Hennessy Advisors, Inc. — Form 10-Q Summary
Business and period: Investment adviser and shareholder-services provider to nine open-end mutual funds and one private pooled fund. This unaudited report covers the three and six months ended March 31, 2012, the second quarter and first half of fiscal 2012.
Financial results
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Revenue | $1.729 million, down 12.6% year over year | $3.446 million, down 12.3% |
| Operating income / margin | $440,000 / 25.4%; prior-year margin 29.4% | $772,000 / 22.4%; prior-year margin 26.8% |
| Net income | $246,000, down 25.9%; diluted EPS $0.04 | $398,000, down 33.4%; diluted EPS $0.07 |
| Operating cash flow | Not separately presented for the quarter | $496,000, versus $511,000 in the prior-year period |
For the six months, operating expenses fell 6.9% to $2.674 million, but rose as a share of revenue to 77.6% from 73.2%. The effective tax rate was 46.6%, versus 41.6%; management attributed the current-period rate partly to a nonrecurring revaluation of state deferred tax liabilities. The filing reports no incentive income from the Micro Cap Fund in either comparative period.
At March 31, cash and cash equivalents were $8.173 million; total assets were $31.990 million and stockholders’ equity was $25.026 million. Current assets of $9.074 million exceeded current liabilities of $1.167 million. Bank debt totaled approximately $2.24 million, including $625,000 current and $1.615 million long term, down from $2.552 million at September 30, 2011. The loan bears interest at 2.25%; the company said it was in compliance with its financial covenants.
Six-month investing cash use was $64,000 and financing cash use was $621,000, including $312,000 of loan principal payments and $324,000 of dividends. Cash declined $189,000 to $8.173 million. The company paid quarterly dividends of $0.025 and $0.03125 per share during the period.
Operating trends and changes
- Average assets under management were $793.2 million for the six months, down 12.8% from $909.8 million. Period-end AUM was $814.9 million, down 11.0% from $915.8 million a year earlier, but up 8.8% from September 30, 2011.
- Management attributed the year-over-year AUM decline primarily to net outflows of $114.4 million, partly offset by $13.5 million of market appreciation. The largest cited fund outflows were from Cornerstone Growth ($31.4 million) and Cornerstone Value ($25.2 million).
- Lower AUM reduced advisory and shareholder-service fees. Expenses also declined, including compensation, general and administrative, distribution, and sub-advisor costs, but the smaller revenue base compressed operating and net margins.
- Management contracts were renewed for one year on March 7, 2012. Management reported no impairment indicators for the $22.3 million management-contract asset at March 31.
Outlook, risks, and other matters
No quantified revenue, earnings, or AUM guidance was provided. Management said cash and liquid assets on hand were expected to meet short-term capital needs; additional debt or equity could be needed for long-term needs, with no assurance of availability. Management described signs of economic improvement but cited investor caution, slow economic growth, global turmoil, and uncertainty over U.S. tax, healthcare, and regulatory policy. It also noted that revenue depends on fund AUM and that substantial expenses are fixed, so revenue swings can significantly affect earnings.
Other risks include redemptions, market performance, competition, regulation, and the annual renewal and termination provisions of fund management agreements. The company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing disclosed no other commitments or contingencies beyond its office lease. The lease was amended through March 31, 2014, with an option for two additional years.
Cash-flow disclosure to reconcile: The cash-flow statement lists $38,000 of payments related to acquisition of management contracts, while MD&A describes $0.38 million paid for a fund merger. These figures do not agree; the filing text does not provide a clear reconciliation.
Important facts for investors to verify
- Whether AUM outflows have continued or reversed, especially in the Cornerstone Growth and Cornerstone Value funds, and the resulting effect on fee revenue.
- The cash-flow statement versus MD&A discrepancy on the fund-merger/acquisition payment.
- The assumptions supporting the carrying value and impairment assessment of the $22.3 million in management contracts.
- Debt amortization, covenant compliance, and the company’s ability to maintain liquidity if AUM or operating cash flow declines.
- The impact of the unusually high six-month effective tax rate and whether subsequent periods return toward a more typical rate.