Diamond Hill(DHIL) - 2022 Q1 - Quarterly Report

Part I: Financial Information This section presents the company's consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls for the reporting period Item 1. Consolidated Financial Statements The consolidated financial statements for Q1 2022 show decreased assets and equity, with revenue growth offset by investment losses leading to a significant decline in net income and negative operating cash flow Consolidated Balance Sheets Total assets decreased to $261.4 million by March 31, 2022, primarily due to reduced cash and accrued incentive compensation liability after annual payments Consolidated Balance Sheet Summary (in thousands) | Balance Sheet Item | March 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $58,779 | $80,550 | | Investments | $161,930 | $166,656 | | Total assets | $261,366 | $286,153 | | Liabilities & Equity | | | | Accrued incentive compensation | $9,401 | $37,235 | | Total liabilities | $58,018 | $83,974 | | Total permanent shareholders' equity | $182,610 | $184,423 | | Book value per share | $57.22 | $58.15 | Consolidated Statements of Income Q1 2022 revenue grew 8% to $42.3 million, but a $7.6 million net investment loss led to a 33% decline in net income to $9.1 million and reduced diluted EPS Q1 2022 vs Q1 2021 Income Statement (in thousands, except per share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total Revenue | $42,256 | $39,014 | | Net Operating Income | $19,073 | $13,532 | | Investment Income (Loss), Net | $(7,592) | $5,663 | | Net Income Attributable to Common Shareholders | $9,130 | $13,709 | | Diluted EPS | $2.87 | $4.34 | Consolidated Statements of Cash Flows Q1 2022 saw $13.7 million net cash used in operations due to incentive payouts, while financing activities used $9.9 million for share repurchases and dividends Q1 2022 vs Q1 2021 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(13,678) | $(15,661) | | Net cash provided by investing activities | $1,834 | $1,588 | | Net cash used in financing activities | $(9,927) | $(4,218) | | Net change in cash | $(21,771) | $(18,291) | Notes to Consolidated Financial Statements These notes detail the company's investment advisory business, accounting policies, revenue recognition, investment composition, compensation, income taxes, and recent corporate actions - The company's revenue is primarily derived from investment advisory and fund administration services provided by its wholly-owned subsidiary, Diamond Hill Capital Management, Inc. (DHCM)[16] Revenue by Source (Q1 2022 vs Q1 2021, in thousands) | Revenue Source | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Proprietary funds | $30,232 | $28,956 | | Separately managed accounts | $7,192 | $6,473 | | Sub-Advised funds | $3,115 | $2,678 | | Model delivery | $1,717 | $907 | - As of March 31, 2022, the company had $505.9 million in AUM subject to performance-based fees, with $1.1 million in unearned fees based on investment results to date[46] - On April 26, 2022, the Board of Directors approved a quarterly cash dividend of $1.50 per share, payable in June 2022[94] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 revenue growth driven by higher AUM, net income decline due to investment losses, AUM decrease from market depreciation, and continued capital return through repurchases and dividends Assets Under Management (AUM) Q1 2022 AUM decreased by $0.7 billion to $30.3 billion due to market depreciation, despite net cash inflows, while average AUM increased 8% year-over-year AUM Roll-Forward (in millions) | Period | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Beginning AUM | $31,028 | $26,411 | | Net cash inflows | $237 | $1,744 | | Net market appreciation (depreciation) | $(943) | $2,427 | | Ending AUM | $30,322 | $30,582 | - Model delivery Assets Under Advisement (AUA), which are not included in AUM, were $2.1 billion as of March 31, 2022, up from $1.4 billion as of March 31, 2021[109] Consolidated Results of Operations Q1 2022 revenue rose 8% to $42.3 million, and net operating income increased 41%, but a $7.6 million investment loss led to a 33% drop in net income to $9.1 million - The increase in revenue was primarily due to an 8% increase in average AUM, partially offset by a decrease in the average advisory fee rate from 0.53% to 0.52% year-over-year[113][118] - The decrease in net income was primarily due to the impact of investment losses in the current period versus investment income in the prior period[116] GAAP to Non-GAAP Reconciliation (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net operating income, GAAP basis | $19,073 | $13,532 | | Gains (losses) on deferred comp plan | $(1,179) | $3,103 | | Net operating income, as adjusted (Non-GAAP) | $17,894 | $16,635 | | Operating profit margin, GAAP basis | 45% | 35% | | Operating profit margin, as adjusted (Non-GAAP) | 42% | 43% | Liquidity and Capital Resources The company maintains $166.2 million in working capital, utilized $9.3 million for share repurchases and $4.8 million for dividends in Q1 2022, and plans to continue its $1.50 per share quarterly dividend - The company repurchased 50,104 common shares for a total of $9.3 million during Q1 2022[129] - A quarterly dividend of $1.50 per share was paid in March 2022, totaling $4.8 million; the company expects to continue this regular quarterly dividend[130][131] - Working capital was approximately $166.2 million as of March 31, 2022, compared to $168.5 million at year-end 2021[132] Item 3. Quantitative and Qualitative Disclosures About Market Risk No significant changes in market risk exposures have occurred since December 31, 2021, with further details available in the 2021 Form 10-K - There have been no significant changes in the Company's market risk exposures since the December 31, 2021 year end[157] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal controls during the quarter - The CEO and CFO concluded that as of the evaluation date, the Company's disclosure controls and procedures are effective[158] - 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[159] Part II: Other Information This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on 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[160] Item 1A. Risk Factors No material changes to the company's risk factors have occurred since those disclosed in the 2021 Form 10-K - No material changes to the Company's risk factors have occurred since the information disclosed in the 2021 Form 10-K[161] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2022, the company repurchased 50,104 shares for $9.3 million, with $44.8 million remaining under a new $50.0 million repurchase program Share Repurchases in Q1 2022 | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (in millions) | | :--- | :--- | :--- | :--- | | Jan 2022 | 9,020 | $180.97 | $1.6 | | Feb 2022 | 13,777 | $179.23 | $2.5 | | Mar 2022 | 27,307 | $191.01 | $5.2 | | Total | 50,104 | $185.94 | $9.3 | - On February 25, 2022, the Board approved a new repurchase program authorizing up to $50.0 million of common share repurchases, which will expire in February 2024[163] Item 6. Exhibits This section provides a comprehensive list of exhibits filed with the Form 10-Q, including governance documents and certifications