GAMCO INVESTORS, INC. ET AL - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

 

 

WASHINGTON, D.C. 20549

 

For the quarterly period ended March 31, 2021

 

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 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 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 three months ended March 31, 2021 and 2020, the Company accrued dividends on restricted stock awards of $20 and $18, respectively.

See notes to condensed consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

		Three Months Ended March 31,
		2021				2020
Investment advisory and incentive fees:
Mutual Funds		$	23,472			$	23,556
Closed-end Funds			18,082				16,420
Sub-advisory accounts			616				732
Institutional & PWM			17,599				20,005
SICAV			1,316				1,465
Performance-based			385				95
Distribution fees and other income			6,458				7,294
Total revenues		$	67,928			$	69,567

		March 31, 2021								December 31, 2020
		Cost				Estimated Fair Value				Cost				Estimated Fair Value
Investments in equity securities and funds:
Common stocks		$	38,297			$	19,068			$	41,341			$	19,099
Open-end funds			5,632				5,960				5,757				6,128
Actively managed semi-transparent ETFs			5,000				4,890				-				-
Closed-end Funds			510				512				628				618
Total investments in equity securities and funds		$	49,439			$	30,430			$	47,726			$	25,845

		March 31, 2021
		Amortized Cost				Gross Unrecognized Holding Gains				Gross Unrecognized Holding Losses				Estimated Fair Value
Short-term investments in U.S. Treasury Bills:
U.S. Treasury Bills		$	9,999			$	1			$	-			$	10,000
Total short-term investments in U.S. Treasury Bills		$	9,999			$	1			$	-			$	10,000

		December 31, 2020
		Amortized Cost				Gross Unrecognized Holding Gains				Gross Unrecognized Holding Losses				Estimated Fair Value
Short-term investments in U.S. Treasury Bills:
U.S. Treasury Bills		$	64,988			$	6			$	-			$	64,994
Total short-term investments in U.S. Treasury Bills		$	64,988			$	6			$	-			$	64,994

		March 31, 2021								December 31, 2020
		Cost				Estimated Fair Value				Cost				Estimated Fair Value
Investments in equity securities:
Common stocks		$	-			$	-			$	728			$	799
Total securities sold, not yet purchased		$	-			$	-			$	728			$	799

-	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, mutual 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.

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, 2021
Cash equivalents		$	118,377			$	-			$	-			$	118,377
Investments in securities:
Common stocks			19,068				-				-				19,068
Open-end Funds			5,960				-				-				5,960
Actively managed semi-transparent ETFs			4,890				-				-				4,890
Closed-end Funds			512				-				-				512
Total investments in securities			30,430				-				-				30,430
Total assets at fair value		$	148,807			$	-			$	-			$	148,807

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, 2020
Cash equivalents		$	32,661			$	-			$	-			$	32,661
Investments in securities:
Common stocks			19,099				-				-				19,099
Open-end Funds			6,128				-				-				6,128
Closed-end Funds			618				-				-				618
Total investments in securities			25,845				-				-				25,845
Total assets at fair value		$	58,506			$	-			$	-			$	58,506
Liabilities
Securities sold, not yet purchased:
Trading - Common stocks		$	799			$	-			$	-			$	799
Total securities sold, not yet purchased		$	799			$	-			$	-			$	799

		March 31, 2021								December 31, 2020
		Carrying Value				Fair Value Level 1				Carrying Value				Fair Value Level 1
U.S. Treasury Bills		$	9,999			$	10,000			$	64,988			$	64,994
Total		$	9,999			$	10,000			$	64,988			$	64,994

		March 31, 2021								December 31, 2020
		Carrying Value				Fair Value Level 2				Carrying Value				Fair Value Level 2
5.875% Senior notes		$	24,221			$	24,398			$	24,215			$	24,554
Total		$	24,221			$	24,398			$	24,215			$	24,554

		Three Months Ended March 31,
		2021				2020
Basic:
Net income		$	15,950			$	11,245
Weighted average shares outstanding			26,393				26,687
Basic net income per share		$	0.60			$	0.42
Diluted:
Net income		$	15,950			$	11,245
Weighted average shares outstanding			26,393				26,687
Restricted stock awards			494				83
Total			26,887				26,770
Diluted net income per share		$	0.59			$	0.42

		Three Months Ended
		March 31,
		2021				2020
Finance lease cost - interest expense		$	263			$	269
Finance lease cost - amortization of right-of-use asset			67				67
Operating lease cost			183				75
Sublease income			(15	)			(46	)
Total lease cost		$	498			$	365
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			113				65
Financing cash flows from finance lease			61				51
Total cash paid for amounts included in the measurement of lease liabilities		$	174			$	116
Right-of-use assets obtained in exchange for new operating lease liabilities		$	-			$	-
Weighted average remaining lease term—finance lease (years)			7.8				8.8
Weighted average remaining lease term—operating leases (years)			3.2				2.6
Weighted average discount rate—finance lease			19.1	%			19.1	%
Weighted average discount rate—operating leases			5.0	%			5.0	%

Year ending December 31,		Finance Leases				Operating Leases				Total Leases
2021 (excluding the three months ended March 31, 2021)		$	970			$	673			$	1,643
2022			1,080				638				1,718
2023			1,080				515				1,595
2024			1,080				391				1,471
2025			1,080				330				1,410
Thereafter			3,240				1,653				4,893
Total lease payments		$	8,530			$	4,200			$	12,730
Less imputed interest			(4,197	)			(1,189	)			(5,386	)
Total lease liabilities		$	4,333			$	3,011			$	7,344

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 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.

 

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, 2020 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), 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, 2 actively managed semi-transparent Exchange Traded Funds (“ETFs”), one société d’investissement à capital variable (“SICAV”), and approximately 1,500 institutional and private wealth management (“Institutional and PWM”) investors principally in the United States (U.S.). The Company generally manages assets on a fully discretionary basis and invests in a variety of 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.

GAMCO offers a wide range of solutions for clients across Value and Growth Equity, ESG, Convertibles, sector-focused strategies including Gold and Utilities, Merger Arbitrage, and Fixed Income. In 1977, GAMCO started its well-known All Cap Value strategy, Gabelli Value, and in 1986 entered the mutual fund business.

The investment advisory business is conducted principally through the following subsidiaries: Gabelli Funds, LLC (open-end funds, closed-end funds, and actively managed semi-transparent ETFs) (“Gabelli Funds”) and GAMCO Asset Management Inc. (Institutional and PWM) (“GAMCO Asset”). The distribution of open-end funds and actively managed semi-transparent ETFs are conducted through G.distributors, LLC (“G.distributors”), the Company’s broker-dealer subsidiary.

As of March 31, 2021, we had $33.4 billion of assets under management (“AUM”).

In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China and has since spread quickly to numerous countries, including the U.S. 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 U.S. 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 2020, the unfolding events led to the worst month for stocks since 2008 and the worst first quarter since 1937. In the remainder of 2020 and continuing into the first quarter of 2021, as a result of unprecedented fiscal and monetary stimulus and the fast tracking of potential COVID-19 vaccines, some of which have been approved and have begun to be distributed, 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.

Giving Back to Society – (Y)our “S” in ESG

Based on the February 28, 2021 record date shareholders who qualified for the most recent shareholder designated charitable contribution (“SDCC”) of $0.25 per share, GAMCO contributed $5.4 million in April 2021 to over 60 501(c)(3) institutions. Each eligible shareholder was able to choose whether a contribution of corporate funds based on their ownership interest was to be made, and, if so, to specify the recipient of that contribution. Since the inception of GAMCO’s SDCC program in 2013, shareholders have designated charitable gifts of close to $37 million to more than 280 charitable organizations.

When combined with our other charitable donations, this boosts our total contributions to approximately $62 million since our initial public offering in February 1999.

This charitable program underscores our giving back to society as part of our commitment to managing socially responsible portfolios since 1987, which has evolved to include integrating ESG (environmental, social, and governance) factors.

Actively managed semi-transparent ETFs

On February 1, 2021, we launched our first actively managed semi-transparent ETF, the Love our Planet & People ETF, which trades on the NYSE under the symbol LOPP. This Fund underscores our belief that an investment focus on the environment is essential to the future of the Planet. In an effort to encourage investment, and to acknowledge our appreciation for our private wealth and mutual fund clients, we are offering a loyalty program under which the first $100 million invested in LOPP will incur no fees or expenses for at least one year.

We launched our second ETF on February 16, 2021, the Gabelli Growth Innovators ETF, which trades on the NYSE under the symbol GGRW. This ETF provides an investment opportunity in businesses both enabling and benefitting from digital acceleration.

Assets Under Management

AUM was $33.4 billion as of March 31, 2021, an increase of $5.9 billion, or 21.5%, from the March 31, 2020 AUM of $27.5 billion. Equity AUM was $31.7 billion at March 31, 2021, an increase of $7.2 billion, or 29.4%, from the March 31, 2020 equity AUM of $24.5 billion. The first quarter 2021 activity consisted of $2.5 billion of market appreciation, offset partially by net cash outflows of $1.5 billion, and recurring distributions, net of reinvestments, from the mutual and closed-end funds (the “Funds”) of $0.1 million. Average total AUM was $33.4 billion in the first quarter of 2021 versus $33.6 billion in the first quarter of 2020, a decrease of 0.6%.

With the spread of the Coronavirus pandemic, investors sought havens in Gold, as well as opportunities in Growth, Global Growth, and Convertibles. The increase in firm-wide AUM in these strategies accelerated, with AUM totaling $2.7 billion at March 31, 2021, up 50% from $1.8 billion a year ago.

We earn incentive fees for 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, 2021, assets with incentive based fees were $1.2 billion, 14.3% below the $1.4 billion on March 31, 2020. 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)

(a) Includes $180 million and $263 million of 100% U.S. Treasury Fund AUM at March 31, 2021 and 2020, respectively.

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

Our AUM by style at March 31, 2021 (in millions) was comprised of the following:

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 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 gains / (losses) from investments, net (which includes both realized and unrealized gains and losses from securities), interest and dividend income, and interest expense. The gain / (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.

 

 

Three Months Ended March 31, 2021 Compared To Three Months Ended March 31, 2020

Net income for the first quarter of 2021 was $16.0 million, or $0.59 per fully diluted share, versus $11.2 million, or $0.42 per fully diluted share, in the first quarter of 2020. The quarter-to-quarter comparison was impacted by higher non-operating income, offset by lower revenues and higher compensation.

 

Investment advisory and incentive fees for the first quarter of 2021 were $61.5 million, 1.3% lower than the 2020 comparative figure of $62.3 million due to lower average AUM. Mutual Fund revenues for the first quarter of 2021 decreased by 0.8% to $24.1 million from $24.3 million in the first quarter of 2020. Our closed-end Fund revenues increased 10.4% to $18.1 million in the first quarter 2021 from $16.4 million in the first quarter of 2020. Institutional and PWM account revenues, which are generally based on beginning of quarter AUM, decreased by 12.0% to $17.6 million in the first quarter of 2021 from $20.0 million in the first quarter of 2020. Revenues relating to the SICAV increased $0.1 million to $1.7 million in the first quarter of 2021, from $1.6 million in the first quarter of 2020.

Mutual Fund distribution fees and other income were $6.4 million for the first quarter of 2021, a decrease of $0.8 million or 11.0% from $7.3 million in the first quarter of 2020 primarily due to lower average AUM in equity mutual Funds that generate distribution fees.

 

Compensation costs, which are largely variable, were $30.7 million in the first quarter of 2021, or 4.8% higher than prior year comparative compensation costs of $29.3 million. The quarter over quarter increase was comprised of a $0.9 million decrease in variable compensation expense offset by a $0.2 million increase in stock compensation expense and a $0.7 million increase in fixed compensation. The marking to market of the deferred cash compensation agreement (“DCCA”) reduced costs by $1.4 million in the prior quarter and resulted in an increase in compensation costs year over year.

Management fee expense, which is wholly variable and based on pretax income, increased to $2.5 million in the first quarter of 2021 from $1.7 million in the first quarter of 2020.

Distribution costs were $7.0 million in the first quarter of 2021, a decrease of $0.6 million, or 7.9%, from $7.6 million in the first quarter of 2020.

 

Other operating expenses were $5.3 million in the first quarter of 2021, a decrease of $0.4 million, or 7.0%, from $5.7 million in the first quarter of 2020.

Operating income for the first quarter of 2021 was $22.5 million, a decrease of $2.8 million, or 11.1%, from the $25.3 million in the first quarter of 2020. Operating income, as a percentage of revenues, was 33.1% in the first quarter of 2021 as compared to 36.4% in the first quarter of 2020.

 

Total non-operating income was $0.2 million for the first quarter of 2021 versus a loss of $10.3 million in the first quarter of 2020. Investment gains were $0.7 million in the first quarter of 2021 versus losses of $10.2 million in the first quarter of 2020. Interest and dividend income decreased to $0.2 million in the first quarter of 2021 from $0.5 million in the first quarter of 2020. Interest expense was $0.7 million and $0.6 million in the first quarter of 2021 and 2020, respectively.

 

The effective tax rates (“ETR”) for the three months ended March 31, 2021 and 2020 were 29.6% and 24.9%, respectively. This increase is primarily due to non-deductibility of certain expenses as a result of the 2017 Tax Cuts and Jobs Act.

 

Operating income before management fee 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 is based on pre-tax income before management fee, which includes non-operating items including gains / (losses) 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):

DEFERRED COMPENSATION

The Company deferred, through a DCCA, the cash compensation of the CEO relating to all of 2016 (“2016 DCCA”) to provide the Company with flexibility to pay down debt and enhance our ability to execute lift-outs, make acquisitions, and seed new products. We have made substantial progress toward this objective, having reduced our debt since the November 2015 spin-off of Associated Capital Group, Inc.

The DCCA deferred the CEO’s compensation expense by amortizing it over the DCCA’s respective vesting period. The CEO was not entitled to receive the compensation until the end of the vesting period, so U.S. GAAP specifies that the expense be amortized over the vesting period. The 2016 DCCA was expensed ratably over 4 years. In addition to the ratable vesting, the expense was marked to market at each reporting period as the DCCA expense was indexed to GBL’s stock price.

Notwithstanding its ability to settle this agreement in stock, GAMCO made a cash payment to the CEO on the vesting date. While the agreement did not change the original calculation of the CEO’s compensation, our reporting under U.S. GAAP for his compensation did change due to the ratable vesting and the indexing to the GBL stock price. The original value of the DCCA was based on the compensation earned in the period divided by the volume weighted average price (“VWAP”) of the GBL stock price for the period (“Original VWAP”) to calculate the number of restricted stock units (“RSUs”) granted. Upon vesting, the DCCA was paid out based on the lesser of the VWAP of GBL’s stock price on the vesting date (“Vesting Date VWAP”) and the Original VWAP multiplied by the number of RSUs. The table below shows a summary of the DCCA (in millions, except RSUs and VWAPs):

On January 2, 2020, the 2016 DCCA vested in accordance with the terms of the agreement and a cash payment of $43.7 million was made to the CEO. This payment was reduced by $32.3 million resulting from the DCCA RSUs being indexed to GBL’s stock price and utilizing the lesser of the Vesting Date VWAP ($18.8812) versus the Original VWAP over 2016 ($32.8187).

The following tables show the mark to market and earnings per share (“EPS”) impact of the DCCA by quarter (in thousands, except per share data):

The following table (in thousands, except per share data) shows a reconciliation of our results for the three months ended March 31, 2021 and 2020 between the U.S. GAAP basis and a non-GAAP adjusted basis (“as adjusted”) as if all of the 2016 DCCA was recognized in 2016 without regard to the vesting schedule. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing results with prior period results, and to enable more appropriate comparisons with industry peers. However, non-GAAP financial measures should not be considered a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies.

LIQUIDITY AND CAPITAL RESOURCES

Our principal assets are highly liquid in nature and consist of cash and cash equivalents, U.S. Treasury Bills, short-term investments, and securities held for investment purposes. Cash and cash equivalents are comprised primarily of U.S. Treasury Bills.

 

Summary cash flow data for the first three months of 2021 and 2020 was as follows (in thousands):

 

 

Cash and liquidity requirements have historically been met through cash generated by operating income and our borrowing capacity. We filed a “shelf” registration statement with the Securities and Exchange Commission (“SEC”) that was declared effective in April 2018. The shelf provides us opportunistic flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $500 million. The shelf was available through April 2021.

On January 2, 2020, the 2016 DCCA 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.

As of March 31, 2021, we had cash, cash equivalents, and short-term investments in U.S. Treasury Bills of $128.9 million, an increase of $30.6 million from December 31, 2020, primarily due to the Company’s investing and operating activities, described below. Total debt outstanding at March 31, 2021 was $24.2 million, which consisted of senior notes due June 1, 2021.

 

Net cash provided by operating activities was $36.7 million for the three months ended March 31, 2021, as compared to $10.2 million used in operating activities in the prior year’s comparative period. Cash flows from operating activities primarily consisted of net income adjusted for certain non-cash items and changes in assets and liabilities.

Net cash provided by investing activities in the first three months of 2021 was $51.3 million, relating to net maturities of U.S. Treasuries under “Short-term investments in U.S. Treasury Bills” on the Condensed Consolidated Statements of Financial Condition, as compared to $3.3 million provided by the prior year’s comparative period. As of March 31, 2021, we had total investments of $40.4 million, including $10.0 million of short-term U.S. Treasury bills with maturities in May 2021, a decrease in total investments of $50.4 million from the prior year-end balance of $90.8 million.

Net cash used in financing activities in the first three months of 2021 was $2.4 million, including $1.8 million paid for the purchase of treasury stock, $0.5 million paid in dividends, and $0.1 million paid on the principal portion of lease liabilities, as compared to $1.5 million used in the prior year’s comparative period.

Based upon our current level of operations and anticipated growth, we expect that our current cash balances plus anticipated cash flows from operating activities and our borrowing capacity will be sufficient to finance our working capital needs for the foreseeable future. We believe we have no immediate material commitments for capital expenditures.

Under the terms of the lease of our Rye, New York office, we are obligated to make minimum total payments of $8.5 million through December 2028.

We have one broker-dealer subsidiary, G.distributors, which 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, 2021. At March 31, 2021, G.distributors had net capital, as defined, of approximately $1.7 million, exceeding the regulatory requirement by approximately $1.5 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.

Critical Accounting Policies and Estimates

 

The preparation of the 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 disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ significantly from those estimates. See Note 1 in Part II, Item 8, Financial Statements and Supplementary Data, and the Company’s Critical Accounting Policies in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in GAMCO’s 2020 annual report on Form 10-K filed with the SEC on March 4, 2021 for details on Critical Accounting Policies.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

In the normal course of its business, GAMCO is exposed to the risk of loss due to fluctuations in the securities market and general economy. Management is responsible for identifying, assessing, and managing market and other risks. 

Our exposure to pricing risk in equity securities is directly related to our role as a financial intermediary and advisor for AUM in our affiliated Funds and Institutional and PWM accounts, as well as our proprietary investment and trading activities. At March 31, 2021, we had investments in securities of $30.4 million. We may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. The investment in securities is at fair value and may move in line with the equity markets. The investments in securities portfolio changes are recorded as gain / (loss) from investments, net in the Condensed Consolidated Statements of Income included in Part I, Item 1 of this Form 10-Q.

Market Risk

 

Our primary market risk exposure is to changes in equity prices and interest rates. Since approximately 90% of our AUM is equities, our financial results are subject to equity market risk, as revenues from our investment management services are sensitive to stock market dynamics. In addition, returns from our proprietary investment portfolios are exposed to interest rate and equity market risk.

The Company’s Chief Investment Officer oversees the proprietary investment portfolios and allocations of proprietary capital among the various strategies. The Chief Investment Officer and the Company’s Board of Directors review the proprietary investment portfolios throughout the year. Additionally, the Company monitors its proprietary investment portfolios to ensure that they are in compliance with the Company’s guidelines.

Equity Price Risk

 

The Company earns substantially all of its revenue as advisory and incentive fees and distribution fees from affiliated Funds and Institutional and PWM assets. Such fees represent a percentage of AUM, and the majority of these assets are in equity investments. Accordingly, since revenues are proportionate to the value of those investments, a substantial increase or decrease in equity markets overall may have a corresponding effect on the Company’s revenues.

Related to our proprietary investment activities, we had investments in equity securities and Funds of $30.4 million at March 31, 2021, which included investments in common stocks of $19.1 million, investments in open-end funds of $5.9 million, investments in ETFs of $4.9 million, and investments in closed-end Funds of $0.5 million, and at December 31, 2020, we had investments in equity securities and Funds of $25.8 million, which included investments in common stocks of $19.1 million, investments in open-end funds of $6.1 million, and investments in closed-end Funds of $0.6 million. Of the $19.1 million invested in common stocks at March 31, 2021 and December 31, 2020, $7.3 million and $8.1 million, respectively, was related to our investment in Westwood Holdings Group Inc. (NYSE: WHG).

The following table provides a sensitivity analysis for our investments in equity securities and Funds as of March 31, 2021 and December 31, 2020 (in thousands). The sensitivity analysis assumes a 10% increase or decrease in the value of these investments:

Interest Rate Risk

 

Our exposure to interest rate risk results, principally, from our investment of excess cash in a sponsored money market fund that holds U.S. government securities. These investments are primarily short term in nature, and the carrying value of these investments generally approximates fair value. Based on the March 31, 2021 cash and cash equivalents balance of $118.9 million, a 1% increase in interest rates would increase our interest income by $1.2 million annually. Given the current low interest rate environment, an analysis of a 1% decrease is not meaningful.

ITEM 4.  CONTROLS AND PROCEDURES

 

We evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021. Disclosure controls and procedures as defined under the Exchange Act Rule 13a-15(e), are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in SEC rules and regulations. Disclosure controls and procedures include, without limitation, controls and procedures accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Principal Financial Officer (“PFO”), to allow timely decisions regarding required disclosure. Our CEO and PFO participated in this evaluation and concluded that, as of the date of March 31, 2021, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting as defined by Rule 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II:  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

From time to time, the Company may be named in legal actions and proceedings in the normal course of business. 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 consolidated financial statements in Part II, Item 8 of this Form 10-K 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, if material, makes the necessary disclosures. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. There are currently no such matters pending that the Company believes could have a material adverse effect on its consolidated financial condition, operations, or cash flows at March 31, 2021. See also Note 10, Commitments and Contingencies, to the condensed consolidated financial statements in Part I, Item I of this Form 10-Q.

ITEM 1A.  RISK FACTORS

There have been no material changes to the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2020. For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 4, 2021, which is accessible on the SEC’s website at sec.gov and the Company’s website at gabelli.com.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information regarding purchases of Class A Stock made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the three months ended March 31, 2021:

ITEM 5.  OTHER INFORMATION

On May 5, 2021, the Company’s Board of Directors declared a special dividend of $2.00 in principal amount of 2-year interest-bearing subordinated debentures (the “Debentures”) for each share of common stock which is payable on June 15, 2021 to class A and class B shareholders of record on June 1, 2021. The Debentures will bear interest at a rate of 4% per annum in year one and 5% per annum in year two and mature on June 15, 2023. Interest on the Debentures is payable on June 15 and December 15 of each year. The Debentures are puttable at par, in whole or in part, starting on September 15, 2021.

ITEM 6.  EXHIBITS