Cohen & Steers, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Cohen & Steers is a global investment manager focused on liquid real assets and income strategies. Results are unaudited.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $89.7 million | $79.7 million | +13% |
| Operating expenses | $54.2 million | $51.4 million | +5% |
| Operating income | $35.5 million | $28.3 million | +26% |
| Operating margin | 39.6% | 35.5% | +4.1 percentage points |
| Net income attributable to common stockholders | $23.0 million | $18.1 million | +27% |
| Diluted EPS | $0.49 | $0.39 | +$0.10 |
| Operating cash flow | $(1.8) million | $(2.5) million | Less cash used |
- Revenue growth was primarily driven by higher average assets under management (AUM). Advisory and administration fees rose to $81.9 million from $73.1 million.
- Operating expenses increased mainly from higher compensation and distribution/service costs. The 2016 comparison included accelerated vesting of certain restricted stock units; management also presented non-GAAP adjusted diluted EPS of $0.47 versus $0.41.
- Effective tax rate was 35.8%, down from 38.0%, mainly due to discrete items in Q1 2017.
- At March 31, cash and cash equivalents were $156.7 million, total assets $319.5 million, total liabilities $45.2 million and stockholders’ equity $273.4 million. The company reported no debt outstanding.
- Cash declined $26.9 million during the quarter. Financing uses included $13.0 million of dividends paid and $9.0 million of share repurchases for employee tax withholding. Investing cash outflow included a new $8.3 million seed investment.
- Management characterized liquidity as strong: liquid assets were $254.2 million, or 80% of total assets, excluding equity-method investments contractually prohibited from redemption. About 56% of cash was held outside the U.S.; management intends to permanently reinvest those funds, and repatriation could entail U.S. corporate income taxes.
Assets under management and period comparisons
- AUM ended the quarter at $58.5 billion, up $1.3 billion (2%) from year-end 2016 and up 6% from March 31, 2016. The quarterly increase reflected $905 million of net inflows and $1.5 billion of market appreciation, partly offset by $1.1 billion of distributions.
- Average AUM was $58.3 billion, up 13% year over year. Management reported a 6% annualized organic growth rate for Q1.
- Q1 net inflows were lower than the $1.4 billion recorded in Q1 2016. Preferred securities and U.S. real estate were notable sources of inflows; Japanese subadvisory accounts experienced substantial distributions, principally from U.S. real estate.
- Versus Q4 2016, revenue increased 0.3%, while operating income decreased 0.9% and operating margin declined to 39.6% from 40.1%, according to management’s quarterly highlights.
Outlook, risks and notable items
- Management said cash, operating cash flows and capital resources were expected to be adequate for foreseeable working-capital needs, dividends, share repurchases, seed investments and other commitments. No earnings or revenue guidance was provided.
- Two new model-based subadvisory mandates in South Korea and Taiwan were expected to fund in Q2 2017. The company expected to launch its SICAV Global Preferred Securities Fund on May 15, 2017.
- The board declared a subsequent quarterly dividend of $0.28 per share, payable June 22, 2017 to holders of record June 1, 2017. The filing says quarterly dividends remain subject to board approval.
- The company had a commitment to co-invest up to $5.1 million alongside GRP-TE; approximately $3.5 million had been funded. The unfunded amount was not recorded as a balance-sheet liability, and funding timing was uncertain.
- Management identified ordinary business sensitivities including changes in markets, investment performance, foreign exchange and client subscriptions or redemptions, which affect AUM and fee revenue. It reported no material change to the prior annual report’s risk factors or market-risk disclosures, and no pending legal matter believed likely to have a material adverse effect.
- Available-for-sale investments in an unrealized-loss position totaled approximately $6.6 million; management considered the losses temporary and reported no material losses persisting more than 12 months. Derivative contracts generated net losses of $1.3 million in Q1.
- Disclosure controls were assessed as effective at a reasonable assurance level; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether AUM growth and net inflows persist, particularly in U.S. real estate, preferred securities and institutional accounts, and how distributions or redemptions affect fee revenue.
- Whether the announced mandates fund as expected and the new preferred-securities fund launches, and whether either contributes meaningfully to AUM.
- How much of the company’s cash held abroad is practically available for U.S. needs, including potential tax consequences of repatriation.
- The timing and amount of the remaining GRP-TE co-investment commitment, along with the liquidity and valuation of seed and private-market investments.
- Whether cash generation improves after the first-quarter incentive-compensation payment, and how dividends, employee tax-withholding share repurchases and new seed investments affect liquidity.
- The effect of discrete tax items and the 2016 accelerated stock-vesting comparison when assessing underlying earnings; the filing’s adjusted measures are non-GAAP.