Hennessy Advisors, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2015; filed May 5, 2015. Financial statements are unaudited. Hennessy provides investment advisory and shareholder services to 16 open-end mutual funds; revenue depends mainly on fund assets under management (AUM).
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $10.56 million, up 27.1% year over year | $20.29 million, up 25.0% |
| Operating income | $4.42 million; 41.9% of revenue | $8.18 million; 40.3% of revenue |
| Net income | $2.59 million, up 47.4%; 24.6% of revenue | $4.66 million, up 44.9%; 23.0% of revenue |
| Diluted EPS | $0.44, versus $0.30 | $0.78, versus $0.55 |
| Operating cash flow | Not separately presented for the quarter | $4.15 million, versus $3.69 million |
For the six-month period, investment advisory fees were $19.40 million and shareholder service fees were $0.89 million. Cash increased by $1.55 million to $9.20 million. At March 31, total assets were $77.18 million, current assets $14.12 million, current liabilities $7.09 million, and stockholders’ equity $41.77 million. The balance sheet reports total debt of approximately $24.85 million, comprising $3.75 million current and $21.10 million long-term. The company paid $1.88 million of loan principal during the six months.
Material changes and operating drivers
- Average AUM was $5.98 billion for the quarter, up 29.5%, and $5.81 billion for the six months, up 30.9%. Period-end AUM was $6.13 billion, up 28.4% from March 31, 2014.
- Management attributed year-over-year AUM growth to approximately $673 million of net inflows and $684 million of market appreciation. For the six months from September 30, 2014, AUM rose through $202 million of net inflows and $408 million of market appreciation.
- From March 1, 2015, Hennessy began earning shareholder service fees from all its funds rather than only some; this contributed to the increase in that revenue stream.
- Operating expenses increased 19.6% for the quarter and 21.4% for the six months, slower than revenue growth, improving operating expense ratios to 58.1% and 59.7%, respectively. Distribution costs rose notably as more fund assets were held on fee-charging platforms.
- Contractual fund expense-ratio limitations expired or terminated February 28, 2015. Hennessy reported fee waivers of about $10,000 for the quarter and $20,000 for the six months under those limitations.
Liquidity, outlook, and risks
Management stated that cash of $9.2 million was sufficient for the next 12 months of operations. The bank loan is secured by company assets, bears interest at the bank prime rate plus 0.75% (4.00% at the filing date), and is due in October 2017; the company reported compliance with its financial covenants. The filing gives no numerical earnings or revenue guidance.
Management described markets as volatile and expressed a view that longer-term returns could be moderate and reasonable, while noting uncertainty around interest rates and international conditions. Key business exposures include fund redemptions, market performance, AUM flows, competition, regulation and the ability to retain managed assets. The filing says regulatory developments may increase administrative and compliance costs. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Debt balance discrepancy: The balance sheet implies approximately $24.85 million of debt, while the liquidity discussion states $25.8 million outstanding. Confirm the intended figure and reconciliation.
- Track redemption trends: monthly redemptions as a percentage of AUM rose year over year, to 2.7% for the quarter and 2.6% for the six-month period.
- Assess whether AUM growth and profitability persist if market appreciation or net inflows weaken, and account for platform distribution and sub-adviser costs.
- Monitor the variable-rate loan, scheduled principal payments, covenant compliance, and annual renewal and termination provisions for fund management contracts.