GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
(Dollars in thousands, except per share data)thousands)
| Three Months Ended | | |
| March 31, | | | Three Months Ended | | | Nine Months Ended | |
| 2020 | | 2019 | | | September 30, | | | September 30, | |
| | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Net income | | $ | 11,245 | | | $ | 19,892 | | | $ | 16,435 | | | $ | 13,626 | | | $ | 38,970 | | | $ | 57,535 | |
Other comprehensive income / (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation gain / (loss) | | | (61 | ) | | | 20 | | | | 42 | | | | (28 | ) | | | (23 | ) | | | (31 | ) |
Total comprehensive income | | $ | 11,184 | | | $ | 19,912 | | | $ | 16,477 | | | $ | 13,598 | | | $ | 38,947 | | | $ | 57,504 | |
See accompanying notes.notes to condensed consolidated financial statements.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNAUDITED
(In thousands)in thousands, except per share data)
| | | | | | | Accumulated | | | | | | | | | | | | | | | | Accumulated | | | | | | | |
| | | Additional | | | | Other | | | | | | | | | | Additional | | | | | | Other | | | | | | | |
| Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | | | | Common | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | | |
| Stock | | Capital | | Earnings | | Loss | | Stock | | Total | | | Stock | | | Capital | | | Earnings | | | Income | | | Stock | | | Total | |
Balance at December 31, 2019 | | $ | 33 | | | $ | 17,033 | | | $ | 362,515 | | | $ | (204 | ) | | $ | (324,660 | ) | | $ | 54,717 | | | $ | 33 | | | $ | 17,033 | | | $ | 362,515 | | | $ | (204 | ) | | $ | (324,660 | ) | | $ | 54,717 | |
Net income | | | - | | | | - | | | | 11,245 | | | | - | | | | - | | | | 11,245 | | | | 0 | | | | 0 | | | | 11,245 | | | | 0 | | | | 0 | | | | 11,245 | |
Foreign currency translation | | | - | | | | - | | | | - | | | | (61 | ) | | | - | | | | (61 | ) | | | 0 | | | | 0 | | | | 0 | | | | (61 | ) | | | 0 | | | | (61 | ) |
Dividends declared ($0.02 per share) | | | - | | | | - | | | | (552 | ) | | | - | | | | - | | | | (552 | ) | | | 0 | | | | 0 | | | | (552 | ) | | | 0 | | | | 0 | | | | (552 | ) |
Stock based compensation expense | | | - | | | | 941 | | | | - | | | | - | | | | - | | | | 941 | | | | 0 | | | | 941 | | | | 0 | | | | 0 | | | | 0 | | | | 941 | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | (946 | ) | | | (946 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (946 | ) | | | (946 | ) |
Balance at March 31, 2020 | | $ | 33 | | | $ | 17,974 | | | $ | 373,208 | | | $ | (265 | ) | | $ | (325,606 | ) | | $ | 65,344 | | | $ | 33 | | | $ | 17,974 | | | $ | 373,208 | | | $ | (265 | ) | | $ | (325,606 | ) | | $ | 65,344 | |
Net income | | | | 0 | | | | 0 | | | | 11,290 | | | | 0 | | | | 0 | | | | 11,290 | |
Foreign currency translation | | | | 0 | | | | 0 | | | | 0 | | | | (4 | ) | | | 0 | | | | (4 | ) |
Dividends declared ($0.02 per share) | | | | 0 | | | | 0 | | | | (551 | ) | | | 0 | | | | 0 | | | | (551 | ) |
Stock based compensation expense | | | | 0 | | | | 1,137 | | | | 0 | | | | 0 | | | | 0 | | | | 1,137 | |
Purchase of treasury stock | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (772 | ) | | | (772 | ) |
Balance at June 30, 2020 | | | $ | 33 | | | $ | 19,111 | | | $ | 383,947 | | | $ | (269 | ) | | $ | (326,378 | ) | | $ | 76,444 | |
Net income | | | | 0 | | | | 0 | | | | 16,435 | | | | 0 | | | | 0 | | | | 16,435 | |
Foreign currency translation | | | | 0 | | | | 0 | | | | 0 | | | | 42 | | | | 0 | | | | 42 | |
Dividends declared ($0.02 per share) | | | | 0 | | | | 0 | | | | (547 | ) | | | 0 | | | | 0 | | | | (547 | ) |
Stock based compensation expense | | | | 0 | | | | 993 | | | | 0 | | | | 0 | | | | 0 | | | | 993 | |
Purchase of treasury stock | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (1,637 | ) | | | (1,637 | ) |
Balance at September 30, 2020 | | | $ | 33 | | | $ | 20,104 | | | $ | 399,835 | | | $ | (227 | ) | | $ | (328,015 | ) | | $ | 91,730 | |
| | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | Additional | | | | | | Other | | | | | | | | | | | | Additional | | | | | | Other | | | | | | | |
| | Common | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | | | | Common | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | | |
| | Stock | | | Capital | | | Earnings | | | Income / (Loss)
| | | Stock | | | Total | | | Stock | | | Capital | | | Earnings | | | Income | | | Stock | | | Total | |
Balance at December 31, 2018 | | $ | 33 | | | $ | 14,192 | | | $ | 282,928 | | | $ | (240 | ) | | $ | (287,303 | ) | | $ | 9,610 | | | $ | 33 | | | $ | 14,192 | | | $ | 282,928 | | | $ | (240 | ) | | $ | (287,303 | ) | | $ | 9,610 | |
Net income | | | - | | | | - | | | | 19,892 | | | | - | | | | - | | | | 19,892 | | | | 0 | | | | 0 | | | | 19,892 | | | | 0 | | | | 0 | | | | 19,892 | |
Adoption of ASU 2016-02 | | | - | | | | - | | | | (106 | ) | | | - | | | | - | | | | (106 | ) | | | 0 | | | | 0 | | | | (106 | ) | | | 0 | | | | 0 | | | | (106 | ) |
Foreign currency translation | | | - | | | | - | | | | - | | | | 20 | | | | - | | | | 20 | | | | 0 | | | | 0 | | | | 0 | | | | 20 | | | | 0 | | | | 20 | |
Dividends declared ($0.02 per share) | | | - | | | | - | | | | (575 | ) | | | - | | | | - | | | | (575 | ) | | | 0 | | | | 0 | | | | (575 | ) | | | 0 | | | | 0 | | | | (575 | ) |
Stock based compensation expense | | | - | | | | 577 | | | | - | | | | - | | | | - | | | | 577 | | | | 0 | | | | 577 | | | | 0 | | | | 0 | | | | 0 | | | | 577 | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | (2,547 | ) | | | (2,547 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (2,547 | ) | | | (2,547 | ) |
Balance at March 31, 2019 | | $ | 33 | | | $ | 14,769 | | | $ | 302,139 | | | $ | (220 | ) | | $ | (289,850 | ) | | $ | 26,871 | | | $ | 33 | | | $ | 14,769 | | | $ | 302,139 | | | $ | (220 | ) | | $ | (289,850 | ) | | $ | 26,871 | |
Net income | | | | 0 | | | | 0 | | | | 24,017 | | | | 0 | | | | 0 | | | | 24,017 | |
Foreign currency translation | | | | 0 | | | | 0 | | | | 0 | | | | (23 | ) | | | 0 | | | | (23 | ) |
Dividends declared ($0.02 per share) | | | | 0 | | | | 0 | | | | (551 | ) | | | 0 | | | | 0 | | | | (551 | ) |
Stock based compensation expense | | | | 0 | | | | 578 | | | | 0 | | | | 0 | | | | 0 | | | | 578 | |
Purchase of treasury stock | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (28,274 | ) | | | (28,274 | ) |
Balance at June 30, 2019 | | | $ | 33 | | | $ | 15,347 | | | $ | 325,605 | | | $ | (243 | ) | | $ | (318,124 | ) | | $ | 22,618 | |
Net income | | | | 0 | | | | 0 | | | | 13,626 | | | | 0 | | | | 0 | | | | 13,626 | |
Foreign currency translation | | | | 0 | | | | 0 | | | | 0 | | | | (28 | ) | | | 0 | | | | (28 | ) |
Dividends declared ($0.02 per share) | | | | 0 | | | | 0 | | | | (551 | ) | | | 0 | | | | 0 | | | | (551 | ) |
Stock based compensation expense | | | | 0 | | | | 843 | | | | 0 | | | | 0 | | | | 0 | | | | 843 | |
Purchase of treasury stock | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (3,790 | ) | | | (3,790 | ) |
Balance at September 30, 2019 | | | $ | 33 | | | $ | 16,190 | | | $ | 338,680 | | | $ | (271 | ) | | $ | (321,914 | ) | | $ | 32,718 | |
See notes to condensed consolidated financial statements.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
| | Three Months Ended | | | Nine Months Ended | |
| | March 31, | | | September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 11,245 | | | $ | 19,892 | | | $ | 38,970 | | | $ | 57,535 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 209 | | | | 313 | | | | 694 | | | | 958 | |
Accretion of discounts and amortization of premiums | | | 36 | | | | - | | | | 53 | | | | 3 | |
Stock based compensation expense | | | 941 | | | | 577 | | | | 3,071 | | | | 1,998 | |
Deferred income taxes | | | 8,281 | | | | 4,015 | | | | 7,621 | | | | (3,085 | ) |
Foreign currency translation gain / (loss) | | | (61 | ) | | | 20 | | | | (23 | ) | | | (31 | ) |
Cost basis of donated securities | | | - | | | | 1,691 | | | | 0 | | | | 2,601 | |
Unrealized loss on securities | | | 5,906 | | | | 920 | | | | 8,329 | | | | 5,947 | |
Net realized loss on securities | | | 530 | | | | 6 | | | | 1,482 | | | | 6 | |
Impairment charge on intangible asset | | | 428 | | | | - | | | | 589 | | | | 0 | |
(Increase) decrease in assets: | | | | | | | | | | | | | | | | |
Investments in securities | | | 3,647 | | | | 2,686 | | | | 2,802 | | | | (2,276 | ) |
Receivable from brokers | | | (2,818 | ) | | | (106 | ) | | | (4,699 | ) | | | (1,151 | ) |
Investment advisory fees receivable | | | 16,844 | | | | 2,619 | | | | 17,099 | | | | 1,903 | |
Receivable from affiliates | | | 15 | | | | (239 | ) | | | 535 | | | | 387 | |
Income taxes receivable | | | (2,936 | ) | | | (660 | ) | | | (1,840 | ) | | | (2,304 | ) |
Other assets | | | 621 | | | | (623 | ) | | | (1,360 | ) | | | (1,265 | ) |
Increase (decrease) in liabilities: | | | | | | | | | | | | | | | | |
Payable to brokers | | | - | | | | 366 | | | | 0 | | | | (110 | ) |
Income taxes payable | | | (536 | ) | | | 1,664 | | | | (395 | ) | | | 3,012 | |
Compensation payable | | | (42,984 | ) | | | (1,267 | ) | | | (32,183 | ) | | | 19,436 | |
Payable to affiliates | | | (3,717 | ) | | | (1,041 | ) | | | (3,688 | ) | | | (661 | ) |
Accrued expenses and other liabilities | | | (5,826 | ) | | | (1,393 | ) | | | 617 | | | | 3,845 | |
Total adjustments | | | (21,420 | ) | | | 9,548 | | | | (1,296 | ) | | | 29,213 | |
Net cash provided by / (used in) operating activities | | | (10,175 | ) | | | 29,440 | | |
Net cash provided by operating activities | | | | 37,674 | | | | 86,748 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Purchases of securities | | | (151 | ) | | | (3,393 | ) | | | (105,598 | ) | | | (5,078 | ) |
Proceeds from sales and repayments of securities | | | 3,487 | | | | 252 | | | | 7,157 | | | | 252 | |
Return of capital on securities | | | 2 | | | | 5 | | | | 18 | | | | 12 | |
Net cash provided by / (used in) investing activities | | | 3,338 | | | | (3,136 | ) | |
Net cash used in investing activities | | | | (98,423 | ) | | | (4,814 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Dividends paid | | | (533 | ) | | | (571 | ) | | | (1,595 | ) | | | (2,221 | ) |
Purchase of treasury stock | | | (946 | ) | | | (2,547 | ) | | | (3,355 | ) | | | (34,611 | ) |
Amortization of debt issuance costs | | | - | | | | 6 | | |
Repayment of principal portion of lease liability | | | | (160 | ) | | | (132 | ) |
Net cash used in financing activities | | | (1,479 | ) | | | (3,112 | ) | | | (5,110 | ) | | | (36,964 | ) |
Effect of exchange rates on cash and cash equivalents | | | 14 | | | | (5 | ) | | | 5 | | | | 7 | |
Net increase / (decrease) in cash and cash equivalents | | | (8,302 | ) | | | 23,187 | | | | (65,854 | ) | | | 44,977 | |
Cash and cash equivalents, beginning of period | | | 86,136 | | | | 41,202 | | | | 86,136 | | | | 41,202 | |
Cash and cash equivalents, end of period | | $ | 77,834 | | | $ | 64,389 | | | $ | 20,282 | | | $ | 86,179 | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 279 | | | $ | 279 | | | $ | 1,597 | | | $ | 1,551 | |
Cash paid for taxes | | $ | 800 | | | $ | 764 | | | $ | 12,373 | | | $ | 20,000 | |
Supplemental disclosure of non-cash activity:
For the threenine months ended March 31,September 30, 2020 and March 31, 2019, the Company accrued dividends on restricted stock awards of $18$55 and $8,$27, respectively.
See notes to condensed consolidated financial statements.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31,September 30, 2020
(Unaudited)
Organization and Description of Business
Unless indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “the Firm,” and “GBL” or similar terms are to GAMCO Investors, Inc., its predecessors, and its subsidiaries.
GAMCO (New(New York Stock Exchange (“NYSE”): GBL), a company incorporated under the laws of Delaware, is a widely-recognized provider ofknown for its research-driven approach to equity investing. GAMCO conducts its investment advisory servicesbusiness principally through 24 mutualtwo subsidiaries: GAMCO Asset Management Inc. (“GAMCO Asset”) (approximately 1,500 institutional and private wealth separate accounts (“Institutional and PWM”), principally in the U.S.) and Gabelli Funds, LLC (“Gabelli Funds”) (24 open-end funds, 16 closed-end funds, one 1société d’investissement à capital variable (“SICAV”), and approximately 1,700 institutional and16 closed-end funds). GAMCO serves a broad client base including institutions, intermediaries, offshore investors, private wealth, management (“Institutional and PWM”) accounts principally in the United States (U.S.). The investments are generally in value, growth, gold, utilities, and convertible securities. The Company’s revenues are based primarily on the levels of assets under management (“AUM”) and fees associated with the various investment products.
Since the Company’s inception in 1977, its value assets have been identified with its research-driven approach to equity investing and proprietary Private Market Value (PMV) with a CatalystTM investment approach.
The investment advisory business is conducted principally through the following subsidiaries: Gabelli Funds, LLC (mutual and closed-end funds) (“Gabelli Funds”) and GAMCO Asset Management Inc. (Institutional and PWM) (“GAMCO Asset”).direct retail investors. The distribution of mutual funds is conducted through G.distributors, LLC (“G.distributors”), the Company’s broker-dealer subsidiary.
GAMCO offers a wide range of solutions across Value and Growth Equity, ESG-SRI, Convertibles, sector-focused strategies including Gold and Utilities, Merger Arbitrage, and Fixed Income. In 1977, GAMCO launched its flagship All Cap Value strategy, Gabelli Value, and in 1986 launched its mutual fund business. In addition to its Value strategies, for over 30 years the firm has managed solutions in Growth Equity, Convertibles, SRI, and Merger Arbitrage.
1. Significant Accounting Policies
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for the fair presentation of financial position, results of operations, and cash flows of GAMCO for the interim periods presented and are not necessarily indicative of a full year’s results.
The interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Gabelli Funds, GAMCO Asset, Distributors Holdings, Inc., G.distributors, GAMCO Asset Management (UK) Limited, Gabelli Fixed Income, Inc., Gabelli Fixed Income L.L.C., GAMCO International Partners LLC, and GAMCO Acquisition LLC, and Nevada NJ Lat, LLC. Intercompany accounts and transactions have been eliminated.
These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2019.
Use of Estimates
The preparation of the interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Developments
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amends the guidance in U.S. GAAP for the accounting for leases with terms longer than 12 months. ASU 2016-02 requires a lessee to recognize assets and liabilities arising from these leases in the consolidated statement of financial position. It requires these leases to be recorded on the balance sheet as right-of-use assets and offsetting lease liability obligations. The guidance was effective for the Company on January 1, 2019 and the Company adopted this guidance on that date. The Company has elected the transition method allowed under ASU 2018-11, Leases (Topic 842): Targeted Improvements, which does not require restatement of comparative periods, but instead requires a cumulative adjustment to opening retained earnings at the January 1, 2019 adoption date. The Company has performed the analysis on the transition to this guidance and, as a result, recorded a $106 thousand reduction to retained earnings, a $650 thousand increase to other assets, and a $756 thousand increase to lease liability obligations.
In June 2016, the FASB issued ASU 2016-13, Accounting for Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), which requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Currently, U.S. GAAP requires an “incurred loss” methodology that delays recognition until it is probable a loss has been incurred. Under ASU 2016-13, the allowance for credit losses must be deducted from the amortized cost of the financial asset to present the net amount expected to be collected. The consolidated statement of income will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), Leases (Topic 842): Effective Dates (ASU 2019-10), which deferred the effective date of this guidance for smaller reporting companies for three years. This guidance is effective for the Company on January 1, 2023 and requires a modified retrospective transition method, which will result in a cumulative-effect adjustment in retained earnings upon adoption. Early adoption is permitted. The Company is currently assessing the potential impact of this new guidance on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the process used to test for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill, and instead any goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In November 2019, the FASB issued ASU 2019-10, which deferred the effective date of this guidance for smaller reporting companies for three years. This guidance will be effective for the Company on January 1, 2023 using a prospective transition method and early adoption is permitted. The Company is currently evaluating the potential effect of this new guidance on the Company’s consolidated financial statements.
2. Revenue Recognition
The discussion below includes all material revenue streams that are within the scope of ASU 2014-09, Revenue From Contracts With Customers (Topic 606) (“ASU 2014-09”). In all cases for all revenue streams discussed below, the revenue generated is from a single transaction price and there is no need to allocate the amounts across more than a single revenue stream. The customer for all revenues derived from mutual and closed-end funds (collectively, the “Funds”) described in detail below has been determined to be each Fund itself and not the ultimate underlying investor in each Fund.
Significant judgments that affect the amounts and timing of revenue recognition:
The Company’s analysis of the timing of revenue recognition for each revenue stream is based upon an analysis of the current terms of each contract. Performance obligations could, however, change from time to time if and when existing contracts are modified or new contracts are entered into. These changes could potentially affect the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the price to performance obligations. In the case of the revenue streams discussed below, the performance obligation is satisfied either at a point in time or over time. For incentive fee revenues, the performance obligation (advising a client portfolio) is satisfied over time, while the recognition of revenues effectively occurs at the end of the measurement period as defined within the contract, as such amounts are subject to reduction to zero0 on the date where the measurement period ends even if the performance benchmarks were exceeded during the intervening period. The judgments outlined below, where the determination as to these factors is discussed in detail, are continually reviewed and monitored by the Company when new contracts or contract modifications occur. Transaction price is in all instances formulaic and not subject to significant (or any) judgment at the current time. The allowance for doubtful accounts is subject to judgment.
Advisory Fee Revenues
Advisory fees for Funds, sub-advisory accounts, and the SICAV are earned based on predetermined percentages of the average net assets of the individual Funds and are recognized as revenues as the related services are performed. Fees for mutual funds, oneFunds, 1 non-U.S. closed-end Fund, sub-advisory accounts, and the SICAV are computed on a daily basis based on average daily net AUM. Fees for U.S. closed-end Funds are computed on average weekly net AUM and fees for one1 non-U.S. closed-end Fund are computed on a daily basis based on daily market value. These fees are received in cash after the end of each monthly period within 30 days. The revenue recognition occurs ratably as the performance obligation (advising the Fund) is met continuously over time. There is a risk of non-payment and, therefore, an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the periods presented.
Advisory fees for Institutional and PWM accounts are earned based on predetermined percentages of the AUM and are generally computed quarterly based on account values at the end of the preceding quarter. The revenue recognition occurs daily as the performance obligation (advising the client portfolio) is met continuously. These fees are received in cash, typically within 60 days of the client being billed. There is a risk of non-payment and, therefore, an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the periods presented.
Performance Correlated and Conditional Revenues
Investment advisory fees are earned on a portion of some closed-end Funds’ preferred shares at year-end if the total return to common shareholders of the respective closed-end Fund for the year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period, which coincides with the calendar year. These fees would also be earned and the contract period ended at any interim point in time that the respective preferred shares are redeemed. These fees are received in cash after the end of each annual measurement period, within 30 days.
TwoThe Company earns an incentive fee from 2 closed-end Funds charge incentive fees.Funds. For The GDL Fund (GDL), there is an incentive fee, which is earned and recognized as of the end of each calendar year and varies to the extent the total return of the Fund is in excess of the ICE Bank of America Merrill Lynch 3-month U.S. Treasury Bill Index total return. For the Gabelli Merger Plus+ Trust Plc (GMP), there is an incentive fee, which is earned and recognized as of the end of each annual measurement period, June 30th, and varies to the extent the total return of the Fund is in excess of twice the rate of return of the 13-week Treasury Bills over the performance period.
AThe Company earns a performance fee from a SICAV sub-fund, the GAMCO Merger Arbitrage SICAV, charges a performance fee.SICAV. This fee is recognized at the end of the measurement period, which coincides with the calendar year. The fee would also be earned and the measurement period ended at any interim point in time that a client redeemed their respective shares. This fee is received in cash after the end of the measurement period, within 30 days.
The Company also receivesmay receive incentive fees from certain institutional clients, which are based upon exceeding either a specific benchmark index or a defined return for these accounts. These fees are recognized at the end of the stipulated contract period, which is generally annually, for each respective account. These fees would also be earned and the contract period ended at any interim point in time that the client terminated its relationship with the Company. These fees are received in cash after the end of the measurement period, typically within 60 days.
In all cases of the incentive fees and performance fees, because of the variable nature of the consideration, revenue recognition is delayed until it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, which is generally when the uncertainty associated with the variable consideration is subsequently resolved (for example, the measurement period has concluded and the hurdle rate has been exceeded). There is a risk of non-payment and, therefore, an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the periods presented.
Distribution Fees and Other Income
Distribution fees and other income primarily includes distribution fee revenue earned in accordance with Rule 12b-1 of the Company Act of 1940, as amended, along with sales charges and underwriting fees associated with the sale of the class A shares of mutual funds. Distribution fees are computed based on average daily net assets of certain classes of each Fund and are accrued during the period in which they are earned. These fees are received in cash after the end of each monthly period within 30 days. In evaluating the appropriate timing of the recognition of these fees, the Company applied the guidance on up-front fees to determine whether such fees are related to the transfer of a promised service (a distinct performance obligation). The Company’s conclusion is that the service being provided by G.distributors to the customer in exchange for the fee is for the initial distribution of certain classes of the mutual funds and is completed at the time of each respective sale. Any fixed amounts are recognized on the trade date and variable amounts are recognized to the extent it is probable that a significant revenue reversal will not occur once the uncertainty is resolved. For variable amounts, as the uncertainty is dependent on the value of the shares at future points in time as well as the length of time the investor remains in the fund, both of which are highly susceptible to factors outside the Company’s influence, the Company does not believe that it can overcome this constraint until the market value of the Fund and the investor activities are known, which are generally monthly. Sales charges and underwriting fees associated with the sale of certain classes of the mutual funds are recognized on the trade date of the sale of the respective shares. There is a risk of non-payment and, therefore, an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the periods presented.
10
Revenue Disaggregated
The following table presents the Company’s revenue disaggregated by investment vehicle (in thousands):
| | Three Months Ended March 31, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Investment advisory and incentive fees: | | | | | | | | | | | | | | | | | | |
Mutual Funds | | $ | 23,556 | | | $ | 26,925 | | | $ | 22,163 | | | $ | 26,263 | | | $ | 66,084 | | | $ | 80,215 | |
Closed-end Funds | | | 16,420 | | | | 15,789 | | | | 16,218 | | | | 16,475 | | | | 47,232 | | | | 48,555 | |
Sub-advisory accounts | | | 732 | | | | 935 | | | | 521 | | | | 843 | | | | 1,770 | | | | 2,677 | |
Institutional & PWM | | | 20,005 | | | | 20,726 | | | | 14,771 | | | | 21,500 | | | | 49,319 | | | | 64,421 | |
SICAV | | | 1,465 | | | | 1,335 | | | | 1,159 | | | | 1,485 | | | | 3,827 | | | | 4,218 | |
Performance-based | | | 95 | | | | 178 | | | | 62 | | | | 449 | | | | 405 | | | | 807 | |
Distribution fees and other income | | | 7,294 | | | | 8,448 | | | | 6,358 | | | | 8,330 | | | | 19,741 | | | | 25,195 | |
Total revenues | | $ | 69,567 | | | $ | 74,336 | | | $ | 61,252 | | | $ | 75,345 | | | $ | 188,378 | | | $ | 226,088 | |
3. Investment in Securities
Investments in equity securities at March 31,September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
| | March 31, 2020 | | December 31, 2019 | | | September 30, 2020 | | | December 31, 2019 | |
| | Cost | | | Estimated Fair Value | | Cost | | Estimated Fair Value | | | Cost | | | Estimated Fair Value | | | Cost | | | Estimated Fair Value | |
Investments in equity securities: | Investments in equity securities: | | | | | | Investments in equity securities: | | | | | | | |
Common stocks | | $ | 41,148 | | | $ | 16,729 | | | $ | 41,226 | | | $ | 26,463 | | | $ | 40,012 | | | $ | 13,645 | | | $ | 41,226 | | | $ | 26,463 | |
Mutual funds | | | 755 | | | | 661 | | | | 755 | | | | 752 | | |
Closed-end funds | | | 494 | | | | 429 | | | | 494 | | | | 511 | | |
Mutual Funds | | | | 756 | | | | 960 | | | | 755 | | | | 752 | |
Closed-end Funds | | | | 497 | | | | 466 | | | | 494 | | | | 511 | |
Total investments in equity securities | | $ | 42,397 | | | $ | 17,819 | | | $ | 42,475 | | | $ | 27,726 | | | $ | 41,265 | | | $ | 15,071 | | | $ | 42,475 | | | $ | 27,726 | |
Investments in equity securities, including the Company’s investments in common stocks and the Funds, are stated at fair value with any unrealized gains or losses reported in each respective period’s earnings.
Investments in debt securities at March 31,September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
| March 31, 2020 | | | September 30, 2020 | |
| Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Estimated Fair Value | | | Amortized Cost | | | Gross Unrecognized Holding Gains | | | Gross Unrecognized Holding Losses | | | Estimated Fair Value | |
Investments in debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign government obligations | | $ | 2,998 | | | $ | - | | | $ | - | | | $ | 2,998 | | |
U.S. Treasury Bills | | | $ | 104,960 | | | $ | 13 | | | $ | 0 | | | $ | 104,973 | |
Total investments in debt securities | | $ | 2,998 | | | $ | - | | | $ | - | | | $ | 2,998 | | | $ | 104,960 | | | $ | 13 | | | $ | 0 | | | $ | 104,973 | |
| December 31, 2019 | | | December 31, 2019 | |
| Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Estimated Fair Value | | | Amortized Cost | | | Gross Unrecognized Holding Gains | | | Gross Unrecognized Holding Losses | | | Estimated Fair Value | |
Investments in debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign government obligations | | $ | 6,547 | | | $ | - | | | $ | - | | | $ | 6,547 | | | $ | 6,547 | | | $ | 0 | | | $ | 0 | | | $ | 6,547 | |
Total investments in debt securities | | $ | 6,547 | | | $ | - | | | $ | - | | | $ | 6,547 | | | $ | 6,547 | | | $ | 0 | | | $ | 0 | | | $ | 6,547 | |
Held-to-maturity investments are stated at amortized cost with any foreign currency remeasurement included in unrealized gains or losses in each respective period’s earnings. The maturity dates of all of the Company’s investments in debt securities are less than one year.
4. Fair Value
All of the instruments within cash and cash equivalents and investments in securities are measured at fair value, except for those investments designated as held-to-maturity. The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), guidance on fair value measurement. The levels of the fair value hierarchy and their applicability to the Company are described below:
- | Level 1 - the valuation methodology utilizes quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date. Level 1 assets include cash equivalents, government obligations, open-endmutual funds, closed-end funds, and listed equities. |
- | Level 2 - the valuation methodology utilizes inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly-quoted intervals. |
- | Level 3 - the valuation methodology utilizes unobservable inputs for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. |
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis by the above fair value hierarchy levels as of March 31,September 30, 2020 and December 31, 2019 (in thousands):
Assets and liabilities measured at fair value on a recurring basis as of March 31,September 30, 2020
Assets | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance as of March 31, 2020 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance as of September 30, 2020 | |
Cash equivalents | | $ | 77,481 | | | $ | - | | | $ | - | | | $ | 77,481 | | | $ | 19,919 | | | $ | 0 | | | $ | 0 | | | $ | 19,919 | |
Investments in securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stocks | | | 16,729 | | | | - | | | | - | | | | 16,729 | | | | 13,645 | | | | 0 | | | | 0 | | | | 13,645 | |
Mutual funds | | | 661 | | | | - | | | | - | | | | 661 | | |
Closed-end funds | | | 429 | | | | - | | | | - | | | | 429 | | |
Mutual Funds | | | | 960 | | | | 0 | | | | 0 | | | | 960 | |
Closed-end Funds | | | | 466 | | | | 0 | | | | 0 | | | | 466 | |
Total investments in securities | | | 17,819 | | | | - | | | | - | | | | 17,819 | | | | 15,071 | | | | 0 | | | | 0 | | | | 15,071 | |
Total assets at fair value | | $ | 95,300 | | | $ | - | | | $ | - | | | $ | 95,300 | | | $ | 34,990 | | | $ | 0 | | | $ | 0 | | | $ | 34,990 | |
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2019
Assets | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance as of December 31, 2019 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance as of December 31, 2019 | |
Cash equivalents | | $ | 85,823 | | | $ | - | | | $ | - | | | $ | 85,823 | | | $ | 85,823 | | | $ | 0 | | | $ | 0 | | | $ | 85,823 | |
Investments in securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stocks | | | 26,463 | | | | - | | | | - | | | | 26,463 | | | | 26,463 | | | | 0 | | | | 0 | | | | 26,463 | |
Mutual funds | | | 752 | | | | - | | | | - | | | | 752 | | | | 511 | | | | 0 | | | | 0 | | | | 511 | |
Closed-end funds | | | 511 | | | | - | | | | - | | | | 511 | | | | 752 | | | | 0 | | | | 0 | | | | 752 | |
Total investments in securities | | | 27,726 | | | | - | | | | - | | | | 27,726 | | | | 27,726 | | | | 0 | | | | 0 | | | | 27,726 | |
Total assets at fair value | | $ | 113,549 | | | $ | - | | | $ | - | | | $ | 113,549 | | | $ | 113,549 | | | $ | 0 | | | $ | 0 | | | $ | 113,549 | |
Cash equivalents primarily consist of an affiliated money market mutual fund, which is invested solely in U.S. Treasuries and valued based on the net asset value of the fund.
Financial assets disclosed but not carried at fair value
The following table presents the carrying value and fair value of the Company’s investments in debt securities disclosed but not carried at fair value, including those foreign government obligations investments designated as held-to-maturity which are carried at amortized cost remeasured in U.S. dollars, as of March 31,September 30, 2020 and December 31, 2019 (in thousands):
| | September 30, 2020 | | | December 31, 2019 | |
| | Carrying Value | | | Fair Value Level 1 | | | Carrying Value | | | Fair Value Level 1 | |
U.S. Treasury Bills | | $ | 104,960 | | | $ | 104,973 | | | $ | 0 | | | $ | 0 | |
Foreign government obligations | | | 0 | | | | 0 | | | | 6,547 | | | | 6,547 | |
Total | | $ | 104,960 | | | $ | 104,973 | | | $ | 6,547 | | | $ | 6,547 | |
| March 31, 2020 | | December 31, 2019 | |
| Carrying Value | | Fair Value Level 1 | | Carrying Value | | Fair Value Level 1 | |
Foreign government obligations | | $ | 2,998 | | | $ | 2,998 | | | $ | 6,547 | | | $ | 6,547 | |
Total | | $ | 2,998 | | | $ | 2,998 | | | $ | 6,547 | | | $ | 6,547 | |
At March 31,September 30, 2020 and December 31, 2019, the Senior Notes were recorded at face value, net of amortized issuance costs, as follows (in thousands) on the Condensed Consolidated Statements of Financial Condition:
| March 31, 2020 | | December 31, 2019 | | | September 30, 2020 | | | December 31, 2019 | |
| Carrying Value | | Fair Value Level 2 | | Carrying Value | | Fair Value Level 2 | | | Carrying Value | | | Fair Value Level 2 | | | Carrying Value | | | Fair Value Level 2 | |
Senior notes | | $ | 24,197 | | | $ | 24,022 | | | $ | 24,191 | | | $ | 24,815 | | | $ | 24,209 | | | $ | 24,658 | | | $ | 24,191 | | | $ | 24,815 | |
Total | | $ | 24,197 | | | $ | 24,022 | | | $ | 24,191 | | | $ | 24,815 | | | $ | 24,209 | | | $ | 24,658 | | | $ | 24,191 | | | $ | 24,815 | |
The carrying value of other financial assets and liabilities approximates their fair value based on the short termshort-term nature of these items.
5. Income Taxes
The effective tax rate (“ETR”) for the three months endedSeptember 30, 2020 and 2019 was 27.4% and 27.1%, respectively. The effective tax rate for the threenine months ended March 31,September 30, 2020 and 2019 was 24.9% 30.6%and 25.7%25.8%, respectively.respectively. The ETR for the first nine months of 2020 was higher by 4.8%, primarily as a result of higher non-deductibility of certain expenses as a result of the 2017 Tax Cuts and Jobs Act.
Basic earnings per share is calculated by dividing net income by the weighted average shares outstanding. Diluted earnings per share is calculated using the treasury stock method by dividing net income by the total weighted average shares of common stock outstanding and restricted stock awards. The computations of basic and diluted net income per share were as follows (in thousands, except per share amounts):
| | Three Months Ended March 31, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Basic: | | | | | | | | | | | | | | | | | | |
Net income | | $ | 11,245 | | | $ | 19,892 | | | $ | 16,435 | | | $ | 13,626 | | | $ | 38,970 | | | $ | 57,535 | |
Weighted average shares outstanding | | | 26,687 | | | | 28,507 | | | | 26,531 | | | | 26,987 | | | | 26,615 | | | | 27,612 | |
Basic net income per share | | $ | 0.42 | | | $ | 0.70 | | | $ | 0.62 | | | $ | 0.50 | | | $ | 1.46 | | | $ | 2.08 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 11,245 | | | $ | 19,892 | | | $ | 16,435 | | | $ | 13,626 | | | $ | 38,970 | | | $ | 57,535 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 26,687 | | | | 28,507 | | | | 26,531 | | | | 26,987 | | | | 26,615 | | | | 27,612 | |
Restricted stock awards | | | 83 | | | | 32 | | | | 82 | | | | 106 | | | | 64 | | | | 64 | |
Total | | | 26,770 | | | | 28,539 | | | | 26,613 | | | | 27,093 | | | | 26,679 | | | | 27,676 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted net income per share | | $ | 0.42 | | | $ | 0.70 | | | $ | 0.62 | | | $ | 0.50 | | | $ | 1.46 | | | $ | 2.08 | |
13
On May 31, 2011, the Company issued 10-year, $100 million senior notes (“Senior Notes”). The Senior 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 Senior Notes at 101% of their principal amount plus accrued interest.
At March 31,September 30, 2020 and December 31, 2019, the debt was recorded at its face value, net of issuance costs, of $24.2 million.
8. Stockholders’ Equity
Shares outstanding were 27.727.5 million and 27.4 million on March 31,September 30, 2020 and December 31, 2019, respectively.
Voting Rights
The holders of class A common stock of GBL (“Class A Stock”) and class B common stock of GBL (“Class B Stock”) have identical rights except that (i) holders of Class A Stock are entitled to one1 vote per share, while holders of Class B Stock are entitled to ten10 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.
Authorized shares
On June 5, 2020, shareholders approved the amendment to the Company’s Amended and Restated Certificate of Incorporation to decrease the total number of authorized shares of Class B Stock from 100,000,000 shares to 25,000,000 shares.
Stock Award and Incentive Plan
The Company maintains a stock award and incentive plan approved by the shareholders (the “Plan”), which is designed to provide incentives which will attract and retain individuals key to the success of GBL through direct or indirect ownership of our common stock. A maximum of 7.5 million shares of Class A Stock have been reserved for issuance under the Plan by a committee of GBL’s board of directors (the “Board of Directors”) responsible for administering the Plan (“Compensation Committee”). Benefits under the Plan 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. Under the Plan, the Compensation Committee may grant restricted stock awards (“RSAs”), each of which entitles the grantee to one share of Class A Stock subject to restrictions, 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, which were recommended by the Company’s Chairman who did not receive any awards.
On June 30, 2019, 264,900 RSAs were issued at a grant price of $19.17 per RSA. On March 5, 2020, 392,700 RSAs were issued at a grant price of $14.31 per RSA.
As of March 31,September 30, 2020 and December 31, 2019, there were 1,040,9001,019,950 and 660,950, respectively, of these RSAs outstanding with weighted average grant prices per RSA of $19.54$19.52 and $22.67, respectively, and 10,000 of these stock options outstanding with an exercise price of $25.55.
For the three months ended March 31,September 30, 2020 and 2019, the Company recognized stock-based non-cash compensation expense of $1.0 million and $0.8 million, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized stock-based non-cash compensation expense of $0.9$3.1 million and $0.6$2.0 million, respectively.
The total compensation costs related to non-vested awards to teammates, excluding the CEO who received none, not yet recognized was approximately $13.6$11.3 million as of March 31,September 30, 2020.
On April 1, 2019, the deferred cash compensation agreement (“DCCA”) with the CEO covering compensation from the fourth quarter of 2017 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. This payment was reduced by $4.5 million resulting from the DCCA being indexed to the GBL stock price and utilizing the lesser of the volume weighted average price (“VWAP”) on the vesting date ($20.7916) versus the VWAP over the fourth quarter of 2017 ($29.1875). On January 2, 2020, the DCCA with the CEO covering compensation from 2016 vested in accordance with the terms of the agreement and a cash payment in the amount of $43.7 million was made to the CEO. This payment was reduced by $32.3 million resulting from the DCCA being indexed to the GBL stock price and utilizing the lesser of the VWAP on the vesting date ($18.8812) versus the VWAP over 2016 ($32.8187).
14
Stock Repurchase Program
In March 1999, the Board of Directors established a stock repurchase program (the “Stock Repurchase Program”) to grant management the authority to repurchase shares of Class A Stock. In May 2019, the Board of Directors increased the buyback authorization by 1,212,759 shares of Class A Stock. On March 18, 2020, the Board of Directors authorized an increase to purchase $30$30 million of its outstanding Class A Stock, which resulted in a modification in the form of the authorization from previously being stated in shares to being stated in dollars.On August 4, 2020, the Board of Directors authorized a share repurchase of 3,000,000 shares of its outstanding Class A Stock, which replaced any outstanding share repurchase authorizations.
On April 16, 2019 and September 16, 2019, GAMCO repurchased 1.2 million and 70 thousand shares, respectively, of Class A Stock at $21.00 and $20.07 per share, respectively, in private transactions. For the three months ended March 31,September 30, 2020 and 2019, outside of the private transaction, the Company repurchased 55,093133,383 and 126,354123,743 shares, respectively, at an average price per share of $17.16$12.26 and $20.15,$19.26, respectively. For the nine months ended September 30, 2020 and 2019, outside of the private transactions, the Company repurchased 254,180 and 397,499 shares, respectively, at an average price per share of $13.19 and $19.46, respectively.At March 31,September 30, 2020, the total dollar amountshares available under the Stock Repurchase Program to be repurchased in the future was $30 million.were 2,916,775. The Stock Repurchase Program is not subject to an expiration date.
On March 11, 2020, GAMCO commenced an offer to purchase up to $30 million in aggregate purchase price of its Class A Stock, pursuant to which holders of shares were invited to tender some or all of their shares at a price within the range of $15.00 to $17.00 per share, which would have enabled GAMCO to purchase for cash up to 2,000,000 shares of its Class A common stock (such offer, the “Offer”). The Offer which was due to expire on April 8, 2020, was terminated on March 18, 2020 as a result of the suspension of trading and market index conditions of the Offer not having been satisfied. As a result of this termination, no shares were purchased in the Offer and all shares previously tendered and not withdrawn were promptly returned to tendering holders.
Dividends
During the three months ended March 31,September 30, 2020 and 2019, the Company declared dividends of $0.02 per share to shareholders of Class A Stock and Class B Stock. During the nine months endedSeptember 30, 2020 and 2019, the Company declared dividends of $0.06 per share to shareholders of Class A Stock and Class B Stock.
Shelf Registration
In April 2018, the SEC declared effective the Company’s “shelf” registration statement on Form S-3 giving the Company the flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, and equity securities (including common and preferred securities) up to a total amount of $500 million. The shelf is available through April 2021, at which time it may be renewed.
9. Goodwill and Identifiable Intangible Assets
Goodwill is initially measured as the excess of the cost of the acquired business over the sum of the amounts assigned to assets acquired less the liabilities assumed. At March 31,September 30, 2020 and December 31, 2019, there was goodwill of $0.2$0.2 million maintained on the Condensed Consolidated Statements of Financial Condition related to G.distributors.
As a result of becoming the advisor to the Gabelli Enterprise Mergers and Acquisitions Fund (the “Enterprise Fund”) and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.5$1.3 million at March 31,September 30, 2020 and $1.9 million at December 31, 2019. The investment advisory agreement for the Enterprise Fund is next up for renewal in February 2021. As a result of becoming the advisor to the Bancroft Fund Ltd. (the “Bancroft Fund”) and the Ellsworth Growth and Income Fund Ltd. (the “Ellsworth Fund”) and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.6 million at March 31,September 30, 2020 and December 31, 2019. The investment advisory agreements for the Bancroft Fund and the Ellsworth Fund are next up for renewal in August 2020.2021. Each of these investment advisory agreements are subject to annual renewal by the respective 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 Company assesses the recoverability of goodwill and intangible assets at least annually, or more often should events warrant. In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China and has since spread quickly to numerous countries, including the United States. On March 11, 2020, COVID-19 was identified as a global pandemic by the World Health Organization. In response to its spread, governmental authorities have imposed restrictions on travel and congregation and the temporary closure of many non-essential businesses in affected jurisdictions, including, beginning in March 2020, in the United States. The pandemic and resulting economic dislocations have had adverse consequences for the portfolios of the Funds, including the Enterprise Fund, Bancroft Fund, and Ellsworth Fund. For the three months and nine months ended March 31,September 30, 2020, as a result of the dislocations in the financial markets resulting from COVID-19, impairment analyses were performed which resulted in a $428$0 and $589 thousand impairment chargecharges, respectively, to the identifiable intangible asset related to the Enterprise Fund included within other operating expenses on the Condensed Consolidated Statements of Income. There was no0 impairment charge recorded to the identifiable intangible asset related to the Bancroft Fund or Ellsworth Fund. There were no indicators of impairment for the three months or nine months ended March 31,September 30, 2019 and, as such, there was no impairment analysis performed or charge recorded for such period.periods.
10. 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 such matters, if any, the 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, make the necessary disclosures. However, management believes such amounts, both those that are probable and those that are reasonably possible, are not material to the Company’s financial condition, operations, or cash flows at March 31,September 30, 2020.
Leases
On December 5, 1997, the Company entered into a fifteen-year lease, expiring on April 30, 2013, of office space from an entity controlled by members of the Chairman’s family. On June 11, 2013, the Company modified and extended its lease with M4E, LLC, the Company’s landlord at One Corporate Center, Rye, NY. The lease term was extended to December 31, 2028 and the base rental remained at $18 per square foot, or $1.1 million, for 2014. For each subsequent year through December 31, 2028, the base rental is determined by the change in the consumer price index for the New York Metropolitan Area for November of the immediate prior year with the base period as November 2008 for the New York Metropolitan Area.
This lease has been accounted for as a finance lease under FASB ASC Topic 842 (and prior to 2019, as a capital lease under FASB ASC Topic 840, Leases) as it transfers substantially all the benefits and risks of ownership to the Company. The Company has recorded the leased property as an asset and a lease obligation for the present value of the obligation of the leased property. The leased property is amortized on a straight-line basis from the date of the most recent extension to the end of the lease. The lease obligation is amortized over the same term using the interest method of accounting. Finance lease improvements are amortized from the date of expenditure through the end of the lease term or the useful life, whichever is shorter, on a straight-line basis. The lease provides that all operating expenses relating to the property (such as property taxes, utilities, and maintenance) are to be paid by the lessee, GAMCO. These are recognized as expenses in the periods in which they are incurred. Accumulated amortization on the leased property at March 31,September 30, 2020 and December 31, 2019 was approximately $5.3$5.4 million and $5.2 million, respectively.
The Company also rents office space under operating leases, which expire at various dates through May 31, 2024.
The following table summarizes the Company'sCompany’s leases for the periods presented (in thousands, except lease term and discount rate):
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Finance lease cost - interest expense | | $ | 264 | | | $ | 268 | | | $ | 800 | | | $ | 810 | |
Finance lease cost - amortization of right-of-use asset | | | 66 | | | | 67 | | | | 200 | | | | 200 | |
Operating lease cost | | | 104 | | | | 172 | | | | 284 | | | | 551 | |
Sublease income | | | (46 | ) | | | (121 | ) | | | (138 | ) | | | (364 | ) |
Total lease cost | | $ | 388 | | | $ | 386 | | | $ | 1,146 | | | $ | 1,197 | |
| | | | | | | | | | | | | | | | |
Other information: | | | | | | | | | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | | | | | | | | |
Operating cash flows from finance lease | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Operating cash flows from operating leases | | | 87 | | | | 177 | | | | 240 | | | | 602 | |
Financing cash flows from finance lease | | | 56 | | | | 46 | | | | 160 | | | | 132 | |
Total cash paid for amounts included in the measurement of lease liabilities | | $ | 143 | | | $ | 223 | | | $ | 400 | | | $ | 734 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 0 | | | $ | 0 | | | $ | 324 | | | $ | 1,431 | |
Weighted average remaining lease term—finance lease (years) | | | 8.3 | | | | 9.3 | | | | 8.3 | | | | 9.3 | |
Weighted average remaining lease term—operating leases (years) | | | 2.2 | | | | 2.8 | | | | 2.2 | | | | 2.8 | |
Weighted average discount rate—finance lease | | | 19.1 | % | | | 19.1 | % | | | 19.1 | % | | | 19.1 | % |
Weighted average discount rate—operating leases | | | 5.0 | % | | | 5.0 | % | | | 5.0 | % | | | 5.0 | % |
| | Three Months Ended | |
| | March 31, | |
| | 2020 | | | 2019 | |
Finance lease cost - interest expense | | $ | 269 | | | $ | 272 | |
Finance lease cost - amortization of right-of-use asset | | | 67 | | | | 66 | |
Operating lease cost | | | 75 | | | | 181 | |
Sublease income | | | (46 | ) | | | (122 | ) |
Total lease cost | | $ | 365 | | | $ | 397 | |
| | | | | | | | |
Other information: | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | |
Operating cash flows from finance lease | | $ | - | | | $ | - | |
Operating cash flows from operating leases | | | 65 | | | | 213 | |
Financing cash flows from finance lease | | | 51 | | | | 42 | |
Total cash paid for amounts included in the measurement of lease liabilities | | $ | 116 | | | $ | 255 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | - | | | | - | |
Weighted average remaining lease term—finance lease (years) | | | 8.8 | | | | 9.8 | |
Weighted average remaining lease term—operating leases (years) | | | 2.6 | | | | 3.1 | |
Weighted average discount rate—finance lease | | | 19.1 | % | | | 19.1 | % |
Weighted average discount rate—operating leases | | | 5.0 | % | | | 5.0 | % |
The finance lease right-of-use asset, net of amortization, at March 31,September 30, 2020 and December 31, 2019 was $1.8$1.7 million and $1.9 million, respectively, and the operating right-of-use assets, net of amortization, were $0.7$0.9 million and $0.8, respectively, and these right-of-use assets were included within other assets in the Condensed Consolidated Statements of Financial Condition.
The following table summarizes the maturities of lease liabilities at March 31,September 30, 2020 (in thousands):
Year ending December 31, | | Finance Leases | | | Operating Leases | | | Total Leases | | | Finance Leases | | | Operating Leases | | | Total Leases | |
2020 (excluding the three months ended March 31, 2020) | | $ | 957 | | | $ | 332 | | | $ | 1,289 | | |
2020 (excluding the nine months ended September 30, 2020) | | | $ | 319 | | | $ | 103 | | | $ | 422 | |
2021 | | | 1,080 | | | | 231 | | | | 1,311 | | | | 1,080 | | | | 346 | | | | 1,426 | |
2022 | | | 1,080 | | | | 164 | | | | 1,244 | | | | 1,080 | | | | 279 | | | | 1,359 | |
2023 | | | 1,080 | | | | 155 | | | | 1,235 | | | | 1,080 | | | | 184 | | | | 1,264 | |
2024 | | | 1,080 | | | | 61 | | | | 1,141 | | | | 1,080 | | | | 61 | | | | 1,141 | |
Thereafter | | | 4,320 | | | | - | | | | 4,320 | | | | 4,320 | | | | 0 | | | | 4,320 | |
Total lease payments | | $ | 9,597 | | | $ | 943 | | | $ | 10,540 | | | $ | 8,959 | | | $ | 973 | | | $ | 9,932 | |
Less imputed interest | | | (5,035 | ) | | | (80 | ) | | | (5,115 | ) | | | (4,509 | ) | | | (73 | ) | | | (4,582 | ) |
Total lease liabilities | | $ | 4,562 | | | $ | 863 | | | $ | 5,425 | | | $ | 4,450 | | | $ | 900 | | | $ | 5,350 | |
The finance lease contains an escalation clause tied to the change in the New York Metropolitan Area Consumer Price Index, which may cause the future minimum payments to exceed the amounts shown above. Future minimum lease payments have not been reduced by related minimum future sublease rentals of approximately $0.8$0.7 million due over the next four years, which are due from affiliated entities. Future minimum lease payments have also not been reduced by future sublease payments of approximately $15 thousand per month from Associated Capital Group, Inc. (“AC”) pursuant to AC’s lease agreement that expired on March 31, 2019, which was extended on the same terms and conditions on a month-to-month basis commencing on April 1, 2019.
11. Shareholder-Designated Contributions
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 are not eligible to participate. For the three and nine months ended September 30, 2020 and 2019, the Company recorded a charge of $5.4 million and $4.5 million, respectively, or $0.25 and $0.20, respectively, per share, which were included in shareholder-designated contributions on the Condensed Consolidated Statements of Income.
12. Related Party Transactions
On December 26, 2018, the Chief Executive Officer (“CEO”) of the Company elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from January 1, 2019 to March 31, 2019. On August 27, 2019, the CEO elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from September 1, 2019 to November 30, 2019. On June 30, 2020, the CEO of the Company elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from July 1, 2020 to November 10, 2020, allowing the Company to cover teammate healthcare costs for July 1, 2020 through December 31, 2020. For the three months ended March 31,September 30, 2020 and 2019, the waiverwaivers reduced compensation by $12.2$8.5 million and $3.6 million, respectively, and management fee expense by $1.7 million.
$1.4 million and $0.6 million, respectively. For the nine months ended September 30, 2020 and 2019, the waivers reduced compensation by $8.5 million and $15.8 million, respectively, and management fee by $1.4 million and $2.3 million, respectively.
12.13. Regulatory Requirements
The Company’s broker-dealer subsidiary, G.distributors, is subject to certain net capital requirements. G.distributors computes its 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, as amended. The requirement was $250,000 for the broker-dealer at March 31,September 30, 2020. At March 31,September 30, 2020, G.distributors had net capital, as defined, of approximately $5.2$2.6 million, exceeding the regulatory requirement by approximately $4.9$2.3 million. Net capital requirements for the Company’s affiliated broker-dealer may increase in accordance with the rules and regulations applicable to broker-dealers to the extent G.distributors engages in other business activities.
13.14. Subsequent Events
From AprilOctober 1, 2020 to May 8,November 6, 2020, the Company repurchased 37,05629,008 shares at $11.22$12.62 per share.
On May 5,November 6, 2020, the Board of Directors declared its regular quarterly dividend of $0.02 per share to all of the Company’s shareholders, payable on June 30,December 29, 2020 to shareholders of record on June 16,December 15, 2020.
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “the“the Firm,” “GBL,” “we,” “us,” and “our” or similar terms are to GAMCO Investors, Inc., its predecessors, and its subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this Form 10-Q contains 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,” “will,” “should,” “may,” 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 may cause our actual results to differ from our expectations include risks associated with the duration and scope of the ongoing coronavirus pandemic resulting in volatile market conditions, a decline in the securities markets that adversely affect our assets under management, negative performance of our products, the failure to perform as required under our investment management agreements, a general downturn in the economy that negatively impacts our operations, and the ongoing impacts of the Tax Cuts and Jobs Act with respect to tax rates and the non-deductibility of certain portions of named executive officer compensation. We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We also direct your attention to any more specific discussions of risk contained in our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other public filings. 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.statements.
OVERVIEW
OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Form 10-Q. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of this Form 10-Q “Risk Factors.” Our actual results could differ materially from those anticipated by such forward-looking statements due to factors discussed under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Form 10-Q.
GAMCO (New(New York Stock Exchange (“NYSE”): GBL), a company incorporated under the laws of Delaware, is a widely-recognized provider ofknown for its research-driven approach to equity investing. GAMCO conducts its investment advisory servicesbusiness principally through 24 mutualtwo subsidiaries: GAMCO Asset Management Inc. (“GAMCO Asset”) (approximately 1,500 institutional and private wealth separate accounts (“Institutional and PWM”), principally in the U.S.) and Gabelli Funds, LLC (“Gabelli Funds”) (24 open-end funds, 16 closed-end funds, one société d’investissement à capital variable (“SICAV”), and approximately 1,700 institutional and16 closed-end funds). GAMCO serves a broad client base including institutions, intermediaries, offshore investors, private wealth, managementand direct retail investors. The distribution of mutual funds is conducted through G.distributors, LLC (“Institutional and PWM”G.distributors”) accounts principally in the United States (“U.S.”). The investments are generally in value, growth, gold, utilities, and convertible securities. Our revenues are based primarily on, the Company’s levelbroker-dealer subsidiary.
GAMCO offers a wide range of solutions across Value and Growth Equity, ESG-SRI, Convertibles, sector-focused strategies including Gold and Utilities, Merger Arbitrage, and Fixed Income. In 1977, GAMCO launched its flagship All Cap Value strategy, Gabelli Value, and in 1986 launched its mutual fund business. In addition to its Value strategies, for over 30 years the firm has managed solutions in Growth Equity, Convertibles, SRI, and Merger Arbitrage.
As of September 30, 2020, we had $29.7 billion of assets under management (“AUM”) and fees associated with our various investment products..
Since our inception in 1977, our value assets are identified with our research-driven approach to equity investing and our Private Market Value (PMV) with a CatalystTM investment approach.
As of March 31, 2020, we had $27.5 billion of AUM. We conduct our investment advisory business principally through two subsidiaries, which are registered investment advisors: Gabelli Funds, LLC (mutual and closed-end funds) (“Gabelli Funds”) and GAMCO Asset Management Inc. (Institutional and PWM) (“GAMCO Asset”). G.distributors, LLC (“G.distributors”), our broker-dealer subsidiary, acts as an underwriter and distributor of our mutual funds.
In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China and has since spread quickly to numerous countries, including the United States. On March 11, 2020, COVID-19 was identified as a global pandemic by the World Health Organization. In response to its spread, governmental authorities have imposed restrictions on travel and congregation and the temporary closure of many non-essential businesses in affected jurisdictions, including, beginning in March 2020, in the United States. As world leaders focused on the unprecedented human and economic challenges of COVID-19, global equity markets plunged as the coronavirus pandemic spread. In March, the unfolding events led to the worst month for stocks since 2008 and the worst first quarter since 1937. In the second and third quarters, as a result of unprecedented fiscal and monetary stimulus and the fast tracking of potential COVID-19 vaccines, the markets have rebounded strongly. The pandemic and resulting economic dislocations have had adverse consequences on our AUM, resulting in decreased revenues, partially offset by decreased variable operating and compensation expenses. As a result of this pandemic, the majority of our employees (“teammates”) are working remotely. However, there has been no material impact of remote work arrangements on our operations, including our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures, and there has been no material challenge in implementing our business continuity plan.
Past and Future - Giving Back to Society
Generating returns for our stakeholders is not the sole gauge we use in measuring our success. Since the inception of GAMCO’s shareholder-designated charitable contribution (“SDCC”) program in 2013, shareholders have designated contributions of over $31 million to over 280 501(c)(3) initiatives. As a result ofMost recently, the SDCC approved by our Board of Directors most recent SDCC approval, $4.5in August 2020 will provide an estimated $5.4 million wasto shareholder designated by shareholders to 501(c)(3) organizations in the fourth quarter of 2019 and paid in 2020.organizations. This program underscores our commitment to managing socially responsible portfolios since 1987, which has evolved to include integrating environmental, social, and governance (ESG) factors into the analysis of companies and the structuring of portfolios.
Since our initial public offering (“IPO”) in February 1999, approximately $57$62 million will havehas been donated to charities by us, including the current year’s SDCC.
Assets Under Management
AUM was $27.5$29.7 billion as of March 31,September 30, 2020, a decrease of $9.8$6.0 billion, or 26.3%16.8%, from the March 31,September 30, 2019 AUM of $37.3$35.7 billion. The firstthird quarter 2020 activity consisted of $7.9$1.6 billion of market depreciation,appreciation, net cash outflows of $1.0$1.1 billion, and recurring distributions, net of reinvestments, from the mutual and closed-end funds (the “Funds”) of $142$133 million. Average total AUM was $33.6$30.3 billion in the firstthird quarter of 2020 versus $36.8$36.0 billion in the firstthird quarter of 2019, a decrease of 8.7%15.8%.
We earn incentive fees for certain client assets, assets attributable to certain preferred issues for our closed-end Funds, our GDL Fund (NYSE: GDL), the Gabelli Merger Plus+ Trust Plc (LSE: GMP), and the GAMCO Merger Arbitrage Fund. As of March 31,September 30, 2020, assets with incentive based fees were $1.4$1.0 billion, 22.2%44.4% below the $1.8 billion on March 31,September 30, 2019. The majority of these assets have calendar year-end measurement periods; therefore, our incentive fees are primarily recognized in the fourth quarter when the uncertainty is removed at the end of the annual measurement period.
Roll-forward of AUM (in millions)
| | Three Months Ended March 31, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Equities: | | | | | | | | | | | | | | | | | | |
Mutual Funds | | | | | | | | | | | | | | | | | | |
Beginning of period assets | | $ | 10,481 | | | $ | 10,589 | | | $ | 8,651 | | | $ | 11,016 | | | $ | 10,481 | | | $ | 10,589 | |
Market appreciation (depreciation) | | | (2,144 | ) | | | 1,190 |
| | | 527 | | | | 31 | | | | (446 | ) | | | 1,514 | |
Net flows | | | (531 | ) | | | (319 | ) | | | (313 | ) | | | (461 | ) | | | (1,154 | ) | | | (1,500 | ) |
Fund distributions, net of reinvestment | | | (8 | ) | | | (8 | ) | | | (10 | ) | | | (18 | ) | | | (26 | ) | | | (35 | ) |
End of period assets | | $ | 7,798 | | | $ | 11,452 | | | $ | 8,855 | | | $ | 10,568 | | | $ | 8,855 | | | $ | 10,568 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Closed-end Funds | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period assets | | $ | 8,005 | | | $ | 6,959 | | | $ | 6,859 | | | $ | 7,646 | | | $ | 8,005 | | | $ | 6,959 | |
Market appreciation (depreciation) | | | (1,723 | ) | | | 725 | | | | 423 | | | | (36 | ) | | | (295 | ) | | | 854 | |
Net flows | | | (64 | ) | | | (6 | ) | | | (142 | ) | | | (4 | ) | | | (303 | ) | | | 51 | |
Fund distributions, net of reinvestment | | | (134 | ) | | | (128 | ) | | | (123 | ) | | | (130 | ) | | | (390 | ) | | | (388 | ) |
End of period assets | | $ | 6,084 | | | $ | 7,550 | | | $ | 7,017 | | | $ | 7,476 | | | $ | 7,017 | | | $ | 7,476 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Institutional & PWM | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period assets | | $ | 14,565 | | | $ | 14,078 | | | $ | 10,455 | | | $ | 15,332 | | | $ | 14,565 | | | $ | 14,078 | |
Market appreciation (depreciation) | | | (3,961 | ) | | | 1,803 | | | | 632 | | | | (240 | ) | | | (1,811 | ) | | | 1,950 | |
Net flows | | | (419 | ) | | | (638 | ) | | | (548 | ) | | | (933 | ) | | | (2,215 | ) | | | (1,869 | ) |
End of period assets (a) | | $ | 10,185 | | | $ | 15,243 | | | $ | 10,539 | | | $ | 14,159 | | | $ | 10,539 | | | $ | 14,159 | |
| | | | | | | | | |
SICAV | | | | | | | | | |
Beginning of period assets | | $ | 594 | | | $ | 507 | | |
Market appreciation (depreciation) | | | (57 | ) | | | 8 | | |
Net flows | | | (57 | ) | | | 7 | | |
End of period assets | | $ | 480 | | | $ | 522 | | |
(a) Includes $263$196 million and $251$237 million of 100% U.S. Treasury Fund AUM at March 31,September 30, 2020 and 2019, respectively.
Roll-forward of AUM (in millions) (continued)
| | Three Months Ended March 31, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | | | | | | | | | | | | |
SICAV | | | | | | | | | | | | | |
Beginning of period assets | | | $ | 451 | | | $ | 538 | | | $ | 594 | | | $ | 507 | |
Market appreciation (depreciation) | | | | 27 | | | | (17 | ) | | | 7 | | | | (5 | ) |
Net flows | | | | (41 | ) | | | 29 | | | | (164 | ) | | | 48 | |
End of period assets | | | $ | 437 | | | $ | 550 | | | $ | 437 | | | $ | 550 | |
| | 2020 | | | 2019 | | | | | | | | | | | | | | | | | |
Total Equities | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period assets | | $ | 33,645 | | | $ | 32,133 | | | $ | 26,416 | | | $ | 34,532 | | | $ | 33,645 | | | $ | 32,133 | |
Market appreciation (depreciation) | | | (7,885 | ) | | | 3,726 |
| | | 1,609 | | | | (262 | ) | | | (2,545 | ) | | | 4,313 | |
Net flows | | | (1,071 | ) | | | (956 | ) | | | (1,044 | ) | | | (1,369 | ) | | | (3,836 | ) | | | (3,270 | ) |
Fund distributions, net of reinvestment | | | (142 | ) | | | (136 | ) | | | (133 | ) | | | (148 | ) | | | (416 | ) | | | (423 | ) |
End of period assets | | $ | 24,547 | | | $ | 34,767 | | | $ | 26,848 | | | $ | 32,753 | | | $ | 26,848 | | | $ | 32,753 | |
| | | | | | | | | | | | | | | | | |
Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | |
100% U.S. Treasury fund | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period assets | | $ | 2,810 | | | $ | 2,195 | | | $ | 2,921 | | | $ | 2,375 | | | $ | 2,810 | | | $ | 2,195 | |
Market appreciation (depreciation) | | | 10 | | | | 14 | | | | - | | | | 14 | | | | 14 | | | | 42 | |
Net flows | | | 118 | | | | 278 | | | | (99 | ) | | | 532 | | | | (2 | ) | | | 684 | |
End of period assets | | $ | 2,938 | | | $ | 2,487 | | | $ | 2,822 | | | $ | 2,921 | | | $ | 2,822 | | | $ | 2,921 | |
| | | | | | | | | | | | | | | | | |
Institutional & PWM | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period assets | | $ | 20 | | | $ | 26 | | | $ | 19 | | | $ | 17 | | | $ | 20 | | | $ | 26 | |
Market appreciation (depreciation) | | | - | | | | - | | | | - | | | | 1 | | | | - | | | | (1 | ) |
Net flows | | | - | | | | (7 | ) | | | 3 | | | | - | | | | 2 | | | | (7 | ) |
End of period assets | | $ | 20 | | | $ | 19 | | | $ | 22 | | | $ | 18 | | | $ | 22 | | | $ | 18 | |
| | | | | | | | | | | | | | | | | |
Total Fixed Income | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period assets | | $ | 2,830 | | | $ | 2,221 | | | $ | 2,940 | | | $ | 2,392 | | | $ | 2,830 | | | $ | 2,221 | |
Market appreciation (depreciation) | | | 10 | | | | 14 | | | | - | | | | 15 | | | | 14 | | | | 41 | |
Net flows | | | 118 | | | | 271 | | | | (96 | ) | | | 532 | | | | - | | | | 677 | |
End of period assets | | $ | 2,958 | | | $ | 2,506 | | | $ | 2,844 | | | $ | 2,939 | | | $ | 2,844 | | | $ | 2,939 | |
| | | | | | | | | | | | | | | | | |
Total AUM | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period assets | | $ | 36,475 | | | $ | 34,354 | | | $ | 29,356 | | | $ | 36,924 | | | $ | 36,475 | | | $ | 34,354 | |
Market appreciation (depreciation) | | | (7,875 | ) | | | 3,740 | | | | 1,609 | | | | (247 | ) | | | (2,531 | ) | | | 4,354 | |
Net flows | | | (953) | | | | (685 | ) | | | (1,140 | ) | | | (837 | ) | | | (3,836 | ) | | | (2,593 | ) |
Fund distributions, net of reinvestment | | | (142 | ) | | | (136 | ) | | | (133 | ) | | | (148 | ) | | | (416 | ) | | | (423 | ) |
End of period assets | | $ | 27,505 | | | $ | 37,273 | | | $ | 29,692 | | | $ | 35,692 | | | $ | 29,692 | | | $ | 35,692 | |
Our AUM by style at September 30, 2020 (in millions) was comprised of the following:
| | Funds | | | Institutional & PWM | | | SICAV | | | Total | |
Value | | $ | 8,771 | | | $ | 9,828 | | | $ | 12 | | | $ | 18,611 | |
100% U.S. Treasury fund | | | 2,822 | | | | - | | | | - | | | | 2,822 | |
Utilities | | | 2,303 | | | | - | | | | - | | | | 2,303 | |
Growth | | | 1,106 | | | | 329 | | | | - | | | | 1,435 | |
Gold | | | 1,333 | | | | 63 | | | | - | | | | 1,396 | |
Convertibles | | | 577 | | | | 72 | | | | 425 | | | | 1,074 | |
Other | | | 1,782 | | | | 269 | | | | - | | | | 2,051 | |
Total | | $ | 18,694 | | | $ | 10,561 | | | $ | 437 | | | $ | 29,692 | |
With the global spread of Coronavirus, investors have sought havens in Gold and opportunities in Growth and Global Growth strategies. Year-to-date through September 30, 2020, The Gabelli Growth Fund, with assets in excess of $900 million, achieved returns of 26.0% versus the Russell 1000 Growth index return of 24.3%; The Gabelli Global Growth Fund, with assets in excess of $160 million, achieved returns of 22.9% versus the MSCI All Country World Index returns of 1.4%; The Gabelli Gold Fund, with assets nearing $470 million, achieved returns of 35.7% versus the Philadelphia Gold and Silver Index returns of 34.7%; The Teton Convertible Securities Fund, sub-advised by GAMCO, achieved returns of 9.1% versus S&P 500 returns of 5.6%. Please refer to www.gabelli.com for full disclosures on the Funds and their performance. The performance of The Gabelli Growth Fund, The Gabelli Global Growth Fund, The Gabelli Gold Fund, and the Teton Convertible Securities Fund and relevant indexes for the 1-year, 5-year, and 10-year periods ended September 30, 2020 were the following:
| | 1 Year | | 5 Years | | 10 Years | | Benchmark |
Gabelli Growth Fund (AAA) | | 37.12% | | 20.07% | | 16.07% | | Russell 1000 Growth Index |
Gabelli Global Growth Fund (AAA) | | 32.72% | | 16.62% | | 13.16% | | MSCI AC World Index |
Gabelli Gold Fund (AAA) | | 53.57% | | 22.31% | | -0.92% | | Phil. Gold and Silver |
Teton Convertible Securities Fund (AAA) | | 15.80% | | 11.89% | | 9.94% | | S&P 500 |
Russell 1000 Growth Index | | 37.53% | | 20.10% | | 17.25% | | |
S&P 500 Index | | 15.15% | | 14.15% | | 13.74% | | |
MSCI AC World Index | | 10.44% | | 10.30% | | 8.55% | | |
Philadelphia Gold and Silver Index | | 63.00% | | 26.27% | | -2.01% | | |
Gabelli Funds, LLC is a registered investment adviser with the Securities and Exchange Commission and is a wholly owned subsidiary of GAMCO Investors, Inc. (NYSE: GBL).
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before investing. The prospectus, which contains more complete information about this and other matters, should be read carefully before investing. To obtain a prospectus, please call 800 GABELLI or visit www.gabelli.com.
Returns represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so, upon redemption, shares may be worth more or less than their original cost. To obtain the most recent month end performance information and a prospectus, please call 800-GABELLI or visit www.gabelli.com.
RESULTS OF OPERATIONS
Investment advisory and incentive fees, which are based on the amount and composition of AUM in our Funds and Institutional and PWM accounts, and distribution fees represent our largest source of revenues. In addition to the general level and trends of the stock market, growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and facilitates the ability to attract additional investors while maintaining current fee levels. Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service. A majority of our cash inflows to mutual fund products have come through third party distribution programs, including no-transaction fee programs. We have also been engaged to act as a sub-advisor for other much larger financial services companies with much larger sales distribution organizations. These sub-advisory clients are subject to business combinations that may result in the termination of the relationship. The loss of a sub-advisory relationship could have a significant impact on our financial results in the future.
Advisory fees from the Funds and sub-advisory accounts are computed daily or weekly based on average net assets. Advisory fees from Institutional and PWM clients are generally computed quarterly based on account values as of the end of the preceding quarter. These revenues are based on AUM, which is highly correlated to the stock market and can vary in direct proportion to movements in the stock market and the level of sales compared with redemptions, financial market conditions, and the fee structure for AUM. Revenues derived from the equity-oriented portfolios generally have higher advisory fee rates than fixed income portfolios.
We also may receive incentive fees from certain Institutional and PWM clients, which are based upon meeting or exceeding a specific benchmark index or indices. These fees are recognized at the end of the stipulated contract period, which may be quarterly or annually, for the respective account. Advisory fees on assets attributable to certain of the closed-end preferred shares are earned at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period.
Distribution fees and other income primarily include distribution fee revenue earned in accordance with Rule 12b-1 of the Investment Company Act of 1940, as amended, along with sales charges and underwriting fees associated with the sale of the mutual funds plus other revenues. Distribution fees fluctuate based on the level of AUM and the amount and type of mutual funds sold directly by G.distributors or through various distribution channels.
Compensation costs include variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research, and all other teammates. Variable compensation paid to sales teammates and portfolio management generally represents 40% of revenues and is the largest component of total compensation costs. Distribution costs include marketing, product distribution, and promotion costs. The management fee is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits, which is paid to Mr. Mario J. Gabelli (“Mr. Gabelli”) or his designee for acting as CEO pursuant to his 2008 Employment Agreement so long as he is an executive of GBL and devotes the substantial majority of his working time to the business. Other operating expenses include general and administrative operating costs.
Non-operating income/(loss) includes gain/(loss)loss from investments, net (which includes both realized and unrealized gains and losses from securities), interest and dividend income, and interest expense. The gain/(loss)loss from investments, net is derived from our proprietary investment portfolio consisting of various public investments.
The following table (in thousands, except per share data) and discussion of our results of operations are based upon data derived from the Condensed Consolidated Statements of Income contained in our condensed consolidated financial statements and should be read in conjunction with those statements included in Part I, Item 1 of this Form 10-Q.10-Q.
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Revenues | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 54,894 | | | $ | 67,015 | | | $ | 168,637 | | | $ | 200,893 | |
Distribution fees and other income | | | 6,358 | | | | 8,330 | | | | 19,741 | | | | 25,195 | |
Total revenues | | | 61,252 | | | | 75,345 | | | | 188,378 | | | | 226,088 | |
Expenses | | | | | | | | | | | | | | | | |
Compensation | | | 17,722 | | | | 29,800 | | | | 72,488 | | | | 90,363 | |
Management fee | | | - | | | | 2,144 | | | | 3,725 | | | | 8,302 | |
Distribution costs | | | 6,994 | | | | 8,271 | | | | 21,258 | | | | 25,546 | |
Other operating expenses | | | 4,694 | | | | 5,562 | | | | 14,982 | | | | 16,936 | |
Total expenses | | | 29,410 | | | | 45,777 | | | | 112,453 | | | | 141,147 | |
Operating income | | | 31,842 | | | | 29,568 | | | | 75,925 | | | | 84,941 | |
Non-operating income / (loss) | | | | | | | | | | | | | | | | |
Gain / (loss) from investments, net | | | (3,133 | ) | | | (6,529 | ) | | | (13,061 | ) | | | (3,160 | ) |
Interest and dividend income | | | 41 | | | | 811 | | | | 700 | | | | 2,250 | |
Interest expense | | | (691 | ) | | | (652 | ) | | | (1,985 | ) | | | (1,962 | ) |
Shareholder-designated contribution | | | (5,436 | ) | | | (4,500 | ) | | | (5,436 | ) | | | (4,500 | ) |
Total non-operating income / (loss) | | | (9,219 | ) | | | (10,870 | ) | | | (19,782 | ) | | | (7,372 | ) |
Income before income taxes | | | 22,623 | | | | 18,698 | | | | 56,143 | | | | 77,569 | |
Provision for income taxes | | | 6,188 | | | | 5,072 | | | | 17,173 | | | | 20,034 | |
Net income | | $ | 16,435 | | | $ | 13,626 | | | $ | 38,970 | | | $ | 57,535 | |
| | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.62 | | | $ | 0.50 | | | $ | 1.46 | | | $ | 2.08 | |
Diluted | | $ | 0.62 | | | $ | 0.50 | | | $ | 1.46 | | | $ | 2.08 | |
| | Three Months Ended March 31, | |
| | 2020 | | | 2019 | |
Revenues | | | | | | |
Investment advisory and incentive fees | | $ | 62,273 | | | $ | 65,888 | |
Distribution fees and other income | | | 7,294 | | | | 8,448 | |
Total revenues | | | 69,567 | | | | 74,336 | |
Expenses | | | | | | | | |
Compensation | | | 29,250 | | | | 30,347 | |
Management fee | | | 1,665 | | | | 1,449 | |
Distribution costs | | | 7,630 | | | | 8,670 | |
Other operating expenses | | | 5,702 | | | | 5,257 | |
Total expenses | | | 44,247 | | | | 45,723 | |
Operating income | | | 25,320 | | | | 28,613 | |
Non-operating income / (loss) | | | | | | | | |
Loss from investments, net | | | (10,237 | ) | | | (1,895 | ) |
Interest and dividend income | | | 544 | | | | 724 | |
Interest expense | | | (647 | ) | | | (655 | ) |
Total non-operating loss | | | (10,340 | ) | | | (1,826 | ) |
Income before income taxes | | | 14,980 | | | | 26,787 | |
Provision for income taxes | | | 3,735 | | | | 6,895 | |
Net income | | $ | 11,245 | | | $ | 19,892 | |
| | | | | | | | |
Earnings per share: | | | | | | | | |
Basic | | $ | 0.42 | | | $ | 0.70 | |
Diluted | | $ | 0.42 | | | $ | 0.70 | |
Three Months Ended March 31,September 30, 2020 Compared To Three Months Ended March 31,September 30, 2019
Overview
Net income for the firstthird quarter of 2020 was $11.2$16.4 million, or $0.42$0.62 per fully diluted share, versus $19.9$13.6 million, or $0.70$0.50 per fully diluted share, in the firstthird quarter of 2019. The quarter to quarterquarter-to-quarter comparison was impacted by lower revenues, and higher non-operating loss, partially offset by lower variable compensation.compensation and lower non-operating loss.
Revenues
Investment advisory and incentive fees for the firstthird quarter of 2020 were $62.3$54.9 million, 5.5%18.1% lower than the 2019 comparative figure of $65.9$67.0 million due to lower average AUM. Mutual fundFund revenues for the firstthird quarter of 2020 decreased by 12.9%16.6% to $24.3$22.6 million from $27.9$27.1 million in the firstthird quarter of 2019. Our closed-end Fund revenues increased 3.8%decreased 1.8% to $16.4$16.2 million in the firstthird quarter 2020 from $15.8$16.5 million in the firstthird quarter of 2019. Institutional and PWM account revenues, which are generally based on beginning of quarter AUM, decreased by 3.4%31.2% to $20.0$14.8 million in the firstthird quarter of 2020 from $20.7$21.5 million in the firstthird quarter of 2019. Revenues relating to the SICAV increased $0.1decreased $0.3 million to $1.6$1.2 million in the firstthird quarter of 2020, inclusive of $0.1 million of incentive fees, from $1.5 million in the firstthird quarter of 2019. There were incentive fees of $0.1 million for the three months ending September 30, 2020 and $0.4 million for the three months ending September 30, 2019.
Mutual Fund distribution fees and other income were $6.4 million for the third quarter of 2020, a decrease of $1.9 million or 22.9% from $8.3 million in the third quarter of 2019 inclusiveprimarily due to lower average AUM in equity mutual Funds that generate distribution fees.
Expenses
Compensation costs, which are largely variable, were $17.7 million in the third quarter of 2020, or 40.6% lower than prior year comparative compensation costs of $29.8 million. The CEO waiver of his compensation reduced compensation by $8.5 million and $3.6 million for the three months ending September 30, 2020 and 2019, respectively. The remainder of the quarter over quarter decrease was comprised of a $4.8 million decrease in variable compensation expense offset by a $0.2 million increase in stock compensation expense. The amortization of the deferred cash compensation agreements (“DCCAs”) resulted in a $2.6 million decrease in compensation costs year over year.
Management fee expense, which is wholly variable and based on pretax income, decreased to $0 in the third quarter of 2020 from $2.1 million in the third quarter of 2019. For the third quarter of 2020 and 2019, management fee expense was reduced by $1.4 million and $0.6 million, respectively, as part of the CEO waiver.
Distribution costs were $7.0 million in the third quarter of 2020, a decrease of $1.3 million, or 15.7%, from $8.3 million in the third quarter of 2019.
Other operating expenses were $4.7 million in the third quarter of 2020, a decrease of $0.9 million, or 16.1%, from $5.6 million in the third quarter of 2019.
Operating income for the third quarter of 2020 was $31.8 million, an increase of $2.2 million, or 7.4%, from the $29.6 million in the third quarter of 2019. Operating income, as a percentage of revenues, was 52.0% in the third quarter of 2020 as compared to 39.2% in the third quarter of 2019.
Non-operating income / (loss)
Total non-operating loss was $9.2 million for the third quarter of 2020 versus a loss of $10.9 million in the third quarter of 2019. Investment losses were $3.1 million in the third quarter of 2020 versus losses of $6.5 million in the third quarter of 2019. Interest and dividend income decreased to $41.0 thousand in the third quarter of 2020 from $0.8 million in the third quarter of 2019. Interest expense was $0.7 million in the third quarter of 2020 and 2019. Accruals related to the SDCC programs were $5.4 million in the third quarter of 2020 and $4.5 million in the third quarter of 2019.
The effective tax rates (“ETR”) for the three months ended September 30, 2020 and 2019 were 27.4% and 27.1%, respectively.
Nine Months Ended September 30, 2020 Compared To Nine Months Ended September 30, 2019
Overview
Net income for the first nine months of 2020 was $39.0 million, or $1.46 per fully diluted share, versus $57.5 million, or $2.08 per fully diluted share, in the first nine months of 2019. The period-to-period comparison was impacted by lower revenues and higher non-operating loss, partially offset by lower variable compensation.
Revenues
Investment advisory and incentive fees.fees for the first nine months of 2020 were $168.6 million, 16.1% lower than the 2019 comparative figure of $200.9 million due to lower average AUM. Mutual fund revenues for the first nine months of 2020 decreased by 18.1% to $67.9 million from $82.9 million in the first nine months of 2019. Our closed-end Fund revenues decreased 2.9% to $47.2 million in the first nine months of 2020 from $48.6 million in the first nine months of 2019. Institutional and PWM account revenues, which are generally based on beginning of quarter AUM, decreased by 23.4% to $49.3 million in the first nine months of 2020 from $64.4 million in the first nine months of 2019. Revenues relating to the SICAV decreased 9.5% to $3.8 million in the first nine months of 2020 from $4.2 million in the first nine months of 2019. There were incentive fees of $0.4 million for nine months ending September 30, 2020 versus $0.8 million for the nine months ended September 30, 2019.
Mutual fund distribution fees and other income were $7.3$19.7 million for the first quarternine months of 2020, a decrease of $1.1$5.5 million or 13.1%21.8% from $8.4$25.2 million in the first quarternine months of 2019 primarily due to lower average AUM in equity mutual funds that generate distribution fees.
Expenses
Compensation costs, which are largely variable, were $29.3$72.5 million in the first quarternine months of 2020, or 3.3%19.8% lower than prior year comparative compensation costs of $30.3$90.4 million. The amortization of the deferred cash compensation agreements (“DCCAs”) resulted in a $12.6 million decrease in compensation costs year over year. The Chief Executive Officer’s (“CEO”) waiver of his compensation reduced compensation by $12.2$8.5 million in the first quarternine months of 2020 and $15.8 million for the first nine months of 2019. The amortization of the DCCAs resulted in a $14.5 million decrease in compensation costs year over year. The remainder of the quarteryear over quarter increaseyear change was comprised of a $0.3$12.4 million decrease in variable compensation expense, a $1.1 million increase in stock compensation expense, and a $0.9$0.6 million decreaseincrease in variable compensation expense.fixed compensation.
Management fee expense, which is wholly variable and based on pretax income, increaseddecreased to $1.7$3.7 million in first nine months of 2020 from $8.3 million in the first quarter of 2020 from $1.4 million in the first quarternine months of 2019. The DCCAs affected management fee expense, a component of the CEO’s DCCAs, in a fashion similar to the compensation expense, which resulted in a $1.4$4.6 million decrease in management fee expense in the first quarternine months of 2020 as compared with the first quarternine months of 2019. For the first nine months of 2020 and 2019, management fee expense was reduced by $1.4 million and $2.3 million, respectively, as part of the CEO waiver.
Distribution costs were $7.6$21.3 million in the first quarternine months of 2020, a decrease of $1.1$4.2 million, or 12.6%16.5%, from $8.7$25.5 million in the first quarternine months of 2019.
Other operating expenses were $5.7$15.0 million in the first quarternine months of 2020, an increasea decrease of $0.4$1.9 million, or 7.5%11.2%, from $5.3$16.9 million in the first quarternine months of 2019. For the threenine months ended March 31,September 30, 2020, as a result of the dislocations in the financial markets resulting from COVID-19, impairment analyses were performed which resulted in a $428$589 thousand impairment charge to the identifiable intangible asset related to the Gabelli Enterprise Mergers and Acquisitions Fund.
Operating income for the first quarternine months of 2020 was $25.3$75.9 million, a decrease of $3.3$9.0 million, or 11.5%10.6%, from the $28.6$84.9 million in the first quarternine months of 2019. Operating income, as a percentage of revenues, was 36.4%40.3% in the first quarternine months of 2020 as compared to 38.5%37.6% in the first quarternine months of 2019.
Non-operating income / (loss)
Total non-operating loss was $10.3$19.8 million for the first quarternine months of 2020 versus a loss of $1.8$7.4 million in the first quarternine months of 2019. Investment losses were $10.2$13.1 million in the first quarternine months of 2020 versus losses of $1.9$3.2 million in the first quarternine months of 2019. Interest and dividend income decreased to $0.5 million in the first quarter of 2020 from $0.7 million in the first quarternine months of 2020 from $2.3 million in the first nine months of 2019. Interest expense was $0.6$2.0 million in the first quarternine months of 2020 versus $0.7$2.0 million in the first quarternine months of 2019. Accruals related to the SDCC programs were $5.4 million in the first nine months of 2020 and $4.5 million in the first nine months of 2019.
The effective tax ratesETR for the threefirst nine months ended March 31,September 30, 2020 and 2019 were 24.9%30.6% and 25.7%25.8%, respectively. The ETR for the first nine months of 2020 was higher by 4.8%, primarily as a result of higher non-deductibility of certain expenses as a result of the 2017 Tax Cuts and Jobs Act.
Non-GAAP information and reconciliation
Operating income before management fee expense is used by management for purposes of evaluating its business operations. We believe this measure is useful in illustrating the operating results of the Company as management fee expense is based on pre-tax income before management fee, expense, which includes non-operating items including gain/(loss)loss from investments, net from our proprietary investment portfolio, interest and dividend income, interest expense, and shareholder-designated contribution. We believe that an investor would find this useful in analyzing our business operations without the impact of the non-operating items such as trading and investment portfolios, interest and dividend income, interest expense, or shareholder-designated contribution.
Reconciliation of GAAP financial measures to non-GAAP (in thousands):
| | | Three Months Ended | | | Nine Months Ended | |
| | Three Months Ended March 31,
| | | September 30, | | | September 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Revenues, U.S. GAAP basis | | $ | 69,567 | | | $ | 74,336 | | | $ | 61,252 | | | $ | 75,345 | | | $ | 188,378 | | | $ | 226,088 | |
Operating income, U.S. GAAP basis | | | 25,320 | | | | 28,613 | | | | 31,842 | | | | 29,568 | | | | 75,925 | | | | 84,941 | |
Add back: management fee expense | | | 1,665 | | | | 1,449 | | | | - | | | | 2,144 | | | | 3,725 | | | | 8,302 | |
Operating income before management fee | | $ | 26,985 | | | $ | 30,062 | | | $ | 31,842 | | | $ | 31,712 | | | $ | 79,650 | | | $ | 93,243 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating margin | | | 36.4 | % | | | 38.5 | % | | | 52.0 | % | | | 39.2 | % | | | 40.3 | % | | | 37.6 | % |
Operating margin before management fee | | | 38.8 | % | | | 40.4 | % | | | 52.0 | % | | | 42.1 | % | | | 42.3 | % | | | 41.2 | % |