Hennessy Advisors, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019; the filing was dated December 3, 2019. This is an annual report, not a standalone fourth-quarter report. Hennessy Advisors is an investment manager whose primary revenue comes from advisory fees on assets managed in its 16 open-end mutual funds; it also earns shareholder-service fees.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $42.7 million | $54.6 million |
| Operating income | $16.0 million; 37.5% margin | $24.5 million; 44.8% margin |
| Net income | $11.0 million; 25.8% margin | $20.6 million; 37.8% margin |
| Diluted EPS | $1.42 | $2.61 |
| Cash from operating activities | $14.4 million | $21.5 million |
| Cash and cash equivalents at year-end | $24.7 million | $25.4 million |
| Gross term-loan balance at year-end | $17.5 million | $21.9 million |
- Revenue fell 21.8%, mainly because average fund assets declined. Advisory fees were $39.4 million and shareholder-service fees were $3.4 million. Sub-advisory fees of $9.2 million are reported as operating expense.
- Operating expenses declined 11.4% to $26.7 million, but rose as a share of revenue to 62.5% from 55.2%. Interest expense was $1.1 million.
- Net cash used in investing activities was $2.0 million; net cash used in financing activities was $13.1 million. Cash declined $0.7 million during the year.
- Year-end total assets were $110.2 million and stockholders’ equity was $75.5 million. Current assets were $29.0 million and current liabilities were $11.4 million.
Material changes and operating trends
- Assets under management (AUM) ended the year at $4.874 billion, down 21.4% from $6.198 billion. Average AUM was $5.2 billion.
- AUM activity included $825.5 million of organic inflows, $2.375 billion of redemptions, $194.9 million of acquisition inflows, and $30.5 million of market appreciation. Monthly redemptions averaged 3.7% of AUM, up from 3.0% in FY2018.
- The October 2018 acquisition of the BP Capital energy and midstream fund management assets added nearly $200 million of AUM and established two funds sub-advised by BP Capital.
- The Hennessy Focus Fund had the largest net outflow ($768 million); the Mid Cap 30 Fund had $390 million of net outflows and the Gas Utility Fund $192 million. The Japan Fund was the largest net inflow, at $146 million.
- Hennessy repurchased 495,947 shares under its buyback program for $4.75 million. It declared $0.47 per share in dividends for FY2019, versus $0.39 in FY2018; the quarterly rate rose to $0.1375 in August 2019.
Outlook, risks, and unusual items
- Outlook: No quantified earnings, revenue, or AUM guidance is provided. Management says it will focus on fund performance, investor service, retaining and attracting fund assets, and pursuing strategic acquisitions. It expected available cash and liquid assets to meet capital needs for at least one year from the report’s issuance, while noting additional capital might be needed for longer-term needs.
- Key risks: Revenue depends on AUM and is vulnerable to market declines, redemptions, weak relative fund performance, fee pressure, and reduced distribution access. Revenue is concentrated: the Focus Fund represented 42% of total revenue, Japan 12%, and Gas Utility 10% in FY2019. The firm also identifies sub-advisor, regulatory, cybersecurity, key-personnel, acquisition, and purchased-management-contract impairment risks.
- Debt and contingencies: The $17.5 million term loan is secured by substantially all company assets, bears a floating rate (4.350% at year-end), and matures in installments through May 2022. The company reported compliance with loan covenants. It had $0.60 million of gross unrecognized tax benefits and $0.23 million of accrued interest and penalties. Minimum operating-lease commitments were $0.772 million for FY2020–FY2021. The filing reports no legal proceedings.
- Unusual comparison: FY2018 included an approximately $4 million non-cash tax benefit from remeasuring deferred taxes after the 2017 Tax Act. This materially reduced FY2018 tax expense and makes the year-over-year net-income comparison less representative of underlying operating change.
- Management described U.S. equity markets as positive but noted market volatility and sharp declines during FY2019. Seven of 16 funds had positive one-year returns; the BP Energy Fund’s one-year return was -32.4% for Investor Class shares.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting and disclosure controls were effective as of September 30, 2019.
Important facts for investors to verify
- Whether AUM outflows continue, particularly in the Focus Fund, and how that affects fee revenue and profitability.
- The performance and asset retention of the three funds generating the largest shares of revenue, including the highly concentrated Focus Fund exposure.
- Debt repayment, floating-rate exposure, covenant headroom, and the effect of the LIBOR transition provisions.
- The carrying value and impairment assumptions for $80.6 million of indefinite-lived management contracts.
- The sustainability of dividends and share repurchases relative to operating cash flow, acquisition spending, and declining AUM.