GAMCO Investors, Inc. Reports Fourth Quarter 2017 Results

 

                    - AUM grew 7.8% to $43.1 billion year-to-year

 

                    - Fourth quarter 2017 diluted EPS was $0.46 compared with $1.07 a year ago

 

                    - Adjusted EPS was $0.78 compared with $0.78 a year ago

Rye, New York, February 6, 2018 – GAMCO Investors, Inc. (“GAMCO”) (NYSE: GBL) today reported fourth quarter 2017 revenues of $98.7 million, net income of $13.5 million, and earnings of $0.46 per diluted share.  This compares to fourth quarter 2016 revenues of $100.0 million, net income of $32.7 million, and earnings of $1.07 per diluted share.  On an adjusted basis, fourth quarter 2017 net income was $23.1 million, and earnings were $0.78 per diluted share versus fourth quarter 2016 net income of $23.6 million and earnings of $0.78 per diluted share.  Adjusted net income and adjusted earnings per share are non-GAAP performance measures and are explained and reconciled with the most comparable GAAP numbers starting on page 11.

Our fourth quarter 2017 AUM was up 7.8% from the prior year and unchanged from $43.1 billion at September 30, 2017.  Market appreciation of $1.2 billion was offset by net outflows of $1.1 billion and distributions, net of reinvestments, of $0.1 billion.

Average AUM was $43.0 billion for the fourth quarter of 2017 versus $42.3 billion for the third quarter of 2017 and $39.3 billion for the fourth quarter of 2016.

As previously disclosed, the Company entered into deferred compensation agreements for the Chief Executive Officer for three distinct periods: 2016 (entire year); the first half of 2017 and the fourth quarter of 2017.  These agreements provided the Company with increased flexibility to pay down debt related to the spin-off of Associated Capital in November 2015.  The deferred compensation expense is recognized ratably over its vesting period, resulting in a $12.7 million increase in compensation expense and management fee year-over-year.  The Company also incurred expenses in the fourth quarter of 2017 relating to the revaluation of deferred tax assets and liabilities, net, related to the Tax Cuts and Jobs Act (the “Act”) ($8.2 million), early extinguishment of the $110 million 4.5% convertible note ($3.3 million) and the accelerated vesting of RSAs ($1.3 million).

This contributed to lowering operating income to $39.5 million in the fourth quarter of 2017 from the $52.0 million in the year-ago quarter.

Financial Highlights
		Fourth Quarter																YTD
($'s in 000's except AUM and per share data)		2017								2016								2017								2016
AUM - end of period (in millions)		$	43,063							$	39,954			(a)				$	43,063							$	39,954			(a)
AUM - average (in millions)			42,965								39,328								42,016								38,878
GAAP
Revenues		$	89,613							$	84,650							$	351,382							$	337,579
Incentive fees			9,053								15,300								9,142								15,421
Total revenues		$	98,666							$	99,950							$	360,524							$	353,000
Operating income			39,524								52,031								145,020								191,796
Income before income taxes			34,886								50,569								132,888								182,227
Effective tax rate							61.3	%							35.4	%							41.4	%							35.7	%
Net income			13,495								32,692								77,809								117,121
Net income per fully diluted share		$	0.46							$	1.07							$	2.60							$	3.92
Non-GAAP
Operating income		$	42,667							$	41,455							$	158,949							$	153,218
Adjusted income before income taxes			37,197								35,995								136,314								129,285
Adjusted effective tax rate							37.8	%							34.5	%							37.8	%							37.0	%
Adjusted net income			23,147								23,583								84,811								81,399
Adjusted net income per fully diluted share		$	0.78							$	0.78							$	2.82							$	2.74
Weighted average diluted shares outstanding			30,336								31,241								30,947								30,170
Shares outstanding at December 31			28,974								29,463								28,974								29,463
See the reconciliation to the comparable U.S. GAAP measures starting on page 11.
(a) Adjusted to include $270 million of Merger Arbitrage assets at December 31, 2016.

-	Total revenues for the fourth quarter of 2017 were $98.7 million compared with $100.0 million in the prior year.

-

Investment advisory fees, excluding incentive fees, rose to $78.7 million in the fourth quarter of 2017 from $73.6 million in the fourth quarter of 2016 highlighted by revenues from our open-end and closed-end funds of $51.1 million, an increase from $47.5 million in the year-ago quarter.  Institutional and Private Wealth Management accounted for $26.2 million of the revenues in 2017 compared to $25.3 million in 2016.  SICAV revenues accelerated to $1.4 million in 2017 from $0.7 million in 2016.

-	Incentive fees earned were $9.1 million and $15.3 million during the fourth quarter ended December 31, 2017 and December 31, 2016, respectively.

-	Distribution fees from our open-end equity funds and other income were $10.9 million for the fourth quarter of 2017 versus $11.1 million in the prior-year quarter.

 

 

Operating Income

As noted, there were several distinct items in both quarters that impacted our results.  Operating income before management fee was $39.5 million in the fourth quarter of 2017 versus $52.0 million in the prior-year period.  The cash compensation deferrals raised operating costs by $12.7 million, comprised of the absence of the $14.6 million expense in the fourth quarter of 2016 coupled with a $1.9 million expense reduction in the fourth quarter of 2017.  The Company also recorded $1.3 million of compensation expense for the acceleration of most of the RSAs outstanding.  Excluding these items adjusted operating income before management fee was $38.5 million in the fourth quarter of 2017 versus $37.5 million in the year-ago quarter.

Other expense

We recognized $4.6 million in net other expenses in the fourth quarter of 2017 versus net other expenses of $1.5 million in the fourth quarter of 2016.  During the fourth quarter of 2017, we repurchased the $110 million convertible note at $103, resulting in a $3.3 million loss on extinguishment of debt.  In the fourth quarter of 2017, we also made $0.3 million of charitable contributions.  Interest expense decreased by $1.0 million year-over-year, reflecting a reduction in outstanding debt to $89.1 million at December 31, 2017 from $234.0 million at December 31, 2016.  Investment income for 2017 was $0.8 million vs. $1.5 million in 2016.

Income Taxes

The Company’s effective tax rate (“ETR”) for the quarter ended December 31, 2017 was 61.3% versus 35.4% for the quarter ended December 31, 2016.  The Act that was enacted in December 2017 resulted in an $8.2 million, or $0.27 per fully diluted share, write down of net deferred tax assets.  Absent this change the effective rate for the quarter would have been 37.8%.

Included in the fourth quarter 2017 income tax expense relating to the Act enacted in the United States in December 2017 were the following:

·	$10.7 million tax expense related to the revaluation of certain deferred income tax assets;

·	$2.5 million non-cash tax benefit related to the revaluation of certain deferred income tax liabilities

These amounts, which are based on reasonable estimates, may require further adjustments as additional guidance from the U.S. Department of Treasury is provided, as changes in GAMCO’s assumptions occur, and as further information and interpretations become available.

In addition, the fourth quarter income tax expense included a $0.5 million discrete tax expense related to the acceleration of stock-based compensation awards.

We previously disclosed an estimated ETR for 2018 of between 33% and 36%.  We now expect the 2018 ETR to be lower than that range, but we continue to evaluate the impact of the Act’s provisions.

Balance Sheet

GAMCO made substantial progress in reducing its debt since the November 2015 spin-off of Associated Capital Group, Inc. from $357 million to $89.1 million as of December 31, 2017.  As a result, Standard & Poor’s recently revised its outlook to stable from negative and reaffirmed our debt rating at BBB-.

During the quarter, we fully extinguished the $110 million 4.5% convertible note and prepaid $20 million of the amount outstanding on the 4% PIK note.

Total deferred compensation payable at December 31, 2017 was $120.5 million, of which $61.5 million is included in the GAAP balance sheet and $59.0 million of which will be recorded in 2018 and 2019, ratably over the vesting periods of each of the three deferral agreements, in accordance with GAAP.

 

We ended the quarter with cash of $17.8 million, investments of $36.8 million, and gross debt of $89.1 million.  We have $500 million available on our universal shelf registration.  Together with earnings from operations, the shelf provides us with flexibility to pay down debt, do acquisitions, perform lift-outs, seed new investment strategies, and co-invest, as well as to fund shareholder compensation, including share repurchases and dividends.

Deferred Compensation

GAMCO entered into a third agreement with its Chief Executive Officer on September 30, 2017, which deferred his cash compensation for the fourth quarter of 2017 until April 2019 under similar terms to the prior two deferrals.

Total deferred compensation payable at December 31, 2017 was $120.5 million, of which $61.5 million is included in the GAAP balance sheet and $59.0 million of which will be recorded in 2018 and 2019, ratably over the vesting periods of each of the three deferral agreements, in accordance with GAAP.

 

Returns to Shareholder

During the quarter ended December 31, 2017, we repurchased 194,226 shares at an average price of $29.33 per share for a total investment of $5.7 million.  We also distributed $0.6 million in dividends.  Since our IPO in February 1999, we have returned $1.9 billion in total to shareholders consisting of $1.0 billion of spin-offs, $491.0 million in the form of dividends, and $453.1 million through stock buybacks of approximately 10.4 million shares.

On February 6, 2018, GAMCO’s Board of Directors declared a regular quarterly dividend of $0.02 per share payable on March 27, 2018 to its Class A and Class B shareholders of record on March 13, 2018.

Business Highlights

-	On October 26, 2017, the GAMCO Natural Resources, Gold & Income Trust completed its offering of $30 million of 5.2% Series A Cumulative Preferred Stock.  The preferred stock is perpetual, non-callable for five years, and was issued at $25 per share.

 

-	During December 2017, the Company completed two rights offerings for two of its closed-end funds, The Gabelli Equity Trust Inc. and The Gabelli Global Small and Mid Cap Value Trust, which raised a combined $203 million.  Both offerings were heavily oversubscribed.

-

We will be launching our third exchange traded managed fund, the Gabelli RBITM NextSharesTM Trust (the “Fund”).  The Fund will invest primarily in equity securities, such as common stock of domestic and foreign services and equipment companies focused on physical asset development, including roads, bridges, and infrastructure (“RBI”).

 

 

About GAMCO Investors, Inc.

GAMCO Investors, Inc., through its subsidiaries, manages open-end funds and closed-end funds (Gabelli Funds, LLC) and private advisory accounts (GAMCO Asset Management Inc.).

		December 31,				December 31,
		2017				2016
Equities:
Open-end Funds		$	13,747			$	13,462
Closed-end Funds			8,053				7,150
Institutional & PWM - direct (a)			13,420				13,441
Institutional & PWM - sub-advisory			5,432				3,783
SICAV			510				320		(b)
Total Equities			41,162				38,156
Fixed Income:
Money-Market Fund			1,870				1,767
Institutional & PWM			31				31
Total Fixed Income			1,901				1,798
Total Assets Under Management		$	43,063			$	39,954
(a) Includes $261 million and $290 million of Money Market Fund AUM at
December 31, 2017 and December 31, 2016, respectively.
(b) Adjusted to include $270 million of Merger Arbitrage assets.

The Company reported Assets Under Management as follows (in millions):
Table I: Fund Flows - 4th Quarter 2017
														Fund
						Market								distributions,
		September 30,				appreciation/				Net cash				net of				December 31,
		2017				(depreciation)				flows				reinvestments				2017
Equities:
Open-end Funds		$	13,762			$	278			$	(255	)		$	(38	)		$	13,747
Closed-end Funds			7,668				282				230				(127	)			8,053
Institutional & PWM - direct			13,893				523				(996	)			-				13,420
Institutional & PWM - sub-advisory			5,346				139				(53	)			-				5,432
SICAV (a)			504				12				(6	)			-				510
Total Equities			41,173				1,234				(1,080	)			(165	)			41,162
Fixed Income:
Money-Market Fund			1,890				5				(25	)			-				1,870
Institutional & PWM			26				-				5				-				31
Total Fixed Income			1,916				5				(20	)			-				1,901
Total Assets Under Management		$	43,089			$	1,239			$	(1,100	)		$	(165	)		$	43,063

Table II: Fund Flows - Full Year 2017
															Fund
						Market									distributions,
		December 31,				appreciation/				Net cash					net of				December 31,
		2016				(depreciation)				flows					reinvestments				2017
Equities:
Open-end Funds		$	13,462			$	1,632			$	(1,264	)			$	(83	)		$	13,747
Closed-end Funds			7,150				994				392					(483	)			8,053
Institutional & PWM - direct			13,441				2,046				(2,067	)				-				13,420
Institutional & PWM - sub-advisory			3,783				661				988		(b)			-				5,432
SICAV (a)			320				41				149					-				510
Total Equities			38,156				5,374				(1,802	)				(566	)			41,162
Fixed Income:
Money-Market Fund			1,767				14				89					-				1,870
Institutional & PWM			31				-				-					-				31
Total Fixed Income			1,798				14				89					-				1,901
Total Assets Under Management		$	39,954			$	5,388			$	(1,713	)			$	(566	)		$	43,063
(a) Adjusted to include $270 million of Merger Arbitrage assets at December 31, 2016.
(b) Includes $1.2 billion from being approved as the sub-advisor on two sub-advisory entities as of February 27, 2017.

Table III
GAMCO INVESTORS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
		For the Quarter Ended
		December 31,
		2017				2016
Investment advisory and incentive fees		$	87,763			$	88,865
Distribution fees and other income			10,903				11,085
Total revenues			98,666				99,950
Compensation costs			36,536				24,442
Distribution costs			11,074				11,403
Other operating expenses			7,321				8,932
Total expenses			54,931				44,777
Operating income before management fee			43,735				55,173
Investment income			833				1,483
Loss on extinguishment of debt			(3,300	)			-
Interest expense			(1,891	)			(2,945	)
Shareholder-designated contribution			(280	)			-
Other expense, net			(4,638	)			(1,462	)
Income before management fee and income taxes			39,097				53,711
Management fee expense			4,211				3,142
Income before income taxes			34,886				50,569
Income tax expense			21,391				17,877
Net income attributable to GAMCO Investors, Inc.		$	13,495			$	32,692
Net income per share attributable to GAMCO Investors, Inc.:
Basic		$	0.46			$	1.12
Diluted		$	0.46			$	1.07
Weighted average shares outstanding:
Basic			29,103				29,062
Diluted			30,336				31,241
Actual shares outstanding (a)			28,974				29,463
Notes:
(a) Includes 19,400 and 424,340 of RSAs, respectively.
See GAAP to non-GAAP reconciliation on page 9.

Table IV
GAMCO INVESTORS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
		For the Year Ended
		December 31,
		2017				2016
Investment advisory and incentive fees		$	316,705			$	308,459
Distribution fees and other income			43,819				44,541
Total revenues			360,524				353,000
Compensation costs			134,170				86,572
Distribution costs			44,447				44,189
Other operating expenses			23,221				23,925
Total expenses			201,838				154,686
Operating income before management fee			158,686				198,314
Investment income			5,465				3,105
Loss on extinguishment of debt			(3,300	)			-
Interest expense			(10,160	)			(12,674	)
Shareholder-designated contribution			(4,137	)			-
Other expense, net			(12,132	)			(9,569	)
Income before management fee and income taxes			146,554				188,745
Management fee expense			13,666				6,518
Income before income taxes			132,888				182,227
Income tax expense			55,079				65,106
Net income attributable to GAMCO Investors, Inc.		$	77,809			$	117,121
Net income per share attributable to GAMCO Investors, Inc.:
Basic		$	2.68			$	4.01
Diluted		$	2.60			$	3.92
Weighted average shares outstanding:
Basic			28,980				29,182
Diluted			30,947				30,170
Actual shares outstanding (a)			28,974				29,463
Notes:
(a) Includes 19,400 and 424,340 of RSAs, respectively.
See GAAP to non-GAAP reconciliation on page 9.

Non-GAAP information and reconciliation:

The following tables reconcile adjusted income before taxes, adjusted effective tax rate, adjusted net income and adjusted net income per share to their closest GAAP equivalent:

		For the three months ended December 31, 2017
		Reported				Fourth Quarter				First Half								RSA
		GAAP				2017 DCCA				2017 DCCA				2016 DCCA				Acceleration				Other				Adjusted
Total revenues		$	98,666			$	-			$	-			$	-			$	-			$	-			$	98,666
Compensation costs			36,536				10,318				(4,771	)			(3,148	)			(1,331	)			-				37,604
Distribution costs			11,074				-				-				-				-								11,074
Other operating expenses			7,321				-				-				-				-				-				7,321
Total expenses			54,931				10,318				(4,771	)			(3,148	)			(1,331	)			-				55,999
Operating income before management fee			43,735				(10,318	)			4,771				3,148				1,331				-				42,667
Other expense, net			(4,638	)			-				-				-				-				3,300				(1,338	)
Income before management fee and income taxes			39,097				(10,318	)			4,771				3,148				1,331				3,300				41,329
Management fee expense			4,211				1,064				(891	)			(715	)			133				330				4,132
Income before income taxes			34,886				(11,382	)			5,662				3,863				1,198				2,970				37,197
Income tax expense			21,391				(4,325	)			2,152				1,468				455				(7,091	)			14,050
Net income attributable to GAMCO Investors, Inc.		$	13,495			$	(7,057	)		$	3,510			$	2,395			$	743			$	10,061			$	23,147
Net income per share attributable to GAMCO Investors, Inc.:
Basic		$	0.46			$	(0.24	)		$	0.12			$	0.08			$	0.03			$	0.35			$	0.80
Diluted		$	0.46			$	(0.23	)		$	0.12			$	0.08			$	0.02			$	0.33			$	0.78