Cohen & Steers, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the same periods in 2010 unless noted. Cohen & Steers manages investment portfolios focused on real estate securities, infrastructure, utilities, preferred securities, and other strategies. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $61.5 | $44.2 | $116.2 | $85.6 |
| Operating expenses | $38.6 | $30.9 | $74.4 | $59.8 |
| Operating income | $22.9 | $13.3 | $41.8 | $25.8 |
| Operating margin | 37.2% | 30.1% | 36.0% | 30.1% |
| Net income attributable to common shareholders | $15.7 | $11.6 | $28.7 | $20.5 |
| Diluted EPS | $0.36 | $0.27 | $0.65 | $0.48 |
- Q2 revenue rose 39% and six-month revenue rose 36%, primarily reflecting higher average assets under management (AUM). Advisory and administration fees were $57.5 million in Q2 and $108.5 million for the six months.
- Operating expenses rose 25% in Q2 and 24% for the six months. Higher compensation, distribution costs, and general and administrative expenses were the principal increases. Management cited incentive and production compensation, salaries, and restricted-stock amortization as compensation drivers.
- Net non-operating income was $1.3 million in Q2 and $2.3 million for the six months, below the comparable 2010 totals, which included approximately $3.1 million of gains related primarily to sales of previously impaired securities. The 2011 period included gains from the offshore real estate long-short fund’s equity-method earnings.
- The effective tax rate was approximately 35% in 2011. The 2010 rates were lower due to discrete items; excluding those items, management reported approximately 34%. Net income growth therefore lagged operating-income growth in Q2.
AUM and business trends
- AUM reached $44.3 billion at June 30, 2011, up 69% from $26.2 billion a year earlier. Average AUM increased 51% in Q2 and 48% for the six-month period.
- Management attributed the year-over-year AUM increase to net inflows and market appreciation. Institutional accounts were $27.3 billion, open-end funds $10.2 billion, and closed-end funds $6.8 billion at quarter-end. Institutional inflows were particularly strong, including subadvisory relationships; open-end funds also recorded net inflows.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $140.7 million at June 30, 2011, versus $136.2 million at year-end 2010. Total assets were $293.8 million; total liabilities were $34.5 million; stockholders’ equity was $255.9 million. The filing does not provide a clear debt balance or identify material borrowings.
- Six-month operating cash flow was $23.8 million, versus $12.3 million in 2010. Investing activities used $3.3 million; financing activities used $17.7 million, including $13.0 million of dividends paid and $6.5 million of share repurchases primarily to meet employee tax withholding obligations.
- Management described the financial position as highly liquid and said operating cash flows should cover anticipated capital needs and obligations. Cash and available-for-sale investments held by foreign subsidiaries totaled approximately $62.3 million; the company said it intended to permanently reinvest these funds outside the U.S.
- Cash, equity investments, available-for-sale investments, and receivables represented 81% of total assets. A portion of investments, including primarily auction-rate preferred securities, was classified as Level 2 fair value. Operating lease commitments totaled $22.2 million; no material capital lease obligations were reported.
Outlook, risks, and unusual items
- Management expected the full-year 2011 effective tax rate to be approximately 35%, excluding discrete items. The filing provides no specific revenue, earnings, or AUM guidance.
- In February 2011, the company began consolidating the Global Listed Infrastructure Fund after obtaining control; quarter-end securities owned included $10.1 million, and the six-month trading-securities loss was $0.5 million. The consolidation also resulted in redeemable noncontrolling interest.
- A single institutional subadvisory client accounted for $17.6 million, or 15%, of revenue in the six months ended June 30, 2011. Cash was principally held at three major financial institutions, creating counterparty credit exposure.
- The company reported no pending legal matter it believed could materially adversely affect its business or financial condition, and no material changes to previously disclosed risk factors or market-risk disclosures. Management concluded disclosure controls were effective as of June 30, 2011.
- On August 4, 2011, the company declared a regular quarterly dividend of $0.15 per share and a special dividend of $1.00 per share, payable September 28 to holders of record September 7.
Investor verification points
- Track whether AUM growth and institutional inflows persist, and distinguish market appreciation from net flows.
- Assess whether compensation and other operating-cost growth remains aligned with fee revenue and AUM.
- Review the quality and liquidity of Level 2 investments, fund-related exposures, and results following consolidation of the infrastructure fund.
- Monitor dependence on the institutional client representing 15% of first-half revenue and the company’s foreign-held cash and reinvestment plans.
- Verify the cash-flow capacity for the declared special dividend and ongoing capital returns, as well as the actual debt position; the filing does not provide a clear debt balance.