U.S. Global Investors, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended December 31, 2011, covering the three and six months ended December 31, 2011. The company provides investment management, distribution, transfer-agent and administrative services and also invests for its own account. Results are unaudited and should be read with the fiscal 2011 Form 10-K.
Financial Performance and Position
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Revenue | $5.88 million | $11.91 million | $13.67 million | $20.83 million |
| Net income | $409,382 | $2.33 million | $1.16 million | $3.60 million |
| Basic and diluted EPS | $0.03 | $0.15 | $0.08 | $0.23 |
| Net income margin | Approximately 7.0% | Approximately 19.6% | Approximately 8.5% | Approximately 17.3% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1.71 million | $2.17 million |
- Six-month pretax income was $1.82 million versus $5.60 million in the prior-year period. Tax expense was $665,975, producing an effective tax rate of approximately 36.5% versus approximately 35.8% in the prior-year period.
- At December 31, 2011, cash and cash equivalents were $27.15 million, trading securities were $5.22 million and available-for-sale securities were $4.03 million.
- Total assets were $44.26 million, shareholders’ equity was $40.23 million and current liabilities were $4.04 million. Net working capital was approximately $32.1 million and the current ratio was 8.9 to 1.
- The company had no long-term liabilities and no borrowings outstanding. It had access to an unused $1 million working-capital credit facility subject to financial covenants.
- Cash flow from operations was $1.71 million for the six months. Dividends paid were $1.85 million, capital expenditures were $12,990 and cash decreased by $57,821 from June 30, 2011.
- Total investments had a market value of approximately $9.3 million and represented approximately 20.9% of total assets. Trading securities included an unrealized loss of $738,408; available-for-sale securities had an unrealized gain of $953,766, with $629,485 recorded in accumulated other comprehensive income.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 50.6% and six-month revenue declined 34.4%. Third-quarter net income declined 82.4%; six-month net income declined 67.8%.
- Total assets under management at December 31, 2011, were $1.890 billion, down 37.9% from $3.044 billion one year earlier and down from $2.603 billion at June 30, 2011. Average assets under management for the six months were $2.229 billion versus $2.608 billion in the prior-year period.
- Asset declines were driven by market depreciation and shareholder redemptions, particularly in natural resources and emerging-market funds. Fixed-income and money-market funds also experienced net outflows as investors sought alternatives to low yields.
- Mutual fund advisory fees declined 52.7% in the quarter and 29.2% for the six-month period. The decline reflected lower assets and unfavorable performance-fee adjustments, including net payments to funds in the current periods versus net receipts in the prior-year periods.
- Other advisory fees declined 91.7% in the quarter and 84.7% for six months, primarily because of lower offshore-fund performance fees. Investment income was $143,268 in the quarter and a loss of $408,607 for six months, compared with gains of $510,047 and $989,898, respectively.
- Expenses declined 36.9% in the quarter and 22.2% for six months, primarily due to lower performance-based compensation, general and administrative costs and platform fees. The expense reductions did not offset the revenue decline.
- The average investment management fee rate decreased to 83 basis points for the quarter and 84 basis points for six months, compared with 87 and 86 basis points, respectively, in the prior-year periods.
Guidance, Outlook, Risks and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management stated that current cash reserves, available financing and anticipated operating cash flow should meet foreseeable cash needs and support potential growth opportunities.
- A monthly dividend of $0.02 per share was authorized through March 2012 and remained subject to quarterly board review. Estimated dividends payable to Class A and Class C shareholders from January through March 2012 were approximately $926,581.
- The company voluntarily waived fees and reimbursed expenses totaling $1.60 million for the six months. These waivers may increase, particularly while interest rates remain low, and could negatively affect revenue and net income. Certain waivers may be recaptured over a three-year period if fund yields permit.
- Investment income is volatile and depends on market movements, security transactions and investment opportunities. Management noted concentration in a small number of issuers and exposure to equity-price risk. A hypothetical 25% change in investment prices would affect shareholders’ equity, net of tax, by approximately $1.53 million in aggregate.
- The company had an unfunded $125,000 commitment related to a Level 3 venture-capital investment. It also held an offshore fund investment of approximately $1.03 million subject to advance redemption notice requirements.
- Routine claims, legal proceedings and other contingencies may arise in the ordinary course of business. Management did not believe liabilities beyond recorded accruals would have a material adverse effect, although unfavorable resolutions remain possible.
- Management identified investment-management industry competition, economic conditions, regulation, market risk, credit risk and liquidity risk as factors that could cause actual results to differ materially from forward-looking statements. No material changes to the fiscal year-end risk factors were reported.
- Disclosure controls and procedures were assessed as effective as of December 31, 2011, with no reported material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the sustainability of assets under management, particularly natural-resource and emerging-market fund flows and performance.
- Review the effect of performance-fee adjustments and offshore-client performance fees on future revenue volatility.
- Monitor voluntary fee waivers, expense reimbursements and the timing and likelihood of any permitted recapture.
- Assess the concentration, liquidity and valuation risk of the company’s $9.3 million investment portfolio, including Level 2 and Level 3 holdings.
- Verify continuation of the monthly dividend after March 2012 and the company’s ability to fund dividends from operating cash flow.
- Review the terms and covenant requirements of the unused $1 million credit facility and any developments in ordinary-course contingencies.