0 million in order to increase the level of funding available for borrowing under the line of credit. As collateral manager, the Company has the unilateral ability to liquidate CLO 2017-1 without cause, a right that, by definition, provides the Company with the power to direct the activities that most significantly impact the economic performance of the entity. The Company’s investment in CLO 2017-1 serves as first-loss protection to the third-party lender and provides the Company with an obligation to absorb losses of, or the right to receive benefits from, the VIE that could
potentially be significant to the entity. Accordingly, the Company deems itself to be the primary beneficiary of CLO 2017-1 from establishment of the warehouse on August 24, 2017.
DuringWhile in the warehousewarehousing phase, the Company, acting as collateral manager and subject to the approval of the third-party lender, intends towill use its capital contributions along with the proceeds from the revolving line of credit to accumulate a portfolio of commercial bank loan investments in open market purchases in an amount sufficient for eventual securitization. The Company has no right to receive the benefits from, nor does the Company bear the risks associated with,line of credit is secured by the commercial bank loan investments held by CLO 2017-1 beyond the Company’s capital contributions. In the eventwarehouse and initially bears interest at a rate of default, recoursedaily LIBOR plus 1.10 percent per annum, with such interest rate increasing to the Company is limited to its investmentdaily LIBOR plus 2.0 percent per annum in the warehouse.January 2020. The Company does not earn any collateral management fees from CLO 2017-12019-1 during the warehousing phase. The Companyphase and will continue to be the collateral manager of the CLO entity during the securitization phase.
The size of the non-recourse revolving line of credit can be increased subject to the occurrence of certain events and the mutual consent of the parties. The line of credit is secured by all of the commercial bank loan investments held by CLO 2017-1 and initially bears interest at a rate of daily LIBOR plus 1.25 percent per annum (with such interest rate increasing to daily LIBOR plus 2.0 percent per annum upon completion of the initial twelve-month warehousing period ending on August 24, 2018). The third-party lender does not have any recourse to the Company’s general credit.
The following table presents the balances attributable to CLO 2017-1 that were included in the Company’s Consolidated Balance Sheets at July 31, 2018 and October 31, 2017:
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Assets of consolidated CLO entities: | ||||||||
Cash | $ | 6,246 | $ | - | ||||
Bank loans and other investments | 196,659 | 31,348 | ||||||
Other assets | 2,116 | - | ||||||
Liabilities of consolidated CLO entities: | ||||||||
Line of credit | 145,709 | 12,598 | ||||||
Other liabilities | 20,967 | - | ||||||
Net interest in CLO 2017-1 | $ | 38,345 | $ | 18,750 |
The Company’s total capital contributions of $35.0 million to CLO 2017-1 were eliminated in consolidation. Upon consolidation, the Company irrevocably elected to subsequently measure the commercial bank loan investments at fair value using the fair value option.
The following table presents the fair value of CLO 2017-1’s assets that are subject to fair value accounting as of July 31, 2018 and October 31, 2017:
CLO Bank Loan Investments | ||||||||
(in thousands) | July 31, 2018 | October 31, 2017 | ||||||
Unpaid principal balance | $ | 195,821 | $ | 31,348 | ||||
Unpaid principal balance over fair value | 838 | - | ||||||
Fair value | $ | 196,659 | $ | 31,348 |
As of July 31, 2018 and October 31, 2017, there were no unpaid principal balances of such loans that were 90 days or more past due or in non-accrual status. Disclosure of the fair value of bank loan investments at July 31, 2018 and October 31, 2017 is included in Note 6.
The Company did not elect the fair value option for amounts outstanding under the revolving line of credit upon the initial consolidation of CLO 2017-1 as these liabilities are temporary in nature. Disclosure of the fair value of amounts outstanding under the revolving line of credit is included in Note 7. If the Company determines it is the primary beneficiary of CLO 2017-1 during the securitization phase, the Company intends to irrevocably elect the fair value option for the note obligations of CLO 2017-1 upon their issuance, mitigating any potential accounting mismatches between the carrying value of the note obligations to be issued during the securitization phase and the carrying value of the commercial bank loan investments held to provide the cash flows for those note obligations.
The following table presents the balances attributable to CLO 2017-1 that were included in the Company’s Consolidated Statements of Income for the three and nine months ended July 31, 2018:
(in thousands) | Three Months Ended July 31, 2018 | Nine Months Ended July 31, 2018 | ||||||
Other income (expense) of consolidated CLO entities: | ||||||||
Gains (losses) and other investment income, net | $ | 1,906 | $ | 4,882 | ||||
Interest and other expense | (998 | ) | (1,537 | ) | ||||
Net gain attributable to the Company | $ | 908 | $ | 3,345 |
Eaton Vance CLO 2014-1 (CLO 2014-1)
As of October 31, 2017, the Company held a 5 percent equity interest in CLO 2014-1 as an investment in non-consolidated CLO entities with a carrying value of $0.8 million. On May 22, 2018, the Company purchased all of the remaining equity interests in CLO 2014-1 for $24.3 million and reconsidered whether it was the primary beneficiary of CLO 2014-1 as of that date. As collateral manager, the Company has the 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 impactaffect the economic performance of the entity. The Company’s 100 percent equity interestinvestment in the warehouse serves as first-loss protection to the third-party lender and provides itthe Company with an obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the entity. Accordingly, the Company deems itself to be the primary beneficiary of CLO 2019-1 as it has both power and economics and began consolidating the entity from establishment of the warehouse on January 3, 2019.
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Upon initial consolidation, the Company irrevocably elected to subsequently measure the bank loan investments held by CLO 2019-1 at fair value using the fair value option. The Company did not elect the fair value option for amounts outstanding under the revolving line of credit upon initial consolidation of the CLO 2019-1 warehouse as these liabilities are temporary in nature. Refer to Note 6 for additional disclosure regarding the fair value of the assets and liabilities of consolidated CLO entities.
Eaton Vance CLO 2018-1
CLO 2018-1 was securitized on October 24, 2018. As of January 31, 2019, the Company continues to hold approximately 93 percent of the subordinated notes that were issued by CLO 2018-1 at closing and is still serving as the collateral manager of the entity. The Company initially deemed itself to be the primary beneficiary of CLO 2014-12018-1 upon acquiring 93 percent of the subordinated interests of the entity on October 24, 2018 and began consolidating CLO 2018-1 as of May 22,that date.
Eaton Vance CLO 2014-1R
CLO 2014-1R was securitized on August 23, 2018. As of January 31, 2019, the Company continues to hold 100 percent of the subordinated notes that were issued by CLO 2014-1R at closing and is still serving as the collateral manager of the entity. The Company initially deemed itself to be the primary beneficiary of CLO 2014-1R upon acquiring 100 percent of the subordinated interests of the entity on August 23, 2018 and began consolidating CLO 2014-1R as of that date.
The Company elected to apply the measurement alternative to ASC 820 for collateralized financing entities upon the initial consolidation and for the subsequent measurement of the securitized CLO 2014-1. The measurement alternative requires reporting entities to useconsolidated by the more observable ofCompany (collectively, the fair value of the financial assets or the financial liabilities to measure both the financial assets and the financial liabilities of a collateralized financing entity.consolidated securitized CLO entities). The Company determined that the fair value of the financial assets of CLO 2014-1these entities is more observable than the fair value of the financial liabilities. Through the application of the measurement alternative, the fair value of the financial liabilities of CLO 2014-1these 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 CLO 2014-1,these entities, which include the equitysubordinated interests held by the Company and any accrued management fees due to the Company. The fair value of the Company’s equity interest, which is eliminated in consolidation,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 equity interest.
The measurement alternative further requires any gain or loss resulting from its initial application to be reflected in earnings and attributable tosubordinated notes. Aggregate disclosures for the reporting entity. Accordingly, the Company recognized a gain of $0.4 million upon initial consolidation ofsecuritized CLO 2014-1, equal to the difference between the initial carrying value of the position upon consolidation and the fair value of the 5 percent equity interest which was heldentities consolidated by the Company prior to May 22, 2018. This gain is included in gainsas of January 31, 2019 and other investment income, net, on the Company’s Consolidated Statements of Income for the three and nine months ended JulyOctober 31, 2018.2018 are provided below.
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The following table presents the balances attributable to the consolidated securitized CLO 2014-1entities and the consolidated warehouse CLO entity that were included in the Company’s Consolidated Balance Sheet at July 31, 2018:Sheets:
January 31, | October 31, | |||||||||||||||
2019 | 2018 | |||||||||||||||
(in thousands) | July 31, 2018 | Consolidated Securitized CLO Entities | Consolidated Warehouse CLO Entity | Consolidated Securitized CLO Entities | ||||||||||||
Assets of consolidated CLO entities: | ||||||||||||||||
Cash | $ | 81,774 | $ | 42,850 | $ | 3,045 | $ | 216,598 | ||||||||
Bank loans and other investments | 412,160 | 891,825 | 154,277 | 874,304 | ||||||||||||
Receivable for pending bank loan sales | 2,288 | - | 2,535 | |||||||||||||
Other assets | 4,802 | 1,850 | 103 | 1,929 | ||||||||||||
Liabilities of consolidated CLO entities: | ||||||||||||||||
Senior note obligations | 465,306 | |||||||||||||||
Senior and subordinated note obligations | 840,929 | - | 873,008 | |||||||||||||
Line of credit | - | 68,458 | - | |||||||||||||
Payable for pending bank loan purchases | 25,929 | 58,104 | 152,152 | |||||||||||||
Other liabilities | 11,015 | 10,136 | 90 | 2,033 | ||||||||||||
Total beneficial interests in CLO 2014-1 | $ | 22,415 | ||||||||||||||
Total beneficial interests | $ | 61,819 | $ | 30,773 | $ | 68,173 |
Although the Company’s beneficial interests in the consolidated securitized CLO 2014-1entities are eliminated upon consolidation, the application of the measurement alternative results in the Company’s total beneficial interests in these entities of $61.8 million and $68.2 million at January 31, 2019 and October 31, 2018, respectively, being equal to the net amount shown above to be equivalent toof the beneficial interests retained by the Company at July 31, 2018.
The note obligations ofconsolidated CLO 2014-1 have contractual recourse only to the relatedentities’ assets of CLO 2014-1. The Company has no right to receive the benefits from, nor does the Company bear the risks associated with, the commercial bank loan investments held by CLO 2014-1 beyondand liabilities included on the Company’s beneficial interests previously described.
The following table presents the fair value of CLO 2014-1’s assets that are subject to fair value accountingConsolidated Balance Sheets, as of July 31, 2018:shown above.
CLO Bank Loan Investments | ||||
(in thousands) | July 31, 2018 | |||
Unpaid principal balance | $ | 412,928 | ||
Unpaid principal balance over fair value | (2,738 | ) | ||
Fair value | $ | 410,190 |
As of JulyJanuary 31, 2019 and October 31, 2018, there were no bank loan investments in default and no unpaid principal balances of such loans that were 90 days or more past due or in non-accrual status. DisclosureAdditional disclosure of the fair values of assets and liabilities of consolidated CLO entities that are measured at fair value of bank loan investments at July 31, 2018on a recurring basis is included in Note 6.
The following table presents the balances attributable to the consolidated securitized CLO 2014-1entities and the consolidated warehouse CLO entity that were included in the Company’s Consolidated StatementsStatement of Income:
Three Months Ended | ||||||||||||
January 31, 2019 | ||||||||||||
(in thousands) | Consolidated Securitized CLO Entities | Consolidated Warehouse CLO Entity | Total | |||||||||
Other income (expense) of consolidated CLO entities: | ||||||||||||
Gains (losses) and other investment income, net | $ | 4,578 | $ | 863 | $ | 5,441 | ||||||
Interest and other expense | (8,246 | ) | (90 | ) | (8,336 | ) | ||||||
Net gain (loss) attributable to the Company | $ | (3,668 | ) | $ | 773 | $ | (2,895 | ) |
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The amounts included in the Company’s Consolidated Statement of Income for the three and nine months ended JulyJanuary 31, 2018:2018 related entirely to the warehouse CLO entity consolidated by the Company during the first quarter of fiscal 2018.
(in thousands) | Three and Nine Months Ended July 31, 2018 | |||
Other income (expense) of consolidated CLO entities: | ||||
Gains (losses) and other investment income, net | $ | (60 | ) | |
Interest and other expense | (2,093 | ) | ||
Net loss attributable to the Company | $ | (2,153 | ) |
As summarized in the table below, the application of the measurement alternative results in the Company's earnings from the consolidated securitized CLO 2014-1entities subsequent to initial consolidation, as shown above, to be equivalent to the Company's own economic interests in CLO 2014-1:these entities:
Three Months Ended January 31, 2019 | ||||||||
(in thousands) | Three and Nine Months Ended July 31, 2018 | Consolidated | ||||||
Economic interests: | ||||||||
Distributions received and unrealized losses on the equity interest held by the Company | $ | (2,390 | ) | |||||
Distributions received and unrealized gains (losses) on the subordinated interests held by the Company | $ | (4,575 | ) | |||||
Management fees | 237 | 907 | ||||||
Total economic interests in CLO 2014-1 | $ | (2,153 | ) | |||||
Total economic interests | $ | (3,668 | ) |
Eaton Vance CLO 2015-1 (CLO 2015-1)Other entity
On November 1, 2017,As of October 31, 2018, the Company purchased 100 percent of the equityheld variable interests in, CLO 2015-1 for $26.7 million and reconsidered whether it was the primary beneficiary of CLO 2015-1 as of that date. As collateral manager, the Company had the power to direct the activities that most significantly impact the economic performance of the entity. The Company’s newly acquired equity interest provided it with an
obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the entity. Accordingly, the Company deemed itself to be the primary beneficiary of, CLO 2015-1 asa privately offered equity fund that was seeded towards the end of November 1, 2017. Onfiscal 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 8, 2017,2018, at which time the total outstanding borrowings were repaid to the Company sold 95 percentand the promissory note was canceled on January 14, 2019. As of its equityJanuary 31, 2019 the Company’s variable interest in CLO 2015-1 for $24.7 million and recognized a loss on disposal of $0.6 million, whichthe fund is includedlimited to its $20,000 investment in gains and other investment income, net, on the Company’s Consolidated Statement of Income forfund. The Company is no longer the nine months ended July 31, 2018. The transaction settled on December 22, 2017. Although the Company continues to serve as collateral managerprimary beneficiary of the entity, and therefore has the power to direct the activities that most significantly impact the economic performance of the entity, the Company determined thatfund 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 CLO 2015-1. As a result, the Company concluded that it is no longer the primary beneficiary and therefore deconsolidated CLO 2015-1 during the first quarter of fiscal 2018.
On April 13, 2018, the Company sold certain of its investments in the senior debt tranches of CLO 2015-1 with an aggregate par value of $6.7 million and received total proceeds of $6.6 million from the sale, consisting of principal and accrued interest. The Company recognized a loss of $0.1 million on the sale, which is included in gains and other investment income, net, on the Company’s Consolidated Statement of Income for the nine months ended July 31, 2018. On May 11, 2018, the Company sold its remaining investments in the senior debt tranches of CLO 2015-1 with an aggregate par value of $12.3 million and received total proceeds of $12.3 million from the sale, consisting of principal and accrued interest. As of July 31, 2018, the Company maintains its remaining 5 percent equity interest in CLO 2015-1 as an investment in non-consolidated CLO entities.entity.
Investments in VIEs that are not consolidated
Sponsored funds
The Company classifies its investments in certain sponsored funds that are considered VIEs as available-for-sale investmentsequity securities when it is not considered the primary beneficiary of these VIEs (generally when the Company owns less than 10 percent of the fund).VIEs. The Company provides aggregated disclosures with respect to these non-consolidated sponsored fund VIEs in Note 3.Notes 3 and 6.
Non-consolidated CLO entities
The Company is not deemed to be the primary beneficiary of several CLO entities in which it holds variable interests that consist of direct investments and management fees (including subordinated management fees) earned from managing the collateral of these CLO entities. In its role as collateral manager, the Company often has the power to direct the activities that most significantly impact the economic performance of these CLO entities.interests. In developing its conclusion that it is not the primary beneficiary of these entities, the Company determined that for certain of these entities, although it has variable interests in each CLO by virtue of its beneficial ownership interests therein andin the collateral management fees it receives, its variableCLO 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. Quantitative factors supporting the Company’s qualitative conclusion in each case included the relative size of the Company’s beneficial interest and the overall magnitude and design of the collateral management fees within each structure.
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The Company’s maximum exposure to lossesloss with respect to these managednon-consolidated CLO entities is limited to the carrying value of its investments in, and collateral management fees receivable from, these entities as of JulyJanuary 31, 2018. Additional information regarding the Company’s investments in non-consolidated CLO entities is included in Note 3.2019. Collateral management fees receivable for these entities totaled $0.1 million
and $0.4 million on Julyboth January 31, 20182019 and October 31, 2017, respectively.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 periodsfiscal years presented. Income from these entities is recorded as a component of gains (losses) and other investment income, net, in the Company’s Consolidated Statements of Income, based upon projected investment yields. Additional information regarding the Company’s investment in non-consolidated CLO entities, as well as the combined assets under management in the pools of non-consolidated CLO entities, is included in Note 3.
Other entities
The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain sponsored privately offered equity funds with total assets of $21.9$22.1 billion and $18.1$21.8 billion on JulyJanuary 31, 20182019 and October 31, 2017,2018, respectively. The Company’s variable interests in these entities consist of the Company’s direct ownership therein, which in each case is insignificant relative to the total ownership of the fund, and any investment advisory fees earned but uncollected. The Company’s maximum exposure to loss with respect to these managed entities is limited to the carrying value of its investments in, and investment advisory fees receivables from, the entities as of January 31, 2019. The Company held investments in these entities totaling $3.0$2.9 million and $2.7 million on JulyJanuary 31, 20182019 and October 31, 2017,2018, respectively, and investment advisory fees receivable totaling $1.2 million and $1.3 million and $1.1 million on JulyJanuary 31, 20182019 and October 31, 2017,2018, 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’s risk of loss with respect to these managed entities is limited to the carrying value of its investments in, and investment advisory fees receivable from, the entities as of July 31, 2018. The Company does not consolidate these VIEs because it does not have the obligation to absorb losses of, or the VIE’sright to receive benefits from, these VIEs that could potentially be significant to the VIEs or right to receive benefits that could potentially be significant to the VIE.these VIEs.
The Company’s investments in privately offered equity funds are carried at fair value and included in investment securities, available-for-sale,non-consolidated sponsored funds and other, which are disclosed as a component of investments in Note 3. The Company records any change in fair value, net of income tax, in other comprehensive income (loss).
The Company also holds a variable interest in, but is not deemed to be the primary beneficiary of, a private equity partnership managed by a third party that invests in companies in the financial services industry. The Company’s variable interest in this entity consists of the Company’s direct ownership in the private equity partnership, equal to $3.6 million and $2.9$3.5 million at Julyboth January 31, 20182019 and October 31, 2017, respectively.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 JulyJanuary 31, 2018.2019. The Company does not consolidate this VIE because the Company does not hold the power to direct the activities that most significantly impactaffect 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 investmentsInvestments in equity method investees.
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5. | Derivative Financial Instruments |
Derivative financial instruments designated as cash flow hedges
In fiscal 2017, the Company entered into a Treasury lock transaction in connection with the offering of its 2027 Senior Notes. The Company concurrently designated the Treasury lock as a cash flow hedge to mitigate its exposure to variability in the forecasted semi-annual interest payments and recorded a loss of $0.4 million, net of tax, in other comprehensive income (loss). The Company reclassified approximately $17,000 of the loss into interest expense during both the three months ended January 31, 2019 and 2018 and will reclassify the remaining $0.6 million loss as of January 31, 2019 to earnings over the remaining term of the debt. During the next twelve months, the Company expects to reclassify approximately $68,000 of the unamortized loss.
In fiscal 2013, the Company entered into a forward-starting interest rate swap in connection with the offering of its 2023 Senior Notes and recorded a gain in other comprehensive income (loss), net of tax. The Company reclassified $50,000 of the gain into interest expense during both the three months ended January 31, 2019 and 2018, respectively, and will reclassify the remaining $0.9 million gain as of January 31, 2019 to earnings over the remaining term of the debt. During the next twelve months, the Company expects to reclassify approximately $0.2 million of the unamortized gain.
Other derivative financial instruments not designated for hedge accounting
The Company utilizes derivative financial instruments to hedge the market and currency risks associated with its investments in certain consolidated seed investments that are not designated as hedging instruments for accounting purposes.
Excluding derivative financial instruments held by consolidated sponsored funds, the Company was party to the following derivative financial instruments:
January 31, 2019 | October 31, 2018 | |||||||||||||||
Number of Contracts | Notional Value (in millions) | Number of Contracts | Notional Value (in millions) | |||||||||||||
Stock index futures contracts | 1,117 | $ | 98.2 | 1,007 | $ | 91.5 | ||||||||||
Total return swap contracts | 2 | $ | 106.5 | 3 | $ | 106.5 | ||||||||||
Credit default swap contracts | 1 | $ | 5.0 | 1 | $ | 5.0 | ||||||||||
Foreign exchange contracts | 17 | $ | 17.4 | 28 | $ | 23.0 | ||||||||||
Commodity futures contracts | 252 | $ | 10.8 | 253 | $ | 11.6 | ||||||||||
Currency futures contracts | 145 | $ | 15.8 | 165 | $ | 16.9 | ||||||||||
Interest rate futures contracts | 266 | $ | 36.4 | 282 | $ | 48.0 |
The derivative contracts outstanding and notional values they represent at January 31, 2019 and October 31, 2018 are representative of derivative balances throughout each respective year.
The Company has not elected to offset fair value amounts related to derivative financial instruments executed with the same counterparty under master netting arrangements; as a result, the Company records all derivative financial instruments as either other assets or other liabilities, gross, on its Consolidated Balance Sheets and measures them at fair value. The following table presents the fair value
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of derivative financial instruments not designated for hedge accounting and how they are reflected on the Company’s Consolidated Balance Sheets:
January 31, 2019 | October 31, 2018 | |||||||||||||||
(in thousands) | Other Assets | Other Liabilities | Other Assets | Other Liabilities | ||||||||||||
Stock index futures contracts | $ | 248 | $ | 2,897 | $ | 5,055 | $ | 372 | ||||||||
Total return swap contracts | - | 5,190 | - | 3,297 | ||||||||||||
Credit default swap contracts | - | 106 | - | 10 | ||||||||||||
Foreign exchange contracts | 14 | 317 | 329 | 202 | ||||||||||||
Commodity futures contracts | 259 | 461 | 770 | 216 | ||||||||||||
Currency futures contracts | 106 | 94 | 14 | 332 | ||||||||||||
Interest rate futures contracts | 162 | 577 | 179 | 17 | ||||||||||||
Total | $ | 789 | $ | 9,642 | $ | 6,347 | $ | 4,446 |
The Company maintains collateral with certain counterparties to satisfy margin requirements for derivative positions. The collateral is classified as restricted cash and is included as a component of other assets on our Consolidated Balance Sheets. At January 31, 2019 and October 31, 2018, collateral balances were $14.4 million and $13.1 million, respectively.
The Company recognized the following gains (losses) on derivative financial instruments within gains (losses) and other investment income, net, on the Company’s Consolidated Statements of Income:
Three Months Ended | ||||||||
January 31, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Stock index futures contracts | $ | (216 | ) | $ | (7,656 | ) | ||
Total return swap contracts | (2,185 | ) | (625 | ) | ||||
Credit default swap contracts | (83 | ) | - | |||||
Foreign exchange contracts | (284 | ) | (899 | ) | ||||
Commodity futures contracts | 870 | (403 | ) | |||||
Currency futures contracts | 36 | (86 | ) | |||||
Interest rate futures contracts | (511 | ) | 84 | |||||
Net gains (losses) | $ | (2,373 | ) | $ | (9,585 | ) |
In addition to the derivative contracts described above, certain consolidated seed investments may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives.
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6. | Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis |
The following tables summarize financial assets and liabilities measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy at July 31, 2018 and October 31, 2017:hierarchy:
JulyJanuary 31, 20182019(1)
(in thousands) | Level 1 | Level 2 | Level 3 | Other Assets Not Held at Fair Value | Total | Level 1 | Level 2 | Level 3 | Other Assets Not Held at Fair Value | Total | ||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
Cash equivalents | $ | 22,843 | $ | 153,715 | $ | - | $ | - | $ | 176,558 | $ | 19,464 | $ | 143,904 | $ | - | $ | - | $ | 163,368 | ||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||||||
Investment securities, trading: | ||||||||||||||||||||||||||||||||||||||||
Short-term debt securities | - | 257,911 | - | - | 257,911 | |||||||||||||||||||||||||||||||||||
Other debt securities | 12,863 | 399,405 | - | - | 412,268 | |||||||||||||||||||||||||||||||||||
Equity securities | 119,326 | 71,768 | - | - | 191,094 | |||||||||||||||||||||||||||||||||||
Investment securities, available-for-sale | 9,483 | 14,772 | - | - | 24,255 | |||||||||||||||||||||||||||||||||||
Investments in non-consolidated CLO entities(1) | - | - | - | 2,935 | 2,935 | |||||||||||||||||||||||||||||||||||
Investments held at fair value: | ||||||||||||||||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||||||||||
Short-term | - | 241,367 | - | - | 241,367 | |||||||||||||||||||||||||||||||||||
Held by consolidated sponsored funds | - | 306,219 | - | - | 306,219 | |||||||||||||||||||||||||||||||||||
Held in separately managed accounts | - | 61,745 | - | - | 61,745 | |||||||||||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||||||
Held by consolidated sponsored funds | 75,067 | 126,331 | - | - | 201,398 | |||||||||||||||||||||||||||||||||||
Held in separately managed accounts | 24,396 | 391 | - | - | 24,787 | |||||||||||||||||||||||||||||||||||
Non-consolidated sponsored funds and other | 7,769 | 2,989 | - | - | 10,758 | |||||||||||||||||||||||||||||||||||
Investments held at cost(2) | - | - | - | 20,868 | 20,868 | |||||||||||||||||||||||||||||||||||
Investments in non-consolidated CLO entities(3) | - | - | - | 2,898 | 2,898 | |||||||||||||||||||||||||||||||||||
Investments in equity method investees(2) | - | - | - | 143,326 | 143,326 | - | - | - | 140,518 | 140,518 | ||||||||||||||||||||||||||||||
Investments, other(3) | - | - | - | 20,874 | 20,874 | |||||||||||||||||||||||||||||||||||
Derivative instruments | - | 1,589 | - | - | 1,589 | - | 789 | - | - | 789 | ||||||||||||||||||||||||||||||
Assets of consolidated CLO entities: | ||||||||||||||||||||||||||||||||||||||||
Bank loans and other investments | - | 606,431 | 2,388 | - | 608,819 | - | 1,044,740 | 1,362 | - | 1,046,102 | ||||||||||||||||||||||||||||||
Total financial assets | $ | 164,515 | $ | 1,505,591 | $ | 2,388 | $ | 167,135 | $ | 1,839,629 | $ | 126,696 | $ | 1,928,475 | $ | 1,362 | $ | 164,284 | $ | 2,220,817 | ||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||
Derivative instruments | $ | - | $ | 4,740 | $ | - | $ | - | $ | 4,740 | $ | - | $ | 9,642 | $ | - | $ | - | $ | 9,642 | ||||||||||||||||||||
Liabilities of consolidated CLO entity: | ||||||||||||||||||||||||||||||||||||||||
Senior note obligations | - | 465,306 | - | - | 465,306 | |||||||||||||||||||||||||||||||||||
Liabilities of consolidated CLO entities: | ||||||||||||||||||||||||||||||||||||||||
Senior and subordinated note obligations | - | 840,929 | - | - | 840,929 | |||||||||||||||||||||||||||||||||||
Total financial liabilities | $ | - | $ | 470,046 | $ | - | $ | - | $ | 470,046 | $ | - | $ | 850,571 | $ | - | $ | - | $ | 850,571 |
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October 31, 20172018(1)
(in thousands) | Level 1 | Level 2 | Level 3 | Other Assets Not Held at Fair Value | Total | |||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash equivalents | $ | 24,811 | $ | 97,571 | $ | - | $ | - | $ | 122,382 | ||||||||||
Investments: | ||||||||||||||||||||
Investment securities, trading: | ||||||||||||||||||||
Short-term debt securities | - | 213,537 | - | - | 213,537 | |||||||||||||||
Other debt securities | 17,255 | 296,096 | - | - | 313,351 | |||||||||||||||
Equity securities | 125,689 | 55,799 | - | - | 181,488 | |||||||||||||||
Investment securities, available-for-sale | 8,938 | 13,527 | - | - | 22,465 | |||||||||||||||
Investments in non-consolidated CLO entities(1) | - | - | - | 3,609 | 3,609 | |||||||||||||||
Investments in equity method investees(2) | - | - | - | 144,911 | 144,911 | |||||||||||||||
Investments, other(3) | - | 146 | - | 18,685 | 18,831 | |||||||||||||||
Derivative instruments | - | 1,418 | - | - | 1,418 | |||||||||||||||
Assets of consolidated CLO entity: | ||||||||||||||||||||
Bank loan investments | - | 31,348 | - | - | 31,348 | |||||||||||||||
Total financial assets | $ | 176,693 | $ | 709,442 | $ | - | $ | 167,205 | $ | 1,053,340 | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Derivative instruments | $ | - | $ | 4,175 | $ | - | $ | - | $ | 4,175 | ||||||||||
Total financial liabilities | $ | - | $ | 4,175 | $ | - | $ | - | $ | 4,175 |
(in thousands) | Level 1 | Level 2 | Level 3 | Other Assets Not Held at Fair Value | Total | |||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash equivalents | $ | 23,262 | $ | 116,070 | $ | - | $ | - | $ | 139,332 | ||||||||||
Investments held at fair value: | ||||||||||||||||||||
Debt securities: | ||||||||||||||||||||
Short-term | - | 273,320 | - | - | 273,320 | |||||||||||||||
Held by consolidated sponsored funds | 12,834 | 392,139 | - | - | 404,973 | |||||||||||||||
Held in separately managed accounts | 521 | 64,539 | - | - | 65,060 | |||||||||||||||
Equity securities: | ||||||||||||||||||||
Held by consolidated sponsored funds | 73,291 | 62,318 | - | - | 135,609 | |||||||||||||||
Held in separately managed accounts | 23,642 | 419 | - | - | 24,061 | |||||||||||||||
Non-consolidated sponsored funds and other | 7,112 | 3,217 | - | - | 10,329 | |||||||||||||||
Investments held at cost(2) | - | - | - | 20,874 | 20,874 | |||||||||||||||
Investments in non-consolidated CLO entities(3) | - | - | - | 2,895 | 2,895 | |||||||||||||||
Investments in equity method investees(2) | - | - | - | 141,506 | 141,506 | |||||||||||||||
Derivative instruments | - | 6,347 | - | - | 6,347 | |||||||||||||||
Assets of consolidated CLO entities: | ||||||||||||||||||||
Bank loans and other investments | - | 872,757 | 1,547 | - | 874,304 | |||||||||||||||
Total financial assets | $ | 140,662 | $ | 1,791,126 | $ | 1,547 | $ | 165,275 | $ | 2,098,610 | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Derivative instruments | $ | - | $ | 4,446 | $ | - | $ | - | $ | 4,446 | ||||||||||
Liabilities of consolidated CLO entities: | ||||||||||||||||||||
Senior and subordinated note obligations | - | 873,008 | - | - | 873,008 | |||||||||||||||
Total financial liabilities | $ | - | $ | 877,454 | $ | - | $ | - | $ | 877,454 |
(1) | Amounts at January 31, 2019 reflect the adoption of ASU 2016-01. Amounts at October 31, 2018 reflect accounting guidance prior to the adoption of ASU 2016-01. See Note 1 for further information. |
(2) | These investments are not measured at fair value in accordance with U.S. GAAP. |
(3) | Investments in non-consolidated CLO entities are carried at amortized cost unless facts or circumstances indicate that the investments have been impaired, at which time the investments are written down to fair value as measured using level 3 inputs. |
Valuation methodologiesA 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.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 classifiedcategorized 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
29 |
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 thethese investments. Depending on the naturecategorization of the significant inputs, these assets are generally classifiedcategorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.
26
Debt securities held at fair value
InvestmentDebt securities trading –held at fair value consist of short-term debt
Short-term debt securities includeheld directly by the Company comprised of certificates of deposit, commercial paper and corporate debt obligations with remainingoriginal (remaining) maturities to the Company ranging from three months to 12 months. 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 classifiedcategorized as Level 2 within the fair value measurement hierarchy.
InvestmentDebt securities trading – other debt
Other debt securities classified as trading include debt obligations held in the portfolios of consolidated sponsored funds and separately managed accounts. Other debt securities heldaccounts are generally valued on the basis of valuations provided by third-party pricing services as described above for investment securities, trading – short-term debt. Other debt securities. Debt securities purchased with a remainingan 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 uponon the naturecategorization of the significant inputs, these assetsdebt securities held in portfolios of consolidated sponsored funds are generally classifiedcategorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.
InvestmentEquity securities trading – equityheld at fair value
Equity securities classified as trading includemeasured at fair value on a recurring basis consist of domestic and foreign and domestic equity securities held in the portfolios of consolidated sponsored funds and separately managed accounts. 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 uponon the naturecategorization of the significant inputs, these assets are generally are classifiedcategorized in their entirety as Level 1 or 2 within the fair value measurement hierarchy.
Investment securities, available-for-sale
Investment securities classified as available-for-sale includeEquity investments in sponsored mutual funds and privately offered equity funds. Sponsoredor other mutual funds are valued using the published net asset valuesvalue per share and are classified as Level 1 within the fair value measurement hierarchy. Investments in sponsored privately offered equityprivate open-end funds that are not listed on an active exchange but havecalculate a net asset values that are comparable tovalue per share (or
30 |
equivalent) as of the Company’s reporting date in a manner consistent with mutual funds andfunds. These investments do not have noany redemption restrictions and are classifiednot probable of being sold at an amount different from their calculated net asset value per share (or equivalent). Accordingly, investments in sponsored private open-end funds are measured at fair value based on the net asset value per share (or equivalent) of the investment as a practical expedient and are categorized as Level 2 within the fair value measurement hierarchy. The Company does not have any unfunded commitments related to investments in sponsored private mutual funds at January 31, 2019 and October 31, 2018.
Derivative instruments
Derivative instruments, which include stock index futures contracts, total return swap contracts, foreign exchange contracts, commodity futures contracts, currency futures contracts and interest rate futures contracts,further discussed in Note 5, are recorded as either other assets or other liabilities on the Company’s Consolidated Balance Sheets. Stock index futures contracts, total returnFuture and swap contracts, credit default swap contracts, commodity futures contracts, currency futures contracts and interest rate futures contracts are valued using a third-party pricing service that determines fair value based on bid and ask prices. Foreign exchange
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 tradingequity 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 naturecategorization of the significant inputs, these assets are classifiedgenerally categorized as Level 2 or 3 within the fair value measurement hierarchy.
Liabilities of consolidated CLO entityentities
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 as discussed further in Note 5.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.
Transfers in and out of Levels
The following table summarizes fair value transfers between Level 1 and Level 2 of the fair value measurement hierarchy for the three and nine months ended July 31, 2018 and 2017:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Transfers from Level 1 into Level 2(1) | $ | 188 | $ | 136 | $ | 189 | $ | 532 | ||||||||
Transfers from Level 2 into Level 1(2) | 58 | 423 | 26 | 2 |
28
Level 3 assets and liabilities
The following table shows a reconciliation of the beginning and ending fair value measurements of assets and liabilities valued on a recurring basis and classified as Level 3 within the fair value measurement hierarchy for the three and nine months ended July 31, 2018:hierarchy:
Three and Nine Months Ended | Three Months Ended | |||||||
July 31, 2018 | January 31, 2019 | |||||||
(in thousands) | Bank Loans and Other Investments of Eaton Vance CLO 2014-1 | Bank Loan Investments of Consolidated CLO Entities | ||||||
Beginning balance | $ | - | $ | 1,547 | ||||
Consolidation of CLO 2014-1(1) | 2,388 | |||||||
Paydowns | (6 | ) | ||||||
Net losses included in net income | (179 | ) | ||||||
Ending balance | $ | 2,388 | $ | 1,362 |
Financial Assets and Liabilities Not Measured at Fair Value
Certain financial instruments are not carried at fair value, but their fair value is required to be disclosed. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at July 31, 2018 and October 31, 2017:instruments:
July 31, 2018 | October 31, 2017 | January 31, 2019 | October 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Carrying Value | Fair Value | Fair Value Level | Carrying Value | Fair Value | Fair Value Level | 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 | $ | 5,000 | $ | 5,000 | 3 | $ | 5,000 | $ | 5,000 | 3 | ||||||||||||||||||||||||||||
Other assets | $ | - | $ | - | - | $ | 6,440 | $ | 6,440 | 3 | ||||||||||||||||||||||||||||||||||||||
Debt | $ | 619,469 | $ | 616,524 | 2 | $ | 618,843 | $ | 644,454 | 2 | $ | 619,887 | $ | 620,890 | 2 | $ | 619,678 | $ | 607,391 | 2 | ||||||||||||||||||||||||||||
Consolidated CLO entity line of credit | $ | 145,709 | $ | 145,709 | 2 | $ | 12,598 | $ | 12,598 | 2 | $ | 68,458 | $ | 68,458 | 2 | $ | - | $ | - | - |
As discussed in Note 19,18, on December 23, 2015, Eaton Vance Management Canada Ltd. (EVMC), a wholly ownedwholly-owned subsidiary of the Company, loaned $5.0 million to Hexavest under a term loan agreement to seed a new investment strategy. The carrying value of the loan approximates fair value. The fair value is determined annually using a cash flow model that projects future cash flows based upon contractual obligations, to which the Company then applies an appropriate discount rate.
Included in other assets at October 31, 2017 was an option to acquire an additional 26 percent interest in Hexavest carried at $6.4 million. The Company valued the option as of October 31, 2017 using a market approach and determined that the carrying value of the option was representative of fair value. The Company determined not to exercise the option, which expired unexercised on December 11, 2017. Upon expiration, the Company recognized a loss equal to the option’s carrying amount of $6.5 million as of
December 11, 2017 within gains (losses) and other investment income, net, in the Company’s Consolidated Statement of Income.
The fair value of the Company’s debt has been determined based on quoted prices in inactive markets.
The Company established CLO 2017-12019-1 on August 24, 2017January 3, 2019 and deems itself to be the primary beneficiary of CLO 2017-12019-1 from that date. The Company did not elect the fair value option for amounts outstanding under the revolving line of credit upon the initial consolidation of CLO 2017-1.2019-1. Additional information regarding CLO 2017-1,2019-1, including the terms of the revolving line of credit, is included in Note 5.4. The carrying amount of the revolving line of credit of $145.7 million and $12.6$68.5 million as of JulyJanuary 31, 2018 and October 31, 2017, respectively,2019 approximates fair value.
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Acquisitions |
Atlanta Capital Management Company, LLC (Atlanta Capital)
In the first quarter of fiscal 2018,2017, the Company paid $2.5 million to settleexercised a series of call options exercised during the fourth quarter of fiscal 2017 through which it purchased all of the remaining 0.45 percent direct profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the provisions of the original Atlanta Capital acquisition agreement, as amended.
Inamended, 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 paid $4.2 million to settleexercised a series of call options exercised during the fourth quarter of fiscal 2017 through which it purchased 1.1 percent$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). There were no puts or calls exercised in relation to indirect profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the terms of the Atlanta Capital Plan during the first nine months of fiscal 2018. The Company did not grant any indirect profit interests under the Atlanta Capital Plan during the first nine months of fiscal 2018.
In the second quarter of fiscal 2017, the Company exercised a call option through which it purchased 0.1 percent direct profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the provisions of the original Atlanta Capital acquisition agreement, as amended, for $0.4 million. The transactionThese transactions settled in May 2017.
In the first quarter of fiscal 2017, the Company paid $1.9 million to settle call options exercised during the fourth quarter of fiscal 2016 through which it purchased 0.9 percent of indirect profit interests held by non-controlling interest holders of Atlanta Capital pursuant to the provisions of the Atlanta Capital Plan. Separately, the Company granted a 1.1 percent indirect profit interest to employees of Atlanta Capital pursuant to the terms of the Atlanta Capital Plancash in the first quarter of fiscal 2017.2019 and 2018, respectively.
Total profit interests in Atlanta Capital held by non-controlling interest holders issued pursuant to the Atlanta Capital Plan were 11.69.8 percent on Julyas of January 31, 20182019 and October 31, 2017, reflecting the transactions described above.
Calvert Research and Management (Calvert)
On December 30, 2016, the Company, through its newly formed subsidiary Calvert, acquired substantially all of the assets of Calvert Investment Management, Inc. (Calvert Investments) for cash.2018. The transaction
was accounted for as an asset acquisition because substantially all of theestimated fair value of these interests was $26.7 million and $26.3 million at January 31, 2019 and October 31, 2018, respectively, and is included as a component of temporary equity on the gross assets acquired was concentrated in a single identifiable intangible asset related to acquired contracts to manage and distribute sponsored mutual funds (the Calvert Funds). The Calvert Funds are a diversified family of mutual funds, encompassing actively and passively managed equity, fixed income and asset allocation strategies managed in accordance with the Calvert Principles for Responsible Investment or other responsible investment criteria.Consolidated Balance Sheets.
Parametric Portfolio Associates LLC (Parametric)
Total profit interests in Parametric held by non-controlling interest holders decreased to 4.9 percent as of January 31, 2019 from 5.1 percent as of October 31, 2018, as described below. Total capital interests in Parametric held by non-controlling interest holders decreased to 0.6 percent as of January 31, 2019 from 0.8 percent as of October 31, 2018, as described below.
Clifton
In December 2012, Parametric acquired Clifton. As part of the transaction, the Company issued a 1.9 percent profit interest and a 1.9 percent capital interest in Parametric Portfolio LP (Parametric LP) to certain employees. In the first quarter of fiscal 2018, the Company exercised the finala series of call option related to non-controlling interests in Parametric issued in conjunction with the Clifton acquisition, resulting in the Company’s acquisition ofoptions through which it acquired the remaining indirect 0.5 percent profit interestsinterest and 0.5 percent capital interests in Parametric. This transaction settled in December 2017Parametric 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 2018,2019, the Company paid $5.7 million to settleexercised a series of call options exercised in the fourth quarter of fiscal 2017 through which it purchased 0.5a 0.2 percent indirectprofit interest and a 0.2 percent capital interest for $4.0 million.
Total profit interests and total capital interests in Parametric LP held by non-controlling interest holders were 0.6 percent and 0.8 percent as of January 31, 2019 and October 31, 2018. The estimated fair value of
33 |
these interests was $11.9 million and $15.9 million at January 31, 2019 and October 31, 2018, respectively, and is included as a component of temporary equity on the Consolidated Balance Sheets.
Parametric Plan
In fiscal 2018 and 2017, the Company exercised a series of call options through which it purchased $5.9 million and $5.7 million, respectively, of profit interests held by non-controlling interest holders of Parametric pursuant to the provisions of the Parametric Portfolio Associates LLC Long-term Equity Plan (the Parametric Plan).
In These transactions settled in cash in the first quarter of fiscal 2017, the Company exercised a call option related to non-controlling interests in Parametric issued in conjunction with the Clifton acquisition, resulting in the Company’s acquisition of an indirect 0.5 percent profit interests2019 and a 0.5 percent capital interests in Parametric. This transaction settled in January 2017 for $6.9 million.
In the first quarter of fiscal 2017, the Company paid $0.6 million to settle call options exercised in the fourth quarter of fiscal 2016 through which it purchased 0.1 percent indirect profit interests held by non-controlling interest holders of Parametric pursuant to the provisions of the Parametric Plan. There were no puts or calls exercised in relation to indirect profit interests held by non-controlling interest holders of Parametric pursuant to the terms of the Parametric Plan during the first nine months of fiscal 2018. The Company did not grant any indirect profit interests under the Parametric Plan during the first nine months of fiscal 2018.2018, respectively.
Total profit interests in Parametric held by non-controlling interest holders including indirect profit interests issued pursuant to the Parametric Plan decreased to 5.5were 4.3 percent as of JulyJanuary 31, 2019 and October 31, 2018. The estimated fair value of these interests was $48.2 million and $47.9 million at January 31, 2019 and October 31, 2018, from 6.0 percentrespectively, and is included as a component of October 31, 2017, reflectingtemporary equity on the transactions described above. Total capital interests in Parametric held by non-controlling interest holders decreased to 0.8 percent as of July 31, 2018 from 1.3 percent as of October 31, 2017.Consolidated Balance Sheets.
Tax Advantaged Bond Strategies (TABS)
In fiscal 2009, the Company acquired the TABS business of M.D. Sass Investors Services for cash and future consideration. During the second quarter of fiscal 2017, the Company made a final contingent payment of $11.6 million to the selling group based upon prescribed multiples of TABS’s revenue for the twelve months ended December 31, 2016. The payment increased goodwill by $11.6 million, as the acquisition was completed prior to the change in accounting for contingent purchase price consideration.
31
Intangible Assets |
The following is a summary of intangible assets at July 31, 2018 and October 31, 2017:assets:
JulyJanuary 31, 2019
(in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Amortizing intangible assets: | ||||||||||||
Client relationships acquired | $ | 134,247 | $ | (113,258 | ) | $ | 20,989 | |||||
Intellectual property acquired | 1,025 | (536 | ) | 489 | ||||||||
Trademark acquired | 4,257 | (1,281 | ) | 2,976 | ||||||||
Research system acquired | 639 | (444 | ) | 195 | ||||||||
Non-amortizing intangible assets: | ||||||||||||
Mutual fund management contracts acquired | 54,408 | - | 54,408 | |||||||||
Total | $ | 194,576 | $ | (115,519 | ) | $ | 79,057 |
October 31, 2018
(in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Amortizing intangible assets: | ||||||||||||||||||||||||
Client relationships acquired | $ | 134,247 | $ | (109,537 | ) | $ | 24,710 | $ | 134,247 | $ | (111,591 | ) | $ | 22,656 | ||||||||||
Intellectual property acquired | 1,025 | (502 | ) | 523 | 1,025 | (519 | ) | 506 | ||||||||||||||||
Trademark acquired | 4,257 | (1,098 | ) | 3,159 | 4,257 | (1,190 | ) | 3,067 | ||||||||||||||||
Research system acquired | 639 | (337 | ) | 302 | 639 | (391 | ) | 248 | ||||||||||||||||
Non-amortizing intangible assets: | ||||||||||||||||||||||||
Mutual fund management contracts acquired | 54,408 | - | 54,408 | 54,408 | - | 54,408 | ||||||||||||||||||
Total | $ | 194,576 | $ | (111,474 | ) | $ | 83,102 | $ | 194,576 | $ | (113,691 | ) | $ | 80,885 |
October 31, 2017
34 |
(in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Amortizing intangible assets: | ||||||||||||
Client relationships acquired | $ | 134,247 | $ | (103,314 | ) | $ | 30,933 | |||||
Intellectual property acquired | 1,025 | (452 | ) | 573 | ||||||||
Trademark acquired | 4,257 | (821 | ) | 3,436 | ||||||||
Research system acquired | 639 | (177 | ) | 462 | ||||||||
Non-amortizing intangible assets: | ||||||||||||
Mutual fund management contracts acquired | 54,408 | - | 54,408 | |||||||||
Total | $ | 194,576 | $ | (104,764 | ) | $ | 89,812 |
Amortization expense was $1.8 million and $2.2 million for both the three months ended JulyJanuary 31, 20182019 and 2017, and $6.7 million and $6.8 million for the nine months ended July 31, 2018, and 2017, respectively. Estimated remaining amortization expense for fiscal 20182019 and the next five fiscal years, on a straight-line basis, is as follows:
Estimated | Estimated | |||||||
Year Ending October 31, | Amortization | Amortization | ||||||
(in thousands) | Expense | Expense | ||||||
Remaining 2018 | $ | 2,217 | ||||||
2019 | 4,978 | |||||||
Remaining 2019 | $ | 3,150 | ||||||
2020 | 3,807 | 3,807 | ||||||
2021 | 2,282 | 2,282 | ||||||
2022 | 2,154 | 2,154 | ||||||
2023 | 1,754 | 1,754 | ||||||
2024 | 1,679 |
9. | Revenue |
The following table disaggregates total revenue by source:
Three Months Ended | ||||||||
January 31, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Management fees: | ||||||||
Sponsored funds | $ | 242,666 | $ | 251,255 | ||||
Separate accounts | 108,084 | 110,602 | ||||||
Total management fees | 350,750 | 361,857 | ||||||
Distribution and underwriter fees: | ||||||||
Distribution fees | 19,045 | 19,763 | ||||||
Underwriter commissions | 4,045 | 5,184 | ||||||
Total distribution and underwriter fees | 23,090 | 24,947 | ||||||
Service fees | 29,360 | 30,361 | ||||||
Other revenue | 3,216 | 3,071 | ||||||
Total revenue | $ | 406,416 | $ | 420,236 |
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The following table disaggregates total management fee revenue by investment mandate:
Three Months Ended | ||||||||
January 31, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Equity | $ | 163,897 | $ | 174,690 | ||||
Fixed income | 67,025 | 64,813 | ||||||
Floating rate income | 53,678 | 50,684 | ||||||
Alternative | 16,173 | 21,578 | ||||||
Portfolio implementation | 39,889 | 38,987 | ||||||
Exposure management | 10,088 | 11,105 | ||||||
Total management fees | $ | 350,750 | $ | 361,857 |
2027 Senior Notes
On April 6, 2017, the Company issued $300.0 million in aggregate principalThe amount of 3.5 percent ten-year senior notes due April 6, 2027, resultingmanagement fees and other receivables reported in net proceedsthe Company’s Consolidated Balance Sheet includes $212.2 million and $221.4 million of approximately $296.1 million after deducting the underwriting discount and offering expenses. Interest is payable semi-annually in arrears on April 6threceivables from contracts with customers at January 31, 2019 and October 6th of each year, commencing on October 6, 2017.31, 2018, respectively. The 2027 Senior Notes are unsecured and unsubordinated obligations of the Company.
Redemption of 2017 Senior Notes
On May 6, 2017, the Company used the net proceeds from the 2027 Senior Notes to redeem the remaining $250.0 million aggregate principal amount of its 2017 Senior Notes. The Company paid total consideration of $256.8deferred revenue reported in other liabilities in the Company’s Consolidated Balance Sheet was $4.5 million and $4.9 million at redemption, which representedJanuary 31, 2019 and October 31, 2018, respectively. The entire deferred revenue balance at the sumend of any given reporting period is expected to be recognized as management fee revenue in the aggregate principal amount then outstanding, the present value of the remaining scheduled payments of interest through the original maturity date and interest accrued to the date of redemption. The Company recognized a $5.4 million non-operating loss on the extinguishment of the 2017 Senior Notes during the third quarter of fiscal 2017, representing the difference between the total consideration paid and the net carrying amount of the extinguished debt plus interest accrued to the date of redemption.immediate subsequent quarter.
Stock-Based Compensation Plans |
The Companycompensation cost recognized compensation costby the Company related to its stock-based compensation plans for the three and nine months ended July 31, 2018 and 2017are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, | July 31, | January 31, | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Omnibus Incentive Plans: | ||||||||||||||||||||||||
Stock options | $ | 5,931 | $ | 5,192 | $ | 18,337 | $ | 15,712 | $ | 5,440 | $ | 7,289 | ||||||||||||
Restricted shares | 13,897 | 13,165 | 39,974 | 36,788 | 14,485 | 13,493 | ||||||||||||||||||
Phantom stock units | 49 | 165 | 978 | 391 | ||||||||||||||||||||
Deferred stock units(1) | 615 | 922 | ||||||||||||||||||||||
Employee Stock Purchase Plans | 312 | 540 | 793 | 716 | 176 | 481 | ||||||||||||||||||
Employee Stock Purchase Incentive Plan | 129 | 111 | 818 | 660 | 52 | 86 | ||||||||||||||||||
Atlanta Capital Plan | 743 | 855 | 2,227 | 2,565 | 570 | 742 | ||||||||||||||||||
Atlanta Capital Phantom Incentive Plan | 274 | 143 | ||||||||||||||||||||||
Parametric Plan | 794 | 940 | 2,383 | 2,820 | 740 | 794 | ||||||||||||||||||
Parametric Phantom Incentive Plan | 842 | 378 | 2,343 | 1,134 | 922 | 701 | ||||||||||||||||||
Atlanta Capital Phantom Incentive Plan | 143 | - | 424 | - | ||||||||||||||||||||
Total stock-based compensation expense | $ | 22,840 | $ | 21,346 | $ | 68,277 | $ | 60,786 | $ | 23,274 | $ | 24,651 |
(1) | In the fourth quarter of fiscal 2018, the Company changed the description of phantom stock units to deferred stock units. The change in the description had no impact on, nor does it constitute a restatement of, the Company's previously reported amounts attributable to these awards. |
The total income tax benefit recognized for stock-based compensation arrangements was $5.8$5.2 million and $7.7$5.7 million for the three months ended JulyJanuary 31, 20182019 and 2017, respectively, and $16.7 million and $22.0 million for the nine months ended July 31, 2018, and 2017, respectively.
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Stock options
Stock option transactions under the Company’s 2013 Omnibus Incentive Plan (the 2013 Plan) and predecessor plans for the ninethree months ended JulyJanuary 31, 20182019 were as follows:
(share and intrinsic value figures in thousands) | Shares | Weighted- Average Exercise Price | Weighted- (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||||||||||
(share and intrinsic value amounts in thousands) | Shares | Weighted- Average Exercise Price | Weighted- | Aggregate Intrinsic Value | ||||||||||||||||||||||||||||
Options outstanding, beginning of period | 17,587 | $ | 32.63 | 16,760 | $ | 35.23 | ||||||||||||||||||||||||||
Granted | 1,747 | 50.71 | 2,408 | 45.50 | ||||||||||||||||||||||||||||
Exercised | (1,884 | ) | 29.57 | (106 | ) | 28.10 | ||||||||||||||||||||||||||
Forfeited/expired | (42 | ) | 40.37 | (50 | ) | 40.68 | ||||||||||||||||||||||||||
Options outstanding, end of period | 17,408 | $ | 34.76 | 5.8 | $ | 319,864 | 19,012 | $ | 36.55 | 6.0 | $ | 80,580 | ||||||||||||||||||||
Options exercisable, end of period | 8,721 | $ | 30.36 | 3.9 | $ | 198,591 | 10,270 | $ | 32.70 | 4.3 | $ | 66,719 |
The Company received $54.7$2.8 million and $98.5$42.3 million related to the exercise of options for the ninethree months ended JulyJanuary 31, 20182019 and 2017,2018, respectively.
As of JulyJanuary 31, 2018, there was $44.8 million of2019, compensation cost of $55.5 million related to unvested stock options granted under the 2013 Plan and predecessor plans have not yet been recognized. That cost is expected to be recognized over a weighted-average period of 2.63.0 years.
Restricted shares
A summary of the Company’s restricted share activity for the ninethree months ended JulyJanuary 31, 20182019 under the 2013 Plan and predecessor plans is as follows:
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Grant Date | Grant Date | |||||||||||||||
(share figures in thousands) | Shares | Fair Value | Shares | Fair Value | ||||||||||||
Unvested, beginning of period | 4,565 | $ | 36.22 | 4,544 | $ | 40.70 | ||||||||||
Granted | 1,407 | 50.96 | 1,533 | 45.47 | ||||||||||||
Vested | (1,305 | ) | 36.15 | (1,078 | ) | 39.16 | ||||||||||
Forfeited | (92 | ) | 39.92 | (39 | ) | 42.28 | ||||||||||
Unvested, end of period | 4,575 | $ | 40.70 | 4,960 | $ | 42.50 |
As of JulyJanuary 31, 2018,2019, there was $127.2$160.4 million of compensation cost related to unvested restricted shares granted under the 2013 Plan and predecessor plans not yet recognized. That cost is expected to be recognized over a weighted-average period of 2.93.2 years.
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PhantomDeferred stock units
Phantom
Deferred stock units issued to non-employee Directors under the 2013 Plan are accounted for as liability awards. During 2017, the 2013 Plan was amended such that non-employee Directors no longer have
substantive service conditions for vesting of awards. Once the awards are granted, the non-employee Directors have the right to receive cash payments related to such awards upon separation from the Company (other than for cause). As a result, phantomDeferred stock units granted on or after November 1, 2017 are considered fully vested on the grant date and the entire grant date fair value of these awards is recognized as compensation cost on the date of grant.
DuringIn the nine months ended July 31, 2018, 14,230 phantomfirst quarter of fiscal 2019, 18,642 deferred stock units were issued to non-employee Directors pursuant to the 2013 Plan. AsThe total liability attributable to deferred stock units included as a component of Julyaccrued compensation on the Company’s Consolidated Balance Sheet was $1.4 million and $1.3 million as of January 31, 2019 and October 31, 2018, there was $0.1respectively. The Company made cash payments of $0.5 million and $0.4 million, in the first quarters of compensation cost relatedfiscal 2019 and 2018, respectively, to unvested phantomsettle deferred stock units granted under the 2013 Plan prior to November 2017 not yet recognized. That cost is expected to be recognized over a weighted-average period of three months.unit award liabilities.
Common Stock Repurchases |
The Company’s current Non-Voting Common Stock share repurchase program was announcedauthorized on January 11, 2017.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 ninethree months of fiscal 2018,2019, the Company purchased and retired approximately 3.43.1 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 2.64.3 million additional shares may be repurchased under the current authorization as of JulyJanuary 31, 2018.2019.
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Non-operating Income (Expense) |
The components of non-operating income (expense) for the three and nine months ended July 31, 2018 and 2017 were as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, | July 31, | January 31, | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Interest and other income | $ | 10,247 | $ | 6,784 | $ | 26,616 | $ | 17,385 | $ | 9,820 | $ | 9,116 | ||||||||||||
Net losses on investments and derivatives(1) | (3,120 | ) | (436 | ) | (16,453 | ) | (889 | ) | (3,646 | ) | (5,545 | ) | ||||||||||||
Net foreign currency gains (losses) | 4 | (811 | ) | (695 | ) | (1,177 | ) | |||||||||||||||||
Net foreign currency losses | (341 | ) | (973 | ) | ||||||||||||||||||||
Gains and other investment income, net | 7,131 | 5,537 | 9,468 | 15,319 | 5,833 | 2,598 | ||||||||||||||||||
Interest expense | (5,906 | ) | (6,180 | ) | (17,716 | ) | (21,592 | ) | (6,131 | ) | (5,907 | ) | ||||||||||||
Loss on extinguishment of debt | - | (5,396 | ) | - | (5,396 | ) | ||||||||||||||||||
Other income (expense) of consolidated CLO entities: | ||||||||||||||||||||||||
Interest income | 4,505 | - | 6,193 | - | 11,750 | 823 | ||||||||||||||||||
Net losses on bank loans and other investments | (2,658 | ) | - | (1,370 | ) | - | ||||||||||||||||||
Net gains (losses) on bank loans and other investments and note obligations | (6,309 | ) | 894 | |||||||||||||||||||||
Gains and other investment income, net | 1,847 | - | 4,823 | - | 5,441 | 1,717 | ||||||||||||||||||
Structuring and closing fees | (101 | ) | - | |||||||||||||||||||||
Interest expense | (8,235 | ) | (94 | ) | ||||||||||||||||||||
Interest and other expense | (3,092 | ) | - | (3,630 | ) | - | (8,336 | ) | (94 | ) | ||||||||||||||
Total non-operating income (expense) | $ | (20 | ) | $ | (6,039 | ) | $ | (7,055 | ) | $ | (11,669 | ) | $ | (3,193 | ) | $ | (1,686 | ) |
(1) |
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Income Taxes |
The provision for income taxes was $37.2$27.6 million and $42.5$48.6 million, or 26.223.4 percent and 36.936.3 percent of pre-tax income, for the three months ended JulyJanuary 31, 20182019 and 2017, respectively. The provision for income taxes was $119.9 million and $123.9 million, or 29.7 percent and 37.2 percent of pre-tax income, for the nine months ended July 31, 2018, and 2017, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into law in the U.S. Among other significant changes, the Tax Act reduced the statutory federal income tax rate for U.S. corporate taxpayers from a maximum of 35 percent to 21 percent and required the deemed repatriation of foreign earnings not previously subject to U.S. taxation. Because the lower federal income tax rate took effect two months into the Company’s fiscal year, a blended federal tax rate of 23.3 percent applies to the Company for fiscal 2018.
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The Company’s income tax provision for the three months ended July 31, 2018 includes a non-recurring charge of $6,400 for the deemed repatriation of foreign-sourced net earnings not previously subject to U.S. taxation. The Company’s effective tax rate for the three months ended July 31, 2018 was decreased by the income tax benefit of $1.3 million related to the exercise of stock options and vesting of restricted stock during the period, and decreased by $1.7 million related to the net income attributable to redeemable non-controlling interests and other beneficial interests, which is not taxable to the Company.
The Company’s income tax provision for the first nine months of fiscal 2018 includes a non-recurring charge of approximately $24.8 million to reflect the estimated effect of the Tax Act. The non-recurring charge is considered to be a provisional estimate under the U.S. Securities and Exchange Commission Staff Accounting Bulletin 118 (SAB 118) and, based on current interpretation of the tax law changes, includes $21.7 million from the revaluation of the Company’s deferred tax assets and liabilities, and $3.1 million for the deemed repatriation of foreign-sourced net earnings not previously subject to U.S. taxation. The increase in the Company’s effective tax rate for the first nine months of fiscal 2018 resulting from this charge was partially offset by an income tax benefit of $15.1 million related to the exercise of stock options and vesting of restricted stock during the period, and $4.5 million related to the net income attributable to redeemable non-controlling interests and other beneficial interests, which is not taxable to the Company.
The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate for the three and nine months ended July 31, 2018:rate:
Three Months Ended | ||||||||||||||||
Three Months Ended | Nine Months Ended | January 31, | ||||||||||||||
July 31, 2018 | July 31, 2018 | 2019 | 2018 | |||||||||||||
Statutory U.S. federal income tax rate(1) | 23.3 | % | 23.3 | % | 21.0 | % | 23.3 | % | ||||||||
State income taxes for current year, net of federal income tax benefits | 4.4 | % | 4.3 | % | ||||||||||||
State and local income tax, net of federal income tax benefits | 4.6 | % | 4.3 | % | ||||||||||||
Net income attributable to non-controlling and other beneficial interests | -1.0 | % | -0.9 | % | -1.0 | % | -1.8 | % | ||||||||
Non-recurring impact of U.S. tax reform | 0.0 | % | 18.4 | % | ||||||||||||
Stock-based compensation | 0.4 | % | 0.0 | % | ||||||||||||
Net excess tax benefits from stock-based compensation plans(2) | -2.5 | % | -8.8 | % | ||||||||||||
Other items | 0.4 | % | 0.6 | % | 0.9 | % | 0.9 | % | ||||||||
Non-recurring impact of U.S. tax reform | 0.0 | % | 6.1 | % | ||||||||||||
Net excess tax benefits from stock-based compensation plans(2) | -0.9 | % | -3.7 | % | ||||||||||||
Effective income tax rate | 26.2 | % | 29.7 | % | 23.4 | % | 36.3 | % |
(1) |
(2) |
The Company continues to carefully evaluateCompany’s income tax provision for the impactthree months ended January 31, 2019 includes $0.6 million of the Tax Act,charges associated with certain provisions of which will not takethe 2017 Tax Act taking effect for the Company untilin fiscal 2019, including, but not limitedrelating principally to limitations on the deductibility of executive compensation.
The income tax provision was reduced by net excess tax benefits related to the global intangible low-taxedexercise of employee stock options and vesting of restricted stock awards during the period totaling $2.9 million and $11.9 million for the three months ended January 31, 2019 and 2018, respectively. The Company’s income foreign-derived intangible income and base erosion anti-abuse tax provisions. Underprovision for the guidance provided bythree months ended January 31, 2018 also included a non-recurring charge of $24.7 million to reflect the U.S. Securities and Exchange Commission in SAB 118, no provisional estimate is required for these items until the accounting for these elementsestimated effect of enactment of the 2017 Tax Act is complete.Act.
No valuation allowance has been recorded for deferred tax assets, reflecting management’s belief that all deferred tax assets will be utilized.
As of JulyJanuary 31, 2018,2019, the Company considers the undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested in foreign operations; however, asoperations. As of January 31, 2019, the Company had approximately $75.7 million of undistributed earnings primarily from Canadian and United Kingdom foreign corporations that are not available to fund domestic operations or to distribute to shareholders unless repatriated. As a result of the 2017 Tax Act an estimatedand foreign exchange rates as of January 31, 2019, there is no future tax of $3.1 million was recorded during the nine months ended July 31, 2018 on theseliability with respect to undistributed earnings. The calculation of this non-recurring charge is based on the Tax Act, guidance issued by the Internal Revenue Service and our interpretation of this information. The Company anticipates additional guidance will be issued by the Internal Revenue Service and continues to monitor interpretative developments. As additional guidance becomes available, the Company may reconsider its repatriation policy and this estimated tax charge may change.
The Company is generally no longer subject to income tax examinations by U.S. federal, state, local or non-U.S. taxing authorities for fiscal years prior to fiscal 2014.2015.
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Non-controlling and Other Beneficial Interests |
The components of net income attributable to non-controlling and other beneficial interests for the three and nine months ended July 31, 2018 and 2017 were as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, | July 31, | January 31, | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Consolidated sponsored funds | $ | (1,862 | ) | $ | (3,124 | ) | $ | (4,215 | ) | $ | (4,836 | ) | $ | (2,422 | ) | $ | (6,300 | ) | ||||||
Majority-owned subsidiaries | (4,119 | ) | (4,365 | ) | (12,026 | ) | (12,015 | ) | (3,037 | ) | (4,155 | ) | ||||||||||||
Non-controlling interest value adjustments(1) | - | (3 | ) | - | 71 | |||||||||||||||||||
Net income attributable to non-controlling and other beneficial interests | $ | (5,981 | ) | $ | (7,492 | ) | $ | (16,241 | ) | $ | (16,780 | ) | $ | (5,459 | ) | $ | (10,455 | ) |
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Accumulated Other Comprehensive Income (Loss) |
The components of accumulated other comprehensive income (loss), net of tax, for the three months ended July 31, 2018 and 2017 are as follows:
(in thousands) | Unamortized Net Gains (Losses) on Cash Flow Hedges(1) | Net Unrealized Gains (Losses) on Available-for-Sale Investments(2) | Foreign Currency Translation Adjustments | Total | ||||||||||||
Balance at April 30, 2018 | $ | 251 | $ | 5,160 | $ | (49,884 | ) | $ | (44,473 | ) | ||||||
Other comprehensive income (loss), before reclassifications and tax | - | 514 | (4,585 | ) | (4,071 | ) | ||||||||||
Tax impact | - | (114 | ) | - | (114 | ) | ||||||||||
Reclassification adjustments, before tax | (33 | ) | (1,861 | ) | - | (1,894 | ) | |||||||||
Tax impact | 8 | 434 | - | 442 | ||||||||||||
Net current period other comprehensive income (loss) | (25 | ) | (1,027 | ) | (4,585 | ) | (5,637 | ) | ||||||||
Balance at July 31, 2018 | $ | 226 | $ | 4,133 | $ | (54,469 | ) | $ | (50,110 | ) | ||||||
Balance at April 30, 2017 | $ | 283 | $ | 3,595 | $ | (63,942 | ) | $ | (60,064 | ) | ||||||
Other comprehensive income (loss), before reclassifications and tax | - | 329 | 18,208 | 18,537 | ||||||||||||
Tax impact | - | (124 | ) | - | (124 | ) | ||||||||||
Reclassification adjustments, before tax | 60 | - | - | 60 | ||||||||||||
Tax impact | (23 | ) | - | - | (23 | ) | ||||||||||
Net current period other comprehensive income (loss) | 37 | 205 | 18,208 | 18,450 | ||||||||||||
Balance at July 31, 2017 | $ | 320 | $ | 3,800 | $ | (45,734 | ) | $ | (41,614 | ) |
The components of accumulated other comprehensive income (loss), net of tax, for the nine months ended July 31, 2018 and 2017 are as follows:
(in thousands) | Unamortized Net Gains (Losses) on Cash Flow Hedges(1) | Net Unrealized Gains (Losses) on Available-for-Sale Investments(2) | Foreign Currency Translation Adjustments | Total | Unamortized Net Gains (Losses) on Cash Flow Hedges(1) | Net Unrealized Gains on Available-for-Sale Investments | Foreign Currency Translation Adjustments | Total | ||||||||||||||||||||||||
Balance at October 31, 2018 | $ | 200 | $ | 3,714 | $ | (57,095 | ) | $ | (53,181 | ) | ||||||||||||||||||||||
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)(2) | - | (3,714 | ) | - | (3,714 | ) | ||||||||||||||||||||||||||
Balance at November 1, 2018, as adjusted | 200 | - | (57,095 | ) | (56,895 | ) | ||||||||||||||||||||||||||
Other comprehensive income, before reclassifications and tax | - | - | 986 | 986 | ||||||||||||||||||||||||||||
Tax impact | - | - | - | - | ||||||||||||||||||||||||||||
Reclassification adjustments, before tax | (33 | ) | - | - | (33 | ) | ||||||||||||||||||||||||||
Tax impact | 9 | - | - | 9 | ||||||||||||||||||||||||||||
Net current period other comprehensive income (loss) | (24 | ) | - | 986 | 962 | |||||||||||||||||||||||||||
Balance at January 31, 2019 | $ | 176 | $ | - | $ | (56,109 | ) | $ | (55,933 | ) | ||||||||||||||||||||||
Balance at October 31, 2017 | $ | 301 | $ | 4,128 | $ | (51,903 | ) | $ | (47,474 | ) | $ | 301 | $ | 4,128 | $ | (51,903 | ) | $ | (47,474 | ) | ||||||||||||
Other comprehensive income, before reclassifications and tax | - | 1,890 | (2,566 | ) | (676 | ) | - | 962 | 12,085 | 13,047 | ||||||||||||||||||||||
Tax impact | - | (458 | ) | - | (458 | ) | - | (242 | ) | - | (242 | ) | ||||||||||||||||||||
Reclassification adjustments, before tax | (99 | ) | (1,861 | ) | - | (1,960 | ) | (33 | ) | - | - | (33 | ) | |||||||||||||||||||
Tax impact | 24 | 434 | - | 458 | 8 | - | - | 8 | ||||||||||||||||||||||||
Net current period other comprehensive income (loss) | (75 | ) | 5 | (2,566 | ) | (2,636 | ) | (25 | ) | 720 | 12,085 | 12,780 | ||||||||||||||||||||
Balance at July 31, 2018 | $ | 226 | $ | 4,133 | $ | (54,469 | ) | $ | (50,110 | ) | ||||||||||||||||||||||
Balance at October 31, 2016 | $ | 687 | $ | 2,943 | $ | (61,213 | ) | $ | (57,583 | ) | ||||||||||||||||||||||
Other comprehensive income (loss), before reclassifications and tax | (684 | ) | 1,396 | 15,479 | 16,191 | |||||||||||||||||||||||||||
Tax impact | 271 | (539 | ) | - | (268 | ) | ||||||||||||||||||||||||||
Reclassification adjustments, before tax | 74 | - | - | 74 | ||||||||||||||||||||||||||||
Tax impact | (28 | ) | - | - | (28 | ) | ||||||||||||||||||||||||||
Net current period other comprehensive income (loss) | (367 | ) | 857 | 15,479 | 15,969 | |||||||||||||||||||||||||||
Balance at July 31, 2017 | $ | 320 | $ | 3,800 | $ | (45,734 | ) | $ | (41,614 | ) | ||||||||||||||||||||||
Balance at January 31, 2018 | $ | 276 | $ | 4,848 | $ | (39,818 | ) | $ | (34,694 | ) |
(1) | Amounts reclassified from accumulated other comprehensive income (loss), net of tax, represent the amortization of net gains (losses) on qualifying derivative financial instruments designated as cash flow hedges over the life of the Company's senior notes into interest expense on the Consolidated Statements of Income. |
(2) |
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Earnings per Share |
The following table sets forth the calculation of earnings per basic and diluted share for the three and nine months ended July 31, 2018 and 2017:shares:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, | July 31, | January 31, | ||||||||||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Net income attributable to Eaton Vance Corp. shareholders | $ | 101,794 | $ | 67,361 | $ | 276,451 | $ | 200,047 | $ | 86,801 | $ | 78,056 | ||||||||||||
Weighted-average shares outstanding – basic | 114,610 | 111,284 | 115,157 | 110,540 | 112,255 | 115,282 | ||||||||||||||||||
Incremental common shares | 8,131 | 5,767 | 8,396 | 5,211 | 3,261 | 8,659 | ||||||||||||||||||
Weighted-average shares outstanding – diluted | 122,741 | 117,051 | 123,553 | 115,751 | 115,516 | 123,941 | ||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic | $ | 0.89 | $ | 0.61 | $ | 2.40 | $ | 1.81 | $ | 0.77 | $ | 0.68 | ||||||||||||
Diluted | $ | 0.83 | $ | 0.58 | $ | 2.24 | $ | 1.73 | $ | 0.75 | $ | 0.63 |
Antidilutive common shares related to stock options and unvested restricted stock excluded from the computation of earnings per diluted share were approximately 1.811.3 million and 3.01.8 million for the three months ended JulyJanuary 31, 20182019 and 2017, respectively, and approximately 2.1 million and 3.9 million for the nine months ended July 31, 2018, and 2017, respectively.
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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Related Party Transactions |
Sponsored funds
The Company is an investment adviser to, and has administrative agreements with, certain sponsored funds, privately offered equity funds and closed-end funds for which employees of the Company are officers and/or directors. Revenues for services provided or related to thesesponsored funds for the three and nine months ended July 31, 2018 and 2017 are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, | July 31, | January 31, | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Management fees | $ | 263,027 | $ | 239,319 | $ | 772,032 | $ | 681,027 | $ | 242,666 | $ | 251,255 | ||||||||||||
Distribution fees | 19,369 | 19,225 | 58,096 | 56,504 | ||||||||||||||||||||
Distribution and underwriter fees(1) | 23,090 | 24,947 | ||||||||||||||||||||||
Service fees | 31,260 | 30,515 | 91,935 | 89,493 | 29,360 | 30,361 | ||||||||||||||||||
Shareholder services fees | 1,672 | 1,126 | 4,540 | 3,099 | ||||||||||||||||||||
Other revenue | 190 | 293 | 473 | 645 | ||||||||||||||||||||
Shareholder services fees included in other revenue | 1,583 | 1,391 | ||||||||||||||||||||||
Total | $ | 315,518 | $ | 290,478 | $ | 927,076 | $ | 830,768 | $ | 296,699 | $ | 307,954 |
(1) | Prior period amounts have been adjusted as a result of the retrospective adoption of ASU 2014-09. See Note 1, Summary of Significant Accounting Policies, for further information on the impact of the adoption of ASU 2014-09. |
For the three months ended JulyJanuary 31, 20182019 and 2017,2018, the Company had investment advisory agreements with certaindiscretionarily waived management fees of $4.3 million and $4.4 million, respectively. Separately, for that same period, the Company provided subsidies to sponsored funds pursuant to which the Company contractually waived $4.4of $9.2 million and $4.6$5.7 million, respectively, ofrespectively. Fee waivers and fund subsidies are recognized as a reduction to management fees it was otherwise entitled to receive. Forrevenue on the nine months ended July 31, 2018 and 2017, the Company contractually waived $13.0 million and $12.7 million, respectively,Consolidated Statements of management fees it was otherwise entitled to receive.Income.
Sales proceeds and net realized gains (losses) for the three and nine months ended July 31, 2018 and 2017 from investments in non-consolidated sponsored funds classified as available-for-sale are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, | July 31, | January 31, | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Proceeds from sales | $ | (2,936 | ) | $ | 5,459 | $ | (7,812 | ) | $ | 9,193 | $ | (4,282 | ) | $ | - | |||||||||
Net realized gains (losses) | 2,066 | 14 | 1,961 | 217 | 24 | 5 |
The Company bears the non-advisorypays all ordinary operating expenses of certain sponsored funds (excluding investment advisory and administrative fees) for which it earns an all-in management fee and provides subsidies to startup and other smaller sponsored funds to enhance their competitiveness.all-in-management fee. For the three months ended JulyJanuary 31, 20182019 and 2017,2018, expenses of $11.6$3.4 million and $10.4 million, respectively, were incurred by the Company pursuant to these arrangements. For the nine months ended July 31, 2018 and 2017, expenses of $33.6 million and $26.3$3.5 million, respectively, were incurred by the Company pursuant to these arrangements.
Included in management fees and other receivables at JulyJanuary 31, 20182019 and October 31, 20172018 are receivables due from sponsoredservice provided to or related to the funds of $105.9$97.7 million and $100.0$104.9 million, respectively. Included in accounts payable and accrued expenses at JulyJanuary 31, 20182019 and October 31, 2017 are2018 mainly relates to payables due to sponsored funds subsides of $2.8$3.7 million and $1.7$3.2 million, respectively.
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Loan to affiliate
On December 23, 2015, EVMC, a wholly owned subsidiary of the Company, loaned $5.0 million to Hexavest under a term loan agreement to seed a new investment strategy. The loan renews automatically for an additional one-year period on each anniversary date unless written termination notice is provided by
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EVMC. The loan earnsThrough October 31, 2018, the Company earned interest equal to the one-year Canadian Dollar Offered Rate plus 200 basis points, which is payable quarterly in arrears.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. During the three months ended July 31, 2018 and 2017, theThe Company recorded $50,000 and $38,000, respectively,$45,000 of interest income related to the loan in gains (losses) and other investment income, net, on the Company’s Consolidated Statement of Income. DuringIncome for both the ninethree months ended JulyJanuary 31, 20182019 and 2017, the Company recorded $0.1 million of interest income related to the loan.2018. Interest due from Hexavest under this arrangement included in other assets on the Company’s Consolidated Balance Sheets was $17,000$15,000 and $13,000$16,151 at JulyJanuary 31, 20182019 and October 31, 2017,2018, 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 amounted to $9.3totaled $7.9 million and $11.1$8.1 million at JulyJanuary 31, 20182019 and October 31, 2017,2018, respectively.
Geographic Information |
Revenues by principal geographic area for the three and nine months ended July 31, 2018 and 2017 are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, | July 31, | January 31, | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
U.S. | $ | 413,076 | $ | 377,688 | $ | 1,214,225 | $ | 1,077,590 | $ | 390,754 | $ | 404,165 | ||||||||||||
International | 17,526 | 16,058 | 52,050 | 45,747 | 15,662 | 16,071 | ||||||||||||||||||
Total | $ | 430,602 | $ | 393,746 | $ | 1,266,275 | $ | 1,123,337 | $ | 406,416 | $ | 420,236 |
Long-lived assets by principal geographic area as of July 31, 2018 and October 31, 2017 are as follows:
July 31, | October 31, | |||||||
(in thousands) | 2018 | 2017 | ||||||
Long-lived Assets: | ||||||||
U.S. | $ | 48,955 | $ | 46,804 | ||||
International | 2,101 | 2,185 | ||||||
Total | $ | 51,056 | $ | 48,989 |
January 31, | October 31, | |||||||
(in thousands) | 2019 | 2018 | ||||||
Long-lived Assets: | ||||||||
U.S. | $ | 58,168 | $ | 50,459 | ||||
International | 1,911 | 1,969 | ||||||
Total | $ | 60,079 | $ | 52,428 |
International revenues and long-lived assets are attributed to countries based on the location in which revenues are earned.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Item includes statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, intentions or strategies regarding the future. All statements, other than statements of historical facts, included in this Form 10-Q regarding our financial position, business strategy and other plans and objectives for future operations are forward-looking statements. The terms “may,” “will,” “could,” “anticipate,” “plan,” “continue,” “project,” “intend,” “estimate,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that they will prove to have beenbe 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, 20172018.
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 productsstrategies and services through multiple distribution channels. In executing thisour 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, and global income, high-yield and investment grade bonds. Through Parametric, we manage a range of engineered alphasystematic 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 customized exposure management services. We also oversee the management of, and distribute, investment funds sub-advised by unaffiliated third-party managers, including global, emerging market and regional equity and asset allocation strategies.
Our breadth of investment management capabilities supports a wide range of productsstrategies and services offered to fund shareholders, retail managed account investors, institutional investors and high-net-worth clients.Our equity strategies encompass a diversity of investment objectives, risk profiles, income levels and geographic representation. Our income investment strategies cover a broad duration, geographic representation and credit quality range and encompass both taxable and tax-free investments. We also offer a range of alternative investment strategies, including commodity- and currency-based investments and a spectrum of absolute return strategies. Although we manage and distribute a wide range of investment productsstrategies and services, we operate in one business segment, namely as an investment adviser to funds and separate accounts. As of JulyJanuary 31, 2018,2019, we had $453.2$444.7 billion in consolidated assets under management.
We distribute our funds and retail managed accounts principally through financial intermediaries. We have broad market reach, with distribution partners including national and regional broker-dealers, independent broker-dealers, registered investment advisors, banks and insurance companies. We support these distribution partners with a team of 120approximately 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-andwholly and majority-owned affiliates and consolidated subsidiaries, we manage investments for a broad range of clients in the institutional and high-net-worth marketplace in the U.S. and internationally, including corporations, sovereign wealth funds, endowments, foundations, family offices and public and private employee retirement plans.
Our revenue is derived primarily from management, distribution and service fees received from Eaton Vance-, Parametric- and Calvert-branded funds and management fees received from separate accounts. Our fees are based primarily on the value of the investment portfolios we manage and fluctuate with changes in the total value and mix of assets under management. As a matter of course, investors in our sponsored open-end funds and separate accounts have the ability to redeem their investments at any time, without prior notice, and there are no material restrictions that would prevent them from doing so. Our major expenses are employee compensation, distribution-related expenses, fund-related expenses, service fee expense, 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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BusinessCurrent Developments
We are pursuing five primary strategic priorities to support business growth: (1) building upon and defending our long-term growth. Those priorities are: (1)leadership position in specialty strategies and services for high-net-worth and institutional investors; (2) capitalizing on the current interest environment to grow our market position in floating-rate and short-duration fixed income strategies; (3) expanding our leadership position in responsible investing; (4) increasing our global investment performance leadershipcapabilities and distribution strengths to grow sales and gain market share in actively managed investment strategies; (2) extending the success we have had with our Custom Beta lineup of rules-based separately managed accounts; (3) becoming a more global company by building our investment and distribution capabilitiesreach outside the United States; (4) launching NextShares™ exchange-traded managed funds (NextShares) as a new exchange-traded product structure for investors in actively managed funds in the U.S; and (5) leveraging Calvert and Parametric’s customized separate account capabilitiespositioning Eaton Vance to leadprofit from a changing environment for the growth of responsible investing.
As of July 31, 2018, we had 65 U.S. mutual funds rated four or five stars by Morningstar™ for at least one class of shares, including 24 funds rated five stars for at least one class of shares. Although actively managed strategies as a whole are losing share to passive investments, the Company believes that top-performing active strategies can continue to grow, particularly in asset classes where competition versus passive alternatives is less acute. In the first nine months of fiscal 2018, net flows into the Company’s active strategies totaled $9.7 billion.management industry.
In the first nine monthsquarter of fiscal 2018,2019, we continued to experience strong growth in our Custom Beta strategies, which include the ParametricParametric’s Custom Core equity and Eaton Vance Management’s laddered municipal and corporate bond separate account strategies. These market-leading offerings combine the benefits of passive investing with the ability to the retailcustomize portfolios to meet individual preferences and high-net-worth markets.needs. Compared to index mutual funds and exchange-traded funds, rules-based separately managedCustom 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 nine monthsquarter of fiscal 2018,2019, net inflows into Parametricour Custom Core equityBeta strategies offered as individual separate accounts totaled $3.9 billion, which equates to annualized internal growth in managed assets of 19 percent.
In a difficult environment for floating-rate bank loan investment strategies, we saw net outflows of $2.9 billion in the first quarter of fiscal 2019, as investors reduced their exposure to below investment grade credits. Our lineup of fixed income mutual funds positioned as short- or ultra-short duration, short-term or adjustable-rate, which invest primarily in investment-grade credit instruments, continued to demonstrate strong appeal to investors in the first quarter of fiscal 2019. Among our leading funds in this category are the highly rated Eaton Vance Short-Duration Government Income and Eaton Vance laddered municipal and corporate bond strategies offered as retail managed accounts and high-net-worth separate accounts totaled $10.5 billion.
Outside the United States, the Company continues to expand investment staff and commit additional client service and distribution resources to support business growth. On January 31, 2018, Eaton Vance Management (International) Limited (EVMI) announced an agreement to hire a five-person global fixed-income team in Frankfurt, Germany to advise approximately $0.8Short-Duration Municipal Opportunities Funds, which had combined net inflows of $1.8 billion in client mandates assumed by Eaton Vance upon the team’s hiring. In addition to providing portfolio advisory services for fixed-income accounts, EVMI’s Frankfurt branch provides sales and client service support for our European business. In the first nine months of fiscal 2018, net inflows into funds and accounts managed for Eaton Vance clients outside the U.S. totaled $0.5 billion. Reflecting favorable market action and positive net flows for the fiscal year to date, assets managed for international clients increased to $25.5 billion at July 31, 2018 from $24.2 billion at October 31, 2017.
We launched the first NextShares funds in February 2016. As of the end of the third quarter of fiscal 2018, 18 NextShares funds from eight different fund families were listed for trading. Since introduction, the sales of NextShares have been constrained by lack of distribution access. In November 2017, NextShares became available for the first time to clients of a major broker-dealer when UBS Financial Services Inc. (UBS) began offering NextShares on its brokerage platforms and through UBS Strategic Advisor, a non-discretionary advisory program. With only modest sales of NextShares realized to date at UBS, we have redoubled efforts to pursue other paths to commercialization and to evaluate different strategic options for the NextShares initiative.2019.
Our leadership position in responsible investing continues to expand. In December 2016, we completed the purchase of substantially all of the business assets of Calvert Investment Management, Inc. (Calvert Investments). The
Calvert Funds are one of the largest and most diversified families of responsibly invested mutual funds, encompassing actively and passively managed equity, fixed and floating-rate income, and asset allocation strategies managed in accordance with the Calvert Principles for Responsible Investment or other responsible investment criteria. Since Calvert became part of Eaton Vance, we have made significant progress growing managed assets in Calvert-branded investment strategies and positioning Calvert as a center for excellence in environmental, social and governance (ESG) research and engagement. Including the Atlanta Capital-subadvised Calvert Equity Fund, assets under management in Calvert strategies have increased from $11.9grew to $15.4 billion at the time of the transaction toJanuary 31, 2019 from $14.7 billion at the end of the third quarter of fiscal 2018. The 24 percent growth in Calvert managed assets over the 19 months of Eaton Vance’s ownership reflectsOctober 31, 2018, reflecting net inflows of $800 million$0.6 billion and market price appreciation of $2.0$0.1 billion. Calvert’s $0.6 billion of net inflows for the quarter equates to 17 percent annualized internal growth rate in managed assets, ranking as the best growth quarter since we acquired the Calvert business just over two years ago.
Separate fromWhile Calvert is the centerpiece of our responsible investment strategy, our commitment to responsible investing does not end there. Eaton Vance Management continues to integrate consideration of responsible investing criteria into the firm’s fundamental research processes, capitalizing on Calvert’s proprietary ESG research. Atlanta Capital also maintains a significant focus on responsible investing, and Parametric manages over $21$20 billion of client assets based on client-directed responsible investment criteria, which assets are held in more than 2,000 Custom Core and other Parametric-managed separate accounts. Combined, we believecriteria. On an overall basis, Eaton Vance is today one of the largest playersparticipants in responsible investing, a position we are committed to growing in conjunction with the surgingrising demand for investment strategies that incorporate ESG-integrated investment research and/or that are managed with a dual objective to achieve favorable investment returns and positive societal impact.
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While change is a constant in the asset management industry, the pace of change appears to be accelerating. We see this in changing market conditions and demographic trends, shifts in investor sentiment and outlook, advances in information technology, changes in the business strategies of key intermediaries and gatekeepers, and new tax and regulatory initiatives. Through changing market conditions, we strive to anticipate the evolving needs of investors and to develop timely solutions to address their needs. Positioning the Company for continued success amid accelerating change is the primary focus of our strategic initiatives.
In the first quarter of fiscal 2019, Eaton Vance Management, together with Eaton Vance Exchange-Traded Fund Trust, filed an exemptive application to permit the offering of exchange-traded funds (ETFs) that would employ a novel method of supporting efficient secondary market trading of fund shares, which we call the Clearhedge Method. Because disclosure of current holdings would not be necessary under the Clearhedge Method, an ETF’s portfolio trading activity could remain confidential. In conjunction with filing the Clearhedge Method exemptive application, Eaton Vance formed a new wholly-owned subsidiary, Advanced Fund Solutions, to manage the development and commercialization of ETFs utilizing the Clearhedge Method and other fund-related intellectual property. Through licensing and services agreements, Eaton Vance and Advanced Fund Solutions seek to make the Clearhedge Method broadly available across the ETF industry, including actively managed and index-based ETFs. We believe the Clearhedge Method could benefit ETF investors by lowering the costs they pay to buy and sell shares, mitigating the performance impact of front-running and free-riding, and facilitating the introduction of proprietary active strategies not currently available as ETFs.
As of January 31, 2019, 68 of our U.S. mutual funds were rated 4 or 5 stars by MorningstarTM for at least one class of shares, including 30 five-star rated funds. A good source of performance-related information for our funds is our website, www.eatonvance.com. On our website, investors can also obtain other current information about our funds, including investment objective and principal investment policies, portfolio characteristics, expenses and Morningstar ratings.
Consolidated Assets under Management
Prevailing equity and income market conditions and investor sentiment affect the sales and redemptions of our investment products,offerings, managed asset levels, operating results and the recoverability of our investments. During the thirdfirst quarter and first nine months of fiscal 2018,2019, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 6.1-0.8 percent and 9.2 percent, respectively, and the MSCI Emerging Market Index, a broad measure of emerging market equity performance, had total returns of -6.5 percent and -3.7 percent, respectively.8.5 percent. Over the same periods,period, the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of 0.8 percent and -1.3 percent, respectively.3.4 percent.
Consolidated assets under management of $453.2$444.7 billion on JulyJanuary 31, 2018 increased $47.62019 decreased $4.6 billion, or 121 percent, from $405.6$449.2 billion of consolidated assets under management on JulyJanuary 31, 2017.2018. The year-over-year increasedecrease in consolidated assets under management reflects net inflows of $23.2$11.7 billion and market price appreciationdeclines in managed assets of $24.4$16.3 billion.
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The following tables summarize our consolidated assets under management by investment mandate, investment vehicle and investment affiliate as of JulyJanuary 31, 20182019 and 2017.2018. Within the investment mandate table, the “Portfolio implementation” category is comprisedconsists of Parametric’sParametric Custom Core equity strategies and centralized portfolio management services, and the “Exposure management” category consists of Parametric’s futures- and options-based customized exposure managementportfolio overlay services.
Consolidated Assets under Management by Investment Mandate(1)(2)
July 31, | ||||||||||||||||||||
(in millions) | 2018 | % of Total | 2017 | % of Total | % Change | |||||||||||||||
Equity(3) | $ | 122,466 | 27 | % | $ | 110,198 | 27 | % | 11 | % | ||||||||||
Fixed income(4) | 76,819 | 17 | % | 68,708 | 17 | % | 12 | % | ||||||||||||
Floating-rate income | 42,955 | 10 | % | 38,754 | 10 | % | 11 | % | ||||||||||||
Alternative | 13,465 | 3 | % | 11,877 | 3 | % | 13 | % | ||||||||||||
Portfolio implementation | 115,035 | 25 | % | 93,285 | 23 | % | 23 | % | ||||||||||||
Exposure management(2) | 82,443 | 18 | % | 82,763 | 20 | % | 0 | % | ||||||||||||
Total | $ | 453,183 | 100 | % | $ | 405,585 | 100 | % | 12 | % |
January 31, | ||||||||||||||||||||
(in millions) | 2019 | % of Total | 2018 | % of Total | % Change | |||||||||||||||
Equity(2) | $ | 116,990 | 26 | % | $ | 122,595 | 27 | % | -5 | % | ||||||||||
Fixed income(3) | 82,525 | 19 | % | 72,663 | 16 | % | 14 | % | ||||||||||||
Floating-rate income | 40,943 | 9 | % | 39,793 | 9 | % | 3 | % | ||||||||||||
Alternative | 9,991 | 2 | % | 13,248 | 3 | % | -25 | % | ||||||||||||
Portfolio implementation | 115,435 | 26 | % | 110,442 | 25 | % | 5 | % | ||||||||||||
Exposure management | 78,768 | 18 | % | 90,488 | 20 | % | -13 | % | ||||||||||||
Total | $ | 444,652 | 100 | % | $ | 449,229 | 100 | % | -1 | % |
(1) | Consolidated Eaton Vance Corp. See table on page |
(2) |
Includes balanced and other multi-asset mandates. |
Includes cash management mandates. |
Equity assets under management included $42.4$40.7 billion and $36.6$41.7 billion of assets managed for after-tax returns on JulyJanuary 31, 20182019 and 2017,2018, respectively. Portfolio implementation assets under management included $81.9$82.6 billion and $65.7$77.5 billion of assets managed for after-tax returns on JulyJanuary 31, 20182019 and 2017,2018, respectively. Fixed income assets included $43.9$46.0 billion and $39.2$41.5 billion of municipal income assets on JulyJanuary 31, 2019 and 2018, and 2017, respectively.
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Consolidated Assets under Management by Investment Vehicle(1)(2)
July 31, | ||||||||||||||||||||
(in millions) | 2018 | % of Total | 2017 | % of Total | % Change | |||||||||||||||
Open-end funds(3) | $ | 104,898 | 23 | % | $ | 95,797 | 24 | % | 10 | % | ||||||||||
Closed-end funds | 24,947 | 5 | % | 24,648 | 6 | % | 1 | % | ||||||||||||
Private funds(4) | 38,933 | 9 | % | 32,289 | 8 | % | 21 | % | ||||||||||||
Institutional separate accounts(2) | 162,701 | 36 | % | 154,253 | 38 | % | 5 | % | ||||||||||||
High-net-worth separate accounts | 45,379 | 10 | % | 36,439 | 9 | % | 25 | % | ||||||||||||
Retail managed accounts | 76,325 | 17 | % | 62,159 | 15 | % | 23 | % | ||||||||||||
Total | $ | 453,183 | 100 | % | $ | 405,585 | 100 | % | 12 | % |
January 31, | ||||||||||||||||||||
(in millions) | 2019 | % of Total | 2018 | % of Total | % Change | |||||||||||||||
Open-end funds(2) | $ | 99,846 | 22 | % | $ | 101,956 | 23 | % | -2 | % | ||||||||||
Closed-end funds | 23,633 | 5 | % | 25,424 | 6 | % | -7 | % | ||||||||||||
Private funds(3) | 39,271 | 9 | % | 37,174 | 8 | % | 6 | % | ||||||||||||
Institutional separate accounts | 155,224 | 35 | % | 169,406 | 37 | % | -8 | % | ||||||||||||
Individual separate accounts(4) | 126,678 | 29 | % | 115,269 | 26 | % | 10 | % | ||||||||||||
Total | $ | 444,652 | 100 | % | $ | 449,229 | 100 | % | -1 | % |
(1) | Consolidated Eaton Vance Corp. See table on page |
(2) |
Includes assets in NextShares funds. |
Includes privately offered equity, fixed income and floating-rate income funds and CLO entities. |
(4) | In the first quarter of fiscal 2019, the Company revised its classification of consolidated assets under management by investment vehicle to combine the formerly separate high-net-worth separate account and retail managed account categories into a single individual separate account category. The above presentation of prior year results has been revised for comparability purposes. The reclassification does not affect total consolidated assets under management for any period. |
Consolidated Assets under Management by Investment Affiliate(1)(2)
July 31, | % | |||||||||||
(in millions) | 2018 | 2017 | Change | |||||||||
Eaton Vance Management(3) | $ | 179,558 | $ | 160,570 | 12 | % | ||||||
Parametric(2) | 236,272 | 213,213 | 11 | % | ||||||||
Atlanta Capital(4) | 25,004 | 21,476 | 16 | % | ||||||||
Calvert(4) | 12,349 | 10,326 | 20 | % | ||||||||
Total | $ | 453,183 | $ | 405,585 | 12 | % |
January 31, | % | |||||||||||
(in millions) | 2019 | 2018 | Change | |||||||||
Eaton Vance Management(2) | $ | 178,261 | $ | 171,788 | 4 | % | ||||||
Parametric | 230,157 | 241,653 | -5 | % | ||||||||
Atlanta Capital(3) | 23,216 | 24,156 | -4 | % | ||||||||
Calvert(3) | 13,018 | 11,632 | 12 | % | ||||||||
Total | $ | 444,652 | $ | 449,229 | -1 | % |
(1) | Consolidated Eaton Vance Corp. See table on page |
(2) |
Includes managed assets of Eaton Vance-sponsored funds and separate accounts managed by Hexavest and unaffiliated third-party advisers under Eaton Vance supervision. |
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 |
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.
51 |
Consolidated Average Assets under Management by Investment Mandate(1)(2)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Equity(3) | $ | 119,536 | $ | 107,017 | 12 | % | $ | 118,378 | $ | 101,117 | 17 | % | ||||||||||||
Fixed income(4) | 75,206 | 67,989 | 11 | % | 73,393 | 65,226 | 13 | % | ||||||||||||||||
Floating-rate income | 42,616 | 37,764 | 13 | % | 40,943 | 35,368 | 16 | % | ||||||||||||||||
Alternative | 13,522 | 11,629 | 16 | % | 13,268 | 11,107 | 19 | % | ||||||||||||||||
Portfolio implementation | 110,737 | 89,512 | 24 | % | 107,267 | 82,980 | 29 | % | ||||||||||||||||
Exposure management(2) | 84,424 | 81,276 | 4 | % | 85,872 | 76,224 | 13 | % | ||||||||||||||||
Total | $ | 446,041 | $ | 395,187 | 13 | % | $ | 439,121 | $ | 372,022 | 18 | % |
Three Months Ended | ||||||||||||
January 31, | % | |||||||||||
(in millions) | 2019 | 2018 | Change | |||||||||
Equity(2) | $ | 114,888 | $ | 117,444 | -2 | % | ||||||
Fixed income(3) | 79,818 | 71,686 | 11 | % | ||||||||
Floating-rate income | 42,702 | 39,200 | 9 | % | ||||||||
Alternative | 11,013 | 12,833 | -14 | % | ||||||||
Portfolio implementation | 111,304 | 104,227 | 7 | % | ||||||||
Exposure management | 77,685 | 88,104 | -12 | % | ||||||||
Total | $ | 437,410 | $ | 433,494 | 1 | % |
(1) | Consolidated Eaton Vance Corp. See table on page |
(2) |
Includes balanced and other multi-asset mandates. |
Includes cash management mandates. |
Consolidated Average Assets under Management by Investment Vehicle(1)(2)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Open-end funds(3) | $ | 103,066 | $ | 94,224 | 9 | % | $ | 101,228 | $ | 88,343 | 15 | % | ||||||||||||
Closed-end funds | 24,677 | 24,356 | 1 | % | 24,836 | 23,971 | 4 | % | ||||||||||||||||
Private funds(4) | 37,734 | 31,387 | 20 | % | 36,695 | 29,785 | 23 | % | ||||||||||||||||
Institutional separate accounts(2) | 163,326 | 150,847 | 8 | % | 162,919 | 143,368 | 14 | % | ||||||||||||||||
High-net-worth separate accounts | 43,535 | 34,637 | 26 | % | 42,434 | 31,518 | 35 | % | ||||||||||||||||
Retail managed accounts | 73,703 | 59,736 | 23 | % | 71,009 | 55,037 | 29 | % | ||||||||||||||||
Total | $ | 446,041 | $ | 395,187 | 13 | % | $ | 439,121 | $ | 372,022 | 18 | % |
Three Months Ended | ||||||||||||
January 31, | % | |||||||||||
(in millions) | 2019 | 2018 | Change | |||||||||
Open-end funds(2) | $ | 100,153 | $ | 99,412 | 1 | % | ||||||
Closed-end funds | 23,602 | 25,064 | -6 | % | ||||||||
Private funds(3) | 38,656 | 35,762 | 8 | % | ||||||||
Institutional separate accounts | 153,135 | 163,392 | -6 | % | ||||||||
Individual separate accounts(4) | 121,864 | 109,864 | 11 | % | ||||||||
Total | $ | 437,410 | $ | 433,494 | 1 | % |
(1) | Consolidated Eaton Vance Corp. See table on page |
(2) |
Includes assets in NextShares funds. |
Includes |
(4) | In the first quarter of fiscal 2019, the Company revised its classification of consolidated assets under management by investment vehicle to combine the formerly separate high-net-worth separate account and retail managed account categories into a single individual separate account category. The above presentation of prior year results has been revised for comparability purposes. The reclassification does not affect total consolidated average assets under management for any period. |
Consolidated Net Flows
Consolidated net inflows of $3.7 billion and $15.2$1.5 billion in the thirdfirst quarter and first nine months of fiscal 2018, respectively,2019, represent annualized internal growth in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management) of 3 percent and 5 percent over1 percent. For comparison, the same respective periods. ConsolidatedCompany had consolidated net inflows of $9.1 billion and $29.9$7.1 billion in the thirdfirst quarter and the first nine months of fiscal 2017, respectively, represent2018, representing annualized internal growth in managed assets of 9 percent
and 12 percent over the same respective periods.7 percent. Excluding exposure management mandates, which have lower fees and more variable flows than the rest of our business, the Company’s annualized internal growth rate in managed assets was 82 percent in both the thirdfirst quarter and first nine months of fiscal 2018,2019 and 117 percent in both the thirdfirst quarter and first nine months of fiscal 2017.2018. The Company’s annualized internal management
52 |
fee revenue growth rate (management fees attributable to consolidated inflows less management fees attributable to consolidated outflows, divided by beginning of period consolidated management fee revenue) was 5 percent and 6-4 percent in the thirdfirst quarter and first nine months of fiscal 2018, respectively,2019, as the management fee revenue lost from redemptions and 6other withdrawals exceeded the management fee revenue contribution from new sales and other inflows. The Company’s annualized internal management fee revenue growth rate was 4 percent in both the thirdfirst quarter and first nine months of fiscal 2017,2018, as the management fee revenue contribution from new sales and other inflows during each period exceeded the management fee revenue lost from redemptions.
The following tables summarize our consolidated assets under management and asset flows by investment mandate and investment vehicle for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
53 |
Consolidated Assets under Management and Net Flows by Investment Mandate(1)(2)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Equity assets - beginning of period | $ | 117,757 | $ | 104,666 | 13 | % | $ | 113,472 | $ | 89,981 | 26 | % | $ | 115,772 | $ | 113,472 | 2 | % | ||||||||||||||||||
Sales and other inflows | 5,385 | 5,745 | -6 | % | 17,174 | 15,955 | 8 | % | 6,220 | 5,876 | 6 | % | ||||||||||||||||||||||||
Redemptions/outflows | (4,900 | ) | (4,259 | ) | 15 | % | (15,485 | ) | (14,317 | ) | 8 | % | (5,461 | ) | (5,320 | ) | 3 | % | ||||||||||||||||||
Net flows | 485 | 1,486 | -67 | % | 1,689 | 1,638 | 3 | % | 759 | 556 | 37 | % | ||||||||||||||||||||||||
Assets acquired(4) | - | - | NM | (7) | - | 5,704 | -100 | % | ||||||||||||||||||||||||||||
Exchanges | 8 | 7 | 14 | % | 6 | 60 | -90 | % | (108 | ) | 3 | NM | (5) | |||||||||||||||||||||||
Market value change | 4,216 | 4,039 | 4 | % | 7,299 | 12,815 | -43 | % | 567 | 8,564 | -93 | % | ||||||||||||||||||||||||
Equity assets - end of period | $ | 122,466 | $ | 110,198 | 11 | % | $ | 122,466 | $ | 110,198 | 11 | % | $ | 116,990 | $ | 122,595 | -5 | % | ||||||||||||||||||
Fixed income assets - beginning of period(5) | 74,024 | 66,881 | 11 | % | 70,797 | 60,607 | 17 | % | ||||||||||||||||||||||||||||
Sales and other inflows(6) | 6,730 | 5,516 | 22 | % | 19,221 | 16,841 | 14 | % | ||||||||||||||||||||||||||||
Fixed income assets - beginning of period(3) | 77,844 | 70,797 | 10 | % | ||||||||||||||||||||||||||||||||
Sales and other inflows(4) | 9,222 | 6,327 | 46 | % | ||||||||||||||||||||||||||||||||
Redemptions/outflows | (4,065 | ) | (4,178 | ) | -3 | % | (11,927 | ) | (13,006 | ) | -8 | % | (6,053 | ) | (3,937 | ) | 54 | % | ||||||||||||||||||
Net flows | 2,665 | 1,338 | 99 | % | 7,294 | 3,835 | 90 | % | 3,169 | 2,390 | 33 | % | ||||||||||||||||||||||||
Assets acquired(4) | - | - | NM | - | 4,170 | -100 | % | |||||||||||||||||||||||||||||
Exchanges | (16 | ) | (2 | ) | 700 | % | (5 | ) | (147 | ) | -97 | % | 326 | 18 | NM | |||||||||||||||||||||
Market value change | 146 | 491 | -70 | % | (1,267 | ) | 243 | NM | 1,186 | (542 | ) | NM | ||||||||||||||||||||||||
Fixed income assets - end of period | $ | 76,819 | $ | 68,708 | 12 | % | $ | 76,819 | $ | 68,708 | 12 | % | $ | 82,525 | $ | 72,663 | 14 | % | ||||||||||||||||||
Floating-rate income assets - beginning of period | 42,282 | 36,957 | 14 | % | 38,819 | 32,107 | 21 | % | 44,837 | 38,819 | 16 | % | ||||||||||||||||||||||||
Sales and other inflows | 3,387 | 3,567 | -5 | % | 10,222 | 12,874 | -21 | % | 3,566 | 2,274 | 57 | % | ||||||||||||||||||||||||
Redemptions/outflows | (2,438 | ) | (2,113 | ) | 15 | % | (6,298 | ) | (6,962 | ) | -10 | % | (6,478 | ) | (1,655 | ) | 291 | % | ||||||||||||||||||
Net flows | 949 | 1,454 | -35 | % | 3,924 | 5,912 | -34 | % | (2,912 | ) | 619 | NM | ||||||||||||||||||||||||
Exchanges | 25 | (8 | ) | NM | 40 | 146 | -73 | % | (266 | ) | (3 | ) | NM | |||||||||||||||||||||||
Market value change | (301 | ) | 351 | NM | 172 | 589 | -71 | % | (716 | ) | 358 | NM | ||||||||||||||||||||||||
Floating-rate income assets - end of period | $ | 42,955 | $ | 38,754 | 11 | % | 42,955 | $ | 38,754 | 11 | % | $ | 40,943 | $ | 39,793 | 3 | % | |||||||||||||||||||
Alternative assets - beginning of period | 13,506 | 11,212 | 20 | % | 12,637 | 10,687 | 18 | % | 12,139 | 12,637 | -4 | % | ||||||||||||||||||||||||
Sales and other inflows | 1,254 | 1,359 | -8 | % | 4,832 | 3,546 | 36 | % | 1,044 | 1,714 | -39 | % | ||||||||||||||||||||||||
Redemptions/outflows | (999 | ) | (666 | ) | 50 | % | (3,377 | ) | (2,351 | ) | 44 | % | (3,264 | ) | (1,034 | ) | 216 | % | ||||||||||||||||||
Net flows | 255 | 693 | -63 | % | 1,455 | 1,195 | 22 | % | (2,220 | ) | 680 | NM | ||||||||||||||||||||||||
Exchanges | (20 | ) | - | NM | (28 | ) | (7 | ) | 300 | % | (27 | ) | (6 | ) | 350 | % | ||||||||||||||||||||
Market value change | (276 | ) | (28 | ) | 886 | % | (599 | ) | 2 | NM | 99 | (63 | ) | NM | ||||||||||||||||||||||
Alternative assets - end of period | $ | 13,465 | $ | 11,877 | 13 | % | 13,465 | $ | 11,877 | 13 | % | $ | 9,991 | $ | 13,248 | -25 | % | |||||||||||||||||||
Portfolio implementation assets - beginning of period | 107,170 | 86,376 | 24 | % | 99,615 | 71,426 | 39 | % | 110,840 | 99,615 | 11 | % | ||||||||||||||||||||||||
Sales and other inflows | 6,085 | 5,869 | 4 | % | 16,984 | 18,160 | -6 | % | 7,487 | 5,108 | 47 | % | ||||||||||||||||||||||||
Redemptions/outflows | (3,025 | ) | (2,790 | ) | 8 | % | (10,322 | ) | (9,260 | ) | 11 | % | (4,113 | ) | (3,755 | ) | 10 | % | ||||||||||||||||||
Net flows | 3,060 | 3,079 | -1 | % | 6,662 | 8,900 | -25 | % | 3,374 | 1,353 | 149 | % | ||||||||||||||||||||||||
Exchanges | (1 | ) | 5 | NM | (16 | ) | 5 | NM | 75 | (16 | ) | NM | ||||||||||||||||||||||||
Market value change | 4,806 | 3,825 | 26 | % | 8,774 | 12,954 | -32 | % | 1,146 | 9,490 | -88 | % | ||||||||||||||||||||||||
Portfolio implementation assets - end of period | $ | 115,035 | $ | 93,285 | 23 | % | 115,035 | $ | 93,285 | 23 | % | $ | 115,435 | $ | 110,442 | 5 | % | |||||||||||||||||||
Exposure management assets - beginning of period | 85,333 | 80,921 | 5 | % | 86,976 | 71,572 | 22 | % | 77,871 | 86,976 | -10 | % | ||||||||||||||||||||||||
Sales and other inflows | 15,131 | 17,734 | -15 | % | 52,866 | 56,293 | -6 | % | 17,122 | 22,652 | -24 | % | ||||||||||||||||||||||||
Redemptions/outflows | (18,814 | ) | (16,649 | ) | 13 | % | (58,657 | ) | (47,897 | ) | 22 | % | (17,808 | ) | (21,155 | ) | -16 | % | ||||||||||||||||||
Net flows | (3,683 | ) | 1,085 | NM | (5,791 | ) | 8,396 | NM | (686 | ) | 1,497 | NM | ||||||||||||||||||||||||
Market value change | 793 | 757 | 5 | % | 1,258 | 2,795 | -55 | % | 1,583 | 2,015 | -21 | % | ||||||||||||||||||||||||
Exposure management assets - end of period(2) | $ | 82,443 | $ | 82,763 | 0 | % | 82,443 | $ | 82,763 | 0 | % | |||||||||||||||||||||||||
Exposure management assets - end of period | $ | 78,768 | $ | 90,488 | -13 | % | ||||||||||||||||||||||||||||||
Total assets under management - beginning of period | 440,072 | 387,013 | 14 | % | 422,316 | 336,380 | 26 | % | 439,303 | 422,316 | 4 | % | ||||||||||||||||||||||||
Sales and other inflows(6) | 37,972 | 39,790 | -5 | % | 121,299 | 123,669 | -2 | % | ||||||||||||||||||||||||||||
Sales and other inflows(4) | 44,661 | 43,951 | 2 | % | ||||||||||||||||||||||||||||||||
Redemptions/outflows | (34,241 | ) | (30,655 | ) | 12 | % | (106,066 | ) | (93,793 | ) | 13 | % | (43,177 | ) | (36,856 | ) | 17 | % | ||||||||||||||||||
Net flows | 3,731 | 9,135 | -59 | % | 15,233 | 29,876 | -49 | % | 1,484 | 7,095 | -79 | % | ||||||||||||||||||||||||
Assets acquired(4) | - | - | NM | - | 9,874 | -100 | % | |||||||||||||||||||||||||||||
Exchanges | (4 | ) | 2 | NM | (3 | ) | 57 | NM | - | (4 | ) | -100 | % | |||||||||||||||||||||||
Market value change | 9,384 | 9,435 | -1 | % | 15,637 | 29,398 | -47 | % | 3,865 | 19,822 | -81 | % | ||||||||||||||||||||||||
Total assets under management - end of period | $ | 453,183 | $ | 405,585 | 12 | % | $ | 453,183 | $ | 405,585 | 12 | % | $ | 444,652 | $ | 449,229 | -1 | % |
(1) | Consolidated Eaton Vance Corp. See table on page |
(2) |
54 |
(3) |
Includes $0.8 billion of managed assets gained in assuming the fixed income business assets of the former Oechsle International Advisors, LLC on January 31, 2018. |
Not meaningful (NM). |
53
55 |
Consolidated Assets under Management and Net Flows by Investment Vehicle(1)(2)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Fund assets - beginning of period(3) | $ | 162,869 | $ | 147,341 | 11 | % | $ | 156,853 | $ | 125,722 | 25 | % | ||||||||||||
Sales and other inflows | 10,855 | 9,736 | 11 | % | 33,167 | 30,664 | 8 | % | ||||||||||||||||
Redemptions/outflows | (7,878 | ) | (7,641 | ) | 3 | % | (25,364 | ) | (24,946 | ) | 2 | % | ||||||||||||
Net flows | 2,977 | 2,095 | 42 | % | 7,803 | 5,718 | 36 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 9,821 | -100 | % | |||||||||||||||||
Exchanges(5) | 304 | 2 | NM | 305 | 2,186 | -86 | % | |||||||||||||||||
Market value change | 2,628 | 3,296 | -20 | % | 3,817 | 9,287 | -59 | % | ||||||||||||||||
Fund assets - end of period | $ | 168,778 | $ | 152,734 | 11 | % | $ | 168,778 | $ | 152,734 | 11 | % | ||||||||||||
Institutional separate accounts - beginning of period | 163,816 | 149,044 | -87 | % | 159,986 | 136,451 | 17 | % | ||||||||||||||||
Sales and other inflows(6) | 18,929 | 21,227 | NM | 64,566 | 66,452 | -3 | % | |||||||||||||||||
Redemptions/outflows | (22,293 | ) | (19,109 | ) | 17 | % | (67,360 | ) | (56,984 | ) | 18 | % | ||||||||||||
Net flows | (3,364 | ) | 2,118 | NM | (2,794 | ) | 9,468 | NM | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 40 | -100 | % | |||||||||||||||||
Exchanges(5) | (308 | ) | - | NM | 18 | (2,055 | ) | NM | ||||||||||||||||
Market value change | 2,557 | 3,091 | -17 | % | 5,491 | 10,349 | -47 | % | ||||||||||||||||
Institutional separate accounts - end of period(2) | $ | 162,701 | $ | 154,253 | 5 | % | $ | 162,701 | $ | 154,253 | 5 | % | ||||||||||||
High-net-worth separate accounts - beginning of period | 42,154 | 33,225 | 27 | % | 39,715 | 25,806 | 54 | % | ||||||||||||||||
Sales and other inflows | 2,654 | 3,103 | -14 | % | 6,949 | 9,827 | -29 | % | ||||||||||||||||
Redemptions/outflows | (1,297 | ) | (1,347 | ) | -4 | % | (4,212 | ) | (3,893 | ) | 8 | % | ||||||||||||
Net flows | 1,357 | 1,756 | -23 | % | 2,737 | 5,934 | -54 | % | ||||||||||||||||
Exchanges | 27 | 4 | 575 | % | (207 | ) | (31 | ) | 568 | % | ||||||||||||||
Market value change | 1,841 | 1,454 | 27 | % | 3,134 | 4,730 | -34 | % | ||||||||||||||||
High-net-worth separate accounts - end of period | $ | 45,379 | $ | 36,439 | 25 | % | $ | 45,379 | $ | 36,439 | 25 | % | ||||||||||||
Retail managed accounts - beginning of period | 71,233 | 57,403 | 24 | % | 65,762 | 48,401 | 36 | % | ||||||||||||||||
Sales and other inflows | 5,534 | 5,724 | -3 | % | 16,617 | 16,726 | -1 | % | ||||||||||||||||
Redemptions/outflows | (2,773 | ) | (2,558 | ) | 8 | % | (9,130 | ) | (7,970 | ) | 15 | % | ||||||||||||
Net flows | 2,761 | 3,166 | -13 | % | 7,487 | 8,756 | -14 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 13 | -100 | % | |||||||||||||||||
Exchanges | (27 | ) | (4 | ) | 575 | % | (119 | ) | (43 | ) | 177 | % | ||||||||||||
Market value change | 2,358 | 1,594 | 48 | % | 3,195 | 5,032 | -37 | % | ||||||||||||||||
Retail managed accounts - end of period | $ | 76,325 | $ | 62,159 | 23 | % | $ | 76,325 | $ | 62,159 | 23 | % | ||||||||||||
Total assets under management - beginning of period | 440,072 | 387,013 | 14 | % | 422,316 | 336,380 | 26 | % | ||||||||||||||||
Sales and other inflows(6) | 37,972 | 39,790 | -5 | % | 121,299 | 123,669 | -2 | % | ||||||||||||||||
Redemptions/outflows | (34,241 | ) | (30,655 | ) | 12 | % | (106,066 | ) | (93,793 | ) | 13 | % | ||||||||||||
Net flows | 3,731 | 9,135 | -59 | % | 15,233 | 29,876 | -49 | % | ||||||||||||||||
Assets acquired(4) | - | - | NM | - | 9,874 | -100 | % | |||||||||||||||||
Exchanges | (4 | ) | 2 | NM | (3 | ) | 57 | NM | ||||||||||||||||
Market value change | 9,384 | 9,435 | -1 | % | 15,637 | 29,398 | -47 | % | ||||||||||||||||
Total assets under management - end of period | $ | 453,183 | $ | 405,585 | 12 | % | $ | 453,183 | $ | 405,585 | 12 | % |
Three Months Ended | ||||||||||||
January 31, | % | |||||||||||
(in millions) | 2019 | 2018 | Change | |||||||||
Fund assets - beginning of period(2) | $ | 164,968 | $ | 156,853 | 5 | % | ||||||
Sales and other inflows | 13,723 | 10,516 | 30 | % | ||||||||
Redemptions/outflows | (15,425 | ) | (8,814 | ) | 75 | % | ||||||
Net flows | (1,702 | ) | 1,702 | NM | ||||||||
Exchanges | (98 | ) | (4 | ) | NM | |||||||
Market value change | (418 | ) | 6,003 | NM | ||||||||
Fund assets - end of period | $ | 162,750 | $ | 164,554 | -1 | % | ||||||
Institutional separate accounts - beginning of period | 153,996 | 159,986 | -87 | % | ||||||||
Sales and other inflows(3) | 20,829 | 25,681 | NM | |||||||||
Redemptions/outflows | (22,329 | ) | (23,334 | ) | -4 | % | ||||||
Net flows | (1,500 | ) | 2,347 | NM | ||||||||
Exchanges | 98 | 80 | 23 | % | ||||||||
Market value change | 2,630 | 6,993 | -62 | % | ||||||||
Institutional separate accounts - end of period | $ | 155,224 | $ | 169,406 | -8 | % | ||||||
Individual separate accounts - beginning of period(4) | 120,339 | 105,477 | 14 | % | ||||||||
Sales and other inflows | 10,109 | 7,754 | 30 | % | ||||||||
Redemptions/outflows | (5,423 | ) | (4,708 | ) | 15 | % | ||||||
Net flows | 4,686 | 3,046 | 54 | % | ||||||||
Exchanges | - | (80 | ) | -100 | % | |||||||
Market value change | 1,653 | 6,826 | -76 | % | ||||||||
Individual separate accounts - end of period | $ | 126,678 | $ | 115,269 | 10 | % | ||||||
Total assets under management - beginning of period | 439,303 | 422,316 | 4 | % | ||||||||
Sales and other inflows(3) | 44,661 | 43,951 | 2 | % | ||||||||
Redemptions/outflows | (43,177 | ) | (36,856 | ) | 17 | % | ||||||
Net flows | 1,484 | 7,095 | -79 | % | ||||||||
Exchanges | - | (4 | ) | -100 | % | |||||||
Market value change | 3,865 | 19,822 | -81 | % | ||||||||
Total assets under management - end of period | $ | 444,652 | $ | 449,229 | -1 | % |
(1) | Consolidated Eaton Vance Corp. See table on page |
(2) |
Includes $0.8 billion of managed assets gained in assuming the fixed income business assets of the former Oechsle International Advisors, LLC on January 31, 2018. |
(4) | In the first quarter of fiscal 2019, the Company revised its classification of consolidated assets under management and net flows by investment vehicle to combine the formerly separate high-net-worth separate account and retail managed account categories into a single individual separate account category. The above presentation of prior year results has been revised for comparability purposes. The reclassification does not affect total consolidated assets under management or total consolidated net flows for any period. |
56 |
As of JulyJanuary 31, 2018,2019, the Company’s 49 percent-owned affiliate Hexavest managed $15.2$13.2 billion of client assets, down 121 percent from $15.4$16.7 billion of managed assets on JulyJanuary 31, 2017.2018. Other than Eaton Vance-sponsored funds for which Hexavest is adviser or sub-adviser, the managed assets and flows of Hexavest are not included in Eaton Vance’s consolidated totals.
The following table summarizes assets under management and net flows of Hexavest for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Hexavest Assets under Management and Net Flows
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Eaton Vance distributed: | ||||||||||||||||||||||||
Eaton Vance sponsored funds - beginning of period(1) | $ | 179 | $ | 262 | -32 | % | $ | 182 | $ | 231 | -21 | % | ||||||||||||
Sales and other inflows | 1 | 29 | -97 | % | 11 | 62 | -82 | % | ||||||||||||||||
Redemptions/outflows | (14 | ) | (147 | ) | -90 | % | (31 | ) | (174 | ) | -82 | % | ||||||||||||
Net flows | (13 | ) | (118 | ) | -89 | % | (20 | ) | (112 | ) | -82 | % | ||||||||||||
Market value change | 2 | 7 | -71 | % | 6 | 32 | -81 | % | ||||||||||||||||
Eaton Vance sponsored funds - end of period | $ | 168 | $ | 151 | 11 | % | $ | 168 | $ | 151 | 11 | % | ||||||||||||
Eaton Vance distributed separate accounts - beginning of period(2) | 3,087 | 2,138 | 44 | % | 3,092 | 2,492 | 24 | % | ||||||||||||||||
Sales and other inflows | 32 | 455 | -93 | % | 172 | 725 | -76 | % | ||||||||||||||||
Redemptions/outflows | (631 | ) | (23 | ) | NM | (849 | ) | (903 | ) | -6 | % | |||||||||||||
Net flows | (599 | ) | 432 | NM | (677 | ) | (178 | ) | 280 | % | ||||||||||||||
Market value change | 34 | 85 | -60 | % | 107 | 341 | -69 | % | ||||||||||||||||
Eaton Vance distributed separate accounts - end of period | $ | 2,522 | $ | 2,655 | -5 | % | $ | 2,522 | $ | 2,655 | -5 | % | ||||||||||||
Total Eaton Vance distributed - beginning of period | 3,266 | 2,400 | 36 | % | 3,274 | 2,723 | 20 | % | ||||||||||||||||
Sales and other inflows | 33 | 484 | -93 | % | 183 | 787 | -77 | % | ||||||||||||||||
Redemptions/outflows | (645 | ) | (170 | ) | 279 | % | (880 | ) | (1,077 | ) | -18 | % | ||||||||||||
Net flows | (612 | ) | 314 | NM | (697 | ) | (290 | ) | 140 | % | ||||||||||||||
Market value change | 36 | 92 | -61 | % | 113 | 373 | -70 | % | ||||||||||||||||
Total Eaton Vance distributed - end of period | $ | 2,690 | $ | 2,806 | -4 | % | $ | 2,690 | $ | 2,806 | -4 | % | ||||||||||||
Hexavest directly distributed - beginning of period(3) | 12,502 | 12,065 | 4 | % | 12,748 | 11,021 | 16 | % | ||||||||||||||||
Sales and other inflows | 440 | 249 | 77 | % | 916 | 850 | 8 | % | ||||||||||||||||
Redemptions/outflows | (587 | ) | (210 | ) | 180 | % | (1,572 | ) | (815 | ) | 93 | % | ||||||||||||
Net flows | (147 | ) | 39 | NM | (656 | ) | 35 | NM | ||||||||||||||||
Market value change | 198 | 534 | -63 | % | 461 | 1,582 | -71 | % | ||||||||||||||||
Hexavest directly distributed - end of period | $ | 12,553 | $ | 12,638 | -1 | % | $ | 12,553 | $ | 12,638 | -1 | % | ||||||||||||
Total Hexavest assets - beginning of period | 15,768 | 14,465 | 9 | % | 16,022 | 13,744 | 17 | % | ||||||||||||||||
Sales and other inflows | 473 | 733 | -35 | % | 1,099 | 1,637 | -33 | % | ||||||||||||||||
Redemptions/outflows | (1,232 | ) | (380 | ) | 224 | % | (2,452 | ) | (1,892 | ) | 30 | % | ||||||||||||
Net flows | (759 | ) | 353 | NM | (1,353 | ) | (255 | ) | 431 | % | ||||||||||||||
Market value change | 234 | 626 | -63 | % | 574 | 1,955 | -71 | % | ||||||||||||||||
Total Hexavest assets - end of period | $ | 15,243 | $ | 15,444 | -1 | % | $ | 15,243 | $ | 15,444 | -1 | % |
Three Months Ended | ||||||||||||
January 31, | % | |||||||||||
(in millions) | 2019 | 2018 | Change | |||||||||
Eaton Vance distributed: | ||||||||||||
Eaton Vance sponsored funds - beginning of period(1) | $ | 159 | $ | 182 | -13 | % | ||||||
Sales and other inflows | 40 | 5 | 700 | % | ||||||||
Redemptions/outflows | (25 | ) | (6 | ) | 317 | % | ||||||
Net flows | 15 | (1 | ) | NM | ||||||||
Market value change | 3 | 12 | -75 | % | ||||||||
Eaton Vance sponsored funds - end of period | $ | 177 | $ | 193 | -8 | % | ||||||
Eaton Vance distributed separate accounts - beginning of period(2) | 2,169 | 3,092 | -30 | % | ||||||||
Sales and other inflows | 21 | 78 | -73 | % | ||||||||
Redemptions/outflows | (140 | ) | (115 | ) | 22 | % | ||||||
Net flows | (119 | ) | (37 | ) | 222 | % | ||||||
Market value change | 15 | 209 | -93 | % | ||||||||
Eaton Vance distributed separate accounts - end of period | $ | 2,065 | $ | 3,264 | -37 | % | ||||||
Total Eaton Vance distributed - beginning of period | 2,328 | 3,274 | -29 | % | ||||||||
Sales and other inflows | 61 | 83 | -27 | % | ||||||||
Redemptions/outflows | (165 | ) | (121 | ) | 36 | % | ||||||
Net flows | (104 | ) | (38 | ) | 174 | % | ||||||
Market value change | 18 | 221 | -92 | % | ||||||||
Total Eaton Vance distributed - end of period | $ | 2,242 | $ | 3,457 | -35 | % | ||||||
Hexavest directly distributed - beginning of period(3) | 11,467 | 12,748 | -10 | % | ||||||||
Sales and other inflows | 519 | 165 | 215 | % | ||||||||
Redemptions/outflows | (1,134 | ) | (500 | ) | 127 | % | ||||||
Net flows | (615 | ) | (335 | ) | 84 | % | ||||||
Market value change | 136 | 858 | -84 | % | ||||||||
Hexavest directly distributed - end of period | $ | 10,988 | $ | 13,271 | -17 | % | ||||||
Total Hexavest assets - beginning of period | 13,795 | 16,022 | -14 | % | ||||||||
Sales and other inflows | 580 | 248 | 134 | % | ||||||||
Redemptions/outflows | (1,299 | ) | (621 | ) | 109 | % | ||||||
Net flows | (719 | ) | (373 | ) | 93 | % | ||||||
Market value change | 154 | 1,079 | -86 | % | ||||||||
Total Hexavest assets - end of period | $ | 13,230 | $ | 16,728 | -21 | % |
(1) | Managed assets and flows of Eaton Vance-sponsored pooled investment vehicles for which Hexavest is adviser or sub-adviser. Eaton Vance receives management fees (and in some cases also distribution fees) on these assets, which are included in Eaton Vance's consolidated assets under management and flows. |
(2) | Managed assets and flows of Eaton Vance-distributed separate accounts managed by Hexavest. Eaton Vance receives distribution fees, but not management fees, on these assets, which are not included in Eaton Vance's consolidated assets under management and flows. |
(3) | Managed assets and flows of pre-transaction Hexavest clients and post-transaction Hexavest clients in Canada. Eaton Vance receives no management fees or distribution fees on these assets, which are not included in Eaton Vance's consolidated assets under management and flows. |
55
57 |
Results of Operations
In evaluating operating performance, we consider net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share, which are calculated on a basis consistent with U.S. GAAP, as well as adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, both of which are internally derived non-U.S. GAAP performance measures.
Management believes that certain non-U.S. GAAP financial measures, specifically, adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, while not a substitute for U.S. GAAP financial measures, may be effective indicators of the Company’s performance over time. Non-U.S. GAAP financial measures should not be construed to be superior to U.S. GAAP measures. In calculating these non-U.S. GAAP financial measures, net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share are adjusted to exclude items management deems non-operating or non-recurring in nature, or otherwise outside the ordinary course of business. These adjustments may include, when applicable, the add back of changes in the estimated redemption value of non-controlling interests in our affiliates redeemable at other than fair value (non-controlling interest value adjustments), closed-end fund structuring fees, costs associated with special dividends, debt repayments and tax settlements, the tax impact of stock-based compensation shortfalls or windfalls, and non-recurring charges for the effect of the tax law changes. Management and our Board of Directors, as well as certain of our outside investors, consider these adjusted numbers a measure of the Company’s underlying operating performance. Management believes adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results, and may provide a useful baseline for analyzing trends in our underlying business.
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The following table provides a reconciliation of net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share to adjusted net income attributable to Eaton Vance Corp. shareholders and adjusted earnings per diluted share, respectively, for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands, except per share figures) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Net income attributable to Eaton Vance Corp. shareholders | $ | 101,794 | $ | 67,361 | 51 | % | $ | 276,451 | $ | 200,047 | 38 | % | $ | 86,801 | $ | 78,056 | 11 | % | ||||||||||||||||||
Repatriation of undistributed earnings of foreign subsidiaries(1) | 6 | - | NM | 3,062 | - | NM | ||||||||||||||||||||||||||||||
Net excess tax benefit from stock-based compensation plans(2) | (1,331 | ) | - | NM | (15,071 | ) | - | NM | ||||||||||||||||||||||||||||
Revaluation of deferred tax amounts(3) | - | - | NM | 21,653 | - | NM | ||||||||||||||||||||||||||||||
Net excess tax benefit from stock-based compensation plans(1) | (2,949 | ) | (11,862 | ) | -75 | % | ||||||||||||||||||||||||||||||
Revaluation of deferred tax amounts(2) | - | 21,653 | -100 | % | ||||||||||||||||||||||||||||||||
Repatriation of undistributed earnings of foreign subsidiaries(3) | - | 3,014 | -100 | % | ||||||||||||||||||||||||||||||||
Loss on write-off of Hexavest option, net of tax(4) | - | - | NM | 5,660 | - | NM | - | 5,660 | -100 | % | ||||||||||||||||||||||||||
Loss on extinguishment of debt, net of tax(5) | - | 3,346 | -100 | % | - | 3,346 | -100 | % | ||||||||||||||||||||||||||||
Closed-end fund structuring fees, net of tax(6) | - | 2,139 | -100 | % | - | 2,139 | -100 | % | ||||||||||||||||||||||||||||
Non-controlling interest value adjustments(7) | - | 3 | -100 | % | - | (71 | ) | -100 | % | |||||||||||||||||||||||||||
Adjusted net income attributable to Eaton Vance Corp. shareholders | $ | 100,469 | $ | 72,849 | 38 | % | $ | 291,755 | $ | 205,461 | 42 | % | $ | 83,852 | $ | 96,521 | -13 | % | ||||||||||||||||||
Earnings per diluted share | $ | 0.83 | $ | 0.58 | 43 | % | $ | 2.24 | $ | 1.73 | 29 | % | $ | 0.75 | $ | 0.63 | 19 | % | ||||||||||||||||||
Repatriation of undistributed earnings of foreign subsidiaries | - | - | NM | 0.02 | - | NM | ||||||||||||||||||||||||||||||
Net excess tax benefit from stock-based compensation plans | (0.01 | ) | - | NM | (0.13 | ) | - | NM | (0.02 | ) | (0.09 | ) | -78 | % | ||||||||||||||||||||||
Revaluation of deferred tax amounts | - | - | NM | 0.18 | - | NM | - | 0.17 | -100 | % | ||||||||||||||||||||||||||
Repatriation of undistributed earnings of foreign subsidiaries | - | 0.02 | -100 | % | ||||||||||||||||||||||||||||||||
Loss on write-off of Hexavest option, net of tax | - | - | NM | 0.05 | - | NM | - | 0.05 | -100 | % | ||||||||||||||||||||||||||
Non-controlling interest value adjustments | - | - | NM | - | - | NM | ||||||||||||||||||||||||||||||
Loss on extinguishment of debt, net of tax | - | 0.03 | -100 | % | - | 0.03 | -100 | % | ||||||||||||||||||||||||||||
Closed-end fund structuring fees, net of tax | - | 0.01 | -100 | % | - | 0.02 | -100 | % | ||||||||||||||||||||||||||||
Adjusted earnings per diluted share | $ | 0.82 | $ | 0.62 | 32 | % | $ | 2.36 | $ | 1.78 | 33 | % | $ | 0.73 | $ | 0.78 | -6 | % |
(1) | Reflects the impact of Accounting Standard Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, which was adopted in the first quarter of fiscal 2018. |
(2) | Reflects the revaluation of deferred tax assets and deferred tax liabilities resulting from the enactment of the Tax Cuts and Jobs Act (the 2017 Tax Act) on December 22, 2017. |
(3) | Reflects the recognition of incremental tax expense related to the deemed repatriation of foreign earnings considered to be indefinitely reinvested abroad and not previously subject to U.S. taxation. |
(4) | Reflects the $6.5 million loss recognized upon expiration of the Company's option to acquire an additional 26 percent ownership interest in Hexavest, net of the associated impact to taxes of $0.8 million. |
The 5111 percent increase in net income attributable to Eaton Vance Corp. shareholders in the thirdfirst quarter of fiscal 20182019 compared to the thirdfirst quarter of fiscal 20172018 is attributable primarily to the following:
· |
· | An increase in expenses of |
· |
· | A decrease in income taxes of |
· |
· | A decrease in net income attributable to non-controlling and other beneficial interests of |
Weighted average diluted shares outstanding increaseddecreased by 5.7 million shares, or 5 percent, in the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017, primarily reflecting the issuance of new shares in conjunction with employees’ exercise of stock options, the vesting of restricted stock awards granted to employees and growth in the amount of in-the-money unexercised options and unvested restricted stock, partially offset by share repurchases.
The 38 percent increase in net income attributable to Eaton Vance Corp. shareholders in the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017 can be primarily attributed to the following:
Weighted average diluted shares outstanding increased by 7.88.4 million shares, or 7 percent, in the first nine monthsquarter of fiscal 20182019 compared to the first nine monthsquarter of fiscal 2017,2018, primarily reflecting the issuancean increase in share repurchases in excess of new shares in conjunction with employees’ exercise of stock options,issued upon the vesting of restricted stock awards granted to employees and growththe exercise of employee stock options and a decrease in the amountdilutive effect of in-the-money unexercised options and unvested restricted stock partially offset by share repurchases.awards due to lower market prices of the Company’s shares.
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Revenue
The following table shows the components of our management fees, distribution and underwriter fees, service fees and other revenue for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Management fees | $ | 374,553 | $ | 339,866 | 10 | % | $ | 1,101,929 | $ | 966,148 | 14 | % | $ | 350,750 | $ | 361,857 | -3 | % | ||||||||||||||||||
Distribution and underwriter fees | 20,099 | 20,114 | 0 | % | 60,393 | 58,991 | 2 | % | 23,090 | 24,947 | -7 | % | ||||||||||||||||||||||||
Service fees | 31,260 | 30,515 | 2 | % | 91,935 | 89,493 | 3 | % | 29,360 | 30,361 | -3 | % | ||||||||||||||||||||||||
Other revenue | 4,690 | 3,251 | 44 | % | 12,018 | 8,705 | 38 | % | 3,216 | 3,071 | 5 | % | ||||||||||||||||||||||||
Total revenue | $ | 430,602 | $ | 393,746 | 9 | % | $ | 1,266,275 | $ | 1,123,337 | 13 | % | $ | 406,416 | $ | 420,236 | -3 | % |
(1) | Prior period amounts have been restated to reflect the Company’s retrospective adoption of ASU 2014-09, Revenue from Contracts with Customers, on November 1, 2018. Fund subsidies previously included as a component of fund-related expenses are now presented as a contra-revenue component of management fees. In addition, certain front-end load sales commissions that were previously reported on a net basis as a component of distribution expense are now reported on a gross basis in distribution and underwriter fee revenue and distribution expense. |
Management fees
The increasedecrease in management fees in the thirdfirst quarter and first nine months of fiscal 20182019 from the same periodsperiod a year earlier is primarily attributable to a decrease in our consolidated average annualized management fee rates, partially offset by an increase in consolidated average assets under management, partially offset by a decline in our consolidated average management fee rate.management. Consolidated average assets under management increased by 13 percent and 181 percent in the thirdfirst quarter and first nine months of fiscal 20182019 from the same periodsperiod a year earlier, respectively.earlier. Excluding performance-based fees, consolidated average annualized management fee rates decreased to 33.5 basis points and 33.632.0 basis points in the thirdfirst quarter and first nine months of fiscal 2018, respectively,2019 from 34.2 basis points and 34.733.3 basis points in the thirdfirst quarter and first nine months of fiscal 2017, respectively.2018. Performance-based fees, all associated with one fund, were $(0.4) million and $(1.4)$(0.3) million in the thirdfirst quarter and first nine months of fiscal 2018,2019 and contributed $0.5 million and $0.6$(0.5) million in the thirdfirst quarter and first nine months of fiscal 2017.2018. Changes in consolidated average annualized management fee rates for the compared periodsperiod primarily reflect the ongoinga shift in the Company’s mix of business towards lower-fee mandates.
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Consolidated average annualized management fee rates, excluding performance-based fees, for the three and nine months ended JulyJanuary 31, 20182019 and 20172018 were as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in basis points on average managed assets) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Equity | 59.9 | 61.5 | -3 | % | 60.1 | 62.1 | -3 | % | 56.9 | 59.4 | -4 | % | ||||||||||||||||||||||||
Fixed income | 35.1 | 37.7 | -7 | % | 35.8 | 38.3 | -7 | % | 33.4 | 36.0 | -7 | % | ||||||||||||||||||||||||
Floating-rate income | 50.4 | 50.7 | -1 | % | 50.9 | 51.5 | -1 | % | 50.0 | 51.4 | -3 | % | ||||||||||||||||||||||||
Alternative | 69.3 | 63.2 | 10 | % | 68.7 | 63.0 | 9 | % | 58.3 | 66.8 | -13 | % | ||||||||||||||||||||||||
Portfolio implementation | 14.5 | 14.6 | -1 | % | 14.5 | 14.6 | -1 | % | 14.3 | 15.0 | -5 | % | ||||||||||||||||||||||||
Exposure management | 5.2 | 5.1 | 2 | % | 5.1 | 5.1 | 0 | % | 5.2 | 5.0 | 4 | % | ||||||||||||||||||||||||
Consolidated average annualized management fee rates | 33.5 | 34.2 | -2 | % | 33.6 | 34.7 | -3 | % | 32.0 | 33.3 | -4 | % |
(1) |
Consolidated average assets under management by investment mandate to which these fee rates apply can be found in the table, “Consolidated Average Assets under Management by Investment Mandate,” on page 50.52.
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Distribution and underwriter fees
Fund distribution and underwriter fee revenue and other fund-related distribution income for the three and nine months ended JulyJanuary 31, 20182019 and 20172018 were as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Distribution fees: | ||||||||||||||||||||||||||||||||||||
Class A | $ | 864 | $ | 199 | 334 | % | $ | 2,556 | $ | 539 | 374 | % | $ | 866 | $ | 871 | -1 | % | ||||||||||||||||||
Class B | 76 | 184 | -59 | % | 295 | 638 | -54 | % | 44 | 124 | -65 | % | ||||||||||||||||||||||||
Class C | 14,072 | 15,417 | -9 | % | 42,879 | 45,977 | -7 | % | 12,534 | 14,792 | -15 | % | ||||||||||||||||||||||||
Class F | 405 | 375 | 8 | % | 1,195 | 850 | 41 | % | 373 | 404 | -8 | % | ||||||||||||||||||||||||
Class N | 23 | 20 | 15 | % | 81 | 52 | 56 | % | 22 | 32 | -31 | % | ||||||||||||||||||||||||
Class R | 481 | 422 | 14 | % | 1,401 | 1,190 | 18 | % | 447 | 467 | -4 | % | ||||||||||||||||||||||||
Private funds | 2,381 | 1,558 | 53 | % | 6,553 | 4,216 | 55 | % | 2,498 | 2,007 | 24 | % | ||||||||||||||||||||||||
Total distribution fees | 18,302 | 18,175 | 1 | % | 54,960 | 53,462 | 3 | % | 16,784 | 18,697 | -10 | % | ||||||||||||||||||||||||
Underwriter fees | 684 | 747 | -8 | % | 2,110 | 2,051 | 3 | % | ||||||||||||||||||||||||||||
Underwriter commissions | 4,045 | 5,184 | -22 | % | ||||||||||||||||||||||||||||||||
Contingent deferred sales charges and other redemption fees | 1,174 | 34 | NM | |||||||||||||||||||||||||||||||||
Other distribution income | 1,113 | 1,192 | -7 | % | 3,323 | 3,478 | -4 | % | 1,087 | 1,032 | 5 | % | ||||||||||||||||||||||||
Total distribution and underwriter fees | $ | 20,099 | $ | 20,114 | 0 | % | $ | 60,393 | $ | 58,991 | 2 | % | $ | 23,090 | $ | 24,947 | -7 | % |
(1) | Prior period amounts have been restated to reflect the Company’s retrospective adoption of ASU 2014-09 on November 1, 2018. Certain front-end load sales commissions that were previously reported on a net basis as a component of distribution expense are now reported on a gross basis in distribution and underwriter fee revenue and distribution expense. In addition, contingent deferred sales commissions and other redemption fees that were previously recorded as a contra-asset component of deferred sales commissions are now recorded as a component of total distribution and underwriter fees. |
Service fees
Fund service fee revenue increased 2 percent in the third quarter of fiscal 2018 from the same period a year earlier anddecreased 3 percent in the first nine monthsquarter of fiscal 20182019 from the same period a year earlier, primarily reflecting an increasea decrease in average assets in funds and fund share classes subject to service fees.
Other revenue
Other revenue, which consists primarily of fund shareholder servicing fees, miscellaneous dealer income, referral fees and separate account distribution and service fee revenue,consultancy fees, increased 44 percent and 385 percent in the third quarter and first nine months of fiscal 2018 from the same periods a year earlier, primarily reflecting increases in each of the principal components.
Expenses
Operating expenses increased by 6 percent, or $15.6 million, in the third quarter of fiscal 20182019 from the same period a year earlier, primarily reflecting increasesan increase in compensation, amortization of deferred sales commissions, fund-related expensesshareholder servicing fees and other operating expenses partially offset by a decrease in distribution expense.miscellaneous dealer income.
62 |
Operating expenses increased by 10 percent, or $76.6 million, in the first nine months of fiscal 2018 from the same period a year earlier, reflecting increases in compensation, distribution expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses.
Expenses
The following table shows our operating expenses for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Compensation and related costs | $ | 152,921 | $ | 142,338 | 7 | % | $ | 455,958 | $ | 412,940 | 10 | % | $ | 153,888 | $ | 155,048 | -1 | % | ||||||||||||||||||
Distribution expense | 35,045 | 37,160 | -6 | % | 105,219 | 100,284 | 5 | % | 37,508 | 41,869 | -10 | % | ||||||||||||||||||||||||
Service fee expense | 28,760 | 28,630 | 0 | % | 84,651 | 83,384 | 2 | % | 25,517 | 26,841 | -5 | % | ||||||||||||||||||||||||
Amortization of deferred sales commissions | 4,637 | 4,182 | 11 | % | 13,342 | 12,062 | 11 | % | 5,547 | 4,277 | 30 | % | ||||||||||||||||||||||||
Fund-related expenses | 15,857 | 14,029 | 13 | % | 46,036 | 36,752 | 25 | % | 9,645 | 9,162 | 5 | % | ||||||||||||||||||||||||
Other expenses | 51,118 | 46,376 | 10 | % | 150,319 | 133,528 | 13 | % | 53,181 | 47,239 | 13 | % | ||||||||||||||||||||||||
Total expenses | $ | 288,338 | $ | 272,715 | 6 | % | $ | 855,525 | $ | 778,950 | 10 | % | $ | 285,286 | $ | 284,436 | 0 | % |
(1) | Prior period amounts have been restated to reflect the Company’s retrospective adoption of ASU 2014-09, on November 1, 2018. Fund subsidies previously included as a component of fund-related expenses are now presented as a contra-revenue component of management fees. In addition, certain front-end load sales commissions that were previously reported on a net basis as a component of distribution expense are now reported on a gross basis in distribution and underwriter fee revenue and distribution expense. |
Compensation and related costs
The following table shows our compensation and related costs for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Base salaries and employee benefits | $ | 68,738 | $ | 62,271 | 10 | % | $ | 203,753 | $ | 182,237 | 12 | % | $ | 74,591 | $ | 68,292 | 9 | % | ||||||||||||||||||
Stock-based compensation | 22,840 | 21,346 | 7 | % | 68,277 | 60,786 | 12 | % | 23,274 | 24,651 | -6 | % | ||||||||||||||||||||||||
Operating income-based incentives | 44,265 | 38,975 | 14 | % | 130,528 | 110,704 | 18 | % | 38,890 | 43,587 | -11 | % | ||||||||||||||||||||||||
Sales-based incentives | 16,844 | 17,591 | -4 | % | 52,050 | 56,192 | -7 | % | 17,034 | 17,876 | -5 | % | ||||||||||||||||||||||||
Other compensation expense | 234 | 2,155 | -89 | % | 1,350 | 3,021 | -55 | % | 99 | 642 | -85 | % | ||||||||||||||||||||||||
Total | $ | 152,921 | $ | 142,338 | 7 | % | $ | 455,958 | $ | 412,940 | 10 | % | $ | 153,888 | $ | 155,048 | -1 | % |
Compensation expense increaseddecreased by $10.6$1.2 million, or 71 percent, in the thirdfirst quarter of fiscal 20182019 from the same period a year earlier. The increasedecrease was driven primarily by (i) a $6.5$1.4 million decrease in stock-based compensation expense; (ii) a $4.7 million decrease in operating income-based bonus accruals due to lower pre-bonus adjusted operating income and a modest decrease in bonus accrual rates; (iii) a $0.8 million decrease in sales-based incentive compensation resulting from a decrease in incentive rates; (iv) and a $0.6 million decrease in other compensation expense related to lower employee recruiting and termination costs. These decreases were partially offset by a $6.3 million increase in base salaries and employee benefits, reflecting higher headcount, fiscal year-end compensation increases and an increase in our corporate 401(k) match; (ii) a $1.5 million increase in stock-based compensation expense primarily due to higher stock-based compensation awards;match and (iii) a $5.3 million increase in operating income-based bonus accruals due to higher pre-bonus adjusted operating income and a modest increase in bonus accrual rates. These increases were partially offset by a $0.7 million decrease in sales-based incentive compensation resulting from a decrease in incentive rates, partially offset by an increase in compensation-eligible sales.
Compensation expense increased by $43.0 million, or 10 percent, in the first nine months of fiscal 2018 from the same period a year earlier. The increase was driven primarily by (i) a $21.5 million increase in base salaries and benefits, reflecting higher headcount, fiscal year-end compensation increases and an increase in our corporate 401(k) match; (ii) a $7.5 million increase in stock-based compensation expense primarily due to higher stock-based compensation awards; and (iii) a $19.8 million increase in operating income-based bonus accruals due to higher pre-bonus adjusted operating income and a modest increase in bonus accrual rates. These increases were partially offset by a $4.1 million decrease in sales-based incentive compensation resulting from a decrease in incentive rates, partially offset by an increase in compensation-eligible sales.profit contribution.
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Distribution expense
The following table shows our distribution expense for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Class A share commissions | $ | 497 | $ | 542 | -8 | % | $ | 1,337 | $ | 1,914 | -30 | % | ||||||||||||||||||||||||
Up-front sales commission expense(1) | $ | 3,841 | $ | 4,935 | -22 | % | ||||||||||||||||||||||||||||||
Distribution fees | 14,179 | 13,306 | 7 | % | 42,687 | 39,437 | 8 | % | 13,939 | 16,320 | -15 | % | ||||||||||||||||||||||||
Closed-end fund structuring fees | - | 3,450 | -100 | % | - | 3,450 | -100 | % | ||||||||||||||||||||||||||||
Closed-end fund dealer compensation payments | 977 | 999 | -2 | % | 2,898 | 2,907 | 0 | % | 910 | 982 | -7 | % | ||||||||||||||||||||||||
Intermediary marketing support payments | 13,064 | 12,307 | 6 | % | 38,251 | 35,645 | 7 | % | 11,954 | 12,534 | -5 | % | ||||||||||||||||||||||||
Discretionary marketing expenses | 6,328 | 6,556 | -3 | % | 20,046 | 16,931 | 18 | % | 4,846 | 4,977 | -3 | % | ||||||||||||||||||||||||
Finder's fees | 2,018 | 2,121 | -5 | % | ||||||||||||||||||||||||||||||||
Total | $ | 35,045 | $ | 37,160 | -6 | % | $ | 105,219 | $ | 100,284 | 5 | % | $ | 37,508 | $ | 41,869 | -10 | % |
(1) | Prior period amounts have been restated to reflect the Company’s retrospective adoption of the ASU 2014-09 on November 1, 2018. Certain front-end load sales commissions that were previously reported on a net basis as a component of distribution expense are now reported on a gross basis in distribution and underwriter fee revenue and distribution expense. In addition, certain fees were reclassified from service fee expense to distribution expense due to the nature of the fees. |
Distribution expense decreased $2.1$4.4 million, or 6 percent, in the third quarter of fiscal 2018, primarily reflecting lower closed-end fund structuring fees and a decrease in discretionary marketing expenses related to significant corporate initiatives, partially offset by an increase in Class C share assets held more than one year on which we pay distribution fees and an increase in intermediary marketing support payments. Distribution expense increased by $4.9 million, or 510 percent, in the first nine monthsquarter of fiscal 2018 versus the same periods a year earlier,2019, primarily reflecting an increaselower distribution fee payments, a decrease in Class C share assets held more than one year on which we pay distribution fees, discretionary marketing expenses, and an increase inup-front sales commission expense, lower intermediary marketing support payments. These increases are partially offset by a decrease in closed-end fund structuring feespayments and a decrease in Class A sales on which we pay commissions.discretionary marketing expenses.
Service fee expense
Service fee expense was substantially unchangeddecreased $1.3 million, or 5 percent, in the thirdfirst quarter of fiscal 20182019 from the same period a year earlier. Service fee expense increased 2 percent, or $1.3 million, in the first nine months of fiscal 2018 versus the same period a year earlier, reflecting higher average fund assets retained more than one year in fundslower Class A and share classes that are subject toClass C service fee payments.
Amortization of deferred sales commissions
Amortization expense increased 11$1.3 million, or 30 percent, or $0.5 million, in the thirdfirst quarter of fiscal 20182019 from the same period a year earlier, reflecting higher private fund commission amortization partially offset by lower Class C share commission amortization. Amortization expense increased 11 percent, or $1.3 million, in the first nine months of fiscal 2018 compared to the same period a year earlier, reflecting higherand private fund commission amortization partially offset by lower Class C share commission amortization.
Fund-related expenses
Fund-related expenses increased $1.8$0.5 million, or 135 percent, in the thirdfirst quarter of fiscal 20182019 over the same period a year earlier, primarily reflecting increases in fund subsidy accruals, sub-advisory fees paid and an increase in fund expenses borne by the Company on funds for which it earns an all-in fee. The increase in fund expense borne by the Company was reduced by $1.9 million as a result of the one-time reimbursements made to certain funds by the Company in the third quarter of fiscal 2017. Fund-related expenses increased $9.3 million,
or 25 percent, in the first nine months of fiscal 2018 compared to the same period a year earlier for the same reasons mentioned above.sub-advisory fees paid.
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Other expenses
The following table shows our other expenses for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Information technology | $ | 23,075 | $ | 18,998 | 21 | % | $ | 66,563 | $ | 56,415 | 18 | % | $ | 23,409 | $ | 21,347 | 10 | % | ||||||||||||||||||
Facilities-related | 12,089 | 10,357 | 17 | % | 35,543 | 30,294 | 17 | % | 13,306 | 10,691 | 24 | % | ||||||||||||||||||||||||
Travel | 4,481 | 4,612 | -3 | % | 13,234 | 12,308 | 8 | % | 4,474 | 3,939 | 14 | % | ||||||||||||||||||||||||
Professional services | 4,154 | 4,244 | -2 | % | 11,901 | 10,702 | 11 | % | 3,657 | 3,217 | 14 | % | ||||||||||||||||||||||||
Communications | 1,502 | 1,460 | 3 | % | 4,358 | 4,139 | 5 | % | 1,522 | 1,412 | 8 | % | ||||||||||||||||||||||||
Amortization of intangible assets | 2,232 | 2,239 | 0 | % | 6,710 | 6,775 | -1 | % | 1,828 | 2,239 | -18 | % | ||||||||||||||||||||||||
Other corporate expense | 3,585 | 4,466 | -20 | % | 12,010 | 12,895 | -7 | % | 4,985 | 4,394 | 13 | % | ||||||||||||||||||||||||
Total | $ | 51,118 | $ | 46,376 | 10 | % | $ | 150,319 | $ | 133,528 | 13 | % | $ | 53,181 | $ | 47,239 | 13 | % |
Other expenses increased 1013 percent in the thirdfirst quarter of fiscal 20182019 from the same period a year earlier, primarily attributable to increases in information technology, and facilitiesfacilities-related expenses, partially offset by lower travel, professional services and other corporate expenses.expenses, partially offset by a decrease in amortization of intangible assets. The increase in information technology expense is attributable primarily toreflects increases in costs associated with the consolidation of our trading platforms, enhancements to Calvert’s research system, higher market data expenses and ongoing system maintenance costs partially offset by a decrease in outside custody and back-office service costs.software consulting services. The increase in facilities-related expenses can be primarily reflects increases in software consulting, rent and building-related expenses. These increases were offset by a decrease in other corporate expenses.
Other expenses increased 13 percent in the first nine months of fiscal 2018 from the same period a year earlier, primarily attributable to increases in information technology, facilities-related, travel and professional services expenses. The increase in information technology expense is attributable primarily to increases in costs associated with the consolidation of our trading platforms, enhancements to Calvert’s research system, higher market data expenses and ongoing system maintenance costs. The increase in facilities-related expenses reflects the acceleration of $1.5 million of depreciation in the second quarter of fiscal 2018, as well as increases in software consulting, rent and building-related expenses. The increase in travel expense relates to increased travel activity during the fiscal year. The increase in professional services expense is primarily attributableattributed to an increase in corporate consulting engagementsrent and external legal costs. These increases were partially offset by a decrease in other corporate expenses primarilythe accelerated depreciation of leasehold improvements associated with expenses related to the Calvert acquisition incurred during fiscal 2017.new office space leased in Seattle.
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Non-operating Income (Expense)
The main categories of non-operating income (expense) for the three and nine months ended JulyJanuary 31, 20182019 and 20172018 are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Gains (losses) and other investment income, net | $ | 7,131 | $ | 5,537 | 29 | % | $ | 9,468 | $ | 15,319 | -38 | % | ||||||||||||||||||||||||
Gains and other investment income, net | $ | 5,833 | $ | 2,598 | 125 | % | ||||||||||||||||||||||||||||||
Interest expense | (5,906 | ) | (6,180 | ) | -4 | % | (17,716 | ) | (21,592 | ) | -18 | % | (6,131 | ) | (5,907 | ) | 4 | % | ||||||||||||||||||
Loss on extinguishment of debt | - | (5,396 | ) | -100 | % | - | (5,396 | ) | -100 | % | ||||||||||||||||||||||||||
Other income (expense) of consolidated CLO entities: | ||||||||||||||||||||||||||||||||||||
Gains and other investment income, net | 1,847 | - | NM | 4,823 | - | NM | 5,441 | 1,717 | 217 | % | ||||||||||||||||||||||||||
Interest and other expense | (3,092 | ) | - | NM | (3,630 | ) | - | NM | (8,336 | ) | (94 | ) | NM | |||||||||||||||||||||||
Total non-operating income (expense) | $ | (20 | ) | $ | (6,039 | ) | -100 | % | $ | (7,055 | ) | $ | (11,669 | ) | -40 | % | ||||||||||||||||||||
Total non-operating expense | $ | (3,193 | ) | $ | (1,686 | ) | 89 | % |
Gains (losses) and other investment income, net, increased by $1.6$3.2 million in the thirdfirst quarter of fiscal 20182019 compared to the same period a year ago, primarily reflecting ana $0.7 million increase in interest and other income, of $3.5a $1.9 million and a $0.8 million increase in foreign currency gains, partially offset by a $3.0 million increasedecrease in net investment losses primarily attributable to investments in sponsored strategies and associated hedges.hedges and a decrease in foreign currency losses of $0.6 million. Gains (losses) and other investment income net, for the third quarter of fiscal 2017 included $0.5 million in losses recognized related to our seed capital investments and associated hedges.
The $0.3 million decrease in interest expense in the thirdfirst quarter of fiscal 2018 compared to the same period a year earlier reflects the May 2017 retirement of the Company’s 2017 Senior Notes and the April 2017 issuance of the Company’s 2027 Senior Notes at a lower interest rate.
The change in other income (expense) of consolidated CLO entities in the third quarter of fiscal 2018 compared to the same period a year earlier reflects net expense from consolidated CLO entities of $2.1 million in the third quarter of fiscal 2018. The Company did not consolidate any CLO entities during the third quarter of fiscal 2017.
Gains (losses) and other investment income, net, decreased by $5.9 million in the first nine months of fiscal 2018 compared to the same period a year earlier, primarily reflecting (i) a $7.5 million increase in net losses attributable to investments in sponsored strategies and associated hedges; (ii)included a $6.5 million loss recognized into reflect the first nine months of fiscal 2018 upon expiration of the Company’s option to acquire an additional 26 percent ownership interest in Hexavest under the terms of the option agreement entered into when we acquired our Hexavest position in 2012; and (iii) a $1.92012.
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Interest expense increased by $0.2 million gain recognized in the first nine monthsquarter of fiscal 2017 upon the release from escrow of payments received in connection with the sale of the Company’s equity interest in Lloyd George Management in fiscal 2011. These decreases were partially offset by an increase in interest income of $9.2 million and a $0.5 million increase in foreign currency gains.
The $3.9 million decrease in interest expense in the first nine months of fiscal 20182019 compared to the same period a year earlier reflectsearlier. The increase is attributable to the May 2017 retirementwrite-off of deferred financing costs associated with replacing the Company’s 2017 Senior Notes and the April 2017 issuance of the Company’s 2027 Senior Notes atprevious revolving credit facility with a lower interest rate.new $300 million senior unsecured revolving credit facility on December 11, 2018. The new credit facility expires on December 11, 2023.
The change in other income (expense) of consolidated CLO entities in the first nine monthsquarter of fiscal 20182019 compared to the same period a year earlier reflects net income contributionexpense from consolidated CLO entities of $0.3$2.9 million in the first nine monthsquarter of fiscal 2019 and net contribution from a consolidated CLO entity of $1.6 million in the first quarter of fiscal 2018. The Company did not consolidate anychange is attributable to a decline in the fair value of our beneficial interest in the consolidated CLO entities during the first nine months of fiscal 2017.entities.
Income Taxes
Our effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 26.223.4 percent in the thirdfirst quarter of fiscal 20182019 and 36.936.3 percent in the thirdfirst quarter of fiscal 2017.
On December 22, 2017, the 2017 Tax Act was signed into law in the U.S. Among other significant changes, the 2017 Tax Act reduced the statutory federal income tax rate for U.S. corporate taxpayers from a maximum of 35 percent to 21 percent and required the deemed repatriation of foreign earnings not previously subject to U.S. taxation. Because the lower federal income tax rate took effect two months into our fiscal year, a blended federal tax rate of 23.3 percent applies to the Company for fiscal 2018.
Our income tax provision for the three and nine months ended JulyJanuary 31, 20182019 includes $0.6 million of charges associated with certain provisions of the 2017 Tax Act taking effect in fiscal 2019, relating principally to limitations on the deductibility of executive compensation.
Our income tax provision was reduced by net excess tax benefits of $1.3 million and $15.1 million, respectively, related to the exercise of employee stock options and vesting of restricted stock awards during those periods. New accounting guidance adopted in the first quarter of fiscalperiod totaling $2.9 million and $11.9 million for the three months ended January 31, 2019 and 2018, requires these net excess tax benefits to be recognized in earnings.respectively. Our income tax provision for the ninethree months ended JulyJanuary 31, 2018 also includesincluded a non-recurring charge of approximately $24.8$24.7 million to reflect the estimated effect of enactment of the 2017 Tax Act. The non-recurring charge includes $21.7 million from the revaluation of the Company’s deferred tax assets and liabilities and $3.1 million for the deemed repatriation of foreign-sourced net earnings not previously subject to U.S. taxation.
Our calculations of adjusted net income and adjusted earnings per diluted share remove the effect of the net excess tax benefits recognized in connection with the new accounting guidanceASU 2016-09 and the non-recurring impact of the tax reform recognized induring the first quarter of fiscal 2018. On this basis, our adjusted effective tax rate was 27.125.9 percent and 27.326.7 percent for the three and nine months ended JulyJanuary 31, 2019 and 2018, respectively.
The following table reconciles the statutory federal income tax rate to our effective tax rate for the three and nine months ended July 31, 2018:
Three Months Ended | Nine Months Ended | |||||||
July 31, 2018 | July 31, 2018 | |||||||
Statutory U.S. federal income tax rate(1) | 23.3 | % | 23.3 | % | ||||
State income taxes for current year, net of federal income tax benefits | 4.4 | 4.3 | ||||||
Net income attributable to non-controlling and other beneficial interests | (1.0 | ) | (0.9 | ) | ||||
Other items | 0.4 | 0.6 | ||||||
Adjusted effective income tax rate(2) | 27.1 | 27.3 | ||||||
Non-recurring impact of U.S. tax reform | - | 6.1 | ||||||
Net excess tax benefits from stock-based compensation plans(3) | (0.9 | ) | (3.7 | ) | ||||
Effective income tax rate | 26.2 | % | 29.7 | % |
We continue to carefully evaluate the impact of the 2017 Tax Act, certain provisions of which will not take effect for the Company until fiscal 2019, including, but not limited to, the global intangible low-taxed income, foreign-derived intangible income and base erosion anti-abuse tax provisions.
Equity in Net Income of Affiliates, Net of Tax
Equity in net income of affiliates, net of tax, for the third quarter and first nine months of fiscal 2018 primarily reflects our 49 percent equity interest in Hexavest and our seven percent minority equity interest in a private equity partnership managed by a third party. Equity in net income of affiliates, net of tax, was $2.8 million and $8.9 million in the third quarter and first nine months of fiscal 2018, respectively, and $2.3 million and $8.0 million in the respective periods a year earlier.
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The following table summarizes the components of equity in net income of affiliates, net of tax, for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||
July 31, | % | July 31, | % | January 31, | % | |||||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Investment in Hexavest, net of tax and amortization | $ | 2,753 | $ | 2,326 | 18 | % | $ | 8,359 | $ | 7,705 | 8 | % | $ | 1,949 | $ | 2,804 | -30 | % | ||||||||||||||||||
Investment in private equity partnership, net of tax | (3 | ) | (3 | ) | 0 | % | 518 | 268 | 93 | % | (1 | ) | 210 | NM | ||||||||||||||||||||||
Total | $ | 2,750 | $ | 2,323 | 18 | % | $ | 8,877 | $ | 7,973 | 11 | % | $ | 1,948 | $ | 3,014 | -35 | % |
Net Income Attributable to Non-controlling and Other Beneficial Interests
The following table summarizes the components of net income attributable to non-controlling and other beneficial interests for the three and nine months ended JulyJanuary 31, 20182019 and 2017:2018:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | % | July 31, | % | |||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Consolidated sponsored funds | $ | (1,862 | ) | $ | (3,124 | ) | -40 | % | $ | (4,215 | ) | $ | (4,836 | ) | -13 | % | ||||||||
Majority-owned subsidiaries | (4,119 | ) | (4,365 | ) | -6 | % | (12,026 | ) | (12,015 | ) | 0 | % | ||||||||||||
Non-controlling interest value adjustments(1) | - | (3 | ) | -100 | % | - | 71 | -100 | % | |||||||||||||||
Net income attributable to non- controlling and other beneficial interests | $ | (5,981 | ) | $ | (7,492 | ) | -20 | % | $ | (16,241 | ) | $ | (16,780 | ) | -3 | % |
Three Months Ended | ||||||||||||
January 31, | % | |||||||||||
(in thousands) | 2019 | 2018 | Change | |||||||||
Consolidated sponsored funds | $ | (2,422 | ) | $ | (6,300 | ) | -62 | % | ||||
Majority-owned subsidiaries | (3,037 | ) | (4,155 | ) | -27 | % | ||||||
Net income attributable to non-controlling and other beneficial interests | $ | (5,459 | ) | $ | (10,455 | ) | -48 | % |
Net income attributable to non-controlling and other beneficial interests is not adjusted for taxes due to the underlying tax status of our consolidated majority-owned subsidiaries, which are treated as partnerships or other pass-through entities for tax purposes. Funds and the CLO entities we consolidate are registered investment companies or private funds that are also treated as pass-through entities for tax purposes.
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Changes in Financial Condition, Liquidity and Capital Resources
The assets and liabilities of our consolidated CLO entities do not affect our liquidity or capital resources. The collateral assets of our consolidated CLO entities are held solely to satisfy the obligations of these entities and we have no right to these assets beyond our direct investment in, and management fees generated from, these entities. The note holders and third-party creditors of these entities have no recourse to the general credit of the Company. As a result, the assets and liabilities of our consolidated CLO entities are excluded from the discussion of liquidity and capital resources below.
The following table summarizes certain key financial data relating to our liquidity and capital resources on JulyJanuary 31, 2019 and October 31, 2018 and October 31, 2017 and the useuses of cash for the ninethree months ended JulyJanuary 31, 20182019 and 2017.2018:
Balance Sheet and Cash Flow Data
Balance Sheet and Cash Flow Data | ||||||||
January 31, | October 31, | |||||||
(in thousands) | 2019 | 2018 | ||||||
Balance sheet data: | ||||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 449,157 | $ | 600,696 | ||||
Management fees and other receivables | 223,898 | 236,736 | ||||||
Total liquid assets | $ | 673,055 | $ | 837,432 | ||||
Investments | $ | 1,010,558 | $ | 1,078,627 | ||||
Liabilities: | ||||||||
Debt(1) | $ | 625,000 | $ | 625,000 |
July 31, | October 31, | |||||||
(in thousands) | 2018 | 2017 | ||||||
Balance sheet data: | ||||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 562,890 | $ | 610,555 | ||||
Management fees and other receivables | 218,955 | 200,453 | ||||||
Total liquid assets | $ | 781,845 | $ | 811,008 | ||||
Investments | $ | 1,052,663 | $ | 898,192 | ||||
Liabilities: | ||||||||
Debt | $ | 625,000 | $ | 625,000 |
(1) | Represents the principal amount of debt outstanding. The carrying value of the debt, including debt issuance costs, was $619.9 million and $619.7 million as of January 31, 2019 and October 31, 2018, respectively. |
Nine Months Ended | Three Months Ended | |||||||||||||||
July 31, | January 31, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
Cash flow data: | ||||||||||||||||
Operating cash flows | $ | 151,287 | $ | 98,900 | $ | 34,332 | $ | (59,217 | ) | |||||||
Investing cash flows | (152,599 | ) | (60,628 | ) | (283,089 | ) | (46,972 | ) | ||||||||
Financing cash flows | (44,889 | ) | 84,376 | (74,963 | ) | 26,008 |
(1) | Prior period operating cash flows have been restated to reflect the Company's retrospective adoption of ASU 2016-18, Restricted Cash, on November 1, 2018. Please see Note 1, "Summary of Significant Accounting Policies" in Item 1, "Consolidated Financial Statements (unaudited)," for further detail. |
Liquidity and Capital Resources
Liquid assets consist of cash and cash equivalents and management fees and other receivables. Cash and cash equivalents consist of cash and short-term, highly liquid investments that are readily convertible to cash. Management fees and other receivables primarily represent receivables due from sponsored funds and
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separately managed accounts for investment advisory and distribution services provided. Liquid assets represented 33 percent and 39 percent of total assets on July 31, 2018 and October 31, 2017, respectively, excludingExcluding those assets identified as assets of our consolidated CLO entities.entities, liquid assets represented 30 percent and 33 percent of total assets on January 31, 2019 and October 31, 2018, respectively. Not included in the liquid asset amounts are $257.9$241.4 million and $213.5$273.3 million of highly liquid short-term debt securities with remaining maturities between three and 12 months at JulyJanuary 31, 20182019 and October 31, 2017,2018, respectively, which are included within investments on our Consolidated Balance Sheets. Our seed investments in consolidated funds and separate accounts are not treated as liquid assets because they may be longer term in nature.
The $29.2 million decrease in liquid assets in the first nine months of fiscal 2018 primarily reflects net purchases of bank loan investments by our consolidated CLO entities of $217.0 million, the repurchase of $186.1 million of Non-Voting Common Stock, the payment of $109.5 million of dividends to shareholders, purchases of investments of $86.0 million, the purchase of additional non-controlling interests for $20.8 million, the addition of $12.8 million in equipment and leasehold improvements and a decrease in the effect of
currency rate changes on cash and cash equivalents of $1.5 million, offset by net proceeds of $133.1 million from a line of credit by our consolidated CLO entities, cash provided by operating activities of $127.0 million, proceeds from sales of bank loan investments by our consolidated CLO entities of $99.6 million, proceeds from net subscriptions received from non-controlling interests holders of $73.6 million, proceeds from the sale of investments of $63.6 million, proceeds from the issuance of Non-Voting Common Stock of $62.2 million in connection with the exercise of employee stock options and other employee stock purchases and principal repayments on notes receivable from stock options exercises of $2.8 million. Purchases of investments for the nine months ended JulyOn January 31, 2018 includes $79.1 million and $6.9 million related to the Company’s investments in CLO entities and investments classified as available-for-sale, respectively. Proceeds from the sale of investments for the nine months ended July 31, 2018 includes $53.8 million and $9.8 million related to the Company’s investments in CLO entities and investments classified as available-for-sale, respectively.
On July 31, 2018,2019, our debt consisted of $325 million in aggregate principal amount of 3.625 percent Senior Notes due in June 2023 and $300 million in aggregate principal amount of 3.5 percent Senior Notes due in April 2027.
We maintain a $300 million unsecured revolving credit facility with several banks that expires on October 21, 2019.December 11, 2023. The facility, which we entered into on December 11, 2018, provides that we may borrow at LIBOR-based rates of interest that vary depending on the level of usage of the facility and our credit ratings. The agreement contains financial covenants with respect to leverage and interest coverage and requires us to pay an annual commitment fee on any unused portion. We had no borrowings under our revolving credit facility at JulyJanuary 31, 20182019 or at any point during the first ninethree months of fiscal 2018.2019. We were in compliance with all debt covenants as of JulyJanuary 31, 2018.2019.
We continue to monitor our liquidity daily. We remain committed to growing our business and returning capital to shareholders. We expect that our main uses of cash will be paying dividends, acquiring shares of our Non-Voting Common Stock, making seed investments in new products andinvestment strategies, potential strategic acquisitions, enhancing our technology infrastructure and paying the operating expenses of our business, which are largely variable in nature and fluctuate with revenue and assets under management.business. We believe that our existing liquid assets, cash flows from operations and borrowing capacity under our existing credit facility are sufficient to meet our current and forecasted operating cash needs. The risk exists, however, that if we need to raise additional capital or refinance existing debt in the future, resources may not be available to us in sufficient amounts or on acceptable terms. Our ability to enter the capital markets in a timely manner depends on a number of factors, including the state of global credit and equity markets, interest rates, credit spreads and our credit ratings. If we are unable to access capital markets to issue new debt, refinance existing debt or sell shares of our Non-Voting Common Stock as needed, or if we are unable to obtain such financing on acceptable terms, our business could be adversely affected.
Recoverability of our Investments
Our $1.1$1.0 billion of investments as of JulyJanuary 31, 20182019 consisted of our 49 percent equity interest in Hexavest, positions in Company-sponsored funds and separate accounts entered into for investment and business development purposes, and certain other investments held directly by the Company. Investments in Company-sponsored funds and separate accounts and investments held directly by the Company are generally in liquid debt or equity securities and are carried at fair market value. We test our investments other than trading and equity method investments,held at cost for impairment on a quarterly basis. We evaluate our investments in non-consolidated CLO entities and investments classified as available-for-sale for impairmentbasis using quantitative factors, including how long the investment has been in a net unrealized loss position, and qualitative factors, including the credit qualityfactors. As of the underlying issuer and our ability and intent to continue holding the
investment. If markets deteriorate in the quarters ahead, our assessmentJanuary 31, 2019 there were no indicators of impairment on a quantitative basis may lead us to impairour investments in future quarters that were in an unrealized loss positionheld at July 31, 2018.cost.
We test our investments in equity method investees, goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, or as facts and circumstances indicate that additional analysis is warranted. There have been no significant changes in financial condition in the first ninethree months of fiscal 20182019 that would indicate that an impairment loss exists at JulyJanuary 31, 2018.2019.
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We periodically review our deferred sales commissions and amortizing identifiable intangible assets for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. There have been no significant changes in financial condition in the first ninethree months of fiscal 20182019 that would indicate that an impairment loss exists at JulyJanuary 31, 2018.2019.
Operating Cash Flows
Cash provided by operating activities totaled $151.3$34.3 million in the first ninethree months of fiscal 2018,2019, compared to $98.9cash used for operating activities of $59.2 million in the first ninethree months of fiscal 2017.2018. The year-over-year change primarily reflects a decrease in net cash used for the purchase of short-term debt securities and investments held by consolidated sponsored funds and separately managed accounts, an increase in net cash provided by the operating activities year-over-year primarily reflects an increase in net cash used to settle accrued compensation, a decrease in net cash used to purchase trading securities,of consolidated CLO entities and a net decreaseincrease as a result of the timing differences in the cash settlements of our deferred income taxes, other liabilities, and other assets attributable to consolidated CLO entities.and liabilities.
Investing Cash Flows
Cash used for investing activities totaled $152.6$283.1 million in the first ninethree months of fiscal 2018 compared to $60.62019 and $47.0 million in the first ninethree months of fiscal 2017.2018. The increase in cash used for investing activities year-over-year is attributable tochange primarily reflects a $217.0 million increase in purchases of bank loan investments by our consolidated CLO entities, a $33.8$253.7 million increase in net purchases of investmentsbank loans and a $4.4 million increase in equipment and leasehold improvements, offset by a $99.6 million increase in proceeds from the sale of bank loanother investments by our consolidated CLO entities and a $5.7 million increase in additions to equipment and leasehold improvements, partially offset by a $20.3 million decrease in cash paidnet purchases of investments made by the Company in acquisitionCLO entity note obligations and a $3.0 million increase in net proceeds from sale of $63.6 million.investments.
Financing Cash Flows
Cash used for financing activities totaled $44.9$75.0 million in the first ninethree months ended January 31, 2019. The Company used $128.2 million to repurchase and retire shares of fiscal 2018 compared to cash provided by financing activities of $84.4 million in the first nine months of fiscal 2017. The decrease in cash provided by financing activities is attributable primarily to the Company’s issuance of the 2027 Senior Notes in the first nine months of fiscal 2017, resulting in net proceeds of $296.1 million, partially offset by $255.4 million of financing cash outflows resulting from the Company’s redemption of the 2017 Senior Notes. The decrease is also attributable to a $85.9 million increase in repurchases ofour Non-Voting Common Stock a $66.2under our current repurchase authorization, paid $18.1 million decreaseto acquire additional interests in net subscriptions from non-controlling interest holders, a $42.7Atlanta Capital and Parametric and received proceeds of $4.9 million decrease in proceeds fromrelated to the issuance of non-voting commonshares of our Non-Voting Common Stock in connection with the grant of restricted share awards, the exercise of stock a $15.3 million increase in the payment of dividends to shareholders,options and a $11.0 million increase in the purchase of non-controlling interests, all partially offset by net proceeds of $133.1 million received by a consolidated CLO entity in the warehousing phase under its revolving line of credit.
Share repurchases in the first nine months of fiscal 2018 totaled $186.1 million.other employee stock purchases. As of JulyJanuary 31, 2018,2019, we havehad authorization to purchase an additional 2.64.3 million shares of our Non-Voting Common Stock under our current share repurchase authorization andauthorization. We anticipate that future repurchases of our Non-Voting Common Stock will continue to be an ongoing use of cash.
DividendsOur dividends declared per share were $0.93$0.35 in the first ninethree months of fiscal 2018 compared to $0.84 per share2019 and we paid an additional $5.7 million of dividends in the first nine monthsquarter of fiscal 2017.2019 versus the first quarter of fiscal 2018. We currently expect to declare and pay quarterly dividends on our Voting and Non-Voting Common Stock comparable to the dividend declared in the thirdfirst quarter of fiscal 2018.2019. Cash provided by financing activities of consolidated CLO entities totaled $68.5 million in the first quarter of fiscal 2019.
Contractual Obligations
We have future obligations under various contracts relating to debt, interest payments and operating leases. During the first ninethree months ended JulyJanuary 31, 2018,2019, there were no material changes to our contractual obligations as previously reported in our Annual Report on Form 10-K for the year ended October 31, 2017,2018, except as discussed below.
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We increased ourbegan consolidating a new CLO entity, CLO 2019-1, in the first quarter of fiscal 2019 that had borrowings under a non-recourse revolving line of credit attributable to CLO 2017-1, a consolidated CLO entity in the warehousing phase, from $12.6 million as of OctoberJanuary 31, 2017 to $145.7 million as2019 of July 31, 2018. In addition, we began consolidating a new CLO entity, CLO 2014-1, in the third quarter of fiscal 2018 with senior notes obligations of $465.3 million that matures on July 2026 and bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 1.2 percent to 5.03 percent.$68.5 million. For additional information, please see Note 5Notes 4 and Note 76 of our Notes to Consolidated Financial Statements contained in Part I, Item 1 of this Form 10-Q.
Non-controlling interests held by employees in Atlanta Capital and Parametric long-term equity incentive plans are not subject to mandatory redemption. The purchase of non-controlling interests is predicated on the exercise of a series of puts held by non-controlling interest holders and calls held by us. The puts provide the non-controlling interest holders the right to require us to purchase these retained interests at specific intervals over time, while the calls provide us with the right to require the non-controlling interest holders to sell their retained equity interests to us at specified intervals over time, as well as upon the occurrence of certain events such as death or permanent disability. These non-controlling interests are redeemable at fair value. There is significant uncertainty as to the timing and amount of any non-controlling interest purchase in the future. Although the timing and amounts of these purchases cannot be predicted with certainty, we anticipate that the purchase of non-controlling interests in our consolidated subsidiaries may be a significant use of cash in future years.
We have presented all redeemable non-controlling interests at redemption value on our Consolidated Balance Sheet as of JulyJanuary 31, 2018.2019. We have recorded the current quarter change in the estimated redemption value of non-controlling interests redeemable at fair value as a component of additional paid-in capital. Based on our calculations, theThe estimated redemption value of our non-controlling interests totaled $308.9$326.6 million on JulyJanuary 31, 20182019 compared to $250.8$335.1 million on October 31, 2017.2018. These interests are all redeemable at fair value. Redeemable non-controlling interests as of JulyJanuary 31, 20182019 consisted of third-party investors’ ownership in consolidated investment fundsprofit interests granted under the long-term incentive plans of $204.6Parametric and Atlanta Capital of $48.2 million and $26.7 million, respectively, and non-controlling interests in Parametric issued in conjunction with the Parametric Risk Advisors LLC (Parametric Risk Advisors) final put option of $15.8 million and profit$11.9 million. Additionally, redeemable non-controlling interests granted under the long-term incentive plans of Parametric and Atlanta Capital of $53.1 million and $35.4 million, respectively. No puts or calls redeemable at other than fair value were outstanding as of JulyJanuary 31, 2018.2019 also included third-party investors’ ownership in consolidated sponsored funds of $239.8 million.
Foreign Subsidiaries
WeAs of January 31, 2019, we consider the undistributed earnings of certain of our foreign subsidiaries to be indefinitely reinvested in foreign operations. As of January 31, 2019, we had approximately $75.7 million of undistributed earnings primarily from Canadian and United Kingdom foreign corporations that are not available to fund domestic operations as of July 31, 2018; however, asor to distribute to shareholders unless repatriated. As a result of the 2017 Tax Act an estimatedand foreign exchange rates as of January 31, 2019, there is no future tax of $3.1 million was recognized during the nine months ended July 31, 2018 on theseliability with respect to undistributed earnings. The calculation of this non-recurring charge was based on the 2017 Tax Act, guidance issued by the Internal Revenue Service, and our interpretations of this information. We anticipate additional guidance to be issued by the Internal Revenue Service and continue to monitor interpretative developments. As a result, this estimated tax charge may change. In light of the changes contained in the 2017 Tax Act, and as additional guidance becomes available, we may reconsider our repatriation policy.
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected in our Consolidated Financial Statements.
Critical Accounting Policies
As of November 1, 2017, the Company has amended its significant accounting policy for stock-based compensation to reflected the adoption of Accounting Standard Update 2016-09, Improvements to Employee Share-Based Payment Accounting. For further details regarding the amended policy, please see Note 1, “Summary of Significant Accounting Policies,” in Item 1, “Consolidated Financial Statements.” There have been no other updates to our critical accounting policies from those disclosed in Management’s Discussion and Analysis of Financial Condition in our Form 10-K for the fiscal year ended October 31, 2017.2018.
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Accounting Developments
There have been no material changesOn November 1, 2018, the Company fully adopted four new accounting standards. Please refer to Note 1, “Summary of Significant Accounting Policies,” in our accounting developments from those previously disclosed in our Annual Report on Form 10-K for the year ended October 31, 2017.Item 1, “Consolidated Financial Statements (unaudited).”
Item 3.Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our Quantitative and Qualitative Disclosures About Market Risk from those previously reported in our Annual Report on Form 10-K for the year ended October 31, 2017.2018.
Item 4. Controls and Procedures
We evaluated the effectiveness of our disclosure controls and procedures as of JulyJanuary 31, 2018.2019. Disclosure controls and procedures are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rule and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Our CEO and CFO participated in this evaluation and concluded that, as of April 30, 2018,January 31, 2019, our disclosure controls and procedures were effective.
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There have been no changes in our internal control over financial reporting that occurred during the thirdfirst quarter of our fiscal year ended October 31, 20182019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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There have been no material developments in litigation previously reported in our SEC filings.
There have been no material changes to our Risk Factors from those previously reported in our Annual Report on Form 10-K for the year ended October 31, 2017.2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below sets forth information regarding purchases by the Company of our Non-Voting Common Stock on a monthly basis during the thirdfirst quarter of fiscal 2018:2019:
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Period | (a) Total Number | (b) Average | (c) Total Number of | (d) Maximum Number | ||||||||||||
May 1, 2018 through May 31, 2018 | 196,490 | $ | 54.39 | 196,490 | 3,859,200 | |||||||||||
June 1, 2018 through June 30, 2018 | 694,163 | $ | 54.25 | 694,163 | 3,165,037 | |||||||||||
July 1, 2018 through July 31, 2018 | 531,322 | $ | 53.25 | 531,322 | 2,633,715 | |||||||||||
Total | 1,421,975 | $ | 53.89 | 1,421,975 | 2,633,715 |
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | (d) Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||
November 1, 2018 through November 30, 2018 | 365,361 | $ | 45.47 | 365,361 | 6,982,414 | |||||||||||
December 1, 2018 through December 31, 2018 | 1,475,120 | $ | 35.31 | 1,475,120 | 5,507,294 | |||||||||||
January 1, 2019 through January 31, 2019 | 1,240,456 | $ | 37.36 | 1,240,456 | 4,266,838 | |||||||||||
Total | 3,080,937 | $ | 37.34 | 3,080,937 | 4,266,838 |
(1) | We announced a share repurchase program on |
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(a) | Exhibits |
Exhibit No. | Description | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | Materials from the Eaton Vance Corp. Quarterly Report on Form 10-Q for the quarter ended |
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EATON VANCE CORP. | |
(Registrant) | |
DATE: | /s/Laurie G. Hylton |
(Signature) | |
Laurie G. Hylton | |
Chief Financial Officer | |
DATE: | /s/Julie E. Rozen |
(Signature) | |
Julie E. Rozen | |
Chief Accounting Officer |
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