Hennessy Advisors, Inc. — Q1 FY2016 10-Q
Reporting period: Three months ended December 31, 2015; comparative period ended December 31, 2014. Financial statements are unaudited. Hennessy advises 16 open-end mutual funds and provides shareholder services to Investor Class shareholders.
Financial performance and key metrics
| Metric | Q1 FY2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $13.153 million | $9.734 million | +35.1% |
| Operating income | $6.261 million | $3.762 million | +66.4% |
| Operating margin | 47.6% | 38.6% | +9.0 percentage points |
| Net income | $3.650 million | $2.066 million | +76.7% |
| Net margin | 27.8% | 21.2% | +6.6 percentage points |
| Diluted EPS | $0.71 | $0.35 | Up |
| Operating cash flow | $2.793 million | $1.734 million | Up |
Investment advisory fees were $11.823 million, up 24.8%; shareholder service fees were $1.330 million, up 409.6%. The latter comparison reflects the company beginning, effective March 1, 2015, to earn service fees on Investor Class shares of all Hennessy Funds rather than only some funds. Total operating expenses rose 15.4% to $6.892 million. Compensation and benefits increased 43.3% to $2.965 million, and sub-advisor fees increased 34.9% to $2.150 million; mutual fund distribution expense fell 82.6% to $0.150 million, partly reflecting Fund-level Rule 12b-1 distribution plans.
Average daily fund assets under management increased 13.8% year over year to $6.42 billion. Period-end AUM was $6.324 billion, up 6.5% year over year and 5.6% from September 30, 2015. For the quarter, net inflows were $189 million and market appreciation was $147 million. Year over year, net inflows of $751 million were partly offset by market depreciation of $367 million. Monthly redemptions as a percentage of AUM averaged 2.9%, versus 2.4% in the prior-year quarter.
Balance sheet, liquidity and debt
At December 31, 2015, cash and cash equivalents were $4.146 million, total current assets $10.492 million, total assets $74.465 million, and stockholders’ equity $26.698 million. Total liabilities were $47.767 million. Cash increased $1.060 million during the quarter; operating cash flow of $2.793 million was offset in part by $0.325 million of investing outflows and $1.408 million of financing outflows. Cash at quarter-end was below the $8.108 million reported at December 31, 2014.
Debt carrying value was $33.906 million, comprising $4.375 million current and $29.531 million long-term. The term loan was originally increased to $35 million in September 2015 to help fund a self-tender offer for up to 1 million shares at $25 per share. It requires 48 monthly principal payments of $364,583 plus interest, is secured by substantially all company assets, and matures September 17, 2019. The effective rate was 4.25% at December 31, 2015; it decreased to 4.0% effective January 21, 2016. The company reported compliance with its financial covenants.
Quarterly cash dividends declared were $0.06 per share, versus $0.05 a year earlier. Management contracts, the principal balance-sheet asset, were recorded at $62.919 million; management reported no impairment indicators at quarter-end.
Material changes, outlook and risks
- Management attributed revenue growth principally to higher average AUM and expanded shareholder-service fee coverage. It said the quarter’s AUM growth reflected both net inflows and market appreciation.
- Management described U.S. equity markets as relatively strong but volatile, with modestly higher bond yields and a strong Japanese equity market. Seven of the 16 funds had positive annualized returns over each of the stated 1-, 3-, 5-, 10-year and since-inception periods as of December 31, 2015.
- No specific financial guidance or quantified forward outlook is provided. Management’s strategy emphasizes acquisitions and organic growth through retaining and attracting fund assets, while focusing on fund performance and investor service.
- Key business sensitivities include fund redemptions, investment performance and market movements, interest rates, competition, and evolving regulation. Management expects regulatory developments to add administrative and compliance costs. Advisory agreements require annual renewal and may be terminated on 60 days’ notice; failure to renew would end the agreements.
- The company noted that its ability to raise additional debt or equity, if needed, is not assured. Its debt has variable-rate terms and is secured by substantially all assets. Management contracts are indefinite-lived intangible assets subject to impairment testing.
- Other notable items: the September 2015 debt increase funded in part the self-tender offer; the effective tax rate was 38.1%, versus 40.9%, with the difference attributed primarily to state taxes and changes in state apportionment. Management said 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 growth and net inflows continue, and how fund performance and redemptions affect fee revenue.
- The durability of higher shareholder-service revenue given its expanded coverage beginning March 2015, and the contribution of distribution-plan changes to lower company distribution expense.
- Debt amortization, variable interest-rate exposure, covenant compliance, and the effect of the January 2016 rate reduction.
- Whether the $62.9 million management-contract asset remains recoverable and whether fund advisory agreements are renewed.
- Developments in regulatory costs, market conditions, and any tax examinations; federal returns for 2012 onward remained open to examination.