UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended October 31, 2018
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _____________ to ____________
Commission File Number 1-8100
EATON VANCE CORP.
(Exact name of registrant as specified in its charter)
| Maryland | 04-2718215 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
| Two International Place, Boston, Massachusetts 02110 | ||
| (Address of principal executive offices) (zip code) | ||
| (617) 482-8260 | ||
| (Registrant's telephone number, including area code) |
| Securities registered pursuant to Section 12(b) of the Act: |
|
Non-Voting Common Stock ($0.00390625 par value per share) |
New York Stock Exchange | |
| (Title of each class) | (Name of each exchange on which registered) |
| Securities registered pursuant to Section 12(g) of the Act: None. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
| Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Aggregate market value of Non-Voting Common Stock held by non-affiliates of the Registrant, based on the closing price of $54.39 on April 30, 2018 on the New York Stock Exchange was $6,278,619,392. Calculation of holdings by non-affiliates is based upon the assumption, for these purposes only, that executive officers, directors, and persons holding 5 percent or more of the registrant’s Non-Voting Common Stock are affiliates.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the close of the latest practicable date.
| Class: | Outstanding at October 31, 2018 | |
| Non-Voting Common Stock, $0.00390625 par value | 116,527,845 | |
| Voting Common Stock, $0.00390625 par value | 422,935 |
Eaton Vance Corp.
Form 10-K
For the Fiscal Year Ended October 31, 2018
Index
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for Eaton Vance Corp. (Eaton Vance or the Company) 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 Annual Report on Form 10-K regarding our financial position, business strategy and other plans and objectives for future operations are forward-looking statements. The terms “may,” “will,” “could,” “anticipate,” “plan,” “continue,” “project,” “intend,” “estimate,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that they will prove to be correct or that we will take any actions that may now be planned. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in Item 1A “Risk Factors” of this 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 statement, whether as a result of new information, future events or otherwise.
General
Eaton Vance Corp. provides advanced investment strategies and wealth management solutions to forward-thinking investors around the world. Our principal business is managing investment funds and providing investment management and advisory services to high-net-worth individuals and institutions. Our core strategy is to develop and sustain management expertise across a range of investment disciplines and to offer leading investment strategies and services through multiple distribution channels. In executing our core strategy, we have developed broadly diversified investment management capabilities and a highly functional marketing, distribution and customer service organization. We measure our success as a Company based on investment performance delivered, client satisfaction, reputation in the marketplace, progress achieving strategic objectives, employee development and satisfaction, business and financial results, and shareholder value created.
We conduct our investment management and advisory business through wholly- and majority-owned investment affiliates, which include: Eaton Vance Management, Parametric Portfolio Associates LLC (Parametric), Atlanta Capital Management Company, LLC (Atlanta Capital) and Calvert Research and Management (Calvert). We also offer investment management advisory services through minority-owned Hexavest Inc. (Hexavest).
Through Eaton Vance Management, Atlanta Capital, Calvert and our other affiliates, we manage active equity, income and alternative strategies across a range of investment styles and asset classes, including U.S. and global equities, floating-rate bank loans, municipal bonds, global income, high-yield and investment grade bonds. Through Parametric, we manage a range of systematic investment strategies, including systematic equity, systematic alternatives and managed options strategies. Through Parametric, we also provide custom portfolio implementation and overlay services, including tax-managed and non-tax-managed Custom Core
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equity strategies, centralized portfolio management of multi-manager portfolios and exposure management services. We also oversee the management of, and distribute, investment funds sub-advised by unaffiliated third-party managers, including global, emerging market and regional equity and asset allocation strategies.
Our breadth of investment management capabilities supports a wide range of strategies and services offered to fund shareholders, retail managed account investors, institutional investors and high-net-worth clients. Our equity strategies encompass a diversity of investment objectives, risk profiles, income levels and geographic representation. Our income investment strategies cover a broad duration, geographic representation and credit quality range and encompass both taxable and tax-free investments. We also offer a range of alternative investment strategies, including commodity- and currency-based investments and absolute return strategies. Although we manage and distribute a wide range of investment strategies and services, we operate in one business segment, namely as an investment adviser to funds and separate accounts. As of October 31, 2018, we had $439.3 billion in consolidated assets under management.
We distribute our funds and retail managed accounts principally through financial intermediaries. We have broad market reach, with distribution partners including national and regional broker-dealers, independent broker-dealers, registered investment advisors, banks and insurance companies. We support these distribution partners with a team of approximately 120 sales professionals covering U.S. and international markets.
We also commit significant resources to serving institutional and high-net-worth clients who access investment management services on a direct basis and through investment consultants. Through our wholly- and majority-owned affiliates and consolidated subsidiaries, we manage investments for a broad range of clients in the institutional and high-net-worth marketplace in the U.S. and internationally, including corporations, sovereign wealth funds, endowments, foundations, family offices and public and private employee retirement plans.
Company History
We have been in the investment management business for over 90 years, tracing our history to two Boston-based investment managers: Eaton & Howard, formed in 1924, and Vance, Sanders & Company, organized in 1934. Eaton & Howard, Vance Sanders, Inc. (renamed Eaton Vance Management, Inc. in June 1984 and reorganized as Eaton Vance Management in October 1990) was formed upon the acquisition of Eaton & Howard, Incorporated by Vance, Sanders & Company, Inc. on April 30, 1979. Following the 1979 merger of these predecessor organizations to form Eaton Vance, our managed assets consisted primarily of open-end mutual funds marketed to U.S. retail investors under the Eaton Vance brand and investment counsel services offered directly to high-net-worth and institutional investors. Over the ensuing years, we have expanded our investment offerings and distribution efforts to include closed-end, private and offshore funds, retail managed accounts, a broad array of investment strategies and services for institutional and high-net-worth investors, NextSharesTM exchange-traded managed funds (NextShares) and multiple responsible investing options.
Our long-term growth strategy focuses on developing and growing market-leading investment franchises and expanding our distribution reach into new channels and geographic markets. Recent strategic acquisitions include our fiscal 2017 purchase of substantially all of the business assets of Calvert Investment Management, Inc. (Calvert Investments), Parametric’s fiscal 2013 purchase of The Clifton Group Investment Management Company (Clifton) and our fiscal 2012 purchase of a 49 percent interest in Hexavest.
In December 2016, we completed the purchase of substantially all of the business assets of Calvert Investments. Founded in 1976, Calvert Investments became a pioneer in responsible investing in 1982 by launching the first mutual fund to avoid investing in companies doing business in apartheid-era South Africa.
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At acquisition, Calvert had $11.9 billion of assets under management. Of this, $2.1 billion had previously been included in the Company’s consolidated managed assets because Atlanta Capital is sub-adviser to one of the Calvert-sponsored mutual funds (Calvert Funds). The total managed assets of Calvert, including assets sub-advised by other Eaton Vance affiliates, have grown to $14.7 billion at October 31, 2018. The 24 percent growth in Calvert’s managed assets over the 22 months of Eaton Vance’s ownership reflects net inflows of $1.5 billion and market price appreciation of $1.3 billion.
The fiscal 2012 purchase of Clifton, which now operates as Parametric’s Minneapolis investment center, provided Parametric with a market-leading position in futures- and options-based portfolio implementation services and risk-management strategies. Managed assets of Parametric’s Minneapolis investment center have grown from $34.8 billion at purchase in December 2012 to $90.7 billion on October 31, 2018. Parametric recently announced the planned integration of its Seattle and Minneapolis investment centers to provide for better coordination of new strategy development, sales and investment research.
In fiscal 2012, we expanded our global equity offerings by acquiring a 49 percent interest in Hexavest, a Montreal-based investment adviser, and became Hexavest’s exclusive distribution partner in all markets outside Canada. Hexavest’s assets under management have grown from $11.0 billion at purchase in August 2012 to $13.8 billion on October 31, 2018.
Investment Managers and Distributors
We conduct our consolidated investment management business through Eaton Vance Management, Parametric, Atlanta Capital, Calvert and other direct and indirect subsidiaries, including Boston Management and Research (BMR), Eaton Vance Advisers International Ltd. (EVAIL), Eaton Vance Advisers (Ireland) Limited (EVAI), Eaton Vance Investment Counsel (EVIC), Eaton Vance Management (International) Limited (EVMI) and Eaton Vance Trust Company (EVTC). Eaton Vance Management, Parametric, Atlanta Capital, Calvert, BMR, EVAIL, EVIC and EVMI are all registered with the U.S. Securities and Exchange Commission (SEC) as investment advisers under the Investment Advisers Act of 1940 (the Advisers Act). EVTC, a Maine-chartered trust company, is exempt from registration under the Advisers Act. EVAIL is a wholly-owned Full Scope Alternative Investment Fund Manager licensed by the Financial Conduct Authority (FCA). EVAI is registered with the Central Bank of Ireland and provides management services to the Eaton Vance International (Ireland) Funds Plc (EV UCITS Funds). EVMI is a wholly-owned financial services company registered with the FCA under the Financial Services and Market Act of the United Kingdom (U.K.).
Eaton Vance Distributors, Inc. (EVD), a wholly-owned broker-dealer registered under the Securities Exchange Act of 1934 (the Exchange Act), markets and sells the Eaton Vance-, Parametric- and Calvert-branded funds and retail managed accounts. EVMI markets the EV UCITS Funds and other sponsored strategies and services in Europe and certain other international markets. Eaton Vance Management International (Asia) Pte. Ltd. (EVMIA), a wholly-owned financial services company registered with the Monetary Authority of Singapore (MAS) and holding a Capital Markets Services License for Fund Management, Dealing in Securities, Trading in Futures Contracts and Leveraged Foreign Exchange Trading, markets our affiliates’ strategies and services in the Asia Pacific region. EVMIA also operates under the Singapore Companies Act as overseen by the Accounting and Corporate Regulatory Authority in Singapore. Eaton Vance Asia Pacific, Ltd. (Eaton Vance Asia Pacific), a wholly-owned subsidiary of the Company incorporated in Cayman with a branch in Japan, is registered with the Financial Services Authority of Japan as a financial instruments business operator conducting an Investment Advisory and Agency Business as defined in Article 28(3) of the Financial Instruments and Exchange Act. Eaton Vance Asia Pacific acts as an intermediary to promote the asset management capabilities of our affiliates to registered financial instruments business operators. Eaton Vance
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Australia Pty. Ltd., a wholly-owned company registered as an Australian propriety company with the Australian Securities and Investment Commission, markets the strategies and services of our affiliates in Australia.
We are headquartered in Boston, Massachusetts. Our affiliates also maintain offices in Atlanta, Georgia; Minneapolis, Minnesota; New York, New York; Seattle, Washington; Washington, District of Columbia; Westport, Connecticut; London, England; Frankfurt, Germany; Singapore; Sydney, Australia; and Tokyo, Japan. Our sales representatives operate throughout the United States and in the U.K., continental Europe, Asia, Australia and Latin America. We are represented in the Middle East through an agreement with a third-party distributor.
Current Developments
We are pursuing five primary strategic priorities to support business growth: (1) building upon and defending our leadership position in specialty strategies and services for high-net-worth and institutional investors; (2) capitalizing on the current interest environment to grow our market position in floating-rate and short-duration fixed income strategies; (3) expanding our leadership position in responsible investing; (4) increasing our global investment capabilities and distribution reach outside the United States; and (5) positioning Eaton Vance to profit from a changing environment for the asset management industry.
In fiscal 2018, we continued to experience strong growth in our Custom Beta strategies, which include Parametric’s Custom Core equity and Eaton Vance’s laddered municipal and corporate bond separate account strategies. These market-leading offerings combine the benefits of passive investing with the ability to customize portfolios to meet individual preferences and needs. Compared to index mutual funds and exchange-traded funds, Custom Core separate accounts can provide clients with the ability to tailor their market exposures to achieve better tax outcomes and to reflect client-specified responsible investing criteria and desired portfolio tilts and exclusions. In fiscal 2018, net inflows into our Custom Beta strategies offered as retail managed accounts and high-net-worth separate accounts totaled $14.8 billion.
Our line-up of floating-rate and short-duration fixed income strategies demonstrated strong appeal to investors in the rising interest rate environment of fiscal 2018. In fiscal 2018, net inflows into our floating-rate bank loan strategies totaled $5.9 billion, primarily driven by strong sales of our floating-rate income mutual funds offered in the U.S., a market in which we are the market leader. Our lineup of fixed income mutual funds positioned as short- or ultra-short duration, short-term or adjustable-rate generated $1.8 billion of net inflows in fiscal 2018. Among our leading funds in this category are the highly rated Eaton Vance Short-Duration Government Income, Eaton Vance Short-Duration Municipal Opportunities and Eaton Vance Short-Duration Inflation-Protected Income Funds, which are well-suited for income investors who have limited appetite for interest rate risk.
Our leadership position in responsible investing continues to expand. The Calvert Funds are one of the largest and most diversified families of responsibly invested mutual funds, encompassing actively and passively managed equity, fixed and floating-rate income, and asset allocation strategies managed in accordance with the Calvert Principles for Responsible Investment or other responsible investment criteria. Since Calvert became part of Eaton Vance, we have made significant progress growing managed assets in Calvert-branded investment strategies and positioning Calvert as a center for excellence in environmental, social and governance (ESG) research and engagement. Including the Atlanta Capital-subadvised Calvert Equity Fund, assets under management in Calvert strategies grew to $14.7 billion at October 31, 2018 from $12.9 billion at October 31, 2017, reflecting net inflows of $1.9 billion and market price declines of $0.1 billion.
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While Calvert is the centerpiece of our responsible investment strategy, our commitment to responsible investing does not end there. In fiscal 2018, Eaton Vance Management launched a program to integrate consideration of responsible investing criteria into the firm’s fundamental research processes, capitalizing on Calvert’s proprietary ESG research. Atlanta Capital also maintains a significant focus on responsible investing, and Parametric manages over $20 billion of client assets based on client-directed responsible investment criteria. On an overall basis, Eaton Vance is one of the largest participants in responsible investing, a position we are committed to growing in conjunction with rising demand for investment strategies that incorporate ESG-integrated investment research and/or are managed with a dual objective to achieve favorable investment returns and positive societal impact.
Outside the United States, the Company continues to expand investment staff and commit additional client service and distribution resources to support business growth. We now have nearly 75 employees located in five non-U.S. office locations, an increase of 30 percent from the end of fiscal 2017. In fiscal 2018, EVMI hired a five-person global fixed-income team in Frankfurt, Germany, and expanded our Tokyo office to support clients in Japan. Assets managed for clients outside the U.S. increased to $24.9 billion at October 31, 2018 from $24.2 billion at October 31, 2017, reflecting positive net flows of $0.7 billion in fiscal 2018.
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.
Investment Management Capabilities
We provide investment management and advisory services to retail, high-net-worth and institutional investors through funds and separately managed accounts across a broad range of investment mandates. The following table sets forth consolidated assets under management by investment mandate for the dates indicated:
Consolidated Assets under Management by Investment Mandate(1)
| October 31, | ||||||||||||||||||||||||
| (in millions) | 2018 | % of Total | 2017 | % of Total | 2016 | % of Total | ||||||||||||||||||
| Equity(2) | $ | 115,772 | 26 | % | $ | 113,472 | 27 | % | $ | 89,981 | 27 | % | ||||||||||||
| Fixed income(3) | 77,844 | 18 | % | 70,797 | 17 | % | 60,607 | 18 | % | |||||||||||||||
| Floating-rate income | 44,837 | 10 | % | 38,819 | 9 | % | 32,107 | 10 | % | |||||||||||||||
| Alternative | 12,139 | 3 | % | 12,637 | 3 | % | 10,687 | 3 | % | |||||||||||||||
| Portfolio implementation | 110,840 | 25 | % | 99,615 | 23 | % | 71,426 | 21 | % | |||||||||||||||
| Exposure management | 77,871 | 18 | % | 86,976 | 21 | % | 71,572 | 21 | % | |||||||||||||||
| Total | $ | 439,303 | 100 | % | $ | 422,316 | 100 | % | $ | 336,380 | 100 | % | ||||||||||||
| (1) | Consolidated Eaton Vance Corp. See table on page 41 for managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Includes balanced and other multi-asset mandates. |
| (3) | Includes cash management mandates. |
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Eaton Vance Investment Affiliates
Eaton Vance provides advanced investment strategies and wealth management solutions to forward-thinking investors around the world. Through our five primary investment affiliates, we offer a diversity of investment approaches, encompassing bottom-up and top-down fundamental active management, responsible investing, systematic investing and customized implementation of client-specified portfolio exposures.
Fundamental active managers
History dating to 1924 | AUM: $179.3 billion(1)
| Equity | Alternative | Taxable Fixed Income | Tax-Advantaged/ Municipal Income | |||
| Dividend/Global Dividend | Commodity | Cash Management | ||||
| Emerging/Frontier Markets | Currency | Core Bond/Core Plus | Laddered Municipal | |||
| Equity Option | Global Macro | Emerging-Markets Debt | Municipal Income | |||
| Global Developed | Hedged Equity | Global | Floating Rate | |||
| Global ex U.S. | High Yield | High Yield | ||||
| Global ex U.S. Small-Cap | Multi-Asset | Inflation-Linked | National | |||
| Global Small-Cap | Asset Allocation | Investment-Grade Corporate | State Specific | |||
| Health Care | Balanced | Laddered Corporate | Opportunistic Municipal | |||
| Large-Cap Core | Global Diversified Income | Mortgage-Backed Securities | Tax-Advantaged Bond | |||
| Large-Cap Growth | Multi-Asset Credit | |||||
| Large-Cap Value | Floating-Rate Income | Multisector | ||||
| Multi-Cap Growth | Floating-Rate Loan | Preferred Securities | ||||
| Real Estate | Short Duration | |||||
| Small-Cap | Taxable Municipal | |||||
| Small/Mid-Cap | ||||||
| Tax-Managed | ||||||
Investment science in action
Founded in 1987 | AUM: $224.2 billion
| Equity | Alternative | Options | Income | |||
| Dividend | Commodity | Absolute Return | Enhanced Income | |||
| Emerging Markets | Covered Calls | |||||
| Global | Implementation | Defensive Equity | Exposure Management | |||
| Global ex U.S. | Centralized Portfolio Management |
Dynamic Hedged Equity | Policy Overlay Services | |||
| Responsible | Put Selling | |||||
| Tax-Managed | Custom CoreTM | |||||
| U.S. |
| (1) | Includes managed assets of Eaton Vance Investment Counsel, Eaton Vance Trust Company and Boston Management and Research. Also includes managed assets of Eaton Vance-sponsored funds and separate accounts managed by Hexavest and unaffiliated third-party advisers under Eaton Vance supervision. |
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Specialists in high-quality investing
Founded in 1969 | AUM: $23.4 billion(2)
| Equity | Fixed Income | |||||
| Large-Cap Growth | Core Bond | |||||
| Mid-Large Cap | Intermediate Duration | |||||
| Small-Cap | Short Duration | |||||
| SMID-Cap |
A global leader in responsible Investing
History dating to 1976 | AUM: $12.4 billion(2)(3)
| Active Equity | Equity Index | Alternative | Taxable Fixed Income | |||
| Emerging Markets | Global Energy | Absolute Return Bond | Core/Core Plus | |||
| Global ex U.S. | Global ex U.S. | Green Bond | ||||
| Global ex U.S. Small/Mid-Cap | Global Water | Multi-Asset | High Yield | |||
| Large-Cap | U.S. Large-Cap Core | Asset Allocation | Long Duration | |||
| Mid-Cap | U.S. Large-Cap Growth | Balanced | Short Duration/Ultra-Short | |||
| Small-Cap | U.S. Large-Cap Value | |||||
| U.S. Mid-Cap Core | Floating-Rate Income | Tax-Exempt Fixed Income | ||||
| Floating-Rate Loan | Municipal |
Top-down global equity managers
Founded in 2004 | AUM: $13.8 billion(4)
| Equity | ||||||
| Canadian | ||||||
| Emerging Markets | ||||||
| Global – All Country | ||||||
| Global – Developed | ||||||
| Global ex U.S. |
The following third-party organizations provide investment management services as sub-advisers to certain Eaton Vance- and Calvert-sponsored mutual funds and portfolios:
| Eaton Vance | Calvert | ||
| BMO Global Asset Management (Asia) Ltd. | Ameritas Investment Partners, Inc. | ||
| Goldman Sachs Asset Management, L.P. | Hermes Investment Management Limited | ||
| Oaktree Capital Management, L.P. | Milliman Financial Risk Management LLC | ||
| Richard Bernstein Advisors LLC |
| (2) | Consistent with the Company’s policies for reporting managed assets and flows of investment portfolios for which multiple Eaton Vance affiliates have management responsibilities, the managed assets of Atlanta Capital include the assets of Calvert Equity Fund, for which Atlanta Capital serves as sub-adviser. The total managed assets of Calvert, including assets sub-advised by other Eaton Vance affiliates, were $14.7 billion as of October 31, 2018. |
| (3) | Includes managed assets of Calvert-sponsored funds and separate accounts managed by unaffiliated third-party advisers under Calvert supervision. |
| (4) | Eaton Vance holds a 49 percent interest in Hexavest Inc., a Montreal-based investment adviser. Other than Eaton Vance-sponsored funds for which Hexavest is adviser or sub-adviser, the managed assets of Hexavest are not included in Eaton Vance’s consolidated totals. |
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Investment Vehicles
Our consolidated assets under management are broadly diversified by distribution channel and investment vehicle. The following table sets forth our consolidated assets under management by investment vehicle for the dates identified:
Consolidated Assets under Management by Investment Vehicle(1)
| October 31, | ||||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| (in millions) | 2018 | Total | 2017 | Total | 2016 | Total | ||||||||||||||||||
| Open-end funds(2) | $ | 102,426 | 24 | % | $ | 97,601 | 23 | % | $ | 74,721 | 22 | % | ||||||||||||
| Closed-end funds | 23,998 | 5 | % | 24,816 | 6 | % | 23,571 | 7 | % | |||||||||||||||
| Private funds(3) | 38,544 | 9 | % | 34,436 | 8 | % | 27,430 | 8 | % | |||||||||||||||
| Institutional separate accounts | 153,996 | 35 | % | 159,986 | 38 | % | 136,451 | 41 | % | |||||||||||||||
| High-net-worth separate accounts | 44,690 | 10 | % | 39,715 | 9 | % | 25,806 | 8 | % | |||||||||||||||
| Retail managed accounts | 75,649 | 17 | % | 65,762 | 16 | % | 48,401 | 14 | % | |||||||||||||||
| Total | $ | 439,303 | 100 | % | $ | 422,316 | 100 | % | $ | 336,380 | 100 | % | ||||||||||||
| (1) | Consolidated Eaton Vance Corp. See table on page 41 for managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Includes assets in NextShares funds. |
| (3) | Includes privately offered equity, fixed income and floating-rate income funds and collateralized loan obligation (CLO) entities. |
Open-end Funds
As of October 31, 2018, our open-end fund lineup included equity funds, floating-rate bank loan funds, taxable fixed income funds, state and national municipal income funds, alternative funds and multi-asset funds sold to U.S. and non-U.S. investors.
Our family of equity funds includes a broad range of fundamental active and systematic strategies in a variety of equity styles and market caps, managed both with and without consideration of shareholder tax effects, as well as Calvert-sponsored index funds. Assets under management in non-tax-managed active equity, tax-managed active equity and equity index funds totaled $33.6 billion, $7.2 billion and $2.4 billion, respectively, on October 31, 2018.
Since introducing our first floating-rate bank loan fund in 1989, we have consistently ranked as one of the largest managers of retail bank loan funds. Assets under management in open-end floating-rate bank loan funds totaled $25.2 billion on October 31, 2018.
Our taxable fixed income funds cover a broad range of fixed income asset classes, including mortgage-backed securities, high-grade bonds, high-yield bonds, multi-sector bonds, short- and ultra-short duration income, and cash instruments. Assets under management in open-end taxable income funds totaled $16.8 billion on October 31, 2018.
Our family of municipal income mutual funds is one of the broadest in the industry, with 13 national and 17 state-specific funds in 16 different states. As of October 31, 2018, we managed $10.0 billion in open-end municipal income fund assets.
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Our alternative funds include absolute return strategies and commodity- and currency-linked investments. We currently offer three absolute return funds in the U.S. and one outside the United States. Assets under management in open-end alternative funds totaled $9.5 billion on October 31, 2018.
The U.S. Charitable Gift Trust and its pooled income funds are designed to simplify the process of donating to qualified charities and to provide professional management of pools of donated assets. Assets under management in the U.S. Charitable Gift Trust and its pooled income funds, which are included in fund assets under management as described above, totaled $612.6 million at October 31, 2018.
Our Ireland- and Cayman Island-domiciled open-end funds offer a range of investment strategies to non-U.S. investors. At October 31, 2018, managed assets in funds sold outside the U.S., which are included in fund assets under management as described above, totaled $2.2 billion.
As of October 31, 2018, 66 of our U.S. mutual funds were rated 4 or 5 stars by MorningstarTM for at least one class of shares, including 28 five-star rated funds. A good source of performance-related information for our funds is 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.
Closed-end Funds
Our family of closed-end funds includes national and state-specific municipal bond, domestic and global equity, bank loan, multi-sector income and taxable income funds, three of which are term trusts. As of October 31, 2018, we managed $24.0 billion in closed-end fund assets, ranking as the third-largest manager of U.S. exchange-listed closed-end funds, according to Strategic Insight, a fund industry data provider.
Private Funds
Our private fund category consists primarily of privately offered equity funds designed to meet the diversification and tax-management needs of qualifying high-net-worth investors. We are recognized as a market leader for these types of privately offered equity funds, with $22.0 billion in assets under management as of October 31, 2018. Also included in private funds are equity, floating-rate bank loan and fixed income funds offered to institutional investors. Assets under management in these funds, which include cash instrument entities and collective trusts as well as leveraged and unleveraged loan funds, totaled $14.7 billion as of October 31, 2018. CLO entity assets included in the private fund category totaled $1.8 billion at October 31, 2018.
Institutional Separate Accounts
We serve a broad range of clients in the institutional marketplace, both in the U.S. and internationally, including government, corporate and union retirement plans, endowments and foundations, nuclear decommissioning trusts, asbestos litigation trusts, sovereign wealth funds and investment funds sponsored by others for which we serve as a sub-adviser. Our diversity of capabilities allows us to offer domestic and international institutional investors a broad spectrum of equity, fixed and floating-rate income, alternative and multi-asset strategies, as well as portfolio implementation and exposure management services.
We have used EVTC, a non-depository trust company, as a platform to launch a series of commingled funds tailored to meet the needs of smaller institutional clients. EVTC also affords us the opportunity to participate in qualified plan commingled investment platforms offered in the broker-dealer channel. In addition to investment management services, EVTC provides certain custody services and has obtained regulatory approval to provide institutional trustee services.
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Institutional separate account assets under management totaled $154.0 billion at October 31, 2018.
High-net-worth Separate Accounts
We offer high-net-worth and family office clients personalized investment counseling services through EVIC. At EVIC, investment counselors work directly with clients to establish long-term financial programs and implement strategies designed for achieving their objectives. The Company has been in this business since the founding of Eaton and Howard in 1924.
Also included in high-net-worth separate accounts are Custom Core equity portfolios managed by Parametric for family offices and high-net-worth individuals. In managing Custom Core accounts, Parametric seeks to match the returns of a client-specified equity benchmark and add incremental returns on an after-tax basis and/or to reflect the investment restrictions and exposure tilts specified by the client. Parametric’s offerings for the high-net-worth and family office market also include investment programs that utilize option overlay strategies to help clients customize their risk and return profiles through the use of disciplined options strategies.
High-net-worth separate account assets under management totaled $44.7 billion at October 31, 2018, with $40.2 billion managed by Parametric and $4.5 billion by EVIC.
Retail Managed Accounts
Retail managed accounts are separately managed accounts offered through the retail intermediary distribution channel. We entered this business in the 1990s by offering Eaton Vance Management-managed municipal bond separate accounts, and later expanded our offerings with the addition of Atlanta Capital- and Parametric-managed account strategies. We now participate in over 50 retail managed account broker-dealer programs.
Included in our retail managed account offerings is our Custom Beta suite of separately managed account strategies, which encompasses Parametric Custom Core equity and Eaton Vance Management laddered municipal bond and corporate bond strategies. According to Cerulli Associates, an investment research firm, Eaton Vance ranked as the third-largest manager of retail managed account assets as of September 30, 2018. Our retail managed account assets under management totaled $75.6 billion at October 31, 2018.
Investment Management and Related Services
Our direct and indirect wholly-owned subsidiaries Eaton Vance Management and BMR are investment advisers to all Eaton Vance- and Parametric-branded funds, and Calvert is investment adviser to the Calvert funds. Although the specifics of our fund advisory agreements vary, the basic terms are similar. Pursuant to the advisory agreements, Eaton Vance Management, BMR or Calvert provides overall investment management services to each internally advised fund, subject, in the case of funds that are registered under the Investment Company Act of 1940 (1940 Act) (Registered Funds), to the supervision of each fund’s board of trustees or directors (together, trustees) in accordance with the fund’s investment objectives and policies. Parametric, Atlanta Capital, Hexavest and unaffiliated advisory firms act as sub-adviser to Eaton Vance Management, BMR or Calvert for certain funds.
Eaton Vance Management provides administrative services, including personnel and facilities, necessary for the operation of all Eaton Vance- and Parametric-branded funds, and Calvert provides such services for the Calvert Funds, subject to the oversight of each fund’s board of trustees. For certain funds, administrative services are provided under comprehensive management agreements that also include investment advisory
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services; other funds have separate administrative services agreements. Administrative services include recordkeeping, preparing and filing documents required to comply with federal and state securities laws, legal, fund administration and compliance services, supervising the activities of the funds’ custodians and transfer agents, providing assistance in connection with the funds’ shareholder meetings and other administrative services, including providing office space and office facilities, equipment and personnel that may be necessary for managing and administering the business affairs of the funds. Each agreement remains in effect indefinitely, subject to, in the case of Registered Funds, annual approval by each fund’s board of trustees. The funds generally bear all expenses associated with their operation and the issuance and redemption or repurchase of their securities, except for the compensation of trustees and officers of the fund who are employed by us. For certain sponsored funds, Eaton Vance Management, BMR or Calvert waives a portion of its management fee and/or pays some expenses of the fund.
For Registered Funds, a majority of the independent trustees (i.e., those unaffiliated with us or any adviser controlled by us and deemed non-interested under the 1940 Act) must review and approve the investment advisory and administrative agreements annually. The fund trustees generally may terminate these agreements upon 30 to 60 days’ notice without penalty. Shareholders of Registered Funds generally must approve amendments to the investment advisory agreements.
Eaton Vance Management has entered into an investment advisory and administrative agreement with the U.S. Charitable Gift Trust. In addition, the U.S. Charitable Gift Trust and its pooled income funds have distribution agreements with EVD that provide for reimbursement of the costs of fundraising and servicing donor accounts.
Either Eaton Vance Management, Parametric, Atlanta Capital, Calvert, BMR or EVIC has entered into an investment advisory agreement for each separately managed account and retail managed account program that sets forth the account’s investment objectives and fee schedule, and provides for management of assets in the account in accordance with the stated investment objectives. Our separate account portfolio managers may assist clients in formulating investment strategies.
EVTC is the trustee for each collective investment trust and is responsible for designing and implementing each trust’s investment program or overseeing sub-advisers managing each trust’s investment portfolio. As trustee, EVTC also provides certain administrative and accounting services to each trust. For services provided under each trust’s declaration of trust, EVTC receives a monthly fee based on the average daily net assets of the trust.
Investment counselors and separate account portfolio managers employed by our subsidiaries make investment decisions for the separate accounts we manage, tailoring portfolios to the needs of particular clients. We generally receive investment advisory fees for separate accounts quarterly, based on the value of the assets managed on a particular date, such as the first or last calendar day of a quarter, or, in some instances, on the average assets for the period. These advisory contracts are generally terminable upon 30 to 60 days’ notice without penalty.
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The following table shows our management fees earned for the fiscal years ended October 31, 2018, 2017 and 2016:
| Years Ended October 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Investment advisory fees: | ||||||||||||
| Funds | $ | 963,365 | $ | 862,178 | $ | 760,137 | ||||||
| Separate accounts | 444,206 | 390,688 | 342,097 | |||||||||
| Administrative fees: | ||||||||||||
| Funds | 74,325 | 65,275 | 48,964 | |||||||||
| Total | $ | 1,481,896 | $ | 1,318,141 | $ | 1,151,198 | ||||||
Marketing and Distribution
We market and distribute shares of Eaton Vance-, Parametric- and Calvert-branded funds domestically through EVD. EVD sells fund shares through a network of financial intermediaries, including national and regional broker-dealers, banks, registered investment advisors, insurance companies and financial planning firms. The Eaton Vance International (Ireland) Funds are Undertakings for Collective Investments in Transferable Securities (UCITS) funds domiciled in Ireland and sold by EVMI through certain intermediaries and directly to investors who are citizens of the U.K., other member nations of the European Union (E.U.) and other countries outside the United States. The Eaton Vance International (Cayman Islands) Funds are Cayman Islands-domiciled funds sold by EVD and EVMI through intermediaries to non-U.S. investors.
Although the firms in our domestic retail distribution network have each entered into selling agreements with EVD, these agreements (which generally are terminable by either party) do not legally obligate the firms to sell any specific amount of our investment strategies and services. EVD currently maintains a sales force of approximately 120 external and internal wholesalers who work closely with financial advisors in the retail distribution network to assist in placing Eaton Vance-, Parametric- and Calvert-branded funds.
Certain sponsored mutual funds have adopted distribution plans as permitted by the 1940 Act that provide for the fund to pay EVD distribution fees for the sale and distribution of shares and service fees for personal and/or shareholder account services (12b-1 fees). Each distribution plan and distribution agreement with EVD for the Registered Funds is initially approved and its subsequent continuance must be approved annually by the board of trustees of the respective funds, including a majority of the independent trustees.
EVD makes payments to financial intermediaries that provide marketing support, shareholder recordkeeping and transaction processing, and/or administrative services to the Eaton Vance-, Parametric- and Calvert-branded mutual funds. Payments are typically based on fund net assets, fund sales and/or number of accounts attributable to that financial intermediary. Registered Funds may pay all or a portion of shareholder recordkeeping and transaction processing and/or administrative services provided to their shareholders. Financial intermediaries also may receive payments from EVD in connection with educational or due diligence meetings that include information concerning our funds.
EVD currently sells Eaton Vance-, Parametric- and Calvert-branded mutual funds under six primary pricing structures: front-end load commission (Class A); level-load commission (Class C); Calvert variable product pricing (Class F); institutional no-load (Class I, Class R6, and Institutional Class, referred to herein as Class I);
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retail no-load (Investor Class and Advisers Class, referred to herein as Class N); and retirement plan level-load (Class R).
For Class A shares, the shareholder may be required to pay a sales charge to the selling broker-dealer of up to five percent and an underwriting commission to EVD of up to 75 basis points of the gross value of the shares sold. Under certain conditions, we waive the sales load on Class A shares and the shares are sold at net asset value. EVD generally receives (and then pays to authorized firms after one year) a distribution and service fee of up to 30 basis points of average net assets annually on Class A shares. In recent years, most of the Company’s sales of Class A shares have been made on a load-waived basis through various fee-based programs. EVD does not receive underwriting commissions on such sales.
For Class C shares, the shareholder pays no front-end commissions but may be subject to a contingent deferred sales charge on redemptions made within the first twelve months of purchase. EVD pays a commission and the projected first year service fees to the dealer at the time of sale. The fund makes monthly distribution plan and service fee payments to EVD at an annual rate of up to 75 basis points and 25 basis points, respectively, of average net assets of the Class. EVD retains the distribution and service fees paid to EVD for the first twelve months and pays the distribution and service fees to the dealer after one year.
Class F shares of Calvert variable products are offered at net asset value and are not subject to any sales charges. The Company receives, and then generally pays to dealers, distribution fees of up to 25 basis points of average daily net assets annually.
Class I shares are offered at net asset value and are not subject to any sales charges, underwriter commissions, distribution fees or service fees. For designated Class I shares, a minimum investment of $250,000 or higher is normally required. Designated Institutional Class shares are normally subject to a minimum investment of $50,000. Sales of R6 shares are limited to participating retirement plans and certain other investors.
Class N shares are offered at net asset value and are not subject to any sales charges or underwriter commissions. EVD receives (and then pays to authorized firms after one year) combined distribution and service fees of 25 basis points of average net assets annually.
Class R shares are offered at net asset value with no front-end sales charge. The Company receives, and then generally pays to dealers, distribution fees of 25 basis points and service fees of 25 basis points of average net assets annually.
We also sponsor unregistered equity funds that are privately placed by EVD, as placement agent, and by various sub-agents to whom EVD and the subscribing shareholders make sales commission payments. The privately placed equity funds are managed by Eaton Vance Management and BMR.
The marketing and distribution of investment strategies to institutional and high-net-worth clients is subsidiary-specific. Eaton Vance Management has institutional sales, consultant relations and client service teams dedicated to supporting the U.S. marketing and sales of strategies managed by Eaton Vance Management, Calvert and Hexavest. Hexavest maintains its own marketing and distribution team to service institutional clients in Canada. Parametric and Atlanta Capital each maintain separate marketing and distribution teams to sell their respective investment strategies to U.S.-based institutions and high-net-worth investors. Parametric also maintains a dedicated institutional marketing and
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distribution team focused on the Australian and New Zealand markets. EVMI is otherwise responsible for the institutional marketing and distribution of all Eaton Vance Management-, Parametric-, Atlanta Capital-, Calvert- and Hexavest-advised strategies to institutions outside of North America.
During the fiscal year ended October 31, 2018, there were no customers that provided over 10 percent of our total revenue.
Regulation
Eaton Vance Management, Parametric, Atlanta Capital, Calvert, BMR, EVIC, EVMI and EVAIL are each registered with the SEC under the Advisers Act. The Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary duties, recordkeeping requirements, operational requirements and disclosure obligations. Most Eaton Vance-, Parametric- and Calvert-branded funds are registered with the SEC under the 1940 Act. The 1940 Act imposes additional obligations on fund advisers, including governance, compliance, reporting and fiduciary obligations relating to the management of funds. Except for privately offered funds and exchange-listed funds exempt from registration, each U.S. fund is also required to make notice filings with most states and U.S. territories where it is offered for sale. Virtually all aspects of our investment management business in the U.S. are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to benefit shareholders of the funds and separate account clients, and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict us from carrying on our investment management business in the event we fail to comply with such laws and regulations. In such event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on Eaton Vance Management, Parametric, Atlanta Capital, Calvert, BMR, EVIC, EVMI and EVAIL engaging in the investment management business for specified periods of time, the revocation of any such company’s registration as an investment adviser, and other censures or fines.
Under a final rule and interpretive guidance issued by the Financial Stability Oversight Council (FSOC) in April 2012, certain non-bank financial companies have been designated for the Federal Reserve’s supervision as systemically important financial institutions (SIFIs). Additional non-bank financial companies, which may include large asset management companies such as us, may be designated as SIFIs in the future. If the Company were designated a SIFI, it would be subject to enhanced prudential measures, which could include capital and liquidity requirements, leverage limits, enhanced public disclosures and risk management requirements, annual stress testing by the Federal Reserve, credit exposure and concentration limits, supervisory and other requirements. These heightened regulatory obligations could, individually or in the aggregate, adversely affect the Company’s business and operations.
Eaton Vance Management, Parametric and BMR are registered with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) as Commodity Pool Operators and Commodity Trading Advisors; other subsidiaries of the Company claim exemptions from registration. In August 2013, the CFTC adopted rules for operators of registered mutual funds that are subject to registration as Commodity Pool Operators, generally allowing such funds to comply with SEC disclosure, reporting and recordkeeping rules as the means of complying with CFTC’s similar requirements. These CFTC rules do not, however, relieve registered Commodity Pool Operators from compliance with applicable anti-fraud provisions and certain performance reporting and recordkeeping requirements. The Company may incur ongoing costs associated with monitoring compliance with these requirements, including, but not limited to, CFTC and NFA registration and exemption obligations and the periodic reporting requirements of Commodity Pool Operators and Commodity Trading Advisors.
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Our mutual funds, privately offered funds and separate accounts that trade CFTC-regulated instruments are also regulated by the CFTC. In the event that Eaton Vance Management, Parametric or BMR fails to comply with applicable requirements, the CFTC may suspend or revoke its registration, prohibit it from trading or doing business with registered entities, impose civil penalties, require restitution and seek fines or imprisonment for criminal violations. In the event that clients on whose behalf we trade CFTC-regulated instruments fail to comply with requirements applicable to their trading, they would be subject to the foregoing remedies excluding suspension of license (provided they are not registered). In addition, to the extent any of the entities trade on a futures exchange or Swap Execution Facility, they would be subject to possible sanction for any violation of the facility’s rules.
EVTC is registered as a non-depository Maine Trust Company and is subject to regulation by the State of Maine Bureau of Financial Institutions (Bureau of Financial Institutions). EVTC is subject to certain capital requirements, as determined by the Examination Division of the Bureau of Financial Institutions. At periodic intervals, regulators from the Bureau of Financial Institutions examine the Company’s and EVTC’s financial condition as part of their legally prescribed oversight function. There were no violations by EVTC of these capital requirements in fiscal 2018 or prior years.
EVD is registered as a broker-dealer under the Exchange Act and is subject to regulation by the Financial Industry Regulatory Authority (FINRA), the SEC and other federal and state agencies. EVD is subject to the SEC’s net capital rule designed to enforce minimum standards regarding the general financial condition and liquidity of broker-dealers. Under certain circumstances, this rule may limit our ability to make withdrawals of capital and receive dividends from EVD. EVD’s regulatory net capital consistently exceeded minimum net capital requirements during fiscal 2018. The securities industry is one of the most highly regulated in the United States, and failure to comply with related laws and regulations can result in the revocation of broker-dealer licenses, the imposition of censures or fines, and the suspension or expulsion from the securities business of a firm, its officers or employees.
EVMI is regulated by the FCA as an authorized firm under a MiFID license to conduct regulated business. EVMI’s primary business purpose is to distribute investment strategies and services in Europe and other non-U.S. markets. Through its Frankfurt branch, EVMI also provides discretionary investment management services. Under the Financial Services and Markets Act 2000 (FSMA), EVMI is subject to certain liquidity and capital requirements. Such requirements may limit our ability to make withdrawals of capital from EVMI. In addition, failure to comply with such requirements could jeopardize EVMI’s approval to conduct business in the United Kingdom. There were no violations by EVMI of the liquidity and capital requirements in fiscal 2018 or prior years.
EVAI is regulated by the Central Bank of Ireland as a UCITS management company. EVAI’s primary business purpose is to provide management services to Eaton Vance International (Ireland) Funds Plc. EVAI is subject to certain liquidity and capital requirements, which may limit our ability to make withdrawals of capital from EVAI. There were no violations by EVAI of the liquidity and capital requirements in fiscal 2018 or prior years.
EVMIA is regulated by the MAS. EVMIA’s primary business purpose is to conduct investment management activities and distribute investment strategies. Under MAS, EVMIA is subject to certain liquidity and capital requirements, which may limit our ability to make withdrawals of capital from EVMIA. There were no violations by EVMIA of the liquidity and capital requirements in fiscal 2018 or prior years.
EVAIL is regulated by the FCA as a Full Scope Alternative Investment Fund Manager. EVAIL’s primary business is conducting discretionary investment management services. Under FSMA, EVAIL is subject to certain liquidity
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and capital requirements, which may limit our ability to make withdrawals of capital from EVAIL. Failure to comply with such requirements could jeopardize EVAIL’s approval to conduct business in the United Kingdom. There were no violations by EVAIL of the liquidity and capital requirements in fiscal 2018.
Our officers, directors and employees may from time to time own securities that are held by one or more of the funds and separate accounts we manage. Our internal policies with respect to individual investments by investment professionals and other employees with access to investment information require prior clearance of most types of transactions and reporting of all securities transactions, and restrict certain transactions to seek to avoid possible conflicts of interest. All employees are required to comply with all prospectus restrictions and limitations on purchases, sales or exchanges of shares of our mutual funds, and to pre-clear purchases and sales of shares of our closed-end funds.
Competition
The investment management business is a highly competitive global industry. We are subject to substantial competition in each of our principal investment classifications and distribution channels. There are few barriers to entry for new firms, and consolidation within the industry continues to alter the competitive landscape. According to the Investment Company Institute, there were approximately 850 fund sponsors at the end of calendar 2017 that competed in the U.S. mutual fund market. We compete with these firms, many of which have substantially greater resources, on the basis of investment performance, diversity of offered strategies, distribution capability, scope and quality of service, fees charged, reputation and the ability to develop new investment strategies and services to meet the changing needs of investors.
In recent years, investor demand for passive investment strategies, such as those employed by index mutual funds and index exchange-traded funds (ETFs), has outpaced the demand for higher-fee actively-managed investment strategies. Across many asset classes, actively-managed strategies as a whole are experiencing net outflows. While our Custom Beta lineup of rules-based separate managed accounts, Calvert index funds and other passive strategies are positioned to benefit from market demand for passive investment strategies, a large majority of our management fee revenue is derived from active strategies. The continuing shift in market demand toward index funds and other passive strategies reduces opportunities for active managers and may accelerate fee compression.
In the retail fund channel, we compete with other mutual fund management, distribution and service companies that distribute through affiliated and unaffiliated sales forces, broker-dealers and direct sales to the public. According to the Investment Company Institute, at the end of calendar 2017 there were over 9,700 registered open-end funds whose shares were being offered to the public in the United States. We rely primarily on intermediaries to distribute our funds, and pursue sales relationships with all types of intermediaries to broaden our distribution network. A failure to maintain strong relationships with intermediaries that distribute our funds could adversely affect our gross and net sales, assets under management, revenue and financial condition.
We are also subject to substantial competition from other investment management firms in the retail managed account channel. Sponsors of retail managed account programs limit the number of approved managers within their programs, and firms compete based on investment performance and other considerations to win and maintain positions in these programs.
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In the high-net-worth and institutional separate account channels, we compete with other investment management firms based on the breadth of investment strategies and services offered, investment performance, strength of reputation, price and the scope and quality of client service.
Employees
On October 31, 2018, we and our controlled subsidiaries had 1,764 full-time and part-time employees. On October 31, 2017, the comparable number was 1,638.
Available Information
We make available free of charge our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13 and 15(d) of the Exchange Act as soon as reasonably practicable after such filing has been made with the SEC. Reports may be viewed and obtained on our website at www.eatonvance.com, or by calling Investor Relations at 617-482-8260. We have included our website address in this Annual Report on Form 10-K as inactive textual reference only. Information on our website is not incorporated by reference into this Annual Report on Form 10-K.
We are subject to substantial competition in all aspects of our investment management business. Our funds and separate accounts compete against a large number of investment strategies and services sold to the public by investment management companies, investment dealers, banks, insurance companies and others. Many institutions we compete against have greater financial resources than us, and there are few barriers to entry. We compete with these firms on the basis of investment performance, diversity of offerings, distribution capability, scope and quality of services, reputation and the ability to develop new investment strategies and services to meet the changing needs of investors. To the extent that current or potential customers decide to invest in strategies sponsored by our competitors, the sales of our sponsored strategies, as well as our market share, revenue and net income, could decline. Our actively managed investment strategies compete not only against other active strategies, but also against similarly positioned index strategies. The continuing shift in market demand toward index funds and other passive strategies reduces opportunities for active managers and may accelerate fee compression as active managers reduce their fees to compete with lower cost passive strategies. To the extent that trend continues, our business could be adversely affected.
The investment management industry is highly competitive and investment management customers are increasingly fee sensitive. In the event that competitors charge lower fees for substantially similar strategies and services, we may be forced to compete increasingly on the basis of price to attract and retain customers. Rules and regulations applicable to Registered Funds provide, in substance, that each investment advisory agreement between a fund and its investment adviser continues in effect from year to year only if its continuation is approved at least annually by the fund’s board of trustees. Periodic review of fund advisory agreements could result in a reduction in the Company’s advisory fee revenues from Registered Funds. Fee reductions on existing or future strategies and services could have an adverse impact on our revenue and net income.
The inability to access clients through intermediaries could have a material adverse effect on our business. Our ability to market investment strategies and services is highly dependent on access to the various distribution systems of national and regional securities dealer firms, which generally offer competing strategies and services that could limit the distribution of our offerings. There can be no assurance that we will be able to
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retain access to these intermediaries. The inability to have such access could have a material adverse effect on our business. To the extent that existing or potential customers, including securities broker-dealers, decide to invest in or broaden distribution relationships with our competitors, the sales of our strategies and services, as well as our market share, revenue and net income, could decline. Certain intermediaries with which we conduct business charge the Company fees to maintain access to their distribution networks. If we choose not to pay such fees, our ability to distribute our strategies and services through those intermediaries would be limited.
Our investment advisory agreements are subject to termination on short notice or non-renewal. We derive almost all of our revenue from management fees, distribution income and service fees received from managed funds and separate accounts. As a result, we are dependent upon management contracts, administrative contracts, distribution contracts, underwriting contracts and/or service contracts under which these fees are paid. Generally, these contracts are terminable upon 30 to 60 days’ notice without penalty. If material contracts are terminated, not renewed or amended to reduce fees, our financial results could be adversely affected.
Our assets under management, which affect revenue, are subject to significant fluctuations. Our major sources of revenue, including investment advisory, administrative, distribution and service fees, are generally calculated as percentages of assets under management. Fee rates for our investment strategies and services generally vary by investment mandate (e.g., equity, fixed income, floating-rate income, alternative, portfolio implementation or exposure management services) and investment vehicle (e.g., fund or separate account). An adverse change in asset mix by mandate or vehicle, independent of our level of assets under management, may result in a decrease in our overall average effective fee rate. Any decrease in the level of our assets under management generally would reduce our revenue and net income. Assets under management could decrease due to, among other things, a decline in securities prices, a decline in the sales of our investment offerings, an increase in open-end fund redemptions or client withdrawals, repurchases of, or other reductions in, closed-end fund shares outstanding, or reductions in leverage used by investment vehicles. Adverse market conditions and/or lack of investor confidence in the financial markets could lead to a decrease in investor risk tolerance. A decrease in investor risk tolerance could result in investors withdrawing from markets or decreasing their rate of investment, thereby reducing our overall assets under management and adversely affecting our revenue, earnings and growth prospects. Changes in investor risk tolerance could also result in investor allocation away from higher-fee strategies to lower-fee strategies, which could adversely affect our revenue and earnings. Our overall assets under management may not change in tandem with overall market conditions, as changes in our assets under management may lag improvements or declines in the overall market due to mix effects and investment performance.
Poor investment performance of the assets we manage could affect our sales or reduce the amount of assets under management, adversely affecting revenue and net income. The performance of the assets we manage is critical to our success. Poor investment performance on an absolute basis or as compared to third-party benchmarks or competitors could lead to a decrease in sales and stimulate higher redemptions, thereby lowering the amount of assets under management and reducing the investment advisory fees we earn. A decline in investment performance of any investment franchise could have a material adverse effect on the level of assets under management, revenue and net income of that franchise. Past or present performance in the investment strategies we manage is not indicative of future performance.
Our clients can withdraw the assets we manage on short notice, making our future client and revenue base unpredictable. Our open-end fund clients generally may redeem their investments in these funds each business day without prior notice. While not subject to daily redemption, closed-end funds that we manage
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may shrink in size due to repurchases of shares in open-market transactions or pursuant to tender offers, or in connection with distributions in excess of realized returns. Institutional and individual separate account clients can terminate their relationships with us generally at any time. In a declining stock market, the pace of open-end fund redemptions could accelerate. Poor performance of the assets we manage relative to other asset management firms could result in lower purchases and increased redemptions of open-end fund shares, and the loss of institutional and individual separate accounts. The decrease in revenue that could result from any of these events could have a material adverse effect on our business.
We could be adversely affected by counterparty or client defaults. As we have seen in periods of significant market volatility, the deteriorating financial condition of one financial institution may materially and adversely affect the performance of others. We, and the funds and accounts we manage, have exposure to many different counterparties, and routinely execute transactions with counterparties across the financial industry. We, and the funds and accounts we manage, may be exposed to credit, operational or other risk in the event of a default by a counterparty or client, or in the event of other unrelated systemic market failures.
Our success depends on key personnel and our financial performance could be negatively affected by the loss of their services. Our success depends upon our ability to attract, retain and motivate qualified portfolio managers, analysts, investment counselors, sales and management personnel, and other key professionals, including our executive officers. Our key employees generally do not have employment contracts and may voluntarily terminate their employment at any time. Certain senior executives and the non-employee members of our Board of Directors are subject to our mandatory retirement policy at age 65 and age 74, respectively. The loss of the services of key personnel or our failure to attract replacement or additional qualified personnel could negatively affect our financial performance. An increase in compensation to attract or retain personnel could result in a decrease in net income.
Our expenses are subject to fluctuations that could materially affect our operating results. Our results of operations are dependent on our level of expenses, which can vary significantly from period to period. Our expenses may fluctuate as a result of, among other things, variations in the level of compensation, expenses incurred to support distribution of our investment strategies and services, expenses incurred to develop new strategies and services, expenses incurred to enhance our technology, compliance and other infrastructure, impairments of intangible assets or goodwill, and the impact of inflation. Increases in our level of expenses, or our inability to reduce our level of expenses when necessary, could materially affect our operating results.
Our business is subject to operational risk. In the management and administration of funds and client accounts, we are subject to the risk that we commit errors that cause the Company to incur financial losses and damage our reputation. Because they involve large numbers of accounts and operate at generally low fee rates, our portfolio implementation and exposure management services businesses may be particularly susceptible to losses from operational or trading errors.
We could be adversely affected by changes in tax laws. Changes in U.S. tax policy may affect us to a greater degree than many of our competitors because we manage significant assets in funds and separate accounts with an after-tax return objective. The Tax Cuts and Jobs Act enacted into U.S. law in December 2017 (2017 Tax Act) included a permanent reduction in the corporate income tax rate. This change in future tax rates caused the carrying value of our deferred tax assets to be lowered. Issuance of additional technical guidance related to the 2017 Tax Act may also pose future risk to our assets under management.
Exposure to additional tax liabilities could have a material impact on our financial condition, results of operations and/or liquidity. Tax authorities may disagree with certain positions we take and assess additional
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taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our financial statements. We are subject to ongoing tax audits in various jurisdictions, including several states. Changes in tax laws or tax rulings could materially affect our effective tax rate.
Our reputation could be damaged. We have built a reputation of high integrity, prudent investment management and superior client service. Our reputation is extremely important to our success. Any damage to our reputation could result in client withdrawals from funds or separate accounts that are advised by us and ultimately impede our ability to attract and retain key personnel. The loss of either client relationships or key personnel due to damage to our reputation could reduce the amount of assets under management and cause us to suffer a loss in revenue and a reduction in net income. Increasingly, we must manage actual and potential conflicts of interest, including situations where our services to a particular client conflict, or are perceived to conflict, with the interests of another client or our affiliates. Failure to adequately address or disclose potential conflicts of interest could adversely affect our reputation, results of operations and business prospects.
Success of our NextShares initiative is highly uncertain. In recent years, the Company has devoted substantial resources to the development of NextShares, a new type of actively managed fund designed to provide better performance for investors. Broad market adoption and commercial success requires the development of expanded distribution, the launch of NextShares by other fund sponsors and acceptance by market participants, which cannot be assured.
Support provided to developing new strategies and services may reduce fee income, increase expenses and expose us to potential loss on invested capital. We may support the development of new investment offerings by waiving all or a portion of the fees we receive, by subsidizing expenses or by making seed capital investments. Seed investments utilize Company capital that would otherwise be available for general corporate purposes and expose us to capital losses to the extent that realized investment losses are not offset by hedging gains. The risk of loss may be greater for seed capital investments that are not hedged, or if an intended hedge does not perform as expected. Failure to have or devote sufficient capital to support new investment offerings could have an adverse impact on our future growth.
We may need to raise additional capital or refinance existing debt in the future, and resources may not be available to us in sufficient amounts or on acceptable terms. Significant future demands on our capital include contractual obligations to service our debt, satisfy the terms of non-cancelable operating leases and purchase non-controlling interests in our majority-owned subsidiaries as described more fully in Contractual Obligations in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K and in Note 10 in Item 8 of this Annual Report on Form 10-K. Although we believe our existing liquid assets, cash flows from operations and borrowing capacity under our credit facility are sufficient to meet our current and forecasted operating cash needs, our ability to satisfy our long-term contractual obligations may be dependent on our ability to access capital markets. Our ability to access capital markets efficiently 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.
We could be subject to losses and reputational harm if we, or our agents, fail to properly safeguard sensitive and confidential information or as a result of cyber attacks. We are dependent on the effectiveness of our information and cyber security policies, procedures and capabilities to protect our computer and
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telecommunications systems and the data that resides in, or is transmitted through, such systems. As part of our normal operations, we maintain and transmit confidential information about our clients and employees as well as proprietary information relating to our business operations. We maintain a system of internal controls designed to provide reasonable assurance that fraudulent activity, including misappropriation of assets, fraudulent financial reporting and unauthorized access to sensitive or confidential data, is either prevented or detected on a timely basis. Nevertheless, all technology systems remain vulnerable to unauthorized access and may be corrupted by cyber attacks, computer viruses or other malicious software code, the nature of which threats are constantly evolving and becoming increasingly sophisticated. In addition, authorized persons could inadvertently or intentionally release confidential or proprietary information. Although we take precautions to password protect and encrypt our mobile electronic hardware, if such hardware is stolen, misplaced or left unattended, it may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions by us. Breach or other failure of our technology systems, including those of third parties with which we do business, or failure to timely and effectively identify and respond to any such breach or failure, could result in the loss of valuable information, liability for stolen assets or information, remediation costs to repair damage caused by the incident, additional security costs to mitigate against future incidents and litigation costs resulting from the incident. Moreover, loss of confidential customer identification information could harm our reputation, result in the termination of contracts by our existing customers and subject us to liability under state, federal and international laws that protect confidential personal data, resulting in increased costs, loss of revenues and substantial penalties. Effective in May 2018, the E.U. significantly increased the potential penalties for noncompliance with requirements for the handling and maintenance of personal and sensitive data concerning customers and employees. Our failure to comply with these requirements could result in penalties of up to four percent of our global revenues, regulatory action and reputational risk. Recent well-publicized security breaches at other companies have led to enhanced government and regulatory scrutiny of the measures taken by companies to protect against cyber attacks, and may in the future result in heightened cyber security requirements, including additional regulatory expectations for oversight of vendors and service providers.
Failure to maintain adequate infrastructure could impede our productivity and ability to support business growth. Our infrastructure, including our technological capacity, data centers and office space, is vital to the operations and competitiveness of our business. The failure to maintain an infrastructure commensurate with the size and scope of our business, including any expansion, could impede our productivity and growth, which could result in a decline in our earnings.
Failure to maintain adequate business continuity plans could have a material adverse impact on us and the investment strategies and services we offer. Significant portions of our business operations and those of our critical third-party service providers are concentrated in a few geographic areas, including Boston, Massachusetts and Seattle, Washington. Critical operations that are geographically concentrated in Boston and/or Seattle include trading operations, information technology, fund administration, and custody and portfolio accounting services for the Company’s investment offerings. Should we, or any of our critical service providers, experience a significant local or regional disaster or other business continuity problem, our continued success will depend in part on the safety and availability of our personnel, our office facilities and the proper functioning of our computer, telecommunication and other related systems and operations. The failure by us, or any of our critical service providers, to maintain updated adequate business continuity plans, including backup facilities, could impede our ability to operate in the event of a disruption, which could cause our earnings to decline. We have developed various backup systems and contingency plans but cannot be assured that they will be adequate in all circumstances that could arise or that material disruptions will not occur. In addition, we rely to varying degrees on outside vendors for disaster contingency support, and we cannot be assured that these vendors will be able to perform in an adequate and timely manner. If we, or any
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of our critical service providers, are unable to respond adequately to such an event in a timely manner, we may be unable to continue our business operations, which could lead to a damaged reputation and loss of customers that results in a decrease in assets under management, lower revenues and reduced net income.
We pursue growth in the United States and abroad in part through acquisitions, which exposes us to risks inherent in assimilating new operations, expanding into new jurisdictions and executing on new development opportunities. Our growth strategy is based in part on the selective development or acquisition of asset management or related businesses that we believe will add value to our business and generate positive net returns. This strategy may not be effective, and failure to successfully develop and implement such a strategy may decrease earnings and harm the Company’s competitive position. We cannot guarantee that we will identify and consummate any such transactions on acceptable terms or have sufficient resources to accomplish such a strategy. In addition, any strategic transaction can involve a number of risks, including additional demands on our staff; unanticipated problems regarding integration of operating facilities, technologies and new employees; and the existence of liabilities or contingencies not disclosed to or otherwise known by us prior to closing a transaction. As a result, the Company may not be able to realize net benefits from such transactions. In addition, we may be required to spend additional time or money on integration that would otherwise be spent on the development of our business.
Expansion into international markets and the introduction of new investment strategies and services increases our operational, regulatory and other risks. We continue to increase the scope of our investment offerings and the scale of our international business activities. As a result, we face increased operational, regulatory, compliance and reputational risks. The failure of our compliance and internal control systems to properly mitigate such additional risks, or of our operating infrastructure to support such expansion, could result in operational failures and regulatory fines or sanctions. Our operations in the U.K., the E.U., Australia, Singapore and other jurisdictions are subject to significant compliance, disclosure and other obligations. We incur additional costs to satisfy the requirements of the E.U. Directive on UCITS and other E.U. directives (together, the E.U. Directives). Compliance requirements relating to the E.U. Directives may also limit our operating flexibility and affect our ability to expand in European markets. Activity in international markets also exposes us to fluctuations in currency exchange rates, which may adversely affect the U.S. dollar value of revenues, expenses and assets associated with our business activities outside the United States. Actual and anticipated changes in current exchange rates may also adversely affect international demand for our investment strategies and services, most of which represent investments primarily in U.S. dollar-based assets. Because certain of our costs to support international business activities are based in local currencies, the profitability of such activities in U.S. dollar terms may be adversely affected by a weakening of the U.S. dollar versus other currencies in which we derive significant revenues.
The impact of the U.K.’s exit from the E.U. (Brexit) on the Company’s business operations in the U.K. and Europe is unknown, and will vary depending on the final terms of the impending separation agreement. Ongoing changes in the E.U.’s regulatory framework applicable to the Company’s operations, including Brexit as well as any other changes in the composition of the E.U.’s member states, may add complexity to the Company’s global operations, impede expansion and/or impose additional risks.
Legal and regulatory developments affecting the investment industry could increase our regulatory costs and/or reduce our revenues. Our business is subject to complex and extensive regulation by various regulatory authorities in jurisdictions around the world. This regulatory environment may be altered without notice by new laws or regulations, revisions to existing regulations or new interpretations or guidance. Global financial regulatory reform initiatives may result in more stringent regulation, and changes in laws or regulations and their application to us could have a material adverse impact on our business, our profitability and mode of
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operations. In recent years, regulators in both the United States and abroad have increased oversight of the financial sector of the economy. Some of the newly adopted and proposed regulations are focused directly on the investment management industry, while others are more broadly focused, but affect our industry. It is uncertain how regulatory trends will be affected by current and future political developments.
Under a final rule and interpretive guidance issued by FSOC, certain non-bank financial institutions have been designated for the Federal Reserve’s supervision as SIFIs. Additional non-bank financial companies, which may include large asset management companies such as us, may be designated as SIFIs in the future. If we are designated a SIFI, we would be subject to enhanced prudential measures, which could include capital and liquidity requirements, leverage limits, enhanced public disclosures and risk management requirements, annual stress testing by the Federal Reserve, credit exposure and concentration limits, supervisory and other requirements. These heightened regulatory obligations could, individually or in the aggregate, adversely affect our business and operations.
Eaton Vance Management, Parametric and BMR are registered with the CFTC and the NFA as Commodity Pool Operators and Commodity Trading Advisors; other subsidiaries of the Company claim exemptions from registration. The CFTC generally allows operators of registered mutual funds that are subject to registration as Commodity Pool Operators to comply with SEC disclosure, reporting and recordkeeping rules as the means of complying with CFTC’s similar requirements. These CFTC rules do not, however, relieve registered Commodity Pool Operators from compliance with applicable anti-fraud provisions or certain performance reporting and recordkeeping requirements. The Company may incur ongoing costs associated with monitoring compliance with these requirements, including, but not limited to, CFTC and NFA registration and exemption obligations and the periodic reporting requirements of Commodity Pool Operators and Commodity Trading Advisors.
The regulation of derivatives markets has undergone substantial change in recent years and such change may continue. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), and regulations promulgated thereunder require many derivatives to be cleared and traded on an exchange, expand entity registration requirements, impose business conduct requirements on counterparties, and impose other regulatory requirements that will continue to change derivative markets as regulations are implemented. Additional regulation of the derivatives markets may make the use of derivatives more costly, may limit the availability or reduce the liquidity of derivatives, and may impose limits or restrictions on the counterparties to derivative transactions.
Certain of our subsidiaries are required to file quarterly reports on Form PF for private funds they manage, pursuant to systemic risk reporting requirements adopted by the SEC. These filings require significant investments in people and systems to ensure timely and accurate reporting. Further investment will be necessary in the coming years as we implement rules adopted by the SEC in 2016 that amended Form ADV and established Form N-PORT to require additional reporting for the separate accounts and Registered Funds we manage, respectively.
In 2016, the U.S. Department of Labor (DOL) began introducing changes to definitions and rules relating to fiduciaries serving holders of qualified retirement accounts. After several delays and challenges, the U.S. Court of Appeals for the Fifth Circuit vacated the DOL’s conflict-of-interest rule, but the DOL has announced a conditional enforcement policy pending issuance of further guidance and is likely to re-propose changes to the definitions and rules relating to fiduciaries that will materially affect how advice can be provided to retirement account holders in 401(k) plans, individual retirement accounts and other qualified retirement programs. We may need to modify our interactions or limit distribution to retirement plans, which could negatively affect our results of operations.
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Our revenues and expenses may also be adversely affected by the new rule adopted in 2016 by the SEC to address liquidity risk management by registered open-end funds and the new rule proposed in 2015 to address use of derivatives by registered open-end and closed-end funds. These rules could limit investment opportunities for certain funds we manage and increase our management and administration costs. Additionally, in April 2018, the SEC proposed a package of rulemakings and interpretations designed to enhance the standard of care for broker-dealers and reiterate the SEC’s standards for investment advisers. The SEC’s promulgation or enactment of an enhanced standard of care could also increase our costs of doing business.
In Europe, the revised Markets in Financial Instruments Directive (MiFID II Directive) and the Markets in Financial Instruments Regulation (MiFIR) (collectively, MiFID II) took effect in January 2018. Implementation of MiFID II significantly affects the structure and operation of the E.U. financial markets and our European operations. Some of the main changes introduced by MiFID II include: (i) enhancing business conduct and governance requirements; (ii) broadening the scope of pre- and post-trade transparency; (iii) enhancing disclosure requirements; (iv) increasing transaction reporting requirements; (v) revising the relationship between client commissions and investment research services; and (vi) further regulating trading revenue.
All of these new and developing laws and regulations will likely result in greater compliance and administrative burdens on us, increasing our expenses.
Our business is subject to risk from regulatory investigation, potential securities laws, liability and litigation. We are subject to federal securities laws, state laws regarding securities fraud, other federal and state laws and rules, and regulations of certain regulatory, self-regulatory and other organizations, including, among others, the SEC, FINRA, the CFTC, the NFA and the New York Stock Exchange. We are also subject to substantial legal and regulatory requirements in the U.K., E.U., Singapore, Japan and other jurisdictions in which we operate outside the U.S. While we have focused significant attention and resources on the development and implementation of compliance policies, procedures and practices, non-compliance with applicable laws, rules or regulations, either in the U.S. or abroad, or our inability to adapt to a complex and ever-changing regulatory environment could result in sanctions against us, which could adversely affect our reputation, business, revenue and earnings. From time to time, various claims or potential claims against us arise, including employment-related claims. We carry insurance in amounts and under terms that we believe are appropriate. We cannot guarantee that our insurance will cover most liabilities and losses to which we may be exposed, or that our insurance policies will continue to be available at acceptable terms and fees. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As our insurance policies come up for renewal, we may need to assume higher deductibles or pay higher premiums, which would increase our expenses and reduce our net income.
Our Non-Voting Common Stock lacks voting rights. Our Non-Voting Common Stock has no voting rights under any circumstances. All voting power resides with our Voting Common Stock, all shares of which are held by officers of the Company and our subsidiaries and deposited in a voting trust (the Voting Trust) in exchange for “Voting Trust Receipts,” which entitle the holder to receive the equivalent of all cash dividends that may be paid to the Voting Trustees with respect to the deposited shares represented thereby. As of October 31, 2018, there were 22 holders of Voting Trust Receipts representing Voting Common Stock, each holder of which is a “Voting Trustee” of the Voting Trust. Holders of Non-Voting Common Stock should understand that such ownership interests have no ability to vote in the election of the Company’s Board of Directors and no right to direct the Company’s management and strategy.
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Item 1B. Unresolved Staff Comments
None.
We conduct our principal operations through leased offices located in Boston, Massachusetts; Atlanta, Georgia; Minneapolis, Minnesota; New York, New York; Seattle, Washington; Washington, District of Columbia; Westport, Connecticut; London, England; Singapore; Sydney, Australia; Tokyo, Japan; and Frankfurt, Germany. For more information, please see Note 20 of our Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
We are party to various legal proceedings that are incidental to our business. We believe these legal proceedings will not have a material effect on our consolidated financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Non-Voting Common Stock, Dividend History and Policy
Our Voting Common Stock, $0.00390625 par value, is not publicly traded, and was held as of October 31, 2018 by 22 Voting Trustees pursuant to the Voting Trust described in Item 12 hereof, which is incorporated herein by reference. Dividends on our Voting Common Stock are paid quarterly and are equal to the dividends paid on our Non-Voting Common Stock (see below).
Our Non-Voting Common Stock, $0.00390625 par value, is listed on the New York Stock Exchange under the symbol EV. The approximate number of registered holders of record of our Non-Voting Common Stock at October 31, 2018 was 747.
On October 11, 2018, the Company declared a quarterly dividend of $0.35 per share on its common stock. The new quarterly rate represents an increase of 12.9 percent over the $0.31 per share declared in each of the Company’s last four fiscal quarters. We currently expect to declare and pay quarterly dividends on our Voting and Non-Voting Common Stock that are comparable to those declared in the fourth quarter of fiscal 2018.
Performance Graph
The following graph compares the cumulative total stockholder return on our Non-Voting Common Stock for the period from November 1, 2013 through October 31, 2018 to that of the cumulative total return of the Standard & Poor’s 500 Stock Index (S&P 500 Index), the Morningstar Financial Services Sector Index and the SNL U.S. Asset Manager Index over the same period. The comparison assumes $100 was invested on October 31, 2013 in our Non-Voting Common Stock and the compared indices at the closing price on that day, and the reinvestment of all dividends paid over the period.
In fiscal 2018, we elected to replace the Morningstar Financial Services Sector Index with the SNL U.S. Asset Manager Index. Both indexes are shown below for comparative purposes. The SNL U.S. Asset Manager Index is a composite of 41 publically traded asset management companies therefore providing an industry specific performance benchmark. In contrast, the Morningstar Financial Services Sector Index tracks the performance of companies that include banks, finance companies, money management firms, savings and loans, securities brokers and insurance companies.
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Comparison of Five-Year Cumulative Total Shareholder Return
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The table below sets forth information regarding purchases by the Company of our Non-Voting Common Stock on a monthly basis during the fourth quarter of fiscal 2018:
| (c) | (d) | |||||||||||||||
| (a) | Total Number of | Maximum Number | ||||||||||||||
| Total | (b) | Shares Purchased | of Shares That May | |||||||||||||
| Number of | Average | as Part of Publicly | Yet Be Purchased | |||||||||||||
| Shares | Price Paid | Announced Plans | Under the Plans | |||||||||||||
| Period | Purchased | Per Share | or Programs(1) | or Programs | ||||||||||||
| August 1, 2018 through August 31, 2018 | - | $ | - | - | 2,633,715 | |||||||||||
| September 1, 2018 through September 30, 2018 | 300,000 | $ | 52.98 | 300,000 | 2,333,715 | |||||||||||
| October 1, 2018 through October 31, 2018 | 1,845,225 | $ | 45.90 | 1,845,225 | 7,347,775 | |||||||||||
| Total | 2,145,225 | $ | 46.89 | 2,145,225 | 7,347,775 | |||||||||||
| (1) | We announced a share repurchase program on January 11, 2017, which authorized the repurchase of up to 8,000,000 shares of our Non-Voting Common Stock in the open market and in private transactions in accordance with applicable securities laws. This repurchase plan was terminated on October 24, 2018. A total of 6,859,285 shares were repurchased under the plan prior to termination. |
We announced a share repurchase program on October 24, 2018, which authorized the repurchase of up to 8,000,000 shares of our Non-Voting Common Stock in the open market and in private transactions in accordance with applicable securities laws. This repurchase program is not subject to an expiration date.
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Item 6. Selected Financial Data
The following table contains selected financial data for the last five years. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and our Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Financial Highlights
| For the Years Ended October 31, | ||||||||||||||||||||
| (in thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Income Statement Data: | ||||||||||||||||||||
| Total revenue | $ | 1,702,249 | $ | 1,529,010 | $ | 1,342,860 | $ | 1,403,563 | $ | 1,450,294 | ||||||||||
| Operating Income(1) | 555,202 | 482,758 | 414,268 | 400,447 | 519,857 | |||||||||||||||
| Net income(1) | 397,905 | 306,373 | 264,757 | 238,191 | 321,164 | |||||||||||||||
| Net income attributable to non-controlling and other beneficial interests(2) | 15,967 | 24,242 | 23,450 | 7,892 | 16,848 | |||||||||||||||
| Net income attributable to Eaton Vance Corp. shareholders(1) | 381,938 | 282,131 | 241,307 | 230,299 | 304,316 | |||||||||||||||
| Adjusted net income attributable to Eaton Vance Corp. shareholders(3) | 394,138 | 288,187 | 242,908 | 274,990 | 309,627 | |||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Total assets(4)(5) | $ | 3,599,328 | $ | 2,330,901 | $ | 1,730,382 | $ | 2,113,737 | $ | 1,856,814 | ||||||||||
| Debt(5)(6) | 619,678 | 618,843 | 571,773 | 571,077 | 570,382 | |||||||||||||||
| Redeemable non-controlling interests (temporary equity) | 335,097 | 250,823 | 109,028 | 88,913 | 107,466 | |||||||||||||||
| Total Eaton Vance Corp. shareholders' equity | 1,107,431 | 1,011,396 | 703,789 | 620,231 | 655,176 | |||||||||||||||
| Non-redeemable non-controlling interests | 1,000 | 864 | 786 | 1,725 | 2,305 | |||||||||||||||
| Total permanent equity | 1,108,431 | 1,012,260 | 704,575 | 621,956 | 657,481 | |||||||||||||||
| Per Share Data: | ||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||
| Basic | $ | 3.33 | $ | 2.54 | $ | 2.20 | $ | 2.00 | $ | 2.55 | ||||||||||
| Diluted | 3.11 | 2.42 | 2.12 | 1.92 | 2.44 | |||||||||||||||
| Adjusted diluted(3) | 3.21 | 2.48 | 2.13 | 2.29 | 2.48 | |||||||||||||||
| Cash dividends declared | 1.280 | 1.150 | 1.075 | 1.015 | 0.910 | |||||||||||||||
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| (1) | Operating income, net income and net income attributable to Eaton Vance Corp. shareholders reflect a one-time payment of $73.0 million to terminate service and additional compensation arrangements in place with a major distribution partner for certain Eaton Vance closed-end funds in fiscal 2015. |
| (2) | Net income attributable to non-controlling and other beneficial interests reflects an increase (decrease) of $0.5 million, $0.2 million, $(0.2) million and $5.3 million in the estimated redemption value of non-controlling interests in our affiliates redeemable at other than fair value in fiscal 2017, 2016, 2015 and 2014, respectively. There were no holders of non-controlling interests in our affiliates redeemable at other than fair value in fiscal 2018. Net income attributable to non-controlling and other beneficial interests also includes net income (loss) of $9.8 million, $(5.8) million and $(4.1) million, respectively, in fiscal 2016, 2015, and 2014 attributable to other beneficial interest holders of consolidated CLO entities. The net income (loss) of consolidated CLO entities in fiscal 2018 and 2017 was entirely attributable to the Company. |
| (3) | Although the Company reports its financial results in accordance with U.S. generally accepted accounting principles (U.S. GAAP), 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. Our use of these adjusted numbers, including reconciliations of net income attributable to Eaton Vance Corp. shareholders to adjusted net income attributable to Eaton Vance Corp. shareholders and earnings per diluted share to adjusted earnings per diluted share, is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K. |
| (4) | Total assets on October 31, 2018, 2017, 2015 and 2014 include $1.1 billion, $31.3 million, $467.1 million and $156.5 million of assets held by consolidated CLO entities, respectively. The Company did not consolidate any CLO entities as of October 31, 2016. |
| (5) | In fiscal 2017, the Company adopted Accounting Standard Update 2015-03, which requires certain debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Total assets and debt were each reduced by $2.2 million, $2.7 million and $3.3 million as of October 31, 2016, 2015 and 2014, respectively, to reflect the reclassification of debt issuance costs from other assets to debt. |
| (6) | In fiscal 2017, the Company issued $300 million of 3.5 percent Senior Notes due April 2027 and used the net proceeds from the issuance in part to retire the remaining $250 million aggregate principal amount of its 6.5 percent Senior Notes due October 2017. The Company recognized a loss on extinguishment of debt totaling $5.4 million in conjunction with the retirement in fiscal 2017. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our principal business is managing investment funds and providing investment management and advisory services to high-net-worth individuals and institutions. Our core strategy is to develop and sustain management expertise across a range of investment disciplines and to offer leading investment strategies and services through multiple distribution channels. In executing our core strategy, we have developed broadly diversified investment management capabilities and a highly functional marketing, distribution and customer service organization. We measure our success as a Company based on investment performance delivered, client satisfaction, reputation in the marketplace, progress achieving strategic objectives, employee development and satisfaction, business and financial results, and shareholder value created.
We conduct our investment management and advisory business through wholly- and majority-owned investment affiliates, which include: Eaton Vance Management, Parametric Portfolio Associates LLC (Parametric), Atlanta Capital Management Company, LLC (Atlanta Capital) and Calvert Research and Management (Calvert). We also offer investment management advisory services through minority-owned affiliate Hexavest Inc. (Hexavest).
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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 systematic investment strategies, including systematic equity, systematic alternatives and managed options strategies. Through Parametric, we also provide custom portfolio implementation and overlay services, including tax-managed and non-tax-managed Custom Core equity strategies, centralized portfolio management of multi-manager portfolios and exposure management services. We also oversee the management of, and distribute, investment funds sub-advised by unaffiliated third-party managers, including global, emerging market and regional equity and asset allocation strategies.
Our breadth of investment management capabilities supports a wide range of strategies and services offered to fund shareholders, retail managed account investors, institutional investors and high-net-worth clients. Our equity strategies encompass a diversity of investment objectives, risk profiles, income levels and geographic representation. Our income investment strategies cover a broad duration, geographic representation and credit quality range and encompass both taxable and municipal investments. We also offer a range of alternative investment strategies, including absolute return and commodity- and currency-based investments. Although we manage and distribute a wide range of investment strategies and services, we operate in one business segment, namely as an investment adviser to funds and separate accounts. As of October 31, 2018, we had $439.3 billion in consolidated assets under management.
We distribute our funds and retail managed accounts principally through financial intermediaries. We have broad market reach, with distribution partners including national and regional broker-dealers, independent broker-dealers, registered investment advisors, banks and insurance companies. We support these distribution partners with a team of approximately 120 sales professionals covering U.S. and international markets.
We also commit significant resources to serving institutional and high-net-worth clients who access investment management services on a direct basis and through investment consultants. Through our wholly-and majority-owned affiliates and consolidated subsidiaries, we manage investments for a broad range of clients in the institutional and high-net-worth marketplace in the U.S. and internationally, including corporations, sovereign wealth funds, endowments, foundations, family offices and public and private employee retirement plans.
Our revenue is derived primarily from management, distribution and service fees received from Eaton Vance-, Parametric- and Calvert-branded funds and management fees received from separate accounts. Our fees are based primarily on the value of the investment portfolios we manage and fluctuate with changes in the total value and mix of assets under management. As a matter of course, investors in our sponsored open-end funds and separate accounts have the ability to redeem their investments at any time, without prior notice, and there are no material restrictions that would prevent them from doing so. Our major expenses are employee compensation, distribution-related expenses, 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
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judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
Business Developments
Please see “Recent Developments” within Item 1, “Business,” of this Annual Report on Form 10-K for a summary of recent developments in our business.
Consolidated Assets under Management
Prevailing equity and income market conditions and investor sentiment affect the sales and redemptions of our investment offerings, managed asset levels, operating results and the recoverability of our investments. During fiscal 2018, the S&P 500 Index, a broad measure of U.S. equity market performance, had total returns of 5.1 percent and the MSCI Emerging Market Index, a broad measure of emerging market equity performance, had total returns of 15.3 percent. Over the same period, the Barclays U.S. Aggregate Bond Index, a broad measure of U.S. bond market performance, had total returns of -2.0 percent.
Consolidated assets under management of $439.3 billion on October 31, 2018 increased $17.0 billion, or 4 percent, from $422.3 billion of consolidated assets under management on October 31, 2017. The year-over-year increase in consolidated assets under management reflects net inflows of $17.3 billion and market price declines in managed assets of $0.4 billion. Consolidated net inflows of $17.3 billion in fiscal 2018 represent a 4 percent internal growth rate in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management). For comparison, the Company had consolidated net inflows of $37.8 billion and $19.3 billion in fiscal 2017 and 2016, respectively, representing 11 percent and 6 percent internal growth in managed assets, respectively. Average consolidated assets under management increased $60.0 billion, or 16 percent, to $442.4 billion for the fiscal year ended October 31, 2018 from $382.4 billion for the fiscal year ended October 31, 2017. For the fiscal year ended October 31, 2016, average consolidated assets under management were $320.9 billion.
| 34 |
The following tables summarize our consolidated assets under management by investment mandate, investment vehicle and investment affiliate as of October 31, 2018, 2017 and 2016. Within the investment mandate table, the “Portfolio implementation” category consists of Parametric Custom Core equity strategies and centralized portfolio management services, and the “Exposure management” category consists of Parametric’s futures- and options-based portfolio overlay services.
Consolidated Assets under Management by Investment Mandate (1)
| October 31, | 2018 | 2017 | ||||||||||||||||||||||||||||||
| % of | % of | % of | vs. | vs. | ||||||||||||||||||||||||||||
| (in millions) | 2018 | Total | 2017 | Total | 2016 | Total | 2017 | 2016 | ||||||||||||||||||||||||
| Equity(2) | $ | 115,772 | 26 | % | $ | 113,472 | 27 | % | $ | 89,981 | 27 | % | 2 | % | 26 | % | ||||||||||||||||
| Fixed income(3) | 77,844 | 18 | % | 70,797 | 17 | % | 60,607 | 18 | % | 10 | % | 17 | % | |||||||||||||||||||
| Floating-rate income | 44,837 | 10 | % | 38,819 | 9 | % | 32,107 | 10 | % | 16 | % | 21 | % | |||||||||||||||||||
| Alternative | 12,139 | 3 | % | 12,637 | 3 | % | 10,687 | 3 | % | -4 | % | 18 | % | |||||||||||||||||||
| Portfolio implementation | 110,840 | 25 | % | 99,615 | 23 | % | 71,426 | 21 | % | 11 | % | 39 | % | |||||||||||||||||||
| Exposure management | 77,871 | 18 | % | 86,976 | 21 | % | 71,572 | 21 | % | -10 | % | 22 | % | |||||||||||||||||||
| Total | $ | 439,303 | 100 | % | $ | 422,316 | 100 | % | $ | 336,380 | 100 | % | 4 | % | 26 | % | ||||||||||||||||
| (1) | Consolidated Eaton Vance Corp. See table on page 41 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Includes balanced and other multi-asset mandates. |
| (3) | Includes cash management mandates. |
Equity assets under management included $40.7 billion, $38.1 billion and $31.4 billion of assets managed for after-tax returns on October 31, 2018, 2017 and 2016, respectively. Portfolio implementation assets under management included $79.7 billion, $70.2 billion and $48.5 billion of assets managed for after-tax returns on October 31, 2018, 2017 and 2016, respectively. Fixed income assets included $44.3 billion, $40.6 billion and $36.1 billion of municipal income assets on October 31, 2018, 2017 and 2016, respectively.
Consolidated Assets under Management by Investment Vehicle(1)
| October 31, | 2018 | 2017 | ||||||||||||||||||||||||||||||
| % of | % of | % of | vs. | vs. | ||||||||||||||||||||||||||||
| (in millions) | 2018 | Total | 2017 | Total | 2016 | Total | 2017 | 2016 | ||||||||||||||||||||||||
| Open-end funds(2) | $ | 102,426 | 24 | % | $ | 97,601 | 23 | % | $ | 74,721 | 22 | % | 5 | % | 31 | % | ||||||||||||||||
| Closed-end funds | 23,998 | 5 | % | 24,816 | 6 | % | 23,571 | 7 | % | -3 | % | 5 | % | |||||||||||||||||||
| Private funds(3) | 38,544 | 9 | % | 34,436 | 8 | % | 27,430 | 8 | % | 12 | % | 26 | % | |||||||||||||||||||
| Institutional separate accounts | 153,996 | 35 | % | 159,986 | 38 | % | 136,451 | 41 | % | -4 | % | 17 | % | |||||||||||||||||||
| High-net-worth separate accounts | 44,690 | 10 | % | 39,715 | 9 | % | 25,806 | 8 | % | 13 | % | 54 | % | |||||||||||||||||||
| Retail managed accounts | 75,649 | 17 | % | 65,762 | 16 | % | 48,401 | 14 | % | 15 | % | 36 | % | |||||||||||||||||||
| Total | $ | 439,303 | 100 | % | $ | 422,316 | 100 | % | $ | 336,380 | 100 | % | 4 | % | 26 | % | ||||||||||||||||
| (1) | Consolidated Eaton Vance Corp. See table on page 41 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Includes assets in NextShares funds. |
| (3) | Includes privately offered equity, fixed income and floating-rate income funds and CLO entities. |
| 35 |
The following table summarizes our assets under management by investment affiliate as of October 31, 2018, 2017 and 2016:
Consolidated Assets under Management by Investment Affiliate(1)
| 2018 | 2017 | |||||||||||||||||||
| October 31, | vs. | vs. | ||||||||||||||||||
| (in millions) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Eaton Vance Management(2) | $ | 179,321 | $ | 164,257 | $ | 143,918 | 9 | % | 14 | % | ||||||||||
| Parametric | 224,238 | 224,941 | 173,981 | 0 | % | 29 | % | |||||||||||||
| Atlanta Capital(3) | 23,355 | 22,379 | 18,481 | 4 | % | 21 | % | |||||||||||||
| Calvert Research and Management(3)(4) | 12,389 | 10,739 | - | 15 | % | NM | (5) | |||||||||||||
| Total | $ | 439,303 | $ | 422,316 | $ | 336,380 | 4 | % | 26 | % | ||||||||||
| (1) | Consolidated Eaton Vance Corp. See table on page 41 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Includes managed assets of Eaton Vance-sponsored funds and separate accounts managed by Hexavest and unaffiliated third-party advisers under Eaton Vance supervision. |
| (3) | Consistent with the Company's policies for reporting the managed assets and flows of investment portfolios for which multiple Eaton Vance affiliates have management responsibilities, the managed assets of Atlanta Capital indicated above include the assets of Calvert Equity Fund, for which Atlanta Capital serves as sub-adviser. The total managed assets of Calvert Research and Management, including assets sub-advised by other Eaton Vance affiliates, were $14.7 billion and $12.9 billion as of October 31, 2018 and 2017, respectively. |
| (4) | Includes managed assets of Calvert-sponsored funds and separate accounts managed by unaffiliated third-party advisers under Calvert supervision. |
| (5) | Not meaningful (NM). |
Consolidated average assets under management presented in the following tables are derived by averaging the beginning and ending assets of each month over the period. The tables are intended to provide information useful in the analysis of our asset-based revenue and distribution expenses. Separate account management fees are generally calculated as a percentage of either beginning, average or ending quarterly assets. Fund management, distribution and service fees, as well as certain expenses, are generally calculated as a percentage of average daily assets.
Consolidated Average Assets under Management by Investment Mandate(1)
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in millions) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Equity(2) | $ | 119,147 | $ | 103,660 | $ | 88,711 | 15 | % | 17 | % | ||||||||||
| Fixed income(3) | 74,399 | 66,405 | 56,339 | 12 | % | 18 | % | |||||||||||||
| Floating-rate income | 41,677 | 36,107 | 32,759 | 15 | % | 10 | % | |||||||||||||
| Alternative | 13,129 | 11,419 | 10,105 | 15 | % | 13 | % | |||||||||||||
| Portfolio implementation | 109,228 | 86,257 | 65,766 | 27 | % | 31 | % | |||||||||||||
| Exposure management | 84,808 | 78,544 | 67,180 | 8 | % | 17 | % | |||||||||||||
| Total | $ | 442,388 | $ | 382,392 | $ | 320,860 | 16 | % | 19 | % | ||||||||||
| (1) | Consolidated Eaton Vance Corp. See table on page 41 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Includes balanced and other multi-asset mandates. |
| (3) | Includes cash management mandates. |
| 36 |
Consolidated Average Assets under Management by Investment Vehicle(1)
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in millions) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Open-end funds(2) | $ | 102,061 | $ | 90,332 | $ | 72,910 | 13 | % | 24 | % | ||||||||||
| Closed-end funds | 24,805 | 24,148 | 23,736 | 3 | % | 2 | % | |||||||||||||
| Private funds(3) | 37,361 | 30,669 | 26,832 | 22 | % | 14 | % | |||||||||||||
| Institutional separate accounts | 162,374 | 146,835 | 128,033 | 11 | % | 15 | % | |||||||||||||
| High-net-worth separate accounts | 43,336 | 33,190 | 24,873 | 31 | % | 33 | % | |||||||||||||
| Retail managed accounts | 72,451 | 57,218 | 44,476 | 27 | % | 29 | % | |||||||||||||
| Total | $ | 442,388 | $ | 382,392 | $ | 320,860 | 16 | % | 19 | % | ||||||||||
| (1) | Consolidated Eaton Vance Corp. See table on page 41 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Includes assets in NextShares funds. |
| (3) | Includes privately offered equity, fixed income and floating-rate income funds and CLO entities. |
Consolidated Net Flows
Consolidated net inflows of $17.3 billion during fiscal 2018 represent 4 percent annualized internal growth in managed assets (consolidated net inflows divided by beginning of period consolidated assets under management). For comparison, the Company had consolidated net inflows of $37.8 billion and $19.3 billion in fiscal 2017 and 2016, respectively, representing annualized internal growth in managed assets of 11 percent and 6 percent in fiscal 2017 and 2016, respectively. 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 8 percent, 10 percent and 5 percent in fiscal 2018, 2017, and 2016, respectively. The Company’s annualized internal management fee revenue growth rate (management fees attributable to consolidated inflows less management fees attributable to consolidated outflows, divided by beginning of period consolidated management fee revenue) was 5 percent, 7 percent and 1 percent in fiscal 2018, 2017 and 2016, respectively, as the management fee revenue contribution from new sales and other inflows during each of these years 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 fiscal years ended October 31, 2018, 2017 and 2016:
| 37 |
Consolidated Assets under Management and Net Flows by Investment Mandate(1)
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in millions) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Equity assets - beginning of period(2) | $ | 113,472 | $ | 89,981 | $ | 89,890 | 26 | % | 0 | % | ||||||||||
| Sales and other inflows | 21,840 | 21,111 | 15,321 | 3 | % | 38 | % | |||||||||||||
| Redemptions/outflows | (20,813 | ) | (19,828 | ) | (15,668 | ) | 5 | % | 27 | % | ||||||||||
| Net flows | 1,027 | 1,283 | (347 | ) | -20 | % | NM | |||||||||||||
| Assets acquired(3) | - | 5,704 | - | -100 | % | NM | ||||||||||||||
| Exchanges | 37 | 62 | (32 | ) | -40 | % | NM | |||||||||||||
| Market value change | 1,236 | 16,442 | 470 | -92 | % | NM | ||||||||||||||
| Equity assets - end of period | $ | 115,772 | $ | 113,472 | $ | 89,981 | 2 | % | 26 | % | ||||||||||
| Fixed income assets - beginning of period(4) | 70,797 | 60,607 | 52,465 | 17 | % | 16 | % | |||||||||||||
| Sales and other inflows (5) | 26,259 | 22,097 | 20,451 | 19 | % | 8 | % | |||||||||||||
| Redemptions/outflows | (16,715 | ) | (16,137 | ) | (13,033 | ) | 4 | % | 24 | % | ||||||||||
| Net flows | 9,544 | 5,960 | 7,418 | 60 | % | -20 | % | |||||||||||||
| Assets acquired(3) | - | 4,170 | - | -100 | % | NM | ||||||||||||||
| Exchanges | - | (139 | ) | 23 | -100 | % | NM | |||||||||||||
| Market value change | (2,497 | ) | 199 | 701 | NM | -72 | % | |||||||||||||
| Fixed income assets - end of period | $ | 77,844 | $ | 70,797 | $ | 60,607 | 10 | % | 17 | % | ||||||||||
| Floating-rate income assets - beginning of period | 38,819 | 32,107 | 35,534 | 21 | % | -10 | % | |||||||||||||
| Sales and other inflows | 14,301 | 15,222 | 7,232 | -6 | % | 110 | % | |||||||||||||
| Redemptions/outflows | (8,401 | ) | (8,889 | ) | (11,078 | ) | -5 | % | -20 | % | ||||||||||
| Net flows | 5,900 | 6,333 | (3,846 | ) | -7 | % | NM | |||||||||||||
| Exchanges | 86 | 136 | (16 | ) | -37 | % | NM | |||||||||||||
| Market value change | 32 | 243 | 435 | -87 | % | -44 | % | |||||||||||||
| Floating-rate income assets - end of period | $ | 44,837 | $ | 38,819 | $ | 32,107 | 16 | % | 21 | % | ||||||||||
| Alternative assets - beginning of period | 12,637 | 10,687 | 10,289 | 18 | % | 4 | % | |||||||||||||
| Sales and other inflows | 5,679 | 5,930 | 4,183 | -4 | % | 42 | % | |||||||||||||
| Redemptions/outflows | (4,947 | ) | (4,067 | ) | (3,590 | ) | 22 | % | 13 | % | ||||||||||
| Net flows | 732 | 1,863 | 593 | -61 | % | 214 | % | |||||||||||||
| Exchanges | (103 | ) | (4 | ) | (2 | ) | NM | 100 | % | |||||||||||
| Market value change | (1,127 | ) | 91 | (193 | ) | NM | NM | |||||||||||||
| Alternative assets - end of period | $ | 12,139 | $ | 12,637 | $ | 10,687 | -4 | % | 18 | % | ||||||||||
| Portfolio implementation assets - beginning of period | 99,615 | 71,426 | 59,487 | 39 | % | 20 | % | |||||||||||||
| Sales and other inflows | 22,562 | 23,359 | 19,882 | -3 | % | 17 | % | |||||||||||||
| Redemptions/outflows | (14,141 | ) | (12,438 | ) | (10,455 | ) | 14 | % | 19 | % | ||||||||||
| Net flows | 8,421 | 10,921 | 9,427 | -23 | % | 16 | % | |||||||||||||
| Exchanges | (22 | ) | 5 | (3 | ) | NM | NM | |||||||||||||
| Market value change | 2,826 | 17,263 | 2,515 | -84 | % | 586 | % | |||||||||||||
| Portfolio implementation assets - end of period | $ | 110,840 | $ | 99,615 | $ | 71,426 | 11 | % | 39 | % | ||||||||||
| Exposure management assets - end of period | 86,976 | 71,572 | 63,689 | 22 | % | 12 | % | |||||||||||||
| Sales and other inflows | 65,812 | 80,532 | 57,988 | -18 | % | 39 | % | |||||||||||||
| Redemptions/outflows | (74,095 | ) | (69,058 | ) | (51,929 | ) | 7 | % | 33 | % | ||||||||||
| Net flows | (8,283 | ) | 11,474 | 6,059 | NM | 89 | % | |||||||||||||
| Market value change | (822 | ) | 3,930 | 1,824 | NM | 115 | % | |||||||||||||
| Exposure management assets - end of period | $ | 77,871 | $ | 86,976 | $ | 71,572 | -10 | % | 22 | % | ||||||||||
| Total assets under management - beginning of period | 422,316 | 336,380 | 311,354 | 26 | % | 8 | % | |||||||||||||
| Sales and other inflows(5) | 156,453 | 168,251 | 125,057 | -7 | % | 35 | % | |||||||||||||
| Redemptions/outflows | (139,112 | ) | (130,417 | ) | (105,753 | ) | 7 | % | 23 | % | ||||||||||
| Net flows | 17,341 | 37,834 | 19,304 | -54 | % | 96 | % | |||||||||||||
| Assets acquired(3) | - | 9,874 | - | -100 | % | NM | ||||||||||||||
| Exchanges | (2 | ) | 60 | (30 | ) | NM | NM | |||||||||||||
| Market value change | (352 | ) | 38,168 | 5,752 | NM | 564 | % | |||||||||||||
| Total assets under management - end of period | $ | 439,303 | $ | 422,316 | $ | 336,380 | 4 | % | 26 | % | ||||||||||
| 38 |
| (1) | Consolidated Eaton Vance Corp. See table on page 41 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Whenever presented, Equity assets include balanced and other multi-asset mandates. |
| (3) | Represents managed assets gained in the acquisition of the business assets of Calvert Investment Management, Inc. (Calvert Investments) on December 30, 2016. Equity assets acquired and total assets acquired exclude $2.1 billion of managed assets of Calvert Equity Fund, which is sub-advised by Atlanta Capital and whose managed assets were included in the Company's consolidated assets under management prior to the Calvert Investments acquisition. |
| (4) | Whenever presented, Fixed Income assets include cash management mandates. |
| (5) | Includes $0.8 billion of managed assets gained in assuming the fixed income business assets of the former Oechsle International Advisors, LLC on January 31, 2018. |
| 39 |
Consolidated Assets under Management and Net Flows by Investment Vehicle(1)
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in millions) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Fund assets - beginning of period(2) | $ | 156,853 | $ | 125,722 | $ | 125,934 | 25 | % | 0 | % | ||||||||||
| Sales and other inflows | 44,470 | 40,967 | 29,890 | 9 | % | 37 | % | |||||||||||||
| Redemptions/outflows | (34,802 | ) | (33,350 | ) | (29,535 | ) | 4 | % | 13 | % | ||||||||||
| Net flows | 9,668 | 7,617 | 355 | 27 | % | NM | ||||||||||||||
| Assets acquired(3) | - | 9,821 | - | -100 | % | NM | ||||||||||||||
| Exchanges(4) | 305 | 2,196 | (94 | ) | -86 | % | NM | |||||||||||||
| Market value change | (1,858 | ) | 11,497 | (473 | ) | NM | NM | |||||||||||||
| Fund assets - end of period | $ | 164,968 | $ | 156,853 | $ | 125,722 | 5 | % | 25 | % | ||||||||||
| Institutional separate accounts - beginning of period | 159,986 | 136,451 | 119,987 | 17 | % | 14 | % | |||||||||||||
| Sales and other inflows(5) | 79,502 | 93,067 | 74,476 | -15 | % | 25 | % | |||||||||||||
| Redemptions/outflows | (85,638 | ) | (81,096 | ) | (62,945 | ) | 6 | % | 29 | % | ||||||||||
| Net flows | (6,136 | ) | 11,971 | 11,531 | NM | 4 | % | |||||||||||||
| Assets acquired(3) | - | 40 | - | -100 | % | NM | ||||||||||||||
| Exchanges(4) | 18 | (2,063 | ) | 420 | NM | NM | ||||||||||||||
| Market value change | 128 | 13,587 | 4,513 | -99 | % | 201 | % | |||||||||||||
| Institutional separate accounts - end of period | $ | 153,996 | $ | 159,986 | $ | 136,451 | -4 | % | 17 | % | ||||||||||
| High-net-worth separate accounts - beginning of period | 39,715 | 25,806 | 24,516 | 54 | % | 5 | % | |||||||||||||
| Sales and other inflows | 9,563 | 12,965 | 5,832 | -26 | % | 122 | % | |||||||||||||
| Redemptions/outflows | (5,414 | ) | (5,370 | ) | (4,841 | ) | 1 | % | 11 | % | ||||||||||
| Net flows | 4,149 | 7,595 | 991 | -45 | % | 666 | % | |||||||||||||
| Exchanges | (165 | ) | (24 | ) | (309 | ) | 588 | % | -92 | % | ||||||||||
| Market value change | 991 | 6,338 | 608 | -84 | % | 942 | % | |||||||||||||
| High-net-worth separate accounts - end of period | $ | 44,690 | $ | 39,715 | $ | 25,806 | 13 | % | 54 | % | ||||||||||
| Retail managed accounts - beginning of period | 65,762 | 48,401 | 40,917 | 36 | % | 18 | % | |||||||||||||
| Sales and other inflows | 22,918 | 21,252 | 14,859 | 8 | % | 43 | % | |||||||||||||
| Redemptions/outflows | (13,258 | ) | (10,601 | ) | (8,432 | ) | 25 | % | 26 | % | ||||||||||
| Net flows | 9,660 | 10,651 | 6,427 | -9 | % | 66 | % | |||||||||||||
| Assets acquired(3) | - | 13 | - | -100 | % | NM | ||||||||||||||
| Exchanges | (160 | ) | (49 | ) | (47 | ) | 227 | % | 4 | % | ||||||||||
| Market value change | 387 | 6,746 | 1,104 | -94 | % | 511 | % | |||||||||||||
| Retail managed accounts - end of period | $ | 75,649 | $ | 65,762 | $ | 48,401 | 15 | % | 36 | % | ||||||||||
| Total assets under management - beginning of period | 422,316 | 336,380 | 311,354 | 26 | % | 8 | % | |||||||||||||
| Sales and other inflows(5) | 156,453 | 168,251 | 125,057 | -7 | % | 35 | % | |||||||||||||
| Redemptions/outflows | (139,112 | ) | (130,417 | ) | (105,753 | ) | 7 | % | 23 | % | ||||||||||
| Net flows | 17,341 | 37,834 | 19,304 | -54 | % | 96 | % | |||||||||||||
| Assets acquired(3) | - | 9,874 | - | -100 | % | NM | ||||||||||||||
| Exchanges | (2 | ) | 60 | (30 | ) | NM | NM | |||||||||||||
| Market value change | (352 | ) | 38,168 | 5,752 | NM | 564 | % | |||||||||||||
| Total assets under management - end of period | $ | 439,303 | $ | 422,316 | $ | 336,380 | 4 | % | 26 | % | ||||||||||
| (1) | Consolidated Eaton Vance Corp. See the table on page 41 for directly managed assets and flows of 49 percent-owned Hexavest, which are not included in the table above. |
| (2) | Whenever presented, Fund assets include assets of cash management funds. |
| (3) | Represents managed assets gained in the acquisition of the business assets of Calvert Investments on December 30, 2016. Fund assets acquired and total assets acquired exclude $2.1 billion of managed assets of Calvert Equity Fund, which is sub-advised by Atlanta Capital and whose managed assets were included in the Company’s consolidated assets under management prior to the Calvert Investments acquisition. |
| (4) | Reflects the reclassification from institutional separate accounts to funds of $2.1 billion of managed assets of Calvert Equity Fund sub-advised by Atlanta Capital upon the Company's acquisition of the business assets of Calvert Investments on December 30, 2016. |
| (5) | Includes $0.8 billion of managed assets gained in assuming the fixed income business assets of the former Oechsle International Advisors, LLC on January 31, 2018. |
| 40 |
As of October 31, 2018, the Company’s 49 percent-owned affiliate Hexavest Inc. (Hexavest) managed $13.8 billion of client assets, down 14 percent from $16.0 billion of managed assets on October 31, 2017. Other than Eaton Vance-sponsored funds for which Hexavest is adviser or sub-adviser, the managed assets and flows of Hexavest are not included in Eaton Vance’s consolidated totals.
The following table summarizes assets under management and net flows of Hexavest for the fiscal years ended October 31, 2018, 2017 and 2016:
Hexavest Assets under Management and Net Flows
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in millions) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Eaton Vance distributed: | ||||||||||||||||||||
| Eaton Vance sponsored funds – beginning of period(1) | $ | 182 | $ | 231 | $ | 229 | -21 | % | 1 | % | ||||||||||
| Sales and other inflows | 12 | 92 | 22 | -87 | % | 318 | % | |||||||||||||
| Redemptions/outflows | (35 | ) | (177 | ) | (33 | ) | -80 | % | 436 | % | ||||||||||
| Net flows | (23 | ) | (85 | ) | (11 | ) | -73 | % | 673 | % | ||||||||||
| Market value change | - | 36 | 13 | -100 | % | 177 | % | |||||||||||||
| Eaton Vance sponsored funds – end of period | $ | 159 | $ | 182 | $ | 231 | -13 | % | -21 | % | ||||||||||
| Eaton Vance distributed separate accounts – beginning of period(2) | $ | 3,092 | $ | 2,492 | $ | 2,440 | 24 | % | 2 | % | ||||||||||
| Sales and other inflows | 230 | 1,124 | 131 | -80 | % | 758 | % | |||||||||||||
| Redemptions/outflows | (1,176 | ) | (920 | ) | (236 | ) | 28 | % | 290 | % | ||||||||||
| Net flows | (946 | ) | 204 | (105 | ) | NM | NM | |||||||||||||
| Market value change | 23 | 396 | 157 | -94 | % | 152 | % | |||||||||||||
| Eaton Vance distributed separate accounts – end of period | $ | 2,169 | $ | 3,092 | $ | 2,492 | -30 | % | 24 | % | ||||||||||
| Total Eaton Vance distributed – beginning of period | $ | 3,274 | $ | 2,723 | $ | 2,669 | 20 | % | 2 | % | ||||||||||
| Sales and other inflows | 242 | 1,216 | 153 | -80 | % | 695 | % | |||||||||||||
| Redemptions/outflows | (1,211 | ) | (1,097 | ) | (269 | ) | 10 | % | 308 | % | ||||||||||
| Net flows | (969 | ) | 119 | (116 | ) | NM | NM | |||||||||||||
| Market value change | 23 | 432 | 170 | -95 | % | 154 | % | |||||||||||||
| Total Eaton Vance distributed – end of period | $ | 2,328 | $ | 3,274 | $ | 2,723 | -29 | % | 20 | % | ||||||||||
| Hexavest directly distributed – beginning of period(3) | $ | 12,748 | $ | 11,021 | $ | 11,279 | 16 | % | -2 | % | ||||||||||
| Sales and other inflows | 1,149 | 1,140 | 985 | 1 | % | 16 | % | |||||||||||||
| Redemptions/outflows | (2,416 | ) | (1,208 | ) | (1,919 | ) | 100 | % | -37 | % | ||||||||||
| Net flows | (1,267 | ) | (68 | ) | (934 | ) | NM | -93 | % | |||||||||||
| Market value change | (14 | ) | 1,795 | 676 | NM | 166 | % | |||||||||||||
| Hexavest directly distributed – end of period | $ | 11,467 | $ | 12,748 | $ | 11,021 | -10 | % | 16 | % | ||||||||||
| Total Hexavest assets – beginning of period | $ | 16,022 | $ | 13,744 | $ | 13,948 | 17 | % | -1 | % | ||||||||||
| Sales and other inflows | 1,391 | 2,356 | 1,138 | -41 | % | 107 | % | |||||||||||||
| Redemptions/outflows | (3,627 | ) | (2,305 | ) | (2,188 | ) | 57 | % | 5 | % | ||||||||||
| Net flows | (2,236 | ) | 51 | (1,050 | ) | NM | NM | |||||||||||||
| Market value change | 9 | 2,227 | 846 | -100 | % | 163 | % | |||||||||||||
| Total Hexavest assets – end of period | $ | 13,795 | $ | 16,022 | $ | 13,744 | -14 | % | 17 | % | ||||||||||
| (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. |
| 41 |
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 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 fiscal years ended October 31, 2018, 2017 and 2016:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands, except per share data) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Net income attributable to Eaton Vance Corp. shareholders | $ | 381,938 | $ | 282,131 | $ | 241,307 | 35 | % | 17 | % | ||||||||||
| Repatriation of undistributed earnings of foreign subsidiaries(1) | 2,807 | - | - | NM | NM | |||||||||||||||
| Net excess tax benefit from stock-based compensation plans(2) | (17,487 | ) | - | - | NM | NM | ||||||||||||||
| Revaluation of deferred tax amounts(3) | 21,220 | - | - | NM | NM | |||||||||||||||
| Loss on write-off of Hexavest option, net of tax(4) | 5,660 | - | - | NM | NM | |||||||||||||||
| Loss on extinguishment of debt, net of tax(5) | - | 3,346 | - | -100 | % | NM | ||||||||||||||
| Closed-end fund structuring fees, net of tax(6) | - | 2,179 | 1,401 | -100 | % | 56 | % | |||||||||||||
| Non-controlling interest value adjustments | - | 531 | 200 | -100 | % | 166 | % | |||||||||||||
| Adjusted net income attributable to Eaton Vance Corp. shareholders | $ | 394,138 | $ | 288,187 | $ | 242,908 | 37 | % | 19 | % | ||||||||||
| Earnings per diluted share | $ | 3.11 | $ | 2.42 | $ | 2.12 | 29 | % | 14 | % | ||||||||||
| Repatriation of undistributed earnings of foreign subsidiaries | 0.02 | - | - | NM | NM | |||||||||||||||
| Net excess tax benefit from stock-based compensation plans | (0.14 | ) | - | - | NM | NM | ||||||||||||||
| Revaluation of deferred tax amounts | 0.17 | - | - | NM | NM | |||||||||||||||
| Loss on write-off of Hexavest option, net of tax | 0.05 | - | - | NM | NM | |||||||||||||||
| Loss on extinguishment of debt, net of tax | - | 0.03 | - | -100 | % | NM | ||||||||||||||
| Closed-end fund structuring fees, net of tax | - | 0.02 | 0.01 | -100 | % | 100 | % | |||||||||||||
| Non-controlling interest value adjustments | - | 0.01 | - | -100 | % | NM | ||||||||||||||
| Adjusted earnings per diluted share | $ | 3.21 | $ | 2.48 | $ | 2.13 | 29 | % | 16 | % | ||||||||||
| (1) | 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, under the 2017 Tax Act. |
| (2) | Reflects the impact of Accounting Standard Update, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which was adopted in the first quarter of fiscal 2018. |
| (3) | Reflects the revaluation of deferred tax assets and deferred tax liabilities resulting from the enactment of the 2017 Tax Act on December 22, 2017. |
| (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. |
| (5) | Reflects the $5.4 million loss on extinguishment of debt associated with retiring the Company's 2017 Senior Notes in May 2017, net of the associated impact to taxes of $2.1 million. |
| (6) | Reflects structuring fees of $3.5 million (net of the associated impact to taxes of $1.3 million) paid in connection with the July 2017 initial public offering of Eaton Vance Floating-Rate 2022 Target Term Trust. |
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The 35 percent increase in net income attributable to Eaton Vance Corp. shareholders in fiscal 2018 compared to fiscal 2017 reflects:
| · | An increase in revenue of $173.2 million, primarily reflecting a 12 percent increase in management fees. |
| · | An increase in operating expenses of $100.8 million, reflecting higher compensation, distribution expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses. |
| · | A decrease in non-operating expense of $1.6 million, reflecting lower interest expense, an increase in income from our consolidated CLO entities and the one-time loss on extinguishment of debt recognized during fiscal 2017, partially offset by a decrease in net gains and other investment income. |
| · | A decrease in income taxes of $17.0 million. |
| · | An increase in equity in net income of affiliates, net of tax, of $0.5 million. |
| · | A decrease in net income attributable to non-controlling and other beneficial interests of $8.3 million. |
Weighted average diluted shares outstanding increased by 6.5 million shares, or 6 percent, in fiscal 2018 compared to 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 17 percent increase in net income attributable to Eaton Vance Corp. shareholders in fiscal 2017 compared to fiscal 2016 reflects:
| · | An increase in revenue of $186.2 million, primarily reflecting a 15 percent increase in management fees. |
| · | An increase in operating expenses of $117.7 million, reflecting higher compensation, distribution expense, service fee expense, amortization of deferred sales commissions, fund-related expenses and other operating expenses. |
| · | An increase in non-operating expense of $7.3 million, reflecting a decrease in income from our consolidated CLO entities and the one-time loss on extinguishment of debt recognized during fiscal 2017, partially offset by an increase in net gains and other investment income and lower interest expense. |
| · | An increase in income taxes of $20.0 million. |
| · | An increase in equity in net income of affiliates, net of tax, of $0.5 million. |
| · | An increase in net income attributable to non-controlling and other beneficial interests of $0.8 million. |
Weighted average diluted shares outstanding increased by 2.4 million shares, or 2 percent, in fiscal 2017 compared to fiscal 2016, primarily reflecting the impact of employee stock option exercises and vesting of restricted stock, partially offset by share repurchases in fiscal 2017, as well as an increase in the dilutive effect of in-the-money options and unvested restricted stock.
Revenue
Our revenue increased by 11 percent in fiscal 2018, reflecting higher management fees, distribution and underwriter fees, service fees and other revenue.
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The following table shows the components of our revenue for the fiscal years ended October 31, 2018, 2017 and 2016:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Management fees | $ | 1,481,896 | $ | 1,318,141 | $ | 1,151,198 | 12 | % | 15 | % | ||||||||||
| Distribution and underwriter fees | 80,478 | 78,776 | 74,822 | 2 | % | 5 | % | |||||||||||||
| Service fees | 123,500 | 119,962 | 107,684 | 3 | % | 11 | % | |||||||||||||
| Other revenue | 16,375 | 12,131 | 9,156 | 35 | % | 32 | % | |||||||||||||
| Total revenue | $ | 1,702,249 | $ | 1,529,010 | $ | 1,342,860 | 11 | % | 14 | % | ||||||||||
Management fees
The increase in management fees of 12 percent in fiscal 2018 and 15 percent in fiscal 2017 is primarily attributable to an increase in consolidated average assets under management, partially offset by a decline in our consolidated average management fee rate due primarily to changes in business mix. Consolidated average assets under management increased by 16 percent and 19 percent in fiscal 2018 and 2017, respectively. Excluding performance-based fees, consolidated average annualized management fee rates decreased to 33.5 basis points in fiscal 2018 from 34.5 basis points in fiscal 2017 and 35.8 basis points in fiscal 2016. Performance-based fees were $(1.7) million, $0.4 million and $3.4 million in fiscal 2018, 2017 and 2016, respectively. Changes in consolidated average annualized management fee rates for the compared periods primarily reflect the ongoing shift in the Company’s mix of business towards investment mandates and distribution channels with lower fee rates.
Consolidated average management fee rates, excluding performance-based fees, for the fiscal years ended October 31, 2018, 2017 and 2016 by investment mandate were as follows:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in basis points on average managed assets) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Equity | 59.9 | 61.7 | 62.8 | -3 | % | -2 | % | |||||||||||||
| Fixed income | 35.5 | 38.0 | 40.0 | -7 | % | -5 | % | |||||||||||||
| Floating-rate income | 50.7 | 51.6 | 51.8 | -2 | % | 0 | % | |||||||||||||
| Alternative | 69.1 | 63.3 | 63.0 | 9 | % | 0 | % | |||||||||||||
| Portfolio implementation | 14.6 | 14.7 | 14.9 | -1 | % | -1 | % | |||||||||||||
| Exposure management | 5.2 | 5.2 | 5.1 | 0 | % | 2 | % | |||||||||||||
| Consolidated average management fee rates | 33.5 | 34.5 | 35.8 | -3 | % | -4 | % | |||||||||||||
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 36.
Distribution and underwriter fees
Distribution fees, which are earned under contractual agreements with certain sponsored funds, are calculated as a percentage of, and fluctuate with, average assets under management of the applicable funds and fund share classes. Distribution fees are paid by our sponsored funds to reimburse EVD for the costs of marketing and selling fund shares. These fees are largely passed through after one year as distribution expense to third-
| 45 |
party intermediaries who distribute our sponsored funds. Underwriter fees and other distribution income primarily consists of underwriter commissions earned on sales of fund share classes subject to those fees, contingent deferred sales charges received on certain Class A redemptions and fundraising and servicing fees associated with the U.S. Charitable Gift Trust.
Fund distribution and underwriter fee revenue and other fund-related distribution income for the fiscal years ended October 31, 2018, 2017 and 2016 were as follows:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Distribution fees: | ||||||||||||||||||||
| Class A | $ | 3,466 | 627 | 646 | 453 | % | -3 | % | ||||||||||||
| Class B | 357 | 792 | 1,338 | -55 | % | -41 | % | |||||||||||||
| Class C | 56,623 | 61,068 | 60,031 | -7 | % | 2 | % | |||||||||||||
| Class F | 1,602 | 1,354 | - | 18 | % | NM | ||||||||||||||
| Class N | 104 | 72 | 78 | 44 | % | -8 | % | |||||||||||||
| Class R | 1,893 | 1,624 | 1,361 | 17 | % | 19 | % | |||||||||||||
| Private funds | 9,177 | 5,942 | 4,382 | 54 | % | 36 | % | |||||||||||||
| Total distribution fees | $ | 73,222 | $ | 71,479 | $ | 67,836 | 2 | % | 5 | % | ||||||||||
| Underwriter fees | 2,854 | 2,765 | 2,763 | 3 | % | 0 | % | |||||||||||||
| Other distribution income | 4,402 | 4,532 | 4,223 | -3 | % | 7 | % | |||||||||||||
| Total distribution and underwriter fees | $ | 80,478 | $ | 78,776 | $ | 74,822 | 2 | % | 5 | % | ||||||||||
Service fees
Service fees, which are paid to EVD pursuant to distribution or service plans adopted by our sponsored mutual funds, are calculated as a percent of, and fluctuate with, average assets under management in specific mutual fund share classes (principally Classes A, C, N and R). Certain private funds also make service fee payments to EVD. These fees are largely passed through after one year as service fee expense to third-party broker dealers.
Service fee revenue increased 3 percent in fiscal 2018, primarily reflecting an increase in consolidated average assets in funds and fund share classes subject to service fees. Service fee revenue increased 11 percent in fiscal 2017, primarily reflecting an increase in consolidated 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 and separate account distribution and service fee revenue, increased 35 percent in fiscal 2018, primarily reflecting increases in each of the principal components. Other revenue increased 32 percent in fiscal 2017, primarily reflecting increases in shareholder servicing fees and miscellaneous dealer income.
Expenses
Operating expenses increased 10 percent in fiscal 2018 from fiscal 2017, reflecting increases in compensation, distribution expense, service fee expense, the amortization of deferred sales commissions, fund-related expenses and other operating expenses.
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The following table shows our operating expenses for the fiscal years ended October 31, 2018, 2017 and 2016:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Compensation and related costs | $ | 604,631 | $ | 553,952 | $ | 491,115 | 9 | % | 13 | % | ||||||||||
| Distribution expense | 141,418 | 132,873 | 117,996 | 6 | % | 13 | % | |||||||||||||
| Service fee expense | 113,337 | 112,519 | 98,494 | 1 | % | 14 | % | |||||||||||||
| Amortization of deferred sales commissions | 18,394 | 16,239 | 15,451 | 13 | % | 5 | % | |||||||||||||
| Fund-related expenses | 64,538 | 48,995 | 35,899 | 32 | % | 36 | % | |||||||||||||
| Other expenses | 204,729 | 181,674 | 169,637 | 13 | % | 7 | % | |||||||||||||
| Total expenses | $ | 1,147,047 | $ | 1,046,252 | $ | 928,592 | 10 | % | 13 | % | ||||||||||
Compensation and related costs
The following table shows our compensation and related costs for the fiscal years ended October 31, 2018, 2017 and 2016:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Base salaries and employee benefits | $ | 271,473 | $ | 245,693 | $ | 226,463 | 10 | % | 8 | % | ||||||||||
| Stock-based compensation | 88,055 | 80,049 | 71,600 | 10 | % | 12 | % | |||||||||||||
| Operating income-based incentives | 174,527 | 152,952 | 131,250 | 14 | % | 17 | % | |||||||||||||
| Sales-based incentives | 68,941 | 72,094 | 55,550 | -4 | % | 30 | % | |||||||||||||
| Other compensation expense | 1,635 | 3,164 | 6,252 | -48 | % | -49 | % | |||||||||||||
| Total | $ | 604,631 | $ | 553,952 | $ | 491,115 | 9 | % | 13 | % | ||||||||||
Compensation expense increased by $50.7 million, or 9 percent, in fiscal 2018 compared to fiscal 2017. The increase was driven primarily by: (i) a $25.8 million increase in base salaries and benefits, reflecting annual merit increases, higher headcount and increases in our corporate 401(k) match and profit sharing contribution; (ii) an $8.0 million increase in stock-based compensation expense primarily due to an increase in annual stock-based compensation awards; (iii) a $21.6 million increase in operating income-based incentives due to higher pre-bonus adjusted operating income (as described in more detail in “Compensation Discussion and Analysis” in Item 11 of this Annual Report on Form 10-K). These increases were partially offset by a $3.2 million decrease in sales-based incentive compensation resulting from a decrease in incentive rates, partially offset by an increase in compensation-eligible sales, and a decrease of $1.5 million in other compensation expense related to lower employee recruiting and termination costs.
Compensation expense increased by $62.8 million, or 13 percent, in fiscal 2017 compared to fiscal 2016. The increase was driven primarily by: (i) a $19.2 million increase in base salaries and benefits, reflecting annual merit increases and higher headcount, partially due to the Calvert acquisition on December 30, 2016; (ii) an $8.4 million increase in stock-based compensation, primarily due to an increase in annual stock-based compensation awards; (iii) a $21.7 million increase in operating income-based incentives due to an increase in pre-bonus adjusted operating income; and (iv) a $16.5 million increase in sales-based incentive driven by
| 47 |
strong compensation-eligible sales. The $3.1 million decrease in other compensation expense is related to lower employee recruiting and termination costs.
Distribution expense
Distribution expense includes distribution fees paid to third-party intermediaries for the distribution of our sponsored funds. Distribution expense also includes intermediary marketing support payments to qualified intermediaries for distribution, shareholder servicing and marketing and support of the Company’s sponsored funds. Both distribution fees and intermediary marketing support payments are asset-based fees. Other asset-based distribution fees include commissions paid to broker-dealers on the sale of Class A shares at net asset value, payments made to distribution partners for certain closed-end funds, and finder’s fees paid to intermediaries for referring certain retail, high-net worth and institutional investors. Distribution expense also includes discretionary marketing expenses, which are driven by corporate initiatives.
The following table shows our distribution expense for the fiscal years ended October 31, 2018, 2017 and 2016:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Class A share commissions | $ | 1,916 | $ | 2,417 | $ | 2,064 | -21 | % | 17 | % | ||||||||||
| Distribution fees | 56,457 | 52,038 | 50,324 | 8 | % | 3 | % | |||||||||||||
| Closed-end fund structuring fees | - | 3,515 | 2,291 | -100 | % | 53 | % | |||||||||||||
| Closed-end fund dealer compensation payments | 3,881 | 3,867 | 3,836 | 0 | % | 1 | % | |||||||||||||
| Intermediary marketing support payments | 51,897 | 47,721 | 40,308 | 9 | % | 18 | % | |||||||||||||
| Discretionary marketing expenses | 18,958 | 18,351 | 15,986 | 3 | % | 15 | % | |||||||||||||
| Finder's fees | 8,309 | 4,964 | 3,187 | 67 | % | 56 | % | |||||||||||||
| Total | $ | 141,418 | $ | 132,873 | $ | 117,996 | 6 | % | 13 | % | ||||||||||
Distribution expense increased by $8.5 million, or 6 percent, in fiscal 2018 compared to fiscal 2017, primarily attributable to increases in distribution fees and intermediary marketing support payments due to higher average assets under management subject to these payments, an increase in discretionary marketing expense related to significant corporate initiatives and an increase in third-party referral fees paid in the U.S. and internationally. These increases were partially offset by a decrease in closed-end fund structuring fees and Class A sales on which we pay commissions.
Distribution expense increased by $14.9 million, or 13 percent, in fiscal 2017 compared to fiscal 2016, primarily attributable to increases in Class A sales on which we pay commissions, Class C share assets held more than one year on which we pay distribution fees, closed-end fund structuring fees, intermediary marketing support payments and discretionary marketing expense related to significant corporate initiatives. The increase in intermediary market support payments was driven primarily by higher average assets under management subject to marketing support payments, attributable in part to the acquisition of the Calvert business in December 2016.
Service fee expense
Service fees we receive from sponsored funds in connection with new sales of fund shares are generally retained in the first year and paid to broker-dealers thereafter as service fee expense pursuant to third-party selling agreements. These fees are calculated as a percent of average assets under management in certain
| 48 |
share classes of our mutual funds (principally Classes A, C, N and R), as well as certain private funds. Service fee expense increased by 1 percent in fiscal 2018 and 14 percent in fiscal 2017, reflecting in each case higher average fund assets retained more than one year in funds and share classes that are subject to service fees.
Amortization of deferred sales commissions
Amortization expense is primarily affected by ongoing sales and redemptions of mutual fund Class C shares and certain private funds. Amortization expense increased 13 percent and 5 percent in fiscal 2018 and 2017, respectively, reflecting higher private fund commission amortization offset by lower Class B and Class C commission amortization for both periods. In fiscal 2018, 36 percent of total amortization expense related to Class C shares and 64 percent to privately offered equity funds. In fiscal 2017, 2 percent of total amortization expense related to Class B shares, 50 percent to Class C shares and 48 percent to privately offered equity funds.
Fund-related expenses
Fund-related expenses consist of fund subsidy expenses, fees paid to sub-advisers, compliance costs and other fund-related expenses we incur. Fund-related expenses increased by 32 percent in fiscal 2018, reflecting increases in fund subsidy accruals, sub-advisory fees paid and an increase in fund expenses borne by the Company on funds for which we earn an all-in fee, partially offset by a $1.9 million decrease in fund expenses borne by the Company related to a one-time reimbursement made by the Company to certain funds in fiscal 2017. Fund-related expenses increased by 36 percent in fiscal 2017, reflecting higher fund subsidies attributable primarily to the addition of the Calvert Funds, higher sub-advisory fees paid, an increase in fund expenses borne by the Company on funds for which it earns an all-in fee and $1.9 million in one-time reimbursements made to certain funds as noted in the preceding sentence.
Other expenses
The following table shows our other expense for the fiscal years ended October 31, 2018, 2017 and 2016:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Information technology | $ | 89,972 | $ | 77,450 | $ | 72,718 | 16 | % | 7 | % | ||||||||||
| Facilities-related | 48,492 | 40,799 | 40,806 | 19 | % | 0 | % | |||||||||||||
| Travel | 18,020 | 17,351 | 16,663 | 4 | % | 4 | % | |||||||||||||
| Professional services | 17,820 | 15,347 | 13,331 | 16 | % | 15 | % | |||||||||||||
| Communications | 5,749 | 5,536 | 5,081 | 4 | % | 9 | % | |||||||||||||
| Amortization of intangible assets | 8,927 | 9,014 | 8,648 | -1 | % | 4 | % | |||||||||||||
| Other corporate expense | 15,749 | 16,177 | 12,390 | -3 | % | 31 | % | |||||||||||||
| Total | $ | 204,729 | $ | 181,674 | $ | 169,637 | 13 | % | 7 | % | ||||||||||
The increase in information technology expense in fiscal 2018 was primarily attributable 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 other building-related expenses. The increase in travel expense relates to an increase in travel activity during the fiscal year. The increase in professional services expense primarily reflects an increase in corporate consulting engagements and external legal costs. The increase in
| 49 |
communications reflects increases in costs associated with telecommunications. These increases were offset by a decrease in the amortization of intangible assets and other corporate expenses.
The increase in information technology expense in fiscal 2017 was primarily attributable to increases in market data and maintenance costs, partially offset by decreases in project-related consulting and outside custody and back-office service costs. The increase in travel expense relates to an increase in travel activity. The increase in professional services expense reflects primarily one-time legal and consulting costs incurred in conjunction with the investigation of fraudulent activities of a former Eaton Vance Management trader. The increase in communications reflects increases in costs associated with telecommunications, subscriptions and supplies, partially offset by a decrease in postage. The increase in other corporate expenses is largely associated with the Calvert acquisition.
Non-operating Income (Expense)
The main categories of non-operating income (expense) for the fiscal years ended October 31, 2018, 2017 and 2016 are as follows:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Gains and other investment income, net | $ | 10,066 | $ | 19,303 | $ | 12,411 | -48 | % | 56 | % | ||||||||||
| Interest expense | (23,629 | ) | (27,496 | ) | (29,410 | ) | -14 | % | -7 | % | ||||||||||
| Loss on extinguishment of debt | - | (5,396 | ) | - | -100 | % | NM | |||||||||||||
| Other income (expense) of consolidated CLO entities: | ||||||||||||||||||||
| Gains and other investment income, net | 16,882 | - | 24,069 | NM | -100 | % | ||||||||||||||
| Interest and other expense | (15,286 | ) | - | (13,286 | ) | NM | -100 | % | ||||||||||||
| Total non-operating income (expense) | $ | (11,967 | ) | $ | (13,589 | ) | $ | (6,216 | ) | -12 | % | 119 | % | |||||||
Gains and other investment income, net, decreased by $9.2 million in fiscal 2018 compared to fiscal 2017, primarily reflecting a $15.9 million increase in net investment losses primarily attributable to investments in sponsored strategies and associated hedges and a $6.5 million loss recognized in fiscal 2018 upon expiration of the Company’s option to acquire an additional 26 ownership interest in Hexavest. The increase in net investment losses was offset by increases in interest and other income and foreign currency gains of $12.6 million and $0.5 million, respectively.
Gains and other investment income, net, increased by $6.9 million in fiscal 2017 compared to fiscal 2016, primarily reflecting an increase in interest and other income of $11.0 million, offset by an increase in net investment losses attributable to investments in sponsored strategies and associated hedges of $1.8 million and an increase in foreign currency losses of $2.3 million.
Interest expense decreased by $3.9 million in fiscal 2018 compared to fiscal 2017 and $1.9 million in fiscal 2017 compared to 2016. The decreases in interest expense reflect 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.
Net gains (losses) of consolidated CLO entities were $1.6 million during fiscal 2018 and $10.8 million in fiscal 2016. Net gains (losses) of consolidated CLO entities were negligible in fiscal 2017. Consolidated CLO entities’
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gains (losses) included in net income attributable to non-controlling and other beneficial interests were approximately $9.8 million during fiscal 2016, reflecting third-party note holders’ proportionate interests in the net income (loss) of each consolidated CLO entity. Income associated with the consolidated CLO entities included in net income attributable to Eaton Vance Corp. shareholders was $1.6 million during fiscal 2018 and $0.8 million for fiscal 2016, representing management fees earned by the Company and the Company’s proportionate interest in net gains (losses) of the consolidated CLO entities.
Income Taxes
Our effective tax rate, calculated as a percentage of income before income taxes and equity in net income of affiliates, was 28.8 percent, 37.0 percent and 37.6 percent in fiscal 2018, 2017 and 2016, respectively.
Our policy for accounting for income taxes includes monitoring our business activities and tax policies for compliance with federal, state and foreign tax laws. In the ordinary course of business, various taxing authorities may not agree with certain tax positions we have taken, or applicable law may not be clear. We periodically review these tax positions and provide for and adjust as necessary estimated liabilities relating to such positions as part of our overall tax provision.
On December 22, 2017, the Tax Cuts and Jobs Act (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 became effective two months into the Company’s fiscal year, a blended federal tax rate of 23.3 percent applied to the Company for the year ended October 31, 2018.
Our income tax provision for the year ended October 31, 2018 included a non-recurring charge of $24.0 million that reflects the estimated effects of the enactment of the 2017 Tax Act. The non-recurring charge was based on guidance issued by the Internal Revenue Service (IRS) and our interpretations of the tax law changes. The non-recurring charge consists of $21.2 million from the revaluation of our deferred tax assets and liabilities and $2.8 million for the deemed repatriation of foreign-sourced net earnings not previously subject to U.S. taxation. The tax increase associated with the non-recurring charges was partially offset by an income tax benefit of $17.5 million related to the exercise of stock options and vesting of restricted stock during the period, and $4.4 million related to the net income attributable to redeemable non-controlling and other beneficial interests, which is not taxable to us. We anticipate additional guidance will be issued by the IRS and continue to monitor interpretative developments. As additional guidance becomes available, we may reconsider our repatriation policy, as a result of which the associated estimated tax charge may change.
Our calculations of adjusted net income and adjusted earnings per diluted share remove the effect of the net excess tax benefits recognized in connection with ASU 2016-09 and the non-recurring impact of the tax reform recognized during fiscal 2018. On this basis, our adjusted effective tax rate was 27.6 percent for the year ended October 31, 2018.
Equity in Net Income of Affiliates, Net of Tax
Equity in net income of affiliates, net of tax, primarily reflects our 49 percent equity interest in Hexavest and our seven percent minority equity interest in a private equity partnership managed by a third party.
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The following table summarizes the components of equity in net income of affiliates, net of tax, for the fiscal years ended October 31, 2018, 2017 and 2016:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Investment in Hexavest, net of tax and amortization | $ | 10,955 | $ | 10,602 | $ | 9,979 | 3 | % | 6 | % | ||||||||||
| Investment in private equity partnership, net of tax | 418 | 268 | 356 | 56 | % | -25 | % | |||||||||||||
| Total | $ | 11,373 | $ | 10,870 | $ | 10,335 | 5 | % | 5 | % | ||||||||||
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 fiscal years ended October 31, 2018, 2017 and 2016:
| 2018 | 2017 | |||||||||||||||||||
| Years Ended October 31, | vs. | vs. | ||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Consolidated sponsored funds | $ | 232 | $ | (6,816 | ) | $ | 43 | NM | NM | |||||||||||
| Majority-owned subsidiaries | (16,199 | ) | (16,895 | ) | (13,525 | ) | -4 | % | 25 | % | ||||||||||
| Non-controlling interest value adjustments | - | (531 | ) | (200 | ) | -100 | % | 166 | % | |||||||||||
| Consolidated CLO entities | - | - | (9,768 | ) | NM | -100 | % | |||||||||||||
| Net income attributable to non-controlling and other beneficial interests | $ | (15,967 | ) | $ | (24,242 | ) | $ | (23,450 | ) | -34 | % | 3 | % | |||||||
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.
In fiscal 2017 and 2016, non-controlling interest value adjustments related to non-controlling interests redeemable at other than fair value reflect changes in the estimated redemption value of non-controlling interests in Atlanta Capital. The Company had no non-controlling interests that are redeemable at other than fair value as of October 31, 2018.
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.
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The following table summarizes certain key financial data relating to our liquidity and capital resources on October 31, 2018, 2017 and 2016 and uses of cash for the years then ended:
Balance Sheet and Cash Flow Data
| As of October 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Balance sheet data: | ||||||||||||
| Assets: | ||||||||||||
| Cash and cash equivalents | $ | 600,696 | $ | 610,555 | $ | 424,174 | ||||||
| Management fees and other receivables | 236,736 | 200,453 | 186,172 | |||||||||
| Total liquid assets | $ | 837,432 | $ | 811,008 | $ | 610,346 | ||||||
| Investments | $ | 1,078,627 | $ | 898,192 | $ | 589,773 | ||||||
| Liabilities: | ||||||||||||
| Debt(1) | $ | 625,000 | $ | 625,000 | $ | 575,000 | ||||||
| (1) | Represents the principal amount of debt outstanding. The carrying value of the debt, including debt issuance costs, was $619.7 million, $618.8 million and $571.8 million as of October 31, 2018, 2017 and 2016, respectively. |
| Years Ended October 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Cash flow data: | ||||||||||||
| Operating cash flows(1) | $ | 133,650 | $ | 79,675 | $ | 343,480 | ||||||
| Investing cash flows | (325,054 | ) | (91,425 | ) | (108,278 | ) | ||||||
| Financing cash flows(1) | 184,413 | 195,430 | (273,130 | ) | ||||||||
| (1) | As previously discussed, the Company adopted ASU 2016-09 in fiscal 2018. Upon adoption, the Company elected to use a retrospective approach, which required excess tax benefits or tax deficiencies, previously classified as financing cash flows, to be classified as operating cash flows. As a result, excess tax benefits of $14.8 million and $2.9 million for the years ended October 31, 2017 and 2016, respectively, were reclassified out of financing cash flows and into operating cash flows. |
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 separately managed accounts for investment advisory and distribution services provided. Excluding those assets identified as assets of consolidated CLO entities, liquid assets represented 33 percent and 35 percent of total assets on October 31, 2018 and 2017, respectively. Not included in the liquid asset amounts are $273.3 million and $213.5 million of highly liquid short-term debt securities with remaining maturities between three and 12 months held as of October 31, 2018 and 2017, 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.
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As of October 31, 2018, 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. The facility 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 October 31, 2018 or at any point during the fiscal year. We were in compliance with all debt covenants as of October 31, 2018. On December 11, 2018, we replaced this credit facility with a new $300 million unsecured revolving credit facility that expires on December 11, 2023 with similar terms and conditions.
We continue to monitor our liquidity daily. We remain committed to growing our business and returning capital to shareholders. We expect that our main uses of cash will be paying dividends, acquiring shares of our Non-Voting Common Stock, making seed investments in new investment strategies, potential strategic acquisitions, enhancing our technology infrastructure and paying the operating expenses of our business. We believe that our existing liquid assets, cash flows from operations and borrowing capacity under our credit facility are sufficient to meet our current and forecasted operating cash needs. The risk exists, however, that if we need to raise additional capital or refinance existing debt in the future, resources may not be available to us in sufficient amounts or on acceptable terms. Our ability to enter the capital markets in a timely manner depends on a number of factors, including the state of global credit and equity markets, interest rates, credit spreads and our credit ratings. If we are unable to access capital markets to issue new debt, refinance existing debt or sell shares of our Non-Voting Common Stock as needed, or if we are unable to obtain such financing on acceptable terms, our business could be adversely affected.
Recoverability of our Investments
Our $1.1 billion of investments as of October 31, 2018 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, for impairment on a quarterly basis. We evaluate our investments in non-consolidated CLO entities and investments classified as available-for-sale for impairment using quantitative factors, including how long the investment has been in a net unrealized loss position, and qualitative factors, including the credit quality of the underlying issuer and our ability and intent to continue holding the investment. In fiscal 2018, the Company recognized $0.2 million of other-than-temporary impairment losses related to its investment in a non-consolidated CLO entity. If markets deteriorate in the quarters ahead, our assessment of impairment on a quantitative basis may lead us to impair additional investments in future quarters that were in an unrealized loss position at October 31, 2018.
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 fiscal 2018 that would indicate that an impairment loss exists at October 31, 2018.
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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 fiscal 2018 that would indicate that an impairment loss exists at October 31, 2018.
Operating Cash Flows
Our operating cash flows are calculated by adjusting net income to reflect other significant sources and uses of cash, certain significant non-cash items and timing differences in the cash settlement of other assets and liabilities. Significant sources and uses of cash that are not reflected in either revenue or expenses include net cash flows associated with our deferred sales commission assets (capitalized sales commissions paid net of contingent deferred sales charges received), as well as net cash flows associated with the purchase and sale of investments within the portfolios of our consolidated sponsored funds and separate accounts (proceeds received from the sale of trading investments net of cash outflows associated with the purchase of trading investments). Significant non-cash items include the amortization of deferred sales commissions and intangible assets, depreciation, stock-based compensation and net change in deferred income taxes.
Cash provided by operating activities totaled $133.7 million in fiscal 2018 compared to $79.7 million in fiscal 2017. The increase in net cash provided by operating activities primarily reflects a decrease in net cash used for the purchase of investments in trading securities and an increase in the timing differences in the cash settlements of our other assets and liabilities, partially offset by a decrease in cash used in the operating activities of consolidated CLO entities.
Cash provided by operating activities totaled $79.7 million in fiscal 2017 compared to $343.5 million in fiscal 2016. The decrease in net cash provided by operating activities primarily reflects an increase in net cash used for the purchase of investments in trading securities and a decrease in cash provided by the operating activities of consolidated CLO entities, partially offset by an increase in the timing differences in the cash settlements of our other assets and liabilities.
Investing Cash Flows
Cash flows from investing activities reflect primarily the purchase of equipment and leasehold improvements, the purchase and sale of available-for-sale investments in sponsored funds that we do not consolidate, the purchase and sale of investments in CLO entity note obligations and any cash payments made in connection with acquisitions. In addition, investing cash flows reflect the investing activities of our consolidated CLO entities, including the purchase and sale of bank loans and other investments.
Cash used for investing activities totaled $325.1 million in fiscal 2018 compared to $91.4 million in fiscal 2017. The increase in cash used for investing activities was primarily attributable to a $221.7 million increase in net purchases of bank loans and other investments by our consolidated CLO entities, a $70.8 million increase in net purchases of investments made by the Company in CLO entity note obligations and a $6.0 million increase in additions to equipment and leasehold improvements, partially offset by a $63.6 decrease in net cash paid in acquisitions.
Cash used for investing activities totaled $91.4 million in fiscal 2017 compared to $108.3 million in fiscal 2016. The decrease in cash used by investing activities reflects a $51.3 million decrease in net purchases of bank loans and other investments by our consolidated CLO entities, a $20.7 million increase in net proceeds from sales of available-for-sale securities and a $4.7 million decrease in proceeds from sales of investments in CLO
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entity note obligations, partially offset by a $53.5 million increase in net cash paid in acquisitions, the issuance of a $5.0 million note receivable to Hexavest in fiscal 2016 and a $2.0 million increase in additions to equipment and leasehold improvements.
Financing Cash Flows
Financing cash flows primarily reflect the issuance and repurchase of our Non-Voting Common Stock, the payment of dividends to our shareholders, the purchase of non-controlling interests in our majority-owned subsidiaries, distributions to non-controlling interest holders of our majority-owned subsidiaries and any proceeds received or repayments made in connection with the Company’s debt. Financing cash flows also reflect the financing activities of our consolidated funds, including the proceeds from the issuance of capital stock, payments for redemptions and distributions to non-controlling interest holders of these funds. In addition, financing cash flows reflect the financing activities of our consolidated CLO entities, including the issuance and repayment of CLO beneficial interests (senior and subordinated note obligations) and proceeds and repayments of CLO borrowings.
Cash provided by financing activities totaled $184.4 million in fiscal 2018. The Company paid $20.8 million to acquire additional interests in Atlanta Capital and Parametric, repurchased and retired 5.6 million shares of our Non-Voting Common Stock for $273.6 million under our authorized repurchase programs, and issued 4.0 million shares of our Non-Voting Common Stock in connection with the grant of restricted share awards, the exercise of stock options and other employee stock purchases for total proceeds of $76.4 million. As of October 31, 2018, we had authorization to purchase an additional 7.3 million shares of our Non-Voting Common Stock under our current share repurchase authorization. We anticipate that repurchases of our Non-Voting Common Stock will continue to be an ongoing use of cash. Our dividends declared per share increased to $1.28 in fiscal 2018 from $1.15 in fiscal 2017, and we paid an additional $19.1 million of dividends in fiscal 2018 versus fiscal 2017. We currently expect to declare and pay quarterly dividends on our Voting and Non-Voting Common Stock comparable to the dividend declared in the fourth quarter of fiscal 2018. Cash provided by financing activities of consolidated CLO entities totaled $442.2 million in fiscal 2018.
Cash provided by financing activities totaled $195.4 million in fiscal 2017. The Company issued $300 million of 2027 Senior Notes, resulting in net proceeds of approximately $296.1 million, and redeemed the remaining $250 million of the Company’s 2017 Senior Notes for $255.4 million. We paid $9.8 million to acquire additional interests in Atlanta Capital and Parametric, repurchased and retired 2.9 million shares of our Non-Voting Common Stock for $126.2 million under our authorized repurchase programs, and issued 7.4 million shares of our Non-Voting Common Stock in connection with the grant of restricted share awards, the exercise of stock options and other employee stock purchases for total proceeds of $210.9 million. Cash provided by financing activities of consolidated CLO entities totaled $12.6 million in fiscal 2017.
Cash used for financing activities totaled $273.1 million in fiscal 2016. The Company paid $15.7 million to acquire additional interests in Atlanta Capital and Parametric, repurchased and retired approximately 7.3 million shares of our Non-Voting Common Stock for $253.0 million under our authorized repurchase programs and issued 5.4 million shares of our Non-Voting Common Stock in connection with the grant of restricted share awards, the exercise of stock options and other employee stock purchases for total proceeds of $110.4 million.
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Contractual Obligations
The following table details our contractual obligations as of October 31, 2018:
| Payments due by Period | ||||||||||||||||||||
| Less | More | |||||||||||||||||||
| than 1 | 1-3 | 4-5 | than 5 | |||||||||||||||||
| (in millions) | Total | Year | Years | Years | Years | |||||||||||||||
| Operating leases | $ | 360 | $ | 24 | $ | 48 | $ | 47 | $ | 241 | ||||||||||
| Senior notes | 625 | - | - | 325 | 300 | |||||||||||||||
| Interest payment on senior notes | 148 | 22 | 44 | 44 | 38 | |||||||||||||||
| Payments to non-controlling interest holders of majority-owned subsidiaries | 14 | 14 | - | - | - | |||||||||||||||
| Unrecognized tax benefits(1) | 1 | 1 | - | - | - | |||||||||||||||
| Total | $ | 1,148 | $ | 61 | $ | 92 | $ | 416 | $ | 579 | ||||||||||
| Contractual obligations of consolidated CLO entities: | ||||||||||||||||||||
| Senior and subordinated note obligations, including interest(2) | $ | 1,314 | $ | 37 | $ | 74 | $ | 74 | $ | 1,129 | ||||||||||
| Total for consolidated CLO entities | $ | 1,314 | $ | 37 | $ | 74 | $ | 74 | $ | 1,129 | ||||||||||
| (1) | This amount includes unrecognized tax benefits along with accrued interest and penalties. |
| (2) | Only the assets of consolidated CLO entities can be used to satisfy the obligations of each entity. Other beneficial interest holders of consolidated CLO entities do not have any recourse to the Company’s general credit. In the event of default, recourse to the Company is limited to its investment in these entities. |
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. Accordingly, future payments to purchase non-controlling interests have been excluded from the above table, unless a put or call option has been exercised and a mandatory firm commitment exists for us to purchase such non-controlling interests. 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. In the table above, payments to non-controlling interest holders of majority-owned subsidiaries include $8.2 million and $5.9 million of payments upon the execution of termination call options by the Company related to profit interests held by non-controlling interest holders of Atlanta Capital and Parametric, respectively. These transactions settled in November 2018. In fiscal 2016 and fiscal 2017, the Company introduced phantom equity plans for Parametric and Atlanta Capital, respectively, and ceased making grants of profits interests under the long-term equity incentive plans referenced above.
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We have presented all redeemable non-controlling interests at redemption value on our Consolidated Balance Sheet as of October 31, 2018. We have recorded the current year change in the estimated redemption value of non-controlling interests redeemable at fair value as a component of additional paid-in capital. The estimated redemption value of our non-controlling interests totaled $335.1 million on October 31, 2018 compared to $250.8 million on October 31, 2017. These interests are all redeemable at fair value. There were no non-controlling interests redeemable at other than fair value as of October 31, 2018. Redeemable non-controlling interests as of October 31, 2018 consisted of profit interests granted under the long-term incentive plans of Parametric and Atlanta Capital of $47.9 million and $26.3 million, respectively, and non-controlling interests in Parametric issued in conjunction with the Parametric Risk Advisors LLC (Parametric Risk Advisors) final put option of $15.9 million. Additionally, redeemable non-controlling interests as of October 31, 2018 also included third-party investors’ ownership in consolidated sponsored funds of $245.0 million.
In November 2010, we acquired patents and other intellectual property from Managed ETFs LLC, a developer of intellectual property in the field of exchange-traded funds. This intellectual property is the foundation of the Company’s NextShares™ exchange-traded managed funds initiative. The terms of the acquisition of the patents and other intellectual property of Managed ETFs LLC include approximately $9.0 million in aggregate contingent milestone payments that are based on specific events representing key developments in the commercialization of NextShares. There is no defined timing on these payments, resulting in significant uncertainty as to when the amount of any payment is due in the future. Accordingly, future payments to be made have been excluded from the above table until such time as the uncertainty has been resolved. If and when the milestones are reached, Managed ETFs LLC is also entitled to revenue-sharing payments that are calculated as a percentage of licensing revenue that we receive for use of the acquired intellectual property.
Foreign Subsidiaries
As of October 31, 2018, we considered the undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested in foreign operations. Relating to the enactment of the 2017 Tax Act, an estimated tax of $2.8 million was recorded during the year ended October 31, 2018 on these earnings. The calculation of this non-recurring charge was based on the language of the 2017 Tax Act, guidance issued by the IRS and our interpretation of this information. We anticipate additional guidance will be issued by the IRS and continue to monitor interpretative developments. As additional guidance becomes available, we may reconsider our repatriation policy and this estimated tax charge may change.
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
We believe the following critical accounting policies reflect our accounting policies that require significant judgments and estimates used in the preparation of our Consolidated Financial Statements. Actual results may differ from these estimates.
Consolidation of variable interest entities (VIEs)
Accounting guidance provides a framework for determining whether an entity should be considered a VIE and, if so, whether our involvement with the entity represents a variable interest in the entity. If we determine that
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we have a variable interest in a VIE, we must perform an analysis to determine whether we are the primary beneficiary of the VIE. If we determine we are the primary beneficiary of the VIE, we are required to consolidate the assets, liabilities, results of operations and cash flows of the VIE.
Our evaluation of whether we qualify as the primary beneficiary of a VIE is complex. We are the primary beneficiary of a VIE if we have a controlling financial interest in the VIE. A company is deemed to have a controlling financial interest in a VIE if it has both (i) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
For CLO entities, we must evaluate the relative size of our beneficial interest and the overall magnitude and design of the collateral management fees within each structure. There is also judgment involved in assessing whether we have the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant.
While we believe our overall evaluation of VIEs is appropriate, future changes in estimates, judgments and assumptions or changes in our ownership interests in a VIE may affect the resulting consolidation, or deconsolidation, of the assets, liabilities, results of operations and cash flows of a VIE.
Fair value measurements
The accounting standards for fair value measurement provide a framework for measuring fair value and require expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting standards establish a fair value measurement hierarchy, which requires an entity to maximize the use of observable inputs where available. This fair value measurement hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
We utilize third-party pricing services to value investments in various asset classes, including interests in senior floating-rate loans and other debt obligations, derivatives and certain foreign equity securities, as further discussed below. Valuations provided by the pricing services are subject to exception reporting that identifies securities with significant movements in valuation, as well as investments with no movements in valuation. These exceptions are reviewed by us on a daily basis. We compare the price of trades executed by us to the valuations provided by the third-party pricing services to identify and research significant variances. We periodically compare the pricing service valuations to valuations provided by a secondary independent source when available. Market data provided by the pricing services and other market participants, such as the Loan Syndication and Trading Association (LSTA) trade study, is reviewed to assess the reliability of the provided data. Our Valuation Committee reviews the general assumptions underlying the methodologies used by the pricing services to value various asset classes at least annually. Throughout the year, members of our Valuation Committee meet with the service providers to discuss any significant changes to the service providers’ valuation methodologies or operational processes.
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories based on the nature of the inputs that are significant to the fair value measurements in their entirety. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
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measurement hierarchy. In such cases, an investment’s classification within the fair value measurement hierarchy is based on the lowest level of input that is significant to the fair value measurement.
| Level 1 | Unadjusted quoted market prices in active markets for identical assets or liabilities at the reporting date. |
| Level 2 | Observable inputs other than Level 1 unadjusted quoted market prices, such as quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active, and inputs other than quoted prices that are observable or corroborated by observable market data. |
| Level 3 | Unobservable inputs that are supported by little or no market activity. |
We recognize any transfers between levels at the end of each quarter.
Income taxes
Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts and tax bases of our assets and liabilities measured using rates expected to be in effect when such differences reverse. To the extent that deferred tax assets are considered more likely than not to be unrealizable, valuation allowances are provided. Proposed changes in U.S. tax policy, which include a proposal to reduce federal tax rates for corporations, may affect the carrying value of deferred tax assets and liabilities due to the change in future tax rates. Re-measurement of deferred taxes for a corporate rate reduction and other applicable provisions of tax reform will be recorded as an expense or benefit in the period that the new legislation is enacted.
Our effective tax rate reflects the statutory tax rates of the many jurisdictions in which we operate. Significant judgment is required in evaluating our tax positions. In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. Accounting standards governing the accounting for uncertainty in income taxes for a tax position taken or expected to be taken in a tax return require that the tax effects of a position be recognized only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold must be met in each reporting period to support continued recognition of the benefit. The difference between the tax benefit recognized in the financial statements for a tax position and the tax benefit claimed in the income tax return is referred to as an unrecognized tax benefit. Unrecognized tax benefits, as well as the related interest and penalties, are regularly evaluated and adjusted as appropriate to reflect changing facts and circumstances. We classify any interest or penalties incurred as a component of income tax expense.
Goodwill
Goodwill represents the excess of the cost of our investment in the net assets of acquired companies over the fair value of the underlying identifiable net assets at the dates of acquisition. We attribute all goodwill associated with the acquisitions of Atlanta Capital, Parametric and Clifton, which share similar economic characteristics, to one reporting unit. We attribute all goodwill associated with the acquisition of the TABS business of M.D. Sass Investor Services and other acquisitions to a second reporting unit.
Goodwill is not amortized but is tested annually for impairment in the fourth quarter of each fiscal year by comparing the fair values of identified reporting units to their respective carrying amounts, including goodwill. We establish fair value for the purpose of impairment testing for each reporting unit by using an income approach and a market approach.
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The income approach employs a discounted cash flow model that takes into account (1) assumptions that market participants would use in their estimates of fair value, (2) current period actual results and (3) budget projections for future periods that have been vetted by senior management. The discounted cash flow model incorporates the same fundamental pricing concepts used to calculate fair value in the acquisition due diligence process and a discount rate that takes into consideration our estimated cost of capital adjusted for the uncertainty inherent in the forecasted information.
The market approach employs market multiples based on comparable publicly traded companies in the financial services industry, calculated with data from industry sources. Estimates of fair value are established using current and forward multiples of both revenue and earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted for size and performance of the reporting unit relative to peer companies.
If the carrying amount of the reporting unit exceeds its calculated fair value, the second step of the goodwill impairment test will be performed to measure the amount of the impairment loss, if any.
Intangible assets
Amortizing identifiable intangible assets generally represent the cost of client relationships, intellectual property, trademarks, and research systems. In valuing these assets, we make assumptions regarding useful lives and projected growth rates, and significant judgment is required. We periodically review our amortizing identifiable intangible assets 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 those assets exceed their respective fair values, an impairment loss is recognized equal to that excess.
Non-amortizing intangible assets generally represent the cost of mutual fund management contracts acquired. Non-amortizing intangible assets are tested for impairment in the fourth quarter of each fiscal year by comparing the fair values of the management contracts acquired to their carrying values. We establish fair value for purposes of impairment testing using the income approach. If the carrying value of a management contract acquired exceeds its fair value, an impairment loss is recognized equal to that excess.
Stock-based compensation
We account 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 profits interests and phantom equity units 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 income and fair value approaches used in the determination of grant date fair value of profits interests and phantom equity units are consistent with those described in Goodwill above.
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
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as income tax expense (for tax deficiencies) or benefit (for excess tax benefits) in the Consolidated Statements of Income in the period in which the tax deduction arises (generally in the period of vesting or settlement of a stock-based award, as applicable) and are reflected as an operating activity in the Consolidated Statements of Cash Flows. Shares of non-voting common stock withheld for tax withholding purposes upon the vesting of restricted share awards are reflected as a financing activity in the Consolidated Statements of Cash Flows.
Non-controlling interests
Non-redeemable non-controlling interests consist entirely of unvested interests granted to employees of our majority-owned subsidiaries under subsidiary-specific long-term equity plans. These grants become subject to holder put rights upon vesting and are reclassified to temporary equity as vesting occurs.
Non-controlling interests redeemable at fair value consist of interests in our consolidated sponsored funds and certain vested interests held by employees of our majority-owned subsidiaries that were granted under the subsidiaries’ long-term equity plans. Our non-controlling interests redeemable at fair value are recorded in temporary equity at estimated redemption value and changes in the estimated redemption value of these interests are recognized as increases or decreases to additional paid-in capital.
Non-controlling interests redeemable at other than fair value consisted of certain other interests in our majority-owned subsidiaries. During the fiscal year ended October 31, 2017, the Company acquired the remaining profit interests held by the non-controlling interest holders of Atlanta Capital. As a result, the Company had no non-controlling interests that are redeemable at other than fair value as of October 31, 2017.
Accounting Developments
See Note 1, “Summary of Significant Accounting Policies – Adoption of new accounting standards,” and Note 2, “New Accounting Standards Not Yet Adopted,” in Item 8, “Financial Statements and Supplementary Data.”
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, our financial position is subject to different types of risk, including market risk. Market risk is the risk that we will incur losses due to adverse changes in equity and bond prices, interest rates, credit events or currency exchange rates. Management is responsible for identifying, assessing and managing market and other risks.
In evaluating market risk, it is important to note that most of our revenue is based on the market value of assets under management. As noted in “Risk Factors” in Item 1A of this Annual Report on Form 10-K, declines of financial market values adversely affect our revenue and net income.
Our primary direct exposure to equity price risk arises from investments in equity securities made by consolidated sponsored funds, investments in equity securities we hold in separately managed accounts and our investments in sponsored equity funds that are not consolidated. Equity price risk as it relates to these investments represents the potential future loss of value that would result from a decline in the fair values of the fund shares or underlying equity securities.
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The following is a summary of the effect that a 10 percent increase or decrease in equity prices would have on our investments subject to equity price fluctuations at October 31, 2018:
| (in thousands) | Carrying Value | Carrying Value Assuming a 10% Increase | Carrying Value Assuming a 10% Decrease | |||||||||
| Investment securities, trading: | ||||||||||||
| Consolidated sponsored funds and separately managed accounts | $ | 159,670 | $ | 175,637 | $ | 143,703 | ||||||
| Investment securities, available-for-sale: | ||||||||||||
| Sponsored funds | 8,957 | 9,853 | 8,061 | |||||||||
| Total | $ | 168,627 | $ | 185,490 | $ | 151,764 | ||||||
At October 31, 2018, we were exposed to interest rate risk and credit spread risk as a result of approximately $744.1 million in investments in fixed and floating-rate income funds sponsored or managed by us, debt securities held by sponsored funds we consolidate and debt securities we hold in separately managed accounts. Management considered a hypothetical 100 basis point change in interest rates and determined that an increase of such magnitude would result in a decrease of approximately $7.4 million in the carrying amount of our debt investments and that a decrease of 100 basis points would increase the carrying amount of such investments by approximately $7.4 million.
Currently we have a corporate hedging program in place to hedge currency risk, interest rate risk and market price exposures on certain of our investments in consolidated sponsored funds and separately managed accounts. As part of this program, we enter into forwards, futures and swap contracts to hedge certain exposures held within the portfolios of these consolidated sponsored funds and separately managed accounts. The contracts negotiated are short term in nature. We do not enter into derivative instruments for speculative purposes.
The following is a summary of the estimated effect that a 10 percent adverse change in market prices would have on the forwards, futures and swap contracts of our corporate hedging program as of October 31, 2018:
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| (in thousands) | Notional Value | Decrease in Fair Value Assuming a 10% Adverse Change | ||||||
| Stock index futures contracts | $ | 91,550 | $ | 468 | ||||
| Total return swap contracts | 106,450 | 330 | ||||||
| Credit default swap contracts | 5,000 | 1 | ||||||
| Foreign exchange contracts | 23,042 | 13 | ||||||
| Commodity futures contracts | 11,567 | 55 | ||||||
| Currency futures contracts | 16,864 | 32 | ||||||
| Interest rate futures contracts | 48,019 | 16 | ||||||
| Total | $ | 302,492 | $ | 915 | ||||
We are required to maintain cash collateral for margin accounts to support certain derivative positions, which are classified as restricted cash and included as a component of other assets on our Consolidated Balance Sheets. At October 31, 2018, cash collateral included in other assets on our Consolidated Balance Sheet totaled $13.1 million.
Direct exposure to credit risk arises from our interests in non-consolidated CLO entities that are included in investments in our Consolidated Balance Sheets, as well as our interests in consolidated CLO entities that are eliminated in consolidation. Our CLO entity investments entitle us only to a residual interest in the CLO entity, making these investments highly sensitive to the default and recovery experiences of the underlying instruments held by the CLO entity. Our CLO investments are subject to an impairment loss in the event that the cash flows generated by the collateral securities are not sufficient to allow equity holders to recover their investments. If there is deterioration in the credit quality of collateral and reference securities and a corresponding increase in defaults, CLO entity cash flows may be adversely affected and we may be unable to recover our investment. We had total investments in non-consolidated CLO entities of $2.9 million and investments of $68.2 million in our consolidated CLO entities as of October 31, 2018, representing our total value at risk with respect to such entities as of that date.
We are subject to foreign currency exchange risk through our international operations. While we operate primarily in the United States and, accordingly, most of our consolidated revenue and associated expenses are denominated in U.S. dollars, we also provide services and earn revenue outside of the United States. Revenue and expenses denominated in foreign currencies may be affected by movements in foreign currency exchange rates. The exposure to foreign currency exchange risk in our Consolidated Balance Sheets relates primarily to an equity method investment and cash and cash equivalents that are denominated in foreign currencies, principally Canadian dollars. This risk will likely increase as our business outside of the United States grows. We generally do not use derivative financial instruments to manage the foreign currency exchange risk exposure we assume in connection with investments in international operations. As a result, both positive and negative currency fluctuations against the U.S. dollar may affect our results of operations and accumulated other comprehensive income (loss). We do not enter into foreign currency transactions for speculative purposes.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data
For the Fiscal Years Ended October 31, 2018, 2017 and 2016
Contents |
Page Number Reference | |
| Consolidated Financial Statements of Eaton Vance Corp.: | ||
| Consolidated Statements of Income for each of the three years in the period ended October 31, 2018 | ||
| Consolidated Statements of Comprehensive Income for each of the three years in the period ended October 31, 2018 | ||
| Consolidated Balance Sheets as of October 31, 2018 and 2017 | 68 | |
| Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended October 31, 2018 | ||
| Consolidated Statements of Cash Flows for each of the three years in the period ended October 31, 2018 | ||
| Notes to Consolidated Financial Statements | 74 | |
| Report of Independent Registered Public Accounting Firm | 129 | |
| All schedules have been omitted because they are not required, are not applicable or the information is otherwise shown in the consolidated financial statements or notes thereto. | ||
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Consolidated Statements of Income
| Years Ended October 31, | ||||||||||||
| (in thousands, except per share data) | 2018 | 2017 | 2016 | |||||||||
| Revenue: | ||||||||||||
| Management fees | $ | 1,481,896 | $ | 1,318,141 | $ | 1,151,198 | ||||||
| Distribution and underwriter fees | 80,478 | 78,776 | 74,822 | |||||||||
| Service fees | 123,500 | 119,962 | 107,684 | |||||||||
| Other revenue | 16,375 | 12,131 | 9,156 | |||||||||
| Total revenue | 1,702,249 | 1,529,010 | 1,342,860 | |||||||||
| Expenses: | ||||||||||||
| Compensation and related costs | 604,631 | 553,952 | 491,115 | |||||||||
| Distribution expense | 141,418 | 132,873 | 117,996 | |||||||||
| Service fee expense | 113,337 | 112,519 | 98,494 | |||||||||
| Amortization of deferred sales commissions | 18,394 | 16,239 | 15,451 | |||||||||
| Fund-related expenses | 64,538 | 48,995 | 35,899 | |||||||||
| Other expenses | 204,729 | 181,674 | 169,637 | |||||||||
| Total expenses | 1,147,047 | 1,046,252 | 928,592 | |||||||||
| Operating income | 555,202 | 482,758 | 414,268 | |||||||||
| Non-operating income (expense): | ||||||||||||
| Gains and other investment income, net | 10,066 | 19,303 | 12,411 | |||||||||
| Interest expense | (23,629 | ) | (27,496 | ) | (29,410 | ) | ||||||
| Loss on extinguishment of debt | - | (5,396 | ) | - | ||||||||
| Other income (expense) of consolidated collateralized loan obligation (CLO) entities: | ||||||||||||
| Gains and other investment income, net | 16,882 | - | 24,069 | |||||||||
| Interest and other expense | (15,286 | ) | - | (13,286 | ) | |||||||
| Total non-operating expense | (11,967 | ) | (13,589 | ) | (6,216 | ) | ||||||
| Income before income taxes and equity in net income of affiliates | 543,235 | 469,169 | 408,052 | |||||||||
| Income taxes | (156,703 | ) | (173,666 | ) | (153,630 | ) | ||||||
| Equity in net income of affiliates, net of tax | 11,373 | 10,870 | 10,335 | |||||||||
| Net income | 397,905 | 306,373 | 264,757 | |||||||||
| Net income attributable to non-controlling and other beneficial interests | (15,967 | ) | (24,242 | ) | (23,450 | ) | ||||||
| Net income attributable to Eaton Vance Corp. shareholders | $ | 381,938 | $ | 282,131 | $ | 241,307 | ||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 3.33 | $ | 2.54 | $ | 2.20 | ||||||
| Diluted | $ | 3.11 | $ | 2.42 | $ | 2.12 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 114,745 | 110,918 | 109,914 | |||||||||
| Diluted | 122,932 | 116,418 | 113,982 | |||||||||
See notes to Consolidated Financial Statements.
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Consolidated Statements of Comprehensive Income
| Years Ended October 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Net income | $ | 397,905 | $ | 306,373 | $ | 264,757 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized loss on cash flow hedges, net of tax | - | (413 | ) | - | ||||||||
| Amortization of net gains on cash flow hedges, net of tax | (101 | ) | 27 | 13 | ||||||||
| Unrealized gains (losses) on available-for-sale investments and reclassification adjustments, net of tax | (414 | ) | 1,185 | (790 | ) | |||||||
| Foreign currency translation adjustments | (5,192 | ) | 9,310 | (8,220 | ) | |||||||
| Other comprehensive income (loss), net of tax | (5,707 | ) | 10,109 | (8,997 | ) | |||||||
| Total comprehensive income | 392,198 | 316,482 | 255,760 | |||||||||
| Comprehensive income attributable to non-controlling and other beneficial interests | (15,967 | ) | (24,242 | ) | (23,450 | ) | ||||||
| Total comprehensive income attributable to Eaton Vance Corp. shareholders | $ | 376,231 | $ | 292,240 | $ | 232,310 | ||||||
See notes to Consolidated Financial Statements.
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| October 31, | ||||||||
| (in thousands, except share data) | 2018 | 2017 | ||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 600,696 | $ | 610,555 | ||||
| Management fees and other receivables | 236,736 | 200,453 | ||||||
| Investments | 1,078,627 | 898,192 | ||||||
| Assets of consolidated CLO entities: | ||||||||
| Cash | 216,598 | - | ||||||
| Bank loans and other investments | 874,304 | 31,348 | ||||||
| Other assets | 4,464 | - | ||||||
| Deferred sales commissions | 48,629 | 36,423 | ||||||
| Deferred income taxes | 45,826 | 67,100 | ||||||
| Equipment and leasehold improvements, net | 52,428 | 48,989 | ||||||
| Intangible assets, net | 80,885 | 89,812 | ||||||
| Goodwill | 259,681 | 259,681 | ||||||
| Loan to affiliate | 5,000 | 5,000 | ||||||
| Other assets | 95,454 | 83,348 | ||||||
| Total assets | $ | 3,599,328 | $ | 2,330,901 | ||||
| Liabilities, Temporary Equity and Permanent Equity | ||||||||
| Liabilities: | ||||||||
| Accrued compensation | $ | 233,836 | $ | 207,330 | ||||
| Accounts payable and accrued expenses | 91,410 | 68,115 | ||||||
| Dividend payable | 51,731 | 44,634 | ||||||
| Debt | 619,678 | 618,843 | ||||||
| Liabilities of consolidated CLO entities: | ||||||||
| Senior and subordinated note obligations | 873,008 | - | ||||||
| Line of credit | - | 12,598 | ||||||
| Other liabilities | 154,185 | - | ||||||
| Other liabilities | 131,952 | 116,298 | ||||||
| Total liabilities | 2,155,800 | 1,067,818 | ||||||
| Commitments and contingencies (Note 20) | ||||||||
| Temporary Equity: | ||||||||
| Redeemable non-controlling interests | 335,097 | 250,823 | ||||||
| Total temporary equity | 335,097 | 250,823 | ||||||
| Permanent Equity: | ||||||||
| Voting Common Stock, par value $0.00390625 per share: | ||||||||
| Authorized, 1,280,000 shares | ||||||||
| Issued and outstanding, 422,935 and 442,932 shares, respectively | 2 | 2 | ||||||
| Non-Voting Common Stock, par value $0.00390625 per share: | ||||||||
| Authorized, 190,720,000 shares | ||||||||
| Issued and outstanding, 116,527,845 and 118,077,872 shares, respectively | 455 | 461 | ||||||
| Additional paid-in capital | 17,514 | 148,284 | ||||||
| Notes receivable from stock option exercises | (8,057 | ) | (11,112 | ) | ||||
| Accumulated other comprehensive loss | (53,181 | ) | (47,474 | ) | ||||
| Retained earnings | 1,150,698 | 921,235 | ||||||
| Total Eaton Vance Corp. shareholders' equity | 1,107,431 | 1,011,396 | ||||||
| Non-redeemable non-controlling interests | 1,000 | 864 | ||||||
| Total permanent equity | 1,108,431 | 1,012,260 | ||||||
| Total liabilities, temporary equity and permanent equity | $ | 3,599,328 | $ | 2,330,901 | ||||
See notes to Consolidated Financial Statements.
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Consolidated Statements of Shareholders’ Equity
| Permanent Equity | Temporary Equity | ||||||||||||||||||||||||||||||||
| (in thousands) | Voting
and Non-Voting Common Shares | Voting Common Stock | Non-Voting Common Stock | Additional Paid-In Capital | Notes Receivable from Stock Option Exercises | Accumulated Other Comprehensive Loss | Appropriated Deficit | Retained Earnings | Non- Redeemable Non- Controlling Interests | Total
Permanent Equity | Redeemable Non- Controlling Interests | ||||||||||||||||||||||
| Balance, November 1, 2015 | 115,886 | $ | 2 | $ | 451 | $ | - | $ | (11,143 | ) | $ | (48,586 | ) | $ | (5,338 | ) | $ | 684,845 | $ | 1,725 | $ | 621,956 | $ | 88,913 | |||||||||
| Net income | - | - | - | - | - | - | 9,768 | 241,307 | 4,066 | 255,141 | 9,616 | ||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | - | - | (8,997 | ) | - | - | - | (8,997 | ) | - | ||||||||||||||||||||
| Dividends declared ($1.075 per share) | - | - | - | - | - | - | - | (122,154 | ) | - | (122,154 | ) | - | ||||||||||||||||||||
| Issuance of Voting Common Stock | 56 | - | - | 232 | - | - | - | - | - | 232 | - | ||||||||||||||||||||||
| Issuance of Non-Voting Common Stock: | |||||||||||||||||||||||||||||||||
| On exercise of stock options | 3,805 | - | 15 | 107,851 | (4,188 | ) | - | - | - | - | 103,678 | - | |||||||||||||||||||||
| Under employee stock purchase plans | 98 | - | - | 3,145 | - | - | - | - | - | 3,145 | - | ||||||||||||||||||||||
| Under employee stock purchase incentive plan | 134 | - | 1 | 3,596 | - | - | - | - | - | 3,597 | - | ||||||||||||||||||||||
| Under restricted stock plan, net of forfeitures | 1,366 | - | 5 | - | - | - | - | - | - | 5 | - | ||||||||||||||||||||||
| Stock-based compensation | - | - | - | 71,337 | - | - | - | - | - | 71,337 | - | ||||||||||||||||||||||
| Tax benefit of stock option exercises and vesting of restricted stock awards | - | - | - | 2,240 | - | - | - | - | - | 2,240 | - | ||||||||||||||||||||||
| Tax benefit of non-controlling interest repurchases (See Note 16) | - | - | - | 52,657 | - | - | - | - | - | 52,657 | - | ||||||||||||||||||||||
| Repurchase of Voting Common Stock | (28 | ) | - | - | (77 | ) | - | - | - | - | - | (77 | ) | - | |||||||||||||||||||
| Repurchase of Non-Voting Common Stock | (7,329 | ) | - | (28 | ) | (221,949 | ) | - | - | - | (30,998 | ) | - | (252,975 | ) | - | |||||||||||||||||
| Principal repayments on notes receivable from stock option exercises | - | - | - | - | 3,257 | - | - | - | - | 3,257 | - | ||||||||||||||||||||||
| Net subscriptions (redemptions/distributions) of non-controlling interest holders | - | - | - | - | - | - | - | - | (4,886 | ) | (4,886 | ) | 1,736 | ||||||||||||||||||||
| Net consolidations (deconsolidations) of sponsored investment funds and CLO entities | - | - | - | - | - | - | (4,430 | ) | - | - | (4,430 | ) | (1,567 | ) | |||||||||||||||||||
| Reclass to temporary equity | - | - | - | - | - | - | - | - | (119 | ) | (119 | ) | 119 | ||||||||||||||||||||
| Purchase of non-controlling interests | - | - | - | - | - | - | - | - | - | - | (8,821 | ) | |||||||||||||||||||||
| Changes in redemption value of non-controlling interests redeemable at fair value | - | - | - | (19,032 | ) | - | - | - | - | - | (19,032 | ) | 19,032 | ||||||||||||||||||||
| Balance, October 31, 2016 | 113,988 | $ | 2 | $ | 444 | $ | - | $ | (12,074 | ) | $ | (57,583 | ) | $ | - | $ | 773,000 | $ | 786 | $ | 704,575 | $ | 109,028 | ||||||||||
See notes to Consolidated Financial Statements.
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Consolidated Statements of Shareholders’ Equity (continued)
| Permanent Equity | Temporary Equity | |||||||||||||||||||||||||||||||||||||||
| (in thousands) | Voting
and Non-Voting Common Shares | 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 | 113,988 | $ | 2 | $ | 444 | $ | - | $ | (12,074 | ) | $ | (57,583 | ) | $ | 773,000 | $ | 786 | $ | 704,575 | $ | 109,028 | |||||||||||||||||||
| Net income | - | - | - | - | - | - | 282,131 | 4,079 | 286,210 | 20,163 | ||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | - | - | - | - | - | 10,109 | - | - | 10,109 | - | ||||||||||||||||||||||||||||||
| Dividends declared ($1.150 per share) | - | - | - | - | - | - | (133,896 | ) | - | (133,896 | ) | - | ||||||||||||||||||||||||||||
| Issuance of Non-Voting Common Stock: | ||||||||||||||||||||||||||||||||||||||||
| On exercise of stock options | 5,599 | - | 22 | 207,471 | (3,538 | ) | - | - | - | 203,955 | - | |||||||||||||||||||||||||||||
| Under employee stock purchase plans | 95 | - | - | 2,976 | - | - | - | - | 2,976 | - | ||||||||||||||||||||||||||||||
| Under employee stock purchase incentive plan | 108 | - | - | 3,997 | - | - | - | - | 3,997 | - | ||||||||||||||||||||||||||||||
| Under restricted stock plan, net of forfeitures | 1,625 | - | 6 | - | - | - | - | - | 6 | - | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | 79,525 | - | - | - | - | 79,525 | - | ||||||||||||||||||||||||||||||
| Tax benefit of stock option exercises and vesting of restricted stock awards | - | - | - | 3,165 | - | - | - | - | 3,165 | - | ||||||||||||||||||||||||||||||
| Tax benefit of non-controlling interest repurchases | - | - | - | 8,454 | - | - | - | - | 8,454 | - | ||||||||||||||||||||||||||||||
| Repurchase of Non-Voting Common Stock | (2,894 | ) | ||||||||||||||||||||||||||||||||||||||