Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2012; filed August 2, 2012. The company earns primarily investment advisory and shareholder-service fees based on average assets managed across its mutual funds and private fund.
Financial performance and position
- Quarter: Revenue was $1.715 million, down 10.8% year over year. Operating income was $532,000 versus $617,000; net income was $303,000 versus $352,000; diluted EPS was $0.05 versus $0.06. Operating margin fell to 31.0% from 32.1%, and net margin to 17.7% from 18.3%.
- Nine months: Revenue was $5.161 million, down 11.8%. Operating income was $1.304 million versus $1.673 million; net income was $701,000 versus $950,000; diluted EPS was $0.12 versus $0.17. Operating margin declined to 25.3% from 28.6%, and net margin to 13.6% from 16.2%.
- Revenue drivers and AUM: Average daily mutual-fund assets were $809.2 million for the quarter, down 9.4%, and $798.5 million for the nine months, down 11.7%. June 30 total AUM was $821.4 million. Year over year, mutual-fund assets declined $61.2 million, reflecting $39.8 million of net outflows and $21.4 million of market depreciation. Advisory fees were $1.523 million for the quarter and $4.591 million for nine months; shareholder-service fees were $192,000 and $570,000, respectively.
- Expenses and taxes: Nine-month operating expenses fell 7.7% to $3.857 million, but rose as a share of revenue to 74.7% from 71.4%. The nine-month effective tax rate was 44.6% versus 41.5%; management attributed the current rate partly to a non-recurring revaluation of state deferred tax liabilities for a higher blended state tax rate.
- Cash flow and liquidity: Nine-month operating cash flow was $1.289 million, versus $1.384 million; investing outflow was $106,000; financing outflow was $958,000. Cash increased $225,000 to $8.587 million. Current assets were $9.458 million and current liabilities $1.427 million.
- Debt and equity: Bank debt totaled approximately $2.083 million at June 30 ($625,000 current and $1.458 million long-term), down from $2.552 million at September 30, 2011. The loan bears interest at prime less 1% (2.25% stated in the filing), is secured by company assets, and matures September 30, 2015. The company reported compliance with its covenants. Stockholders’ equity was $25.133 million.
Material changes, outlook, and risks
- Management linked lower revenue and earnings mainly to reduced average AUM and continuing investor redemptions. Net flows turned positive in the two months preceding the filing, according to management, which also expressed confidence that the economic environment was showing signs of improvement; this is not formal financial guidance.
- Management identified market performance, redemptions, competition, regulation, interest rates, economic conditions, and the ability to retain managed assets as key business risks. A significant portion of expenses is fixed, so revenue changes can disproportionately affect earnings.
- On June 6, 2012, the company signed an agreement to acquire management-related assets for the ten FBR Funds, reported to have more than $1.9 billion in AUM. Closing was expected before December 31, 2012, subject to regulatory review and shareholder approval, and was to be funded with additional bank borrowing. Approximately $40,000 of transaction costs had been capitalized; those costs would be expensed if shareholders did not approve the transaction.
- Management reported no indicators of impairment for the $22.358 million management-contract asset as of June 30. No incentive fee income was earned from the Micro Cap Fund in either comparative nine-month period.
- The company paid quarterly dividends during the nine months; total dividends paid were $504,000, versus $801,000 in the prior-year period. It amended its Novato office lease, extending the term through June 30, 2014, with an option for a further two years.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether AUM inflows persist and reverse the year-over-year net outflows, particularly in the Cornerstone Value and Select Large Value funds.
- Regulatory and shareholder approval, closing timing, financing terms, and expected economics of the FBR Funds acquisition.
- The sustainability of margins amid declining fee revenue and the degree to which expenses can adjust to lower AUM.
- The bank loan balance, repayment schedule, covenant compliance, and incremental borrowing associated with the proposed acquisition.
- The assumptions supporting the carrying value of management contracts and the effect of the state tax-rate revaluation on future tax expense.