Diamond Hill(DHIL) - 2021 Q4 - Annual Report

PART I Item 1. Business Diamond Hill Investment Group (DHIL) offers investment advisory and fund administration services, emphasizing valuation-disciplined active management and AUM-based revenue - Diamond Hill Investment Group, Inc. (DHIL) generates revenue from investment advisory and fund administration services through its wholly-owned subsidiary, Diamond Hill Capital Management, Inc. (DHCM)[13][284] - DHCM's core values include curiosity, ownership, trust, and respect, fostering an environment focused on client success and long-term investment outcomes[14][51][52] Assets Under Management (AUM) by Product (2017-2021) | (in millions) | 2021 | 2020 | 2019 | 2018 | 2017 | |:---|:---|:---|:---|:---|:---| | Proprietary funds | $19,802 | $17,615 | $16,148 | $13,440 | $15,974 | | Sub-advised funds | 3,994 | 3,185 | 2,029 | 1,358 | 1,518 | | Separately managed accounts | 7,232 | 5,611 | 5,222 | 4,310 | 4,825 | | Total AUM | $31,028 | $26,411 | $23,399 | $19,108 | $22,317 | Assets Under Advisement (AUA) from Model Delivery Programs (2017-2021) | (in millions) | 2021 | 2020 | 2019 | 2018 | 2017 | |:---|:---|:---|:---|:---|:---| | Model delivery program AUA | $2,098 | $1,099 | $933 | $476 | $445 | - The company maintains capacity discipline, closing strategies to new clients if size impedes investment return goals. As of December 31, 2021, Large Cap and Small-Mid Cap strategies were closed to most new investors[28] - In 2021, DHIL expanded its domestic equity line-up and vehicle availability, including a new Large Cap Concentrated mutual fund and collective investment trusts for several strategies. It also launched a private fund focused on micro-cap companies[31] - DHIL is subject to extensive federal, state, and non-U.S. laws and regulations, including the Advisers Act and the Investment Company Act of 1940, with potential for significant penalties for non-compliance[38][40][41] - The company is highly dependent on contractual relationships with the Funds, which generated approximately 69%, 75%, and 77% of revenues in 2021, 2020, and 2019, respectively[44][78] Workforce Data (as of December 31, 2021) | Metric | Value | |:---|:---| | Full-time equivalent employees | 128 | | Average employee tenure | ~7 years | | Employees with >10 years service | >20% | | 5-year average employee turnover | <9% | | Females on Board of Directors | 42% | | Females in management team | 66% | | Females among employees | 30% | | Racial/ethnic minorities among workforce | ~14% | ITEM 1A. Risk Factors The company faces significant business, operational, market, economic, and regulatory risks that could materially impact its financial condition and operations - Poor investment results or adverse ratings of products could diminish investor interest and reduce AUM, negatively impacting revenue and net income[63][64] - The loss of highly skilled key personnel, including portfolio managers and research analysts, could damage reputation, hinder client attraction/retention, and decrease net income due to increased compensation costs or asset loss[65][66] - Intense competition from various financial institutions, including those offering passive index strategies, could lead to market share decline, reduced AUM, and pressure to lower fees, impacting profitability[37][70][71] - Cybersecurity attacks pose a significant operational risk, potentially leading to unauthorized disclosure of sensitive information, disruption of business operations, financial losses, reputational harm, and costly litigation[81][82][85] - Revenues are highly dependent on AUM and equity market performance; declines in securities prices, sales, or increased redemptions, or economic/political events, can significantly reduce revenue and net income[99][100] - The company's business is subject to substantial governmental regulation, with frequent changes potentially increasing compliance costs, reducing revenue, and resulting in fines or lawsuits for noncompliance[105][106] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[110] Item 2. Properties The company leases a single office space in Columbus, Ohio, for operations and owns no real estate - The company leases its office space at 325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215[111] - The company does not own any real estate or interests in real estate[112] Item 3. Legal Proceedings No pending legal matters are expected to materially affect the consolidated financial statements - No legal matters are currently pending that are believed to have a material adverse effect on the consolidated financial statements[113] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Mine Safety Disclosures are not applicable[114] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities DHIL common shares trade on NASDAQ, with a 29% 5-year total return, and the Board approved a dividend increase and a new $50.0 million share repurchase program Cumulative 5-Year Total Return (as of December 31, 2021) | Entity | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | Cumulative 5 Year Total Return | |:---|:---|:---|:---|:---|:---|:---|:---| | Diamond Hill Investment Group, Inc. | $100 | $102 | $77 | $77 | $89 | $129 | 29 % | | Russell Microcap® Index | $100 | $113 | $98 | $120 | $146 | $174 | 74 % | | Peer Group* | $100 | $119 | $86 | $109 | $127 | $159 | 59 % | Quarterly Stock Prices and Dividends (2020-2021) | Quarter ended: | 2021 High Price | 2021 Low Price | 2021 Quarterly Dividend Per Share | 2021 Special Dividend Per Share | 2020 High Price | 2020 Low Price | 2020 Quarterly Dividend Per Share | 2020 Special Dividend Per Share | |:---|:---|:---|:---|:---|:---|:---|:---|:---| | March 31 | $175.00 | $141.51 | $1.00 | — | $144.40 | $81.70 | — | — | | June 30 | $178.79 | $158.59 | $1.00 | — | $122.13 | $86.00 | — | — | | September 30 | $184.60 | $161.00 | $1.00 | — | $128.08 | $111.80 | — | — | | December 31 | $231.22 | $178.75 | $1.00 | $19.00 | $160.00 | $128.01 | — | $12.00 | - The Board approved an increase in the regular quarterly dividend from $1.00 to $1.50 per share, effective Q1 2022[122] Common Share Repurchase Program Activity (Q4 2021) | Period | Total Number of Shares Purchased for Employee Tax Withholdings (a) | Average Price Paid Per Share Purchased Under the Program | Purchase Price of Shares Purchased Under the Program | Aggregate Purchase Price Yet To Be Purchased Under the Program | |:---|:---|:---|:---|:---| | October 1, 2021 through October 31, 2021 | 608 | — | — | $27,831,775 | | November 1, 2021 through November 30, 2021 | — | — | — | $27,831,775 | | December 1, 2021 through December 31, 2021 | — | $184.28 | $276,414 | $27,555,361 | | Total | 608 | | $276,414 | $27,555,361 | - The 2020 Repurchase Program expired in February 2022, and a new 2022 Repurchase Program was approved, authorizing up to $50.0 million in common share repurchases until February 2024[126][127][201] Item 6. Selected Financial Data This item is not applicable, as selected financial data is integrated within other report sections - Selected Financial Data is not applicable[129] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and operations for the past three years, detailing AUM, revenue, expenses, liquidity, and cash flow, noting significant 2021 growth - The performance of U.S. and international equity markets and the U.S. fixed income market directly impacts the company's operations and financial position[131] - The company aims to deliver market-beating returns over a full market cycle through active management and strict capacity discipline[134] Key Financial Performance Indicators (2019-2021) | Indicator | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | Ending AUM (in millions) | $31,028 | $26,411 | $23,399 | | Average AUM (in millions) | 30,297 | 21,907 | 21,653 | | Net cash inflows (outflows) (in millions) | 2,123 | 1,529 | (677) | | Total revenue (in thousands) | 182,194 | 126,388 | 136,624 | | Net operating income | 76,258 | 45,538 | 47,935 | | Net operating income, as adjusted (non-GAAP) | $83,340 | $47,757 | $53,912 | | Average advisory fee rate | 0.56 % | 0.54 % | 0.59 % | | Average advisory fee rate, excluding performance fees | 0.52 % | 0.54 % | 0.59 % | | Operating profit margin | 42 % | 36 % | 35 % | | Operating profit margin, as adjusted (non-GAAP) | 46 % | 38 % | 39 % | Consolidated Results of Operations (2019-2021) | (in thousands, except per share amounts and percentages) | 2021 | 2020 | % Change (2021 vs 2020) | 2019 | % Change (2020 vs 2019) | |:---|:---|:---|:---|:---|:---| | Total revenue | $182,194 | $126,388 | 44% | $136,624 | (7)% | | Net operating income | 76,258 | 45,538 | 67% | 47,935 | (5)% | | Investment income, net | 16,381 | 6,585 | 149% | 30,507 | (78)% | | Gain on sale of high yield-focused advisory contracts | 9,000 | — | NM | — | NM | | Income tax expense | 26,050 | 13,958 | 87% | 18,688 | (25)% | | Net income attributable to common shareholders | 74,201 | 38,661 | 92% | 54,959 | (30)% | | Earnings per share attributable to common shareholders (diluted) | $23.34 | $12.03 | 94% | $15.99 | (25)% | | Operating profit margin | 42 % | 36 % | NM | 35 % | NM | - Revenue increased by $55.8 million (44%) in 2021 compared to 2020, primarily due to a 38% increase in average AUM and $11.9 million in performance-based fees, partially offset by a decrease in the average advisory fee rate[160][176][177] - Net income attributable to common shareholders increased by 92% to $74.2 million ($23.34 diluted EPS) in 2021, driven by increased revenues, higher investment income, and a $9.0 million gain from the sale of High Yield-Focused Advisory Contracts[164][167] - The company's liquidity is strong, with cash flows from operating activities as the main source. Primary uses of cash include operating expenses and seed capital for new investment strategies[198][199] Cash Dividends Paid (2019-2021) | Year | Total Dividends Per Share | |:---|:---| | 2021 | $23.00 | | 2020 | $12.00 | | 2019 | $9.00 | Contractual Obligations (as of December 31, 2021) | | Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |:---|:---|:---|:---|:---|:---|:---|:---| | Operating lease obligations | $2,028,581 | $624,179 | $624,179 | $624,179 | $156,044 | $— | $— | | Purchase obligations | 7,099,679 | 3,960,575 | 1,670,814 | 709,138 | 706,027 | 53,125 | — | | Deferred compensation obligations | 37,348,294 | 3,474,351 | 3,911,526 | 4,288,132 | 4,942,954 | 2,262,332 | 18,468,999 | | Total | $46,476,554 | $8,059,105 | $6,206,519 | $5,621,449 | $5,805,025 | $2,315,457 | $18,468,999 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk Revenues and net income are highly sensitive to AUM and market values, with investments subject to price risk, where a 10% change significantly impacts fair value - The majority of the company's revenue and net income are directly impacted by the value of its AUM and financial market values[244] - Investments in company funds are sensitive to market risk, specifically price risk, which can lead to potential future loss of value[245] Market Risk Sensitivity (as of December 31, 2021) | | Fair Value as of December 31, 2021 | Fair Value Assuming a Hypothetical 10% Increase | Fair Value Assuming a Hypothetical 10% Decrease | |:---|:---|:---|:---| | Equity investments | $115,079,799 | $126,587,779 | $103,571,819 | | Fixed Income investments | 51,576,202 | 56,733,822 | 46,418,582 | | Total | $166,656,001 | $183,321,601 | $149,990,401 | Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements and the independent auditor's unqualified opinion on financial statements and internal controls, with detailed notes - KPMG LLP issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2021, and on the effectiveness of internal control over financial reporting as of December 31, 2021[253][254][265][266] Consolidated Balance Sheets (as of December 31, 2021 and 2020) | ASSETS | 2021 | 2020 | |:---|:---|:---| | Cash and cash equivalents | $80,550,393 | $98,478,202 | | Investments | 166,656,001 | 128,401,136 | | Accounts receivable | 20,443,562 | 17,805,864 | | Prepaid expenses | 2,555,296 | 2,977,759 | | Income taxes receivable | — | 256,538 | | Property and equipment, net of depreciation | 6,100,599 | 6,740,396 | | Deferred taxes | 9,847,552 | 8,437,446 | | Total assets | $286,153,403 | $263,097,341 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Liabilities | | | | Accounts payable and accrued expenses | $8,588,713 | $8,002,303 | | Accrued incentive compensation | 37,235,418 | 28,400,000 | | Deferred compensation | 37,348,294 | 33,241,952 | | Income taxes payable | 801,740 | — | | Total liabilities | 83,974,165 | 69,644,255 | | Redeemable noncontrolling interest | 17,756,336 | 9,372,333 | | Permanent Shareholders' Equity | | | | Common stock, no par value | 80,434,049 | 80,810,946 | | Deferred equity compensation | (15,268,705) | (14,748,118) | | Retained Earnings | 119,257,558 | 118,017,925 | | Total permanent shareholders' equity | 184,422,902 | 184,080,753 | | Total liabilities and shareholders' equity | $286,153,403 | $263,097,341 | | Book value per share | $58.15 | $58.09 | Consolidated Statements of Income (Years Ended December 31, 2021, 2020, and 2019) | | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | REVENUES: | | | | | Investment advisory | $170,137,609 | $119,125,230 | $128,009,409 | | Mutual fund administration, net | 12,056,228 | 7,262,488 | 8,614,971 | | Total revenue | 182,193,837 | 126,387,718 | 136,624,380 | | OPERATING EXPENSES: | | | | | Compensation and related costs, excluding deferred compensation expense | 73,591,327 | 58,291,670 | 60,264,117 | | Deferred compensation expense | 7,082,153 | 2,218,898 | 5,976,938 | | General and administrative | 14,020,836 | 11,002,572 | 13,277,843 | | Sales and marketing | 7,659,423 | 5,999,846 | 5,867,297 | | Mutual fund administration | 3,581,960 | 3,336,575 | 3,302,767 | | Total operating expenses | 105,935,699 | 80,849,561 | 88,688,962 | | NET OPERATING INCOME | 76,258,138 | 45,538,157 | 47,935,418 | | Investment income, net | 16,381,216 | 6,584,849 | 30,507,375 | | Gain on sale of high yield-focused advisory contracts | 9,000,000 | — | — | | NET INCOME BEFORE TAXES | 101,639,354 | 52,123,006 | 78,442,793 | | Income tax expense | (26,049,815) | (13,957,868) | (18,688,474) | | NET INCOME | 75,589,539 | 38,165,138 | 59,754,319 | | Net loss (income) attributable to redeemable noncontrolling interest | (1,388,930) | 495,407 | (4,795,295) | | NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $74,200,609 | $38,660,545 | $54,959,024 | | Earnings per share attributable to common shareholders | | | | | Basic | $23.34 | $12.03 | $15.99 | | Diluted | $23.34 | $12.03 | $15.99 | | Weighted average shares outstanding | | | | | Basic | 3,179,497 | 3,214,564 | 3,436,574 | | Diluted | 3,179,497 | 3,214,564 | 3,436,641 | Consolidated Statements of Cash Flows (Years Ended December 31, 2021, 2020, and 2019) | | 2021 | 2020 | 2019 | |:---|:---|:---|:---| | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | Net Income | $75,589,539 | $38,165,138 | $59,754,319 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Depreciation | 1,281,420 | 992,836 | 1,164,207 | | Share-based compensation | 7,415,170 | 7,739,320 | 9,081,421 | | Increase in accounts receivable | (2,666,551) | (582,502) | (5,021,516) | | Change in current income taxes | 1,058,278 | 3,592,561 | (6,617,780) | | Change in deferred income taxes | (1,410,106) | 1,949,407 | 1,079,247 | | Gain on sale of high yield-focused advisory contracts | (9,000,000) | — | — | | Net gain on investments | (10,878,658) | (3,005,441) | (21,058,463) | | Net change in securities held by Consolidated Funds | (50,430,607) | 3,179,362 | 6,286,645 | | Increase in accrued incentive compensation | 9,365,224 | 5,180,849 | 3,516,639 | | Increase in deferred compensation | 4,106,342 | 2,899,748 | 7,954,330 | | Other changes in assets and liabilities | 1,882,186 | (338,793) | 827,194 | | Net cash provided by operating activities | 26,312,237 | 59,772,485 | 56,966,243 | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | Purchase of property and equipment | (1,104,981) | (2,450,421) | (707,790) | | Purchase of Company sponsored investments | (21,395,411) | (14,852,892) | (14,351,062) | | Proceeds from sale of Company sponsored investments | 40,764,891 | 25,715,013 | 48,637,779 | | Net cash on deconsolidation of Company sponsored investments | — | — | (22,723,853) | | Proceeds from sale of high yield-focused advisory contracts | 9,000,000 | — | — | | Net cash provided by investing activities | 27,264,499 | 8,411,700 | 10,855,074 | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | Value of shares withheld related to employee tax withholding | (1,625,413) | (1,947,456) | (1,390,482) | | Payment of dividends | (72,960,976) | (37,976,714) | (30,275,867) | | Net subscriptions (redemptions) received from redeemable noncontrolling interest holders | 10,298,891 | (4,311,084) | 11,340,880 | | Repurchase of common stock | (7,820,315) | (18,646,982) | (38,749,654) | | Proceeds received under employee stock purchase plan | 603,268 | — | — | | Net cash used in financing activities | (71,504,545) | (62,882,236) | (59,075,123) | | CASH AND CASH EQUIVALENTS | | | | | Net change during the year | (17,927,809) | 5,301,949 | 8,746,194 | | At beginning of year | 98,478,202 | 93,176,253 | 84,430,059 | | At end of year | $80,550,393 | $98,478,202 | $93,176,253 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures No changes in or disagreements with accountants on accounting and financial disclosures were reported - There are no changes in or disagreements with accountants on accounting and financial disclosures[379] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[380] - No material changes in internal control over financial reporting occurred during the year ended December 31, 2021[381] - Management assessed and concluded that the company's internal control over financial reporting was effective as of December 31, 2021[384][385] Item 9B. Other Information No other information required by this item was reported - No other information is reported under this item[387] Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[388] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement[390] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the 2022 Proxy Statement - Information on executive compensation is incorporated by reference from the 2022 Proxy Statement[391] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Security ownership and equity compensation plan information is incorporated by reference from the 2022 Proxy Statement - Information on security ownership and equity compensation plans is incorporated by reference from the 2022 Proxy Statement[392][394] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement[394] Item 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2022 Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the 2022 Proxy Statement[395] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits, with schedules omitted as information is in the financial statements or notes - Financial statements are referenced from Part II, Item 8[397] - All financial statement schedules are omitted as the required information is included in the accompanying financial statements or notes[397] - A comprehensive list of exhibits, including organizational documents, agreements, and certifications, is provided[397][398] Item 16. Form 10-K Summary The company does not provide a separate Form 10-K summary - No Form 10-K Summary is provided[400] Signatures The report is signed by the CEO, CFO, Controller, and Directors, affirming compliance with the Securities Exchange Act of 1934 - The report is signed by Heather E. Brilliant (CEO and President), Thomas E. Line (CFO and Treasurer), Jeffrey J. Cook (Controller), and several Directors, dated February 25, 2022[402][403]