Hennessy Advisors, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the fiscal second quarter and six months ended March 31, 2022; the comparable periods are the three and six months ended March 31, 2021. Hennessy earns investment advisory and shareholder-service fees from 16 open-end mutual funds. Advisory fees are tied to average daily fund assets. The company reported $3.8 billion in assets under management (AUM) at quarter-end.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $7.745 million, down 2.4% year over year | $16.279 million, up 3.5% |
| Operating income | $2.673 million; 34.5% margin | $5.460 million; 33.5% margin |
| Net income | $1.602 million, down 15.1%; diluted EPS $0.21 | $3.515 million, down 3.9%; diluted EPS $0.46 |
| Operating cash flow | Not separately stated in the supplied filing text | $3.543 million, versus $3.623 million |
For the six-month period, operating expenses were $10.819 million, or 66.5% of revenue, compared with $10.751 million, or 68.4%, a year earlier. Interest expense was $0.490 million for the quarter and $0.998 million for six months, versus none in the prior-year periods. Cash dividends declared were $0.14 per share for the quarter and $0.28 for six months, unchanged year over year.
At March 31, 2022, cash and cash equivalents were $55.835 million, total current assets $59.383 million and current liabilities $3.261 million. Notes payable were $38.728 million net of issuance costs; stockholders’ equity was $85.394 million. Total assets were $141.317 million.
Changes versus the prior comparable period
- Quarterly revenue decreased as average daily fund assets declined; six-month revenue increased, primarily reflecting higher average Institutional Class assets.
- Quarterly net income fell 15.1%, and six-month net income fell 3.9%, mainly because of interest on the 2026 Notes issued in October 2021.
- Quarterly operating expenses declined 5.6%; six-month operating expenses were broadly flat. Sub-advisory expense decreased, partly reflecting the termination of two sub-advisory arrangements.
- Quarter-end AUM of $3.804 billion was down 5.5% from March 31, 2021. In the March 2022 quarter, $209.8 million of organic inflows was more than offset by $346.6 million of redemptions and $132.1 million of market depreciation.
- Cash increased by $39.999 million during the six months, largely reflecting financing proceeds from the notes offering; operating cash flow was slightly lower than a year earlier.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided. Management said cash and other liquid assets should meet capital requirements for at least one year from the filing’s issuance date and longer-term requirements beyond that; additional capital could be sought if needed, with no assurance it would be available.
- Management described inflation, rising interest rates, the Federal Reserve’s policy actions, the war in Ukraine and market volatility as relevant conditions. It said fund performance, redemptions, market conditions, competition and regulation can affect results, and highlighted continued focus on fund performance, investor service, asset retention and growth.
- On January 31, 2022, Hennessy and BP Capital Fund Services mutually terminated sub-advisory agreements for the Energy Transition and Midstream Funds; Hennessy assumed internal management of both.
- The company issued $40.25 million principal amount of unsecured 4.875% notes due December 31, 2026. The notes are redeemable at the company’s option on or after December 31, 2023. Management contracts, recorded at $80.643 million, were assessed for impairment and no impairment was identified.
- The filing added a risk factor addressing catastrophic events, including infectious-disease outbreaks, military conflicts and financial-market disruptions. It reported no other material changes to the previously disclosed risk factors, no significant contingencies beyond operating leases, and effective disclosure controls.
- A new month-to-month Dallas office lease was entered into on April 20, 2022, with a June 1, 2022 start date. The filing reports no other material subsequent events requiring disclosure.
Key facts for investors to verify
- Whether AUM and net flows stabilize, especially given sizable redemptions from the Japan and Focus Funds.
- Whether internally managing the Energy Transition and Midstream Funds affects performance, costs and future advisory revenue.
- The impact of interest expense and the repayment or refinancing of the $40.25 million notes due in 2026.
- Whether the stated liquidity outlook remains supported by cash generation, fund assets and operating requirements.
- Potential effects of market volatility, interest rates, inflation, geopolitical events, regulation and contractual fee waivers on results.