Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013. The company provides investment management and shareholder services to 16 open-end mutual funds; revenue is primarily based on funds’ average daily net assets. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Three months ended Mar. 31, 2013 | Prior-year quarter | Six months ended Mar. 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $5.947 | $1.729 | $10.650 | $3.446 |
| Operating income | $2.053 | $0.440 | $3.653 | $0.772 |
| Net income | $1.117 | $0.246 | $1.885 | $0.398 |
| Diluted EPS | $0.20 | $0.04 | $0.33 | $0.07 |
| Operating margin | 34.5% | 25.4% | 34.3% | 22.4% |
| Net margin | 18.8% | 14.2% | 17.7% | 11.5% |
- Quarterly revenue increased 244%; six-month revenue increased 209%. Investment advisory fees drove the increase, rising to $5.726 million for the quarter and $10.215 million for six months.
- Operating expenses were $3.894 million for the quarter and $6.997 million for six months. Expenses increased substantially in dollars with the addition of seven funds, but fell as a share of revenue year over year.
- Interest expense was $0.179 million for the quarter and $0.317 million for six months, reflecting debt added to fund the FBR fund-management acquisition. Six-month other expense of $0.109 million primarily included a realized investment loss.
- Six-month effective tax rate was 41.6%, versus 46.6% a year earlier. The current rate reflected a disallowed capital loss; the prior-year rate included a one-time state deferred-tax revaluation.
Cash, liquidity, and debt
- At March 31, 2013, cash and cash equivalents were $6.145 million; total current assets were $9.403 million and current liabilities $4.131 million. Total assets were $52.397 million and stockholders’ equity $27.151 million.
- Six-month operating cash flow was $1.837 million, investing cash flow was negative $19.701 million, and financing cash flow was positive $15.279 million. Cash declined $2.585 million to $6.145 million.
- Debt outstanding was approximately $17.8 million: $1.840 million current and $15.947 million long-term. The amended U.S. Bank loan bears interest at prime plus 0.75% (4.00% at filing), requires monthly principal payments of $153,333, and matures October 26, 2017. The company reported compliance with loan covenants.
- Management said cash and liquid assets on hand were expected to cover short-term requirements. It may need additional debt or equity financing for longer-term needs, including the potential FBR acquisition payment; access to financing is not assured.
Material changes and business developments
- On October 26, 2012, the company acquired management-related assets for the former FBR Funds, adding approximately $2.2 billion in assets under management (AUM). The acquisition covered ten funds and expanded the company’s managed lineup by seven funds.
- AUM was $3.406 billion at March 31, 2013, compared with $814.9 million a year earlier. Average AUM was $3.23 billion for the quarter and $2.84 billion for six months, versus $809.5 million and $793.2 million, respectively, in the comparable periods.
- Management attributed growth principally to the FBR acquisition and market appreciation. The filing reported approximately $421 million of market appreciation since the prior comparable period and approximately $50 million of net outflows; redemptions remained a business sensitivity.
- The acquisition’s initial payment was funded with an additional $16.3 million bank borrowing and $3.4 million of cash. A remaining payment is due on the first anniversary of closing, based on FBR fund AUM on October 25, 2013. Using March 31 values, management estimated it at approximately $14 million, but the amount could change substantially, has no stated maximum, and could be zero. Although considered probable, it was not estimable and no liability was recorded.
- The company paid $0.361 million in dividends during the six months; quarterly dividends were $0.03125 per share. It also adopted a 2013 Omnibus Incentive Plan.
Outlook, commentary, and risks
- The filing provides no quantified revenue, earnings, or AUM guidance. Management expressed optimism about investor confidence and market conditions, noting that all 16 funds had positive returns in the quarter, but these statements are not a forecast or assurance of future results.
- Revenue and liquidity depend on average fund assets, which are exposed to market movements, investment performance, redemptions, and inflows. Management also cited economic and political uncertainty, interest-rate movements, competition, regulation, and volatility.
- Management noted that a significant portion of expenses is fixed, so revenue fluctuations can have a direct effect on earnings. Platform distribution costs and sub-adviser fees rise with assets; platform-held assets may be less profitable than direct accounts. Certain funds are subject to contractual expense-ratio limits, with $53,325 of fee waivers for the six months.
- Management contracts were carried at $42.517 million, and no impairment indicators were reported at March 31, 2013. An impairment could adversely affect earnings. The filing reported no other commitments or contingencies as of that date and no material change in lease arrangements.
- Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How AUM, redemptions, market performance, and post-acquisition organic flows develop—and how durable the unusually large year-over-year growth proves to be.
- The final FBR contingent payment calculation using October 25, 2013 AUM, and whether cash flow or financing is needed to fund it.
- Debt amortization, interest-rate exposure, and continued covenant compliance.
- Profitability after sub-adviser and platform fees, fee waivers, and the acquisition-related cost structure.
- Whether market or client-attrition changes could affect the carrying value of management contracts.