Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter, three months ended December 31, 2013; compared with the three months ended December 31, 2012. Financial statements are unaudited. Hennessy provides investment advisory services to 16 open-end mutual funds and shareholder services to some of them; fees depend mainly on each fund’s average daily net assets.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $7.921 million | $4.703 million | +68.4% |
| Operating income | $3.075 million | $1.600 million | +92.2% |
| Operating margin | 38.8% | 34.0% | +4.8 percentage points |
| Net income | $1.457 million | $0.768 million | +89.7% |
| Net margin | 18.4% | 16.3% | +2.1 percentage points |
| Diluted EPS | $0.25 | $0.13 | — |
| Operating cash flow | $1.483 million | $(0.115) million | Improved |
| Investing cash flow | $(19.193) million | $(19.603) million | — |
| Financing cash flow | $12.331 million | $15.915 million | — |
Revenue growth reflected average assets under management (AUM) of $4.27 billion, up 74% from $2.46 billion. Advisory fees rose 71.4% to $7.693 million; shareholder service fees rose 6.5% to $0.228 million. Operating expenses increased 56.2% to $4.846 million, but declined as a share of revenue to 61.2% from 66.0%. Major expense increases included sub-advisor fees (+96.2%), distribution costs (+113.8%), and general and administrative expense (+55.5%).
Balance sheet, liquidity and debt
- At December 31, 2013, cash and cash equivalents were $3.027 million, down from $8.406 million at September 30; total assets were $69.710 million and stockholders’ equity was $31.109 million.
- Current assets of $6.509 million were approximately equal to current liabilities of $6.503 million. The filing identifies cash and receivables as the main liquid resources.
- Bank debt totaled approximately $29.5 million: $3.750 million current and $25.784 million long-term on the balance sheet. The loan is secured by company assets, bears interest at prime plus 0.75% (4.00% effective at filing), and is scheduled to mature October 26, 2017. The company reported compliance with its financial covenants.
- Cash decreased by $5.379 million during the quarter. Investing outflow primarily reflected the $19.194 million contingent FBR Funds purchase payment; financing included $13.287 million of additional bank borrowing and $0.619 million of principal payments. Quarterly dividends paid were $0.184 million.
Material changes, outlook and risks
- Total AUM reached $4.480 billion, up 48.2% from December 31, 2012. Management attributed the increase to market appreciation and net inflows; year-over-year net inflows were approximately $516.6 million and market appreciation approximately $939.7 million. Redemptions were fully offset by subscriptions in the reported quarter.
- The FBR Funds acquisition added approximately $2.2 billion in AUM. Its contingent purchase payment was determined at $19.194 million and paid in November 2013, funded partly with additional debt. Management contracts, the principal asset, were carried at $62.489 million; management reported no indicators of impairment at December 31.
- Net income included a one-time $0.23 million tax charge (about $0.04 per diluted share) from a prior-year tax provision true-up related to compensation expenses disallowed under Section 162(m). The effective tax rate was 48.5%, versus 43.2% a year earlier.
- No specific financial guidance was provided. Management expressed confidence in market and fund-flow conditions but cautioned that results depend on AUM, market performance, redemptions, interest rates, competition, and the company’s ability to retain assets. Advisory agreements generally require annual renewal and may be terminated on 60 days’ notice; failure to renew would terminate them. Management also noted that platform distribution assets are less profitable because of participation fees.
- Contractual fund expense-ratio limits resulted in $49,361 of fee waivers in the quarter; management said it did not anticipate voluntary fee waivers. The company reported no other contingencies as of December 31 beyond disclosed lease commitments.
Important facts for investors to verify
- Whether AUM growth and net inflows continue, and how much future fee revenue depends on market appreciation versus subscriptions.
- Debt repayment capacity, the effect of variable-rate borrowing, and continued compliance with bank covenants.
- Profitability after platform distribution and sub-advisor fees, especially as assets and fund mix change.
- Renewal and retention of investment advisory contracts, plus assumptions underlying the valuation and impairment testing of management contracts.
- The tax treatment of compensation and whether the reported one-time tax true-up has any continuing effects.