Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011; filed August 4, 2011. Financial statements are unaudited. Hennessy provides investment advisory and shareholder services to ten open-end mutual funds and advises one private pooled fund.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1.923 | $1.964 | $5.851 | $5.863 |
| Operating income | $0.617 | $0.489 | $1.673 | $1.240 |
| Net income | $0.352 | $0.275 | $0.950 | $0.689 |
| Diluted EPS | $0.06 | $0.05 | $0.17 | $0.12 |
| Operating margin | 32.1% | 24.9% | 28.6% | 21.1% |
| Net margin | 18.3% | 14.0% | 16.2% | 11.8% |
- For the quarter, revenue declined 2.1%, while net income rose 28.0%. For the nine months, revenue was nearly flat, while net income increased 37.9%.
- Operating expenses fell 11.5% in the quarter and 9.6% in the nine-month period. Lower compensation costs were the principal factor; management cited position eliminations, a retirement, and consolidation of a position.
- Average assets under management (AUM) were $893.5 million for the quarter, down 1.4% year over year, and $904.3 million for the nine months, down 1.8%. Period-end AUM was $882.6 million, up 8.6% from June 30, 2010, reflecting $217.2 million of market appreciation partly offset by $147.2 million of net outflows.
- Nine-month operating cash flow was $1.384 million, investing cash outflow was $0.042 million, and financing cash outflow was $1.218 million. Cash increased $0.124 million to $8.178 million. Dividends paid were $0.801 million.
- At June 30, 2011, total assets were $31.966 million and stockholders’ equity was $24.812 million. Current assets of $9.023 million exceeded current liabilities of $1.388 million. Bank debt totaled $2.708 million, including $0.625 million current and $2.083 million long-term.
Material changes and management commentary
- Lower advisory revenue reflected reduced average fund assets and net outflows; shareholder-service fees increased following the introduction of fees on certain fund share classes. Quarterly outflows were especially notable in the Cornerstone Growth and SPARX Japan funds.
- Management attributed investor redemptions to market volatility, investor caution, withdrawals for living expenses, and performance sensitivity; six of ten funds outperformed their benchmarks year to date. The Cornerstone Growth Fund represented about 22.8% of quarterly average AUM.
- Interest expense increased following a September 2010 loan amendment that added $2.0 million of borrowing. The loan bears interest at prime less 1% (2.25% stated in the filing), requires monthly principal payments, and matures September 30, 2015. The company reported compliance with its financial covenants.
- Trading operations were consolidated at the Novato headquarters in January 2011; the Stamford lease remained payable through August 2011. Management reported no material change in lease commitments.
Outlook, risks, and contingencies
- No specific financial guidance was provided. Management expected cash and liquid assets on hand to meet short-term capital needs; it said additional debt or equity might be needed for long-term requirements if operating cash and liquid resources prove insufficient, with no assurance such financing would be available.
- Results depend heavily on average AUM and are exposed to market performance, redemptions, fund flows, competition, regulation, and economic conditions. Management noted that a significant portion of expenses is fixed, so revenue fluctuations can materially affect earnings.
- Management reported no indicators of impairment for the $22.284 million management-contract asset as of June 30, 2011. A future decline in market valuations could lead to impairment and reduce earnings.
- Fund management agreements are renewed annually; the applicable boards renewed them in March 2011 for one year. Agreements may also terminate upon assignment or with 60 days’ notice. The filing reports no material changes in lease arrangements and identifies commitments and contingencies, but provides no clear quantified material contingency.
- 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 fund flows and market performance sustain or reverse the reported period-end AUM increase, given the nine-month net outflows.
- The effect of fund concentration and relative benchmark performance on future AUM, fee revenue, and margins.
- Debt amortization, covenant compliance, and available liquidity if cash flows weaken or long-term funding is needed.
- Assumptions underlying management-contract impairment testing and the sensitivity of the $22.284 million carrying value to AUM growth and client attrition.
- Annual renewal and termination status of fund management agreements, and any subsequent changes in fee waivers or commitments.