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-end funds, closed-end funds, and institutional and private wealth management investors principally in the United States. Through G.distributors, LLC (“G.distributors”), we provide distribution for open-end fund distribution.funds. We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles.styles including value, growth, non-market correlated, and convertible securities. 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 greatestan 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 Private Wealth Management) and Gabelli Funds, LLC (Funds). The distribution of our open-end funds is conducted through G.distributors, our broker-dealer subsidiary.
Assets under management (“AUM”) were $43.1$37.3 billion as of September 30, 2017,March 31, 2019, an increase of $1.8$2.9 billion, or 4.3%8.4%, from June 30, 2017the December 31, 2018 AUM of $41.3$34.4 billion and an increasea decrease of $3.5$3.6 billion, or 8.9%8.8%, from the September 30, 2016March 31, 2018 AUM of $39.6$40.9 billion. The thirdfirst quarter 20172019 activity consisted of $3.7 billion of market appreciation partially reduced by net cash outflows of $213$685 million $1.8 billion of market appreciation and recurring distributions, net of reinvestments, from open-end and closed-end funds of $140$136 million. Average total AUM was $42.3$36.8 billion in the 20172019 quarter versus $39.9$42.5 billion in the prior year period, an increasea decrease of 6.0%13.4%.
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, two closed-end funds, and our GDL Fund (NYSE: GDL).one SICAV. As of September 30, 2017,March 31, 2019, assets under management with incentive based fees were $3.0$1.8 billion, $0.2$0.9 billion higherless than the $2.8$2.7 billion on June 30, 2017 and $0.6 billion higher than the $2.4 billion on September 30, 2016.March 31, 2018.
The Company reported Assets Under Management as follows (in millions):
Table I: Fund Flows - 3rd1st Quarter 20172019
| | | | | | | | | | | Fund | | | | |
| | | | | Market | | | | | | distributions, | | | | |
| | June 30, | | | appreciation/ | | | Net cash | | | net of | | | September 30, | |
| | 2017 | | | (depreciation) | | | flows | | | reinvestments | | | 2017 | |
Equities: | | | | | | | | | | | | | | | |
Open-end Funds | | $ | 13,574 | | | $ | 517 | | | $ | (305 | ) | | $ | (24 | ) | | $ | 13,762 | |
Closed-end Funds | | | 7,359 | | | | 249 | | | | 176 | | | | (116 | ) | | | 7,668 | |
Institutional & PWM - direct | | | 13,437 | | | | 613 | | | | (157 | ) | | | - | | | | 13,893 | |
Institutional & PWM - sub-advisory | | | 5,048 | | | | 368 | | | | (70 | ) | | | - | | | | 5,346 | |
SICAV (a) | | | 421 | | | | 10 | | | | 73 | | | | - | | | | 504 | |
Total Equities | | | 39,839 | | | | 1,757 | | | | (283 | ) | | | (140 | ) | | | 41,173 | |
Fixed Income: | | | | | | | | | | | | | | | | | | | | |
Money-Market Fund | | | 1,813 | | | | 4 | | | | 73 | | | | - | | | | 1,890 | |
Institutional & PWM | | | 29 | | | | - | | | | (3 | ) | | | - | | | | 26 | |
Total Fixed Income | | | 1,842 | | | | 4 | | | | 70 | | | | - | | | | 1,916 | |
Total Assets Under Management | | $ | 41,681 | | | $ | 1,761 | | | $ | (213 | ) | | $ | (140 | ) | | $ | 43,089 | |
(a) Adjusted to include Merger Arbitrage of $371 million at June 30, 2017.
| | | | | | | | | | | Fund | | | | |
| | | | | Market | | | | | | distributions, | | | | |
| | December 31, | | | appreciation/ | | | Net cash | | | net of | | | March 31, | |
| | 2018 | | | (depreciation) | | | flows | | | reinvestments | | | 2019 | |
Equities: | | | | | | | | | | | | | | | |
Open-end Funds | | $ | 10,589 | | | $ | 1,190 | | | $ | (319 | ) | | $ | (8 | ) | | $ | 11,452 | |
Closed-end Funds | | | 6,959 | | | | 725 | | | | (6 | ) | | | (128 | ) | | | 7,550 | |
Institutional & PWM | | | 14,078 | | | | 1,803 | | | | (638 | ) | | | - | | | | 15,243 | |
SICAV | | | 507 | | | | 8 | | | | 7 | | | | - | | | | 522 | |
Total Equities | | | 32,133 | | | | 3,726 | | | | (956 | ) | | | (136 | ) | | | 34,767 | |
Fixed Income: | | | | | | | | | | | | | | | | | | | | |
100% U.S. Treasury Fund | | | 2,195 | | | | 14 | | | | 278 | | | | - | | | | 2,487 | |
Institutional & PWM | | | 26 | | | | - | | | | (7 | ) | | | - | | | | 19 | |
Total Fixed Income | | | 2,221 | | | | 14 | | | | 271 | | | | - | | | | 2,506 | |
Total Assets Under Management | | $ | 34,354 | | | $ | 3,740 | | | $ | (685 | ) | | $ | (136 | ) | | $ | 37,273 | |
Table II: Fund Flows - Year to date September 2017
| | | | | | | | | | | | Fund | | | | |
| | | | | Market | | | | | | | distributions, | | | | |
| | December 31, | | | appreciation/ | | | Net cash | | | | net of | | | September 30, | |
| | 2016 | | | (depreciation) | | | flows | | | | reinvestments | | | 2017 | |
Equities: | | | | | | | | | | | | | | | | |
Open-end Funds | | $ | 13,462 | | | $ | 1,354 | | | $ | (1,009 | ) | | | $ | (45 | ) | | $ | 13,762 | |
Closed-end Funds | | | 7,150 | | | | 712 | | | | 162 | | | | | (356 | ) | | | 7,668 | |
Institutional & PWM - direct | | | 13,441 | | | | 1,523 | | | | (1,071 | ) | | | | - | | | | 13,893 | |
Institutional & PWM - sub-advisory | | | 3,783 | | | | 522 | | | | 1,041 | | (b) | | | - | | | | 5,346 | |
SICAV (a) | | | 320 | | | | 29 | | | | 155 | | | | | - | | | | 504 | |
Total Equities | | | 38,156 | | | | 4,140 | | | | (722 | ) | | | | (401 | ) | | | 41,173 | |
Fixed Income: | | | | | | | | | | | | | | | | | | | | | |
Money-Market Fund | | | 1,767 | | | | 9 | | | | 114 | | | | | - | | | | 1,890 | |
Institutional & PWM | | | 31 | | | | - | | | | (5 | ) | | | | - | | | | 26 | |
Total Fixed Income | | | 1,798 | | | | 9 | | | | 109 | | | | | - | | | | 1,916 | |
Total Assets Under Management | | $ | 39,954 | | | $ | 4,149 | | | $ | (613 | ) | | | $ | (401 | ) | | $ | 43,089 | |
(a) Adjusted to include Merger Arbitrage of $270 million at December 31, 2016.
(b) Includes $1.2 billion from being approved as the sub-advisor on two sub-advisory entities as of February 27, 2017.
Table III: Assets Under Management by Quarter
| | | | | | | | | | | % Change From | | | | | | | | | | | | % Change From | |
| | September 30, | | | June 30, | | | September 30, | | | June 30, | | | September 30, | | | March 31, | | | December 31, | | | March 31, | | | December 31, | | | March 31, | |
| | 2017 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | | | 2018 | | | 2018 | |
Equities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Open-end Funds | | $ | 13,762 | | | $ | 13,574 | | | $ | 13,799 | | | | 1.4 | % | | | (0.3 | %) | | $ | 11,452 | | | $ | 10,589 | | | $ | 12,964 | | | | 8.2 | % | | | (11.7 | %) |
Closed-end Funds | | | 7,669 | | | | 7,359 | | | | 7,178 | | | | 4.2 | | | | 6.8 | | | | 7,550 | | | | 6,959 | | | | 7,768 | | | | 8.5 | | | | (2.8 | ) |
Institutional & PWM - direct | | | 13,893 | | | | 13,437 | | | | 13,245 | | | | 3.4 | | | | 4.9 | | |
Institutional & PWM - sub-advisory | | | 5,346 | | | | 5,048 | | | | 3,542 | | | | 5.9 | | | | 50.9 | | |
SICAV (a) | | | 504 | | | | 50 | | | | 42 | | | | 908.0 | | | | 1,100.0 | | |
Institutional & PWM | | | | 15,243 | | | | 14,078 | | | | 17,643 | | | | 8.3 | | | | (13.6 | ) |
SICAV
| | | | 522 | | | | 507 | | | | 527 | | | | 3.0 | | | | (0.9 | ) |
Total Equities | | | 41,174 | | | | 39,468 | | | | 37,806 | | | | 4.3 | | | | 8.9 | | | | 34,767 | | | | 32,133 | | | | 38,902 | | | | 8.2 | | | | (10.6 | ) |
Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money-Market Fund | | | 1,890 | | | | 1,813 | | | | 1,738 | | | | 4.2 | | | | 8.7 | | |
100% U.S. Treasury Fund | | | | 2,487 | | | | 2,195 | | | | 1,922 | | | | 13.3 | | | | 29.4 | |
Institutional & PWM | | | 26 | | | | 29 | | | | 37 | | | | (10.3 | ) | | | (29.7 | ) | | | 19 | | | | 26 | | | | 30 | | | | (26.9 | ) | | | (36.7 | ) |
Total Fixed Income | | | 1,916 | | | | 1,842 | | | | 1,775 | | | | 4.0 | | | | 7.9 | | | | 2,506 | | | | 2,221 | | | | 1,952 | | | | 12.8 | | | | 28.4 | |
Total Assets Under Management | | $ | 43,090 | | | $ | 41,310 | | | $ | 39,581 | | | | 4.3 | % | | | 8.9 | % | | $ | 37,273 | | | $ | 34,354 | | | $ | 40,854 | | | | 8.5 | | | | (8.8 | ) |
Institutional & PWM - direct includes $280$251 million, $300$247 million and $286$212 million of Money Market Fund AUM at September 30, 2017, June 30, 2017March 31, 2019,
December 31, 2018 and September 30, 2016,March 31, 2018, respectively.
(a) Adjusted to include Merger Arbitrage of $371 million and $225 million at June 30, 2017 and September 30, 2016, respectively.
DEFERRED COMPENSATION
As previously disclosed, the Company has deferred the cash compensation of the Chief Executive Officer relating to all of 2016 (“2016 DCCA”) and, the first half of 2017 (“First Half 2017 DCCA”), and the fourth quarter of 2017 (“Fourth Quarter 2017 DCCA”) to provide the Company with flexibility to pay down debt.debt and enhance our ability to execute lift-outs, make acquisitions, and seed new products. We have made substantial progress toward this objective, having reduced our debt since the November 2015 spin-off of AC, resulting in Standard & Poor’s recent revision of its outlook to stable from negative andJuly 2018 reaffirmation of our debtinvestment grade rating of BBB-. In furtherance of this strategic objective, we entered into a third DCCA agreement (“Fourth Quarter 2017 DCCA”) with our Chief Executive Officer on September 30, 2017 deferring his cash compensation for the fourth quarter of 2017 until April 2019 under terms that are similar to the prior two DCCAs. This new Fourth Quarter 2017 DCCA had no effect on the third quarter results but will impact our results in future quarters as his fourth quarter 2017’s compensation expense is amortized over the DCCA vesting period.BBB- and stable outlook.
Notwithstanding its ability to settle these agreements in stock, GAMCO currently intends to make a cash paymentspayment to Mr. Gabelli on the respective vesting dates.date. While the agreements did not change Mr. Gabelli’s compensation, GAAPgenerally accepted accounting principles (“GAAP”) reporting for his compensation did change due to the ratable vesting.
The DCCAs defer the Chief Executive Officer’s compensation expense by amortizing it over each DCCA’s respective vesting period. The Chief Executive Officer is not entitled to receive the compensation until the end of the vesting period, so generally accepted accounting principles (“GAAP”)GAAP specify this treatment of the expense. The 2016 DCCA is expensed ratably over 4 years, the First Half 2017 DCCA iswas expensed ratably over 18 months, and the Fourth Quarter 2017 DCCA will bewas expensed ratably over 18 months beginning October 1, 2017.months.
Because the GAAP reporting of the DCCAs granted to the CEO tracks vesting, compensation expense and management fee expense in the year of grant is lower than compensation expense and management fee expense in future periods to the extent that future periods contain the vesting of the prior year’s DCCA compensation on top of thein addition to normal non-deferred compensation for the current year period which has not been deferred.period. In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year. In the first six months of 2017, the ratable vesting continued for the 2016 compensation, and the new First Half 2017 DCCA grant resulted in compensation for the first six months of 2017 being deferred and expense being recorded for 33% vesting in that period. The CEO'sCEO’s third quarter 2017 compensation was not deferred so 100% of the CEO’s compensation for that period was recorded together with the ratable portions of the vestings of the 2016 DCCA and the First Half 2017 DCCA. So there isThis results in a compounding effect in future periods when there are bothnon-deferred current period compensation that has not been deferred and prior period deferred compensation that is being ratably vested. On May 23, 2018, the CEO waived receipt of $6 million of the First Half 2017 DCCA, and a reduction in expense was recognized. On July 2, 2018, the First Half 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to the CEO. On April 1, 2019, the Fourth Quarter 2017 DCCA vested in accordance with the terms of the agreement, and a cash payment in the amount of $11.0 million was made to the CEO.
Accordingly, this vesting schedule resulted in a $19.1 million and a $26.8$13.0 million increase in compensation expense in the thirdfirst quarter 2017 and first nine months of 2017, respectively,2019 versus the comparable 2016 periods’2018 period’s amounts as well as a $4.0$1.4 million and $6.4 million increasedecrease in management fee expense in the thirdfirst quarter 2017 and first nine months 2017, respectively,2019 as compared to the 2016 periods’2018 period’s amounts.
The following tables show the amortization and EPS impact of the DCCAs by quarter. The amortization amount of future periods assumes that the stock price of GBL of $20.50 is unchanged from March 31, 2019. For every $1.00 change in the GBL stock price, up to a GBL stock price of $32.8187, the 2016 DCCA would increase by $2,314,695.
Amortization by quarter (increase / (decrease)): | | | EPS impact by quarter: | |
| | 2017 | | | 2018 | | | 2019 | | | 2020 | | | | | 2017 | | | 2018 | | | 2019 | | | 2020 | |
| | (amounts in thousands) | | | | | | | | | |
| Q1 | | | $ | (8,126 | ) | | $ | 979 | | | $ | 12,615 | | | $ | - | | | | Q1 | | | $ | 0.16 | | | $ | (0.03 | ) | | $ | (0.34 | ) | | $ | - | |
| Q2 | | | | (7,389 | ) | | | 11,232 | | | | 2,966 | | | | - | | | | Q2 | | | | 0.15 | | | | (0.29 | ) | | | (0.07 | ) | | | - | |
| Q3 | | | | 9,805 | | | | 183 | | | | 2,966 | | | | - | | | | Q3 | | | | (0.20 | ) | | | - | | | | (0.07 | ) | | | - | |
| Q4 | | | | (1,857 | ) | | | (8,764 | ) | | | 2,966 | | | | - | | | | Q4 | | | | 0.04 | | | | 0.23 | | | | (0.07 | ) | | | - | |
Year | | | $ | (7,567 | ) | | $ | 3,630 | | | $ | 21,513 | | | $ | - | | | Year | | | $ | 0.15 | | | $ | (0.09 | ) | | $ | (0.55 | ) | | $ | - | |
The GAAP based balance sheets are also impacted; the compensation payable at September 30, 2017impacted as only includes the vested portion of the compensation subject to the DCCAs.DCCAs is included in compensation payable. At September 30, 2017,March 31, 2019, the amount of unrecognized compensation was $57.2$8.9 million.
The following tables show a reconciliation of our results for the third quartersthree months ended March 31, 2019 and first nine months of 2017 and 2016,2018 and our balance sheet at September 30, 2017March 31, 2019 between the GAAP basis and a non-GAAP adjusted basis as if all of the 2016 DCCA was recognized in 2016, and the First Half 2017 DCCA and the Fourth Quarter 2017 DCCA expense were recognized in 2016 and 2017 respectively, without regard to the vesting schedule. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing results with prior period results, and to enable more appropriate comparisons with industry peers. However, non-GAAP financial measures should not be considered a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies. The following schedules reconcile U.S. GAAP financial measures to non-GAAP measures for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 as well as at September 30, 2017.March 31, 2019.
| | Three Months Ended March 31, 2019 | |
| | | | | Impact of | | | | | | | |
| | Reported | | | Fourth Quarter | | | Impact of | | | | |
| | GAAP | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 65,888 | | | $ | - | | | $ | - | | | $ | 65,888 | |
Distribution fees and other income | | | 8,448 | | | | - | | | | - | | | | 8,448 | |
Total revenues | | | 74,336 | | | | - | | | | - | | | | 74,336 | |
Expenses | | | | | | | | | | | | | | | | |
Compensation | | | 30,347 | | | | (2,983 | ) | | | (8,184 | ) | | | 19,180 | |
Management fee | | | 1,449 | | | | (419 | ) | | | (1,030 | ) | | | - | |
Distribution costs | | | 8,670 | | | | - | | | | - | | | | 8,670 | |
Other operating expenses | | | 5,257 | | | | - | | | | - | | | | 5,257 | |
Total expenses | | | 45,723 | | | | (3,402 | ) | | | (9,214 | ) | | | 33,107 | |
| | | | | | | | | | | | | | | | |
Operating income | | | 28,613 | | | | 3,402 | | | | 9,214 | | | | 41,229 | |
Other income (expense) | | | | | | | | | | | | | | | | |
Net gain (loss) from investments | | | (1,895 | ) | | | - | | | | - | | | | (1,895 | ) |
Interest and dividend income | | | 724 | | | | - | | | | - | | | | 724 | |
Interest expense | | | (655 | ) | | | - | | | | - | | | | (655 | ) |
Total other expense, net | | | (1,826 | ) | | | - | | | | - | | | | (1,826 | ) |
Income before income taxes | | | 26,787 | | | | 3,402 | | | | 9,214 | | | | 39,403 | |
Income tax provision | | | 6,895 | | | | 816 | | | | 2,211 | | | | 9,922 | |
Net income | | $ | 19,892 | | | $ | 2,586 | | | $ | 7,003 | | | $ | 29,481 | |
| | | | | | | | | | | | | | | | |
Net income: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.70 | | | $ | 0.09 | | | $ | 0.25 | | | $ | 1.03 | |
Diluted | | | 0.70 | | | | 0.09 | | | | 0.25 | | | | 1.03 | |
| | Three Months Ended March 31, 2018 | |
| | | | | Impact of | | | Impact of | | | | | | | |
| | Reported | | | Fourth Quarter | | | First Half | | | Impact of | | | | |
| | GAAP | | | 2017 DCCA | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 77,348 | | | $ | - | | | $ | - | | | $ | - | | | $ | 77,348 | |
Distribution fees and other income | | | 10,149 | | | | - | | | | - | | | | - | | | | 10,149 | |
Total revenues | | | 87,497 | | | | - | | | | - | | | | - | | | | 87,497 | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Compensation | | | 25,950 | | | | (1,391 | ) | | | 213 | | | | 3,016 | | | | 27,788 | |
Management fee | | | 4,634 | | | | (419 | ) | | | (1,368 | ) | | | (1,030 | ) | | | 1,817 | |
Distribution costs | | | 10,204 | | | | - | | | | - | | | | - | | | | 10,204 | |
Other operating expenses | | | 5,453 | | | | - | | | | - | | | | - | | | | 5,453 | |
Total expenses | | | 46,241 | | | | (1,810 | ) | | | (1,155 | ) | | | 1,986 | | | | 45,262 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | | | 41,256 | | | | 1,810 | | | | 1,155 | | | | (1,986 | ) | | | 42,235 | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | |
Net gain (loss) from investments | | | (5,347 | ) | | | - | | | | - | | | | - | | | | (5,347 | ) |
Interest and dividend income | | | 492 | | | | - | | | | - | | | | - | | | | 492 | |
Interest expense | | | (1,200 | ) | | | - | | | | - | | | | - | | | | (1,200 | ) |
Total other expense, net | | | (6,055 | ) | | | - | | | | - | | | | - | | | | (6,055 | ) |
Income before income taxes | | | 35,201 | | | | 1,810 | | | | 1,155 | | | | (1,986 | ) | | | 36,180 | |
Income tax provision | | | 7,940 | | | | 453 | | | | 289 | | | | (497 | ) | | | 8,185 | |
Net income | | $ | 27,261 | | | $ | 1,357 | | | $ | 866 | | | $ | (1,489 | ) | | $ | 27,995 | |
| | | | | | | | | | | | | | | | | | | | |
Net income: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.94 | | | $ | 0.05 | | | $ | 0.03 | | | $ | (0.05 | ) | | $ | 0.97 | |
Diluted | | $ | 0.94 | | | $ | 0.05 | | | $ | 0.03 | | | $ | (0.05 | ) | | $ | 0.97 | |
| | Three Months Ended September 30, 2017 | |
| | | | | Impact of | | | | | | | |
| | Reported | | | First Half | | | Impact of | | | | |
| | GAAP | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 77,328 | | | $ | - | | | $ | - | | | $ | 77,328 | |
Distribution fees and other income | | | 11,013 | | | | - | | | | - | | | | 11,013 | |
Total revenues | | | 88,341 | | | | - | | | | - | | | | 88,341 | |
Expenses | | | | | | | | | | | | | | | | |
Compensation | | | 42,919 | | | | (4,816 | ) | | | (3,415 | ) | | | 34,688 | |
Management fee | | | 4,935 | | | | (886 | ) | | | (688 | ) | | | 3,361 | |
Distribution costs | | | 11,665 | | | | - | | | | - | | | | 11,665 | |
Other operating expenses | | | 5,429 | | | | - | | | | - | | | | 5,429 | |
Total expenses | | | 64,948 | | | | (5,702 | ) | | | (4,103 | ) | | | 55,143 | |
| | | | | | | | | | | | | | | | |
Operating income | | | 23,393 | | | | 5,702 | | | | 4,103 | | | | 33,198 | |
Other income (expense) | | | | | | | | | | | | | | | | |
Net gain (loss) from investments | | | 2,841 | | | | - | | | | - | | | | 2,841 | |
Interest and dividend income | | | 745 | | | | - | | | | - | | | | 745 | |
Interest expense | | | (2,688 | ) | | | - | | | | - | | | | (2,688 | ) |
Shareholder-designated contribution | | | (3,857 | ) | | | - | | | | - | | | | (3,857 | ) |
Total other expense, net | | | (2,959 | ) | | | - | | | | - | | | | (2,959 | ) |
Income before income taxes | | | 20,434 | | | | 5,702 | | | | 4,103 | | | | 30,239 | |
Income tax provision | | | 3,834 | | | | 2,167 | | | | 1,559 | | | | 7,560 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 16,600 | | | $ | 3,535 | | | $ | 2,544 | | | $ | 22,679 | |
| | | | | | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | | | | | | | | | | | | | | | |
per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.57 | | | $ | 0.12 | | | $ | 0.09 | | | $ | 0.78 | |
Diluted | | $ | 0.55 | | | $ | 0.11 | | | $ | 0.08 | | | $ | 0.75 | |
| | March 31, 2019 | |
| | | | | | | | | |
| | Reported | | | Impact of | | | | |
| | GAAP | | | 2016 DCCA | | | Non-GAAP | |
ASSETS | | | | | | | | | |
Cash and cash equivalents | | $ | 64,389 | | | $ | - | | | $ | 64,389 | |
Investments in securities | | | 31,623 | | | | - | | | | 31,623 | |
Receivable from brokers | | | 3,529 | | | | - | | | | 3,529 | |
Investment advisory fees receivable | | | 23,058 | | | | - | | | | 23,058 | |
Receivable from affiliates | | | 4,435 | | | | - | | | | 4,435 | |
Deferred tax asset and income tax receivable | | | 15,661 | | | | 2,135 | | | | 17,796 | |
Other assets | | | 11,534 | | | | - | | | | 11,534 | |
Total assets | | $ | 154,229 | | | $ | 2,135 | | | $ | 156,364 | |
| | | | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | | | |
Payable to brokers | | | 478 | | | | - | | | | 478 | |
Income taxes payable and deferred tax liabilities | | | 8,068 | | | | - | | | | 8,068 | |
Lease liability obligations | | | 5,300 | | | | - | | | | 5,300 | |
Compensation payable | | | 59,142 | | | | 8,897 | | | | 68,039 | |
Payable to affiliates | | | - | | | | - | | | | - | |
Accrued expenses and other liabilities | | | 30,196 | | | | - | | | | 30,196 | |
Sub-total | | | 103,184 | | | | 8,897 | | | | 112,081 | |
| | | | | | | | | | | | |
5.875% Senior notes (due June 1, 2021) | | | 24,174 | | | | - | | | | 24,174 | |
Total liabilities | | | 127,358 | | | | 8,897 | | | | 136,255 | |
| | | | | | | | | | | | |
Equity | | | | | | | | | | | | |
GAMCO Investors, Inc. stockholders' equity | | | | | | | | | | | | |
Class A Common Stock | | | 14 | | | | - | | | | 14 | |
Class B Common Stock | | | 19 | | | | - | | | | 19 | |
Additional paid-in capital | | | 14,769 | | | | - | | | | 14,769 | |
Retained earnings | | | 302,139 | | | | (6,762 | ) | | | 295,377 | |
Accumulated other comprehensive income | | | (220 | ) | | | - | | | | (220 | ) |
Treasury stock, at cost | | | (289,850 | ) | | | - | | | | (289,850 | ) |
Total GAMCO Investors, Inc. stockholders' equity | | | 26,871 | | | | (6,762 | ) | | | 20,109 | |
Total liabilities and equity | | $ | 154,229 | | | $ | 2,135 | | | $ | 156,364 | |
| | Nine Months Ended September 30, 2017 | |
| | | | | Impact of | | | | | | | |
| | Reported | | | First Half | | | Impact of | | | | |
| | GAAP | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 228,942 | | | $ | - | | | $ | - | | | $ | 228,942 | |
Distribution fees and other income | | | 32,916 | | | | - | | | | - | | | | 32,916 | |
Total revenues | | | 261,858 | | | | - | | | | - | | | | 261,858 | |
Expenses | | | | | | | | | | | | | | | | |
Compensation | | | 97,634 | | | | 14,390 | | | | (9,174 | ) | | | 102,850 | |
Management fee | | | 9,455 | | | | 2,666 | | | | (2,172 | ) | | | 9,949 | |
Distribution costs | | | 33,373 | | | | - | | | | - | | | | 33,373 | |
Other operating expenses | | | 15,900 | | | | - | | | | - | | | | 15,900 | |
Total expenses | | | 156,362 | | | | 17,056 | | | | (11,346 | ) | | | 162,072 | |
| | | | | | | | | | | | | | | | |
Operating income | | | 105,496 | | | | (17,056 | ) | | | 11,346 | | | | 99,786 | |
Other income (expense) | | | | | | | | | | | | | | | | |
Net gain (loss) from investments | | | 2,867 | | | | - | | | | - | | | | 2,867 | |
Interest and dividend income | | | 1,765 | | | | - | | | | - | | | | 1,765 | |
Interest expense | | | (8,269 | ) | | | - | | | | - | | | | (8,269 | ) |
Shareholder-designated contribution | | | (3,857 | ) | | | - | | | | - | | | | (3,857 | ) |
Total other expense, net | | | (7,494 | ) | | | - | | | | - | | | | (7,494 | ) |
Income before income taxes | | | 98,002 | | | | (17,056 | ) | | | 11,346 | | | | 92,292 | |
Income tax provision | | | 33,688 | | | | (6,594 | ) | | | 4,350 | | | | 31,444 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 64,314 | | | $ | (10,462 | ) | | $ | 6,996 | | | $ | 60,848 | |
| | | | | | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | | | | | | | | | | | | | | | |
per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 2.22 | | | $ | (0.36 | ) | | $ | 0.24 | | | $ | 2.10 | |
Diluted | | $ | 2.14 | | | $ | (0.34 | ) | | $ | 0.22 | | | $ | 2.02 | |
| | Three Months Ended September 30, 2016 | |
| | | | | | | | | |
| | Reported | | | Impact of | | | | |
| | GAAP | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | |
Investment advisory and incentive fees | | $ | 75,952 | | | $ | - | | | $ | 75,952 | |
Distribution fees and other income | | | 11,769 | | | | - | | | | 11,769 | |
Total revenues | | | 87,721 | | | | - | | | | 87,721 | |
Expenses | | | | | | | | | | | | |
Compensation | | | 21,233 | | | | 10,885 | | | | 32,118 | |
Management fee | | | 1,163 | | | | 2,400 | | | | 3,563 | |
Distribution costs | | | 11,568 | | | | - | | | | 11,568 | |
Other operating expenses | | | 5,681 | | | | - | | | | 5,681 | |
Total expenses | | | 39,645 | | | | 13,285 | | | | 52,930 | |
| | | | | | | | | | | | |
Operating income | | | 48,076 | | | | (13,285 | ) | | | 34,791 | |
Other income (expense) | | | | | | | | | | | | |
Net gain from investments | | | 55 | | | | - | | | | 55 | |
Interest and dividend income | | | 371 | | | | - | | | | 371 | |
Interest expense | | | (3,155 | ) | | | - | | | | (3,155 | ) |
Total other expense, net | | | (2,729 | ) | | | - | | | | (2,729 | ) |
Income before income taxes | | | 45,347 | | | | (13,285 | ) | | | 32,062 | |
Income tax provision | | | 14,486 | | | | (5,075 | ) | | | 9,411 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 30,861 | | | $ | (8,210 | ) | | $ | 22,651 | |
| | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | | | | | | | | | | | |
per share: | | | | | | | | | | | | |
Basic | | $ | 1.06 | | | $ | (0.28 | ) | | $ | 0.78 | �� |
Diluted | | $ | 1.03 | | | $ | (0.27 | ) | | $ | 0.76 | |
| | Nine Months Ended September 30, 2016 | |
| | | | | | | | | |
| | Reported | | | Impact of | | | | |
| | GAAP | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | |
Investment advisory and incentive fees | | $ | 219,594 | | | $ | - | | | $ | 219,594 | |
Distribution fees and other income | | | 33,456 | | | | - | | | | 33,456 | |
Total revenues | | | 253,050 | | | | - | | | | 253,050 | |
Expenses | | | | | | | | | | | | |
Compensation | | | 62,130 | | | | 32,016 | | | | 94,146 | |
Management fee | | | 3,376 | | | | 6,926 | | | | 10,302 | |
Distribution costs | | | 32,786 | | | | - | | | | 32,786 | |
Other operating expenses | | | 14,993 | | | | - | | | | 14,993 | |
Total expenses | | | 113,285 | | | | 38,942 | | | | 152,227 | |
| | | | | | | | | | | | |
Operating income | | | 139,765 | | | | (38,942 | ) | | | 100,823 | |
Other income (expense) | | | | | | | | | | | | |
Net gain from investments | | | 518 | | | | - | | | | 518 | |
Interest and dividend income | | | 1,104 | | | | - | | | | 1,104 | |
Interest expense | | | (9,729 | ) | | | - | | | | (9,729 | ) |
Total other expense, net | | | (8,107 | ) | | | - | | | | (8,107 | ) |
Income before income taxes | | | 131,658 | | | | (38,942 | ) | | | 92,716 | |
Income tax provision | | | 47,229 | | | | (14,811 | ) | | | 32,418 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 84,429 | | | $ | (24,131 | ) | | $ | 60,298 | |
| | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | | | | | | | | | | | |
per share: | | | | | | | | | | | | |
Basic | | $ | 2.89 | | | $ | (0.83 | ) | | $ | 2.06 | |
Diluted | | $ | 2.85 | | | $ | (0.81 | ) | | $ | 2.04 | |
| | September 30, 2017 | |
| | | | | | | | Impact of | | | | |
| | Reported | | | Impact of | | | First Half | | | | |
| | GAAP | | | 2016 DCCA | | | 2017 DCCA | | | Non-GAAP | |
ASSETS | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 61,097 | | | $ | - | | | $ | - | | | $ | 61,097 | |
Investments in securities | | | 101,425 | | | | - | | | | - | | | | 101,425 | |
Receivable from brokers | | | 1,342 | | | | - | | | | - | | | | 1,342 | |
Investment advisory fees receivable | | | 25,549 | | | | - | | | | - | | | | 25,549 | |
Receivable from affiliates | | | 4,784 | | | | - | | | | - | | | | 4,784 | |
Income tax receivable | | | 24,941 | | | | 14,724 | | | | 7,017 | | | | 46,682 | |
Other assets | | | 11,888 | | | | - | | | | - | | | | 11,888 | |
Total assets | | $ | 231,026 | | | $ | 14,724 | | | $ | 7,017 | | | $ | 252,767 | |
| | | | | | | | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | |
Payable to brokers | | | 13,311 | | | | - | | | | - | | | | 13,311 | |
Income taxes payable and deferred tax liabilities | | | 3,215 | | | | - | | | | - | | | | 3,215 | |
Capital lease obligation | | | 4,976 | | | | - | | | | - | | | | 4,976 | |
Compensation payable | | | 82,896 | | | | 38,748 | | | | 18,467 | | | | 140,111 | |
Payable to affiliates | | | 2,981 | | | | - | | | | - | | | | 2,981 | |
Accrued expenses and other liabilities | | | 24,134 | | | | - | | | | - | | | | 24,134 | |
Sub-total | | | 131,513 | | | | 38,748 | | | | 18,467 | | | | 188,728 | |
| | | | | | | | | | | | | | | | |
4.5% Convertible note (due August 15, 2021) | | | 109,862 | | | | - | | | | - | | | | 109,862 | |
AC 4% PIK Note (due November 30, 2020) | | | 70,000 | | | | - | | | | - | | | | 70,000 | |
5.875% Senior notes (due June 1, 2021) | | | 24,138 | | | | - | | | | - | | | | 24,138 | |
Total liabilities | | | 335,513 | | | | 38,748 | | | | 18,467 | | | | 392,728 | |
| | | | | | | | | | | | | | | | |
Equity | | | | | | | | | | | | | | | | |
GAMCO Investors, Inc. stockholders' equity | | | | | | | | | | | | | | | | |
Class A Common Stock | | | 14 | | | | - | | | | - | | | | 14 | |
Class B Common Stock | | | 19 | | | | - | | | | - | | | | 19 | |
Additional paid-in capital | | | 11,084 | | | | - | | | | - | | | | 11,084 | |
Retained earnings (deficit) | | | 143,026 | | | | (24,024 | ) | | | (11,450 | ) | | | 107,552 | |
Accumulated other comprehensive income | | | 12,365 | | | | - | | | | - | | | | 12,365 | |
Treasury stock, at cost | | | (270,995 | ) | | | - | | | | - | | | | (270,995 | ) |
Total GAMCO Investors, Inc. stockholders' equity (deficit) | | | (104,487 | ) | | | (24,024 | ) | | | (11,450 | ) | | | (139,961 | ) |
Total liabilities and equity (deficit) | | $ | 231,026 | | | $ | 14,724 | | | $ | 7,017 | | | $ | 252,767 | |
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, 2017March 31, 2019 Compared To Three Months Ended September 30, 2016March 31, 2018
(Unaudited; in thousands, except per share data) | | | | | | |
| | 2017 | | | 2016 | | | 2019 | | | 2018 | |
Revenues | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 77,328 | | | $ | 75,952 | | | $ | 65,888 | | | $ | 77,348 | |
Distribution fees and other income | | | 11,013 | | | | 11,769 | | | | 8,448 | | | | 10,149 | |
Total revenues | | | 88,341 | | | | 87,721 | | | | 74,336 | | | | 87,497 | |
Expenses | | | | | | | | | | | | | | | | |
Compensation | | | 42,919 | | | | 21,233 | | | | 30,347 | | | | 25,950 | |
Management fee | | | 4,935 | | | | 1,163 | | | | 1,449 | | | | 4,634 | |
Distribution costs | | | 11,665 | | | | 11,568 | | | | 8,670 | | | | 10,204 | |
Other operating expenses | | | 5,429 | | | | 5,681 | | | | 5,257 | | | | 5,453 | |
Total expenses | | | 64,948 | | | | 39,645 | | | | 45,723 | | | | 46,241 | |
Operating income | | | 23,393 | | | | 48,076 | | | | 28,613 | | | | 41,256 | |
Other income (expense) | | | | | | | | | | | | | | | | |
Net gain from trading securities | | | 2,841 | | | | 55 | | |
Net loss from investments | | | | (1,895 | ) | | | (5,347 | ) |
Interest and dividend income | | | 745 | | | | 371 | | | | 724 | | | | 492 | |
Interest expense | | | (2,688 | ) | | | (3,155 | ) | | | (655 | ) | | | (1,200 | ) |
Shareholder-designated contribution | | | (3,857 | ) | | | - | | |
Total other expense, net | | | (2,959 | ) | | | (2,729 | ) | | | (1,826 | ) | | | (6,055 | ) |
Income before income taxes | | | 20,434 | | | | 45,347 | | | | 26,787 | | | | 35,201 | |
Income tax provision | | | 3,834 | | | | 14,486 | | | | 6,895 | | | | 7,940 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 16,600 | | | $ | 30,861 | | |
Net income | | | $ | 19,892 | | | $ | 27,261 | |
| | | | | | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders per share: | | | | | | | | | |
Net income: | | | | | | | | | |
Basic | | $ | 0.57 | | | $ | 1.06 | | | $ | 0.70 | | | $ | 0.94 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.55 | | | $ | 1.03 | | | $ | 0.70 | | | $ | 0.94 | |
Overview
Net income for the quarter was $16.6$19.9 million, or $0.55$0.70 per fully diluted share, versus $30.9$27.3 million, or $1.03$0.94 per fully diluted share, in the prior year’s quarter. There were several distinct items in both quarters thatThe quarter to quarter comparison was impacted results. During the third quarter of 2017, we recorded an additional $1.7 million of stockby lower revenues and higher variable compensation partially offset by lower other expense, net of tax, $0.6 million of launch costs, net of tax, for a closed-end fund, $2.2 million of charitable contributions, net of tax, and an additional $6.1 million of expense, net of tax, for the 2016 DCCA and the First Half 2017 DCCA. The 2017 quarter also included the recognition of $2.6 million in gains on securities donated, net of tax, and a $3.4 million income tax accrual reversal. The 2016 third quarter included $8.2 million less in expense, net of tax, relating to the 2016 DCCA, an income tax reversal of $2.6 million and $0.3 million of expense, net of tax, from the launch of a closed-end fund. Absent these distinct items, net income for 2017 was $21.2 million versus $20.4 million in 2016.net.
Revenues
Investment advisory and incentive fees for the thirdfirst quarter 20172019 were $77.3$65.9 million, 1.7% higher14.7% lower than the 20162018 comparative figure of $76.0$77.3 million. Open-end fund revenues increaseddecreased by 0.6%15.2% to $33.8$27.9 million from $33.6$32.9 million in the thirdfirst quarter of 2016.2018. Our closed-end fund revenues increased 5.2%decreased 7.6% to $16.2$15.8 million in the thirdfirst quarter 20172019 from $15.4$17.1 million in 2016 due to a 5.3% increase in non-performance fee based average AUM.2018. Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, fell $0.2declined $5.3 million to $26.0$20.7 million from $26.2$26.0 million in the thirdfirst quarter of 2016.2018. There were no incentive fees earned during the thirdfirst quarters of 20172019 or 2016.2018. We recognize incentive fees only when the earning period for them is complete. Revenues relating to the SICAV were $1.5 million in the first quarter of 2019 versus $1.3 million in the thirdfirst quarter of 2017 versus $0.8 million in the third quarter of 2016.2018.
Open-end fund distribution fees and other income were $11.0$8.4 million for the thirdfirst quarter 2017,2019, a decrease of $0.8$1.7 million or 6.8%16.8% from $11.8$10.1 million in the prior year period, primarily due to lower average AUM in open-end equity funds that generate distribution fees.
Expenses
Compensation costs, which are largely variable, were $42.9$30.3 million, or 102.4%16.5%, higher than prior year compensation costs of $21.2$26.0 million. This is primarily due to the accounting for the vesting of the DCCAs.
Because the GAAP reportingThe amortization of the DCCAs granted to the CEO tracks vesting, compensation expense in the year of grant is lower than compensation expense in future periods to the extent that future periods contain the vesting of the prior year’s DCCA compensation on top of the normal compensation for the current year period which has not been deferred. In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year. In the first half of 2017, the ratable vesting continued for the 2016 compensation, and the new First Half 2017 DCCA grant resulted in compensation for the first six months of 2017 being deferred and expense being recorded for 33% vesting in that period. In the third quarter 2017, there was no DCCA so 100% of the CEO’s compensation for that period was recorded together with the ratable portions of the vestings of the 2016 DCCA and the First Half 2017 DCCA. So there is a compounding effect in future periods when there are both current period compensation that has not been deferred and prior period compensation that is being ratably vested. Accordingly, this vesting schedule resulted in a $19.1$13.0 million increase in compensation year over year. The CEO’s waiver of his compensation for January 1, 2019 through March 31, 2019 and March 1, 2018 through March 31, 2018 reduced compensation by $12.2 million and $4.9 million in thirdthe first quarter 2017 versus third quarter 2016.of 2019 and 2018, respectively.
The remainder of the quarter over quarter increase was comprised of a $1.1$0.4 million increase in variable compensation related to the increased levels of AUM, a $0.6 million increase in fixed compensation, and a $0.9 million net increase in stock compensation expense, inclusive of the $1.8a $2.9 million incurreddecrease in the third quarter of 2017 for the acceleration of the GBL RSAs.variable compensation and a $1.1 million increase in fixed compensation.
Management fee expense, which is wholly variable and based on pretax income, increaseddecreased to $4.9$1.4 million in the thirdfirst quarter of 20172019 from $1.2$4.6 million in the 20162018 period. Once again,$1.8 million of this increase is primarilydecrease was due to the accountingCEO waiver for 2018 only being in effect for March 2018 while the waiver for 2019 was in effect for the vesting of the DCCAs.entire first quarter. The DCCAs affected management fee expense, which is part of the CEO’s DCCAs, in a fashion similar fashion to the compensation expense with the vesting schedule resulting in a $4.0$1.4 million increasedecrease in management fee expense in the thirdfirst quarter 20172019 as compared with the thirdfirst quarter 2016. The remaining $0.3 decline in the year-over-year comparison is due to the decline in pre-tax income on which the management fee is based.2018.
Distribution costs were $11.7$8.7 million, an increasea decrease of $0.1$1.5 million or 0.9%14.7% from $11.6$10.2 million in the prior year’s period.
Other operating expenses were $5.4$5.3 million in the thirdfirst quarter of 2017,2019, a decrease of $0.3$0.2 million, or 5.3%3.6%, from $5.7$5.5 million in the thirdfirst quarter of 2016. The research fee paid to G.research increased to $0.8 million in the third quarter of 2017 from $0.4 million in the prior year quarter. Legal expense was lower by $0.7 million in the 2017 period.2018.
Operating income for the thirdfirst quarter of 20172019 was $23.4$28.6 million, a decrease of $24.7$12.7 million, or 51.4%30.8%, from the $48.1$41.3 million in the thirdfirst quarter of 2016.2018. Operating income, as a percentage of revenues, was 26.5%38.5% in the 20172019 quarter as compared to 54.8%47.2% in the 20162018 quarter.
Other expenseincome (expense)
Total other expense,income (expense), net was an expense of $3.0$1.8 million for the thirdfirst quarter 20172019 versus an expense of $2.7$6.1 million in the prior year’s quarter. Net gainslosses from trading securitiesinvestments were $2.8$1.9 million in the thirdfirst quarter of 20172019 versus gainslosses of $55,000$5.3 million in the thirdfirst quarter of 2016.2018. Interest and dividend income increased to $0.7 million in the third quarter 2017 from $0.4$0.5 million in the third quarter 2016.2018 quarter. Interest expense decreased $0.5 million to $2.7was $0.7 million in the thirdfirst quarter of 2017 from $3.22019 versus $1.2 million in the thirdfirst quarter of 2016 as gross debt at September 30, 2017 was $29.9 million lower as debt fell from $233.9 million at September 30, 2016 to $204.0 million at September 30, 2017.2018.
The effective tax rates (“ETR”) for the three months ended September 30, 2017March 31, 2019 and September 30, 2016March 31, 2018 were 18.8%25.7% and 31.9%22.6%, respectively. The ETR for the three months ended September 30, 2017 was higher by 3.6% than it would have otherwise been as a resultfirst quarter of a reduction to previously recorded stock compensation tax benefits. The current year quarter’s ETR benefited from the reversal2019 included an accrual of certain tax accruals totaling $3.4$1.5 million as well as a $1.0 million tax benefit related to charitable contributions while the prior year quarter benefited from a reversal of $2.6 millionan adjustment in an uncertain tax accruals due to the conclusion of a state audit.position. The ETR absent this accrual was 20.4%.
Nine Months Ended September 30, 2017 Compared To Nine Months Ended September 30, 2016
(Unaudited; in thousands, except per share data) | | | |
| | 2017 | | | 2016 | |
Revenues | | | | | | |
Investment advisory and incentive fees | | $ | 228,942 | | | $ | 219,594 | |
Distribution fees and other income | | | 32,916 | | | | 33,456 | |
Total revenues | | | 261,858 | | | | 253,050 | |
Expenses | | | | | | | | |
Compensation | | | 97,634 | | | | 62,130 | |
Management fee | | | 9,455 | | | | 3,376 | |
Distribution costs | | | 33,373 | | | | 32,786 | |
Other operating expenses | | | 15,900 | | | | 14,993 | |
Total expenses | | | 156,362 | | | | 113,285 | |
Operating income | | | 105,496 | | | | 139,765 | |
Other income (expense) | | | | | | | | |
Net gain from trading securities | | | 2,867 | | | | 518 | |
Interest and dividend income | | | 1,765 | | | | 1,104 | |
Interest expense | | | (8,269 | ) | | | (9,729 | ) |
Shareholder-designated contribution | | | (3,857 | ) | | | - | |
Total other expense, net | | | (7,494 | ) | | | (8,107 | ) |
Income before income taxes | | | 98,002 | | | | 131,658 | |
Income tax provision | | | 33,688 | | | | 47,229 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 64,314 | | | $ | 84,429 | |
| | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders per share: | | | | | | | | |
Basic | | $ | 2.22 | | | $ | 2.89 | |
| | | | | | | | |
Diluted | | $ | 2.14 | | | $ | 2.85 | |
Overview
Net income for the first nine months was $64.3 million, or $2.14 per fully diluted share, versus $84.4 million, or $2.85 per fully diluted share, in the prior year’s first nine months. There were several distinct items in both periods that impacted results. During 2017, we recorded an additional $4.0 million of stock compensation expense, net of tax, $0.6 million of launch costs, net of tax, for a closed-end fund, and $2.2 million of charitable contributions, net of tax. The 2017 quarter also included a $3.4 million reduction of expense, net of tax, for the 2016 DCCA and the First Half 2017 DCCA, the recognition of $2.6 million in gains on securities donated, net of tax, and a $3.4 million income tax accrual reversal. The 2016 third quarter included $24.1 million less in expense, net of tax benefit, relating to the 2016 DCCA, a tax reversal of $2.6 million and $0.3 million of expense, net of tax benefit, from the launch of a closed-end fund. Absent these distinct items, net income for 2017 was $61.7 million versus $58.0 million in 2016.
Revenues
Investment advisory and incentive fees for the nine months ended September 2017 were $228.9 million, 4.2% higher than the 2016 comparative figure of $219.6 million. Open-end fund revenues increased by 2.2% to $99.7 million from $97.6 million in the first nine months of 2017. Our closed-end fund revenues increased 11.0% to $47.4 million in the nine months ended September 2017 from $42.7 million in 2016 due to a 7.4% 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, rose $1.3 million to $78.6 million from $77.3 million in the first nine months of 2016. There were no incentive fees earned during the first nine months of 2017 or 2016. We recognize incentive fees only when the earning period for them is complete. Revenues relating to the SICAV were $3.2 million in the nine months ended September 2017 versus $1.9 million in the nine months ended September 2016.
Open-end fund distribution fees and other income were $32.9 million for the first nine months of 2017, a decrease of $0.6 million or 1.8% from $33.5 million in the prior year period, primarily due to lower average AUM in open-end equity funds that generate distribution fees.
Expenses
Compensation costs, which are largely variable, were $97.6 million or 57.2% higher than prior year compensation costs of $62.1 million. This is primarily due to the accounting for the vesting of the DCCAs.
Because the GAAP reporting of the DCCAs granted to the CEO tracks vesting, compensation expense in the year of grant is lower than compensation expense in future periods to the extent that future periods contain the vesting of the prior year’s DCCA compensation on top of the normal compensation for the current year period which has not been deferred. In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year. In the first six months of 2017, the ratable vesting continued for the 2016 compensation, and the new First Half 2017 DCCA grant resulted in compensation for the first six months of 2017 being deferred and expense being recorded for 33% vesting in that period. In the third quarter 2017, there was no DCCA, so 100% of the CEO’s compensation for that period was recorded together with the ratable portions of the vestings of the 2016 DCCA and the First Half 2017 DCCA. So there is a compounding effect in future periods when there are both current period compensation that has not been deferred and prior period compensation that is being ratably vested. Accordingly, this vesting schedule resulted in a $26.8 million increase in compensation expense in the first nine months of 2017 versus the comparable 2016 period.
The remainder of the period over period increase was comprised of a $4.2 million increase in variable compensation related to the increased levels of AUM, a $0.6 million increase in fixed compensation, and a $3.9 million net increase in stock compensation expense, inclusive of the $5.5 million incurred in 2017 for the acceleration of the GBL and AC RSAs.
Management fee expense, which is wholly variable and based on pretax income, increased to $9.5 million in the nine months ended September 30, 2017 from $3.4 million in the 2016 period. Once again, this increase is primarily due to the accounting for the vesting of the DCCAs. The DCCAs affected management fee expense, which is part of the CEO’s DCCAs, in a similar fashion to the compensation expense with the vesting schedule resulting in a $6.4 million increase in management fee expense in the first nine months of 2017 as compared with the comparable period in 2016. The remaining $0.3 decline in the year-over-year comparison is due to the decline in pre-tax income on which the management fee is based.
Distribution costs were $33.4 million, an increase of $0.6 million or 1.8% from $32.8 million in the prior year’s period.
Other operating expenses were $15.9 million in the first nine months of 2017, an increase of $0.9 million, or 6%, from $15.0 million in the first nine months of 2016. The research fee paid to G.research increased to $2.3 million in the nine months ending September 30, 2017 from $1.1 million in the prior year period.
Operating income for the first nine months of 2017 was $105.5 million, a decrease of $34.3 million, or 24.5%, from the $139.8 million in the first nine months of 2016. Operating income, as a percentage of revenues, was 40.3% in the 2017 period as compared to 55.2% in the 2016 period.
Other expense
Total other expense, net was an expense of $7.5 million for the nine months ended September 30, 2017 versus an expense of $8.1 million in the prior year’s period. Net gains from trading securities increased to $2.9 million in the first nine months of 2017 from $0.5 million in the prior year period. Interest and dividend income increased to $1.8 million in the first nine months of 2017 from $1.1 million in the first nine months of 2016. Interest expense decreased $1.4 million to $8.3 million in the first nine months of 2017 from $9.7 million in the first nine months of 2016 as gross debt at September 30, 2017 was $204.0 million down from the $233.9 million at September 30, 2016.
The ETR for the nine months ended September 30, 2017 and September 30, 2016 were 34.4% and 35.9%, respectively. The ETR for the nine months ended September 30, 2017 was higher by 1.0% than it would have otherwise been as a result of a reduction to previously recorded stock compensation tax benefits. The current year quarter’s ETR benefited from the reversal of certain tax accruals totaling $3.6 million as well as a $1.0 million tax benefit related to charitable contributions while the prior year quarter benefited from a reversal of $2.6 million in tax accruals due to the conclusion of a state audit.
LIQUIDITY AND CAPITAL RESOURCES
Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments and securities held for investment purposes. Cash and cash equivalents are comprised primarily of 100% U.S. Treasury money market funds managed by GAMCO.
Summary cash flow data is as follows:
| | Nine months ended | | | Three months ended | |
| | September 30, | | | March 31, | |
| | 2017 | | | 2016 | | | 2019 | | | 2018 | |
Cash flows provided by / (used in) operations : | | (in thousands) | | |
Cash flows provided by/(used in) continuing operations : | | | (in thousands) | |
Operating activities | | $ | 65,229 | | | $ | 105,212 | | | $ | 29,440 | | | $ | 53,020 | |
Investing activities | | | (3,611 | ) | | | 185 | | | | (3,136 | ) | | | - | |
Financing activities | | | (40,318 | ) | | | (85,292 | ) | | | (3,112 | ) | | | (43,360 | ) |
Increase in cash and cash equivalents from operations | | | 21,300 | | | | 20,105 | | |
Increase in cash and cash equivalents from continuing operations | | | | 23,192 | | | | 9,660 | |
Effect of exchange rates on cash and cash equivalents | | | (15 | ) | | | 28 | | | | (5 | ) | | | (98 | ) |
Net increase | | | 21,285 | | | | 20,133 | | | | 23,187 | | | | 9,562 | |
Cash and cash equivalents at beginning of period | | | 39,812 | | | | 13,719 | | | | 41,202 | | | | 17,821 | |
Cash and cash equivalents at end of period | | $ | 61,097 | | | $ | 33,852 | | | $ | 64,389 | | | $ | 27,383 | |
Cash and liquidity requirements have historically been met through cash generated by operating income and our borrowing capacity. We filed a “shelf” registration statement with the SEC that was declared effective in 2015 which, among other things,April 2018. The shelf 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 $500 million. The shelf is available through April 2018,2021, at which time it may be renewed.
On February 23, 2018, the Company announced that its CEO elected to waive all of his compensation that he would otherwise have been entitled to for the period from March 1, 2018 through December 31, 2018. On December 26, 2018, the Company announced that the CEO elected to continue to waive all of his compensation that he would otherwise have been entitled to for the period from January 1, 2019 to March 31, 2019. As a result of this waiver, there was $13.9 million and $6.6 million of compensation and management fee waived by the CEO for the three months ended March 31, 2019 and March 31, 2018, respectively. On July 2, 2018, the First Half 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to the CEO. On April 1, 2019, the Fourth Quarter 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $11.0 million was made to the CEO.
At September 30, 2017,March 31, 2019, we had total unrestricted cash and cash equivalents of $61.0$64.4 million, an increase of $21.2$23.2 million from December 31, 20162018 primarily due to the Company’s operating activities described below. We also held $0.1 million of cash equivalents and $59.9 million of investments in securities in an escrow account for the benefit of the Convertible Note holder. Total debt outstanding at September 30, 2017March 31, 2019 was $204$24.2 million, consisting of $70 million of a 4% PIK Note due November 30, 2020, $110 million of a 4.5% convertible note due August 15, 2021, and $24.2 million of 5.875% senior notes due 2021. It is anticipated that the majority of our free cash flow will go towards servicing our debt andthe deferred compensation payable foras well as share buybacks in the next few years.near future.
For the ninethree months ended September 30, 2017,March 31, 2019, cash provided by operating activities was $65.2$29.4 million, a decrease of $40.0$23.6 million from cash provided in the prior year period of $105.2$53.0 million. Cash was provided through an increase in deferred income taxes of $5.4 million, an increase of $0.4 million in stock based compensation payable of $33.5expense, and $0.9 million a decreasefrom all other sources. Reducing cash was an increase in investment advisory fees receivable of $13.7$8.9 million, an increasea decrease in net income of $7.4 million, a decrease income taxes payable and deferred tax liabilities of $9.4 million, an increase of $3.9 million in stock based compensation expense, an increase in payable to brokers of $3.1 million, an increase in payable to affiliates of $1.6 million and $1.7 million from other sources. Reducing cash was an increase in investments in trade securities of $60.2$4.1 million, a decrease in net incomecompensation payable of $20.1$2.7 million, an increase in income tax receivable and deferred tax assets of $11.7$3.4 million, an increase in deferred income taxesinvestments in trading securities of $5.3$2.7 million, and a decrease in payables to accrued expenses and other liabilities of $8.0 million and an increase in receivable from brokers of $1.6affiliates $1.1 million. Cash used in investing activities in the first three months of 2019 was $3.6$3.1 million, including $3.4 million in purchased of available for sale securities offset by $0.3 million in proceeds from the sale of available for sale securities. Cash used in financing activities in the first three months of 2019 was $3.1 million, including $2.5 million paid for the purchase of treasury stock and $0.6 million paid in dividends.
For the three months ended March 31, 2018, cash provided by operating activities was $53.0 million. Cash used in financing activities in the first ninethree months of 20172018 was $40.3 million, including $8.6 million paid for the purchase of treasury stock, and $1.7 million paid in dividends and $30.0 million for the partial repayment for the 4% PIK Note.
For the nine months ended September 30, 2016,$43.4 million. There was no cash provided by operating activities was $105.2 million. Cash provided byor used in investing activities related to proceeds from sales of available for sale securities was $0.2 million in the first ninethree months of 2016. Cash used in financing activities in the first nine months of 2016 was $85.3 million.2018.
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 one broker-dealer, G.distributors, which is subject to certain net capital requirements. G.distributors computes itits 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 the broker-dealer at September 30, 2017.March 31, 2019. At September 30, 2017,March 31, 2019, G.distributors had net capital, as defined, of approximately $3.8 million, exceeding the regulatory requirement by approximately $3.5 million. Net capital requirements for our affiliated broker-dealer 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 approximately 96%95% 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 affiliated open-end and closed-end funds and Institutional and Private Wealth Management assets. Such fees represent a percentage of AUM, and the majority 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, investments in securities of $101.4$31.6 million, $37.3$33.8 million and $32.9$31.4 million at September 30, 2017,March 31, 2019, December 31, 20162018 and September 30, 2016,March 31, 2018, respectively, included investments in common stocks of $41.3$30.4 million, $37.2$32.4 million and $32.9$31.3 million, respectively, and investments in closed-end funds of $0.1 million, $0.1$30,000, $1.3 million and $0,$0.1 million, respectively. Of the $41.3$30.4 million, $37.2$32.4 million and $32.9$31.3 million, invested in common stocks at September 30, 2017,March 31, 2019, December 31, 20162018 and September 30, 2016,March 31, 2018, respectively, $41.3$19.9 million, $37.1$18.8 million and $32.9$31.3 million, respectively, was related to our investment in Westwood Holdings Group Inc. Securities sold, not yet purchased are financial instruments purchased under agreements to resell and financial instruments sold under agreement to repurchase. These financial instruments are stated at fair value and are subject to market risks resulting from changes in price and volatility. At September 30, 2017,March 31, 2019, December 31, 20162018 and September 30, 2016,March 31, 2018, there were no securities sold, not yet purchased.
The following table provides a sensitivity analysis for our investments in equity securities as of September 30, 2017March 31, 2019 and December 31, 2016.2018. 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, 2017: | | | | | | | |
At March 31, 2019 | | | | | | | |
Equity price sensitive investments, at fair value | | $ | 101,425 | | | $ | 91,282 | | | $ | 111,567 | | | $ | 31,623 | | | $ | 28,460 | | | $ | 34,785 | |
At December 31, 2016: | | | | | | | | | | | | | |
At December 31, 2018 | | | | | | | | | | | | | |
Equity price sensitive investments, at fair value | | $ | 37,285 | | | $ | 33,557 | | | $ | 41,014 | | | $ | 33,789 | | | $ | 30,410 | | | $ | 37,168 | |
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, 2017,the March 31, 2019 cash and cash equivalent balance of $61.1$64.3 million, a 1% increase in interest rates would increase our interest income by $0.6 million annually. Given that our current return on these cash equivalent investments in this low interest rate environment is approximately 0.98% annually an analysis ofwhile a 1% decrease is not meaningful.would reduce our interest income by $0.6 million annually
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 20162018 Annual Report on Form 10-K filed with the SEC on March 7, 201711, 2019 for details on Critical Accounting Policies.
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, 2017,March 31, 2019, we had equity investments of $101.4$31.6 million. We may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. The equity securities investment portfolio is at fair value and will move in line with the equity markets. The tradingequity securities investment portfolio changes are recorded as net gain (loss) from investments in the condensed consolidated statements of income while the available for sale portfolio changes are recorded in accumulated other comprehensive income in the condensed consolidated statements of financial condition.income.
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.