XNAS:DHIL Diamond Hill Investment Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012

Commission file number 000-24498

 

 

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, including Zip Code, of principal executive offices)

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨            Accelerated filer  x            Non-accelerated filer  ¨            Smaller reporting company  ¨

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 July 27, 2012, is 3,153,266 shares.

 

 

 


Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC.

 

              PAGE  

Part I: FINANCIAL INFORMATION

     3   
  Item 1.   

Consolidated Financial Statements

     3   
  Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     17   
  Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     25   
  Item 4.   

Controls and Procedures

     25   

Part II: OTHER INFORMATION

     25   
  Item 1.   

Legal Proceedings

     25   
  Item 1A.   

Risk Factors

     25   
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     25   
  Item 3.   

Defaults Upon Senior Securities

     26   
  Item 4.   

Mine Safety Disclosures

     26   
  Item 5.   

Other Information

     26   
  Item 6.   

Exhibits

     27   

Signatures

     28   

 

2


Table of Contents

PART I: FINANCIAL INFORMATION

 

ITEM 1: Consolidated Financial Statements

Diamond Hill Investment Group, Inc.

Consolidated Balance Sheets

 

     6/30/2012     12/31/2011  
     (Unaudited)        

ASSETS

    

Cash and cash equivalents

   $ 14,772,101      $ 15,242,768   

Investment portfolio

     15,363,288        8,208,489   

Accounts receivable

     9,869,809        10,295,723   

Prepaid expenses

     843,216        920,460   

Furniture and equipment, net of depreciation, and other assets

     723,469        829,781   

Income tax receivable

     619,193        139,696   

Deferred taxes

     2,317,163        2,083,402   
  

 

 

   

 

 

 

Total assets

   $ 44,508,239      $ 37,720,319   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Liabilities

    

Accounts payable and accrued expenses

   $ 2,289,815      $ 2,895,504   

Accrued incentive compensation

     8,368,040        16,774,457   
  

 

 

   

 

 

 

Total liabilities

     10,657,855        19,669,961   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Shareholders’ Equity

    

Common stock, no par value
7,000,000 shares authorized;
3,152,073 issued and outstanding at June 30, 2012;
2,995,814 issued and outstanding at December 31, 2011

     62,055,392        49,995,622   

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

     —          —     

Deferred compensation

     (15,738,826     (11,539,632

Accumulated deficit

     (12,466,182     (20,405,632
  

 

 

   

 

 

 

Total shareholders’ equity

     33,850,384        18,050,358   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 44,508,239      $ 37,720,319   
  

 

 

   

 

 

 

Book value per share

   $ 10.74      $ 6.03   
  

 

 

   

 

 

 

 

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

 

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Table of Contents

Diamond Hill Investment Group, Inc.

Consolidated Statements of Income (unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

REVENUES:

        

Investment advisory

   $ 14,101,053      $ 14,801,457      $ 28,476,147      $ 29,239,325   

Mutual fund administration, net

     2,059,802        2,026,066        4,298,928        4,037,946   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     16,160,855        16,827,523        32,775,075        33,277,271   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

        

Compensation and related costs

     8,378,703        8,949,286        16,866,212        18,114,057   

General and administrative

     1,099,053        1,067,883        2,235,444        2,082,452   

Sales and marketing

     332,324        267,903        642,950        500,167   

Third party distribution

     138,298        230,312        351,706        480,981   

Mutual fund administration

     381,949        461,093        827,695        800,029   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,330,327        10,976,477        20,924,007        21,977,686   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET OPERATING INCOME

     5,830,528        5,851,046        11,851,068        11,299,585   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment return

     (468,432     90,362        803,299        461,143   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE TAXES

     5,362,096        5,941,408        12,654,367        11,760,728   

Income tax provision

     (2,033,999     (2,212,519     (4,714,917     (4,400,104
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 3,328,097      $ 3,728,889      $ 7,939,450      $ 7,360,624   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

   $ 1.07      $ 1.26      $ 2.59      $ 2.54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     3,101,170        2,967,002        3,066,002        2,902,788   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents

Diamond Hill Investment Group, Inc.

Consolidated Statements of Cash Flows (unaudited)

 

     Six Months Ended June 30,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income

   $ 7,939,450      $ 7,360,624   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation on furniture and equipment

     162,177        166,371   

Stock-based compensation

     2,155,813        2,127,217   

(Increase) decrease in accounts receivable

     425,914        (1,107,002

Change in deferred income taxes

     (246,121     (442,141

Investment gain/loss, net

     (789,799     (447,151

Increase (decrease) in accrued liabilities

     (3,471,314     (130,587

Other changes in assets and liabilities

     (379,716     (826,332
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     5,796,404        6,700,999   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of furniture and equipment

     (55,867     (85,571

Cost of investments purchased and other portfolio activity

     (6,365,000     (926,998

Proceeds from sale of investments

     —          2,333,000   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (6,420,867     1,320,431   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payment of taxes withheld on employee stock transactions

     (363,925     (139,707

Proceeds from common stock issuance

     517,721        479,442   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     153,796        339,735   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS

    

Net change during the period

     (470,667     8,361,165   

At beginning of period

     15,242,768        5,775,526   
  

 

 

   

 

 

 

At end of period

   $ 14,772,101      $ 14,136,691   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ —        $ —     

Income taxes paid

     5,418,000        5,733,000   

Supplemental disclosure of non-cash transactions:

    

Common stock issued as incentive compensation

     5,540,792        7,461,984   

 

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

 

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Table of Contents

Diamond Hill Investment Group, Inc.

Notes to Consolidated Financial Statements (unaudited)

Note 1 Business and Organization

Diamond Hill Investment Group, Inc. (the “Company”) derives its consolidated revenues and net income primarily from investment advisory and fund administration services. The Company has four operating subsidiaries.

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”), and also offers advisory services to institutional and individual investors.

Diamond Hill GP (Cayman) Ltd. (“DHGP”) was incorporated in the Cayman Islands as an exempted company on May 18, 2006 for the purpose of acting as the general partner of a Cayman Islands exempted limited partnership. This limited partnership acts as a master fund for Diamond Hill Offshore Ltd., a Cayman Islands exempted company; and Diamond Hill Investment Partners II, L.P., an Ohio limited partnership. DHGP has no operating activity.

Beacon Hill Fund Services, Inc. (“BHFS”), an Ohio corporation, is a wholly owned subsidiary of the Company incorporated on January 29, 2008. BHFS provides certain compliance, treasury, and fund administration services to mutual fund companies. BHIL Distributors, Inc. (“BHIL”), an Ohio corporation, is a wholly owned subsidiary of BHFS incorporated on February 19, 2008. BHIL provides underwriting and distribution services to mutual fund companies. BHFS and BHIL collectively operate as Beacon Hill.

Note 2 Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses for the periods. Actual results could differ from those estimates. Certain prior period amounts and disclosures have been reclassified to conform to the current period financial presentation. Book value per share is computed by dividing total shareholders’ equity by the number of shares issued and outstanding at the end of the measurement period. The following is a summary of the Company’s significant accounting policies:

Principles of Consolidation

The accompanying consolidated financial statements include the operations of the Company and its subsidiaries. All material inter-company transactions and balances have been eliminated in consolidation.

Segment Information

Management has determined that the Company operates in one business segment, namely providing investment management and administration services to mutual funds, separate accounts, and private investment funds. Therefore, no disclosures relating to operating segments are required in annual or interim financial statements.

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits and money market mutual funds.

 

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Note 2 Significant Accounting Policies (Continued)

 

Accounts Receivable

Accounts receivable are recorded when they are due and are presented in 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 those individuals or entities that owe the receivable. No allowance for doubtful accounts was deemed necessary at June 30, 2012 or December 31, 2011.

Valuation of Investment Portfolio

Investments held by the Company are valued based upon the definition of Level 1 inputs and Level 2 inputs. Level 1 inputs are defined as fair values which use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are defined as quoted prices in markets that are not considered to be active for identical assets or liabilities, quoted prices in active markets for similar assets or liabilities and inputs other than quoted prices that are directly observable or indirectly through corroboration with observable market data. The following table summarizes the Company’s investments valued based upon Level 1 and Level 2 inputs as of June 30, 2012 and December 31, 2011:

 

 

     June 30, 2012      December 31, 2011  

Level 1 Inputs

   $ 22,182,738       $ 10,480,353   

Level 2 Inputs

     3,737,429         6,977,929   

Level 1 investments are all registered investment companies (mutual funds) and include $10.6 million and $9.2 million, respectively, of money market mutual funds that the Company classifies as cash equivalents. Level 2 investments are all limited partnerships. There were no transfers in or out of the levels.

The changes in market values on the investments are recorded in the Consolidated Statements of Income as investment return.

Limited Partnership Interests

DHCM is the managing member of Diamond Hill General Partner, LLC, the General Partner of Diamond Hill Investment Partners, L.P. (“DHIP”), Diamond Hill Investment Partners II, L.P. (“DHIP II”), Diamond Hill Research Partners, L.P. (“DHRP”), Diamond Hill Research Partners – International, L.P. (“DHRPI”), and Diamond Hill Valuation-Based Index, L.P. (“DHBV”) collectively (the “Partnerships”), each a limited partnership whose underlying assets consist of marketable securities. Effective January 3, 2012, Diamond Hill Research Partners, L.P. converted to Diamond Hill Research Opportunities Fund, a series of the Diamond Hill Funds.

DHCM, in its role as managing member of the General Partner, has the power to direct the Partnerships’ economic activities and the right to receive investment advisory and performance incentive fees that are significant to the Partnerships. The Partnerships are subject to investment company accounting and, as a result, they have not been consolidated in presenting the accompanying financial statements. DHCM’s investments in these partnerships are reported as a component of the Company’s investment portfolio, valued at DHCM’s proportionate interest in the net asset value of the marketable securities held by the Partnerships. Gains and losses attributable to changes in the value of DHCM’s interests in the Partnerships are included in the Company’s reported investment return.

The Company’s exposure to loss as a result of its involvement with the Partnerships is limited to the amount of its investments. DHCM is not obligated to provide financial or other support to the Partnerships, other than its investments to date and its contractually provided investment advisory responsibilities, and has not provided such support. The Company has not provided liquidity arrangements, guarantees or other commitments to support the Partnerships’ operations, and the Partnerships’ creditors and interest holders have no recourse to the general credit of the Company.

 

7


Table of Contents

Note 2 Significant Accounting Policies (Continued)

Limited Partnership Interests (Continued)

 

Several board members, officers and employees of the Company invest in the DHIP through Diamond Hill General Partner, LLC. These individuals receive no remuneration as a result of their personal investment in the Partnerships. The capital of Diamond Hill General Partner, LLC is not subject to a management fee or an incentive fee.

Furniture and Equipment

Furniture and equipment, consisting of computer equipment, furniture, and fixtures, are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over estimated lives of three to seven years.

Revenue Recognition - General

The Company earns substantially all of its revenue from investment advisory and fund administration services. Mutual fund investment advisory and administration fees, generally calculated as a percentage of assets under management, are recorded as revenue as services are performed. Managed account and private investment fund clients provide for monthly or quarterly management fees, in addition to periodic variable incentive fees.

Revenue Recognition – Incentive Revenue

The Company manages certain client accounts that provide for variable incentive fees. These fees are based on investment results over rolling five year periods. For variable management fees based on a formula, there are two methods by which incentive revenue may be recorded. Under “Method 1”, incentive fees are recorded at the end of the contract measurement period; under “Method 2”, the incentive fees are recorded periodically and calculated as the amount that would be due under the formula at any point in time as if the contract was terminated at that date. Management has chosen Method 1, in which incentive fees are recorded at the end of the contract measurement period for the specific client in which the incentive fee applies. The table below shows assets under management (“AUM”) subject to incentive fees and the incentive fees, as calculated under each of the above methods:

 

 

     As Of June 30,  
     2012      2011  

AUM Contractual Period Ends:

     

Calendar Quarter-End

   $ —         $ 102,510,121   

Calendar Year-End

     —           127,418,326   

May 31, 2017

     254,288,524         —     
  

 

 

    

 

 

 

Total AUM Subject to Incentive Fees

   $ 254,288,524       $ 229,928,447   
  

 

 

    

 

 

 

 

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Table of Contents

Note 2 Significant Accounting Policies (Continued)

Revenue Recognition – Incentive Revenue (Continued)

 

     For The Three Months      For The Six Months  
     Ending June 30,      Ending June 30,  
     2012      2011      2012      2011  

Incentive Fees Under Method 1 - Contractual Period Ends:

           

Calendar Quarter-End

   $ —         $ —         $ —         $ 507   

Calendar Year-End

     —           187         —           187   

May 31, 2017

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Incentive Fees Under Method 1

   $ —         $ 187       $ —         $ 694   
  

 

 

    

 

 

    

 

 

    

 

 

 

Incentive Fees Under Method 2 - Contractual Period Ends:

           

Calendar Quarter-End

   $ —         $ —         $ —         $ 507   

Calendar Year-End

     —           722         —           722   

May 31, 2017

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Incentive Fees Under Method 2

   $ —         $ 722       $ —         $ 1,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 mutual fund administration, transfer agency and other related functions. For performing these services, each fund compensates DHCM a fee, which is calculated using the following annual rates times the average daily net assets of each respective series and share class:

 

 

     Prior to February 29,     After February 29,  
     2012     2012  

Class A and Class C

     0.26     0.25

Class I

     0.24     0.25

Class Y(a)

     0.10     0.10

(a) – Class Y commenced operations on January 3, 2012.

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, 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 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

 

9


Table of Contents

Note 2 Significant Accounting Policies (Continued)

Revenue Recognition – Mutual Fund Administration (Continued)

 

services. Revenue has been recorded net of these Fund related expenses, in accordance with the appropriate accounting treatment for this agency relationship. In addition, DHCM finances the upfront commissions which are paid by the Fund’s principal underwriter to brokers who sell Class C shares of the Funds. As financer, DHCM advances to the underwriter the commission amount to be paid to the selling broker at the time of sale. 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.

Beacon Hill has underwriting and administrative service agreements with certain clients, including registered mutual funds. The fee arrangements vary from client to client based upon services provided and are recorded as revenue under Mutual Fund Administration on the Consolidated Statements of Income. Part of Beacon Hill’s role as underwriter is to act as an agent on behalf of its mutual fund clients to receive 12b-1/service fees and commission revenue and facilitate the payment of those fees and commissions to third parties who provide services to the funds and their shareholders. The amount of 12b-1/service fees and commissions are determined by each mutual fund client and Beacon Hill bears no financial risk related to these services. As a result, 12b-1/service fees and commission revenue has been recorded net of the expense payments to third parties, in accordance with the appropriate accounting treatment for this agency relationship.

 

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Note 2 Significant Accounting Policies (Continued)

Revenue Recognition – Mutual Fund Administration (Continued)

 

Mutual fund administration gross and net revenue are summarized below:

 

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Mutual fund administration:

        

Administration revenue, gross

   $ 3,216,646      $ 3,031,607      $ 6,326,505      $ 5,972,920   

12b-1/service fees and commission revenue received from fund clients

     1,705,001        1,876,633        3,434,353        3,773,805   

12b-1/service fees and commission expense payments to third parties

     (1,705,001     (1,876,633     (3,434,353     (3,773,805

Fund related expense

     (1,161,474     (1,014,851     (2,033,369     (1,957,895
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue, net of fund related expenses

     2,055,172        2,016,756        4,293,136        4,015,025   

DHCM C-Share financing:

        

Broker commission advance repayments

     58,262        91,876        120,670        207,110   

Broker commission amortization

     (53,632     (82,566     (114,878     (184,189
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activity, net

     4,630        9,310        5,792        22,921   
  

 

 

   

 

 

   

 

 

   

 

 

 

Mutual fund administration revenue, net

   $ 2,059,802      $ 2,026,066      $ 4,298,928      $ 4,037,946   
  

 

 

   

 

 

   

 

 

   

 

 

 

Third Party Distribution Expense

Third party distribution expenses are earned by various third party financial services firms based on sales and/or assets of the Company’s investment products generated by the respective firms. Expenses recognized represent actual payments made to the third party firms and are recorded in the period earned based on the terms of the various contracts.

Income Taxes

The Company accounts for income taxes through an asset and liability approach. A net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

The Company has analyzed its tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2008 through 2011) to determine any uncertainty in income taxes and has recognized no adjustment in the net asset or liability.

Earnings Per Share

Earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if outstanding warrants were exercised. For the periods presented, the Company does not have dilutive securities outstanding.

 

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Note 3 Investment Portfolio

As of June 30, 2012, the Company held investments worth $15.4 million and an estimated cost basis of $11.7 million. The following table summarizes the market value of these investments as of June 30, 2012 and December 31, 2011:

 

 

     June 30,      December 31,  
     2012      2011  

Diamond Hill Small Cap Fund

   $ 207,938       $ 189,042   

Diamond Hill Small-Mid Cap Fund

     224,087         203,571   

Diamond Hill Large Cap Fund

     231,732         213,110   

Diamond Hill Select Fund

     233,891         214,833   

Diamond Hill Long-Short Fund

     229,166         212,720   

Diamond Hill Research Opportunities Fund(a)

     10,287,142         —     

Diamond Hill Strategic Income Fund

     211,903         197,284   

Diamond Hill Investment Partners, L.P.

     165,473         156,122   

Diamond Hill Investment Partners II, L.P.

     134,152         131,203   

Diamond Hill Research Partners L.P.(a)

     —           5,770,874   

Diamond Hill Research Partners - International, L.P.

     1,309,749         919,730   

Diamond Hill Valuation-Based Index, L.P.

     2,128,055         —     
  

 

 

    

 

 

 

Total Investment Portfolio

   $ 15,363,288       $ 8,208,489   
  

 

 

    

 

 

 

(a) – Effective January 3, 2012, Diamond Hill Research Partners, L.P. converted to Diamond Hill Research Opportunities Fund, a series of the Diamond Hill Funds.

DHCM is the managing member of the Diamond Hill General Partner LLC, which is the General Partner of the Partnerships. The underlying assets of the Partnerships are cash and marketable equity securities. Summary financial information, including the Company’s carrying value and income from the Partnerships is as follows:

 

 

     As of  
     June 30, 2012      December 31, 2011  

Total partnership assets

   $ 100,325,825       $ 130,880,368   

Total partnership liabilities

     17,746,070         21,570,822   
  

 

 

    

 

 

 

Net partnership assets

   $ 82,579,755       $ 109,309,546   

DHCM’s portion of net assets

   $ 3,737,429       $ 6,977,929   
     For the      For the  
     Six Months Ended      Year Ended  
     June 30, 2012      December 31, 2011  

Net partnership income (loss)

   $ 6,176,099       $ (11,007,617

DHCM’s portion of net income (loss)

   $ 255,375       $ (75,082

 

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Note 4 Capital Stock

Common Shares

The Company has only one class of securities, Common Shares.

Authorization of Preferred Shares

The Company’s Articles of Incorporation authorize the issuance of 1,000,000 shares of “blank check” preferred shares with such designations, rights and preferences, as may be determined from time to time by the Company’s Board of Directors. The Board of Directors is authorized, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting or other rights of the holders of the Common Shares. There were no shares of preferred stock issued or outstanding at June 30, 2012 or December 31, 2011.

Note 5 Stock-Based Compensation

Equity Incentive Plans

2011 Equity and Cash Incentive Plan

At the Company’s annual shareholder meeting on April 26, 2011, shareholders approved the 2011 Equity and Cash Incentive Plan (“2011 Plan”). The 2011 Plan is intended to facilitate the Company’s ability to attract and retain staff, provide additional incentive to employees, directors and consultants, and promote the success of the Company’s business. The 2011 Plan authorizes the issuance of 600,000 Common Shares of the Company in various forms of equity awards. As of June 30, 2012, there were 338,076 Common Shares available for issuance under the 2011 Plan. The 2011 Plan provides that the Board of Directors, or a committee appointed by the Board, may grant awards and otherwise administer the 2011 Plan. Restricted stock grants issued under the 2011 Plan, which vest over time, are recorded as deferred compensation in the equity section of the balance sheet on the grant date and then recognized as compensation expense based on the grant date price over the vesting period of the respective grant.

2005 Employee and Director Equity Incentive Plan

At the Company’s annual shareholder meeting on May 12, 2005, shareholders approved the 2005 Employee and Director Equity Incentive Plan (“2005 Plan”). With the approval of the 2011 Plan, there are no longer any Common Shares available for future issuance under the 2005 Plan. Outstanding grants under the 2005 Plan are unaffected and remain issued and outstanding. Restricted stock grants issued under the 2005 Plan, which vest over time, are recorded as deferred compensation in the equity section of the balance sheet on the grant date and then recognized as compensation expense based on the grant date price over the vesting period of the respective grant.

 

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Note 5 Stock-Based Compensation (Continued)

Equity Incentive Plans (Continued)

 

Restricted Stock Grant Transactions

The following table represents a roll-forward of outstanding restricted stock grants issued pursuant to the 2011 and 2005 Plans and related activity during the year ended December 31, 2011 and the six months ended June 30, 2012:

 

 

           Weighted-Average  
           Grant Date Price  
     Shares     per Share  

Outstanding restricted stock grants as of December 31, 2010

     164,832      $ 69.72   

Grants issued

     109,333        79.45   

Grants vested

     (5,176     78.85   

Grants forfeited

     (8,368     64.74   
  

 

 

   

Outstanding restricted stock grants as of December 31, 2011

     260,621      $ 73.78   
  

 

 

   

Grants issued

     83,100        77.25   

Grants vested

     (12,156     77.06   

Grants forfeited

     (944     68.04   
  

 

 

   

Total outstanding restricted stock grants as of June 30, 2012

     330,621      $ 74.55   
  

 

 

   

Total deferred compensation related to unvested restricted stock grants was $15,738,826 as of June 30, 2012. Expense recognition of deferred compensation over the remaining vesting periods is as follows:

 

 

2012      2013      2014      2015      2016      2017      Total  
$ 2,506,528       $ 4,368,970       $ 4,034,636       $ 3,122,752       $ 1,261,206       $ 444,734       $ 15,738,826   

401(k) Plan

The Company sponsors a 401(k) plan under which all employees participate. Employees may contribute a portion of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions of Common Shares of the Company with a value equal to 200 percent of the first six percent of an employee’s compensation contributed to the plan. Employees become fully vested in the matching contributions after six plan years of employment. The following table summarizes the Company’s expenses attributable to the plan during the three and six months ended June 30, 2012 and 2011:

 

 

     2012      2011  

Three Months Ended

   $ 264,802       $ 238,597   

Six Months Ended

     517,721         479,442   

 

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Note 6 Operating Leases

The Company leases approximately 25,500 square feet of office space at two locations. The following table summarizes the total lease and operating expenses for the three and six months ended June 30, 2012 and 2011:

 

 

     2012      2011  

Three Months Ended

   $ 167,872       $ 140,796   

Six Months Ended

     338,251         287,021   

The approximate future minimum lease payments under the operating leases are as follows:

 

 

2012      2013      2014      2015      2016  
$ 224,000       $ 417,000       $ 397,000       $ 401,000       $ 234,000   

In addition to the above rent, the Company will also be responsible for normal operating expenses of the properties. Such operating expenses were approximately $9.60 per square foot in 2011, on a combined basis, and are expected to be approximately $9.69 per square foot in 2012.

Note 7 Income Taxes

The provision for income taxes for the three and six months ended June 30, 2012 and 2011 consists of federal, state and city income taxes. During 2011, the Company and its subsidiaries fully utilized the capital loss carry forward outstanding from December 31, 2010. As of June 30, 2012, there was no capital loss carry forward outstanding.

Note 8 Earnings Per Share

The following table sets forth the computation for earnings per share (“EPS”):

 

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Net income

   $ 3,328,097       $ 3,728,889       $ 7,939,450       $ 7,360,624   

Weighted average number of outstanding shares

     3,101,170         2,967,002         3,066,002         2,902,788   

Earnings per share

   $ 1.07       $ 1.26       $ 2.59       $ 2.54   

For the periods presented, the Company does not have dilutive securities outstanding.

 

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Note 9 Regulatory Requirements

BHIL, a wholly owned subsidiary of the Company and principal underwriter for mutual funds, is subject to the U.S. Securities and Exchange Commission (“SEC”) uniform net capital rule, which requires the maintenance of minimum net capital. BHIL’s net capital exceeded its minimum net capital requirement at June 30, 2012 and December 31, 2011. The net capital balances, minimum net capital requirements, and ratio of aggregate indebtedness to net capital for BHIL are summarized below as of June 30, 2012 and December 31, 2011:

 

 

     June 30,      December 31,  
     2012      2011  

Net Capital

   $ 376,442       $ 360,167   

Minimum Net Capital Requirement

     40,630         38,139   

Ratio of Aggregate Indebtedness to Net Capital

     1.62 to 1         1.59 to 1   

Note 10 Commitments and Contingencies

The Company indemnifies its directors and certain of its officers and employees for certain liabilities that might arise from their performance of their duties to the Company. 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 would 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 11 Subsequent Event

On July 18, 2012, the Company liquidated Diamond Hill Offshore Ltd., and Diamond Hill Investment Partners II, LP, both private investment funds. Substantially all of the assets in these funds were redeemed and paid out to investors during June 2012 and therefore, the effect of the liquidation is already reflected in June 30, 2012 asset under management. In addition, the Company has started the process of dissolving its subsidiary Diamond Hill GP (Cayman) Ltd., which acted as the general partner to the master fund of the above two funds. The dissolution is expected to be substantially completed during the third quarter of 2012.

 

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DIAMOND HILL INVESTMENT GROUP, INC.

 

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 for achieving the critical threshold of assets under management, technological developments, economic trends (including interest rates and market volatility), expected transactions and acquisitions 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 the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and accordingly, the actual results and experiences of the Company could differ materially from the anticipated results or other expectations expressed by the Company in its 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 the Company’s products; changes in interest rates; a general or prolonged downturn in the economy; changes in government policy and regulation, including monetary policy; changes in the Company’s ability 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 the Company’s public documents on file with the SEC.

General

The Company, an Ohio corporation organized in 1990, derives its consolidated revenue and net income from investment advisory and fund administration services provided by its subsidiaries Diamond Hill Capital Management, Inc. (“DHCM”), Beacon Hill Fund Services, Inc. (“BHFS”), and BHIL Distributors, Inc. (“BHIL”). BHFS and BHIL collectively operate as Beacon Hill. DHCM is a registered investment adviser under the Investment Advisers Act of 1940 providing investment advisory services to individuals and institutional investors through Diamond Hill Funds, separate accounts, and private investment funds (generally known as “hedge funds”). Beacon Hill was incorporated during the first quarter of 2008, and provides certain fund administration services and underwriting services to mutual fund companies, including Diamond Hill Funds.

In this section, the Company discusses and analyzes the consolidated results of operations for the three and six month periods ending June 30, 2012 and 2011 and other factors that may affect future financial performance. The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results which may be expected for the entire fiscal year.

The Company’s revenue is derived primarily from investment advisory and fund administration fees. Investment advisory and fund administration fees paid to the Company are generally based on the value of the investment portfolios managed by the Company and fluctuate with changes in the total value of the assets under management (“AUM”). Such fees are recognized in the period that the Company manages these assets. The Company can also earn variable incentive fees which are based on investment results in client accounts and are achieved if those results exceed a specified hurdle. The Company’s primary expense is employee compensation and benefits.

 

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Assets Under Management

As of June 30, 2012, AUM totaled $9.2 billion, unchanged compared to June 30, 2011. Revenues are highly dependent on both the value and composition of AUM. The following tables show AUM by product and investment objective for the dates indicated and a roll-forward of the change in AUM for the three and six months ended June 30, 2012 and 2011:

 

     Assets Under Management by Product  
     As of June 30,  

(in millions)

   2012      2011      % Change  

Proprietary funds

   $ 4,761       $ 4,580         4

Sub-advised funds

     940         1,073         –12

Separate accounts

     3,463         3,533         –2
  

 

 

    

 

 

    

Total AUM

   $ 9,164       $ 9,186         0
  

 

 

    

 

 

    
     Assets Under Management  
     by Investment Objective  
     As of June 30,  

(in millions)

   2012      2011      % Change  

Small Cap

   $ 953       $ 980         –3

Small-Mid Cap

     297         318         –7

Large Cap

     5,267         5,029         5

Select (All Cap)

     273         414         –34

Long-Short

     2,174         2,261         –4

Strategic Income

     200         184         9
  

 

 

    

 

 

    

Total AUM

   $ 9,164       $ 9,186         0
  

 

 

    

 

 

    

 

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     Change in Assets Under Management  
     For the Three Months Ended June 30,  

(in millions)

   2012     2011  

AUM at beginning of the period

   $ 9,360      $ 9,250   

Net cash inflows (outflows)

    

proprietary funds

     137        (16

sub-advised funds

     (15     41   

separate accounts

     133        (127
  

 

 

   

 

 

 
     255        (102

Net market appreciation (depreciation) and income

     (451     38   
  

 

 

   

 

 

 

Decrease during the period

     (196     (64
  

 

 

   

 

 

 

AUM at end of the period

   $ 9,164      $ 9,186   
  

 

 

   

 

 

 
     Change in Assets Under Management  
     For the Six Months Ended June 30,  

(in millions)

   2012     2011  

AUM at beginning of the period

   $ 8,671      $ 8,623   

Net cash inflows (outflows)

    

proprietary funds

     207        (18

sub-advised funds

     (75     77   

separate accounts

     20        34   
  

 

 

   

 

 

 
     152        93   

Net market appreciation (depreciation) and income

     341        470   
  

 

 

   

 

 

 

Increase during the period

     493        563   
  

 

 

   

 

 

 

AUM at end of the period

   $ 9,164      $ 9,186   
  

 

 

   

 

 

 

 

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Consolidated Results of Operations

The following is a discussion of the consolidated results of operations of the Company.

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(in thousands, except per share amounts)

   2012     2011     % Change     2012     2011     % Change  

Net operating income

   $ 5,831      $ 5,851        0   $ 11,851      $ 11,300        5

Net operating income after tax (a)

   $ 3,619      $ 3,672        –1   $ 7,435      $ 7,072        5

Net income

   $ 3,328      $ 3,729        –11   $ 7,939      $ 7,361        8

Net operating income after tax per share (a)

   $ 1.17      $ 1.24        –6   $ 2.42      $ 2.44        –1

Net income per share

   $ 1.07      $ 1.26        –15   $ 2.59      $ 2.54        2

Operating profit margin

     36     35     NM        36     34     NM   

(a) – Net operating income after tax is a non-GAAP performance measure. See Use of Supplemental Data as Non-GAAP Performance Measure on page 24 of this report.

Three Months Ended June 30, 2012 compared with Three Months Ended June 30, 2011

The Company generated net income of $3.3 million ($1.07 per share) for the three months ended June 30, 2012, compared with net income of $3.7 million ($1.26 per share) for the three months ended June 30, 2011. Operating income was flat period over period as revenue decreases were offset by decreases in operating expenses. Net income decreased $401 thousand, largely as a result of negative returns on the Company’s corporate investments. Operating profit margin increased to 36% for second quarter 2012 from 35% for second quarter 2011. The Company expects that its operating margin will 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         
     June 30,         

(in thousands)

   2012      2011      % Change  

Investment advisory

   $ 14,101       $ 14,801         –5

Mutual fund administration, net

     2,060         2,026         2
  

 

 

    

 

 

    

Total

   $ 16,161       $ 16,827         –4
  

 

 

    

 

 

    

As a percent of total second quarter 2012 revenues, investment advisory fees accounted for 87% and mutual fund administration fees made up the remaining 13%. This compared to 88% and 12%, respectively, for second quarter 2011.

Investment Advisory Fees. Investment advisory fees decreased by $700 thousand, or 5%, from the quarter ended June 30, 2011 to the quarter ended June 30, 2012. Investment advisory fees are calculated as a percent of average AUM at various rates depending on the investment product. While the average AUM period over period was relatively flat, the average advisory fee rate declined 2 basis points to 0.61% for the quarter ended June 30, 2012 compared to 0.63% for the quarter ended June 30, 2011. Contributing to the decrease in the average advisory fee rate is the large cap fee reduction where the Company voluntarily lowered the investment advisory fee it charges on the Diamond Hill Large Cap Fund and certain large cap separate accounts by 0.05% effective October 1, 2011.

Mutual Fund Administration Fees. Mutual fund administration fees increased $34 thousand, or 2%, from the quarter ended June 30, 2011 to the quarter ended June 30, 2012. Mutual fund administration fees include administration fees received from Diamond Hill Funds, which are calculated as a percent of average mutual fund AUM, and all Beacon Hill fee revenue. The increase in the mutual fund administration fee is primarily due to a 5% increase in average mutual fund AUM from $4.4 billion for the quarter ended June 30, 2011 to $4.5 billion for the quarter ended June 30, 2012.

 

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Expenses

 

     Three Months Ended         
     June 30,         

(in thousands)

   2012      2011      % Change  

Compensation and related costs

   $ 8,379       $ 8,949         –6

General and administrative

     1,099         1,068         3

Sales and marketing

     332         268         24

Third party distribution

     138         230         –40

Mutual fund administration

     382         461         –17
  

 

 

    

 

 

    

Total

   $ 10,330       $ 10,976         –6
  

 

 

    

 

 

    

Compensation and Related Costs. Employee compensation and benefits decreased $570 thousand, or 6%, during the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011. The decrease is primarily due to a decrease of $900 thousand in incentive compensation during the quarter ended June 30, 2012 offset by an increase in salaries and related benefits of $330 thousand due to increases in staffing levels and related costs during the period.

General and Administrative. General and administrative expenses increased by $31 thousand, or 3%, period over period. This increase is primarily due to additional research expenses to support the Company’s investment team, general employee professional development, and the expansion of the Company’s office space during the second half of 2011, offset by a decrease in state use tax.

Sales and Marketing. Sales and marketing expenses increased by $64 thousand, or 24%. The increase was primarily due to an increase in travel and other expenses related to continued business development and retention efforts during second quarter 2012.

Third Party Distribution. Third party distribution expense represents payments made to intermediaries related to sales of the Company’s investment products. The expense is directly correlated with investments in the Company’s private investment funds. The period over period increase or decrease directly corresponds to the increase or decrease in investment advisory fees earned by the Company.

Mutual Fund Administration. Mutual fund administration expense decreased by $79 thousand, or 17%, period over period. The majority of mutual fund administration fees are variable based on the amount of mutual fund AUM or the number of shareholder accounts. This decrease is primarily due to a shift in AUM to Class Y shares which do not incur any sub-transfer agent fees. This decrease was slightly reduced by an increase in average mutual fund AUM by 5% from the quarter ended June 30, 2011 to the quarter ended June 30, 2012.

Six Months Ended June 30, 2012 compared with Six Months Ended June 30, 2011

The Company generated net income of $7.9 million ($2.59 per share) for the six months ended June 30, 2012, compared with net income of $7.4 million ($2.54 per share) for the six months ended June 30, 2011. Operating income increased by $551 thousand period over period primarily due to a decrease in operating expenses of $1.05 million offset by reduced revenue of $502 thousand. Net income increased $579 thousand for the period compared to the six months ended June 30, 2011. Operating profit margin increased to 36% for the six months ended June 30, 2012 from 34% for the six months ended June 30, 2011. The Company expects that its operating margin will 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.

 

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Revenue

 

     Six Months Ended         
     June 30,         

(in thousands)

   2012      2011      % Change  

Investment advisory

   $ 28,476       $ 29,239         –3

Mutual fund administration, net

     4,299         4,038         6
  

 

 

    

 

 

    

Total

   $ 32,775       $ 33,277         –2
  

 

 

    

 

 

    

As a percent of 2012 year to date revenues, investment advisory fees accounted for 87% and mutual fund administration fees accounted for the remaining 13% compared to the 2011 period where investment advisory fees accounted for 88% and mutual fund administration fees accounted for the remaining 12% of revenues.

Investment Advisory Fees. Investment advisory fees decreased by $763 thousand, or 3%, for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. Investment advisory fees are calculated as a percent of average net AUM at various rates depending on the investment product. While the average AUM period over period was relatively flat, the average advisory fee rate declined 1 basis point to 0.63% for the six months ended June 30, 2012 compared to 0.64% for the six months ended June 30, 2011. Contributing to the decrease in the average advisory fee rate is the large cap fee reduction where the Company voluntarily lowered the investment advisory fee it charges on the Diamond Hill Large Cap Fund and certain large cap separate accounts by 0.05% effective October 1, 2011.

Mutual Fund Administration Fees. Mutual fund administration revenues increased by $261 thousand, or 6%, for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. Mutual fund administration fees include administration fees received from Diamond Hill Funds, which are calculated as a percent of average mutual fund AUM, and all Beacon Hill fee revenue. The increase in the mutual fund administration fee is due to a 4.1% increase in average mutual fund AUM from $4.36 billion for the six months ended June 30, 2011 to $4.54 billion for the six months ended June 30, 2012.

Expenses

 

     Six Months Ended
June 30,
        

(in thousands)

   2012      2011      % Change  

Compensation and related costs

   $ 16,866       $ 18,114         –7

General and administrative

     2,235         2,083         7

Sales and marketing

     643         500         29

Third party distribution

     352         481         –27

Mutual fund administration

     828         800         4
  

 

 

    

 

 

    

Total

   $ 20,924       $ 21,978         –5
  

 

 

    

 

 

    

Compensation and Related Costs. Employee compensation and benefits decreased $1.2 million, or 7%, during the six months ended June 30, 2012 compared to the same period a year ago, primarily due to a decrease of $2.0 million in incentive compensation during the six months ended June 30, 2012 offset by an increase in salaries and related benefits of $800 thousand due to increases in staffing levels and related costs during the period.

General and Administrative. General and administrative expenses increased by $152 thousand, or 7%, period over period. This increase is primarily due to additional research expenses and systems related expenses to support the Company’s investment team, additional rent related to the expansion of the company’s office space, general employee professional development, offset by a reduction in corporate legal expenses and a decrease in state use tax.

Sales and Marketing. Sales and marketing expenses increased by $143 thousand, or 29%, period over period. The increase was primarily due to an increase in travel and other expenses related to business development and retention efforts during 2012.

 

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Third Party Distribution. Third party distribution expense represents payments made to intermediaries related to sales of the Company’s investment products. The expense is directly correlated with investments in the Company’s private investment funds. The period over period increase or decrease directly corresponds to the increase or decrease in investment advisory fees earned by the Company.

Mutual Fund Administration. Mutual fund administration expense increased by $28 thousand, or 4%, period over period. The majority of mutual fund administration fees are variable based on the amount of mutual fund AUM or the number of shareholder accounts. This expense increase is consistent with an increase in average mutual fund AUM of 4.1% for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Beacon Hill Fund Services

Beacon Hill is currently staffed with 11 full-time equivalent employees, and provides compliance, treasurer, and other fund administration services to mutual fund clients and their investment advisers. In addition, through its registered broker/dealer, Beacon Hill also serves as the underwriter for a number of mutual funds. The following is a summary of Beacon Hill’s performance for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011, excluding 12b-1/service fees and commission revenue and expenses, which net to zero:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(in thousands)

   2012     2011     2012     2011  

Revenue1

   $ 552      $ 450      $ 1,037      $ 939   

Expenses

     585        562        1,164        1,141   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (33   $ (112   $ (127   $ (202
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Beacon Hill’s revenue for the three months ended June 30, 2012 and 2011 includes $131 thousand and $129 thousand, respectively, of inter-company revenue earned from services provided to DHCM. Beacon Hill’s revenue for the six months ended June 30, 2012 and 2011 includes $262 thousand and $260 thousand, respectively, of inter-company revenue earned from services provided to DHCM. These amounts have been eliminated from the Consolidated Statements of Income.

Liquidity and Capital Resources

The Company’s entire investment portfolio is in readily marketable securities, which provide for cash liquidity, if needed. Investments in mutual funds are valued at their quoted current net asset value. Investments in private investment funds are valued independently based on readily available market quotations. Inflation is expected to have no material impact on the Company’s performance.

As of June 30, 2012, the Company had working capital of approximately $29.3 million compared to $14.0 million at December 31, 2011. Working capital includes cash, securities owned and accounts receivable, net of all liabilities. The Company has no debt and its available working capital is expected to be sufficient to cover current expenses. The Company does not expect any material capital expenditures during 2012.

During the third quarter of 2007 the Board of Directors authorized management to repurchase up to 350,000 shares of the Company’s common stock. Under the program, the Company has repurchased a total 31,567 shares since third quarter 2007. No shares were repurchased during the six months ended June 30, 2012.

 

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Use of Supplemental Data as Non-GAAP Performance Measure

Net Operating Income After Tax

As supplemental information, we are providing performance measures that are based on methodologies other than generally accepted accounting principles (“non-GAAP”) for “Net Operating Income After Tax” that management uses as benchmarks in evaluating and comparing the period-to-period operating performance of the Company and its subsidiaries.

The Company defines “net operating income after tax” as the Company’s net operating income less income tax provision excluding investment return and the tax impact related to the investment return. The Company believes that “net operating income after tax” provides a good representation of the Company’s operating performance, as it excludes the impact of investment return on financial results. The amount of the investment portfolio and market fluctuations on the investments can change significantly from one period to another, which can distort the underlying earnings potential of a company. We also believe “net operating income after tax” is an important metric in estimating the value of an asset management business. This non-GAAP measure is provided in addition to net income and net operating income and is not a substitute for net income or net operating income and may not be comparable to non-GAAP performance measures of other companies.

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(in thousands, except per share data)

   2012      2011      2012      2011  

Net operating income, GAAP basis

   $ 5,831       $ 5,851       $ 11,851       $ 11,300   

Non-GAAP adjustments:

           

Tax provision excluding impact of investment return

     2,212         2,179         4,416         4,228   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating income after tax, non-GAAP basis

   $ 3,619       $ 3,672       $ 7,435       $ 7,072   

Net operating income after tax per share, non-GAAP basis

   $ 1.17       $ 1.24       $ 2.42       $ 2.44   

Weighted average shares outstanding, GAAP basis

     3,101         2,967         3,066         2,903   

The tax provision excluding impact of investment return is calculated by applying the tax rate from the actual tax provision to net operating income.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements. It does not have any obligation under a guarantee contract, or a retained or contingent interest in assets or similar arrangement that serves as credit, liquidity or market risk support for such assets, or any other obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument or arising out of a variable interest.

Critical Accounting Policies and Estimates

There have been no material changes to the Critical Accounting Policies and Estimates provided in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

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DIAMOND HILL INVESTMENT GROUP, INC.

 

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 Annual Report on Form 10-K for the year ended December 31, 2011.

 

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 Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 Securities Exchange Act of 1934 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 six-month period ending June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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. The Company believes these claims will not have a material adverse effect on its financial condition, liquidity or results of operations.

 

ITEM 1A: Risk Factors

There has been no material change to the information provided in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not purchase any shares of its common stock during the six months ended June 30, 2012. The following table sets forth information regarding the Company’s repurchase program of its common stock during the second quarter of fiscal year 2012:

 

                   Cumulative Number      Maximum Number  
                   of Shares Purchased      of Shares That May  
                   as part of a Publicly      Yet Be Purchased  
     Total Number      Average Price      Announced Plans      Under the Plans or  

Period

   of Shares Purchased      Paid Per Share      or Programs      Programs (1)  

April 1, 2012 through April 30, 2012

     —           —           31,567         318,433   

May 1, 2012 through May 31, 2012

     —           —           31,567         318,433   

June 1, 2012 through June 30, 2012

     —           —           31,567         318,433   

(1) - The Company’s current share repurchase program was announced on August 9, 2007. The board of directors authorized management to repurchase up to 350,000 shares of its common stock in the open market and in private transactions in accordance with applicable securities laws. The Company’s stock repurchase program is not subject to an expiration date.

 

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Table of Contents
ITEM 3: Defaults Upon Senior Securities

None

 

ITEM 4: Mine Safety Disclosures

None.

 

ITEM 5: Other Information

None

 

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DIAMOND HILL INVESTMENT GROUP, INC.

 

ITEM 6: Exhibits

 

    3.1    Amended and Restated Articles of Incorporation of the Company. (Incorporated by reference from Form 8-K Current Report for the event on May 2, 2002 filed with the SEC on May 7, 2002; File No. 000-24498.)
    3.2    Code of Regulations of the Company. (Incorporated by reference from Form 8-K Current Report for the event on May 2, 2002 filed with the SEC on May 7, 2002; File No. 000-24498.)
  31.1    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
  31.2    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
  32.1    Section 1350 Certifications.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

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Table of Contents

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

August 3, 2012   

President, Chief Executive Officer, and a Director

 

/S/    R. H. DILLON        

R. H. Dillon

August 3, 2012   

Chief Financial Officer, Treasurer, and Secretary

 

/S/    JAMES F. LAIRD        

James F. Laird

 

28

XNAS:DHIL Diamond Hill Investment Group Inc Quarterly Report 10-Q Filling

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XNAS:DHIL Diamond Hill Investment Group Inc Quarterly Report 10-Q Filing - 6/30/2012
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