D. Investments in Partnerships, Offshore Funds and Variable Interest Entities ("VIEs"(“VIEs”)
The Company is general partner or co-general partner of various affiliated entities in which the Company has investments totaling $93.2$93.4 million, $82.0$94.2 million and $84.3$91.1 million at September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013,March 31, 2014, respectively, and whose underlying assets consist primarily of marketable securities (the "affiliated entities"“affiliated entities”). We also have investments in unaffiliated entities of $14.2$13.5 million, $14.0$13.4 million and $13.5$14.7 million at September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013,March 31, 2014, respectively (the "unaffiliated entities"“unaffiliated entities”). On a quarterly basis, we evaluate each entity for the appropriate accounting treatment and disclosure. Certain of the affiliated entities, and none of the unaffiliated entities, are consolidated.
For those entities where consolidation is not deemed to be appropriate, we report them in our condensed consolidated statement of financial condition under the caption "Investments“Investments in partnerships"partnerships”. This caption includes those investments, in both affiliated and unaffiliated entities, which the Company accounts for under the equity method of accounting, as well as certain investments that the feeder funds hold that are carried at fair value, as described in Note C. The Company reflects the equity in earnings of these equity method investees and the change in fair value of the consolidated feeder funds ("CFFs"(“CFFs”) under the caption "Net“Net gain/(loss) from investments"investments” on the condensed consolidated statements of income.
The following table highlights the number of entities, including voting interest entities ("VOEs"(“VOEs”), that we consolidate as well as under which accounting guidance they are consolidated, including CFFs, which retain their specialized investment company accounting in consolidation, partnerships and offshore funds.
The following table breaks down the investments in partnerships line by accounting method, either fair value or equity method, and investment type (in thousands):
The following table includes the net impact by line item on the condensed consolidated statements of financial condition for each category of entity consolidated (in thousands):
The following table includes the net impact by line item on the condensed consolidated statements of income for each category of entity consolidated (in thousands):
We sponsor a number of investment vehicles where we are the general partner or investment manager. Certain of these vehicles are VIEs, but we are not the primary beneficiary, in all but one case, because we do not absorb a majority of the entities'entities’ expected losses and/or expected returns, and they are, therefore, not consolidated. We consolidate the one VIE where we are the primary beneficiary. The Company has not provided any financial or other support to those VIEs where we are not the primary beneficiary. The total net assets of these non-consolidated VIEs at September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013March 31, 2014 were $59.8$71.4 million, $72.7$71.6 million and $77.7$74.1 million, respectively. Our maximum exposure to loss as a result of our involvement with the non-consolidated VIEs is limited to the investment in two VIEs and the deferred carried interest that we have in another. On September 30,March 31, 2015, December 31, 2014 and March 31, 2014 we had an investment in two of the non-consolidated VIE offshore funds of approximately $8.0 million. On December 31, 2013 and September 30, 2013, we had an investment in one of the non-consolidated VIE offshore funds of approximately $10.0$10.6 million, $10.6 million and $9.9$10.9 million, respectively, which was included in investments in partnerships on the condensed consolidated statements of financial condition. On September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013,March 31, 2014, we had a deferred carried interest in one of the non-consolidated VIE offshore funds of $44,000, $45,000$43,000, $43,000 and $45,000, respectively, which was included in investments in partnerships on the condensed consolidated statements of financial condition. Additionally, as the general partner or investment manager to these VIEs the Company earns fees in relation to these roles, which given a decline in AUMs of the VIEs would result in lower fee revenues earned by the Company which would be reflected on the condensed consolidated statement of income, condensed consolidated statement of financial condition and condensed consolidated statement of cash flows.
The assets of these VIEs may only be used to satisfy obligations of the VIEs. The following table presents the balances related to the VIE that is consolidated and is included on the condensed consolidated statements of financial condition as well as GAMCO'sGAMCO’s net interest in this VIE. Only one VIE was consolidated at September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013:March 31, 2014:
E. Income Taxes
F. Earnings Per Share
G. Debt
On May 31, 2011, the Company issued 10-year, $100 million senior notes. The notes mature on June 1, 2021 and bear interest at 5.875% per annum, payable semi-annually on June 1 and December 1 of each year and commenced on December 1, 2011. Upon the occurrence of a change of control triggering event, as defined in the indenture, the Company would be required to offer to repurchase the notes at 101% of their principal amount.
On December 31, 2010, the Company issued $86.4 million in par value of five year zero coupon subordinated debentures due December 31, 2015 ("Debentures"(“Debentures”) to its shareholders of record on December 15, 2010 through the declaration of a special dividend of $3.20 per share. The Debentures have a par value of $100 and are callable at the option of the Company, in whole or in part, at any time or from time to time, at a redemption price equal to 100% of the principal amount of the Debentures to be redeemed. During the three month period ended September 30,March 31, 2015 and March 31, 2014 the Company repurchased 1,032 Debentures having a face value of $0.1 million. The redemptions were accounted for as extinguishments of debt and resulted in a loss of $10,000, which was included in net gain from investments on the condensed consolidated statements of income. There were no repurchases during the three month period ended September 30, 2013. During the nine month periods ended September 30, 2014 and September 30, 2013, the Company repurchased 7,16525,957 Debentures and 11,974416 Debentures, respectively, having a face value of $0.7$2.6 million and $1.2 million,$41,600, respectively. The redemptions were accounted for as extinguishments of debt and resulted in losses of $84,000$156,000 and $0.1 million, respectively.$5,000, respectively, which were included in net gain from investments on the condensed consolidated statements of income. The debt is being accreted to its face value using the effective rate on the date of issuance of 7.45%. At September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013,March 31, 2014, the debt was recorded at its accreted value of $11.9$9.9 million, $11.9$12.2 million and $17.3$12.1 million, respectively.
H. Stockholders'Stockholders’ Equity
Shares outstanding were 25.925.8 million, 26.125.9 million and 26.0 million on September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013,March 31, 2014, respectively.
Dividends
Dividends
| Payment Date | Record Date | | Amount | |
| | | | | | |
| Three months ended March 31, 2014 | March 25, 2014 | March 11, 2014 | | $ | 0.06 | |
| Three months ended June 30, 2014 | June 24, 2014 | June 10, 2014 | | $ | 0.06 | |
| Three months ended September 30, 2014 | September 30, 2014 | September 16, 2014 | | | 0.06 | |
| Nine months ended September 30, 2014 | | | | $ | 0.18 | |
| | | | | | | |
| Three months ended March 31, 2013 | March 26, 2013 | March 12, 2013 | | $ | 0.05 | |
| Three months ended June 30, 2013 | June 25, 2013 | June 11, 2013 | | $ | 0.05 | |
| Three months ended September 30, 2013 | September 24, 2013 | September 10, 2013 | | $ | 0.06 | |
| Nine months ended September 30, 2013 | | | | $ | 0.16 | |
| | Payment | | Record | | | |
| | Date | | Date | | Amount | |
| | | | | | | |
| Three months ended March 31, 2015 | March 31, 2015 | | March 17, 2015 | | $ | 0.07 | |
| Three months ended March 31, 2014 | March 25, 2014 | | March 11, 2014 | | $ | 0.06 | |
Voting Rights
The holders of Class A Common stock ("(“Class A Stock"Stock”) and Class B Common stock ("(“Class B Stock"Stock”) have identical rights except that (i) holders of Class A Stock are entitled to one vote per share, while holders of Class B Stock are entitled to ten votes per share on all matters to be voted on by shareholders in general, and (ii) holders of Class A Stock are not eligible to vote on matters relating exclusively to Class B Stock and vice versa.
Stock Award and Incentive Plan
The Company maintains two plansPlans approved by the shareholders, the 1999 Plan and the 2002 Plan, which are designed to provide incentives which will attract and retain individuals key to the success of GAMCOGBL through direct or indirect ownership of our common stock. Benefits under both the 1999 and 2002 Plans may be granted in any one or a combination of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents and other stock or cash based awards. A maximum of 1.53.5 million shares of Class A Stock were originallyhave been reserved for issuance under each of the 1999 and 2002 Plans by a committee of the Board of Directors responsible for administering the Plans ("(“Compensation Committee"Committee”). In November 2013, the shareholders approved an amendment to the Company's 2002 Stock Award and Incentive Plan to increase the number of shares of Class A Stock authorized and reserved for issuance by 2 million. Under the Plans, the committee may grant restricted stock awards ("RSA")RSAs and either incentive or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price that the Compensation committee may determine. Options granted under the plans typically vest 75% after three years and 100% after four years from the date of grant and expire after ten years. RSA shares granted under the Plans typically vest 30% after three years and 100% after five years.
On December 23, 2014, September 15, 2014 and January 9, 2014, the Company approved the granting of 73,000 RSA shares, 83,500 RSA shares and 2,100 RSA shares, respectively, at a grant date fair value of 73.41$87.99 per share, $73.41 per share and 81.99$81.99 per share, respectively. As of September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013,March 31, 2014, there were 639,750707,050 RSA shares, 566,950710,750 RSA shares and 427,700566,850 RSA shares outstanding, respectively, that were previously issued at an average weighted grant price of $65.12, $63.93$67.43, $67.45 and $57.86,$63.97, respectively. All grants of the RSA shares were recommended by the Company's Chairman, who did not receive a RSA, and approved by the Compensation Committee. This expense, net of estimated forfeitures, is recognized over the vesting period for these awards which is either (1) 30% over three years from the date of grant and 70% over five years from the date of grant except for the August 2013 and September 2014 grants which areor (2) 30% over three years from the date of grant and 10% each year over years four through ten from the date of grant. During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates. Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings on the declaration date.
For the three months ended September 30,March 31, 2015 and March 31, 2014, and September 30, 2013, we recognized stock-based compensation expense of $1.8$2.3 million and $0.7 million, respectively. For the nine months ended September 30, 2014 and September 30, 2013, we recognized stock-based compensation expense of $5.2 million and $0.8$1.7 million, respectively. Actual and projected stock-based compensation expense for RSA shares and options for the years ended December 31, 20142015 through December 31, 20232024 (based on awards currently issued or granted) is as follows ($ in thousands):
| | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | |
| | Q1 | | | $ | 15 | | | $ | 1,700 | | | $ | 1,962 | | | $ | 1,961 | | | $ | 1,171 | | | $ | 908 | | Q1 | | | $ | 1,700 | | | $ | 2,277 | | | $ | 2,277 | | | $ | 1,486 | | | $ | 1,112 | | | $ | 612 | |
| | Q2 | | | | 15 | | | | 1,697 | | | | 1,961 | | | | 1,961 | | | | 1,171 | | | | 908 | | Q2 | | | | 1,697 | | | | 2,277 | | | | 2,277 | | | | 1,486 | | | | 1,090 | | | | 612 | |
| | Q3 | | | | 741 | | | | 1,785 | | | | 1,961 | | | | 1,607 | | | | 1,040 | | | | 828 | | Q3 | | | | 1,785 | | | | 2,276 | | | | 1,922 | | | | 1,355 | | | | 1,011 | | | | 547 | |
| | Q4 | | | | 1,301 | | | | 1,965 | | | | 1,961 | | | | 1,346 | | | | 910 | | | | 659 | | Q4 | | | | 2,017 | | | | 2,276 | | | | 1,660 | | | | 1,225 | | | | 841 | | | | 501 | |
| Full Year | Full Year | | | $ | 2,072 | | | $ | 7,147 | | | $ | 7,845 | | | $ | 6,875 | | | $ | 4,292 | | | $ | 3,303 | | Full Year | | | $ | 7,199 | | | $ | 9,106 | | | $ | 8,136 | | | $ | 5,552 | | | $ | 4,054 | | | $ | 2,272 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2019 | | | | 2020 | | | | 2021 | | | | 2022 | | | | 2023 | | | | 2024 | | | | | | 2020 | | | | 2021 | | | | 2022 | | | | 2023 | | | | 2024 | | | | | |
| | Q1 | | | $ | 429 | | | $ | 319 | | | $ | 227 | | | $ | 146 | | | $ | 76 | | | $ | 12 | | Q1 | | | $ | 350 | | | $ | 227 | | | $ | 146 | | | $ | 76 | | | $ | 12 | | | | | |
| | Q2 | | | | 429 | | | | 319 | | | | 227 | | | | 146 | | | | 76 | | | | 12 | | Q2 | | | | 319 | | | | 227 | | | | 146 | | | | 76 | | | | 12 | | | | | |
| | Q3 | | | | 364 | | | | 264 | | | | 179 | | | | 104 | | | | 38 | | | | 8 | | Q3 | | | | 264 | | | | 179 | | | | 104 | | | | 38 | | | | 9 | | | | | |
| | Q4 | | | | 319 | | | | 227 | | | | 146 | | | | 76 | | | | 12 | | | | - | | Q4 | | | | 227 | | | | 145 | | | | 76 | | | | 11 | | | | - | | | | | |
| Full Year | Full Year | | | $ | 1,541 | | | $ | 1,129 | | | $ | 779 | | | $ | 472 | | | $ | 202 | | | $ | 32 | | Full Year | | | $ | 1,160 | | | $ | 778 | | | $ | 472 | | | $ | 201 | | | $ | 33 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The total compensation cost related to non-vested options not yet recognized is approximately $28.4$29.5 million as of September 30, 2014.March 31, 2015. There were no options exercised for the three months ended September 30, 2014 or September 30, 2013.March 31, 2015. For the ninethree months ended September 30,March 31, 2014, and 2013, proceeds from the exercise of 40,00020,000 stock options and 2,623 stock options, respectively, were $1.6$0.8 million and $76,000, respectively, resulting in a tax benefit to GAMCO of $0.3 million and $16,000, respectively.$0.2 million.
Stock Repurchase Program
In March 1999, GAMCO's Board of Directors established the Stock Repurchase Program to grant management the authority to repurchase shares of our Class A Common Stock. On February 5, 2013, our Board of Directors authorized an incremental 500,000 shares to be added to the current buyback authorization. For the three months ended September 30,March 31, 2015 and March 31, 2014, and September 30, 2013, the Company repurchased 94,94241,393 shares and 40,857121,192 shares, respectively, at an average price per share of $77.67$77.19 and $72.40, respectively. For the nine months ended September 30, 2014 and September 30, 2013, the Company repurchased 319,662 shares and 159,259 shares, respectively, at an average price per share of $78.43 and $57.97,$79.59, respectively. From the inception of the program through September 30, 2014, 9,031,255March 31, 2015, 9,167,418 shares have been repurchased at an average price of $43.53$44.07 per share. At September 30, 2014,March 31, 2015, the total shares available under the program to be repurchased in the future were 603,553.467,390.
I. Goodwill and Identifiable Intangible Assets
At September 30, 2014,March 31, 2015, $3.5 million of goodwill is reflected within other assets on the condensed consolidated statements of financial condition with $3.3 million related to a 94%-owned subsidiary, Gabelli Securities, Inc. and $0.2 million related to G.distributors, LLC. The Company assesses the recoverability of goodwill at least annually, or more often should events warrant, using a qualitative assessment of whether it is more likely than not that an impairment has occurred to determine if a quantitative analysis is required. There were no indicators of impairment for the three months ended September 30,March 31, 2015 or March 31, 2014, or September 30, 2013, and as such there was no impairment analysis performed or charge recorded.
As a result of becoming the advisor to the Gabelli Enterprise Mergers and Acquisitions Fund and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.9 million within other assets on the condensed consolidated statements of financial condition at September 30, 2014,March 31, 2015, December 31, 20132014 and September 30, 2013.March 31, 2014. The investment advisory agreement is subject to annual renewal by the fund's Board of Directors, which the Company expects to be renewed, and the Company does not expect to incur additional expense as a result, which is consistent with other investment advisory agreements entered into by the Company. The advisory contract is next up for renewal in February 2015.2016. The Company assesses the recoverability of this intangible asset at least annually, or more often should events warrant. There were no indicators of impairment for the three months ended September 30,March 31, 2015 or March 31, 2014, or September 30, 2013, and as such there was no impairment analysis performed or charge recorded.
J. Commitments and Contingencies
From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exist losses which may be reasonably possible and will, if material, makesmake the necessary disclosures. SuchHowever, management believes such amounts, both those that are probable and those that are reasonably possible, are not considered material to the Company'sCompany’s financial condition, operations or cash flows.flows at March 31, 2015.
The Company indemnifies the clearing brokers of G.research, Inc., our broker-dealer subsidiary, for losses they may sustain from the customer accounts that trade on margin introduced by it. At September 30, 2014,March 31, 2015, the total amount of customer balances subject to indemnification (i.e. unsecured margin debits) was immaterial. The Company also has entered into arrangements with various other third parties many of which provide for indemnification of the third parties against losses, costs, claims and liabilities arising from the performance of obligations under the agreements. The Company has had no claims or payments pursuant to these or prior agreements and believes the likelihood of a claim being made is remote. The Company'sCompany’s estimate of the value of such agreements is de minimis, and therefore an accrual has not been made on the condensed consolidated financial statements.
K. Shareholder-Designated Contribution Plan
During 2013, the Company established a Shareholder Designated Charitable Contribution program. Under the program, each shareholder is eligible to designate a charity to which the Company would make a donation based upon the actual number of shares registered in the shareholder's name. Shares held in nominee or street name were not eligible to participate. The Board of Directors approved two contributions during 2013 of $0.25 per registered share each. During the first nine months of 2013, the Company recorded a charge of $5.3 million, or $0.12 per diluted share, net of management fee and tax benefit, related to the contributions which was included in shareholder-designated contribution in the condensed consolidated statements of income.
During the fourth quarter of 2013, the Company recorded a charge of $5.3 million, or $0.12 per diluted share, net of management fee and tax benefit, as an estimate of the expected contribution to be made relating to the $0.25 per share contribution approved by the Board in November 2013. Based upon the number of registered shares that participated in the program, the Company recorded an additional charge of $134,000 during the first nine months of 2014.
L. Subsequent Events
From OctoberApril 1, 20142015 to NovemberMay 7, 2014,2015, the Company repurchased 59,53927,600 shares at $77.42$81.33 per share.
On November 6, 2014, theMarch 24, 2015, our Board of Directors declared a special dividend of $0.25 per share and a regular quarterly dividend of $0.07 per shareauthorized the Company to allrenew its shelf registration, before the expiration of its shareholders, both payable on December 30, 2014current shelf in May 2015, which will allow the Company to shareholdersissue up to $500 million in a combination of record on December 16, 2014.senior and subordinated debt securities, convertible debt securities and common and preferred securities. The shelf was declared effective by the SEC and will now expire in May 2018.
TheOn April 10, 2015, the Company announced that its Board of Directors has authorized management to exploreapproved the next step in the process of exploring a potential restructurerestructuring that will enable the Company to further increase its market focus. While this may involve a split-up of certain facets of our business, there are numerous regulatory related and other issues that may preclude pursuit of any alternative. Management does not plan to give periodic updates on the Company’sCompany’s progress.
On May 5, 2015, the Board of Directors declared its regular quarterly dividend of $0.07 per share to all of its shareholders, payable on June 30, 2015 to shareholders of record on June 16, 2015.
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)
Overview
GAMCO, through the Gabelli brand, well known for its Private Market Value (PMV) with a CatalystTM investment approach, is a widely-recognized provider of investment advisory services to open- and closed-end funds, institutional and high net worthprivate wealth management investors, and investment partnerships, principally in the United States. Through G.research, Inc. (“G.research”), we provide institutional research and brokerage services to institutional clients and investment partnerships. Through G.distributors, LLC (“G.distributors”), we provide mutual fund distribution. We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles. Our revenues are based primarily on the Company’s levels of assets under management and fees associated with our various investment products.
Our revenues are highly correlated to the level of assets under management and fees associated with our various investment products, rather than our own corporate assets. Assets under management, which are directly influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, the addition of new accounts or the loss of existing accounts. Since various equity products have different fees, changes in our business mix may also affect revenues. At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues. General stock market trends will have the greatest impact on our level of assets under management and hence, on revenues.
We conduct our investment advisory business principally through the following subsidiaries: GAMCO Asset Management Inc. (Institutional and High Net Worth)Private Wealth Management), Gabelli Funds, LLC (Funds) and Gabelli Securities, Inc. (Investment Partnerships). We also act as an underwriter and provide institutional research through G.research, one of our broker-dealer subsidiaries. The distribution of our open-end funds is conducted through G.distributors, our other broker-dealer subsidiary.
Assets under management (“AUM”) were $46.9$46.5 billion as of September 30, 2014,March 31, 2015, a decrease of 4.9%2.0% from AUM of $49.4$47.5 billion at June 30,December 31, 2014 but up 7.9%and 2.1% from the September 30, 2013March 31, 2014 AUM of $43.5$47.6 billion. The thirdfirst quarter 20142015 AUM fell $2.5$1.0 billion which consisted of $2.2 billion of market depreciation, net cash outflows of $36 million$1.4 billion and recurring distributions, net of reinvestments, from open-end and closed-end funds of $145 million.$143 million, offset slightly by $0.6 billion of market appreciation. Average total AUM was $48.4$46.8 billion in the 20142015 quarter versus $42.6$47.0 billion in the prior year period, an increasea decrease of 13.6%0.4%. Average AUM in our open-end equity funds, a key driver to our investment advisory fees, was $18.1$17.0 billion in the thirdfirst quarter of 2014, rising 19.9%2015, falling 0.6% from the 20132014 quarter average AUM of $15.1$17.1 billion.
In addition to management fees, we earn incentive fees for certain institutional client assets, certain assets attributable to preferred issues of our closed-end funds, to our GDL Fund (NYSE: GDL) and investment partnership assets. As of September 30, 2014,March 31, 2015, assets with incentive based fees were $4.5$5.2 billion, a decreasean increase of $0.1$0.4 billion, or 2.2%8.3%, from the $4.6$4.8 billion at June 30,December 31, 2014 but 9.8%and 15.6% higher than the $4.1$4.5 billion on September 30, 2013.March 31, 2014.
The Company reported Assets Under Management as follows (in millions): | The Company reported Assets Under Management as follows (in millions): | | | | | | | | | | | The Company reported Assets Under Management as follows (in millions): | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table I: Fund Flows - 3rd Quarter 2014 | | | | | | | | | | | | | | |
| Table I: Fund Flows - 1st Quarter 2015 | | Table I: Fund Flows - 1st Quarter 2015 | | | | | | | | | | | | | |
| | | | | | | | | | | | Fund | | | | | | | | | | | | | | | Fund | | | | |
| | | | | | Market | | | | | | distributions, | | | | | | | | | Market | | | | | | distributions, | | | | |
| | | June 30, | | | appreciation/ | | | Net cash | | | net of | | | September 30, | | | December 31, | | | appreciation/ | | | Net cash | | | net of | | | March 31, | |
| | | 2014 | | | (depreciation) | | | flows | | | reinvestments | | | 2014 | | | 2014 | | | (depreciation) | | | flows | | | reinvestments | | | 2015 | |
| Equities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Open-end Funds | | $ | 18,508 | | | $ | (839 | ) | | $ | (175 | ) | | $ | (36 | ) | | $ | 17,458 | | | $ | 17,684 | | | $ | 185 | | | $ | (1,199 | ) | | $ | (27 | ) | | $ | 16,643 | |
| Closed-end Funds | | | 7,224 | | | | (326 | ) | | | 174 | | | | (109 | ) | | | 6,963 | | | | 6,949 | | | | 93 | | | | 145 | | | | (116 | ) | | | 7,071 | |
| Institutional & PWM - direct | | | 16,941 | | | | (772 | ) | | | 54 | | | | - | | | | 16,223 | | | | 16,597 | | | | 140 | | | | (330 | ) | | | - | | | | 16,407 | |
| Institutional & PWM - sub-advisory | | | 3,883 | | | | (296 | ) | | | (62 | ) | | | - | | | | 3,525 | | | | 3,704 | | | | 172 | | | | (62 | ) | | | - | | | | 3,814 | |
| Investment Partnerships | | | 897 | | | | (12 | ) | | | 14 | | | | - | | | | 899 | | | | 905 | | | | 19 | | | | 4 | | | | - | | | | 928 | |
| SICAV (a) | | | 94 | | | | (4 | ) | | | 31 | | | | - | | | | 121 | | | | 135 | | | | (5 | ) | | | 25 | | | | - | | | | 105 | |
| Total Equities | | | 47,547 | | | | (2,249 | ) | | | 36 | | | | (145 | ) | | | 45,189 | | | | 45,974 | | | | 604 | | | | (1,467 | ) | | | (143 | ) | | | 44,968 | |
| Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Money-Market Fund | | | 1,766 | | | | - | | | | (68 | ) | | | - | | | | 1,698 | | | | 1,455 | | | | - | | | | 65 | | | | - | | | | 1,520 | |
| Institutional & PWM | | | 64 | | | | - | | | | (4 | ) | | | - | | | | 60 | | | | 58 | | | | - | | | | (6 | ) | | | - | | | | 52 | |
| Total Fixed Income | | | 1,830 | | | | - | | | | (72 | ) | | | - | | | | 1,758 | | | | 1,513 | | | | - | | | | 59 | | | | - | | | | 1,572 | |
| Total Assets Under Management | | $ | 49,377 | | | $ | (2,249 | ) | | $ | (36 | ) | | $ | (145 | ) | | $ | 46,947 | | | $ | 47,487 | | | $ | 604 | | | $ | (1,408 | ) | | $ | (143 | ) | | $ | 46,540 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) Includes $71 million and $40 million of seed capital at December 31, 2014 and March 31, 2015, respectively.
| | | | | | | | | | | | | | | | | |
| Table II: Fund Flows - Nine Months ended September 30, 2014 | | | | | | | | | | | | | | |
| | | | | | | | | | | | Fund | | | | | |
| | | | | | Market | | | | | | distributions, | | | | | |
| Table II: AUM Summary | | | | | | | | | | | | % Change From | |
| | | December 31, | | | appreciation/ | | | Net cash | | | net of | | | September 30, | | | March 31, | | | December 31, | | | March 31, | | | December 31, | | | March 31, | |
| | | 2013 | | | (depreciation) | | | flows | | | reinvestments | | | 2014 | | | 2015 | | | 2014 | | | 2014 | | | 2014 | | | 2014 | |
| Equities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Open-end Funds | | $ | 17,078 | | | $ | 158 | | | $ | 320 | | | $ | (98 | ) | | $ | 17,458 | | | $ | 16,643 | | | $ | 17,684 | | | $ | 17,531 | | | | (5.9 | %) | | | (5.1 | %) |
| Closed-end Funds | | | 6,945 | | | | 180 | | | | 178 | | | | (340 | ) | | | 6,963 | | | | 7,071 | | | | 6,949 | | | | 6,967 | | | | 1.8 | | | | 1.5 | |
| Institutional & PWM - direct | | | 16,486 | | | | 157 | | | | (420 | ) | | | - | | | | 16,223 | | | | 16,407 | | | | 16,597 | | | | 16,403 | | | | (1.1 | ) | | | 0.0 | |
| Institutional & PWM - sub-advisory | | | 3,797 | | | | (112 | ) | | | (160 | ) | | | - | | | | 3,525 | | | | 3,814 | | | | 3,704 | | | | 3,822 | | | | 3.0 | | | | (0.2 | ) |
| Investment Partnerships | | | 811 | | | | 12 | | | | 76 | | | | - | | | | 899 | | | | 928 | | | | 905 | | | | 865 | | | | 2.5 | | | | 7.3 | |
| SICAV (a) | | | 96 | | | | (2 | ) | | | 27 | | | | - | | | | 121 | | | | 105 | | | | 135 | | | | 91 | | | | (22.2 | ) | | | 15.4 | |
| Total Equities | | | 45,213 | | | | 393 | | | | 21 | | | | (438 | ) | | | 45,189 | | | | 44,968 | | | | 45,974 | | | | 45,679 | | | | (2.2 | ) | | | (1.6 | ) |
| Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Money-Market Fund | | | 1,735 | | | | - | | | | (37 | ) | | | - | | | | 1,698 | | | | 1,520 | | | | 1,455 | | | | 1,812 | | | | 4.5 | | | | (16.1 | ) |
| Institutional & PWM | | | 62 | | | | - | | | | (2 | ) | | | - | | | | 60 | | | | 52 | | | | 58 | | | | 64 | | | | (10.3 | ) | | | (18.8 | ) |
| Total Fixed Income | | | 1,797 | | | | - | | | | (39 | ) | | | - | | | | 1,758 | | | | 1,572 | | | | 1,513 | | | | 1,876 | | | | 3.9 | | | | (16.2 | ) |
| Total Assets Under Management | | $ | 47,010 | | | $ | 393 | | | $ | (18 | ) | | $ | (438 | ) | | $ | 46,947 | | | $ | 46,540 | | | $ | 47,487 | | | $ | 47,555 | | | | (2.0 | ) | | | (2.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) Includes $40 million, $71 million and $88 million of seed capital at March 31, 2015, December 31, 2014 and March 31, 2014, respectively.
Table III: Assets Under Management | | | | | | | |
| | | September 30, | | | September 30, | | | % | |
| | | 2013 | | | 2014 | | | Inc.(Dec.) | |
| Equities: | | | | | | | | | |
| Open-end Funds | | $ | 15,581 | | | $ | 17,458 | | | | 12.0 | % |
| Closed-end Funds | | | 6,721 | | | | 6,963 | | | | 3.6 | |
| Institutional & PWM - direct | | | 15,026 | | | | 16,223 | | | | 8.0 | |
| Institutional & PWM - sub-advisory | | | 3,503 | | | | 3,525 | | | | 0.6 | |
| Investment Partnerships | | | 805 | | | | 899 | | | | 11.7 | |
| SICAV (a) | | | 94 | | | | 121 | | | | 28.7 | |
| Total Equities | | | 41,730 | | | | 45,189 | | | | 8.3 | |
| Fixed Income: | | | | | | | | | | | | |
| Money-Market Fund | | | 1,714 | | | | 1,698 | | | | (0.9 | ) |
| Institutional & PWM | | | 63 | | | | 60 | | | | (4.8 | ) |
| Total Fixed Income | | | 1,777 | | | | 1,758 | | | | (1.1 | ) |
| Total Assets Under Management | | $ | 43,507 | | | $ | 46,947 | | | | 7.9 | % |
| | | | | | | | | | | | | |
Table IV: Assets Under Management by Quarter | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | % Increase/ | |
| | | | | | | | | | | | | | | | | | (decrease) from | |
| | | | 9/13 | | | | 12/13 | | | | 3/14 | | | | 6/14 | | | | 9/14 | | | | 9/13 | | | | 6/14 | |
| Equities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Open-end Funds | | $ | 15,581 | | | $ | 17,078 | | | $ | 17,531 | | | $ | 18,508 | | | $ | 17,548 | | | | 12.0 | % | | | (5.7 | %) |
| Closed-end Funds | | | 6,721 | | | | 6,945 | | | | 6,967 | | | | 7,224 | | | | 6,963 | | | | 3.6 | | | | (3.6 | ) |
| Institutional & PWM - direct | | | 15,026 | | | | 16,486 | | | | 16,403 | | | | 16,941 | | | | 16,223 | | | | 8.0 | | | | (4.2 | ) |
| Institutional & PWM - sub-advisory | | | 3,503 | | | | 3,797 | | | | 3,822 | | | | 3,883 | | | | 3,525 | | | | 0.6 | | | | (9.2 | ) |
| Investment Partnerships | | | 805 | | | | 811 | | | | 865 | | | | 897 | | | | 899 | | | | 11.7 | | | | 0.2 | |
| SICAV (a) | | | 94 | | | | 96 | | | | 91 | | | | 94 | | | | 121 | | | | 28.7 | | | | 28.7 | |
| Total Equities | | | 41,730 | | | | 45,213 | | | | 45,679 | | | | 47,547 | | | | 45,189 | | | | 8.3 | | | | (5.0 | ) |
| Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Money-Market Fund | | | 1,714 | | | | 1,735 | | | | 1,812 | | | | 1,766 | | | | 1,698 | | | | (0.9 | ) | | | (3.9 | ) |
| Institutional & PWM | | | 63 | | | | 62 | | | | 64 | | | | 64 | | | | 60 | | | | (4.8 | ) | | | (6.3 | ) |
| Total Fixed Income | | | 1,777 | | | | 1,797 | | | | 1,876 | | | | 1,830 | | | | 1,758 | | | | (1.1 | ) | | | (3.9 | ) |
| Total Assets Under Management | | $ | 43,507 | | | $ | 47,010 | | | $ | 47,555 | | | $ | 49,377 | | | $ | 46,947 | | | | 7.9 | % | | | (4.9 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (a) Includes $92 million, $94 million, $88 million, $77 million and $70 million of proprietary seed capital at September 30, 2013, | | | | | |
| December 31, 2013, March 31, 2014, June 30, 2014 and September 30, 2014, respectively. | | | | | |
The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and the notes thereto included in Item 1 to this report.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2014March 31, 2015 Compared To Three Months Ended September 30, 2013March 31, 2014
(Unaudited; in thousands, except per share data) | | | | | | |
| | | 2014 | | | 2013 | | | 2015 | | | 2014 | |
| Revenues | | | | | | | | | | | | |
| Investment advisory and incentive fees | | $ | 92,591 | | | $ | 80,438 | | | $ | 88,037 | | | $ | 87,797 | |
| Distribution fees and other income | | | 15,727 | | | | 13,545 | | | | 13,743 | | | | 14,873 | |
| Institutional research services | | | 2,540 | | | | 2,394 | | | | 2,065 | | | | 1,807 | |
| Total revenues | | | 110,858 | | | | 96,377 | | | | 103,845 | | | | 104,477 | |
| Expenses | | | | | | | | | | | | | | | | |
| Compensation | | | 43,316 | | | | 39,803 | | | | 44,494 | | | | 43,897 | |
| Management fee | | | 3,756 | | | | 5,629 | | | | 4,437 | | | | 4,728 | |
| Distribution costs | | | 15,101 | | | | 12,769 | | | | 14,283 | | | | 13,963 | |
| Other operating expenses | | | 5,099 | | | | 5,448 | | | | 6,686 | | | | 5,390 | |
| Total expenses | | | 67,272 | | | | 63,649 | | | | 69,900 | | | | 67,978 | |
| Operating income | | | 43,586 | | | | 32,728 | | | | 33,945 | | | | 36,499 | |
| Other income (expense) | | | | | | | | | | | | | | | | |
| Net gain/(loss) from trading securities | | | (9,434 | ) | | | 13,589 | | |
| Net gain from AFS securities | | | 348 | | | | 5,745 | | |
| Net gain from trading securities | | | | 6,958 | | | | 6,944 | |
| Interest and dividend income | | | 1,084 | | | | 1,134 | | | | 1,054 | | | | 1,141 | |
| Interest expense | | | (1,987 | ) | | | (2,164 | ) | | | (2,019 | ) | | | (1,992 | ) |
| Shareholder-designated contribution | | | - | | | | (313 | ) | |
| Total other income/(expense), net | | | (9,989 | ) | | | 17,991 | | |
| Total other income, net | | | | 5,993 | | | | 6,093 | |
| Income before income taxes | | | 33,597 | | | | 50,719 | | | | 39,938 | | | | 42,592 | |
| Income tax provision | | | 13,045 | | | | 17,515 | | | | 15,179 | | | | 14,616 | |
| Net income | | | 20,552 | | | | 33,204 | | | | 24,759 | | | | 27,976 | |
| Net income/(loss) attributable to noncontrolling interests | | | (3,113 | ) | | | 106 | | | | (17 | ) | | | 22 | |
| Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 23,665 | | | $ | 33,098 | | | $ | 24,776 | | | $ | 27,954 | |
| | | | | | | | | | | | | | | | | |
| Net income attributable to GAMCO Investors, Inc.'s shareholders per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.94 | | | $ | 1.29 | | | $ | 0.99 | | | $ | 1.10 | |
| Diluted | | $ | 0.93 | | | $ | 1.29 | | | $ | 0.97 | | | $ | 1.09 | |
| | | | | | | | | | | | | | | | | |
Overview
Net income attributable to shareholders of GAMCO for the quarter was $23.7$24.8 million, or $0.93$0.97 per fully diluted share, versus $33.1$28.0 million, or $1.29$1.09 per fully diluted share, in the prior year’syear’s quarter. The quarter to quarter comparison was impacted by lower revenues, lower income from firm investments and increased stock compensation costs partially offset by higher revenues and lower interest expense.costs.
Revenues
Investment advisory and incentive fees for the thirdfirst quarter 20142015 were $92.6$88.0 million, 15.2% above0.2% higher than the 20132014 comparative figure of $80.4$87.8 million. Open-end fund revenues increaseddecreased by 18.5%0.7% to $44.2$40.5 million from $37.3$40.8 million in the thirdfirst quarter of 20132014 driven by a 19.9% increase0.6% decrease in average open-end equity AUM. Our closed-end fund revenues rose 9.8%2.1% to $15.7$14.9 million in the thirdfirst quarter 20142015 from $14.3$14.6 million in 20132014 due to an 8.8%a 1.5% increase in non-performance fee based average AUM. Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $4.0decreased $0.3 million, or 14.9%1.0%, to $30.8$30.1 million from $26.8$30.4 million in thirdfirst quarter 2013.2014. Incentive fees declined $0.4increased $0.1 million, on a quarter to quarter basis, to $0.1$0.5 million in the 20142015 quarter from $0.5$0.4 million in the prior year period. Investment partnership revenues were $1.8$2.0 million, an increase of 20.0%25.0% from $1.5$1.6 million in thirdfirst quarter 20132014 due to an increase in average AUM resulting from a combination of market performance and net inflows.
Open-end fund distribution fees and other income were $15.7$13.7 million for the thirdfirst quarter 2014, an increase2015, a decrease of $2.2$1.2 million or 16.3%8.1% from $13.5$14.9 million in the prior year period, primarily due to higherlower average AUM in open-end equity funds that generate distribution fees and increaseddecreased level of sales of load shares of mutualopen-end funds.
Our institutional research revenues were $2.5$2.1 million in the thirdfirst quarter 20142015 comparable to $2.4$1.8 million reported in the prior year period.
Expenses
Compensation costs, which are largely variable, were $43.3$44.5 million or 8.8%1.4% higher than prior year compensation costs of $39.8$43.9 million. The quarter over quarter increase was comprised of variable compensation of $2.3 million related to the increased levels of AUM, $0.2$0.3 million in fixed compensation and a $1.0$0.6 million increase in stock compensation expense recognized for RSAs issued in 2014 partially offset by a $0.3 million decrease in variable compensation related to the third and fourth quartersdecreased levels of 2013.AUM.
Management fee expense, which is wholly variable and based on pretax income, decreased to $3.8$4.4 million in the thirdfirst quarter of 20142015 from $5.6$4.7 million in the 20132014 period.
Distribution costs were $15.1$14.3 million, an increase of $2.3$0.3 million or 18.0%2.1% from $12.8$14.0 million in the prior year’s period. The increasecurrent year quarter included $1.0 million of expenses incurred in the launching of our first London stock exchange listed closed-end fund, The Gabelli Value Plus+ Trust (“GVP”), which raised £100 million in AUM. Revenues earned in the quarter totaled $175,000. Our investment of £27 million is treated as available for sale (“AFS”) and as such all currency fluctuations are included in other comprehensive income. Excluding the launch of GVP the decrease in distribution costs was driven by increasedlower AUM, largely from the direct to intermediary channel, which resulted in an increasea decrease in payments to third-party distributorsthe amortization of $2.0advanced commissions of $0.6 million.
Other operating expenses were $5.1$6.7 million in the thirdfirst quarter of 2014, a decline2015, an increase of $0.3$1.3 million, or 5.6%24.1%, from $5.4 million in the thirdfirst quarter of 2013.2014. The current year quarter includes approximately $0.9 million in costs associated with the possible restructuring that the Company is exploring while the prior year quarter benefitted from additional insurance reimbursements of $0.3$0.4 million for legal and regulatory costs previously incurred and expensed as compared to the priorcurrent year quarter. Excluding these costs in the current quarter and the reimbursements in the prior quarter other operating expenses were down 1%.flat.
Operating income for the thirdfirst quarter of 20142015 was $43.6$33.9 million, an increasea decrease of $10.9$2.6 million, or 33.3%7.1%, from the $32.7$36.5 million in the thirdfirst quarter of 2013.2014. Operating income, as a percentage of revenues, was 39.3%32.7% in the 20142015 quarter as compared to 34.0%34.9% in the 20132014 quarter.
Other
Total other income/(expense), was a net expense of $10.0 million for the third quarter 2014 versus income of $18.0 million in the prior year’s quarter. Realized and unrealized losses in our trading portfolio were $9.1 million in the 2014 quarter; a swing of $28.4 million from the $19.3 million of gains reported in the 2013 quarter. Interest and dividend income, was lower by $0.1 million. Interest expense decreased by $0.2 million to $2.0 million in the third quarter of 2014 from $2.2 million in third quarter of 2013 due to a decrease in total average debt outstanding.
The effective tax rates (“ETR”) for the three months ended September 30, 2014 and September 30, 2013 were 38.8% and 34.5%, respectively. Excluding net income (loss) attributable to noncontrolling interests the ETR was 35.5% and 34.6% for the third quarters of 2014 and 2013, respectively.
Nine Months Ended September 30, 2014 Compared To Nine Months Ended September 30, 2013
| (Unaudited; in thousands, except per share data) | | | |
| | | 2014 | | | 2013 | |
| Revenues | | | | | | |
| Investment advisory and incentive fees | | $ | 270,544 | | | $ | 230,488 | |
| Distribution fees and other income | | | 46,367 | | | | 37,420 | |
| Institutional research services | | | 6,720 | | | | 6,940 | |
| Total revenues | | | 323,631 | | | | 274,848 | |
| Expenses | | | | | | | | |
| Compensation | | | 131,258 | | | | 113,214 | |
| Management fee | | | 13,628 | | | | 14,455 | |
| Distribution costs | | | 44,087 | | | | 35,650 | |
| Other operating expenses | | | 17,036 | | | | 16,290 | |
| Total expenses | | | 206,009 | | | | 179,609 | |
| Operating income | | | 117,622 | | | | 95,239 | |
| Other income (expense) | | | | | | | | |
| Net gain from trading securities | | | 4,091 | | | | 27,575 | |
| Net gain from AFS securities | | | 3,511 | | | | 16,191 | |
| Interest and dividend income | | | 3,557 | | | | 4,986 | |
| Interest expense | | | (6,000 | ) | | | (8,448 | ) |
| Shareholder-designated contribution | | | (134 | ) | | | (5,313 | ) |
| Total other income, net | | | 5,025 | | | | 34,991 | |
| Income before income taxes | | | 122,647 | | | | 130,230 | |
| Income tax provision | | | 44,796 | | | | 46,434 | |
| Net income | | | 77,851 | | | | 83,796 | |
| Net income/(loss) attributable to noncontrolling interests | | | (2,718 | ) | | | 260 | |
| Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 80,569 | | | $ | 83,536 | |
| | | | | | | | | |
| Net income attributable to GAMCO Investors, Inc.'s shareholders per share: | | | | | | | | |
| Basic | | $ | 3.17 | | | $ | 3.25 | |
| Diluted | | $ | 3.15 | | | $ | 3.25 | |
| | | | | | | | | |
Overview
Net income attributable to shareholders of GAMCO for the first nine months of 2014 was $80.6 million or $3.15 per fully diluted share versus $83.5 million or $3.25 per fully diluted share in the prior year’s first nine months. Included in the 2013 results is a $5.3 million charge, or $0.12 per diluted share, net of management fee and tax benefit, for the shareholder designated charitable contribution program. The period to period comparison, excluding this charge, was impacted by lower income from firm investments and increased stock compensation costs offset partially by higher revenues and lower interest expense.
Revenues
Investment advisory and incentive fees for the nine months ended September 30, 2014 were $270.5 million, 17.4% above the comparable 2013 figure of $230.5 million. Open-end mutual fund revenues increased by 23.4% to $128.1 million from $103.8 million in first nine months of 2013 driven by a 25.0% increase in average open-end equity AUM. Our closed-end fund revenues rose 8.4% to $45.3 million in the first nine months of 2014 from $41.8 million in 2013 due to an 8.5% increase in non-performance fee based average AUM. Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $15.9 million, or 21.1%, to $91.2 million from $75.3 million in the first nine months of 2013. During the first nine months of 2014, we earned $0.9 million in incentive fees, a decrease of $4.3 million from $5.2 million earned in the first nine months of 2013. Investment partnership revenues were $5.0 million, an increase of 13.6% from $4.4 million for the nine months ended September 30, 2013 due to an increase in average AUM resulting from net inflows.
Open-end fund distribution fees and other income were $46.4$6.0 million for the first nine months of 2014, an increase of $9.0 million or 24.1% from $37.4 million in the prior year period, primarily due to higher average AUM in open-end equity mutual funds that generate distribution fees and an increased level of sales of load shares of mutual funds.
Our institutional research revenues were $6.7 million in the first nine months of 2014quarter 2015 versus $6.9 million in the prior year period. Although commission revenues were largely unchanged in most areas of that business, dealer manager fee revenues from underwriting closed-end fund offerings declined $0.1 million from the prior year period.
Expenses
Compensation costs, which are largely variable, were $131.3 million or 16.0% higher than prior year compensation costs of $113.2 million. The period over period increase was comprised of variable compensation of $10.6 million related to the increased levels of AUM, $3.1 million in fixed compensation and a $4.4 million increase in stock compensation expense for RSAs issued in the second half of 2013.
Management fee expense, which is wholly variable and based on pretax income, decreased to $13.6 million for the nine months ended September 30, 2014 from $14.5 million in the 2013 period.
Distribution costs were $44.1 million, an increase of $8.4 million or 23.5% from $35.7 million in the prior year’s period. The increase in distribution costs was driven by increased AUM, largely from the direct to intermediary channel, which resulted in an increase in payments to third-party distributors of $6.4 million.
Other operating expenses were $17.0 million in the first nine months of 2014, an increase of $0.7 million, or 4.3%, from $16.3 million in the first nine months of 2013. The period to period comparison was impacted by decreases in insurance reimbursements for legal and regulatory costs previously incurred and expensed for a legal matter which was successfully concluded in the first nine months of 2014. Excluding the effects of insurance reimbursements, other operating expenses were down 1%.
Operating income for the first nine months of 2014 was $117.6 million, an increase of $22.4 million, or 23.5%, from the $95.2 million in the first nine months of 2013. Operating income, as a percentage of revenues, was 36.3% in the 2014 period as compared to 34.7% in the 2013 period.
Other
Other income/(expense), was $5.0 million for the first nine months of 2014 versus $35.0$6.1 million in the prior year’s quarter. Realized and unrealized gains in our trading portfolio were $7.6$7.0 million in the 2015 quarter versus $6.9 million in the 2014 period, $36.2 million lower than the $43.8 million reported in the 2013 period.quarter. Interest and dividend income was lower by $1.4remained the same at $1.1 million. Interest expense decreased by $2.4 million to $6.0remained the same at $2.0 million in the first nine monthsquarters of 2014 from $8.4 million in first nine months of 2013 due to a decrease in total average debt outstanding. On May 15, 2013, the $99 million of 5.5% Senior notes matured,2015 and were repaid. Expenses for the shareholder-designated charitable contribution program were $0.1 million during the first nine months of 2014 and $5.3 million for the first nine months of 2013.2014.
The ETReffective tax rates (“ETR”) for the ninethree months ended September 30,March 31, 2015 and March 31, 2014 was 36.5% as comparedwere 38.0% and 34.3%, respectively. During the 2014 quarter we benefitted from the donation of appreciated securities used to fund our shareholder designated charitable contribution program. This reduced the prior year period’s2014 ETR of 35.7%by 2.8%. Excluding net income (loss) attributable to noncontrolling interests the ETR was 35.7% for both the nine months ended September 30, 2014 and 2013.
LIQUIDITY AND CAPITAL RESOURCES
Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments, securities held for investment purposes, investments in funds, and investment partnerships. Cash and cash equivalents are comprised primarily of 100% U.S. Treasury money market funds managed by GAMCO. Although investments in partnerships and offshore funds are subject to restrictions as to the timing of distributions, the underlying investments of such partnerships or funds are, for the most part, liquid, and the valuations of these products reflect that underlying liquidity.
Summary cash flow data is as follows:
| | | Nine months ended | | | Three months ended | |
| | | September 30, | | | March 31, | |
| | | 2014 | | | 2013 | | | 2015 | | | 2014 | |
| Cash flows provided by (used in): | | (in thousands) | | | (in thousands) | |
| Operating activities | | $ | 122,150 | | | $ | 155,493 | | | $ | 82,426 | | | $ | 41,991 | |
| Investing activities | | | 2,593 | | | | 25,089 | | | | (41,048 | ) | | | (579 | ) |
| Financing activities | | | 23,222 | | | | (125,779 | ) | | | (7,992 | ) | | | (8,718 | ) |
| Effect of exchange rates on cash and cash equivalents | | | 5 | | | | - | | | | 11 | | | | (3 | ) |
| Net increase | | | 147,970 | | | | 54,803 | | | | 33,397 | | | | 32,691 | |
| Cash and cash equivalents at beginning of period | | | 210,451 | | | | 190,608 | | | | 298,224 | | | | 210,451 | |
| Increase in cash from deconsolidation | | | | 13 | | | | - | |
| Cash and cash equivalents at end of period | | $ | 358,421 | | | $ | 245,411 | | | $ | 331,634 | | | $ | 243,142 | |
| | | | | | | | | | | | | | | | | |
Cash and liquidity requirements have historically been met through cash generated by operating income and our borrowing capacity. We filed a registration statement with the SEC in 2012 which, among other things, provides us opportunistic flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $400$500 million. TheWe renewed our universal shelf is available throughfor $500 million, extending the expiration date to May 30, 2015, at which time it may be renewed.2018.
At September 30, 2014,March 31, 2015, we had total cash and cash equivalents of $358.4$331.6 million, an increase of $148.0$33.4 million from December 31, 2013.2014. Cash and cash equivalents of $0.1 million and investments in securities of $8.8$7.8 million held by consolidated investment partnerships and offshore funds may not be readily available for the Company to access. Total debt outstanding at September 30, 2014March 31, 2015 was $111.9$109.9 million, consisting of $11.9$9.9 million in Debentures (face value of $13.1$10.5 million) and $100 million of 5.875% senior notes due 2021.
For the ninethree months ended September 30, 2014,March 31, 2015, cash provided by operating activities was $122.2$82.4 million, a decreasean increase of $33.3$40.4 million from cash provided in the prior year period of $155.5$42.0 million. Cash was provided through a $35.7decrease of $17.1 million in other assets, a $13.1 million increase in net contributions and distributions to/from partnerships, a decrease in receivable from brokers of $11.1 million, a $6.5 million increase to accrued expenses and other liabilities, a decrease of $4.9 million in trading securities, a $3.6 million increase in payables to brokers a decreaseand $1.2 million from other sources. Reducing cash was an increase in investment advisory fees receivables collected of $9.1 million, a $4.4 million increase in stock compensation, a decrease of $12.7 million in gains on available for sale securities and a decrease of $8.0 million in other assets. Reducing cash was a decrease in net income of $5.9$10.5 million, a decrease in compensation payable of $16.8$3.4 million and a $12.0 million decrease in net contributions and distributions to/from partnerships, an increaseincome of $10.6 million$3.2 million. Cash used in trading securities, a $11.9 million decrease in income taxes payable and deferred tax liabilities, an increase in receivable from brokers of $37.2 million, a $4.8 million reduction to accrued expenses and other liabilities and $4.0 million from other sources. Cash provided by investing activities, related to purchases and proceeds from sales of available for sale securities, was $2.6$41.0 million in the first ninethree months of 2014.2015. Cash provided byused in financing activities in the first ninethree months of 20142015 was $23.2$8.0 million including $52.0$0.4 million in net contributionsredemptions from redeemable noncontrolling interests, and $1.6 million in proceeds from exercise of stock options less $4.6$1.8 million paid in dividends, $25.1$3.2 million paid for the purchase of treasury stock and $0.7$2.6 million for the repurchase of zero coupon subordinated debentures.
For the ninethree months ended September 30, 2013,March 31, 2014, cash provided by operating activities was $155.5$42.0 million. Cash provided byused in investing activities, related to purchases and proceeds from sales of available for sale securities, was $25.1$0.6 million in the first ninethree months of 2013.2014. Cash used in financing activities in the first ninethree months of 20132014 was $125.8$8.7 million.
Based upon our current level of operations and anticipated growth, we expect that our current cash balances plus cash flows from operating activities and our borrowing capacity will be sufficient to finance our working capital needs for the foreseeable future. We have no material commitments for capital expenditures.
We have two broker-dealers, G.research and G.distributors, which are subject to certain net capital requirements. Both broker-dealers compute their net capital under the alternative method permitted, which requires minimum net capital of the greater of $250,000 or 2% of the aggregate debit items in the reserve formula for those broker-dealers subject to Rule 15c3-3 promulgated under the Securities Exchange Act of 1934. The requirement was $250,000 for each broker-dealer at September 30, 2014.March 31, 2015. At September 30, 2014,March 31, 2015, G.research had net capital, as defined, of approximately $4.0$8.4 million, exceeding the regulatory requirement by approximately $3.7$8.2 million, and G.distributors had net capital, as defined, of approximately $4.3$3.8 million, exceeding the regulatory requirement by approximately $4.0$3.6 million. Net capital requirements for our affiliated broker-dealers may increase in accordance with rules and regulations to the extent they engage in other business activities.
Market Risk
Our primary market risk exposure is to changes in equity prices and interest rates. Since over 90% of our AUM are equities, our financial results are subject to equity-market risk as revenues from our investment management services are sensitive to stock market dynamics. In addition, returns from our proprietary investment portfolio are exposed to interest rate and equity market risk.
The Company’s Chief Investment Officer oversees the proprietary investment portfolios and allocations of proprietary capital among the various strategies. The Chief Investment Officer and the Board of Directors review the proprietary investment portfolios throughout the year. Additionally, the Company monitors its proprietary investment portfolios to ensure that they are in compliance with the Company’s guidelines.
Equity Price Risk
The Company earns substantially all of its revenue as advisory and distribution fees from our affiliated open-end and closed-end funds, Institutional and Private Wealth Management assets, and Investment Partnership assets. Such fees represent a percentage of AUM, and substantially all of these assets are in equity investments. Accordingly, since revenues are proportionate to the value of those investments, a substantial increase or decrease in equity markets overall will have a corresponding effect on the Company's revenues.
With respect to our proprietary investment activities, included in investments in securities of $254.6$158.8 million and investments in sponsored registered investment companies of $39.5$120.8 million at September 30, 2014March 31, 2015 were investments in United States Treasury Bills and Notes of $21.0$10.0 million, open-end funds and closed-end funds, largely invested in equity products, of $44.3$125.7 million, a selection of common and preferred stocks totaling $227.3$143.1 million, and other investments of approximately $1.5$0.8 million. In addition, we may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. Of the approximately $227.3$143.1 million invested in common and preferred stocks at September 30, 2014, $36.4March 31, 2015, $38.0 million represented our investment in Westwood Holdings Group Inc., and $91.1$68.7 million was invested by the Company in risk arbitrage opportunities in connection with mergers, consolidations, acquisitions, tender offers or other similar transactions. Risk arbitrage generally involves announced deals with agreed upon terms and conditions, including pricing, which typically involve less market risk than common stocks held in a trading portfolio. The principal risk associated with risk arbitrage transactions is the inability of the companies involved to complete the transaction. Securities sold, not yet purchased are stated at fair value and are subject to market risks resulting from changes in price and volatility. At September 30, 2014,March 31, 2015, the fair value of securities sold, not yet purchased was $14.2$8.6 million. Investments in partnerships totaled $107.4$106.9 million at September 30, 2014, $57.4March 31, 2015, $61.0 million of which consisted of investment partnerships and offshore funds which invest in risk arbitrage opportunities.
The following table provides a sensitivity analysis for our investments in equity securities and partnerships and affiliates which invest primarily in equity securities, excluding arbitrage products for which the principal exposure is to deal closure and not overall market conditions, as of September 30, 2014March 31, 2015 and December 31, 2013.2014. The sensitivity analysis assumes a 10% increase or decrease in the value of these investments (in thousands):
| | | | | | Fair Value | | | Fair Value | | | | | | Fair Value | | | Fair Value | |
| | | | | | assuming | | | assuming | | | | | | assuming | | | assuming | |
| | | | | | 10% decrease in | | | 10% increase in | | | | | | 10% decrease in | | | 10% increase in | |
| (unaudited) | | Fair Value | | | equity prices | | | equity prices | | | Fair Value | | | equity prices | | | equity prices | |
| At September 30, 2014: | | | | | | | | | | |
| At March 31, 2015: | | | | | | | | | | |
| Equity price sensitive investments, at fair value | | $ | 253,097 | | | $ | 227,787 | | | $ | 278,407 | | | $ | 256,845 | | | $ | 231,161 | | | $ | 282,530 | |
| At December 31, 2013: | | | | | | | | | | | | | |
| At December 31, 2014: | | | | | | | | | | | | | |
| Equity price sensitive investments, at fair value | | $ | 291,346 | | | $ | 262,211 | | | $ | 320,481 | | | $ | 243,720 | | | $ | 219,348 | | | $ | 268,092 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Rate Risk
Our exposure to interest rate risk results, principally, from our investment of excess cash in a sponsored money market fund that holds U.S. Government securities. These investments are primarily short term in nature, and the carrying value of these investments generally approximates fair value. Based on September 30, 2014March 31, 2015, cash and cash equivalent balance of $358.4$331.6 million, a 1% increase in interest rates would increase our interest income by $3.6$3.3 million annually. Given that our current return on these cash equivalent investments in this low interest rate environment is approximately 0.0% annually, an analysis of a 1% decrease is not meaningful.
Currency Risk
36
We operate offices outside the United States in London, Shanghai and Tokyo from which we perform sales, marketing and research activities. In connection with these offices, we transact business in multiple currencies, primarily British Pounds and Japanese Yen. We are a net payer of foreign currencies and therefore benefit from a strengthening U.S. dollar and are adversely affected when the U.S. dollar weakens relative to the foreign currencies. We project our future currency needs on a net basis and may from time to time purchase foreign currencies or enter into foreign exchange forward contracts as a way to minimize our foreign exchange risk. Historically these amounts have not been material. In addition, we may use foreign exchange forward contracts to offset the foreign exchange risk on investments held in foreign denominated funds, including the Gabelli Value Plus+ Trust Ltd. which is denominated in British Pounds. Absent such hedging strategies, a hypothetical 10% change in the U.S dollar to British Pound exchange rate would have increased or decreased the value of the investment we had in this fund on March 31, 2015 by $4.2 million. Because this investment is classified as an AFS security, the net unrealized change on this investment due to currency fluctuation would be included in other comprehensive income.
Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. See Note A and the Company’s Critical Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in GAMCO’s 20132014 Annual Report on Form 10-K filed with the SEC on March 6, 20142015 for details on Critical Accounting Policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of its business, GAMCO is exposed to risk of loss due to fluctuations in the securities market and general economy. Management is responsible for identifying, assessing and managing market and other risks.
Our exposure to pricing risk in equity securities is directly related to our role as financial intermediary and advisor for AUM in our affiliated open-end and closed-end funds, institutional and private wealth management accounts, and investment partnerships as well as our proprietary investment and trading activities. At September 30, 2014,March 31, 2015, we had equity investments, including open-end funds largely invested in equity products, of $294.1$279.6 million. Investments in open-end funds and closed-end funds, $44.3$125.7 million, usually generate lower market risk through the diversification of financial instruments within their portfolios. In addition, we may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. We also hold investments in partnerships which invest primarily in equity securities and which are subject to changes in equity prices. Investments in partnerships totaled $107.4$106.9 million, of which $57.4$61.0 million were invested in partnerships which invest in risk arbitrage. Risk arbitrage is primarily dependent upon deal closure rather than the overall market environment. The equity investment portfolio is at fair value and will move in line with the equity markets. The trading portfolio changes are recorded as net gain from investments in the condensed consolidated statements of income while the available for sale portfolio changes are recorded in other comprehensive income in the condensed consolidated statements of financial condition.
Item 4. Controls and Procedures
We evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014.March 31, 2015. Disclosure controls and procedures as defined under the Exchange Act Rule 13a-15(e), are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and regulations. Disclosure controls and procedures include, without limitation, controls and procedures accumulated and communicated to our management, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and Co-Chief Accounting Officers (“CAOs”), to allow timely decisions regarding required disclosure. Our CEO, CFO, and CAOs participated in this evaluation and concluded that, as of the date of September 30, 2014,March 31, 2015, our disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting as defined by Rule 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Forward-Looking Information
Our disclosure and analysis in this report contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees; and unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations. We also direct your attention to any more specific discussions of risk contained in our Form 10-Q and other public filings. We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements.
Part II: Other Information
From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exist losses which may be reasonably possible and will, if material, makesmake the necessary disclosures. SuchHowever, management believes such amounts, both those that are probable and those that are reasonably possible, are not considered material to the Company'sCompany’s financial condition, operations or cash flows.flows at March 31, 2015.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides information with respect to the repurchase of Class A Common Stock of GAMCO during the three months ended September 30, 2014:March 31, 2015:
| | | | | | | | (c) Total Number of | | | (d) Maximum | |
| | | (a) Total | �� | | (b) Average | | | Shares Repurchased as | | | Number of Shares | |
| | | Number of | | | Price Paid Per | | | Part of Publicly | | | That May Yet Be | |
| | | Shares | | | Share, net of | | | Announced Plans | | | Purchased Under | |
| Period | | Repurchased | | | Commissions | | | or Programs | | | the Plans or Programs | |
| 7/01/14 - 7/31/14 | | | 25,912 | | | $ | 83.65 | | | | 25,912 | | | | 672,583 | |
| 8/01/14 - 8/31/14 | | | 20,259 | | | | 78.42 | | | | 20,259 | | | | 652,324 | |
| 9/01/14 - 9/30/14 | | | 48,771 | | | | 74.19 | | | | 48,771 | | | | 603,553 | |
| Totals | | | 94,942 | | | $ | 77.67 | | | | 94,942 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | (c) Total Number of | | | (d) Maximum | |
| | | (a) Total | | | (b) Average | | | Shares Repurchased as | | | Number of Shares | |
| | | Number of | | | Price Paid Per | | | Part of Publicly | | | That May Yet Be | |
| | | Shares | | | Share, net of | | | Announced Plans | | | Purchased Under | |
| Period | | Repurchased | | | Commissions | | | or Programs | | | the Plans or Programs | |
| 1/01/15 - 1/31/15 | | | 556 | | | $ | 82.00 | | | | 556 | | | | 508,227 | |
| 2/01/15 - 2/28/15 | | | 14,790 | | | | 79.53 | | | | 14,790 | | | | 494,437 | |
| 3/01/15 - 3/31/15 | | | 26,047 | | | | 75.76 | | | | 26,047 | | | | 467,390 | |
| Totals | | | 41,393 | | | $ | 77.19 | | | | 41,393 | | | | | |
| | | | | | | | | | | | | | | | | |
| | 31.1 | Certification of CEO pursuant to Rule 13a-14(a). |
| | 31.2 | Certification of CFO pursuant to Rule 13a-14(a). |
| | 32.1 | Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 32.2 | Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. |
| | 101.INS | | XBRL Instance Document |
| | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GAMCO INVESTORS, INC.
(Registrant)
| By: /s/ Kieran Caterina | | By: /s/ Diane M. LaPointe | |
| Name: Kieran Caterina | Name: Diane M. LaPointe |
| Title: Co-Chief Accounting Officer | Title: Co-Chief Accounting Officer |
| | |
Date: NovemberMay 7, 20142015 | Date: NovemberMay 7, 20142015 |