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GBL > SEC Filings for GBL > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for GAMCO INVESTORS, INC. ET AL

Form 10-Q for GAMCO INVESTORS, INC. ET AL


8-Aug-2013

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)

Overview

GAMCO Investors, Inc. ("GAMCO") through the Gabelli brand, well known for its Private Market Value (PMV) with a CatalystTM investment approach, is a widely-recognized provider of investment advisory services to mutual funds, institutional and high net worth investors, and investment partnerships, principally in the United States. Through G.research, Inc. (formerly Gabelli & Company, Inc.) ("G.research"), we provide institutional research and brokerage services to institutional clients and investment partnerships. Through G.distributors, LLC ("G.distributors"), we provide mutual fund distribution. We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles. 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 and fees associated with our various investment products, rather than our own corporate assets. Assets under management, which are directly influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, 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 the greatest impact on our level of assets under management and hence, on revenues.

We conduct our investment advisory business principally through the following subsidiaries: GAMCO Asset Management Inc. (Institutional and High Net Worth), Gabelli Funds, LLC (Mutual Funds) and Gabelli Securities, Inc. (Investment Partnerships). We also act as an underwriter and provide institutional research through G.research, one of our broker-dealer subsidiaries. The distribution of our open-end funds is conducted through G.distributors, our other broker-dealer subsidiary.

Assets under management ("AUM") were $40.5 billion as of June 30, 2013, an increase of 1.0% from AUM of $40.1 billion at March 31, 2013 and an increase of 13.5% from the June 30, 2012 AUM of $35.7 billion. The second quarter 2013 AUM increased $0.4 billion and consisted of market appreciation of $293 million, net cash inflows of $240 million and recurring distributions, net of reinvestments, from open-end and closed-end funds of $145 million. Average total AUM was $40.3 billion in the 2013 quarter versus $35.6 billion in the prior year period, an increase of 13.2%. Average AUM in our open-end equity funds, a key driver to our investment advisory fees, was $14.1 billion in the second quarter of 2013, rising 12.8% from the 2012 quarter average AUM of $12.5 billion.

In addition to management fees, we earn incentive fees for certain institutional client assets, certain assets attributable to preferred issues of our closed-end funds and to our GDL Fund (NYSE: GDL) and investment partnership assets. As of June 30, 2013, assets with incentive based fees were $3.9 billion, 5.4% higher than the $3.7 billion on March 31, 2013 and 2.5% lower than the $4.0 billion on June 30, 2012.


The Company reported Assets Under Management as follows (in millions):

Table I: Fund Flows - 2nd Quarter 2013

                                                                                              Fund
                                                         Market                          distributions,
                                    March 31,         appreciation/       Net cash           net of           June 30,
                                       2013          (depreciation)        flows         reinvestments          2013
Equities:
Open-end Funds                     $     13,813      $           (11 )   $      417     $            (31 )   $   14,188
Closed-end Funds                          6,557                 (128 )           94                 (114 )        6,409
Institutional & PWM - direct             13,690                  358             21                    -         14,069
Institutional & PWM -
sub-advisory                              3,299                   69           (183 )                  -          3,185
Investment Partnerships                     796                    5            (23 )                  -            778
SICAV (a)                                   113                    -            (20 )                  -             93
Total Equities                           38,268                  293            306                 (145 )       38,722
Fixed Income:
Money-Market Fund                         1,758                    -            (69 )                  -          1,689
Institutional & PWM                          64                    -              3                    -             67
Total Fixed Income                        1,822                    -            (66 )                  -          1,756
Total Assets Under Management      $     40,090      $           293     $      240     $           (145 )   $   40,478

The Company reported Assets Under Management as follows (in millions):

Table II: Fund Flows - Six months ended June 30, 2013

                                                                                               Fund
                                                          Market                          distributions,
                                   December 31,        appreciation/       Net cash           net of           June 30,
                                       2012           (depreciation)        flows         reinvestments          2013
Equities:
Open-end Funds                     $      12,502      $         1,129     $      619     $            (62 )   $   14,188
Closed-end Funds                           6,288                  253             96                 (228 )        6,409
Institutional & PWM - direct              12,030                1,843            196                    -         14,069
Institutional & PWM -
sub-advisory                               2,924                  385           (124 )                  -          3,185
Investment Partnerships                      801                   13            (36 )                  -            778
SICAV (a)                                    119                    2            (28 )                  -             93
Total Equities                            34,664                3,625            723                 (290 )       38,722
Fixed Income:
Money-Market Fund                          1,681                    -              8                    -          1,689
Institutional & PWM                           60                    -              7                    -             67
Total Fixed Income                         1,741                    -             15                    -          1,756
Total Assets Under Management      $      36,405      $         3,625     $      738     $           (290 )   $   40,478


Table III: Assets Under Management
                                     June 30,      June 30,           %
                                       2012          2013         Inc.(Dec.)
Equities:
Open-end Funds                       $  12,496     $  14,188             13.5 %
Closed-end Funds                         5,860         6,409              9.4
Institutional & PWM - direct            11,655        14,069             20.7
Institutional & PWM - sub-advisory       2,788         3,185             14.2
Investment Partnerships                    781           778             (0.4 )
SICAV (a)                                  126            93            (26.2 )
Total Equities                          33,706        38,722             14.9
Fixed Income:
Money-Market Fund                        1,893         1,689            (10.8 )
Institutional & PWM                         63            67              6.3
Total Fixed Income                       1,956         1,756            (10.2 )
Total Assets Under Management        $  35,662     $  40,478             13.5 %

Table IV: Assets Under Management by Quarter

                                                                                                                    % Increase/
                                                                                                                  (decrease) from
                             6/12               9/12               12/12              3/13            6/13         6/12        3/13
Equities:
Open-end Funds          $     12,496       $     12,758       $     12,502       $     13,813      $ 14,188         13.5 %       2.7 %
Closed-end Funds               5,860              6,365              6,288              6,557         6,409          9.4        (2.3 )
Institutional & PWM
- direct                      11,655             12,189             12,030             13,690        14,069         20.7         2.8
Institutional & PWM
- sub-advisory                 2,788              2,912              2,924              3,299         3,185         14.2        (3.5 )
Investment
Partnerships                     781                785                801                796           778         (0.4 )      (2.3 )
SICAV (a)                        126                121                119                113            93        (26.2 )     (17.7 )
Total Equities                33,706             35,130             34,664             38,268        38,722         14.9         1.2
Fixed Income:
Money-Market Fund              1,893              1,752              1,681              1,758         1,689        (10.8 )      (3.9 )
Institutional & PWM               63                 63                 60                 64            67          6.3         4.7
Total Fixed Income             1,956              1,815              1,741              1,822         1,756        (10.2 )      (3.6 )
Total Assets Under
Management              $     35,662       $     36,945       $     36,405       $     40,090      $ 40,478         13.5 %       1.0 %

(a) Includes $101 million, $102 million, $104 million, $99 million and $90 million of proprietary seed capital at June 30, 2012, September 30, 2012, December 31, 2012, March 31, 2013 and June 30, 2013, respectively.


The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in Item 1 to this report.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 Compared To Three Months Ended June 30, 2012

(Unaudited; in thousands, except per share data)
                                                                 2013          2012
Revenues
  Investment advisory and incentive fees                       $  77,443     $  67,210
  Distribution fees and other income                              12,522        11,006
  Institutional research services                                  2,325         2,808
Total revenues                                                    92,290        81,024
Expenses
  Compensation                                                    37,759        32,921
  Management fee                                                   4,846         2,615
  Distribution costs                                              11,871        10,012
  Other operating expenses                                         6,030         5,109
Total expenses                                                    60,506        50,657
Operating income                                                  31,784        30,367
Other income (expense)
  Net gain/(loss) from investments                                12,141        (4,171 )
  Interest and dividend income                                     2,507         1,782
  Interest expense                                                (2,796 )      (4,429 )
Total other income (expense), net                                 11,852        (6,818 )
Income before income taxes                                        43,636        23,549
Income tax provision                                              15,724         8,686
Net income                                                        27,912        14,863
Net income/(loss) attributable to noncontrolling interests            19          (242 )
Net income attributable to GAMCO Investors, Inc.'s
shareholders                                                   $  27,893     $  15,105

Net income attributable to GAMCO Investors, Inc.'s
shareholders per share:
Basic                                                          $    1.09     $    0.58
Diluted                                                        $    1.09     $    0.57

Overview

Net income attributable to shareholders of GAMCO for the quarter was $27.9 million or $1.09 per fully diluted share versus $15.1 million or $0.57 per fully diluted share in the prior year's quarter. The quarter to quarter comparison was positively impacted by higher revenues, lower interest expense and higher income from our proprietary investments.

Revenues

Investment advisory and incentive fees for the second quarter 2013 were $77.4 million, 15.2% above the comparable 2012 figure of $67.2 million. Open-end mutual fund revenues increased by 12.7% to $34.5 million from $30.6 million in second quarter 2012 driven by a 12.8% increase in average open-end equity AUM.
Our closed-end fund revenues rose 17.9% to $13.8 million in the second quarter 2013 from $11.7 million in 2012 due to a 17.0% increase in non-performance fee based average AUM. Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $3.1 million, or 13.9%, to $25.4 million from $22.3 million in second quarter 2012. Incentive fees more than doubled to $2.3 million in the 2013 quarter from $1.1 million in the prior year period.
Investment partnership revenues were $1.4 million, a decrease of 6.7% from $1.5 million in second quarter 2012.


Open-end fund distribution fees and other income were $12.5 million for the second quarter 2013, an increase of $1.5 million or 13.6% from $11.0 million in the prior year period, primarily due to higher quarterly average AUM in open-end equity mutual funds that generate distribution fees and increased level of sales of load shares of mutual funds.

Our institutional research revenues were $2.3 million in the second quarter 2013 versus $2.8 million in the prior year period. Although commission revenues were higher in most areas of that business, dealer manager fee revenues from underwriting closed-end fund offerings declined $0.7 million from the prior year period.

Expenses

Compensation costs, which are largely variable, were $37.8 million or 14.9% higher than prior year compensation costs of $32.9 million. The quarter over quarter increase was comprised of variable compensation of $4.8 million related to the increased levels of AUM and $1.0 million in fixed compensation partially offset by a $0.9 million decrease in amortization expense for RSAs issued in prior years.

Management fee expense, which is wholly variable and based on pretax income, increased to $4.8 million in the second quarter of 2013 from $2.6 million in the 2012 period.

Distribution costs were $11.9 million, an increase of $1.9 million or 19.0% from $10.0 million in the prior year's period. This increase in distribution costs was due to an increase in payments to third-party distributors of $2.2 million partially offset by lower amortization of upfront commissions paid to third-party distributors of $0.4 million and a reduction in expense reimbursements to our open-end mutual funds of $0.1 million.

Other operating expenses were $6.0 million in the second quarter of 2013, an increase of $0.9 million, or 17.6%, from $5.1 million in the second quarter of 2012. The quarter to quarter comparison was impacted by increases in client service expenses, costs related to our UCITS fund and charitable contributions as well as lower insurance reimbursements for legal and regulatory costs previously incurred and expensed.

Operating income for the second quarter of 2013 was $31.8 million, an increase of $1.4 million, or 4.6%, from the second quarter 2012's $30.4 million.
Operating income, as a percentage of revenues, was 34.4% in the 2013 quarter as compared to 37.5% in the 2012 quarter.

Other

Total other income, net of interest expense, was $11.9 million for the second quarter 2013 versus an expense of $6.8 million in the prior year's quarter.
Realized and unrealized gains in our trading portfolio were $12.1 million in the 2013 quarter, a turnaround of $16.3 million from the loss of $4.2 million reported in the 2012 quarter. Interest and dividend income increased by $0.7 million. Interest expense decreased by $1.6 million to $2.8 million in the second quarter of 2013 from $4.4 million in second quarter of 2012 due to a decrease in total average debt outstanding. On May 15, 2013, the $99 million of 5.5% Senior notes matured and were repaid. Additionally, during the third quarter of 2012, we reduced our overall debt through the repurchase of $64.1 million (face value) five year zero coupon subordinated debentures due 2015 ("Debentures").

The effective tax rate ("ETR") for the three months ended June 30, 2013 was 36.0% as compared to the prior year period's effective rate of 36.9%. The 2013 ETR declined largely as a result of having a proportionately higher component of pretax income from investment earnings including dividend income.


Six Months Ended June 30, 2013 Compared To Six Months Ended June 30, 2012

(Unaudited; in thousands, except per share data)
                                                                 2013          2012
Revenues
  Investment advisory and incentive fees                       $ 150,050     $ 134,993
  Distribution fees and other income                              23,875        22,629
  Institutional research services                                  4,546         5,151
Total revenues                                                   178,471       162,773
Expenses
  Compensation                                                    73,411        67,475
  Management fee                                                   8,826         6,799
  Distribution costs                                              22,881        20,189
  Other operating expenses                                        10,842        10,931
Total expenses                                                   115,960       105,394
Operating income                                                  62,511        57,379
Other income (expense)
  Net gain from investments                                       24,432         9,707
  Interest and dividend income                                     3,852         3,018
  Interest expense                                                (6,284 )      (8,833 )
  Shareholder-designated contribution                             (5,000 )           -
Total other income, net                                           17,000         3,892
Income before income taxes                                        79,511        61,271
Income tax provision                                              28,919        22,442
Net income                                                        50,592        38,829
Net income/(loss) attributable to noncontrolling interests           154          (112 )
Net income attributable to GAMCO Investors, Inc.'s
shareholders                                                   $  50,438     $  38,941

Net income attributable to GAMCO Investors, Inc.'s
shareholders per share:
Basic                                                          $    1.96     $    1.48
Diluted                                                        $    1.96     $    1.47

Overview

Net income attributable to shareholders of GAMCO for the first six months of 2013 was $50.4 million or $1.96 per fully diluted share versus $38.9 million or $1.47 per fully diluted share in the prior year's first six months. Included in the 2013 results is a $5.0 million charge, or $0.11 per diluted share, net of management fee and tax benefit, for our recently adopted shareholder designated charitable contribution program. The period to period comparison, excluding this charge, was positively impacted by higher revenues, lower interest expense and higher income from our proprietary investments.

Revenues

Investment advisory and incentive fees for the six months ended June 30, 2013 were $150.1 million, 11.2% above the comparable 2012 figure of $135.0 million.
Open-end mutual fund revenues increased by 7.1% to $66.5 million from $62.1 million in first half 2012 driven by a 7.9% increase in average open-end equity AUM. Our closed-end fund revenues rose 14.2% to $27.4 million in the first half of 2013 from $24.0 million in 2012 due to a 13.9% increase in non-performance fee based average AUM. Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $6.0 million, or 14.2%, to $48.5 million from $42.5 million in first half of 2012. During the first half of 2013, we earned $4.7 million in incentive fees, an increase of $1.1 million from $3.6 million earned in the first half of 2012. Investment partnership revenues were $2.9 million, an increase of 7.4% from $2.7 million for the six months ended June 30, 2012 due to an increase in average AUM resulting from net inflows.


Open-end fund distribution fees and other income were $23.9 million for the first six months of 2013, an increase of $1.3 million or 5.8% from $22.6 million in the prior year period, primarily due to higher quarterly average AUM in open-end equity mutual funds that generate distribution fees and an increased level of sales of load shares of mutual funds.

Our institutional research revenues were $4.5 million in the first half of 2013 versus $5.2 million in the prior year period. Revenues were lower despite an increase in commissions from trading activities of $0.3 million due to decreased dealer manager fees from underwriting closed-end fund offerings which totaled $1.0 million.

Expenses

Compensation costs, which are largely variable, were $73.4 million or 8.7% higher than prior year compensation costs of $67.5 million. The period over period increase was comprised of variable compensation of $6.1 million related to the increased levels of AUM and $1.5 million in fixed compensation partially offset by $1.7 million decrease in amortization expense for RSAs issued in prior years.

Management fee expense, which is wholly variable and based on pretax income, increased to $8.8 million for the six months ended June 30, 2013 from $6.8 million in the 2012 period.

Distribution costs were $22.9 million, an increase of $2.7 million or 13.4% from $20.2 million in the prior year's period. This increase in distribution costs was largely due to an increase in payments to third-party distributors of $4.0 million partially offset by lower amortization of upfront commissions paid to third-party distributors of $1.1 million and a reduction in expense reimbursements to our open-end mutual funds of $0.4 million.

Other operating expenses were $10.8 million in the first six months of 2013, a decrease of $0.1 million, or .9%, from $10.9 million in the first half of 2012.
The decrease was principally the result of insurance reimbursements for legal and regulatory fees previously incurred and expensed.

Operating income for the first six months of 2013 was $62.5 million, an increase of $5.1 million, or 8.9%, from the first half 2012's $57.4 million. Operating income, as a percentage of revenues, was 35.0% in the 2013 period as compared to 35.3% in the 2012 period.

Other

Total other income, net of interest expense, was $17.0 million for the first six months of 2013 versus $3.9 million in the prior year's quarter. Realized and unrealized gains in our trading portfolio were $24.4 million in the 2013 period, $14.7 million higher than the $9.7 million reported in the 2012 period.
Interest and dividend income was higher by $0.9 million. Interest expense decreased by $2.5 million to $6.3 million in the first half of 2013 from $8.8 million in first half of 2012 due to a decrease in total average debt outstanding. On May 15, 2013, the $99 million of 5.5% Senior notes matured, and were repaid. Additionally, during the third quarter of 2012, we reduced our overall debt through the repurchase of $64.1 million (face value) five year zero coupon subordinated debentures due 2015 ("Debentures"). The 2013 period includes a $5.0 million charge related to the newly established Shareholder-designated charitable contribution program in which registered shareholders have the opportunity to participate in determining which charities will receive company contributions.

The effective tax rate for the six months ended June 30, 2013 was 36.4% as compared to the prior year period's effective rate of 36.6%.

LIQUIDITY AND CAPITAL RESOURCES

Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments, securities held for investment purposes, investments in mutual funds and investment partnerships. Cash and cash equivalents are comprised primarily of 100% U.S. Treasury money market funds managed by GAMCO. Although investments in partnerships and offshore funds are subject to restrictions on the timing of distributions, the underlying investments of such partnerships or funds are, for the most part, liquid, and the valuations of these products reflect that underlying liquidity.


Summary cash flow data is as follows:

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