Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; comparisons are with the three months ended December 31, 2016. Financial statement amounts below are in millions of dollars unless otherwise noted.
Business context
Hennessy provides investment advisory services to 14 open-end mutual funds and shareholder services to the fund family. Advisory and shareholder-service fees are based primarily on average daily assets under management (AUM). The company also uses sub-advisers for four funds.
Financial performance and position
| Metric | Q1 2018 | Prior comparable period / reference |
|---|---|---|
| Total revenue | $13.813 | $13.294; up 3.9% |
| Investment advisory fees | $12.672 | $12.109; up 4.6% |
| Shareholder-service fees | $1.141 | $1.185; down 3.7% |
| Operating expenses | $7.416 | $7.052; up 5.2% |
| Net operating income | $6.397 | $6.242; up 2.5% |
| Income before taxes | $6.147 | $5.976 |
| Income tax benefit (expense) | $(2.040) benefit | $1.980 expense |
| Net income | $8.187 | $3.996; up 104.9% |
| Diluted EPS | $1.04 | $0.52 |
| Operating cash flow | $2.363 | $2.382 |
Operating margin was 46.3% of revenue, versus 47.0% a year earlier; net margin was 59.3%, versus 30.1%, principally reflecting the tax benefit rather than a comparable increase in operating profitability. Operating expenses rose faster than revenue, including higher sub-adviser and general and administrative costs.
At December 31, 2017, cash and cash equivalents were $15.198, total assets $96.939, and stockholders’ equity $59.622. Total liabilities were $37.317. Bank debt was $25.156 gross, or $24.899 net of issuance costs, with a 4.111% effective rate and final principal and interest due September 17, 2019. The loan is secured by substantially all company assets; the company reported compliance with its financial covenants. Cash declined $0.502 during the quarter to $15.198.
AUM was $6.924 billion at quarter-end, up $311 million (4.7%) from September 30, 2017, and up $331 million (5.0%) year over year. Quarter activity included $121.8 million of acquisition inflows, $324.1 million of organic inflows, $480.8 million of redemptions, and $346.1 million of market appreciation. Redemptions averaged 2.4% of AUM per month, down from 3.3% in the prior-year quarter.
Material changes, outlook, and risks
- The Tax Cuts and Jobs Act, enacted December 22, 2017, generated a one-time, non-cash income tax benefit of approximately $4 million from remeasurement of deferred taxes. Management expects the lower federal corporate tax rate to benefit future net income, EPS, and cash flows; no quantified earnings guidance was provided.
- On December 1, 2017, the company acquired management-related assets for two Rainier funds for $1.0 million, covering approximately $122 million of AUM. A further Rainier fund acquisition closed January 12, 2018, after quarter-end, for $2.1 million and approximately $253 million of AUM.
- Management said cash and other liquid assets were expected to meet short-term capital requirements. If internal resources are inadequate for long-term needs, it may seek additional borrowing capacity or access capital markets; there is no assurance it can raise additional capital.
- Management’s strategy centers on acquisitions and organic growth through asset retention and fund inflows. It cited shareholder redemptions, market and economic conditions, interest rates, competition, and regulation as factors that could affect results; regulatory developments may increase administrative and compliance costs.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material change in market risk was reported.
Important facts for investors to verify
- How much of the net-income and EPS increase reflects the non-cash tax remeasurement benefit, and what is the expected ongoing tax rate?
- Whether AUM growth and fee revenue can be sustained given fund-level outflows, including outflows from the Mid Cap 30, Gas Utility, and Focus funds.
- The cash, debt, and covenant impact of the January 2018 Rainier acquisition and any future acquisition activity.
- Whether operating expense growth—particularly sub-adviser, distribution, and general and administrative costs—continues to exceed revenue growth.
- The effect of market performance, redemptions, interest-rate changes, and regulatory costs on advisory fees, liquidity, and debt repayment.