Cohen & Steers, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; financial statements are unaudited. Cohen & Steers is a global investment manager specializing in liquid real assets, preferred securities and related strategies. Results are sensitive to assets under management (AUM), market performance, currency movements and client flows.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $92.8 million | $86.4 million | $182.5 million | $166.1 million |
| Operating income | $37.4 million | $34.1 million | $72.9 million | $62.4 million |
| Operating margin | 40.3% | 39.5% | 39.9% | 37.6% |
| Net income attributable to common stockholders | $23.5 million | $24.8 million | $46.5 million | $42.9 million |
| Diluted EPS | $0.50 | $0.53 | $0.99 | $0.93 |
| Dividends declared per share | $0.28 | $0.26 | $0.56 | $0.52 |
For Q2, revenue rose about 7% and operating income about 9%, while common-stockholder net income fell about 5% and diluted EPS fell about 6%. For the first half, revenue increased about 10%, operating income about 17%, and common-stockholder net income about 8%. Employee compensation, distribution costs and general and administrative expenses increased; higher average AUM was the main revenue driver.
Non-operating income was $0.3 million in Q2 versus $4.5 million a year earlier, and $0.5 million for the first half versus $5.1 million. Management attributed the decline primarily to lower fair values and weaker results from seed investments. The effective tax rate was 38.4% in Q2 and 37.1% for the first half, compared with 35.5% and 36.6%, respectively, in 2016.
AUM, cash flow and financial position
- AUM was $60.4 billion at June 30, 2017, up 3% from $58.7 billion a year earlier. Q2 AUM increased $1.9 billion, reflecting $1.3 billion of net inflows and $1.8 billion of market appreciation, partly offset by $1.2 billion of distributions. Management reported a 9% annualized organic growth rate at quarter-end.
- Cash and cash equivalents were $178.4 million, compared with $183.2 million at December 31, 2016. Total assets were $397.9 million; total liabilities were $62.4 million. Stockholders’ equity was $290.1 million.
- Net liquid assets were $247.8 million, up from $221.8 million at year-end. The company reported no debt outstanding. About 43% of cash was held outside the U.S.; management said it currently intends to permanently reinvest those funds, and repatriation could require U.S. taxes.
- First-half operating cash flow was negative $21.6 million, versus positive $30.7 million in 2016. The filing cites working-capital movements, including changes in trading investments and broker balances. Investing cash flow was positive $5.7 million; financing cash flow was positive $10.5 million, including $45.1 million of contributions from redeemable noncontrolling interests, partly offset by $26.0 million of dividends paid and $9.1 million of share repurchases for employee tax withholding.
Management commentary, outlook and risks
- Management said cash, operating cash generation and capital resources should be adequate for working capital and reasonably foreseeable commitments. No specific earnings or revenue guidance was provided.
- The board declared a $0.28-per-share quarterly dividend on August 3, payable September 21, 2017, to holders of record September 1. Management said future quarterly dividends remain subject to board approval and relevant business, financial, legal and regulatory considerations.
- The company committed up to $5.1 million to co-invest alongside GRP-TE; about $3.5 million had been funded by June 30. The timing of the remaining funding is uncertain, and the unfunded amount was not recorded as a liability. Contractual operating lease payments totaled $79.0 million.
- A newly launched SICAV Global Preferred Securities Fund was consolidated as a variable interest entity; the company reported $45.4 million of redeemable noncontrolling interest at June 30. Consolidated fund assets and liabilities are not necessarily available to satisfy the company’s own obligations.
- Business risks include market declines, client withdrawals and distributions, investment performance, and foreign-currency movements. A Japanese distribution partner reduced the distribution rate on one sub-advised fund by 30% in July 2017. The filing reported no material change to the risk factors in the 2016 Form 10-K and no pending legal matters believed likely to have a material adverse effect.
- Management stated disclosure controls were effective as of June 30, 2017, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether AUM inflows, especially in preferred securities and U.S. real estate, persist and offset distributions and outflows, including in Japan.
- Whether the sharp year-over-year decline in seed-investment and other non-operating results is temporary, and how much reported earnings depend on those items.
- Drivers of negative first-half operating cash flow and whether cash conversion improves as broker balances, trading investments and accrued compensation fluctuate.
- The liquidity, ownership and performance effects of consolidated sponsored funds, including the SICAV preferred fund and its redeemable noncontrolling interest.
- Funding timing for the remaining GRP-TE commitment, cash held abroad and potential tax costs of repatriation, and the impact of the Japanese distributor’s fee-rate reduction.