Note 8 Income Taxes
The Company has determined its interim tax provision projecting an estimated annual effective tax rate.
A reconciliation of the statutory federal tax rate to the Company’s effective income tax rate is as follows:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
Statutory U.S. federal income tax rate | 21.0 | % | | 21.0 | % |
State and local income taxes, net of federal benefit | 4.8 | % | | 4.9 | % |
Internal revenue code section 162 limitations | 1.2 | % | | 2.0 | % |
Other | — | % | | 0.5 | % |
Unconsolidated effective income tax rate | 27.0 | % | | 28.4 | % |
Impact attributable to redeemable noncontrolling interest(a) | — | % | | (0.6) | % |
Effective income tax rate | 27.0 | % | | 27.8 | % |
(a) The provision for income taxes includes the impact of the operations of the Consolidated Fund, which is not subject to federal income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate tax levels.
The Company’s actual effective tax rate for the fiscal year ending December 31, 2024 could be materially different from the projected rate as of September 30, 2024.
The net temporary differences incurred to date will reverse in future periods as the Company generates taxable earnings. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets recorded. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of September 30, 2024 and December 31, 2023, no valuation allowance was deemed necessary.
FASB ASC 740, Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company recognizes tax benefits related to positions taken, or expected to be taken, on its tax returns, only if the positions are “more-likely-than-not” sustainable. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements. The Company did not record an accrual for tax-related uncertainties or unrecognized tax positions as of September 30, 2024 or December 31, 2023.
The Company did not recognize any interest and penalties during the nine months ended September 30, 2024.
Note 9 Earnings Per Share
Basic and diluted EPS are calculated under the two-class method and are computed by dividing net income attributable to common shareholders by the weighted average number of DHIL common shares outstanding for the period, including unvested restricted shares. For the periods reported, DHIL did not have any dilutive common shares outstanding. DHIL has not issued any preferred shares. The following table sets forth the computation for basic and diluted EPS:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net income | $ | 14,644,593 | | | $ | 5,200,593 | | | $ | 35,786,366 | | | $ | 29,472,589 | |
Less: Net (income) loss attributable to redeemable noncontrolling interest | — | | | 1,272,839 | | | — | | | (859,126) | |
Net income attributable to common shareholders | $ | 14,644,593 | | | $ | 6,473,432 | | | $ | 35,786,366 | | | $ | 28,613,463 | |
| | | | | | | |
Weighted average number of outstanding shares - Basic | 2,738,588 | | | 2,939,055 | | | 2,774,819 | | | 2,977,853 | |
Weighted average number of outstanding shares - Diluted | 2,738,588 | | | 2,939,055 | | | 2,774,819 | | | 2,977,853 | |
| | | | | | | |
Earnings per share attributable to common shareholders | | | | | | | |
Basic | $ | 5.35 | | | $ | 2.20 | | | $ | 12.90 | | | $ | 9.61 | |
Diluted | $ | 5.35 | | | $ | 2.20 | | | $ | 12.90 | | | $ | 9.61 | |
Note 10 Commitments and Contingencies
The Company indemnifies its directors, officers, and certain employees for certain liabilities that may arise from the performance of their duties to the Company. From time to time, the Company may be involved in legal matters incidental to its business. There are currently no such legal matters pending that the Company believes will have a material adverse effect on its consolidated financial statements. However, litigation involves an element of uncertainty, and future developments could cause legal actions or claims to have a material adverse effect on the Company’s financial condition, results of operations, and/or liquidity.
Additionally, in the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and that provide indemnification obligations. Certain agreements do not contain any limits on the Company’s liability and could involve future claims that may be made against the Company that have not yet occurred. Therefore, it is not possible to estimate the Company’s potential liability under these indemnities. Further, the Company maintains insurance policies that may provide full or partial coverage against certain of these liabilities.
Note 11 Subsequent Events
On November 4, 2024, DHIL’s board of directors (“Board”) approved a quarterly cash dividend of $1.50 per share, payable on December 6, 2024, to shareholders of record as of the close of business on November 22, 2024. This dividend is expected to reduce shareholders’ equity by approximately $4.1 million.
| | | | | |
ITEM 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q, the documents incorporated herein by reference and statements, whether oral or written, made from time to time by representatives of the Company may contain or incorporate “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended (the “PSLR Act”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are provided under the “safe harbor” protection of the PSLR Act. Forward-looking statements include, but are not limited to, statements regarding anticipated operating results, prospects and levels of AUM or AUA, technological developments, economic trends (including interest rates and market volatility), expected transactions and similar matters. The words “may,” “believe,” “expect,” “anticipate,” “target,” “goal,” “project,” “estimate,” “guidance,” “forecast,” “outlook,” “would,” “will,” “continue,” “likely,” “should,” “hope,” “seek,” “plan,” “intend,” and variations of such words and similar expressions identify forward-looking statements. Similarly, descriptions of the Company’s objectives, strategies, plans, goals, or targets are also forward-looking statements. Forward-looking statements are based on the Company’s expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. While the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, the Company’s actual results and experiences may differ materially from the anticipated results or other expectations expressed in its forward-looking statements.
Factors that may cause the Company’s actual results or experiences to differ materially from results discussed in forward-looking statements include, but are not limited to: (i) any reduction in the Company’s AUM or AUA; (ii) withdrawal, renegotiation, or termination of investment advisory agreements; (iii) damage to the Company’s reputation; (iv) failure to comply with investment guidelines or other contractual requirements; (v) challenges from the competition the Company faces in its business; (vi) challenges from industry trends towards lower fee strategies and model portfolio arrangements; (vii) adverse regulatory and legal developments; (viii) unfavorable changes in tax laws or limitations; (ix) interruptions in or failure to provide critical technological service by the Company or third parties; (x) adverse civil litigation and government investigations or proceedings; (xi) failure to adapt to or successfully incorporate technological changes, such as artificial intelligence, into the Company’s business; (xii) risk of loss on the Company’s investments; (xiii) lack of sufficient capital on satisfactory terms; (xiv) losses or costs not covered by insurance; (xv) a decline in the performance of the Company’s products; (xvi) changes in interest rates and inflation; (xvii) changes in national and local economic and political conditions; (xviii) the continuing economic uncertainty in various parts of the world; (xix) the after-effects of the COVID-19 pandemic and the actions taken in connection therewith; (xx) political uncertainty caused by, among other things, political parties, economic nationalist sentiments, tensions surrounding the current socioeconomic landscape; and (xxi) other risks identified from time-to-time in the Company’s public documents on file with the SEC.
Forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above, in “Part I – Item 1A. – Risk Factors” of the 2023 Form 10-K, and in the Company’s public documents on file with the SEC. New risks and uncertainties arise from time to time, and factors that the Company currently deems immaterial may become material, and it is impossible for the Company to predict these events or how they may affect it. The Company undertakes no obligation to update any forward-looking statements after the date they are made, whether as a result of new information, future events or developments or otherwise, except as required by law, although it may do so from time to time. Readers are advised to review this Form 10-Q in its entirety and consult any further disclosures the Company makes on related subjects in its public announcements and SEC filings. The Company does not endorse any projections regarding future performance that may be made by third parties.
General
The Company derives its consolidated revenue and net income from investment advisory and fund administration services provided by DHCM. DHCM is a registered investment adviser under the 1940 Act, and is the investment adviser and administrator for the Funds. DHCM also provides investment advisory and related services to DHMF as well as separately managed accounts, CITs, other pooled vehicles including sub-advised funds, and model delivery programs.
The Company believes focusing on generating excellent, long-term investment outcomes and building enduring client partnerships will enable it to grow its intrinsic value to achieve a compelling, long-term return for its shareholders.
The Company accomplishes this through its shared investment principles, including: (i) valuation-disciplined active portfolio management; (ii) fundamental bottom-up research; (iii) a long-term, business owner mindset; and (iv) a client alignment philosophy that ensures clients’ interests come first. Client alignment is emphasized through: (i) a strategic capacity discipline
that protects portfolio managers’ abilities to generate excess returns; (ii) personal investment by the Company’s portfolio managers in the strategies they manage; (iii) portfolio manager compensation being driven by long-term investment results in client portfolios; and (iv) a fee philosophy focused on a fair sharing of the economics among clients, employees, and shareholders. The Company’s core cultural values of curiosity, ownership, trust, and respect create an environment where investment professionals focus on investment results and all teammates focus on the overall client experience.
The Company offers a variety of investment strategies designed for long-term strategic allocations from institutionally-oriented investors in key asset classes, aligning its investment team’s competitive advantages with its clients’ needs.
Assets Under Management
DHCM’s principal source of revenue is investment advisory fees earned from managing client accounts under investment advisory and sub-advisory agreements. The fees earned depend on the type of investment strategy, account size, and servicing requirements. DHCM’s revenues depend largely on the total value and composition of its AUM. Accordingly, net cash flows from clients, market fluctuations, and the composition of AUM impact the Company’s revenues and results of operations. The Company also has certain agreements that allow it to earn performance-based fees if investment returns exceed targeted amounts over a specified measurement period.
Model Delivery Programs - Assets Under Advisement
DHCM provides strategy-specific model portfolios to sponsors of model delivery programs. DHCM is paid for its services by the program sponsors at a pre-determined rate based on AUA in the model delivery programs. DHCM does not have discretionary investment authority over individual client accounts in the model delivery programs, and therefore, AUA is not included in the Company’s AUM.
The Company’s revenues are highly dependent on both the value and composition of AUM and AUA. The following is a summary of the Company’s AUM by product and investment strategy, a roll-forward of the change in AUM, and a summary of AUA for the three-month and nine-month periods ended September 30, 2024 and 2023:
| | | | | | | | | | | | | | | | | |
| Assets Under Management and Assets Under Advisement |
| As of September 30, |
(in millions, except percentages) | 2024 | | 2023 | | % Change |
Diamond Hill Funds | $ | 18,416 | | | $ | 14,744 | | | 25 | % |
Separately managed accounts | 6,841 | | | 6,041 | | | 13 | % |
Collective investment trusts | 1,978 | | | 1,129 | | | 75 | % |
Other pooled vehicles | 4,040 | | | 3,069 | | | 32 | % |
Total AUM | 31,275 | | | 24,983 | | | 25 | % |
Total AUA | 1,957 | | | 1,638 | | | 19 | % |
Total AUM and AUA | $ | 33,232 | | | $ | 26,621 | | | 25 | % |
| | | | | | | | | | | | | | | | | |
| Assets Under Management by Investment Strategy |
| As of September 30, |
(in millions, except percentages) | 2024 | | 2023 | | % Change |
U.S. Equity | | | | | |
Large Cap | $ | 19,065 | | | $ | 15,738 | | | 21 | % |
Small-Mid Cap | 2,482 | | | 2,406 | | | 3 | % |
Mid Cap | 1,120 | | | 905 | | | 24 | % |
Select | 744 | | | 493 | | | 51 | % |
Small Cap | 267 | | | 289 | | | (8) | % |
Large Cap Concentrated | 129 | | | 86 | | | 50 | % |
Micro Cap | 25 | | | 19 | | | 32 | % |
Total U.S. Equity | 23,832 | | | 19,936 | | | 20 | % |
| | | | | |
Alternatives | | | | | |
Long-Short | 1,798 | | | 1,714 | | | 5 | % |
Total Alternatives | 1,798 | | | 1,714 | | | 5 | % |
| | | | | |
International Equity | | | | | |
International | 143 | | | 65 | | | 120 | % |
Total International Equity | 143 | | | 65 | | | 120 | % |
| | | | | |
Fixed Income | | | | | |
Short Duration Securitized | 3,186 | | | 1,910 | | | 67 | % |
Core Fixed Income | 2,299 | | | 1,344 | | | 71 | % |
Long Duration Treasury | 27 | | | 23 | | | 17 | % |
Total Fixed Income | 5,512 | | | 3,277 | | | 68 | % |
| | | | | |
Total-All Strategies | 31,285 | | | 24,992 | | | 25 | % |
(Less: Investments in affiliated funds)(a) | (10) | | | (9) | | | NM |
Total AUM | 31,275 | | | 24,983 | | | 25 | % |
Total AUA(b) | 1,957 | | | 1,638 | | | 19 | % |
Total AUM and AUA | $ | 33,232 | | | $ | 26,621 | | | 25 | % |
(a) Certain of the Funds own shares of the Diamond Hill Short Duration Securitized Fund. The Company reduces the total AUM of each Fund that holds such shares by the AUM of the investments held in this affiliated fund.
(b) AUA is primarily comprised of the Company’s Large Cap and Select strategies.
| | | | | | | | | | | | |
| | | | |
| Change in Assets Under Management | |
| For the Three Months Ended September 30, | |
(in millions) | 2024 | | 2023 | |
AUM at beginning of the period | $ | 29,291 | | | $ | 26,066 | | |
Net cash inflows (outflows) | | | | |
Diamond Hill Funds | 423 | | | (260) | | |
Separately managed accounts | (313) | | | (251) | | |
Collective investment trusts | (23) | | | 184 | | |
Other pooled vehicles | (109) | | | (16) | | |
| (22) | | | (343) | | |
Net market appreciation (depreciation) and income | 2,006 | | | (740) | | |
Increase (decrease) during the period | 1,984 | | | (1,083) | | |
AUM at end of the period | 31,275 | | | 24,983 | | |
AUA at end of period | 1,957 | | | 1,638 | | |
Total AUM and AUA at end of period | $ | 33,232 | | | $ | 26,621 | | |
| | | | |
Average AUM during the period | $ | 30,488 | | | $ | 26,004 | | |
Average AUA during the period | 1,928 | | | 1,756 | | |
Total Average AUM and AUA during the period | $ | 32,416 | | | $ | 27,760 | | |
| | | | |
| Change in Assets Under Management | |
| For the Nine Months Ended September 30, | |
(in millions) | 2024 | | 2023 | |
AUM at beginning of the period | $ | 27,418 | | | $ | 24,763 | | |
Net cash inflows (outflows) | | | | |
Diamond Hill Funds | 632 | | | (349) | | |
Separately managed accounts | (661) | | | (340) | | |
Collective investment trusts | 394 | | | 67 | | |
Other pooled vehicles | (40) | | | 260 | | |
| 325 | | | (362) | | |
Net market appreciation and income | 3,532 | | | 582 | | |
Increase during the period | 3,857 | | | 220 | | |
AUM at end of the period | 31,275 | | | 24,983 | | |
AUA at end of period | 1,957 | | | 1,638 | | |
Total AUM and AUA at end of period | $ | 33,232 | | | $ | 26,621 | | |
| | | | |
Average AUM during the period | $ | 29,333 | | | $ | 25,495 | | |
Average AUA during the period | 1,870 | | | 1,796 | | |
Total Average AUM and AUA during the period | $ | 31,203 | | | $ | 27,291 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Cash Inflows (Outflows) Further Breakdown |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
(in millions) | 2024 | | 2023 | | 2024 | | 2023 |
Net cash inflows (outflows) | | | | | | | |
Equity | $ | (477) | | | $ | (732) | | | $ | (1,199) | | | $ | (1,448) | |
Fixed Income | 455 | | | 389 | | | 1,524 | | | 1,086 | |
| $ | (22) | | | $ | (343) | | | $ | 325 | | | $ | (362) | |
| | | | | | | |
AUM increased $2.0 billion during the three months ended September 30, 2024, due primarily to market appreciation, partially offset by net outflows from the Company’s strategies. Net equity outflows were primarily out of the Company’s Large Cap and Small-Mid Cap strategies. These outflows were partially offset by fixed income inflows, primarily into the Company’s Short Duration Securitized Bond and Core Bond strategies.
AUM increased $3.9 billion during the nine months ended September 30, 2024, due to appreciation in the financial markets and net inflows into the Company’s strategies. Net fixed income inflows were primarily into the Company’s Short Duration Securitized Bond and Core Bond strategies. Those inflows were partially offset by equity outflows, primarily out of the Company’s Large Cap and Small-Mid Cap strategies.
Consolidated Results of Operations
The following is a table and discussion of the Company’s consolidated results of operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts and percentages) | 2024 | | 2023 | | % Change | | 2024 | | 2023 | | % Change |
Total revenue | $ | 39,018 | | | $ | 35,554 | | | 10% | | $ | 111,974 | | | $ | 102,895 | | | 9% |
Net operating income | 10,217 | | | 12,361 | | | (17)% | | 30,653 | | | 31,089 | | | (1)% |
Adjusted net operating income(a) | 12,467 | | | 11,623 | | | 7% | | 35,224 | | | 33,287 | | | 6% |
Investment income (loss), net | 9,669 | | | (4,637) | | | NM | | 18,380 | | | 9,722 | | | 89% |
Income tax expense | 5,242 | | | 2,524 | | | 108% | | 13,247 | | | 11,339 | | | 17% |
Net income attributable to common shareholders | 14,645 | | | 6,473 | | | 126% | | 35,786 | | | 28,613 | | | 25% |
Earnings per share attributable to common shareholders (diluted) | $ | 5.35 | | | $ | 2.20 | | | 143% | | $ | 12.90 | | | $ | 9.61 | | | 34% |
Adjusted earnings per share attributable to common shareholders (diluted)(a) | $ | 3.35 | | | $ | 2.85 | | | 18% | | $ | 9.26 | | | $ | 8.01 | | | 16% |
Net operating profit margin | 26 | % | | 35 | % | | | | 27 | % | | 30 | % | | |
Adjusted net operating profit margin(a) | 32 | % | | 33 | % | | | | 31 | % | | 32 | % | | |
(a) Adjusted net operating income, adjusted EPS attributable to common shareholders (diluted), and adjusted net operating profit margin are non-GAAP financial measures. Refer to the information under the heading “Non-GAAP Financial Measures and Reconciliation” within this “Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the definition of “non-GAAP” and a reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
Summary Discussion of Consolidated Results of Operations - Three Months Ended September 30, 2024, compared with Three Months Ended September 30, 2023
Revenue for the three months ended September 30, 2024 increased $3.5 million, or 10%, compared to revenue for the same period in 2023, primarily due to a 17% increase in total average AUM and AUA, partially offset by a decrease in the average advisory fee rate from 0.48% for the three months ended September 30, 2023 to 0.46% for the three months ended September 30, 2024.
Operating profit margin was 26% for the three months ended September 30, 2024, and 35% for the three months ended September 30, 2023. The decrease in operating profit margin was primarily driven by deferred compensation expense (8% of the 9% margin decline).
Adjusted operating profit margin was 32% for the three months ended September 30, 2024, and 33% for the three months ended September 30, 2023. Adjusted operating profit margin excludes the impact of market movements on the deferred compensation liability and related economic hedges, and the impact of the Consolidated Fund in 2023. Refer to the information under the heading “Non-GAAP Financial Measures and Reconciliation” within this “Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional discussion.
The Company expects that its operating profit margin will fluctuate period over period based on various factors, including revenues, investment results in the strategies the Company manages, employee performance, staffing levels, and gains and losses on investments held in the Deferred Compensation Plans.
The Company had $9.7 million in investment income due to market appreciation for the three months ended September 30, 2024, compared to investment loss of $4.6 million for the three months ended September 30, 2023.
Income tax expense increased $2.7 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The increase in income tax expense was primarily due to the increase in the Company’s income before taxes period over period.
The Company generated net income attributable to common shareholders of $14.6 million ($5.35 per diluted share) for the three months ended September 30, 2024, compared with net income attributable to common shareholders of $6.5 million ($2.20 per diluted share) for the same period in 2023. The increase in net income attributable to common shareholders period over period was primarily due to investment income during the three months ended September 30, 2024 compared to investment losses during the three months ended September 30, 2023.
Revenue
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
(in thousands, except percentages) | 2024 | | 2023 | | % Change |
Investment advisory | $ | 37,230 | | | $ | 33,668 | | | 11 | % |
Mutual fund administration, net | 1,788 | | | 1,886 | | | (5) | % |
Total | $ | 39,018 | | | $ | 35,554 | | | 10 | % |
Investment Advisory Fees. Investment advisory fees for the three months ended September 30, 2024 increased $3.6 million, or 11%, compared to the three months ended September 30, 2023. Investment advisory fees are calculated as a percentage of the market value of client accounts at contractual fee rates, which vary by investment product. The increase in investment advisory fees was primarily due to an increase in total average AUM and AUA of 17%, partially offset by a decrease in the average advisory fee rate from 0.48% to 0.46% period over period.
The average advisory fee rate for equity assets decreased from 0.51% during the three months ended September 30, 2023 to 0.49% during the three months ended September 30, 2024, and the average fee rate for fixed income assets increased from 0.30% during the three months ended September 30, 2023 to 0.31% during the three months ended September 30, 2024. The decrease in the total average advisory fee rate was due to growth in the lower fee fixed income assets, which increased from 11% of AUM and AUA during the three months ended September 30, 2023, to 16% during the three months ended September 30, 2024. The average advisory fee rate is calculated by dividing investment advisory revenues by total average AUM and AUA during the period (annualized for all periods less than one year).
Mutual Fund Administration Fees. Mutual fund administration fees for the three months ended September 30, 2024 decreased by less than $0.1 million compared to the three months ended September 30, 2023. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of the Funds’ average AUM.
Expenses
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
(in thousands, except percentages) | 2024 | | 2023 | | % Change |
Compensation and related costs, excluding deferred compensation expense (benefit) | $ | 19,509 | | | $ | 17,838 | | | 9 | % |
Deferred compensation expense (benefit) | 2,250 | | | (859) | | | NM |
General and administrative | 4,324 | | | 3,820 | | | 13 | % |
Sales and marketing | 1,841 | | | 1,567 | | | 17 | % |
Mutual fund administration | 877 | | | 828 | | | 6 | % |
Total | $ | 28,801 | | | $ | 23,194 | | | 24 | % |
Compensation and Related Costs, Excluding Deferred Compensation Expense (Benefit). Employee compensation and related costs (excluding deferred compensation expense (benefit)) increased by $1.7 million, or 9%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. This increase was due to separation payments of $0.9 million made during the 2024 period, an increase in accrued incentive compensation of $0.6 million, and an increase in salary and related benefits of $0.5 million, partially offset by a decrease in restricted stock expense of $0.3 million. Incentive compensation expense can fluctuate significantly period over period as the Company evaluates investment performance, individual performance, Company performance and other factors. Employee compensation and related costs (excluding deferred compensation expense (benefit)) as a percentage of total revenue was 50% for both the three months ended September 30, 2024 and the three months ended September 30, 2023.
Deferred Compensation Expense (Benefit). Deferred compensation expense was $2.3 million for the three months ended September 30, 2024, compared to a benefit of $0.9 million for the three months ended September 30, 2023, primarily due to market returns on the Deferred Compensation Plans’ investments period over period.
The gain (loss) on the Deferred Compensation Plans’ investments increases (decreases) deferred compensation expense (benefit) and is included in operating income. Deferred compensation expense (benefit) is offset by an equal amount in investment income (loss) below net operating income on the consolidated statements of income, and thus, has no impact on net income attributable to the Company.
General and Administrative. General and administrative expenses increased by $0.5 million, or 13%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. This increase was due to a $0.4 million increase in expenses to support improvements to the Company’s research management system, cloud data platform and overall technology support, and an increase in other software expenses of $0.1 million.
Sales and Marketing. Sales and marketing expenses increased by $0.3 million, or 17%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The increase was due to a $0.2 million increase in payments made to third-party intermediaries as a result of the increase in the Funds’ average AUM period over period and a $0.1 million increase in advertising and marketing expenses.
Mutual Fund Administration. Mutual fund administration expenses increased by less than $0.1 million, or 6%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. Mutual fund administration expenses consist of both variable and fixed expenses. The increase was primarily due to the increase in the Funds’ average AUM period over period.
Summary Discussion of Consolidated Results of Operations - Nine Months Ended September 30, 2024, compared with Nine Months Ended September 30, 2023
Revenue for the nine months ended September 30, 2024 increased $9.1 million, or 9%, compared to revenue for the same period in 2023, primarily due to a 14% increase in total average AUM and AUA. The average advisory fee rate decreased from 0.48% for the nine months ended September 30, 2023 to 0.46% for the nine months ended September 30, 2024.
Operating profit margin was 27% for the nine months ended September 30, 2024, and 30% for the nine months ended September 30, 2023, respectively. The decrease in operating profit margin was primarily driven by deferred compensation expense (2% of the 3% margin decline).
Adjusted operating profit margin was 31% for the nine months ended September 30, 2024, and 32% for the nine months ended September 30, 2023. Adjusted operating profit margin excludes the impact of market movements on the deferred compensation liability and related economic hedges, and the impact of the Consolidated Fund in 2023. Refer to the information under the heading “Non-GAAP Financial Measures and Reconciliation” within this “Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional discussion.
The Company expects that its operating profit margin will fluctuate period over period based on various factors, including revenues, investment results in the strategies the Company manages, employee performance, staffing levels, and gains and losses on investments held in the Deferred Compensation Plans.
The Company had $18.4 million in investment income due to market appreciation for the nine months ended September 30, 2024, compared to investment income of $9.7 million for the nine months ended September 30, 2023.
Income tax expense increased $1.9 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase in income tax expense was primarily due to the increase in the Company’s income before taxes period over period.
The Company generated net income attributable to common shareholders of $35.8 million ($12.90 per diluted share) for the nine months ended September 30, 2024, compared with net income attributable to common shareholders of $28.6 million ($9.61 per diluted share) for the same period in 2023. The increase in net income attributable to common shareholders period over period was primarily due to increased revenues and investment income, partially offset by increased operating expenses for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.
Revenue | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
(in thousands, except percentages) | 2024 | | 2023 | | % Change |
Investment advisory | $ | 106,423 | | | $ | 97,211 | | | 9 | % |
Mutual fund administration, net | 5,551 | | | 5,684 | | | (2) | % |
Total | $ | 111,974 | | | $ | 102,895 | | | 9 | % |
Investment Advisory Fees. Investment advisory fees for the nine months ended September 30, 2024 increased $9.2 million, or 9%, compared to the nine months ended September 30, 2023. Investment advisory fees are calculated as a percentage of the market value of client accounts at contractual fee rates, which vary by investment product. The increase in investment advisory fees was primarily due to an increase in total average AUM and AUA of 14%, partially offset by a decrease in the average advisory fee rate from 0.48% to 0.46% period over period.
The average advisory fee rate for equity assets decreased from 0.50% during the nine months ended September 30, 2023 to 0.48% during the nine months ended September 30, 2024, and the average fee rate for fixed income assets remained unchanged at 0.30%. The decrease in the total average advisory fee rate was due to growth in the lower fee fixed income assets, which increased from 10% of AUM and AUA during the nine months ended September 30, 2023, to 14% during the nine months ended September 30, 2024. The average advisory fee rate is calculated by dividing investment advisory revenues by total average AUM and AUA during the period (annualized for all periods less than one year).
Mutual Fund Administration Fees. Mutual fund administration fees for the nine months ended September 30, 2024 decreased by $0.1 million compared to the nine months ended September 30, 2023. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of the Funds’ average AUM.
Expenses | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
(in thousands, except percentages) | 2024 | | 2023 | | % Change |
Compensation and related costs, excluding deferred compensation expense | $ | 55,987 | | | $ | 51,600 | | | 9 | % |
Deferred compensation expense | 4,571 | | | 1,868 | | | 145 | % |
General and administrative | 12,755 | | | 10,963 | | | 16 | % |
Sales and marketing | 5,422 | | | 4,941 | | | 10 | % |
Mutual fund administration | 2,587 | | | 2,434 | | | 6 | % |
Total | $ | 81,322 | | | $ | 71,806 | | | 13 | % |
Compensation and Related Costs, Excluding Deferred Compensation Expense. Employee compensation and related costs (excluding deferred compensation expense) for the nine months ended September 30, 2024 increased by $4.4 million, compared to the nine months ended September 30, 2023. This increase was due to increases in accrued incentive compensation of $1.7 million, separation payments of $1.5 million made in 2024, an increase in salary and related benefits of $1.1 million, and an increase in restricted stock expense of $0.1 million. Incentive compensation expense can fluctuate significantly period over period as the Company evaluates investment performance, individual performance, Company performance, and other factors. Employee compensation and related costs (excluding deferred compensation expense (benefit)) as a percentage of total revenue was 50.0% for both the nine months ended September 30, 2024 and the nine months ended September 30, 2023.
Deferred Compensation Expense. Deferred compensation expense was $4.6 million for the nine months ended September 30, 2024, compared to $1.9 million for the nine months ended September 30, 2023, primarily due to market returns on the Deferred Compensation Plans’ investments period over period.
The income on the Deferred Compensation Plans’ investments increases deferred compensation expense and is included in operating income.
General and Administrative. General and administrative expenses for the nine months ended September 30, 2024, increased by $1.8 million, or 16%, compared to the nine months ended September 30, 2023. The increase was due to a $1.4 million increase in expenses to support improvements to the Company’s research management system, cloud data platform and overall technology support, a $0.3 million increase in other software expenses, and a $0.1 million increase in investment research expenses.
Sales and Marketing. Sales and marketing expenses for the nine months ended September 30, 2024, increased by $0.5 million, or 10%, compared to the nine months ended September 30, 2023. The increase was due to a $0.3 million increase in payments made to third-party intermediaries as a result of the increase in the Funds’ average AUM period over period and a $0.2 million increase in advertising and marketing expenses.
Mutual Fund Administration. Mutual fund administration expenses for the nine months ended September 30, 2024, increased by $0.2 million, or 6%, compared to the nine months ended September 30, 2023. Mutual fund administration expenses consist of both variable and fixed expenses. The increase was primarily due to the increase in the Funds’ average AUM period over period.
Liquidity and Capital Resources
Sources of Liquidity
The Company’s current financial condition is liquid, with a significant amount of its assets comprised of cash and cash equivalents, investments, accounts receivable, and other current assets. The Company’s main source of liquidity is cash flows from operating activities, which are generated from investment advisory and mutual fund administration fees. Cash and cash equivalents, investments held directly by DHCM, accounts receivable, and other current assets represented $185.5 million and $181.8 million of total assets as of September 30, 2024 and December 31, 2023, respectively. The Company believes that these sources of liquidity, as well as its continuing cash flows from operating activities, will be sufficient to meet its current and future operating needs.
Uses of Liquidity
The Company anticipates that its main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies. The Board and management regularly review various factors to determine whether the Company has capital in excess of that required for its business and the appropriate uses of any such excess capital, including share repurchases and/or the payment of dividends.
Share Repurchases
DHIL repurchased 142,425 common shares during the nine months ended September 30, 2024 for a total of $21.7 million. For additional information on the Company’s repurchase plans, refer to “Part II - Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds” of this Form 10-Q.
Dividends
Subject to Board approval and compliance with applicable law, DHIL expects to pay a regular quarterly dividend of $1.50 per share. A summary of cash dividends paid during the nine months ended September 30, 2024, is presented below:
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Dividend | Declaration Date | | Date Paid | | Dividend Amount (in millions) |
First quarter - $1.50 per share | February 29, 2024 | | March 22, 2024 | | $ | 4.2 | |
Second quarter - $1.50 per share | May 08, 2024 | | June 14, 2024 | | 4.2 | |
Third quarter - $1.50 per share | July 31, 2024 | | September 13, 2024 | | 4.1 | |
Total | | | | | $ | 12.5 | |
On November 4, 2024, the Board approved a regular quarterly dividend for the fourth quarter of 2024 of $1.50 per share which will be paid on December 6, 2024, to shareholders of record as of the close of business on November 22, 2024. The fourth quarter dividend is expected to reduce shareholders’ equity by approximately $4.1 million.
Working Capital
As of September 30, 2024, the Company had working capital of approximately $150.1 million, compared to $146.1 million as of December 31, 2023. Working capital includes cash and cash equivalents, accounts receivable, investments, and other current assets of DHCM, net of accounts payable and accrued expenses, accrued incentive compensation, deferred compensation and other current liabilities of DHCM.
Below is a summary of investments as of September 30, 2024 and December 31, 2023.
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| As of |
| September 30, 2024 | | December 31, 2023 |
Corporate Investments: | | | |
Diamond Hill International Fund | $ | 59,323,634 | | | $ | 52,763,714 | |
Diamond Hill Core Bond Fund | 36,086,880 | | | 34,003,006 | |
Diamond Hill Large Cap Concentrated Fund | 14,476,553 | | | 12,402,576 | |
Diamond Hill Micro Cap Fund, LP | 14,451,954 | | | 12,482,396 | |
Total Corporate Investments | 124,339,021 | | | 111,651,692 | |
Deferred Compensation Plans’ Investments in the Funds | 38,924,862 | | | 36,087,170 | |
Total Investments | $ | 163,263,883 | | | $ | 147,738,862 | |
Cash Flow Analysis
Cash Flows from Operating Activities
The Company’s cash flows from operating activities are calculated by adjusting net income to reflect other significant operating sources and uses of cash, certain significant non-cash items (such as share-based compensation), and timing differences in the cash settlement of operating assets and liabilities. The Company expects that cash flows provided by operating activities will continue to serve as its primary source of working capital in the near future.
For the nine months ended September 30, 2024, net cash provided by operating activities totaled $25.4 million. Cash provided by operating activities was primarily driven by net income of $35.8 million, non-cash adjustments added back to net income consisting of share-based compensation of $9.0 million, and depreciation of $0.9 million. These inflows were partially offset by a $6.8 million decrease in the incentive compensation accrual, and the cash impact of timing differences in the settlement of other assets and liabilities of $13.5 million.
For the nine months ended September 30, 2023, net cash provided by operating activities totaled $11.6 million. Cash inflows from operating activities were primarily driven by net income of $29.5 million, non-cash adjustments added back to net income consisting of share-based compensation of $9.0 million and depreciation of $1.0 million. These inflows were partially offset by an $11.3 million decrease in the incentive compensation accrual, the net change in securities held by the Consolidated Funds of $10.9 million, and the cash impact of timing differences in the settlement of other assets and liabilities of $5.7 million. Net cash provided by operating activities of $11.6 million is inclusive of $9.8 million of cash used in operations by the Consolidated Funds.
Cash Flows from Investing Activities
The Company’s cash flows from investing activities consist primarily of purchases and redemptions in the Company’s investment portfolio and capital expenditures.
Cash flows used in investing activities totaled $0.3 million for the nine months ended September 30, 2024. Cash flows used in investing activities were driven by purchases of Deferred Compensation Plan investments of $10.5 million and the purchase of property and equipment of $0.4 million, partially offset by proceeds from the sale of Deferred Compensation Plan investments totaling $10.6 million.
Cash flows used in investing activities totaled $1.8 million for the nine months ended September 30, 2023. Cash flows used in investing activities were driven by purchases of Deferred Compensation Plan investments of $6.6 million, which were partially offset by proceeds from the sale of Deferred Compensation Plan totaling $4.8 million. During the nine months ended September 30, 2023, all purchases and sales of investments were in the Deferred Compensation Plans.
Cash Flows from Financing Activities
The Company’s cash flows from financing activities consist primarily of the repurchase of DHIL common shares, dividends paid on DHIL common shares, shares withheld related to employee tax withholding, proceeds received under the ESPP, and distributions to, or contributions from, redeemable noncontrolling interest holders.
For the nine months ended September 30, 2024, net cash used in financing activities totaled $38.4 million, consisting of cash outflows for repurchases of DHIL’s common shares of $21.7 million, the payment of quarterly dividends totaling $12.5 million, and the value of shares withheld to cover employee tax withholding obligations of $4.5 million. These cash outflows were partially offset by proceeds received under the ESPP of $0.3 million.
For the nine months ended September 30, 2023, net cash used in financing activities totaled $27.2 million, consisting of cash outflows for repurchases of DHIL’s common stock of $19.6 million, the payment of quarterly dividends totaling $13.4 million, and the value of shares withheld to cover employee tax withholding obligations of $5.0 million. These cash outflows were partially offset by net subscriptions received in the Consolidated Funds from redeemable noncontrolling interest holders of $10.4 million and proceeds received under the ESPP of $0.4 million.
Non-GAAP Financial Measures and Reconciliation
As supplemental information, the Company is providing certain financial measures that are based on methodologies other than GAAP (“non-GAAP”). Management believes the non-GAAP financial measures below are useful measures of the Company’s core business activities, are important metrics in estimating the value of an asset management business, and help facilitate comparisons to Company operating performance across periods. These non-GAAP financial measures are presented for supplemental informational purposes only, should not be used as a substitute for financial measures calculated in accordance with GAAP and may be calculated differently from similarly titled non-GAAP measures used by other companies. The following schedules reconcile the differences between financial measures calculated in accordance with GAAP and non-GAAP financial measures for the three-month and nine-month periods ended September 30, 2024 and 2023, respectively. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, as well as the Company’s condensed consolidated financial statements and related notes included elsewhere in this report.
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| Three Months Ended September 30, 2024 |
(in thousands, except percentages and per share data) | Total operating expenses | | Net operating income | | Total non-operating income (loss) | | Income tax expense(4) | | Net income attributable to common shareholders | | Earnings per share attributable to common shareholders - diluted | | Net operating profit margin |
GAAP Basis | $ | 28,801 | | | $ | 10,217 | | | $ | 9,669 | | | $ | 5,242 | | | $ | 14,645 | | | $ | 5.35 | | | 26 | % |
Non-GAAP Adjustments: | | | | | | | | | | | | | |
Deferred compensation liability(1) | (2,250) | | | 2,250 | | | (2,250) | | | — | | | — | | | — | | | 6 | % |
Other investment income(3) | — | | | — | | | (7,419) | | | (1,956) | | | (5,463) | | | (2.00) | | | — | |
Adjusted Non-GAAP basis | $ | 26,551 | | | $ | 12,467 | | | $ | — | | | $ | 3,286 | | | $ | 9,182 | | | $ | 3.35 | | | 32 | % |
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| Three Months Ended September 30, 2023 |
(in thousands, except percentages and per share data) | Total operating expenses | | Net operating income | | Total non-operating income (loss) | | Income tax expense(4) | | Net income attributable to common shareholders | | Earnings per share attributable to common shareholders - diluted | | Net operating profit margin |
GAAP Basis | $ | 23,193 | | | $ | 12,361 | | | $ | (4,637) | | | $ | 2,524 | | | $ | 6,473 | | | $ | 2.20 | | | 35 | % |
Non-GAAP Adjustments: | | | | | | | | | | | | | |
Deferred compensation liability(1) | 859 | | | (859) | | | 859 | | | — | | | — | | | — | | | (2) | % |
Consolidated Fund(2) | — | | | 121 | | | 3,269 | | | 593 | | | 1,525 | | | 0.52 | | | — | |
Other investment income(3) | — | | | — | | | 509 | | | 143 | | | 366 | | | 0.13 | | | — | |
Adjusted Non-GAAP basis | $ | 24,052 | | | $ | 11,623 | | | $ | — | | | $ | 3,260 | | | $ | 8,364 | | | $ | 2.85 | | | 33 | % |
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| Nine Months Ended September 30, 2024 |
(in thousands, except percentages and per share data) | Total operating expenses | | Net operating income | | Total non-operating income (loss) | | Income tax expense(4) | | Net income attributable to common shareholders | | Earnings per share attributable to common shareholders - diluted | | Net operating profit margin |
GAAP Basis | $ | 81,322 | | | $ | 30,653 | | | $ | 18,380 | | | $ | 13,247 | | | $ | 35,786 | | | $ | 12.90 | | | 27 | % |
Non-GAAP Adjustments: | | | | | | | | | | | | | |
Deferred compensation liability(1) | (4,571) | | | 4,571 | | | (4,571) | | | — | | | — | | | — | | | 4 | % |
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Other investment income(3) | — | | | — | | | (13,809) | | | (3,731) | | | (10,078) | | | (3.64) | | | — | |
Adjusted Non-GAAP basis | $ | 76,751 | | | $ | 35,224 | | | $ | — | | | $ | 9,516 | | | $ | 25,708 | | | $ | 9.26 | | | 31 | % |
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| Nine Months Ended September 30, 2023 |
(in thousands, except percentages and per share data) | Total operating expenses | | Net operating income | | Total non-operating income (loss) | | Income tax expense(4) | | Net income attributable to common shareholders | | Earnings per share attributable to common shareholders - diluted | | Net operating profit margin |
GAAP Basis | $ | 71,806 | | | $ | 31,089 | | | $ | 9,722 | | | $ | 11,339 | | | $ | 28,613 | | | $ | 9.61 | | | 30 | % |
Non-GAAP Adjustments: | | | | | | | | | | | | | |
Deferred compensation liability (1) | (1,868) | | | 1,868 | | | (1,868) | | | — | | | — | | | — | | | 2 | % |
Consolidated Fund(2) | — | | | 330 | | | (4,148) | | | (840) | | | (2,119) | | | (0.71) | | | — | |
Other investment income(3) | — | | | — | | | (3,706) | | | (1,053) | | | (2,653) | | | (0.89) | | | — | |
Adjusted Non-GAAP basis | $ | 69,938 | | | $ | 33,287 | | | $ | — | | | $ | 9,446 | | | $ | 23,841 | | | $ | 8.01 | | | 32 | % |
(1) This non-GAAP adjustment removes the compensation expense resulting from market valuation changes in the Deferred Compensation Plans’ liability and the related net gains/losses on investments designated as an economic hedge against the related liability. Amounts deferred under the Deferred Compensation Plans are adjusted for appreciation/depreciation of investments chosen by participants. The Company believes it is useful to offset the non-operating investment income or loss realized on the hedges against the related compensation expense and remove the net impact to help readers understand the Company’s core operating results and to improve comparability from period to period.
(2) This non-GAAP adjustment removes the impact that the Consolidated Fund has on the Company’s GAAP consolidated statements of income. Specifically, the Company adds back the operating expenses and subtracts the investment income of the Consolidated Fund. The adjustment to net operating income represents the operating expenses of the Consolidated Fund, net of the elimination of related management and administrative fees. The adjustment to net income attributable to common shareholders represents the net income of the Consolidated Fund, net of redeemable non-controlling interests. The Company believes removing the impact of the Consolidated Fund helps readers understand its core operating results and improves comparability from period to period.
(3) This non-GAAP adjustment represents the net gains or losses earned on the Company’s non-consolidated investment portfolio that are not designated as economic hedges of the Deferred Compensation Plans’ liability, non-consolidated seed investments, and other investments. The Company believes adjusting for these non-operating income or loss items helps readers understand the Company’s core operating results and improves comparability from period to period.
(4) The income tax expense impacts were calculated and resulted in the overall non-GAAP effective tax rates of 26.4% for the three months ended September 30, 2024, 28.0% for the three months ended September 30, 2023, 27.0% for the nine months ended September 30, 2024, and 28.4% for the nine months ended September 30, 2023.
Critical Accounting Estimates
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of financial statements and related disclosures in accordance with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities. The Company evaluates such estimates, judgments, and assumptions on an ongoing basis, and bases its estimates, judgements, and assumptions on historical experiences, current trends, and various other factors that management believes to be reasonable under the circumstances at the time the estimate was made. By their nature, these estimates, judgments, and assumptions are subject to uncertainty, and actual results may differ materially from these estimates.
For a summary of the critical accounting policies important to understanding the condensed consolidated financial statements, please see Note 2, Significant Accounting Policies, in “Part I - Item 1 - Financial Statements” of this Form 10-Q, and Note 2, Significant Accounting Policies, in “Part II - Item 8 - Financial Statements and Supplementary Data” in the 2023 Form 10-K.
There have been no material changes to the Company’s critical accounting estimates during the quarter ended September 30, 2024, as compared to the critical accounting estimates disclosed in “Part II - Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Form 10-K.
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ITEM 3: | Quantitative and Qualitative Disclosures About Market Risk |
For information regarding the Company’s exposure to certain market risks, see “Part II - Item 7A - Quantitative and Qualitative Disclosures About Market Risk” in the 2023 Form 10-K. Except as described in “Part I - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q, there have been no significant changes in the Company’s market risk exposures since the Company’s December 31, 2023 year end.
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ITEM 4: | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Management, including the Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q (the “Evaluation Date”). Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance, not absolute, of achieving the desired control objectives, and in reaching a reasonable level of assurance, the Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As a result, there can be no assurance that the Company’s controls and procedures will detect all errors or fraud.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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PART II: | OTHER INFORMATION |
From time to time, the Company is party to ordinary, routine litigation that is incidental to its business. There are currently no such matters pending that the Company believes could have a material adverse effect on its consolidated financial statements.
There have been no material changes to the Company’s risk factors from the information disclosed in “Part I - Item 1A - Risk Factors” of the 2023 Form 10-K.
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ITEM 2: | Unregistered Sales of Equity Securities and Use of Proceeds |
During the quarter ended September 30, 2024, DHIL did not sell any common shares that were not registered under the Securities Act. The following table sets forth information regarding repurchases of DHIL common shares during the quarter ended September 30, 2024:
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Period | Total Number of Common Shares Purchased (a) | | Average Price Paid Per Common Share | | Total Number of Common Shares Purchased as part of Publicly Announced Plans or Programs(b) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(b) |
July 1, 2024 through July 31, 2024 | 308 | | | $ | 140.75 | | | — | | | $ | 8,077,166 | |
August. 1, 2024 through August 31, 2024 | 22,367 | | | 149.17 | | | 22,367 | | | 4,740,602 | |
September. 1, 2024 through September 30, 2024 | 9 | | | 149.11 | | | 9 | | | 4,739,260 | |
Total | 22,684 | | | $ | 149.06 | | | 22,376 | | | $ | 4,739,260 | |
(a)The Company regularly withholds common shares for tax payments due upon the vesting of employee restricted stock. Common shares withheld to cover tax withholding obligations in connection with the vesting of employee restricted stock are treated as common share repurchases for purposes of this table. The common shares withheld are not considered repurchases of DHIL common shares under any authorized common share repurchase plan or program. During the quarter ended September 30, 2024, the Company withheld 308 DHIL common shares for employee tax withholding obligations at an average price paid per share of $140.75.
(b)On May 10, 2023, the Board authorized management to repurchase up to $50.0 million of DHIL common shares (the “2023 Repurchase Program”). On November 4, 2024, the Board terminated the 2023 Repurchase Program and approved a
new repurchase plan, authorizing management to repurchase up to $50 million DHIL common shares in the open market and in private transactions in accordance with applicable securities laws (the “2024 Repurchase Program”). The 2024 Repurchase Program will expire on November 4, 2026, or upon the earlier completion of all authorized purchases under the program.
In connection with the 2024 Repurchase Program, DHIL entered into a Rule 10b5-1 trading plan. The Rule 10b5-1 trading plan is intended to qualify for the safe harbor under Rule 10b5-1 of the Exchange Act. A Rule 10b5-1 trading plan allows a company to purchase its stock at times when it would not ordinarily be in the market because of its trading policies or the possession of material nonpublic information. Because repurchases under DHIL’s Rule 10b5-1 trading plan are subject to specified parameters and certain price, timing, and volume restraints specified in the plan, there is no guarantee as to the exact number of common shares that will be repurchased or that there will be any repurchases at all pursuant to the plan. Purchases under the 2024 Repurchase Program may be made in the open market or through privately negotiated transactions. Purchases in the open market are intended to comply with Rule 10b-18 under the Exchange Act.
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ITEM 3: | Defaults Upon Senior Securities |
None.
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ITEM 4: | Mine Safety Disclosures |
Not applicable.
During the quarter ended September 30, 2024, no director or Section 16 officer (as defined under Rule 16a-1 of the Exchange Act) adopted or terminated any Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading arrangement (in each case, as defined in Item 408(a) of Regulation S-K).
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DIAMOND HILL INVESTMENT GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DIAMOND HILL INVESTMENT GROUP, INC.
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Date | | Title | | Signature |
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November 4, 2024 | | Chief Executive Officer and President (Principal Executive Officer) | | /s/ Heather E. Brilliant |
| | | | Heather E. Brilliant |
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November 4, 2024 | | Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | | /s/ Thomas E. Line |
| | | | Thomas E. Line |