GAMCO Investors, Inc. Reports Fourth Quarter 2017 Results

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

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

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

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

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

Revenues

• Total revenues for the fourth quarter of 2017 were $98.7 million compared with $100.0 million in the prior year.
• Investment advisory fees, excluding incentive fees, rose to $78.7 million in the fourth quarter of 2017 from $73.6 million in the fourth quarter of 2016 highlighted by revenues from our open-end and closed-end funds of $51.1 million, an increase from $47.5 million in the year-ago quarter. Institutional and Private Wealth Management accounted for $26.2 million of the revenues in 2017 compared to $25.3 million in 2016. SICAV revenues accelerated to $1.4 million in 2017 from $0.7 million in 2016.
• Incentive fees earned were $9.1 million and $15.3 million during the fourth quarter ended December 31, 2017 and December 31, 2016, respectively.
• Distribution fees from our open-end equity funds and other income were $10.9 million for the fourth quarter of 2017 versus $11.1 million in the prior-year quarter.

Operating Income

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

Other expense

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

Income Taxes

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

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

• $10.7 million tax expense related to the revaluation of certain deferred income tax assets;
• $2.5 million non-cash tax benefit related to the revaluation of certain deferred income tax liabilities

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

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

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

Balance Sheet

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

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

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

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

Deferred Compensation

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

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

Returns to Shareholder

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

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

Business Highlights

• On October 26, 2017, the GAMCO Natural Resources, Gold & Income Trust completed its offering of $30 million of 5.2% Series A Cumulative Preferred Stock. The preferred stock is perpetual, non-callable for five years, and was issued at $25 per share.
• During December 2017, the Company completed two rights offerings for two of its closed-end funds, The Gabelli Equity Trust Inc. and The Gabelli Global Small and Mid Cap Value Trust, which raised a combined $203 million. Both offerings were heavily oversubscribed.
• We will be launching our third exchange traded managed fund, the Gabelli RBITM NextSharesTM Trust (the “Fund”). The Fund will invest primarily in equity securities, such as common stock of domestic and foreign services and equipment companies focused on physical asset development, including roads, bridges, and infrastructure (“RBI”).

Subsequent Event

As previously disclosed, on February 1, 2018, our affiliate, Associated Capital Group, Inc. (“AC”), commenced an exchange offer for up to one million shares of its Class A shares. Tendering shareholders will receive 1.35 GAMCO Class A shares that AC holds in exchange for each share of AC tendered. The exchange offer is scheduled to expire at 5:00 p.m., New York City time, on March 5, 2018, unless earlier extended or terminated. This AC exchange offer has no impact on the number of issued and outstanding GAMCO shares.

About GAMCO Investors, Inc.

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

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

Non-GAAP information and reconciliation:

GAMCO’s non-GAAP measures include adjusted income before taxes, adjusted effective tax rate, adjusted net income and adjusted net income per fully diluted share. GAMCO’s calculation of these non-GAAP measures may not be comparable to similarly titled measures of other companies due to potential differences between companies in the method of calculation. As a result, the use of these non-GAAP measures has limitations and should not be considered superior to, in isolation from, or a substitute for, related U.S. GAAP measures.

These non-GAAP measures allow management and investors to view operating trends, perform analytical comparisons and benchmark performance between periods to understand operating performance without regard to items that we do not consider to be a component of our core operating performance. Management uses these measures in its financial, investment and operational decision-making processes, for internal reporting and as part of its forecasting and budgeting processes. For these reasons we believe these non-GAAP measures are useful for our investors.

Adjusted income before taxes, adjusted effective tax rate, adjusted net income and adjusted net income per fully diluted share can be used by investors to review our results on a consistent basis. Examples of adjustments to these measures include the GAAP impact of the 2016 Deferred Cash Compensation Agreement (“DCCA”), First Half 2017 DCCA, and the Fourth Quarter 2017 DCCA that were put in place to enable the Company to more quickly pay down its debt, the acceleration of outstanding RSAs, charitable contributions, closed-end fund launch expenses, extinguishment of debt, and the recently enacted Tax Cuts and Jobs Act.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

The financial results set forth in this press release are preliminary. Our disclosure and analysis in this press release, which do not present historical information, contain “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements convey 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,” 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, the economy, the effects of the Tax Cuts and Jobs Act, and other conditions, there can be no assurance that our actual results will not differ materially from what we expect or believe. Therefore, you should proceed with caution in relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance.

Forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors, some of which are listed below, that are difficult to predict and could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. Some of the factors that could cause our actual results to differ from our expectations or beliefs include 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 NEO compensation. We also direct your attention to the more specific discussions of these and other risks, uncertainties and other important factors contained in our Form 10-K and other public filings. Other factors that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations whether as a result of new information, future developments or otherwise, except as may be required by law.

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