GAMCO INVESTORS, INC. ET AL - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

For the quarterly period ended September 30, 2019

or

□	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___ to ___

Commission File No. 001-14761

  

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practical date.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

* Items other than those listed above have been omitted because they are not applicable.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

UNAUDITED

(in thousands, except per share data)

See notes to condensed consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED

(in thousands, except per share data)

See notes to condensed consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

(in thousands)

See notes to condensed consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

UNAUDITED

(in thousands, except per share data)

See notes to condensed consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

Supplemental disclosure of non-cash activity:

For the nine months ended September 30, 2019 and September 30, 2018, the Company accrued dividends on restricted stock awards of $27 and $12, respectively.

See notes to condensed consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(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” and “GBL” or similar terms are to GAMCO Investors, Inc., its predecessors and its subsidiaries.

 

GAMCO (New York Stock Exchange (“NYSE”): GBL), a company incorporated under the laws of Delaware, is a widely-recognized provider of investment advisory services to 24 open-end funds, 16 closed-end funds, one société d’investissement à capital variable (“SICAV”) and approximately 1,700 institutional and private wealth management (“Institutional & PWM”) investors principally in the United States.  The Company generally manages assets on a fully discretionary basis and invests in a variety of United States (“U.S.”) and international securities through various investment styles including value, growth, non-market correlated, 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, it has been identified with its research driven approach to equity investing and proprietary Private Market Value (PMV) with a Catalyst™ investment approach.  The investment advisory business is conducted principally through the following subsidiaries: GAMCO Asset Management Inc. (Institutional & PWM) and Gabelli Funds, LLC (open-end and closed-end funds).  The distribution of open-end funds is conducted through G.distributors, LLC (“G.distributors”), the Company’s broker-dealer subsidiary.

1.  Significant Accounting Policies

Basis of Presentation

The unaudited interim condensed consolidated financial statements of GAMCO included herein have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the U.S. for interim financial information and with the instructions to 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 a 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 GAMCO and its subsidiaries.  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, 2018.

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 amounts reported on the interim condensed consolidated financial statements and accompanying notes.  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.  ASU 2016-02 requires a lessee to recognize assets and liabilities arising from most operating leases in the condensed consolidated statement of financial position.  It requires these operating 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 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.  This guidance will be effective for the Company on January 1, 2020 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 condensed consolidated financial statements.

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 condensed 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.  This guidance is effective for the Company on January 1, 2020 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 condensed consolidated financial statements.

2.  Revenue Recognition

The revenue streams in the discussion below include those 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 open-end and closed-end 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 zero 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.

Investment Advisory Fees

Advisory fees for open-end funds, closed-end 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 open-end funds, one non-U.S. closed-end fund, sub-advisory accounts, and the SICAV are computed on a daily basis based on average daily net assets under management (“AUM”).  Fees for U.S. closed-end funds are computed on average weekly net AUM and fees for one 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 private wealth management 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.

Incentive Fees

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.

Two closed-end funds charge incentive fees.  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 measurement period, June 30^th, 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.

A SICAV sub-fund, the GAMCO Merger Arbitrage SICAV, charges a performance fee.  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.

We also 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, 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 Investment Company Act of 1940, as amended, along with sales charges and underwriting fees associated with the sale of the class A shares of open-end funds.  Distribution plan 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 open-end 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 open-end 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.

Revenue Disaggregated

The following table presents our revenue disaggregated by account type (in thousands):

3.  Investment in Securities

Effective with the Company’s adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018, the Company carries all investments in equity securities at fair value through net income (“FVTNI”).  The Company has no securities that qualify for the equity method or for consolidation of the investee for which the Company has elected the practicality exception to fair value measurement.

Investments in securities at September 30, 2019 and December 31, 2018 consisted of the following (in thousands):

There were no securities sold, not yet purchased at September 30, 2019 and December 31, 2018.

Investments in U.S. Treasury bills and notes with maturities of greater than three months at the time of purchase are classified as investments in securities, and those with maturities of three months or less at the time of purchase are classified as cash equivalents.   Securities carried at FVTNI at September 30, 2019 and December 31, 2018 are stated at fair value with any unrealized gains or losses reported in each respective period’s earnings.

4. Fair Value

The Company applies fair value accounting in accordance with the terms of FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”).  All of the instruments within cash and cash equivalents and investments in securities are measured at fair value.  The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with the ASC 820 guidance on fair value measurement. The levels of the fair value hierarchy and their applicability to the Company are described below:

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 September 30, 2019 and December 31, 2018 (in thousands):

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2019

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2018

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.  U.S. Treasury Bills and Notes with maturities of three months or less at the time of purchase are also considered cash equivalents.  Cash equivalents are valued using unadjusted quoted market prices.

Investments in securities are generally valued based on quoted prices from an exchange.  To the extent these securities are actively traded, valuation adjustments are not applied, and they are categorized in Level 1 of the fair value hierarchy.  Securities categorized in Level 2 investments are valued using other observable inputs.  Nonpublic and infrequently traded investments are included in Level 3 of the fair value hierarchy because significant inputs to measure fair value are unobservable.

5. Income Taxes

The effective tax rate (“ETR”) for the three months ended September 30, 2019 and 2018 was 27.1% and 24.6%, respectively. The ETR for the nine months ended September 30, 2019 and 2018 was 25.8% and 24.3%, respectively.  The ETR for the first nine months of 2019 included an accrual of $1.5 million related to an adjustment in an uncertain tax position.  The ETR absent this accrual was 23.9%.

6. Earnings Per Share

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):

7. Debt

AC 4% PIK Note

In connection with the spin-off of Associated Capital Group, Inc. (“AC”) on November 30, 2015, the Company issued a $250 million promissory note (the “AC 4% PIK Note”) payable to AC, which bore interest at 4.0% per annum.  The original principal amount had a maturity date of November 30, 2020.  During the three months and nine months ended September 30, 2018, the Company prepaid $20 million and $50 million, respectively, of principal of the AC 4% PIK Note.  The AC 4% PIK Note was fully repaid on August 28, 2018 without penalty.

5.875% Senior Notes

The Company has not elected the fair value option for its debt, and, therefore, the provisions of ASU 2016-01 (adopted by the Company on January 1, 2018) related to instrument-specific credit risk are not applicable.

8. Stockholders’ Equity

 

Shares outstanding were 27.5 million and 29.0 million on September 30, 2019 and December 31, 2018, 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 one vote per share, while holders of Class B Stock are entitled to ten votes per share, on all matters to be voted on by shareholders in general, and (ii) holders of Class A Stock are not eligible to vote on matters relating exclusively to Class B Stock and vice versa.

Stock Award and Incentive Plan

 

The Company maintains 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.  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.  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”).  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.

On January 5, 2018, the Compensation Committee accelerated the vesting relating to the remaining 19,400 RSAs outstanding at that time. As a result, GBL recorded an incremental $0.2 million of stock-based compensation expense during the first nine months of 2018.

On April 4, 2018, 270,500 RSAs were issued at a grant price of $24.77 per RSA.  On August 7, 2018, 162,450 RSAs were issued at a grant price of $25.16 per RSA.  On September 17, 2018, 5,000 RSAs were issued at a grant price of $25.74 per RSA.  On June 30, 2019, 264,900 RSAs were issued at a grant price of $19.17 per RSA.

As of September 30, 2019 and December 31, 2018, there were 674,450 and 427,650, respectively, of these RSAs outstanding with weighted average grant prices per RSA of $22.67 and $24.93, respectively.  All grants of the RSAs were recommended by the Company’s Chairman and CEO, who did not request or receive any RSAs, and approved by the Compensation Committee.  This expense, net of estimated forfeitures, is recognized over the vesting period for these awards, which is 30% over three years from the date of grant and 70% over five years from the date of grant.  During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates.  Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings on the declaration date.

During the nine months ended September 30, 2018, the Company reduced previously recorded tax benefits relating to RSA expense by $0.1 million on RSAs that vested.  There were no RSAs that vested during the nine months ended September 30, 2019 or the three months ended September 30, 2019 and September 30, 2018.

For the three months ended September 30, 2019 and 2018, the Company recognized stock-based compensation expense of $0.8 million and $0.5 million, respectively.  For the nine months ended September 30, 2019 and 2018, the Company recognized stock-based compensation expense of $2.0 million and $1.0 million, respectively.

The total compensation costs related to non-vested RSAs not yet recognized was approximately $10.5 million as of September 30, 2019.

On July 2, 2018, the deferred cash compensation agreement (“DCCA”) with the CEO covering compensation from the first half of 2017 vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to the CEO.  This payment was after a waiver of $6.0 million by the CEO and a reduction of $2.6 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 ($27.1837) versus the VWAP over the first half of 2017 ($29.6596).  On April 1, 2019, the 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 VWAP on the vesting date ($20.7916) versus the VWAP over the fourth quarter of 2017 ($29.1875).

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 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 September 30, 2019, outside of the private transaction, the Company repurchased 123,743 shares at an average price per share of $19.26.  For the nine months ended September 30, 2019, outside of the private transactions, the Company repurchased 397,499 shares at an average price per share of $19.46.  At September 30, 2019, the total shares available under the Stock Repurchase Program to be repurchased in the future were 397,311.  The Stock Repurchase Program is not subject to an expiration date.

Dividends

During the three months ended September 30, 2019 and 2018, the Company declared dividends of $0.02 per share to shareholders of Class A Stock and Class B Stock.  During the nine months ended September 30, 2019 and 2018, 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 September 30, 2019 and December 31, 2018, there was goodwill of $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 and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.9 million at September 30, 2019 and December 31, 2018.  This investment advisory agreement is next up for renewal in February 2020.  As a result of becoming the advisor to the Bancroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd. and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.6 million at September 30, 2019 and December 31, 2018.  The investment advisory agreements for the Bancroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd. are next up for renewal in August 2020.  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.  There were no indicators of impairment for the three months or nine months ended September 30, 2019 or 2018 and, as such, there was no impairment analysis performed or charge recorded for such 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 any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable.  Furthermore, the Company evaluates whether there exist losses which may be reasonably possible and will, if material, 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 September 30, 2019.

Leases

On December 5, 1997, the Company entered into a fifteen year lease, expiring on April 30, 2014, 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 401 Theodore Fremd Ave, 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 September 30, 2019 and December 31, 2018 was approximately $5.2 million and $5.1 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's leases for the periods presented (in thousands, except lease term and discount rate):

The finance lease right-of-use asset, net of amortization, at September 30, 2019 and December 31, 2018 was $1.9 million and $2.1 million, respectively, and the operating right-of-use assets, net of amortization, were $0.9 million and $0, 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 September 30, 2019 (in thousands):

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 million due over the next five years, which are due from affiliated entities.  Future minimum lease payments have also not been reduced by future sublease payments of approximately $40 thousand per month from 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 months ended September 30, 2019 and 2018, the Company recorded a charge of $4.5 million and $0.7 million, respectively.  For the nine months ended September 30, 2019 and 2018, the Company recorded a charge of $4.5 million and $0.9 million, respectively.

12. Related Party Transactions

On February 23, 2018, the Chief Executive Officer (“CEO”) of the Company elected to irrevocably waive all of his compensation that he would have otherwise been entitled to for the period of March 1, 2018 through December 31, 2018.  On December 26, 2018, the CEO elected to continue to waive all of his compensation that he would otherwise have been entitled to for the period from January 1, 2019 to March 31, 2019.  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.  For the three months ended September 30, 2019 and 2018, the waivers reduced compensation by $3.6 million and $14.4 million, respectively, and management fee expense by $0.6 million and $3.3 million, respectively.  For the nine months ended September 30, 2019 and 2018, the waivers reduced compensation by $15.8 million and $33.5 million, respectively, and management fee expense by $2.3 million and $8.0 million, respectively.

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 September 30, 2019.  At September 30, 2019, G.distributors had net capital, as defined, of approximately $4.1 million, exceeding the regulatory requirement by approximately $3.8 million.  Net capital requirements for our 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.

14. Subsequent Events

From October 1, 2019 to November 8, 2019, the Company repurchased 56,064 shares at $17.27 per share.

On November 8, 2019, the Board of Directors declared its regular quarterly dividend of $0.02 per share to all of the Company’s shareholders, payable on December 31, 2019 to shareholders of record on December 17, 2019.

On November 8, 2019, the Board of Directors increased the authorization under the Stock Repurchase Program by an additional 1,000,000 shares.  As a result, there are 1,341,247 shares available to be repurchased under this existing buyback plan.

ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “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 contain some forward-looking statements.  Forward-looking statements give our current expectations or forecasts of future events.  You can identify these statements because they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “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 could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets that adversely affects our assets under management; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees; unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations; 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 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 are providing these statements as permitted by the Private Litigation Reform Act of 1995.  We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements.

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, 2018 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 York Stock Exchange (“NYSE”): GBL), through the Gabelli brand, well known for its Private Market Value (“PMV”) with a Catalyst^TM investment approach, is a widely-recognized provider of investment advisory services to 24 open-end funds, 16 closed-end funds, one société d’investissement à capital variable (“SICAV”) and approximately 1,700 institutional and private wealth management (“Institutional & PWM”) investors principally in the United States (“U.S.”).  Through G.distributors, LLC (“G.distributors”), our broker-dealer subsidiary, we provide distribution for open-end funds.  We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles including value, growth, non-market correlated, and convertible securities.  Our revenues are based primarily on the Company’s levels of assets under management and fees associated with our various investment products.

 

Our revenues are highly correlated to the level of assets under management (“AUM”) and fees associated with our various investment products, rather than our own corporate assets.  Our total AUM, which is influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, inflows or outflows in open-end funds, the addition of new accounts, or the loss of existing accounts.  Since various equity products have different fees, changes in our business mix may also affect revenues.  At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues.  General stock market trends will have an impact on our level of AUM and hence, on revenues.

We conduct our investment advisory business principally through the following subsidiaries: GAMCO Asset Management Inc. (Institutional and PWM) and Gabelli Funds, LLC (open-end and closed-end funds).  The distribution of our open-end funds is conducted through G.distributors, our broker-dealer subsidiary.

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 approximately $27 million to over 150 501(c)(3) initiatives.  Most recently, the SDCC approved by our Board of Directors in August 2019 will provide an estimated $4.5 million to shareholder designated 501(c)(3) organizations.  This program underscores our commitment to managing socially responsible portfolios since 1987.  More recently, the socially responsible mandates have evolved to include integrating ESG (environmental, social, and governance) factors into the analysis of companies and the structuring of portfolios.

Including the current year’s SDCC, approximately $57 million will have been donated to charities by GAMCO, including through our SDCC program, since our initial public offering (“IPO”) in February 1999.

Assets Under Management

AUM was $35.7 billion as of September 30, 2019, a decrease of $4.9 billion, or 12.1%, from the September 30, 2018 AUM of $40.6 billion.  The third quarter 2019 activity consisted of $247 million of market depreciation, net cash outflows of $837 million and recurring distributions, net of reinvestments, from open-end and closed-end funds of $148 million.  Average total AUM was $36.0 billion in the third quarter of 2019 quarter versus $41.0 billion in the third quarter of 2018, a decrease of 12.2%.

In addition to management fees, we earn incentive fees from certain institutional client assets, certain assets attributable to preferred issues of our closed-end funds, two closed-end funds, and one SICAV.  As of September 30, 2019, AUM with incentive based fees were $1.8 billion, $0.4 billion less than the $2.2 billion of AUM with incentive fees on September 30, 2018. 

Roll-forward of AUM (in millions)

(a) Includes $237 million and $324 million of 100% U.S. Treasury Fund AUM at September 30, 2019 and 2018, respectively.

Roll-forward of AUM (in millions) (continued)

RESULTS OF OPERATIONS