Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The company provides investment advisory and shareholder services to 16 mutual funds; revenue is primarily based on fund assets under management (AUM).
Financial performance
| Metric | Three months ended Mar. 31, 2020 | Year-over-year change | Six months ended Mar. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $8.879 million | Down 15.1% | $19.123 million | Down 13.5% |
| Net operating income | $2.993 million; 33.7% margin | Down from $3.958 million; margin down from 37.9% | $6.724 million; 35.2% margin | Down from $8.563 million; margin down from 38.7% |
| Net income | $1.970 million | Down 32.1% | $4.598 million | Down 22.9% |
| Diluted EPS | $0.27 | Down from $0.37 | $0.62 | Down from $0.75 |
| Operating cash flow | Not separately stated for the quarter | $5.289 million | Down from $5.464 million |
Quarterly operating expenses fell 9.4% to $5.886 million, but increased to 66.3% of revenue from 62.1%, as fixed costs declined more slowly than revenue. The six-month effective tax rate was 27.8%, versus 26.5%, mainly due to state apportionment changes. Quarterly dividends declared were $0.14 per share (six-month total $0.28).
Balance sheet, liquidity and capital allocation
- At March 31, cash and cash equivalents were $6.997 million, total assets $91.904 million, and stockholders’ equity $76.320 million.
- The company prepaid its term loan in full on March 26, 2020, paying $15.4 million from cash on hand without a prepayment penalty. It reported no debt at quarter-end. Six-month financing cash outflow was $22.200 million, including $17.500 million of loan principal payments, $2.713 million of share repurchases, and $2.007 million of dividends.
- Cash declined by $17.690 million over the six months, from $24.687 million to $6.997 million. Management said available cash and other liquid assets were expected to cover capital requirements for at least one year from the report’s issuance; additional capital, if needed, might be sought through borrowing or capital markets, with no assurance it could be raised.
- Management contracts were $80.643 million, unchanged from September 30, 2019; the company reported no impairment at either date. A deferred tax liability of $11.219 million was the largest remaining liability identified by management.
Material changes and operating trends
- Quarter-end AUM was $3.320 billion, down 35.4% from $5.136 billion a year earlier. From December 31, 2019, AUM fell from $4.979 billion, reflecting $161.4 million of organic inflows, $685.6 million of redemptions, and $1.134 billion of market depreciation.
- Lower average daily fund assets drove the revenue decline. Average AUM was $4.4 billion for the quarter, down 14.8% year over year, and $4.7 billion for the six months, down 13.1%. Management warned that the quarter-end AUM decline would pressure average assets and revenue in subsequent quarters.
- Redemptions averaged 4.9% of AUM per month in the quarter, compared with 3.4% a year earlier; for the six-month period, the rate averaged 3.6%, compared with 4.7% a year earlier. The Focus Fund had the largest net outflows in both comparison periods.
- Net operating income and net income declined despite lower operating expenses, reflecting reduced revenue and weaker operating margins. Interest expense also declined as debt was repaid.
Outlook, risks and other disclosures
- No quantitative financial guidance was provided. Management cited acquisitions and organic growth through asset retention and new inflows as business strategy priorities.
- Management said it activated its business continuity plan in mid-March, shifted employees to remote work, and continued serving the funds. It described the pandemic’s duration, economic effects, and impact on the company’s business and revenue as highly uncertain and not reasonably estimable.
- The filing identifies market volatility, fund redemptions, investment performance, competition, regulation, and COVID-19-related economic disruption as risks to AUM and revenue. All Hennessy Funds had negative returns for the quarter and one-year period ended March 31, 2020, according to management.
- The company reported no material subsequent events through issuance and no material changes to previously disclosed risk factors other than adding a public-health-emergency risk related to COVID-19. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Subsequent AUM, net flows, redemptions, and market performance, particularly for the Focus and Gas Utility Funds.
- Whether reduced AUM translates into further revenue and margin pressure, given the company’s fixed-cost base.
- Cash and liquidity trends following full debt repayment, dividends, and share repurchases.
- Whether COVID-19-related operating disruption or market conditions affect fund services, fund assets, or the company’s ability to execute its growth strategy.
- Management-contract valuation assumptions and the continued absence of impairment; the filing provides no clear quantitative sensitivity estimate.