Diamond Hill(DHIL) - 2021 Q3 - Quarterly Report

Part I: Financial Information Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements, highlighting significant revenue and net income growth from AUM and performance fees Consolidated Balance Sheets Consolidated Balance Sheet Summary (Unaudited) | Account | 9/30/2021 ($) | 12/31/2020 ($) | | :--- | :--- | :--- | | Total Assets | 316,744,019 | 263,097,341 | | Cash and cash equivalents | 98,580,247 | 98,478,202 | | Investments | 167,692,971 | 128,401,136 | | Total Liabilities | 75,319,635 | 69,644,255 | | Total Shareholders' Equity | 228,056,910 | 184,080,753 | | Book value per share | 71.89 | 58.09 | Consolidated Statements of Income Consolidated Statements of Income (Unaudited) | Metric | Three Months Ended 9/30/2021 ($) | Three Months Ended 9/30/2020 ($) | Nine Months Ended 9/30/2021 ($) | Nine Months Ended 9/30/2020 ($) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 55,054,554 | 31,175,755 | 139,138,640 | 91,350,429 | | Net Operating Income | 28,320,989 | 9,969,599 | 59,619,985 | 37,462,427 | | Gain on sale of advisory contracts | 9,000,000 | 0 | 9,000,000 | 0 | | Net Income | 24,875,795 | 11,140,583 | 56,764,946 | 22,250,694 | | Diluted EPS | 8.03 | 3.30 | 17.66 | 7.52 | Consolidated Statements of Cash Flows Consolidated Cash Flow Summary (Unaudited) | Cash Flow Activity | Nine Months Ended 9/30/2021 ($) | Nine Months Ended 9/30/2020 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | 15,319,993 | 38,202,042 | | Net cash provided by (used in) investing activities | (543,374) | 10,693,754 | | Net cash used in financing activities | (14,674,574) | (24,318,377) | | Net change in Cash and Cash Equivalents | 102,045 | 24,577,419 | | Cash and cash equivalents at end of period | 98,580,247 | 117,753,672 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial results, including significant performance fees, advisory contract sale, and post-quarter dividend declarations - In Q3 2021, the company recognized $11.9 million in performance-based fees as a significant agreement reached its first five-year measurement term. No such fees were recorded in the comparable 2020 period[57][52] - On July 30, 2021, the company sold its high yield-focused advisory contracts to Brandywine Global for an initial cash payment of $9.0 million, which was recognized as a gain. An additional $13.0 million in payments is contingent on future net revenue[98][99][101] - Subsequent to the quarter end, on October 26, 2021, the Board approved a special cash dividend of $19.00 per share and a regular Q4 dividend of $1.00 per share. The company also expects to increase its regular quarterly dividend to $1.50 per share starting in Q1 2022[103][104] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant financial performance growth in Q3 and YTD 2021, driven by AUM increase, performance fees, and strong liquidity Assets Under Management Assets Under Management (AUM) as of September 30 | Metric | 2021 (million $) | 2020 (million $) | % Change | | :--- | :--- | :--- | :--- | | Total AUM | 29,186 | 22,283 | 31% | | Proprietary funds | 18,750 | 14,761 | 27% | | Sub-advised funds | 3,665 | 2,750 | 33% | | Separately managed accounts | 6,771 | 4,772 | 42% | - For the nine months ended September 30, 2021, AUM increased by $2.8 billion, primarily due to market appreciation and net inflows of $2.4 billion, partially offset by the sale of high yield-focused advisory contracts which reduced AUM by $3.5 billion[121][118] - Net cash inflows for the nine months ended September 30, 2021, were $2.36 billion, a significant improvement from $580 million in the same period of 2020. Equity strategies saw inflows of $1.18 billion, reversing outflows of $540 million from the prior year[120][118] Consolidated Results of Operations Q3 2021 vs Q3 2020 Performance | Metric | Q3 2021 ($M) | Q3 2020 ($M) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 55.1 | 31.2 | 77% | | Net Operating Income | 28.3 | 10.0 | 184% | | Net Income Attributable to Common Shareholders | 25.6 | 10.6 | 143% | | Diluted EPS | 8.03 | 3.30 | 143% | - Q3 2021 revenue growth was driven by a 39% increase in average AUM and $11.9 million in performance-based fees, which were not present in Q3 2020[127] - For the nine months ended September 30, 2021, net income attributable to common shareholders rose 131% to $56.2 million, driven by higher revenue, a $9.0 million gain on the sale of advisory contracts, and improved investment income[147][126] Liquidity and Capital Resources - The company's working capital increased to $213.5 million as of September 30, 2021, from $168.9 million at year-end 2020, reflecting strong operating cash flows[165] - During the first nine months of 2021, the company repurchased $7.5 million of its common stock. As of September 30, 2021, $27.8 million remained available for repurchase under the current program[160] - The company paid $9.5 million in regular quarterly dividends during the first nine months of 2021. A significant special dividend of $19.00 per share and a regular Q4 dividend of $1.00 per share were approved post-quarter end, totaling approximately $63.4 million[161][162] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no significant changes in its market risk exposures since the end of the fiscal year 2020 - There have been no significant changes in the Company's market risk exposures since the December 31, 2020 year-end report[192] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal controls - Management concluded that as of September 30, 2021, the Company's disclosure controls and procedures are effective[193] - No changes in internal controls over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[194] Part II: Other Information Item 1. Legal Proceedings The company reports that it is not currently party to any material legal proceedings - There are currently no pending legal matters that the Company believes could have a material adverse effect on its consolidated financial statements[195] Item 1A. Risk Factors The company states there have been no material changes to its risk factors from those disclosed in its 2020 Form 10-K - There have been no material changes to the Company's risk factors from the information disclosed in the 2020 Form 10-K[196] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's repurchase of 31,468 common shares for approximately $5.6 million during Q3 2021 Share Repurchases for Q3 2021 | Period | Total Shares Purchased (Public Program) | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | August 2021 | 17,096 | 177.99 | | September 2021 | 14,372 | 178.99 | | Total Q3 | 31,468 | 178.44 | - Through September 30, 2021, the Company has repurchased a total of 173,616 shares for $22.2 million under the 2020 Repurchase Program[201] Item 5. Other Information The company entered a new employment agreement with CEO Heather E. Brilliant, modifying her compensation structure - On October 26, 2021, the Company entered into a new employment agreement with CEO Heather E. Brilliant, which supersedes her 2019 agreement[204] - Key terms of the new agreement include: - Annual base salary of $400,000 - Eligibility for an annual incentive award with a target of $1,750,000 - Eligibility for an annual equity bonus with a target of $600,000 through October 2024, and $1,200,000 thereafter[205][208] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, the new employment agreement for the CEO, required certifications by the CEO and CFO, and XBRL data files - Key exhibits filed with this report include the Employment Agreement for CEO Heather E. Brilliant (Exhibit 10.1), and CEO and CFO certifications required by Rule 13a-14(a) (Exhibits 31.1 and 31.2)[214]