Hennessy Advisors, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021; this is an annual report, not a standalone Q4 report. Filed November 24, 2021. Hennessy is an investment manager whose revenue primarily comes from advisory fees on its 16 mutual funds, with additional shareholder-service fees.
Key financial and operating metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $32.76 million | $33.39 million |
| Operating income | $10.88 million; 33.2% margin | $11.32 million; 33.9% margin |
| Net income | $7.90 million; 24.1% margin | $7.84 million; 23.5% margin |
| Diluted EPS | $1.07 | $1.06 |
| Cash from operations | $10.39 million | $10.62 million |
| Cash and cash equivalents at year-end | $15.84 million | $9.96 million |
| Total assets / stockholders’ equity | $101.91 million / $83.26 million | $94.79 million / $78.18 million |
Average assets under management (AUM) were $3.99 billion, down 2.7% from $4.10 billion in FY2020. Period-end AUM was $4.07 billion, up 14.1%, primarily because of $1.03 billion in market appreciation. Organic inflows of $818 million were more than offset by $1.35 billion in redemptions. Revenue shown above is before the separately reported sub-advisory expense; FY2021 sub-advisory fees were $7.33 million.
At September 30, 2021, the company had no outstanding borrowings. Current assets were $19.71 million and current liabilities $5.56 million. The principal balance-sheet items included $80.64 million of management contracts and a $12.44 million net deferred tax liability. The company paid approximately $4.0 million in dividends and declared $0.55 per share for the year.
Changes versus FY2020
- Revenue decreased 1.9%, reflecting lower average AUM; advisory fees fell 1.5% and shareholder-service fees 6.5%.
- Operating expenses declined 0.9% to $21.88 million, but rose as a share of revenue to 66.8% from 66.1%. Compensation increased 2.9%, partly because FY2020 included temporary executive salary reductions; general and administrative expense fell 4.2%.
- Net income increased 0.8%, primarily because interest expense fell to zero after the company repaid its bank term loan in March 2020.
- Operating cash flow was slightly lower. Cash increased by $5.88 million, compared with a $14.73 million decrease in FY2020, when the company repaid debt and repurchased shares.
- Fund flows were uneven: the Focus, Gas Utility, and Cornerstone Mid Cap 30 Funds had the largest net outflows; the Japan, Small Cap Financial, and Japan Small Cap Funds had the largest net inflows. Average monthly redemptions declined to 2.8% of AUM from 3.6%.
Outlook, risks, and notable items
- Management said year-end cash and liquid assets were expected to cover capital needs for at least one year and longer-term requirements. No earnings, revenue, or AUM guidance was provided.
- Management’s strategy remains organic growth through marketing and distribution, retention of fund assets, and selective acquisitions. No acquisition was completed in FY2021; the most recent was in October 2018.
- Management described continued COVID-19 monitoring and said it had returned to its Novato office in August 2021. It noted that market volatility, inflation, interest-rate changes, regulation, competition, and fund redemptions could affect results.
- Revenue and AUM are concentrated: four funds represented about 74% of average AUM and 72% of revenue. Fund performance and investor redemptions can therefore materially affect the business.
- After fiscal year-end, on October 20, 2021, the company issued $40.25 million of unsecured 4.875% notes due December 31, 2026, with quarterly interest payments. The notes were not outstanding at September 30, 2021. The common stock also transferred to Nasdaq Global Market in October.
- The $80.64 million management-contract intangible was not impaired at year-end; impairment testing involves significant estimates and was identified as a critical audit matter. The auditor issued an unqualified opinion on the financial statements. The filing reports no legal proceedings and no significant contingencies beyond operating leases.
- Management reported effective disclosure controls and internal control over financial reporting. The company is a smaller reporting company and was not required to obtain an auditor opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether AUM growth can be sustained through net inflows, given FY2021 redemptions exceeded organic inflows and outflows were concentrated in major funds.
- The financial impact of the $40.25 million note issuance, including interest costs, use of proceeds, and future repayment or refinancing needs.
- Ongoing performance and asset concentration in the Focus, Japan, Gas Utility, and Cornerstone Mid Cap 30 Funds.
- Assumptions supporting the carrying value and impairment assessment of management contracts, and the trend in fee waivers and expense limitations.
- The board’s future dividend decisions; the stated dividend policy is discretionary, not guaranteed.