Hennessy Advisors, Inc. — FY2013 Form 10-K
Business context and reporting period. Hennessy Advisors is an investment manager whose revenue depends primarily on advisory fees calculated on assets in its 16 mutual funds. This annual report covers the fiscal year ended September 30, 2013; comparisons are with FY2012. The company acquired the management-related assets of the FBR fund family in October 2012, a major driver of the year’s growth.
Financial performance and position
| Metric | FY2013 / September 30, 2013 | FY2012 / September 30, 2012 |
|---|---|---|
| Revenue | $24.3 million | $7.1 million |
| Operating income / margin | $8.9 million / 36.7% | $1.8 million / 25.2% |
| Net income / net margin | $4.8 million / 19.8% | $1.0 million / 13.7% |
| Diluted EPS | $0.83 | $0.17 |
| Average assets under management (AUM) | $3.28 billion | $823.4 million |
| Year-end AUM | $4.03 billion | $919.3 million |
| Cash and cash equivalents | $8.4 million | $8.7 million |
| Operating cash flow | $6.2 million | $2.0 million |
- Revenue rose 243.7%, mainly as the FBR acquisition, market appreciation and net subscriptions lifted average AUM. Advisory fees were $23.4 million; shareholder-service fees were $0.9 million.
- Operating expenses increased to $15.4 million from $5.3 million, including higher compensation, distribution and sub-advisor costs. Expenses grew more slowly than revenue, improving the operating margin.
- Investing cash outflow was $20.5 million, principally for FBR-related payments; financing cash inflow was $14.0 million, largely from bank borrowing. Cash declined by $0.3 million during the year.
- At year-end, bank debt was $16.9 million. The balance sheet also recorded a $19.2 million remaining FBR purchase-price obligation, of which approximately $7.6 million was current and $11.6 million long-term. After year-end, the company borrowed additional funds for the final payment, bringing the loan balance to $30.0 million.
- Quarterly dividends of $0.03125 per share were paid during FY2013; total cash dividends were $0.7 million. A further $0.03125-per-share dividend was announced after year-end.
Material changes versus FY2012
- FBR added approximately $2.2 billion of AUM at acquisition. Year-end AUM increased by $3.1 billion overall; market appreciation was $648.8 million. Management reported approximately $243 million in net inflows, with higher redemptions offset by subscriptions.
- Sub-advisor fees rose to $3.9 million from $0.5 million, reflecting newly sub-advised funds. Interest expense increased to $0.7 million from $0.05 million as acquisition-related borrowing increased.
- Management contracts, an indefinite-lived intangible asset, increased to $62.4 million from $22.6 million. The company reported no impairment at year-end.
Outlook, commentary and risks
- Management said available cash and the post-year-end loan amendment were expected to meet short-term capital needs; additional capital might be needed for longer-term requirements. No specific earnings or AUM guidance was provided.
- Management attributed asset growth to the acquisition, favorable markets, net inflows and expanded distribution and marketing. Fifteen of 16 funds had positive FY2013 returns, though several funds lagged relevant benchmarks over the one-year period.
- Key risks include market declines and redemptions reducing fee-based AUM; investment performance and competition; reliance on intermediary distribution platforms; annual renewal and termination rights for advisory contracts; floating-rate, covenant-bearing debt; and possible impairment of management-contract assets.
- The loan is secured by company assets and bears interest at prime plus 0.75% (4.00% at the stated rate). The filing reports compliance with loan covenants at September 30, 2013 and expected compliance for the first subsequent reporting period.
- The FBR contingent purchase payment and related borrowing, as well as a post-year-end extension of the Novato office lease through March 2017, are notable subsequent events. Management reported no legal proceedings. The independent auditor issued an unqualified opinion; management assessed internal control over financial reporting as effective.
Important facts for investors to verify
- Whether FBR-related AUM and net inflows were retained after acquisition, given substantial redemptions and the concentration of revenue in a few funds.
- Post-acquisition debt repayment capacity, loan covenants, floating-rate exposure and the effect of the $30.0 million loan balance on liquidity.
- Fund performance relative to appropriate benchmarks and any resulting effects on subscriptions, redemptions and fee revenue.
- Assumptions supporting the $62.4 million management-contract asset valuation and future impairment testing.
- The sustainability of the improved margins, which followed a large acquisition-driven increase in revenue, alongside higher sub-advisor, distribution and personnel costs.