Hennessy Advisors, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020; this is an annual report, not a standalone fourth-quarter report. The company manages 16 open-end mutual funds and earns most of its revenue from advisory fees tied to fund assets under management (AUM). Financial statements were audited by Marcum LLP, which issued an unqualified opinion.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $33.4 million | $42.7 million |
| Revenue after sub-advisory fees | $25.8 million | $33.5 million |
| Operating income | $11.3 million; 33.9% margin | $16.0 million; 37.5% margin |
| Net income | $7.8 million; 23.5% margin | $11.0 million; 25.8% margin |
| Diluted earnings per share | $1.06 | $1.42 |
| Net cash from operating activities | $10.6 million | $14.4 million |
- Average AUM was $4.1 billion, down 21.0%; ending AUM was $3.6 billion, down 26.9% from FY2019. Redemptions were $1.77 billion, organic inflows were $571 million, and market depreciation was $109 million. There were no acquisition inflows.
- Cash and cash equivalents were $10.0 million at year-end, versus $24.7 million a year earlier. Financing cash outflow was $24.5 million, including repayment of the term loan. The company reported no bank debt at year-end; deferred income tax liability was $11.5 million.
- Total assets were $94.8 million and stockholders’ equity was $78.2 million. The $80.6 million management-contract intangible was unchanged and was not impaired in FY2020.
- The company paid $4.0 million in dividends. Dividends declared were $0.55 per share for FY2020, compared with $0.47 in FY2019. A $0.1375-per-share quarterly dividend was announced after year-end.
Changes versus FY2019
- Revenue fell 21.8%, principally because average AUM declined amid net outflows and COVID-19-related market depreciation. Net income fell 28.9%.
- Operating expenses declined 17.3% to $22.1 million, but rose as a share of revenue to 66.1% from 62.5%, as fixed costs did not fall as quickly as revenue.
- Operating cash flow decreased by $3.8 million. Cash used in financing increased, primarily because the company repaid its $15.4 million term loan in full on March 26, 2020, using cash on hand, without a prepayment penalty.
- Net outflows affected most funds; the Balanced Fund was the only fund with net inflows. The largest reported outflows were Focus ($562 million), Gas Utility ($214 million), and Mid Cap 30 ($88 million).
Outlook, commentary, and risks
- Management provided no quantified revenue or earnings guidance. It said cash and other liquid assets should meet capital requirements for at least one year from the report’s issuance, while noting that future capital raising may be needed if resources and operating cash are insufficient.
- Management described ongoing COVID-19 uncertainty and its effects on markets, fund performance, AUM, and revenues. The company shifted employees to remote work and reported continuing operations without interruption.
- Revenue exposure is concentrated: Focus, Gas Utility, and Japan represented 34%, 17%, and 16% of average AUM, respectively, and 42%, 10%, and 16% of total revenue. Revenue also depends on fund performance, investor flows, market levels, distribution platforms, and fee rates.
- Fund performance was mixed: 9 of 16 funds had positive one-year returns, and 13 had positive five-year returns. The BP Energy Fund’s one-year Investor Class return was -42.54%; the BP Midstream Fund’s was -46.40%. Past performance does not guarantee future results.
- Other key risks include competition and pressure to reduce fees, reliance on sub-advisers and third-party distribution channels, possible impairment of management contracts, regulatory and litigation exposure, cybersecurity and operational risks, and the possibility that advisory agreements are terminated or not renewed. No legal proceedings were reported; the company disclosed no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether AUM and redemption trends improved after September 30, 2020, especially in the three funds with the greatest revenue concentration.
- Whether fee waivers, lower advisory fees, or continued expense rigidity further pressure operating margins.
- Cash use following debt repayment, dividend payments, and share repurchases; the stock-buyback program was suspended March 24, 2020.
- The assumptions supporting the $80.6 million indefinite-lived management-contract asset and the $11.5 million deferred tax liability.
- Management reported effective internal control over financial reporting and disclosure controls as of year-end; the auditor was not engaged to opine on internal-control effectiveness.