Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; statements are unaudited. Hennessy provides investment advisory and shareholder services to 14 open-end mutual funds. Most revenue is tied to the funds’ average daily net assets (AUM).
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue, 2018 (2017) | $13.57 million ($13.18 million), +3.0% | $41.39 million ($39.71 million), +4.2% |
| Net operating income, 2018 (2017) | $6.09 million ($6.27 million) | $18.71 million ($18.62 million) |
| Net income, 2018 (2017) | $4.22 million ($3.96 million), +6.5% | $16.96 million ($11.58 million), +46.4% |
| Diluted EPS, 2018 (2017) | $0.53 ($0.51) | $2.15 ($1.49) |
| Operating expenses as % of revenue | 55.1% (52.4%) | 54.8% (53.1%) |
- Quarterly advisory fees rose 4.0% to $12.50 million; shareholder service fees fell 8.1% to $1.06 million. For the nine months, advisory fees rose 5.2% to $38.07 million and shareholder service fees declined 5.6% to $3.32 million.
- Net income benefited materially from the 2017 Tax Act: the company recorded an approximately $4 million one-time, non-cash tax benefit in its first fiscal quarter. Nine-month effective tax rate was 5.7%, versus 34.9% a year earlier; excluding the effects of tax reform, the filing does not provide a clear adjusted earnings figure.
- For the quarter, net operating income declined despite higher revenue as operating expenses rose 8.2%, primarily from higher sub-advisory fees. Nine-month operating expenses increased 7.5%; sub-advisory expense rose 14.3%.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $21.14 million at June 30, 2018, versus $15.70 million at September 30, 2017. Current assets were $26.70 million and current liabilities $10.66 million.
- Nine-month operating cash flow was $14.55 million (2017: $14.05 million); investing cash outflow was $3.69 million (2017: $0.28 million); financing cash outflow was $5.42 million (2017: $4.98 million). Cash increased $5.44 million.
- Gross term debt was $22.97 million ($22.79 million net of issuance costs), down from $26.25 million gross at September 30, 2017. The loan bears a disclosed effective rate of 4.732%, is secured by substantially all company assets, and is due in final installment September 2019. The company reported compliance with loan covenants.
- Management stated available cash and liquid assets should fund requirements for at least one year from the report’s issuance. Total equity was $68.02 million; management contracts, the principal asset, were $78.04 million. No impairment was reported.
AUM, changes and management commentary
- AUM was $6.40 billion at June 30, down 2.0% ($132 million) year over year and down 3.3% from September 30, 2017. The year-over-year decline reflected net outflows, partly offset by market appreciation and the Rainier acquisition.
- For the nine months, reported fund redemptions were $1.88 billion and organic inflows $1.00 billion; Rainier acquisition inflows totaled about $374 million. Redemptions as a share of AUM averaged 3.1% monthly, versus 2.9% in the comparable 2017 period.
- Management attributed advisory-fee growth to higher average daily AUM. It noted higher redemption rates and market sensitivity as key drivers of revenue variability. All 14 funds had positive annualized returns for the one-, three-, five-, 10-year and since-inception periods ended June 30, 2018, according to the filing.
- Sub-advisory fees increased partly because of higher assets in sub-advised funds and an amendment to the SPARX agreement that increased fees for the Hennessy Japan Small Cap Fund.
Outlook, risks and unusual items
- In July 2018, the company signed an agreement to acquire management-related assets for two BP Capital funds, with closing expected in the fourth calendar quarter of 2018, subject to customary conditions including shareholder approval. Consideration includes $100,000 plus 0.75% of fund NAV at closing and a further 0.75% of successor-fund NAV on the first anniversary. BP Capital would serve as sub-advisor.
- Management’s strategy emphasizes acquisitions and organic growth through retaining existing assets and generating inflows. The filing provides no numerical earnings or revenue guidance.
- Risks identified include fund redemptions, investment performance and market fluctuations, interest rates, competition, regulatory change and associated compliance costs, and economic and international-market conditions. Management noted trade tensions and rising short-term rates during the period.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also reported no material change in market risk from its prior annual report.
Important facts for investors to verify
- Whether the BP Capital acquisition closed on expected terms and how acquired assets, fees and sub-advisory costs affect results.
- Subsequent AUM, organic flows and redemption trends, especially in the Focus, Gas Utility and Cornerstone Mid Cap 30 funds, which had the largest reported outflows.
- Ongoing earnings and cash generation excluding the one-time tax-remeasurement benefit, and the effects of the lower tax rate.
- Debt repayment capacity and refinancing or liquidity plans ahead of the September 2019 final installment; the loan is secured by substantially all assets.
- Management-contract renewal and termination provisions: contracts require annual renewal and may be terminated on 60 days’ notice.