GAMCO Investors, Inc. Reports Third Quarter Results

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GAMCO Investors, Inc. Reports Third Quarter Results

Record Level AUM at $37 billion

Earnings higher at $0.72 per fully diluted share versus $0.29 per fully diluted share


RYE, N.Y.--(BUSINESS WIRE)-- GAMCO Investors, Inc. (GAMCO) (NYS: GBL) announced third quarter 2012 earnings of $19.0 million or $0.72 per fully diluted share versus $7.7 million or $0.29 per fully diluted share in the third quarter 2011. Third quarter 2012 earnings include a charge of $2.1 million or $0.08 per diluted share, (net of management fee and tax benefit), for the Dutch Auction of the 0% coupon notes (extinguishment of debt).

Revenues in the third quarter of 2012 were $82.2 million, including incentive fees of $0.8 million, up $2.0 million, or 2.6%, from $80.2 million, including $1.0 million in incentive fees, in the prior year quarter. Operating income before management fee was $32.1 million, a 0.1% increase from the $32.0 million in the prior year period as operating margin before management fee fell slightly to 39.0% from 40.0%.

For the nine months ended September 30, 2012, earnings were $57.9 million or $2.19 per fully diluted share versus $46.0 million or $1.72 per fully diluted share in 2011. The first nine months of 2011 had $5.6 million, or $0.12 per diluted share, of one-time costs directly related to the launch of a new closed-end fund.

 
Financial Highlights     Third Quarter   Year-to-date
($'s in 000's except AUM and per share data)2012 2011  

% ∆

2012  2011  

% ∆

 
AUM (in millions)$36,945$31,34217.9%$36,945$31,34217.9%
Revenues82,23180,1512.6245,004242,1371.2
Operating income:
before management fee32,06832,0480.196,24690,0446.9
after management fee29,01230,661(5.4)86,39181,9185.5
Operating margin:
before management fee39.0%40.0%39.3%37.2%
after management fee35.3%38.3%35.3%33.8%
Extinguishment of debt(6,305)-n/m(6,307)-n/m
Other income/(expense), net(1,446)(a)(18,747)n/m2,446(8,811)n/m
Net income attributable to GAMCO19,0047,699146.857,94545,98926.0
Net income attributable to GAMCO per share$0.72$0.29148.3%$2.19$1.7227.3%
Shares outstanding at September 30      26,606    26,773        26,606    26,773    
(a) After charge of $6,305 relating to extinguishment of debt.
 

Shareholders' book value was $440.0 million or $16.54 per share at September 30, 2012. We ended the quarter with cash and investments of approximately $690.9 million and $216.1 million ($220.8 million face value) of debt.

Assets under Management

AUM at September 30, 2012 were a record $36.9 billion, an increase of 17.9% from AUM of $31.3 billion at September 30, 2011 and 3.6% above the June 30, 2012 AUM of $35.7 billion. During the third quarter of 2012, we had net outflows of $356 million versus net inflows of $111 million in the second quarter of 2012 and $899 million of inflows in the third quarter of 2011. Highlights are as follows:

  • Our open-end equity funds' AUM were $12.8 billion on September 30, 2012, 11.2% above the $11.5 billion on September 30, 2011 and 2.1% higher than the $12.5 billion on June 30, 2012. Net outflows for our open-end equity funds were $366 million during the third quarter of 2012 versus net outflows of $194 million for the second quarter of 2012 and net inflows of $347 million during the third quarter of 2011.
  • Our closed-end funds had AUM of $6.4 billion on September 30, 2012, 18.9% higher than the $5.4 billion on September 30, 2011 and 8.6% higher than the $5.9 billion on June 30, 2012. In the third quarter of 2012, net additions to AUM from at-the-market offerings and preferred share offerings were $260 million. Distributions from all closed-end funds, net of reinvestments, reduced AUM by $114 million.
  • Our institutional and private wealth management business ended the quarter with a record $15.2 billion in AUM, rising 26.7% from $12.0 billion on September 30, 2011 and 4.8% above the June 30, 2012 level of $14.5 billion. Net flows, encompassing new and closed accounts as well as additional investments or withdrawals, totaled $101 million of outflows in the third quarter of 2012.
  • Our investment partnerships' AUM increased to $785 million on September 30, 2012 from $627 million on September 30, 2011 and $781 million on June 30, 2012. Net cash outflows in the third quarter of 2012 were $2 million.
  • The GAMCO International SICAV, our Luxembourg based UCITS fund which has two sub-funds, the GAMCO Strategic Value and the GAMCO Merger Arbitrage, totaled $121 million in AUM at September 30, 2012 as compared to $126 million at June 30, 2012.
  • AUM in The Gabelli U.S. Treasury Money Market Fund ("GUSTO"), our 100% U.S. Treasury money market fund, were $1.8 billion at September 30, 2012 as compared to the $1.9 billion at both September 30, 2011 and June 30, 2012.
  • In addition to management fees, we earn incentive fees for certain institutional client assets, assets attributable to certain preferred issues for our closed-end funds, our GDL Fund (NYS: GDL) and investment partnership assets. As of September 30, 2012, assets with incentive based fees were $3.9 billion, 14.7% higher than the $3.4 billion on September 30, 2011 and unchanged from the $3.9 billion on June 30, 2012. 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.

For the Third quarter

Revenues

Investment advisory and incentive fees for the third quarter ended September 30, 2012 were $67.8 million, an increase of 3.9% from the $65.2 million reported in the 2011 period:

  • Open-end fund revenues were $31.2 million versus $30.4 million in the third quarter 2011, an increase of 2.6%. Average AUM for open-end equity funds rose 2.5% from the prior year quarter and average AUM for all open-end funds were 2.9% higher at $14.4 billion in the 2012 quarter versus $14.0 billion in the prior year quarter.
  • Our closed-end fund revenues increased 9.2% to $13.1 million from $12.0 million in the third quarter 2011. Average closed-end fund AUM, excluding certain closed-end fund preferred share assets that generate annual performance based fees, increased 3.9% from the prior year quarter. During the third quarter of 2012, results benefitted from $0.5 million in incentive fees from a partial redemption of certain preferred issues which are realized if the cost of capital is met. There were no such fees earned during the 2011 quarter.
  • Institutional and private wealth management account revenues, excluding incentive fees, which are generally based upon beginning of quarter AUM, increased 3.8% to $21.6 million in the third quarter 2012 from $20.8 million in third quarter 2011. During the third quarter 2012, we earned $0.3 million in incentive fees, a decrease of $0.7 million from the $1.0 million recognized in the third quarter 2011.
  • Investment partnership gross fee income for the third quarter 2012 was $1.6 million, an increase of 45.5% from $1.1 million in the third quarter 2011.

Revenues from the distribution of our open-end funds and other income were $11.1 million for the third quarter 2012, a decrease of $0.4 million or 3.0% from the prior year quarter of $11.5 million, which was largely the result of lower levels of sales of load shares of mutual funds.

Our institutional research services generated revenues of $3.3 million in the third quarter 2012 and were largely unchanged from the $3.4 million in the prior year period.

Operating Income and Margin

Operating income, which is net of management fee expense, was $29.0 million in the 2012 third quarter versus $30.7 million in the prior year period, a decline of $1.7 million, or 5.5%. The year over year decrease in operating income results from higher management fee expense primarily the result of the $17.3 million increase in other income (expense), net. Operating income before management fee was $32.1 million in the third quarter 2012, versus $32.0 million in the third quarter 2011. For the third quarter 2012, the operating margin before management fee was 39.0% versus 40.0% in the third quarter of 2011. After management fee the operating margin was 35.3% in the 2012 third quarter versus 38.3% in the prior year period. Management believes evaluating operating income before management fee is an important measure in analyzing the Company's operating results. Further information regarding Non-GAAP measures is included in Notes on Non-GAAP Financial Measures and Table VII included elsewhere herein.

Other Income / (Expense)

Other income/(expense), net, was ($0.03) per diluted share, a $0.33 per diluted share positive improvement from the ($0.36) per diluted share, net of management fee and tax benefit in the third quarter of 2011. This year's results include a charge of $6.3 million related to purchases of $64.6 million (face value) of the Company's 0% Subordinated Debentures due 2015 ("Subordinated Debentures"). Additionally, mark to market gains, largely unrealized, from proprietary investments in our mutual funds, in our alternative products and proprietary accounts, were $8.4 million versus mark to market losses of $14.3 million in the 2011 third quarter. Interest expense was $3.6 million in the 2012 third quarter, $0.8 million lower than the prior year quarter following the debt repurchase.

Income Taxes

The effective tax rate for the quarter ended September 30, 2012 was 30.7% compared to the 2011 quarter effective tax rate of 39.8% and full year 2011 effective tax rate of 36.9%. The third quarter 2012 rate included a benefit of 5.1% resulting from the difference between the tax and book basis of Subordinated Debentures repurchased, including the tender offer completed in July 2012. In addition, the third quarter 2011 rate was affected by the change in the mix of operating income and investment losses which increased the effective state tax rate for the period.

For the Nine months

Revenues

Investment advisory and incentive fees for the nine months ended September 30, 2012 were $202.8 million, an increase of 2.7% from the $197.4 million reported in the 2011 period:

  • Open-end fund revenues were $93.3 million versus $89.6 million in the first nine months of 2011, an increase of 4.1%. Average AUM for open-end equity funds rose 3.7% from the prior year nine months. Average AUM for all open-end funds were 5.1% higher at $14.5 billion in the 2012 period versus $13.8 billion in the prior year nine months.
  • Our closed-end fund revenues increased 2.2% to $37.2 million from $36.4 million in the nine months ended September 30, 2011.
  • The institutional and private wealth management business generated revenues, excluding incentive fees, of $64.1 million, up 3.4%, in the first nine months of 2012 from the $62.0 million realized in the first nine months of 2011. We realized $3.9 million in incentive fees during this period versus $6.6 million in the prior year period.
  • Investment partnership revenues for the nine months ended September 30, 2012 were $4.3 million, an increase of 48.3% from $2.9 million in the prior year period.

Reflecting higher average AUM in our open-end funds, revenues from the distribution of our open-end funds and other income were $33.8 million for the nine months ended September 30, 2012, an increase of $0.4 million or 1.0% from the prior year period of $33.4 million.

Our institutional research services generated revenues of $8.5 million in the first nine months of 2012, versus $11.3 million in the prior year period.

Operating Income and Margin

Operating income, net of management fee expense, increased $4.5 million, or 5.5%, to $86.4 million for the first nine months of 2012 versus $81.9 million in the prior year period. The year over year increase in operating income primarily results from $5.6 million, or $0.12 per diluted share, of one-time costs directly related to the launch of a new closed-end fund during the first nine months of 2011 as well as lower non-compensation operating expenses. Operating margin was 35.3% in the first nine months of 2012 versus 33.8% in the prior year period (35.9% excluding one-time costs). Operating income before management fee was $96.2 million in the nine months ended September 30, 2012, versus $90.0 million in 2011. Operating margin before management fee was 39.3% in the 2012 period versus 37.2% in the 2011 period (39.5% excluding one-time costs). Management believes evaluating operating income before management fee is an important measure in analyzing the Company's operating results. Further information regarding Non-GAAP measures is included in Notes on Non-GAAP Financial Measures and Table VII included elsewhere herein.

Other Income / (Expense)

Other income/(expense), net, was $2.4 million or $0.05 per diluted share net of management fee and tax expense in the first nine months of 2012 versus an expense of $8.8 million or $0.21 per diluted share, net of management fee and tax benefit in the first nine months of 2011. Included in the 2012 results are $6.3 million in charges related to total purchases of $64.6 million (face value) of the Subordinated Debentures. Interest expense was $12.4 million in the 2012 period, $1.7 million higher than the prior year period due to an increase in average debt outstanding of $40.8 million, due to the issuance of $100 million of 5.875% Senior Debentures due 2021 in May 2011 and less the purchase of approximately $64.6 million (face value) of Subordinated Debentures during the third quarter of 2012.

Income Taxes

The effective tax rate for the nine months ended September 30, 2012 was 34.8% compared to the nine months ended September 30, 2011 and full year 2011 effective tax rate of 36.9%. The 2012 nine month rate included a benefit of 1.6% resulting from the difference between the tax and book basis of Subordinated Debentures repurchased, including the tender offer completed in July 2012.

Business and Investment Highlights

  • On July 9, 2012, GAMCO concluded the tender offer (the "Offer") to purchase the entire principal amount ("face value") of its Subordinated Debentures, purchasing $64.1 million of the $86.3 million face value outstanding at $870 per $1,000 principal amount, for a total outlay of $55.8 million.
  • During July 2012, the Gabelli Equity Trust Inc. (NYS: GAB) completed a rights offering in which the fund issued 2,816,524 shares of Series G Cumulative Preferred Stock totaling $70,413,100. In the offering, the fund's existing 6.20% Series F Cumulative Preferred Stock shareholders received one transferrable right (the "Right") for each share of Series F Preferred held on the record date. Holders of the Right were entitled to purchase one share of Series G Preferred by submitting one Right plus $25.00, which could be satisfied by surrendering Series F Preferred stock, cash or a combination. 702,193 shares of Series F Preferred shares, or approximately $17.6 million, were surrendered by subscribing shareholders to acquire Series G Preferred.
  • In September 2012, the Gabelli Equity Trust Inc. completed an offering of 4.2 million of 5.0% Series H Cumulative Preferred Stock valued at $105 million. The Series H Preferred is a perpetual preferred rated "AAA" by Standard & Poor's Rating Services and is non-callable for five years.
  • Institutional Investor Magazine's July/August issue lists GAMCO as #117 in its America's Top 300 Money Managers ranking for AUM as of December 31, 2011.
  • On August 29, 2012, Gabelli Securities, Inc. announced the addition of Daniel R. Lee to its board of directors. Mr. Lee has served in a number of senior executive positions over the course of his long and distinguished career. He is currently Chairman and Chief Executive Officer of Creative Casinos, LLC, a casino developer and operator of gaming casinos.
  • Daniel M. Miller was elected Chairman of Gabelli & Company, Inc. where he will assist the incoming president in building the institutional sales and research business. Mr. Miller led a major growth initiative that included significant enhancements to the professional staff who contribute the highly regarded research team which has ranked near the top of the Wall Street Journal's "Best of the Street" survey in each of the past three years.
  • Effective October 1, 2012, Jeffrey J. Jonas, CFA was named to the investment team of The Gabelli Asset Fund. Mr. Jonas joins portfolio manager Mario J. Gabelli, manager of the fund since its inception on March 3, 1986, and associate portfolio managers, Kevin V. Dreyer, and Christopher J. Marangi as it continues to expand its investment team.
  • In September, Gabelli & Company, Inc., our Institutional Research services subsidiary, held its 18th Annual Aircraft Supplier Conference featuring management presentations from several leading aerospace and defense companies, with an emphasis on industry dynamics, new technologies, and company fundamentals.
  • During October Gabelli & Company, Inc. will host its 36th Annual Automotive Aftermarket Symposium in Las Vegas, Nevada. The two day conference will showcase a full spectrum of leading automotive companies, including aftermarket parts retailers, original equipment and aftermarket parts suppliers, publicly traded dealership groups, and medium and heavy duty truck manufacturers. Available on the "In the News" and "On the Air" segments of our website are recent interviews with Portfolio Managers including Mario Gabelli, Barbara Marcin, Howard Ward and Caesar Bryan among others as they address world markets, industries and specific stocks. Complete articles and interviews are on the Gabelli website at www.gabelli.com/inthenews.html.

Other Financial Highlights

Statement of Financial Condition

We ended the quarter with approximately $690.9 million in cash and investments versus $735.8 million at June 30, 2012 and $704.3 million at September 30, 2011. This included approximately $98.1 million in available for sale securities at September 30, 2012 of which $64.2 million was in our sponsored registered investment companies.

With the renewal of our universal shelf registration in May 2012, we continue to have the flexibility of issuing any combination of senior and subordinated debt securities, convertible debt securities and common and preferred securities of up to a total amount of $400 million.

Shareholders' book value was $440.0 million or $16.54 per share on September 30, 2012 compared to $404.0 million or $15.10 per share on December 31, 2011 and $404.0 million or $15.09 per share on September 30, 2011.

Shareholder Compensation

Dividends

On August 7, 2012 GAMCO's Board of Directors approved a 25% increase to our quarterly dividend to $0.05 per share from $0.04 per share in addition to a special dividend of $0.25 per share to all of its Class A and Class B shareholders.

During 2012, we paid $16.8 million, or $0.63 per share, in dividends, and since our IPO, we have paid cumulative dividends of $360.8 million, or $14.05 per share.

Share Repurchase

Through September 30, 2012, we repurchased 275,528 shares at an average price of $44.94 per share for an investment of $12.4 million. Since our IPO, we have repurchased a total of 7.6 million shares at an average price of $40.78 per share for an investment of $310.7 million. There currently remain 297,839 shares available to be repurchased under our existing buyback plan.

Since our NYSE IPO of six million shares of GBL at a price of $17.50 per share in 1999, we have returned $672 million to our shareholders through dividends and stock repurchases.

Fully diluted shares outstanding for the third quarter 2012 were 26.4 million, 0.5% lower than 26.6 million in the third quarter 2011. Diluted shares outstanding were lower in the third quarter 2012 due to shares purchased under our Stock Repurchase Program.

At September 30, 2012, we had 371,500 RSAs outstanding.

NOTES ON NON-GAAP FINANCIAL MEASURES

A. Stockholders' book value per share:

(in millions, except per share data)     9/30/2012   12/31/2011   9/30/2011
Stockholders' book value$440.01$403.97$404.00
Shares outstanding 26.61 26.75 26.77
Stockholders' book value per share$16.54$15.10$15.09
 
B.  Operating income before management fee expense is used by management to evaluate its business operations. We believe this measure is useful in illustrating the operating results of GAMCO Investors, Inc. (the "Company") as management fee expense is based on pre-tax income before management fee expense, which includes non-operating items including investment gains and losses from the Company's proprietary investment portfolio and interest expense. The reconciliation of operating income before management fee expense to operating income is provided in Table VII.
 
C.Operating income before management fee expense per share and other income, net per share are used by management for purposes of evaluating its business operations. We believe this measure is useful in comparing the operating and non-operating results of the Company for the purposes of understanding the composition of net income per fully diluted share. The reconciliation of operating income before management fee expense per share and other income, net per share to net income per fully diluted share, is provided below.
 
 
     3rd Quarter   YTD September
2012   20112012   2011
Operating income before management fee$32,068$32,048$96,246$90,044
Management fee expense(3,201)(3,262)(9,610)(9,007)
Tax expense(8,867)(11,465)(30,143)(29,904)
Noncontrolling interest (expense)/income (189) 125  242  577 
Operating income (after management fee and taxes) 19,811  17,446  56,735  51,710 
Per fully diluted share$0.75 $0.65 $2.14 $1.93 
 
Other income, net$(1,446)$(18,747)$2,446$(8,811)
Management fee expense1451,875(245)881
Tax expense4006,720(766)2,926
Noncontrolling interest expense 94  405  (225) (717)
Other income, net (after management fee and taxes)$(807)$(9,747)$1,210 $(5,721)
Per fully diluted share$(0.03)$(0.36)$0.05 $(0.21)
 
Net income per fully diluted share$0.72 $0.29 $2.19 $1.72 
Diluted weighted average shares outstanding  Read Full Story

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