Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2021; comparative income and cash-flow figures are for the three months ended December 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted.
Business context
Hennessy earns investment advisory and shareholder service fees from its 16 open-end mutual funds. Fees are primarily tied to funds’ average daily net assets (AUM). The company manages 10 funds internally and, during the quarter, used sub-advisers for six.
Financial results and liquidity
| Metric | Q1 FY2022 | Prior-year quarter / comparison |
|---|---|---|
| Total revenue | $8.534 million | $7.789 million; up 9.6% |
| Investment advisory fees | $7.938 million | $7.208 million; up 10.1% |
| Net operating income | $2.787 million; 32.7% of revenue | $2.409 million; 30.9% of revenue |
| Interest expense | $508,000 | None reported |
| Income before taxes | $2.281 million | $2.410 million |
| Net income | $1.913 million; 22.4% of revenue | $1.773 million; 22.8% of revenue; up 7.9% |
| Diluted EPS | $0.25 | $0.24 |
| Operating cash flow | $1.159 million | $1.051 million |
| Cash and cash equivalents | $54.502 million at December 31 | $15.836 million at September 30, 2021 |
| Total assets / liabilities | $140.413 million / $55.896 million | $101.905 million / $18.643 million at September 30, 2021 |
Operating expenses rose 6.8% to $5.747 million, but declined as a share of revenue to 67.3% from 69.1%. Net income increased despite lower pretax income, principally because income tax expense fell to $368,000 from $637,000. The effective tax rate was 16.1% versus 26.4%; the current quarter benefited from a California tax refund-related tax benefit of approximately $200,000.
Operating activities generated $1.159 million; investing activities used $57,000, primarily for equipment; financing activities provided $37.564 million, principally from the notes offering. Cash increased by $38.666 million during the quarter. The company said its cash and other liquid assets should meet capital requirements for at least one year after the report’s issuance.
AUM, debt, and material changes
- Period-end AUM was $4.073 billion, up 6.3% from $3.833 billion a year earlier. Management attributed the year-over-year increase to market appreciation. Average AUM was $4.099 billion, up 8.3% year over year.
- Quarterly AUM activity included $147.5 million of organic inflows, $240.2 million of redemptions, and $99.6 million of market appreciation. Redemptions averaged 2.0% of AUM per month, down from 3.5% in the prior-year quarter.
- On October 20, 2021, the company issued $40.25 million of unsecured 4.875% notes due December 31, 2026. Notes payable were $38.662 million net of issuance costs at quarter-end; reported fair value was approximately $41.78 million. The notes are redeemable at the company’s option beginning December 31, 2023.
- Cash dividends paid were approximately $1.008 million; the company reported dividends declared of $0.14 per share and a quarterly cash dividend payment of $0.1375 per share.
- After quarter-end, effective January 31, 2022, the company and BP Capital Fund Services mutually terminated their sub-advisory agreement for the Energy Transition and Midstream funds; Hennessy now manages those funds internally.
Outlook, commentary, and risks
The filing provides no quantified earnings or revenue guidance. Management’s stated strategy is to pursue acquisitions and organic growth through retaining existing fund assets and generating inflows. Management highlighted sensitivity to fund performance, shareholder redemptions, market fluctuations, interest rates, competition, regulation, taxes, and general economic conditions, including COVID-19-related developments. It expects regulatory developments to add administrative and compliance costs.
Management described persistent inflation and possible Federal Reserve rate increases in 2022 as market considerations. It noted that 14 of 16 funds had positive returns over the 12 months ended December 31, 2021, while the Energy Transition and Midstream funds were exceptions to positive annualized returns across the cited longer-term periods. The company reported no significant contingencies beyond operating leases. Management contracts, carried at $80.643 million, were unchanged; management’s quarter-end qualitative review found no indication of impairment.
Most important facts for investors to verify
- Whether AUM growth can be sustained, given that quarterly redemptions exceeded organic inflows and market appreciation supported the reported increase.
- The effect of the $40.25 million notes, including ongoing interest costs, maturity and redemption provisions, and the impact of debt on future financial results.
- Whether internal management of the Energy Transition and Midstream funds changes costs, performance, or asset-retention trends.
- The recurring versus nonrecurring components of the California tax benefit and the company’s future effective tax rate.
- Fund performance, advisory-agreement renewals, and potential impairment risk for the $80.643 million management-contract asset.