U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2012. The provided request identifies “2011 Q3,” but the filing itself is the quarter ended March 31, 2012, which is the third quarter of fiscal 2012. The filing was signed May 2, 2012.
Business Context
The company provides investment management, distribution, transfer-agent and administrative services for its mutual funds and offshore clients. It also invests corporate cash for its own account. Results are highly dependent on assets under management, market performance, shareholder flows and investment gains or losses.
- Period-end assets under management were $1.894 billion, down 40.5% from $3.180 billion at March 31, 2011 and down from $2.603 billion at June 30, 2011.
- Average assets under management for the nine months were $2.168 billion, compared with $2.797 billion in the prior-year period.
- Declines were concentrated in natural-resources and emerging-market equity funds, reflecting market depreciation and shareholder redemptions.
Financial Performance and Key Metrics
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Nine months ended March 31, 2012 | Nine months ended March 31, 2011 |
|---|---|---|---|---|
| Revenue | $5.54 million | $11.41 million | $19.21 million | $32.24 million |
| Income before taxes | $795,425 | $4.05 million | $2.62 million | $9.65 million |
| Net income | $487,138 | $2.69 million | $1.65 million | $6.29 million |
| Basic and diluted EPS | $0.03 | $0.17 | $0.11 | $0.41 |
| Net margin | 8.8% | 23.6% | 8.6% | 19.5% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1.18 million | $5.68 million |
- Quarterly revenue declined 51.5%, while nine-month revenue declined 40.4%.
- Quarterly expenses declined 35.6% to $4.74 million; nine-month expenses declined 26.6% to $16.59 million.
- Primary revenue sources remained mutual-fund advisory fees, distribution fees and transfer-agent fees.
- Mutual-fund advisory fees declined 62.4% for the quarter and 41.8% for the nine-month period. Performance-fee adjustments shifted from receipts in the prior-year periods to net payments to funds in the current periods.
- Investment income was $464,863 in the quarter but only $56,256 for the nine-month period, compared with $1.17 million in the prior-year nine-month period. Investment income remains volatile.
Liquidity, Capital Resources and Investments
- March 31, 2012 cash and cash equivalents were $20.92 million, compared with $27.21 million at June 30, 2011.
- Marketable investments totaled approximately $14.7 million, or 34.2% of total assets; total assets were $43.15 million.
- Net working capital was approximately $26.7 million, and the current ratio was 9.5 to 1.
- Total shareholders’ equity was approximately $40.0 million. Cash, cash equivalents and marketable securities represented 82.6% of total assets.
- The company had no long-term liabilities and no borrowings outstanding. It had access to an unused $1.0 million one-year working-capital credit facility subject to financial covenants.
- Cash flow from operations was $1.18 million for the nine months, compared with $5.68 million in the prior-year period. Investing activities used $4.83 million, primarily because of $5.00 million invested in available-for-sale securities. Financing activities used $2.64 million, principally for $2.78 million of dividends.
- Available-for-sale securities increased to $9.24 million from $4.66 million at June 30, 2011. Total investments had a market value of $14.74 million and cost basis of $14.02 million.
Material Changes Versus the Prior Comparable Period
- Profitability deteriorated materially: quarterly net income fell 81.9%, and nine-month net income fell 73.8%.
- Lower assets under management reduced advisory, distribution and transfer-agent revenue. Quarterly net shareholder redemptions were $93.3 million, compared with net purchases of $78.8 million in the prior-year quarter.
- Expense reductions partially offset the revenue decline, including lower performance-based compensation, platform fees, advertising and general and administrative costs.
- The average annualized investment management fee rate decreased to 83 basis points for the quarter and 84 basis points for the nine-month period, from 88 and 87 basis points, respectively.
- Advisory-fee adjustments were unfavorable: the company reduced base advisory fees by $1.14 million for the quarter and $1.79 million for the nine months, compared with upward adjustments in the prior-year periods.
- The company repaid no debt and made no stock repurchases during the nine months. It paid approximately $2.78 million in dividends.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management stated that cash reserves, available financing and expected operating cash flow should meet foreseeable needs.
- A monthly dividend of $0.02 per share was authorized through June 2012 and remained subject to quarterly board review and business conditions. Dividends payable for April through June 2012 were estimated at approximately $927,318.
- The company voluntarily waived or reimbursed $2.37 million of fund fees and expenses during the nine months. Certain waivers may be recaptured through 2015, but management expects recoveries primarily in a rising-interest-rate environment and cautions that future waivers could increase and reduce revenue and net income.
- Offshore-client advisory fees decreased substantially; the company recorded $263,634 for the nine months versus $1.28 million in the prior-year period. Performance fees may fluctuate significantly.
- Investment exposure creates equity-price, market, credit and liquidity risk. A hypothetical 25% change in investment prices would have changed shareholders’ equity, net of tax, by approximately $2.43 million in either direction.
- The portfolio included a $5.0 million offshore-fund investment and a $105,964 Level 3 venture-capital investment with a $125,000 unfunded commitment.
- Management reported no material change in risk factors from the prior Form 10-K. Pending claims and proceedings are considered ordinary-course matters, and management does not expect liabilities beyond recorded accruals to be material.
- Disclosure controls and procedures were evaluated as effective as of March 31, 2012, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether assets under management and net shareholder flows stabilized after March 31, 2012, particularly in natural-resources and emerging-market funds.
- The sustainability and potential recapture of voluntary fee waivers and expense reimbursements.
- The effect of future performance-fee adjustments and offshore-client performance fees on revenue volatility.
- The valuation, liquidity and concentration of the company’s $14.7 million investment portfolio, including offshore and Level 3 holdings.
- Continuation of the $0.02 monthly dividend after June 2012 relative to earnings and operating cash flow.
- Renewal status of offshore-client contracts and any changes in fund advisory agreements.