Diamond Hill(DHIL) - 2021 Q1 - Quarterly Report

Part I: Financial Information This section provides the company's unaudited consolidated financial statements and management's discussion for the first quarter of 2021 Consolidated Financial Statements This section presents the unaudited consolidated financial statements for Q1 2021, including balance sheets, income statements, cash flows, and detailed notes Financial Statements Overview Q1 2021 saw net income of $13.7 million, total assets of $259.7 million, and $(15.7) million net cash used in operations Consolidated Balance Sheet Summary (Unaudited, in USD) | Account | March 31, 2021 (USD) | December 31, 2020 (USD) | | :--- | :--- | :--- | | Total Assets | $259,665,393 | $263,097,341 | | Total Liabilities | $54,559,169 | $69,644,255 | | Total Shareholders' Equity | $194,441,078 | $184,080,753 | | Total Liabilities and Shareholders' Equity | $259,665,393 | $263,097,341 | Consolidated Statement of Income Summary (Unaudited, in thousands USD) | Metric | Three Months Ended March 31, 2021 (in thousands USD) | Three Months Ended March 31, 2020 (in thousands USD) | | :--- | :--- | :--- | | Total Revenue | $39,014 | $31,926 | | Net Operating Income | $13,532 | $20,465 | | Investment Income (Loss), Net | $5,663 | $(22,398) | | Net Income Attributable to Common Shareholders | $13,709 | $1,530 | | Diluted EPS | $4.34 | $0.47 | Consolidated Statement of Cash Flows Summary (Unaudited, in USD) | Cash Flow Activity | Three Months Ended March 31, 2021 (USD) | Three Months Ended March 31, 2020 (USD) | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(15,660,505) | $1,990,996 | | Net Cash Provided by Investing Activities | $1,587,873 | $12,145,851 | | Net Cash Used in Financing Activities | $(4,217,885) | $(10,001,543) | | Net Change in Cash and Cash Equivalents | $(18,290,517) | $4,135,304 | Note 2: Significant Accounting Policies This note details the company's accounting policies, including U.S. GAAP basis, consolidation principles, and revenue recognition from advisory fees - The company consolidates funds where its ownership represents a majority interest (greater than 50%), including the Diamond Hill Large Cap Concentrated, International, and Global Funds as of March 31, 2021[28] Revenue by Source (Three Months Ended March 31, in USD) | Revenue Source | 2021 (USD) | 2020 (USD) | | :--- | :--- | :--- | | Investment Advisory | | | | Proprietary funds | $26,510,701 | $23,454,563 | | Sub-advised funds and separately managed accounts | $10,058,402 | $6,703,117 | | Mutual fund administration, net | $2,445,330 | $1,768,065 | | Total Revenue | $39,014,433 | $31,925,745 | - As of March 31, 2021, the company had $443.4 million in AUM subject to performance-based fees, with unearned potential fees of $10.1 million based on investment results to date, with no performance-based fees recorded in Q1 2021 or Q1 2020[44] Note 3: Investments Investments increased to $142.7 million by March 31, 2021, with Q1 2021 net investment income of $5.7 million, a recovery from prior year losses Carrying Value of Investments (in USD) | Investment Type | March 31, 2021 (USD) | December 31, 2020 (USD) | | :--- | :--- | :--- | | Securities held in Consolidated Funds | $47,164,927 | $33,233,307 | | Company sponsored investments | $95,530,265 | $95,167,829 | | Total Investments | $142,695,192 | $128,401,136 | Components of Net Investment Income (Loss) (in USD) | Component | Three Months Ended March 31, 2021 (USD) | Three Months Ended March 31, 2020 (USD) | | :--- | :--- | :--- | | Realized gains (losses) | $2,523,505 | $(817,539) | | Unrealized gains (losses) | $2,505,344 | $(22,467,598) | | Dividends | $665,009 | $894,413 | | Investment income (loss), net | $5,663,454 | $(22,398,092) | Note 11: Sale of Assets of Diamond Hill's High Yield-Focused Funds The company agreed to sell its high yield-focused funds for up to $9.0 million initial payment and $13.0 million in potential future payments - DHCM entered into an asset purchase agreement with Brandywine Global to sell its two high yield-focused mutual funds[87] - The deal consideration includes an initial payment of up to $9.0 million at closing and two potential additional payments totaling up to $13.0 million based on net revenue one year after closing[89] - The sale is subject to customary closing conditions, including shareholder approval of the acquired funds, and is expected to close on July 30, 2021[90] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 performance, highlighting 75% AUM growth, 22% revenue increase, and changes in liquidity and capital resources Assets Under Management (AUM) Total AUM grew 75% to $30.6 billion by March 31, 2021, driven by market appreciation and $1.7 billion net inflows AUM by Product (in millions) | Product | March 31, 2021 (in millions) | March 31, 2020 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Proprietary funds | $20,954 | $11,942 | 75% | | Sub-advised funds | $3,575 | $1,928 | 85% | | Separately managed accounts | $6,053 | $3,626 | 67% | | Total AUM | $30,582 | $17,496 | 75% | AUM Roll-Forward for Q1 2021 (in millions) | Description | Amount (in millions) | | :--- | :--- | | AUM at beginning of period | $26,411 | | Net cash inflows | $1,744 | | Net market appreciation and income | $2,427 | | AUM at end of period | $30,582 | - Effective March 31, 2021, the Company closed its Large Cap strategy to most new investors due to strong inflows[104] Consolidated Results of Operations Q1 2021 revenue increased 22% to $39.0 million, with net income surging 796% to $13.7 million, despite a 34% decline in reported net operating income Q1 2021 vs. Q1 2020 Performance Summary (in thousands) | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total revenue | $39,014 | $31,926 | 22% | | Net operating income | $13,532 | $20,465 | (34)% | | Net operating income, as adjusted (Non-GAAP) | $16,635 | $12,309 | 35% | | Net income attributable to common shareholders | $13,709 | $1,530 | 796% | | Diluted EPS | $4.34 | $0.47 | 823% | - The 22% increase in revenue was primarily due to a 35% increase in average AUM, partially offset by a decrease in the average advisory fee rate from 0.58% to 0.53% due to a shift in asset mix to lower-fee strategies[109][115] - Deferred compensation expense was $3.1 million in Q1 2021 compared to a benefit of $(8.2) million in Q1 2020, significantly impacting reported operating income due to market performance of plan investments[118] Liquidity and Capital Resources The company maintains strong liquidity, repurchased $1.9 million in shares, and initiated a $1.00 per share quarterly dividend in Q1 2021 - The company's main source of liquidity is cash flow from operating activities, believed sufficient to meet operating needs for the next 12 months[124] - Under its $50.0 million share repurchase program, the company repurchased $1.9 million of common shares during Q1 2021, with $33.5 million remaining available[128] - The Board of Directors instituted a regular quarterly dividend of $1.00 per share, with the first payment made in March 2021 and a second approved in April 2021[129] Quantitative and Qualitative Disclosures About Market Risk No significant changes in market risk exposures have occurred since the December 31, 2020, Annual Report on Form 10-K - There have been no significant changes in the Company's market risk exposures since its December 31, 2020 year-end report[158] Controls and Procedures Management concluded that disclosure controls and procedures are effective, with no material changes to internal controls during Q1 2021 - Management concluded that as of the end of the period, the Company's disclosure controls and procedures are effective[159] - There were no changes in internal control over financial reporting during Q1 2021 that have materially affected, or are likely to materially affect, the company's internal controls[160] Part II: Other Information This section covers legal proceedings, risk factors, equity security sales, and exhibits for the reporting period Legal Proceedings The company is not currently involved in any legal matters expected to materially impact its consolidated financial statements - There are currently no pending legal matters that the Company believes could have a material adverse effect on its consolidated financial statements[161] Risk Factors No material changes to the company's risk factors have occurred since its 2020 Annual Report on Form 10-K - There have been no material changes to the Company's risk factors from the information disclosed in its 2020 Annual Report on Form 10-K[162] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 12,529 shares for approximately $1.9 million under its publicly announced program during Q1 2021 Share Repurchases in Q1 2021 (in USD) | Period | Total Shares Purchased (Publicly Announced Program) | Average Price Paid Per Share (USD) | Total Cost (Publicly Announced Program, USD) | | :--- | :--- | :--- | :--- | | Jan 2021 | 0 | N/A | $0 | | Feb 2021 | 0 | N/A | $0 | | Mar 2021 | 12,529 | $151.10 | $1,893,146 | | Total Q1 | 12,529 | $151.10 | $1,893,146 | - Through March 31, 2021, the Company has repurchased a total of 141,918 shares under the 2020 Repurchase Program at a total cost of $16.5 million[166] Exhibits This section lists key exhibits, including the Asset Purchase Agreement and required CEO/CFO certifications - Key exhibits filed with this report include: - 10.1: Asset Purchase Agreement with Brandywine Global Investment Management, LLC - 31.1 & 31.2: Certifications of the CEO and CFO - 32.1: Section 1350 Certifications[171]