Cohen & Steers, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Cohen & Steers is a global investment manager specializing in liquid real assets, preferred securities and related strategies. Financial statements are unaudited.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $94.4 million | $92.7 million | $188.9 million | $182.5 million |
| Operating income | $36.3 million | $37.4 million | $73.5 million | $72.9 million |
| Operating margin | 38.4% | 40.3% | 38.9% | 39.9% |
| Net income attributable to common stockholders | $30.0 million | $23.5 million | $57.5 million | $46.5 million |
| Diluted EPS | $0.63 | $0.50 | $1.22 | $0.99 |
| Dividends declared per share | $0.33 | $0.28 | $0.66 | $0.56 |
- Q2 revenue rose 2%, mainly from higher advisory and administration fees tied to open-end funds. First-half revenue increased 4%.
- Expenses increased 5% in both the quarter and first half. Higher compensation and general and administrative costs more than offset lower distribution and service expenses.
- Operating income was lower in Q2 but slightly higher for the first half; operating margins narrowed in both comparisons. Lower effective tax rates—24.9% in Q2 and 23.9% for the first half, versus 38.4% and 37.1%—supported higher common-stockholder earnings. The company attributed the lower rates primarily to the Tax Act, including transition-tax adjustments and, for the first half, restricted-stock-unit tax benefits.
- Non-operating results were losses of $0.8 million for Q2 and $1.0 million for the first half, compared with income in the prior-year periods. The company cited weaker seed-investment results, partly offset by foreign-exchange gains and higher interest income.
- Cash and cash equivalents were $193.7 million at June 30, 2018, versus $193.5 million at year-end 2017. First-half operating cash flow was $6.1 million, versus cash used of $21.6 million in 2017. Ending cash was $193.7 million; the period’s net cash increase was $1.1 million before a $0.8 million foreign-exchange reduction.
- The company reported no debt outstanding. Net liquid assets were $270.3 million, up from $241.6 million at year-end 2017. Total assets were $450.1 million and total liabilities were $62.1 million at June 30, 2018.
Material changes versus the prior comparable period
- Assets under management were $60.2 billion at June 30, 2018, down 0.4% from $60.4 billion a year earlier. First-half net inflows were $85 million, but distributions and market movements produced a $1.9 billion decline from the beginning of 2018.
- Q2 AUM benefited from $2.6 billion of market appreciation and $180 million of net inflows, offset by $1.0 billion of distributions. First-half flows were stronger in 2017, with $2.2 billion of net inflows compared with $85 million in 2018.
- Institutional AUM was $28.3 billion, down 4% year over year, including significant declines in Japan subadvisory accounts. Open-end fund AUM grew 6% to $22.8 billion; closed-end fund AUM declined 3% to $9.1 billion.
- Investment losses were $5.1 million for the first half, versus a $0.2 million loss in 2017, principally reflecting $4.9 million of unrealized losses on investments still held at period-end.
- First-half common-stockholder dividends paid were $30.9 million, and $10.6 million of common stock was repurchased to satisfy employee tax withholding on vested restricted stock units.
Outlook, commentary, risks and unusual items
- No quantitative earnings or AUM guidance was provided. Management said operating cash flows and cash on hand should be adequate for foreseeable commitments and obligations; the company anticipates paying dividends subject to board approval and applicable restrictions.
- New business included a preferred-securities fund launched in May with approximately $121 million of initial third-party commitments, a diversified real-assets fund launched in June with a $10 million company seed investment, and a new Midstream Energy MLP Focus strategy.
- First-half general and administrative expense included approximately $871,000 related to evaluating a business transaction that was not pursued. Q2 compensation expense included a cumulative incentive-compensation adjustment.
- The company adopted new revenue guidance retrospectively; prior-period comparisons were recast. Adoption changed gross-versus-net presentation of certain revenue and expenses but did not materially affect revenue-recognition timing. Adoption of the financial-instruments guidance moved equity-investment fair-value changes into earnings and included a $1.1 million opening-equity adjustment.
- At June 30, the company had funded $3.8 million of a commitment to co-invest up to $5.1 million alongside a sponsored fund; the unfunded amount was not recorded as a liability. Contractual obligations totaled $77.2 million, primarily operating leases and transition-tax payments.
- The company reported no pending legal matters it believed could materially affect its financial position, results or cash flows, and no material changes to previously disclosed risk factors or market-risk disclosures. Disclosure controls were considered effective; no material change in internal control over financial reporting was reported.
- A quarterly dividend of $0.33 per share was declared on August 2, 2018, payable August 30 to shareholders of record August 16.
Important facts for investors to verify
- Whether AUM flows improve, particularly in institutional mandates and Japan subadvisory accounts, and whether distributions continue to pressure fee-generating assets.
- Whether higher compensation and general and administrative costs persist, and how they affect operating margins.
- The performance and valuation effects of seed investments, which drove material first-half investment losses; also distinguish these results from management’s non-GAAP adjusted measures.
- The durability of earnings growth given the lower 2018 tax rate and the role of tax adjustments and other non-operating items.
- The timing and funding of the remaining co-investment commitment, lease obligations and transition-tax payments, and any effects of the forthcoming lease-accounting standard.
- Comparisons use revenue-standard-recast 2017 figures; confirm definitions and reconciliations when assessing reported versus adjusted results.