Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2017 (fiscal second quarter). Unaudited results are compared with the corresponding 2016 periods. The company advises 14 open-end mutual funds and provides shareholder services.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2017 (year-over-year change) | $13.236 million (+8.6%) | $26.530 million (+4.7%) |
| Net operating income, 2017 | $6.111 million (+12.1%) | $12.353 million (+5.5%) |
| Net income, 2017 (year-over-year change) | $3.628 million (+10.5%) | $7.624 million (+10.0%) |
| Diluted earnings per share, 2017 | $0.47 | $0.98 |
| Operating cash flow, 2017 | Not separately provided | $7.938 million, versus $7.678 million |
For the quarter, operating margin (net operating income as a share of revenue) was 46.2%, compared with 44.7%; net margin was 27.4%, versus 26.9%. For the six months, those margins were 46.6% versus 46.2%, and 28.7% versus 27.4%, respectively. Six-month operating expenses rose 4.0% to $14.177 million; compensation and sub-advisor fees increased, while general and administrative and distribution expenses decreased. Lower distribution expense partly reflected fund-level distribution plans and payment timing.
Financial position and liquidity
- At March 31, 2017, cash and equivalents were $8.099 million, up from $3.535 million at September 30, 2016. Total assets were $89.243 million and stockholders’ equity was $44.771 million.
- Debt was $28.438 million gross, or $28.071 million net of unamortized debt issuance costs, down from $30.625 million gross at September 30. The balance sheet reports $4.228 million as current and $23.843 million as long-term debt, net of discounts.
- Six-month cash increased $4.564 million: operating activities provided $7.938 million; investing activities used $0.187 million; and financing activities used $3.187 million, including $2.114 million of loan principal payments and $1.074 million of dividends.
- The term loan is secured by substantially all company assets, carries a March 31 effective interest rate of 3.784%, and is due September 17, 2019. The company reported compliance with its financial covenants.
- Management said cash and other liquid assets on hand were expected to meet short-term capital requirements; it noted that additional capital might be needed for long-term requirements and could not be assured.
Business trends and material changes
- Investment advisory fees drove 91% of six-month revenue and rose 6.0% to $24.172 million, mainly on higher average assets under management. Shareholder service fees fell 6.8% to $2.358 million as assets shifted toward Institutional Class shares, which do not bear those fees.
- Assets under management were $6.636 billion at March 31, up 3.3% year over year, but down 0.9% from September 30. For the six months, $436 million of market appreciation was more than offset by $499 million in net outflows. For the quarter, $221 million of appreciation was offset by $178 million in net outflows.
- The Mid Cap 30 Fund had the largest reported net outflows: $353 million for the six months and $142 million for the quarter. The Gas Utility and Equity & Income funds also had significant six-month outflows. Management reported that monthly redemptions as a percentage of assets declined year over year.
- The Westport funds acquisition, completed in September 2016, added approximately $435 million of assets under management. Management contracts, the company’s largest asset, stood at $74.478 million; management reported no impairment.
- The Hennessy Core Bond Fund was liquidated in February 2017, and the Hennessy Large Value Fund was reorganized into the Cornerstone Value Fund. The Technology Fund’s advisory fee was reduced from 0.90% to 0.74%, with a contractual expense limitation effective February 28, 2017. The filing also reports a 3-for-2 stock split effective March 6, 2017; share and per-share disclosures reflect the split.
Outlook, risks and other matters
- No specific financial guidance or quantified forecast is provided. Management’s stated strategy is to pursue acquisitions and organic growth through asset retention and inflows, while focusing on fund performance and investor service.
- Management identified redemptions, fund investment performance, market and economic conditions, interest rates, competition, regulation, and changes in investor flows as business risks. Advisory revenue depends on fund assets and therefore is exposed to market movements and net outflows. Management expected regulatory developments to add administrative and compliance costs.
- The company had recently lowered advisory fees on certain funds; the Technology Fund fee waiver reduces advisory revenue. Four funds use sub-advisors, whose fees are borne by the company.
- Management reported no material change in market risk, no material subsequent events requiring disclosure, and effective disclosure controls. The filing describes operating leases, including the Novato headquarters lease through June 2021; it reports no material change in leasing arrangements.
- Early adoption of ASU 2016-09 affected tax accounting and contributed discrete tax benefits of approximately $0.204 million across the December and March quarters; management cautioned that the guidance may increase effective tax-rate volatility.
Important facts for investors to verify
- Whether net outflows—especially from the Mid Cap 30 and Gas Utility funds—continue and how flows affect assets, fees, and earnings.
- Whether market appreciation, fund performance, and asset retention support the company’s acquisition-and-organic-growth strategy.
- Debt amortization, interest-rate exposure, covenant compliance, and the company’s capacity to meet longer-term capital needs.
- The continued effect of fee reductions, the Technology Fund expense limitation, and the shift toward Institutional Class assets on revenue and margins.
- The carrying value and impairment assumptions for management contracts, along with the renewal and retention of the underlying fund advisory agreements.