U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2012, filed February 6, 2013. The company provides investment management, transfer-agent, distribution and administrative services and invests excess cash for its own account. Its principal revenue source is investment management and related services.
Financial performance and position
| Metric | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Revenue | $5.49 million | $10.47 million |
| Income before taxes | $305,243 | $394,779 |
| Net income | $165,985 | $214,785 |
| Net margin | Approximately 3.0% | Approximately 2.1% |
| Basic and diluted EPS | $0.01 | $0.01 |
| Operating cash flow | Not separately provided for the quarter | $120,505 |
- Six-month revenue consisted primarily of mutual fund advisory fees of $6.41 million, distribution fees of $1.55 million, transfer-agent fees of $1.44 million and administrative-services fees of $511,141. Investment income was $361,638.
- At December 31, 2012, cash and cash equivalents were $18.94 million, investments were approximately $13.6 million, total assets were $39.82 million and shareholders’ equity was $37.52 million.
- Net working capital was approximately $24.9 million and the current ratio was 11.8 to 1. The company had no long-term liabilities and had not drawn on its $1 million credit facility.
- Cash decreased by $1.67 million during the six months, principally because of $2.17 million of dividends paid. Ending cash was $18.94 million versus $27.15 million at December 31, 2011.
- Investments represented approximately 34.2% of total assets. Trading securities had a $395,757 unrealized loss, while available-for-sale securities had a $561,821 unrealized gain before related tax effects.
Material changes versus the prior comparable period
- Quarterly revenue declined $388,339, or 6.6%, while net income declined $243,397, or 59.5%, from the prior-year quarter.
- Six-month revenue declined $3.20 million, or 23.4%, and net income declined $944,115, or 81.5%, from the prior-year period.
- Six-month advisory fees declined $2.39 million, or 27.1%, primarily because of lower management fees associated with market depreciation and shareholder redemptions in natural-resources and emerging-markets funds.
- Distribution, transfer-agent and administrative-services revenue declined by 32.6%, 29.1% and 31.5%, respectively, over the six-month comparison.
- Investment income improved to $361,638 from a $408,607 loss, primarily because of gains on trading securities versus losses in the prior-year period. This improvement partially offset the decline in recurring advisory revenue.
- Six-month expenses decreased $1.77 million, or 15.0%, driven by lower employee compensation, platform fees and advertising. Quarterly general and administrative expense increased 32.3%.
- Assets under management at December 31, 2012 were $1.610 billion, down from $1.890 billion a year earlier and $1.624 billion at June 30, 2012. Six-month average assets under management declined to $1.671 billion from $2.264 billion.
Outlook, commentary, risks and unusual items
- Management stated that liquidity, available financing and expected operating cash flow should be sufficient for foreseeable needs and potential growth opportunities.
- Beginning in January 2013, the monthly dividend was reduced from $0.02 to $0.005 per share. The reduced dividend was authorized through March 2013 and is subject to quarterly board review.
- In December 2012, the board authorized repurchases of up to $2.75 million of common stock over twelve months; the program may be suspended or discontinued.
- The company voluntarily waived or reimbursed $1.70 million of fund fees and expenses during the six months. Recoverable waivers totaled approximately $4.41 million through December 2015, but management expects recovery primarily in a rising-rate environment and warned that future waivers could increase and reduce revenue and net income.
- The company agreed to acquire shares representing 50% of Galileo Global Equity Advisor Inc., subject to regulatory approval and other closing conditions, with anticipated closing on or before March 31, 2013. The filing does not provide the purchase price.
- Key risks include volatile markets, changes in assets under management and investor sentiment, fund redemptions, regulatory changes, investment concentration, market and liquidity risk, and volatility in investment income and performance fees.
- A hypothetical 25% market-price decline would reduce shareholders’ equity, net of tax, by approximately $835,268 for trading securities and $1.41 million for available-for-sale securities. The filing cautions that actual results could differ materially.
- The company had an unfunded $62,500 commitment related to a venture-capital investment. Management stated that pending or threatened claims are not expected to have a material adverse effect, although unfavorable resolutions remain possible.
- Management concluded that disclosure controls were effective as of December 31, 2012, and reported no material change in internal control over financial reporting.
Investor verification points
- Verify the trend in assets under management, particularly natural-resources, emerging-markets and money-market fund flows.
- Assess recurring advisory revenue separately from volatile performance fees and investment gains.
- Review the sustainability of the reduced dividend and the authorized share-repurchase program relative to operating cash flow.
- Evaluate the effect of continued fund-fee waivers and the likelihood and timing of recovering waived amounts.
- Review the terms, funding requirements and regulatory status of the proposed Galileo transaction.
- Monitor the valuation, liquidity and concentration of the company’s $13.6 million investment portfolio, including offshore and venture-capital holdings.