Hamilton Lane(HLNE) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides Hamilton Lane's unaudited condensed consolidated financial statements and management's discussion and analysis for the three and six months ended September 30, 2020 Financial Statements This section presents Hamilton Lane's unaudited condensed consolidated financial statements for Q2 and H1 2020, highlighting asset growth, increased revenue, and net income Condensed Consolidated Balance Sheets Total assets increased to $608.1 million by September 30, 2020, driven by deferred income taxes and investments, with total liabilities rising to $344.9 million and equity to $263.2 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | March 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $81,987 | $50,124 | | Investments | $224,032 | $207,747 | | Deferred income taxes | $220,815 | $137,941 | | Total assets | $608,089 | $473,529 | | Liabilities & Equity | | | | Debt | $74,084 | $74,524 | | Payable to related parties pursuant to tax receivable agreement | $176,046 | $98,956 | | Total liabilities | $344,894 | $236,128 | | Total equity | $263,195 | $237,401 | Condensed Consolidated Statements of Income Total revenues for Q2 2020 increased 31% to $84.4 million due to higher incentive fees, with net income attributable to HLI at $21.8 million Income Statement Summary (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Management and advisory fees | $66,367 | $59,196 | $133,634 | $119,747 | | Incentive fees | $18,064 | $5,096 | $20,541 | $9,231 | | Total revenues | $84,431 | $64,292 | $154,175 | $128,978 | | Total expenses | $46,117 | $37,367 | $87,028 | $75,060 | | Net income | $44,599 | $32,273 | $49,567 | $59,726 | | Net income attributable to HLI | $21,813 | $15,299 | $25,059 | $26,680 | | Diluted EPS of Class A stock | $0.66 | $0.56 | $0.79 | $0.98 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income for Q2 2020 increased to $44.7 million, with $21.9 million attributable to Hamilton Lane Incorporated Comprehensive Income (in thousands) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income | $44,599 | $32,273 | $49,567 | $59,726 | | Comprehensive income | $44,739 | $32,231 | $49,697 | $59,697 | | Comprehensive income attributable to HLI | $21,897 | $15,278 | $25,137 | $26,666 | Condensed Consolidated Statements of Stockholders' Equity Total equity increased to $263.2 million by September 30, 2020, driven by net income and deferred tax adjustments, partially offset by dividends and distributions - Key drivers of the change in total equity for the six months ended September 30, 2020 include net income ($49.6 million), deferred tax adjustments ($14.4 million), equity-based compensation ($3.6 million), offset by dividends declared ($20.9 million) and member distributions ($20.6 million)[25] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities for H1 2020 increased to $89.6 million, while cash used in investing and financing activities totaled $17.4 million and $40.6 million, respectively Cash Flow Summary (in thousands) | Activity | Six Months Ended Sep 30, 2020 | Six Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $89,634 | $66,203 | | Net cash used in investing activities | ($17,351) | ($10,780) | | Net cash used in financing activities | ($40,594) | ($31,945) | | Increase in cash, cash equivalents, and restricted cash | $31,819 | $23,493 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation, investments, stock offerings, unfunded commitments, and a declared quarterly dividend Revenue by Product Offering (in thousands) | Revenue Source | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Management and advisory fees | | | | Specialized funds | $31,717 | $26,985 | | Customized separate accounts | $23,800 | $22,466 | | Advisory & Other | $10,603 | $9,743 | | Total management and advisory fees | $66,367 | $59,196 | | Incentive fees | $18,064 | $5,096 | - The company completed two registered offerings of Class A common stock: one in June 2020 for 2,995,757 shares and another in September 2020 for 2,207,380 shares. Proceeds were used to settle exchanges of HLA units[59][60] - As of September 30, 2020, the company had an aggregate unfunded commitment to its Partnerships of $170.8 million[81] - On November 4, 2020, the company declared a quarterly dividend of $0.3125 per share of Class A common stock, payable on January 7, 2021[85] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2020 financial performance, noting a 31% revenue increase driven by fees, 23% expense growth, COVID-19 impact, $39.2 billion Fee-Earning AUM, and strong liquidity Business Overview Hamilton Lane provides private markets investment solutions, managing $57 billion in customized separate accounts AUM, $16 billion in specialized funds AUM, and $474 billion in AUA as of September 30, 2020 - The company's primary business lines are Customized Separate Accounts ($57 billion AUM), Specialized Funds ($16 billion AUM), and Advisory Services (~$474 billion AUA) as of September 30, 2020[91] Trends Affecting Our Business The COVID-19 pandemic poses risks including valuation volatility and fundraising challenges, though the company maintains strong liquidity with $82.0 million cash and $125 million credit availability - Key business risks from the ongoing COVID-19 pandemic include: volatility in investment valuations, potential decrease in incentive fee revenue due to limited exit opportunities, and challenges in fundraising and new business development due to travel restrictions and market uncertainty[98] - As of September 30, 2020, the company has $82.0 million in available cash and $125 million in availability under its loan agreements, providing adequate liquidity[98] Consolidated Results of Operations Q2 2020 total revenues grew 31% to $84.4 million driven by fees, while expenses rose 23% due to compensation, and equity in income of investees increased $14.3 million - Q2 2020 revenues increased 31% YoY, driven by a $4.7 million increase in specialized funds revenue (including $2.9 million in retroactive fees) and a $13.0 million increase in incentive fees[127][128][129] - Q2 2020 expenses increased 23% YoY, primarily due to an $11.3 million (48%) increase in compensation and benefits, partially offset by a $2.6 million decrease in G&A expenses from lower travel and consulting fees[133][134][135] - Equity in income of investees increased by $14.3 million in Q2 2020 compared to Q2 2019, reflecting the recovery of public and private market valuations from the COVID-19 downturn experienced in the quarter ended March 31, 2020[142] Fee-Earning AUM Fee-earning AUM increased by $0.2 billion to $39.2 billion in Q3 2020, with customized separate accounts growing to $24.6 billion and specialized funds decreasing to $14.6 billion Fee-Earning AUM Rollforward - Q3 2020 (in millions) | Category | Beginning Balance | Contributions | Distributions | FX/Market/Other | Ending Balance | | :--- | :--- | :--- | :--- | :--- | :--- | | Customized Separate Accounts | $24,286 | $1,368 | ($1,099) | $33 | $24,588 | | Specialized Funds | $14,720 | $368 | ($462) | $13 | $14,639 | | Total | $39,006 | $1,736 | ($1,561) | $46 | $39,227 | Non-GAAP Financial Measures Non-GAAP metrics for Q2 2020 show Fee Related Earnings of $28.5 million, Adjusted EBITDA of $40.5 million, and Non-GAAP EPS of $0.78 Non-GAAP Financial Highlights (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Fee Related Earnings | $28,497 | $24,221 | | Adjusted EBITDA | $40,481 | $29,574 | | Adjusted net income | $41,993 | $26,596 | | Non-GAAP earnings per share | $0.78 | $0.50 | Liquidity and Capital Resources The company maintains strong liquidity with $82.0 million cash and $74.5 million debt, supported by operating cash flow of $89.6 million for H1 2020, with a $50 million share repurchase program available - As of September 30, 2020, the company had $82.0 million in cash and cash equivalents and $74.5 million in outstanding debt[182][187] - The company has a $50 million stock repurchase program authorized in November 2018, under which no shares have been repurchased to date[190] Cash Flow Summary - Six Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $89,634 | $66,203 | | Net cash used in investing activities | ($17,351) | ($10,780) | | Net cash used in financing activities | ($40,594) | ($31,945) | Quantitative and Qualitative Disclosures about Market Risk Primary market risk stems from investment fair value fluctuations impacting 'equity in income of investees', with limited exchange rate risk and interest rate risk from $74.5 million floating-rate debt - The company's main market risk is the fluctuation in the fair value of its fund investments, which impacts equity in income of investees; management and incentive fees are less affected[207][208] - As of September 30, 2020, the company had $74.5 million in floating-rate debt; a 100 basis point increase in interest rates is estimated to increase annual interest expense by $0.4 million[210][211] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[215] - No changes were made to the internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[216] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, and exhibits for Hamilton Lane Incorporated Legal Proceedings The company is not currently involved in any legal proceedings expected to materially impact its financial statements - In the opinion of management, it is not probable that any pending or threatened legal proceeding would individually or in the aggregate materially affect the company's condensed consolidated financial statements[219] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - No material changes from the risk factors disclosed in the 2020 Form 10-K have occurred[220] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the company repurchased 511 shares of Class A common stock for employee tax obligations, with no repurchases under its $50 million stock repurchase program - In August 2020, 511 shares of Class A common stock were repurchased at an average price of $69.82 to satisfy employee tax withholding obligations on vested restricted stock[221] - The company has not repurchased any shares under its $50 million Stock Repurchase Program, leaving the full authority available[222] Exhibits This section lists exhibits filed with the Form 10-Q, including loan agreement amendments and CEO/CFO certifications - Key exhibits filed include amendments to various loan and security agreements with First Republic Bank and certifications by the Principal Executive Officer and Principal Financial Officer[224]