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Section 1: 10-Q (10-Q)

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Table of Contents


 
United States
Securities and Exchange Commission
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
Commission file number 000-24498
 
 
395552973_diamondhillinvgroup4ca01a08.jpg

DIAMOND HILL INVESTMENT GROUP, INC.

(Exact name of registrant as specified in its charter)
  
 
Ohio
 
65-0190407
(State of
incorporation)
 
(I.R.S. Employer
Identification No.)
325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215
(Address of principal executive offices) (Zip Code)
(614) 255-3333
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.     Yes:  x    No:  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes:  ¨    No:  x
The number of shares outstanding of the issuer’s common stock, as of October 30, 2018, is 3,511,541 shares.
 


Table of Contents


DIAMOND HILL INVESTMENT GROUP, INC.
 
 
 
PAGE
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


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PART I:
FINANCIAL INFORMATION
 
ITEM 1:
Consolidated Financial Statements
Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets
 
 
9/30/2018
 
12/31/2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
100,619,433

 
$
76,602,108

Investment portfolio
212,389,477

 
138,476,022

Accounts receivable
19,365,969

 
19,220,279

Prepaid expenses
2,305,652

 
2,073,343

Income taxes receivable

 
4,114,962

Property and equipment, net of depreciation
3,908,750

 
4,057,901

Deferred taxes
7,553,479

 
5,843,704

Total assets
$
346,142,760

 
$
250,388,319

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Accounts payable and accrued expenses
$
13,654,401

 
$
11,890,403

Accrued incentive compensation
21,709,000

 
25,496,500

Deferred compensation
25,432,661

 
20,480,790

Income taxes payable
640,811

 

Total liabilities
61,436,873

 
57,867,693

Redeemable noncontrolling interest
60,714,693

 
20,076,806

Permanent Shareholders’ equity
 
 
 
Common stock, no par value 7,000,000 shares authorized; 3,534,148 issued and outstanding at September 30, 2018 (inclusive of 207,500 unvested shares); 3,470,428 issued and outstanding at December 31, 2017 (inclusive of 191,900 unvested shares)
130,555,846

 
118,209,111

Preferred stock, undesignated, 1,000,000 shares authorized and unissued

 

Deferred equity compensation
(22,502,206
)
 
(19,134,963
)
Retained earnings
115,937,554

 
73,369,672

Total permanent shareholders’ equity
223,991,194

 
172,443,820

Total liabilities and shareholders’ equity
$
346,142,760

 
$
250,388,319

 
 
 
 
Book value per share
$
63.38

 
$
49.69

The accompanying notes are an integral part of these consolidated financial statements.

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Diamond Hill Investment Group, Inc.
Consolidated Statements of Income (unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
REVENUES:
 
 
 
 
 
 
 
Investment advisory
$
34,928,205

 
$
33,782,603

 
$
103,085,767

 
$
98,105,905

Mutual fund administration, net
2,543,442

 
2,989,026

 
8,095,596

 
9,247,339

Total revenue
37,471,647

 
36,771,629


111,181,363


107,353,244

OPERATING EXPENSES:
 
 
 
 
 
 
 
Compensation and related costs
15,441,623

 
14,446,102

 
44,401,217

 
42,438,985

General and administrative
2,962,220

 
3,088,000

 
8,748,419

 
9,556,585

Sales and marketing
1,281,856

 
1,230,306

 
3,793,382

 
3,612,877

Mutual fund administration
870,103

 
1,119,889

 
2,769,009

 
3,149,242

Total operating expenses
20,555,802

 
19,884,297


59,712,027


58,757,689

NET OPERATING INCOME
16,915,845

 
16,887,332

 
51,469,336

 
48,595,555

Investment income, net
5,210,332

 
2,767,747

 
7,216,278

 
9,673,720

INCOME BEFORE TAXES
22,126,177

 
19,655,079


58,685,614


58,269,275

Income tax expense
(5,726,807
)
 
(6,496,980
)
 
(14,446,092
)
 
(19,018,708
)
NET INCOME
16,399,370

 
13,158,099


44,239,522


39,250,567

Less: Net income attributable to redeemable noncontrolling interest
(1,191,317
)
 
(459,252
)
 
(1,671,640
)
 
(1,156,385
)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
15,208,053

 
$
12,698,847


$
42,567,882


$
38,094,182

Earnings per share attributable to common shareholders
 
 
 
 

 
 
Basic
$
4.31

 
$
3.68

 
$
12.12

 
$
11.07

Diluted
$
4.31

 
$
3.67

 
$
12.11

 
$
11.05

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
3,530,586

 
3,454,178

 
3,512,547

 
3,442,402

Diluted
3,532,346

 
3,461,418

 
3,514,517

 
3,447,976

The accompanying notes are an integral part of these consolidated financial statements.

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Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest (unaudited)

 
Shares
Outstanding
 
Common
Stock
 
Deferred Equity
Compensation
 
Retained
Earnings
 
Total
 
Redeemable Noncontrolling Interest
Balance at December 31, 2017
3,470,428

 
$
118,209,111

 
$
(19,134,963
)
 
$
73,369,672

 
$
172,443,820

 
$
20,076,806

Issuance of restricted stock grants
63,950

 
12,298,334

 
(12,298,334
)
 

 

 

Amortization of restricted stock grants

 

 
4,814,465

 

 
4,814,465

 

Issuance of stock grants
20,153

 
4,109,197

 

 

 
4,109,197

 

Issuance of common stock related to 401k plan match
8,481

 
1,658,358

 

 

 
1,658,358

 

Shares withheld related to employee tax withholding
(7,964
)
 
(1,602,528
)
 

 

 
(1,602,528
)
 

Forfeiture of restricted stock grants
(20,900
)
 
(4,116,626
)
 
4,116,626

 

 

 

Net income

 

 

 
42,567,882

 
42,567,882

 
1,671,640

Net subscriptions of Consolidated Funds

 

 

 

 

 
22,521,607

New consolidations of Company sponsored investments

 

 

 

 

 
16,444,640

Balance at September 30, 2018
3,534,148

 
$
130,555,846

 
$
(22,502,206
)
 
$
115,937,554

 
$
223,991,194

 
$
60,714,693

The accompanying notes are an integral part of these consolidated financial statements.



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Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flows (unaudited)
 
 
Nine Months Ended 
 September 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
44,239,522

 
$
39,250,567

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
868,243

 
659,707

Share-based compensation
6,472,823

 
6,258,112

(Increase) decrease in accounts receivable
(90,525
)
 
143,920

Change in current income taxes
4,755,773

 
(432,068
)
Change in deferred income taxes
(1,709,775
)
 
(1,653,524
)
Net gains on investments
(3,184,197
)
 
(7,829,950
)
Net change in securities held by Consolidated Funds
(47,246,344
)
 
(5,639,151
)
Increase in accrued incentive compensation
321,697

 
2,268,924

Increase in deferred compensation
4,951,871

 
5,388,568

Other changes in assets and liabilities
252,238

 
2,188,850

Net cash provided by operating activities
9,631,326

 
40,603,955

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(699,917
)
 
(509,750
)
Purchase of Company sponsored investments
(4,362,077
)
 
(13,372,301
)
Proceeds from sale of Company sponsored investments
1,789,359

 
2,745,690

Net cash used in investing activities
(3,272,635
)
 
(11,136,361
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Value of shares withheld related to employee tax withholding
(1,602,528
)
 
(2,789,949
)
Net subscriptions received from redeemable noncontrolling interest holders
19,261,162

 
6,022,875

Net cash provided by financing activities
17,658,634

 
3,232,926

CASH AND CASH EQUIVALENTS
 
 
 
Net change during the period
24,017,325

 
32,700,520

At beginning of period
76,602,108

 
57,189,876

At end of period
$
100,619,433

 
$
89,890,396

Supplemental cash flow information:
 
 
 
Income taxes paid
$
11,400,094

 
$
21,104,300

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued as incentive compensation
$
4,109,197

 
$
3,892,424

Charitable donation of corporate investments and property and equipment
1,989,803

 
1,748,841

Net subscriptions (redemptions) of ETF shares for marketable securities
3,260,445

 
(1,555,305
)
The accompanying notes are an integral part of these consolidated financial statements.

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Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements (unaudited)
Note 1 Business and Organization
Diamond Hill Investment Group, Inc. (the "Company"), an Ohio corporation, derives its consolidated revenues and net income from investment advisory and fund administration services.
Diamond Hill Capital Management, Inc. ("DHCM"), an Ohio corporation, is a wholly owned subsidiary of the Company and a registered investment adviser. DHCM is the investment adviser to the Diamond Hill Funds (the "Funds"), a series of open-end mutual funds, private investment funds ("Private Funds"), an exchange traded fund (the "ETF"), and other institutional accounts. In addition, DHCM is administrator for the Funds.
Note 2 Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and December 31, 2017, and for the three- and nine-month periods ended September 30, 2018 and 2017, for Diamond Hill Investment Group, Inc. and its subsidiaries (referred to in these notes to the condensed consolidated financial statements as "the Company," "management," "we," "us," and "our") have been prepared in accordance with United States generally accepted accounting principles ("GAAP") and with the instructions to Form 10-Q and Article 10 of the Securities and Exchange Commission ("SEC") Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair statement of the financial condition and results of operations at the dates and for the interim periods presented, have been included. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for any full fiscal year. These unaudited condensed consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 ("2017 Annual Report") as filed with the SEC.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions related to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Reclassification
Certain prior period amounts and disclosures may have been reclassified to conform to the current period's financial presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the operations of the Company and its controlled subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
The Company holds certain investments in the Funds and the ETF for general corporate investment purposes, to provide seed capital for newly formed strategies or to add capital to existing strategies. The Funds are organized in a series fund structure in which there are multiple mutual funds within one Trust. The Trust is an open-end investment company registered under the Investment Company Act of 1940, as amended (the"1940 Act"). The ETF is an individual series of ETF Series Solutions which is also an open-end investment company registered under the 1940 Act. Each of the individual mutual funds and the ETF represents a separate share class of a legal entity organized under the Trust. The Company performs its analysis at the individual mutual fund and ETF level and has concluded the mutual funds and ETF are voting rights entities ("VREs") because the structure of the investment product is such that the shareholders are deemed to have the power through voting rights to direct the activities that most significantly impact the entity's economic performance. To the extent material, these investment products are consolidated if Company ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interests in consolidated investments for which the Company's ownership is less

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than 100%. The Company has consolidated the ETF, the Diamond Hill Core Bond Fund, the Diamond Hill High Yield Fund, and the Diamond Hill Global Fund (collectively the "Consolidated Funds") as of September 30, 2018.
DHCM is the managing member of Diamond Hill General Partner, LLC (the “General Partner”), which is the general partner of Diamond Hill Investment Partners, L.P. (“DHIP”), and Diamond Hill International Equity Fund, L.P. ("DHIEF"), each a limited partnership (collectively, the "Partnerships" or “LPs”) whose underlying assets consist primarily of marketable securities.
DHCM is wholly owned by the Company and is consolidated by us. Further, DHCM, through its control of the General Partner, has the power to direct each LP’s economic activities and the right to receive investment advisory fees that may be significant to the LPs.
The Company concluded it did not have a variable interest in DHIP as the fees paid to the General Partner are considered to contain customary terms and conditions as found in the market for similar products and the Company has no equity ownership in DHIP.
The Company concluded DHIEF was a variable interest entity ("VIE") as DHCM has disproportionately less voting interest than economic interest, given that the limited partners have full power to remove the Company as the General Partner due to the existence of substantive kick-out rights. In addition, substantially all of DHIEF's activities are conducted on behalf of the General Partner which has disproportionately few voting rights. The Company concluded it is not the primary beneficiary of DHIEF as we lack the power to control the entity due to the existence of single-party kick-out rights where the limited partners have the unilateral ability to remove the General Partner without cause. DHCM’s investments in DHIEF are reported as a component of the Company’s investment portfolio, valued at DHCM’s respective share of the net income or loss of DHIEF.
The LPs are not subject to lock-up periods and can be redeemed on demand. Gains and losses attributable to changes in the value of DHCM’s interests in the LPs are included in the Company’s reported investment income. The Company’s exposure to loss as a result of its involvement with the LPs is limited to the amount of its investments. DHCM is not obligated to provide, and has not provided, financial or other support to the LPs, other than its investments to date and its contractually provided investment advisory responsibilities. The Company has not provided liquidity arrangements, guarantees or other commitments to support the LPs’ operations, and the LPs’ creditors and interest holders have no recourse to the general credit of the Company.
Certain board members and employees of the Company invest in the LPs and are not subject to a management fee or an incentive fee. These individuals receive no remuneration as a result of their personal investment in the LPs. The capital of the General Partner is not subject to a management fee or an incentive fee.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest represents third-party interests in the Consolidated Funds. This interest is redeemable at the option of the investors and therefore is not treated as permanent equity. Redeemable noncontrolling interest is recorded at redemption value, which approximates the fair value each reporting period.
Segment Information
Management has determined that the Company operates in one business segment, providing investment management and administration services to mutual funds, institutional accounts, and private investment funds. Therefore, no disclosures relating to operating segments are presented in the Company's annual or interim financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market mutual funds held by DHCM.
Accounts Receivable
Accounts receivable are recorded when they are due and are presented on the balance sheet net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical losses, existing conditions in the industry, and the financial stability of the individuals or entities that owe the receivable. No allowance for doubtful accounts was deemed necessary at September 30, 2018 or December 31, 2017. Accounts receivable from the Funds were $10.8 million as of September 30, 2018 and $11.6 million as of December 31, 2017.

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Investments
Management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination at each reporting period.
Investments in the Funds we advise where the Company has neither control nor the ability to exercise significant influence, as well as securities held in the Consolidated Funds, are measured at fair value based on quoted market prices. Unrealized gains and losses are recorded as investment income (loss) in the Company's consolidated statements of income.
Investments classified as equity method investments represent investments in which the Company owns between 20-50% of the outstanding voting interests in the entity or when it is determined that the Company is able to exercise significant influence but not control over the investments. When using the equity method, the Company recognizes its respective share of the investee's net income or loss for the period which is recorded as investment income in the Company's consolidated statements of income.
Fair Value Measurements
Accounting Standards Codification Topic 820, Fair Value Measurement ("ASC 820") specifies a hierarchy of valuation classifications based on whether the inputs to the valuation techniques used in each valuation classification are observable or unobservable. These classifications are summarized in the three broad levels listed below:
Level 1 - Unadjusted quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations in which all significant inputs are observable.
Level 3 - Valuations derived from techniques in which significant inputs are unobservable.
Inputs used to measure fair value might fall in different levels of the fair value hierarchy, in which case the Company defaults to the lowest level input that is significant to the fair value measurement in its entirety. These levels are not necessarily an indication of the risk or liquidity associated with investments. The following table summarizes investments that are recognized in our consolidated balance sheet using fair value measurements (excludes investments classified as equity method investments) determined based upon the differing levels of inputs as of September 30, 2018:
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
98,886,472

 
$

 
$

 
$
98,886,472

Fair value investments
 
 
 
 
 
 
 
     Securities held in Consolidated Funds(a)
43,884,224

 
109,615,566

 

 
153,499,790

     Company sponsored investments
38,757,226

 

 

 
38,757,226

(a) Of the securities held in the Consolidated Funds as of September 30, 2018, $85.9 million were held directly by the Company and $67.6 million were held by noncontrolling shareholders.
Level 1 investments are comprised of investments in registered investment companies (mutual funds) or equity securities held in the Consolidated Funds and $98.9 million of investments in money market mutual funds owned by DHCM that the Company classifies as cash equivalents.
Level 2 investments are comprised of investments in foreign equity securities and debt securities held in the Consolidated Funds, which are valued by an independent pricing service using pricing techniques which take into account factors such as trading activity, readily available market quotations, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit rates and other observable inputs.
The Company determines transfers between fair value hierarchy levels at the end of the reporting period. There were no transfers in or out of the levels during the nine months ended September 30, 2018.
Changes in fair values of the investments are recorded in the Company's consolidated statements of income as investment income (loss), net.

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Property and Equipment
Property and equipment, consisting of leasehold improvements, computer equipment, furniture, and fixtures, are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated lives of the assets.
New Accounting Guidance
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers", which supersedes existing accounting standards for revenue recognition and creates a single framework. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard also specifies the accounting for certain costs to obtain or fulfill a contract with a customer. Our implementation efforts included a detailed review of revenue contracts within the scope of the guidance and an evaluation of the impact on the Company's revenue recognition policies. No transition-related practical expedients were applied. The Company adopted this ASU on its effective date, January 1, 2018, and it had no impact on the timing of the Company's revenue recognition.
Revenue Recognition – General
Revenue is recognized when performance obligations under the terms of a contract with a client are satisfied. The Company earns substantially all of its revenue from investment advisory and fund administration contracts. Investment advisory and administration fees, generally calculated as a percentage of assets under management ("AUM"), are recorded as revenue as services are performed. In addition to fixed fees based on a percentage of AUM, certain client accounts also provide periodic variable rate fees.
Revenue earned during the three months ended September 30, 2018 and 2017 under contracts with clients include:
 
Three Months Ended September 30, 2018
 
Investment advisory
 
Mutual fund
administration, net
 
Total revenue
Proprietary funds
$
26,864,835

 
$
2,543,442

 
$
29,408,277

Sub-advised funds and institutional accounts
8,063,370

 

 
8,063,370

 
$
34,928,205

 
$
2,543,442

 
$
37,471,647

 
Three Months Ended September 30, 2017
 
Investment advisory
 
Mutual fund
administration, net
 
Total revenue
Proprietary funds
$
26,571,891

 
$
2,989,026

 
$
29,560,917

Sub-advised funds and institutional accounts
7,210,712

 

 
7,210,712

 
$
33,782,603

 
$
2,989,026

 
$
36,771,629

Revenue earned during the nine months ended September 30, 2018 and 2017 under contracts with clients include:
 
Nine Months Ended September 30, 2018
 
Investment advisory
 
Mutual fund
administration, net
 
Total revenue
Proprietary funds
$
80,464,941

 
$
8,095,596

 
$
88,560,537

Sub-advised funds and institutional accounts
22,620,826

 

 
22,620,826

 
$
103,085,767

 
$
8,095,596

 
$
111,181,363


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Nine Months Ended September 30, 2017
 
Investment advisory
 
Mutual fund
administration, net
 
Total revenue
Proprietary funds
$
76,975,740

 
$
9,247,339

 
$
86,223,079

Sub-advised funds and institutional accounts
21,130,165

 

 
21,130,165

 
$
98,105,905

 
$
9,247,339

 
$
107,353,244

Revenue Recognition – Investment Advisory Fees
The Company's investment advisory contracts have a single performance obligation (the investment advisory services provided to the client) as the promised services are not separately identifiable from other promises in the contracts and, therefore, are not distinct. All performance obligations to provide advisory services are satisfied over time and the Company recognizes revenue as time passes.
The fees we receive for our services under our investment advisory contracts are based on our AUM, which changes based on the value of securities held under each advisory contract. These fees are thereby constrained and represent variable consideration, and are excluded from revenue until the AUM on which our client is billed is no longer subject to market fluctuations.
Revenue Recognition – Variable Rate Fees
The Company manages certain client accounts that provide for variable rate fees. These fees are calculated based on client investment results over rolling five-year periods. The Company records variable rate fees at the end of the contract measurement period because the variable fees earned are constrained based on movements in the financial markets. During the three and nine months ended September 30, 2018, the Company recorded $0.6 million in variable rate fees. No variable rate fees were earned during the three and nine months ended September 30, 2017. The table below shows AUM subject to variable rate fees and the amount of variable rate fees that would be recognized based upon investment results as of September 30, 2018:
 
As of September 30, 2018
 
AUM subject to variable rate fees
 
Unearned variable rate fees
Contractual Period Ends:
 
 
 
Quarter Ending December 31, 2018
$
61,028,560

 
$
1,416,398

Quarter Ending September 30, 2019
36,681,776

 
708,542

Quarter Ending March 31, 2020
13,336,076

 

Quarter Ending September 30, 2021
284,788,511

 
4,145,635

Total
$
395,834,923

 
$
6,270,575


The contractual end dates highlight the time remaining until the variable rate fees are scheduled to be earned. The amount of variable rate fees that would be recognized based upon investment results as of September 30, 2018 will increase or decrease based on future client investment results through the contractual period end. There can be no assurance that the unearned amounts will ultimately be earned.
Revenue Recognition – Mutual Fund Administration
DHCM has an administrative and transfer agency services agreement with the Funds under which DHCM performs certain services for each Fund. These services include performance obligations including mutual fund administration, fund accounting, transfer agency and other related functions. These services are performed concurrently under our agreement with the Funds, and all performance obligations to provide these administrative services are satisfied over time, and the Company recognizes revenue as time passes. For performing these services each Fund pays DHCM a fee, which is calculated using an annual rate times the average daily net assets of each respective share class. These fees are thereby constrained and represent variable consideration, and are excluded from revenue until the AUM on which we bill the Funds is no longer subject to market fluctuations.

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The Funds have selected and contractually engaged certain vendors to fulfill various services to benefit the Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include, among others, required shareholder mailings, federal and state registrations, and legal and audit services. DHCM, in fulfilling a portion of its role under the administration agreement with the Funds, acts as agent to pay these obligations of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates fees and terms with the management and board of trustees of the Funds. The fee that each Fund pays to DHCM is reviewed annually by the Funds’ board of trustees and specifically takes into account the contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these services and bears no risk related to these services. Revenue has been recorded net of these Fund related expenses. In addition, DHCM advances the upfront commissions that are paid to brokers who sell Class C shares of the Funds. These advances are capitalized and amortized over 12 months to correspond with the repayments DHCM receives from the principal underwriter to recoup this commission advancement.
Mutual fund administration gross and net revenue are summarized below:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Mutual fund administration:
 
 
 
 
 
 
 
Administration revenue, gross
$
6,169,984

 
$
6,557,054

 
$
18,771,040

 
$
19,432,002

Fund related expense
(3,638,618
)
 
(3,576,598
)
 
(10,702,498
)
 
(10,214,948
)
Revenue, net of related expenses
2,531,366

 
2,980,456

 
8,068,542

 
9,217,054

DHCM C-Share financing:
 
 
 
 
 
 
 
Broker commission advance repayments
84,248

 
101,238

 
264,107

 
315,283

Broker commission amortization
(72,172
)
 
(92,668
)
 
(237,053
)
 
(284,998
)
Financing activity, net
12,076

 
8,570

 
27,054

 
30,285

Mutual fund administration revenue, net
$
2,543,442

 
$
2,989,026

 
$
8,095,596

 
$
9,247,339

Income Taxes
The Company accounts for current and deferred income taxes through an asset and liability approach. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company is subject to examination by federal and applicable state and local jurisdictions for various tax periods. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws among those jurisdictions, and the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company’s estimates of income tax liabilities may differ from actual payments or assessments. The Company regularly assesses its position with regard to tax exposures and records liabilities for these uncertain tax positions and related interest and penalties, if any, according to the principles of FASB ASC 740, Income Taxes. As of September 30, 2018, the Company has recorded approximately $0.8 million for uncertain tax positions in the state and city jurisdictions in which we do business. The Company records interest and penalties within income tax expense on the income statement.
Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, which includes participating securities. Diluted EPS reflects the potential dilution of EPS due to unvested restricted stock units. See Note 8.

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Newly Issued But Not Yet Adopted Accounting Guidance
In February 2016, the FASB issued ASU 2016-02, "Leases", which, among other things, requires lessees to recognize most leases on-balance sheet. This will increase the reported assets and liabilities of lessees - in some cases significantly. Lessor accounting remains substantially similar to current GAAP. ASU 2016-02 supersedes Topic 840, Leases. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. We will adopt this standard on its effective date, January 1, 2019. While we continue evaluating the full impact this standard will have on our consolidated financial statements, we expect the most significant impact will be the recognition of a lease liability and right of use asset on our consolidated balance sheets for our office operating lease.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurements.” This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. ASU 2018-13 does not change fair value measurements already required or permitted by existing standards. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Management does not believe that adoption of ASU 2018-13 will materially impact the Company’s financial statements.

Note 3 Investment Portfolio
As of September 30, 2018, the Company held investments (excluding money market funds, which are included with cash and cash equivalents) of $212.4 million. The following table summarizes the carrying value of these investments as of September 30, 2018 and December 31, 2017:
 
As of
 
September 30, 2018
 
December 31, 2017
Fair value investments:
 
 
 
Securities held in Consolidated Funds(a)
$
153,499,790

 
$
65,890,500

Company sponsored investments
38,757,226

 
36,541,818

Company sponsored equity method investments
20,132,461

 
36,043,704

Total Investment portfolio
$
212,389,477

 
$
138,476,022

(a) Of the securities held in the Consolidated Funds as of September 30, 2018, $85.9 million were held directly by the Company and $67.6 million were held by noncontrolling shareholders. Of the securities held in the Consolidated Funds as of December 31, 2017, $42.6 million were held directly by the Company and $23.3 million were held by noncontrolling shareholders.

New consolidations of Company sponsored investments of $16.4 million during 2018 included the consolidation of the Diamond Hill Global Fund and the Diamond Hill High Yield Fund. As of December 31, 2017, these investments were classified as equity method investments.


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As of September 30, 2018, our equity method investments consisted of the Diamond Hill Research Opportunities Fund and DHIEF, and our ownership percentage in each of these investments was approximately 30%. The following table includes the condensed summary financial information from the Company's equity method investments as of and for the period ended September 30, 2018:
 
 
 
As of
 
 
 
September 30, 2018
Total assets
 
 
$
99,404,580

Total liabilities
 
 
31,473,525

Net assets
 
 
67,931,055

DHCM's portion of net assets
 
 
20,132,461

 
 
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2018
Investment income
$
261,767

 
$
817,862

Expenses
228,936

 
712,938

Net realized gains
829,029

 
476,343

Net change in unrealized appreciation
1,374,838

 
1,688,384

Net income
2,236,698

 
2,269,651

DHCM's portion of net income
668,226

 
742,944

Note 4 Line of Credit
The Company has an uncommitted Line of Credit Agreement (the "Credit Agreement") with a commercial bank that matures in December of 2018 and permits the Company to borrow up to $25.0 million. Borrowings under the Credit Agreement bear interest at a rate equal to LIBOR plus 1.50%. The Company has not borrowed under the Credit Agreement as of and for the nine-month period ended September 30, 2018. No interest is payable on the unused portion of the Credit Agreement.
The proceeds of the Credit Agreement may be used by the Company and its subsidiaries for ongoing working capital needs, to seed new and existing investment strategies and for other general corporate purposes. The Credit Agreement contains representations, warranties and covenants that are customary for agreements of this type.
Note 5 Compensation Plans
Share-Based Payment Transactions
The Company issues restricted stock units and restricted stock awards (collectively, "Restricted Stock") under its 2014 Equity and Cash Incentive Plan ("2014 Plan"). Restricted stock units represent common shares which may be issued in the future, whereas restricted stock awards represent common shares issued and outstanding upon grant subject to vesting restrictions. The following table represents a roll-forward of outstanding Restricted Stock and related activity during the nine months ended September 30, 2018:
 
Shares
 
Weighted-Average
Grant Date Price
per Share
Outstanding Restricted Stock as of December 31, 2017
197,900

 
$
165.60

Grants issued
60,950

 
201.78

Grants vested
(27,450
)
 
77.81

Grants forfeited
(20,900
)
 
196.97

Total Outstanding Restricted Stock as of September 30, 2018
210,500

 
$
176.75

As of September 30, 2018, there were 296,429 common shares available for awards under the 2014 Plan.

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Total deferred equity compensation related to unvested Restricted Stock grants was $22.5 million as of September 30, 2018. Compensation expense related to Restricted Stock grants is calculated based upon the fair market value of the common shares on grant date. The Company's policy is to adjust compensation expense for forfeitures as they occur. The recognition of compensation expense related to deferred compensation over the remaining vesting periods is as follows:
Three Months 
 Remaining In
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
$
1,850,410

 
$
6,863,879

 
$
5,399,940

 
$
4,087,381

 
$
3,100,248

 
$
1,200,348

 
$
22,502,206

Stock Grant Transactions
The following table represents common shares issued as part of our incentive compensation program during the nine months ended September 30, 2018 and 2017:
 
Shares Issued
 
Grant Date Value
September 30, 2018
20,153

 
$
4,109,197

September 30, 2017
19,219

 
3,892,424

Deferred Compensation Plans
The Company offers two deferred compensation plans, the Diamond Hill Fixed Term Deferred Compensation Plan and the Diamond Hill Variable Term Deferred Compensation Plan (collectively the “Plans”). Under the Plans, participants may elect to voluntarily defer, for a minimum of five years, certain incentive compensation, which the Company then contributes into the Plans. Each participant is responsible for designating investment options for assets they contribute, and the distribution paid to each participant reflects any gains or losses on the assets realized while in the Plans. Assets held in the Plans are included in the Company’s investment portfolio, and the associated obligation to participants is included in deferred compensation liability. Assets held in the Plans are recorded at fair value. Deferred compensation liability was $25.4 million and $20.5 million as of September 30, 2018 and December 31, 2017, respectively.
Note 6 Operating Leases
The Company currently leases office space of approximately 37,829 square feet at one location. The following table summarizes the total lease and operating expenses for the three and nine months ended September 30, 2018 and 2017:
 
 
September 30,
2018
 
September 30,
2017
Three Months Ended
$
238,014

 
$
235,272

Nine Months Ended
$
732,318

 
$
700,926

The approximate future minimum lease payments under the operating lease are as follows:
 
Future Minimum Lease Payments
Three Months 
 Remaining In
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
$
146,587

 
$
586,350

 
$
614,721

 
$
624,179

 
$
624,179

 
$
1,404,000

 
$
4,000,016

In addition to the above lease payments, the Company is also responsible for normal operating expenses of the property. Such operating expenses were approximately $0.4 million in 2017, and are expected to be approximately the same in 2018.

15

Table of Contents


Note 7 Income Taxes
The Company has determined its interim tax provision projecting an estimated annual effective tax rate. The Tax Cuts and Jobs Act was passed on December 22, 2017. Among other federal tax law changes, for taxable years beginning after December 31, 2017, the new law establishes a flat corporate income tax rate of 21% to replace our prior year rate of 35% and eliminates the corporate alternative minimum tax. 
For the three months ended September 30, 2018, the Company recorded income tax expense of $5.7 million, yielding an effective tax rate of 25.9%. The effective tax rate of 25.9% differed from the federal statutory tax rate of 21% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business, including new jurisdictions in which we are filing in 2018, which was partially offset by $0.2 million of excess tax benefits from the vesting of stock awards.
For the nine months ended September 30, 2018, the Company recorded income tax expense of $14.4 million, yielding an effective tax rate of 24.6%. The effective tax rate of 24.6% differed from the federal statutory tax rate of 21% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business, including new jurisdictions in which we are filing in 2018, which was partially offset by $0.7 million of excess tax benefits from the vesting of stock awards.
For the three months ended September 30, 2017, the Company recorded income tax expense of $6.5 million, yielding an effective tax rate of 33.1%. The effective tax rate of 33.1% differed from the federal statutory tax rate of 35% due primarily to $0.4 million of excess tax benefits from the vesting of stock awards. The tax benefits were partially offset by the additional income tax expense recorded in the state and city jurisdictions in which we do business.
For the nine months ended September 30, 2017, the Company recorded income tax expense of $19.0 million, yielding an effective tax rate of 32.6%. The effective tax rate of 32.6% differed from the federal statutory tax rate of 35% due primarily to $1.7 million of excess tax benefits from the vesting of stock awards. The tax benefits were partially offset by the additional income tax expense recorded in the state and city jurisdictions in which we do business.
The net temporary differences incurred to date will reverse in future periods as the Company generates taxable earnings. The Company believes 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, 2018 and December 31, 2017, 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 derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of September 30, 2018, the Company has recorded approximately $0.8 million for uncertain tax positions in the state and city jurisdictions in which we do business. The Company did not record an accrual for tax related uncertainties or unrecognized tax positions as of December 31, 2017.

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Note 8 Earnings Per Share
The Company’s common shares outstanding consist of all shares issued and outstanding, including unvested restricted shares. Basic and diluted EPS are calculated under the two-class method. Restricted stock units are considered dilutive. The following table sets forth the computation for basic and diluted EPS and reconciliation between basic and diluted shares outstanding:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net Income
$
16,399,370

 
$
13,158,099

 
$
44,239,522

 
$
39,250,567

Less: Net income attributable to redeemable noncontrolling interest
(1,191,317
)
 
(459,252
)
 
(1,671,640
)
 
(1,156,385
)
Net income attributable to common shareholders
$
15,208,053

 
$
12,698,847

 
$
42,567,882

 
$
38,094,182

 
 
 
 
 
 
 
 
Weighted average number of outstanding shares - Basic
3,530,586

 
3,454,178

 
3,512,547

 
3,442,402

Dilutive impact of restricted stock units
1,760

 
7,240

 
1,970

 
5,574

Weighted average number of outstanding shares - Diluted
3,532,346

 
3,461,418

 
3,514,517

 
3,447,976

 
 
 
 
 
 
 
 
Earnings per share attributable to common shareholders
 
 
 
 
 
 
 
Basic
$
4.31

 
$
3.68

 
$
12.12

 
$
11.07

Diluted
$
4.31

 
$
3.67

 
$
12.11

 
$
11.05

Note 9 Commitments and Contingencies
The Company indemnifies its directors, officers and certain of its employees for certain liabilities that might arise from their performance of their duties to the Company. From time to time, the Company is involved in legal matters relating to claims arising in the ordinary course of business. There are currently no such matters pending that the Company believes could have a material adverse effect on its consolidated financial statements.
Additionally, in the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and which provide general indemnifications. 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 coverage against certain claims under these indemnities.
Note 10 Subsequent Event
On October 30, 2018, the Company’s board of directors approved a special cash dividend of $8.00 per share payable December 11, 2018 to shareholders of record on December 3, 2018. This dividend will reduce shareholders' equity by approximately $28.1 million.


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ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Throughout this Quarterly Report on Form 10-Q, the Company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to such matters as anticipated operating results, prospects and levels of assets under management, technological developments, economic trends (including interest rates and market volatility), expected transactions and similar matters. The words “believe,” “expect,” “anticipate,” “estimate,” “should,” “hope,” “seek,” “plan,” “intend” and similar expressions identify forward-looking statements that speak only as of the date thereof. While we believe that the assumptions underlying our forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, our actual results and experiences could differ materially from the anticipated results or other expectations expressed in our forward-looking statements. Factors that could cause such actual results or experiences to differ from results discussed in the forward-looking statements include, but are not limited to: the adverse effect from a decline in the securities markets; a decline in the performance of our products; changes in interest rates; changes in national and local economic and political conditions; the continuing economic uncertainty in various parts of the world; changes in government policy and regulation, including monetary policy; our inability to attract or retain key employees; unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations; and other risks identified from time-to-time in other public documents on file with the SEC.
General
The Company derives its consolidated revenue and net income from investment advisory and fund administration services provided by DHCM. DHCM is registered with the SEC as an investment adviser under the 1940 Act. DHCM sponsors, distributes, and provides investment advisory and related services to various clients through the Funds, institutional accounts, the ETF, and the Partnerships.
The Company’s primary objective is to fulfill our fiduciary duty to our clients. Our secondary objective is to grow the intrinsic value of the Company in order to achieve an adequate long-term return for our shareholders.
Assets Under Management
Our revenue is derived primarily from investment advisory and administration fees. Investment advisory and administration fees paid to the Company are generally based on the value of the investment portfolios we manage and fluctuate with changes in the total value of our AUM. Substantially all of our AUM (94%) is valued based on readily available market quotations. AUM in the fixed income strategies (6%) is valued using evaluated prices from independent third-party providers.
Our revenues are highly dependent on both the value and composition of AUM. The following is a summary of our AUM by product and investment objective, and a roll-forward of the change in AUM for the three and nine months ended September 30, 2018 and 2017:
 
 
Assets Under Management
 
As of September 30,
(in millions, except percentages)
2018
 
2017
 
% Change
Proprietary funds
$
16,148

 
$
15,417

 
5
%
Sub-advised funds
1,595

 
1,411

 
13
%
Institutional accounts
4,886

 
4,627

 
6
%
Total AUM
$
22,629

 
$
21,455

 
5
%


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Table of Contents


 
Assets Under Management
by Investment Strategy
 
As of September 30,
(in millions, except percentages)
2018
 
2017
 
% Change
Small Cap
$
1,452

 
$
1,549

 
(6
)%
Small-Mid Cap
3,419

 
3,482

 
(2
)%
Mid Cap
135

 
121

 
12
 %
Large Cap
11,654

 
10,153

 
15
 %
All Cap Select
503

 
390

 
29
 %
Long-Short
4,281

 
4,943

 
(13
)%
Global/International
19

 
6

 
217
 %
Short Duration Fixed Income
490

 
296

 
66
 %
Core Fixed Income
53

 
44

 
20
 %
Long Duration Fixed Income
25

 

 
NM

Corporate Credit
773

 
658

 
17
 %
High Yield
54

 
29

 
86
 %
  (Less: Investments in affiliated funds)(a)
(229
)
 
(216
)
 
6
 %
Total AUM
$
22,629

 
$
21,455

 
5
 %
(a) Certain of the Funds own shares of the Diamond Hill Short Duration Total Return Fund. The Company reduces its total AUM by these investments held in this affiliated fund.
 
Change in Assets
Under Management
 
For the Three Months Ended 
 September 30,
(in millions)
2018
 
2017
AUM at beginning of the period
$
21,827

 
$
20,924

Net cash inflows (outflows)
 
 
 
proprietary funds
(158
)
 
106

sub-advised funds
(130
)
 
(65
)
institutional accounts
(82
)
 
1

 
(370
)
 
42

Net market appreciation and income
1,172

 
489

Increase during the period
802

 
531

AUM at end of the period
$
22,629

 
$
21,455

 
Change in Assets
Under Management
 
For the Nine Months Ended 
 September 30,
(in millions)
2018
 
2017
AUM at beginning of the period
$
22,317

 
$
19,381

Net cash inflows (outflows)
 
 
 
proprietary funds
(332
)
 
805

sub-advised funds
(3
)
 
(197
)
institutional accounts
(171
)
 
(206
)
 
(506
)
 
402

Net market appreciation and income
818

 
1,672

Increase during the period
312

 
2,074

AUM at end of the period
$
22,629

 
$
21,455


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Table of Contents


Consolidated Results of Operations
The following is a discussion of our consolidated results of operations.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per share amounts and percentages)
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Total revenue
$
37,472

 
$
36,772

 
2%
 
$
111,181

 
$
107,353

 
4%
Net operating income
$
16,916

 
$
16,887

 
—%
 
$
51,469

 
$
48,596

 
6%
Net income attributable to common shareholders
$
15,208

 
$
12,699

 
20%
 
$
42,568

 
$
38,094

 
12%
Earnings per share attributable to common shareholders (Diluted)
$
4.31

 
$
3.67

 
17%
 
$
12.11

 
$
11.05

 
10%
Operating profit margin
45
%
 
46
%
 
 
 
46
%
 
45
%
 
 
Operating profit margin, as adjusted(a)
48
%
 
47
%
 
 
 
47
%
 
47
%
 
 
(a) Operating profit margin, as adjusted, is a non-GAAP performance measure. See the Use of Supplemental Data as Non-GAAP Performance Measure section within this report.
Three Months Ended September 30, 2018 compared with Three Months Ended September 30, 2017
The Company generated net income attributable to common shareholders of $15.2 million ($4.31 per diluted share) for the three months ended September 30, 2018, compared with net income attributable to common shareholders of $12.7 million ($3.67 per diluted share) for the three months ended September 30, 2017. Revenue increased $0.7 million period over period primarily due to an increase in average AUM. The revenue increase was primarily offset by an increase in operating expenses of $0.7 million primarily related to increases in compensation and related costs. The Company had $5.2 million in investment income due to market appreciation for the three months ended September 30, 2018, compared to investment income of $2.8 million for the three months ended September 30, 2017.
Income tax expense decreased $0.8 million from the three months ended September 30, 2017 to the three months ended September 30, 2018 due to the the reduction of the effective tax rate from 33.1% to 25.9%. This reduction was primarily due to the impact of the Tax Cuts and Jobs Act, passed on December 22, 2017, which reduced our corporate income tax rate from 35% to 21% quarter over quarter. The effective tax rate of 25.9% differed from the federal statutory tax rate of 21% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business, which was partially offset by $0.2 million of excess tax benefits from the vesting of stock awards.
Operating profit margin was 45% for the three months ended September 30, 2018 and 46% for the three months ended September 30, 2017. Operating profit margin, as adjusted, increased to 48% for the three months ended September 30, 2018 from 47% for the three months ended September 30, 2017. See Use of Supplemental Data as Non-GAAP Performance Measure section within this report. We expect that our operating margin may fluctuate from period-to-period based on various factors, including revenues; investment results; employee performance; staffing levels; development of investment strategies, products, or channels; and industry comparisons.
Revenue
 
Three Months Ended September 30,
 
 
(in thousands, except percentages)
2018
 
2017
 
% Change
Investment advisory
$
34,928

 
$
33,783

 
3
 %
Mutual fund administration, net
2,544

 
2,989

 
(15
)%
Total
$
37,472

 
$
36,772

 
2
 %
Investment Advisory Fees. Investment advisory fees increased $1.1 million, or 3%, from the three months ended September 30, 2017 to the three months ended September 30, 2018. 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 driven by an increase of 7% in average AUM quarter over quarter, which was partially offset by a decrease of two basis points in the average advisory fee rate from 0.64% for the three months ended September 30, 2017 to 0.62% for the three months ended September 30, 2018. The decrease in average advisory fee rate was driven by a shift in the mix of assets held in lower fee rate strategies during the three months ended September 30, 2018 compared to the three months ended September 30, 2017.

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Table of Contents


Mutual Fund Administration Fees. Mutual fund administration fees decreased $0.4 million, or 15%, from the three months ended September 30, 2017 to the three months ended September 30, 2018. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of average Funds' AUM. The decrease was due to a reduction in the administration fee rates paid by the Funds and an increase in shareholder servicing expenses and required shareholder mailings that DHCM pays on behalf of the Funds. This was partially offset by the 6% increase in average Funds' AUM from the three months ended September 30, 2017 to the three months ended September 30, 2018. The table below summarizes the decreases in the administration fee rates during the periods indicated:
 
Class A & C
 
Class I
 
Class Y
1/1/2017 - 5/31/2017
0.24%
 
0.19%
 
0.09%
6/1/2017 - 2/27/2018
0.23%
 
0.18%
 
0.08%
2/28/2018 - 9/30/2018
0.21%
 
0.17%
 
0.05%
Expenses
 
Three Months Ended September 30,
 
 
(in thousands, except percentages)
2018
 
2017
 
% Change
Compensation and related costs
$
15,442

 
$
14,446

 
7
 %
General and administrative
2,962

 
3,088

 
(4
)%
Sales and marketing
1,282

 
1,230

 
4
 %
Mutual fund administration
870

 
1,120

 
(22
)%
Total
$
20,556

 
$
19,884

 
3
 %
Compensation and Related Costs. Employee compensation and benefits increased by $1.0 million, or 7%, from the three months ended September 30, 2017 compared to the three months ended September 30, 2018. This increase is primarily due to an increase in salary and related benefits of $0.5 million and an increase in deferred compensation expense of $0.5 million.
General and Administrative. General and administrative expenses decreased 4%, from the three months ended September 30, 2017 to the three months ended September 30, 2018. This decrease is due primarily to a decrease in information technology consulting expense.
Sales and Marketing. Sales and marketing expenses increased 4%, from the three months ended September 30, 2017 to the three months ended September 30, 2018. The increase was primarily due to additional payments made to third-party intermediaries related to the sale of our proprietary funds.
Mutual Fund Administration. Mutual fund administration expenses decreased by $0.2 million, or 22%, from the three months ended September 30, 2017 to the three months ended September 30, 2018. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM and the number of shareholder accounts. The decrease was primarily due to a reduction in outsourced administration services.
Nine Months Ended September 30, 2018 compared with Nine Months Ended September 30, 2017
The Company generated net income attributable to common shareholders of $42.6 million ($12.11 per diluted share) for the nine months ended September 30, 2018, compared with net income attributable to common shareholders of $38.1 million ($11.05 per diluted share) for the nine months ended September 30, 2017. Revenue increased $3.8 million period over period primarily due to an increase in average AUM. The revenue increase was partially offset by an increase in operating expenses of $1.0 million primarily related to increases in compensation and related costs. The Company had $7.2 million in investment income due to market appreciation for the nine months ended September 30, 2018 compared to investment income of $9.7 million for the nine months ended September 30, 2017.
Income tax expense decreased $4.6 million from the nine months ended September 30, 2017 to the nine months ended September 30, 2018 due to the reduction of the Company's effective tax rate from 32.6% to 24.6%. This reduction was primarily due to the impact of the Tax Cuts and Jobs Act. The effective tax rate of 24.6% differed from the federal statutory tax rate of 21% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business, which was partially offset by $0.7 million of excess tax benefits from the vesting of stock awards.

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Operating profit margin was 46% for the nine months ended September 30, 2018 and 45% for the nine months ended September 30, 2017. Operating profit margin, as adjusted, was 47% for both the nine months ended September 30, 2018 and 2017. See Use of Supplemental Data as Non-GAAP Performance Measure section within this report. We expect that our operating margin may fluctuate from period to period based on various factors, including revenues; investment results; employee performance; staffing levels; development of investment strategies, products, or channels; and industry comparisons.
Revenue
 
Nine Months Ended 
 September 30,
 
 
(in thousands, except percentages)
2018
 
2017
 
% Change
Investment advisory
$
103,086

 
$
98,106

 
5
 %
Mutual fund administration, net
8,095

 
9,247

 
(12
)%
Total
$
111,181

 
$
107,353

 
4
 %
Investment Advisory Fees. Investment advisory fees increased $5.0 million, or 5%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. 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 driven by an increase of 8% in average AUM period over period, and was partially offset by a decrease of two basis points in the average advisory fee rate from 0.64% for the nine months ended September 30, 2017 to 0.62% for the nine months ended September 30, 2018. The decrease in average advisory fee rate was driven by a shift in the mix of assets held in lower fee rate strategies during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.
Mutual Fund Administration Fees. Mutual fund administration fees decreased $1.2 million, or 12%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of average Funds' AUM. The decrease was due to a reduction in the administration fee rates paid by the Funds and an increase in shareholder servicing expenses and required shareholder mailings that DHCM pays on behalf of the Funds. This was partially offset by the 9% increase in average Funds' AUM from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. The table below summarizes the decreases in the administration fee rates during the periods indicated:
 
Class A & C
 
Class I
 
Class Y
1/1/2017 - 5/31/2017
0.24%
 
0.19%
 
0.09%
6/1/2017 - 2/27/2018
0.23%
 
0.18%
 
0.08%
2/28/2018 - 9/30/2018
0.21%
 
0.17%
 
0.05%
Expenses
 
Nine Months Ended 
 September 30,
 
 
(in thousands, except percentages)
2018
 
2017
 
% Change
Compensation and related costs
$
44,401

 
$
42,439

 
5
 %
General and administrative
8,749

 
9,557

 
(8
)%
Sales and marketing
3,793

 
3,613

 
5
 %
Mutual fund administration
2,769

 
3,149

 
(12
)%
Total
$
59,712

 
$
58,758

 
2
 %
Compensation and Related Costs. Employee compensation and benefits increased by $2.0 million, or 5%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. This increase is primarily due to increases in salary and related benefits of $2.3 million and in incentive compensation and restricted stock expense of $0.2 million. These increases were partially offset by a decrease in deferred compensation expense of $0.5 million. Incentive compensation expense can fluctuate significantly period over period as we evaluate investment performance, individual performance, Company performance and other factors.

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General and Administrative. General and administrative expenses decreased by $0.8 million, or 8%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. This decrease was primarily due to decreases in charitable donations of $1.0 million and information technology consulting expense of $0.4 million, which were partially offset by an increase in research expenses to support our investment team of $0.4 million and depreciation expense of $0.2 million.
Sales and Marketing. Sales and marketing expenses increased by $0.2 million, or 5%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. The increase was primarily due to additional payments made to third-party intermediaries related to the sale of our proprietary funds.
Mutual Fund Administration. Mutual fund administration expenses decreased by $0.4 million, or 12%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM and the number of shareholder accounts. The decrease was primarily due to a reduction in outsourced administration services.
Liquidity and Capital Resources
Sources of Liquidity
Our current financial condition is highly liquid, with a significant amount of our assets comprised of cash and cash equivalents, investments, and accounts receivable. Our main source of liquidity is cash flows from operating activities, which are generated from investment advisory and fund administration fees. Cash and cash equivalents, accounts receivable, and investments represented approximately 96% and 94% of total assets as of September 30, 2018 and December 31, 2017, respectively. We believe these sources of liquidity, as well as our continuing cash flows from operating activities, will be sufficient to meet our current and future operating needs for at least the next 12 months.
Uses of Liquidity
In line with the Company’s primary objective to fulfill our fiduciary duty to clients and secondary objective to achieve an adequate long-term return for shareholders, we anticipate our main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies.
Our board of directors and management regularly review various factors to determine whether we have capital in excess of that required for our business and the appropriate use of any excess capital. The factors considered include our investment opportunities, capital needed for investment strategies, risks, and future dividend and capital gain tax rates. Our board of directors has also authorized management to repurchase the Company's common shares having an aggregate purchase price up to $50.0 million. The authority to repurchase shares will be exercised from time to time as market conditions warrant and is subject to regulatory considerations. Evaluating management’s stewardship of capital for shareholders is a central part of our investment discipline that we practice for our clients. We hold ourselves to the same standard.
Working Capital
As of September 30, 2018, the Company had working capital of approximately $213 million, compared to $163 million at December 31, 2017. Working capital includes cash, securities owned by common shareholders, prepaid expenses and current receivables, net of all liabilities and redeemable noncontrolling interest. The Company has no debt, and we believe our available working capital is sufficient to cover current expenses and anticipated capital expenditures.

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Below is a summary of securities owned by the Company as of September 30, 2018 and December 31, 2017.
 
As of
 
September 30, 2018
 
December 31, 2017
Corporate Investments:
 
 
 
Diamond Hill Core Bond Fund
$
36,394,830

 
$
30,529,852

Diamond Hill High Yield Fund
25,571,852

 
14,200,885

Diamond Hill Mid Cap Fund
17,929,066

 
19,270,451

Diamond Hill Research Opportunities Fund
16,022,598

 
15,409,571

Diamond Hill Valuation-Weighted 500 ETF
12,190,658

 
12,096,719

Diamond Hill Global Fund
10,086,637

 

Diamond Hill Global Fund, L.P.

 
2,055,196

Diamond Hill International Equity Fund, L.P.
1,193,456

 
1,173,870

Total Corporate Investments
119,389,097

 
94,736,544

Deferred Compensation Plan Investments in the Funds
25,432,661

 
20,480,790

Total investments held by DHCM
144,821,758

 
115,217,334

Redeemable noncontrolling interest in Consolidated Funds
67,567,719

 
23,258,688

Total Investment Portfolio
$
212,389,477

 
$
138,476,022

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. We expect that cash flows provided by operating activities will continue to serve as our primary source of working capital in the near future.
For the nine months ended September 30, 2018, net cash provided by operating activities totaled $9.6 million. Cash inflows provided by operating activities was primarily driven by net income of $44.2 million, the add back of share-based compensation of $6.5 million, depreciation of $0.9 million, and the cash impact of timing differences in the settlement of assets and liabilities of $5.2 million. These cash inflows were partially offset by net purchases of securities held in the underlying investment portfolios of the Consolidated Funds of $47.2 million. Absent the cash used by Consolidated Funds to purchase securities into their investment portfolios, cash flow provided by operations was $55.9 million.
For the nine months ended September 30, 2017, net cash provided by operating activities totaled $40.6 million. Cash inflows provided by operating activities were primarily driven by net income of $39.2 million and the add-back of share-based compensation of $6.2 million, depreciation of $0.7 million, and the cash impact of timing differences in the settlement of assets and liabilities of $0.1 million. These cash inflows were partially offset by the net change in trading securities held in the underlying investment portfolios of the Consolidated Funds of $5.6 million. Absent the cash used by the Consolidated Funds to purchase securities into their investment portfolios, cash flow provided by operations was approximately $43.5 million.
Cash Flows from Investing Activities
The Company’s cash flows from investing activities consist primarily of capital expenditures and purchases and redemptions in our investment portfolio.
Cash flows used in investing activities totaled $3.3 million for the nine months ended September 30, 2018. The Company purchased investments of $4.4 million and $0.7 million of property and equipment during the period. These cash outflows were partially offset by proceeds from the sale of investments of $1.8 million.
Cash flows used in investing activities totaled $11.1 million for the nine months ended September 30, 2017. The Company purchased investments of $13.3 million and $0.5 million of property and equipment during the period. These cash outflows were partially offset by proceeds from sales of investments of $2.7 million.

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Table of Contents


Cash Flows from Financing Activities
The Company’s cash flows from financing activities consist primarily of shares withheld related to employee tax withholding and distributions to, or contributions from, redeemable noncontrolling interest holders.
For the nine months ended September 30, 2018, net cash provided by financing activities totaled $17.7 million, consisting of net subscriptions received in the Consolidated Funds from redeemable noncontrolling interest holders of $19.3 million, which were partially offset by the value of shares withheld related to employee tax withholding of $1.6 million.
For the nine months ended September 30, 2017, net cash provided by financing activities totaled $3.2 million, consisting of net subscriptions received in the Consolidated Funds from redeemable noncontrolling interest holders of $6.0 million, which were partially offset by the value of shares withheld related to employee tax withholding of $2.8 million.
Supplemental Consolidated Cash Flow Statement
Our consolidated balance sheets reflect the investments and other assets and liabilities of the Consolidated Funds, as well as redeemable noncontrolling interests for the portion of the Consolidated Funds that are held by third-party investors. Although we can redeem our net interest in the Consolidated Funds at any time, we cannot directly access or sell the assets held by the Consolidated Funds to obtain cash for general operations. Additionally, the assets of the Consolidated Funds are not available to our general creditors.
The following table summarizes the condensed cash flows for the nine months ended September 30, 2018, that are attributable to Diamond Hill Investment Group, Inc. and to the Consolidated Funds, and the related eliminations required in preparing the consolidated statements.
 
Nine Months Ended September 30, 2018
 
Cash flow attributable to Diamond Hill Investment Group, Inc.
 
Cash flow attributable to Consolidated Funds
 
Eliminations
 
As reported on the Consolidated Statement of Cash Flows
Cash flows from Operating Activities:
 
 
 
 
 
 
 
Net Income
$
42,567,882

 
$
3,549,489

 
$
(1,877,849
)
 
$
44,239,522

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation
868,243

 

 

 
868,243

Share-based compensation
6,472,823

 

 

 
6,472,823

Net (gains)/losses on investments
(1,512,557
)
 
(3,549,489
)
 
1,877,849

 
(3,184,197
)
Net change in securities held by Consolidated Funds

 
(47,246,344
)
 

 
(47,246,344
)
Other changes in assets and liabilities
7,505,048

 
976,231

 

 
8,481,279

Net cash provided by (used in) operating activities
55,901,439

 
(46,270,113
)
 

 
9,631,326

Net cash used in investing activities
(30,281,588
)
 

 
27,008,953

 
(3,272,635
)
Net cash provided by (used in) financing activities
(1,602,526
)
 
46,270,113

 
(27,008,953
)
 
17,658,634

Net change during the period
24,017,325

 

 

 
24,017,325

Cash and cash equivalents at beginning of period
76,602,108

 

 

 
76,602,108

Cash and cash equivalents at end of period
$
100,619,433

 
$

 
$

 
$
100,619,433


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Table of Contents


Use of Supplemental Data as Non-GAAP Performance Measure
As supplemental information, we are providing performance measures that are based on methodologies other than U.S. generally accepted accounting principles (“non-GAAP”). We believe the non-GAAP measures below are useful measures of our core business activities, are important metrics in estimating the value of an asset management business and may enable more appropriate comparison to our peers. These non-GAAP measures should not be a substitute for financial measures calculated in accordance with GAAP, and may be calculated differently by other companies. The following schedule reconciles GAAP measures to non-GAAP measures for the three and nine months ended September 30, 2018 and 2017, respectively.

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except percentages and per share data)
2018
 
2017
 
2018
 
2017
Total revenue
$
37,472

 
$
36,772

 
$
111,181

 
$
107,353

 
 
 
 
 
 
 
 
Net operating income, GAAP basis
$
16,916

 
$
16,887

 
$
51,469

 
$
48,596

Non-GAAP adjustment:
 
 
 
 
 
 
 
Gains on deferred compensation plan investments, net(1)
983

 
451

 
923

 
1,472

Net operating income, as adjusted, non-GAAP basis(2)
17,899

 
17,338

 
52,392

 
50,068

Non-GAAP adjustment:
 
 
 
 
 
 
 
Tax provision on net operating income, as adjusted, non-GAAP basis(3)
(4,633
)
 
(5,731
)
 
(12,897
)
 
(16,342
)
Net operating income, as adjusted, after tax, non-GAAP basis(4)
$
13,266

 
$
11,607

 
$
39,495

 
$
33,726

 


 


 


 


Net operating income, as adjusted after tax per diluted share, non-GAAP basis(5)
$
3.76

 
$
3.35

 
$
11.24

 
$
9.78

Diluted weighted average shares outstanding, GAAP basis
3,532

 
3,461

 
3,515

 
3,448

 
 
 
 
 
 
 
 
Operating profit margin, GAAP basis
45
%
 
46
%
 
46
%
 
45
%
Operating profit margin, as adjusted, non-GAAP basis(6)
48
%
 
47
%
 
47
%
 
47
%
(1) Gains on deferred compensation plan investments, net: The gain on deferred compensation plan investments, which increases deferred compensation expense included in operating income, is removed from operating income in the calculation because it is offset by an equal amount in investment income below net operating income on the income statement, and thus has no impact on net income attributable to the Company.
(2) Net operating income, as adjusted: This non-GAAP measure was calculated as the Company’s net operating income adjusted to exclude the impact on compensation expense of gains and losses on investments in the deferred compensation plan.
(3) Tax provision on net operating income, as adjusted: This non-GAAP measure represents the tax provision excluding the impact of investment related activity and is calculated by applying the tax rate from the actual tax provision to net operating income, as adjusted.
(4) Net operating income, as adjusted, after tax: This non-GAAP measure deducts from the net operating income, as adjusted, the tax provision on net operating income, as adjusted.
(5) Net operating income, as adjusted after tax per diluted share: This non-GAAP measure was calculated by dividing the net operating income, as adjusted after tax, by diluted weighted average shares outstanding.
(6) Operating profit margin, as adjusted: This non-GAAP measure was calculated by dividing the net operating income, as adjusted, by total revenue.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements. We do not have any obligations under guarantee contracts, any retained or contingent interests in assets or similar arrangements that serve as credit, liquidity or market risk support for such assets, or any other obligation, including any contingent obligation, under a contract that would be accounted for as a derivative instrument or arising out of a variable interest.

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Table of Contents


Critical Accounting Policies and Estimates

Consolidation. We consolidate all subsidiaries and certain investments in which we have a controlling interest. We are generally deemed to have a controlling interest when we own the majority of the voting interest of a VRE or are deemed to be the primary beneficiary of a VIE. VIEs are entities that lack sufficient equity to finance their activities or the equity holders do not have defined power to direct the activities of the entity normally associated with an equity investment. Our analysis to determine whether an entity is a VIE or a VRE involves judgment and considers several factors, including an entity's legal organization, equity structure, the rights of the investment holders, our ownership interest in the entity, and our contractual involvement with the entity. We continually review and reconsider our VIE or VRE conclusions upon the occurrence of certain events, such as changes to our ownership interest or amendments to contract documents. Our VIEs are primarily sponsored investment entities and our variable interest consists of our equity ownership in these entities. The Company concluded we are not the primary beneficiary of any of these VIEs as of September 30, 2018, as we lack the power to control these entities.

Provisions for Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.

Revenue Recognition on Performance-Based Advisory Contracts. We have certain investment advisory contracts in which a portion of the fees are based on investment performance achieved in the respective client portfolio in excess of a specified hurdle rate. These fees are calculated based on client investment results over rolling five-year periods. The Company records variable performance fees at the end of the contract measurement period because the variable fees earned are constrained based on movements in the financial markets.

Revenue Recognition when Acting as an Agent vs. Principal. The Funds have selected and contractually engaged certain vendors to fulfill various services to benefit the Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include, among others, required Fund shareholder mailings, registration services, and legal and audit services. DHCM, in fulfilling a portion of its role under the administration agreement with the Funds, acts as agent to pay these obligations of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates fees and terms with the management and board of trustees of the Funds. The fee that the Funds pay to DHCM is reviewed annually by the Funds’ board of trustees and specifically takes into account the contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these services and bears no risk related to these services. Revenue has been recorded net of these Fund expenses, as it is the appropriate accounting treatment for this agency relationship.

ITEM 3:
Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the information provided in Item 7A of the Company’s 2017 Annual Report.

ITEM 4:
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) of the Exchange Act) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on that 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 are 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.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents



PART II:
OTHER INFORMATION
 
ITEM 1:
Legal Proceedings
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.

ITEM 1A:
Risk Factors
There has been no material change to the information provided in Item 1A of the Company’s 2017 Annual Report.

ITEM 2:
Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2018, the Company did not purchase any of its common shares and did not sell any common shares that were not registered under the Securities Act of 1933. The following table sets forth information regarding the Company’s repurchase program of its common shares during the third quarter of fiscal year 2018:
 
Period
Total Number of Shares Purchased for Employee Tax Withholdings(a)
 
Total Number
of Shares 
Purchased
as part of Publicly
Announced Program(b)
 
Average Price
Paid Per Share
 
Purchase Price of Shares
 Purchased
Under the Program
 
Aggregate Purchase Price Yet To Be Purchased Under the Program
July 1, 2018 through
   July 31, 2018
3,525

 

 
$

 

 
50,000,000

August 1, 2018 through
   August 31, 2018

 

 
$

 

 
50,000,000

September 1, 2018 through
   September 30, 2018

 

 
$

 

 
50,000,000

Total
3,525

 

 
$



 
 
 
a.)
During the quarter ended September 30, 2018, the Company purchased 3,525 shares of the Company's common shares at an average price paid per share of $194.43. Those repurchases consisted solely of shares withheld for tax payments due upon employee Restricted Stock which vested during the quarter.
b.)
The Company's current share repurchase program was announced on September 25, 2018. The Board of Directors authorized management to repurchase up to $50,000,000 of the Company’s common shares in the open market and in private transactions in accordance with applicable securities laws. The Company’s share repurchase program will expire in September 2020. The Company's previous program, announced on August 9, 2007, was terminated effective with the adoption of the current program.
The Company has entered into a Rule 10b5-1 repurchase plan in connection with its currently effective repurchase program.  This plan is intended to qualify for the safe harbor under Rule 10b5-1 of the Securities Exchange Act of 1934.  A Rule 10b5-1 plan allows a company to purchase its shares at times when it would not ordinarily be in the market due to its trading policies or the possession of material nonpublic information. Purchases may be made in the open market or through privately negotiated transactions.  Purchases in the open market will be made in compliance with Rule 10b-18 under the Exchange Act. Because the repurchases under the 10b5-1 plan will be 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 shares that will be repurchased, or that there will be any repurchases at all pursuant to the plan.

ITEM 3:
Defaults Upon Senior Securities
None


28

Table of Contents


ITEM 4:
Mine Safety Disclosures
None

ITEM 5:
Other Information
None


29

Table of Contents


ITEM 6:
Exhibits
3.1
  
 
 
 
3.2
 
 
 
 
3.3
  
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32.1
  
Section 1350 Certifications. (Furnished herewith)
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
  
XBRL Taxonomy Definition Linkbase Document.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.


30

Table of Contents


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.
 
Date
 
Title
 
Signature
 
 
 
 
 
October 30, 2018
 
Chief Executive Officer and President
 
/s/ Christopher M. Bingaman
 
 
 
 
Christopher M. Bingaman
 
 
 
 
 
October 30, 2018
 
Chief Financial Officer and Treasurer
 
/s/ Thomas E. Line
 
 
 
 
Thomas E. Line


31
(Back To Top)

Section 2: EX-31.1 (EXHIBIT 31.1)

Exhibit


CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q
I, Christopher M. Bingaman, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Diamond Hill Investment Group, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 30, 2018
 
/s/ Christopher M. Bingaman
 
 
Christopher M. Bingaman
 
 
Chief Executive Officer




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Section 3: EX-31.2 (EXHIBIT 31.2)

Exhibit


CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q
I, Thomas E. Line, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Diamond Hill Investment Group, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 30, 2018
 
/s/ Thomas E. Line
 
 
Thomas E. Line
 
 
Chief Financial Officer



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Section 4: EX-32.1 (EXHIBIT 32.1)

Exhibit


CERTIFICATION PURSUANT TO
TITLE 18, UNITED STATES CODE, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Diamond Hill Investment Group, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Christopher M. Bingaman, Chief Executive Officer of the Company, and Thomas E. Line, Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Christopher M. Bingaman
Print Name: Christopher M. Bingaman
Title: Chief Executive Officer
Date: October 30, 2018
 
/s/ Thomas E. Line
Print Name: Thomas E. Line
Title: Chief Financial Officer
Date: October 30, 2018




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