Cohen & Steers, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Cohen & Steers is a global investment manager focused on liquid real assets and income strategies. Financial statements are unaudited.
Financial performance and liquidity
- Revenue: $79.7 million, down 5% from $83.8 million in Q1 2015. Investment advisory and administration fees fell $4.7 million, reflecting lower average AUM across institutional, open-end and closed-end vehicles.
- Profitability: Operating income was $28.3 million, down 18% from $34.5 million. Operating margin was 35.5%, versus 41.2%. Net income attributable to common stockholders was $18.1 million, versus $20.8 million; diluted EPS was $0.39, versus $0.45.
- Non-operating results: $0.6 million income, compared with a $1.6 million loss in Q1 2015, primarily reflecting improved seed-investment results.
- Cash flow: Operating activities used $2.5 million, compared with $0.3 million provided in Q1 2015. Investing activities used $1.6 million and financing activities used $15.5 million. Cash declined $19.6 million, excluding foreign-exchange effects, to $122.9 million.
- Balance sheet and liquidity: Total assets were $278.3 million at March 31, down from $305.3 million at year-end 2015; stockholders’ equity was $237.6 million. Management described the business as highly liquid and said cash and operating cash flows should be adequate for anticipated requirements. The filing presents no separate borrowings or debt balance; a clear debt value is not provided.
- Capital returns: Dividends declared were $0.26 per share, versus $0.25 a year earlier. The company paid $12.0 million in dividends and repurchased $7.4 million of shares, primarily to meet employee tax withholding on vested restricted stock units.
Material changes and operating trends
- AUM ended the quarter at $55.1 billion, up 5% from December 31, 2015 and 1% year over year. Quarterly net inflows were $1.4 billion and market appreciation was $1.9 billion, partly offset by $0.9 billion of distributions.
- Average AUM was $51.6 billion, down 1% from Q4 2015 and 6% from Q1 2015. Management cited lower average closed-end fund assets and one fewer day in the quarter in its sequential revenue discussion. The quarterly annualized organic growth rate was 11%.
- Operating expenses rose 4% to $51.4 million, led by higher compensation and benefits, including increased stock-award amortization and accelerated vesting. Lower distribution and service fees partly offset those increases.
- Effective March 1, 2016, the company lost majority voting ownership of the Low Duration Preferred and Income Fund (LPX) after third-party subscriptions increased. It deconsolidated LPX and began accounting for its approximately 48% interest under the equity method. This reduced redeemable noncontrolling interest by $14.0 million and increased equity-method investments by $14.6 million, both non-cash changes.
Outlook, risks and contingencies
- Management expected the full-year 2016 effective tax rate to be approximately 38%, excluding discrete items. No revenue or earnings guidance was provided.
- The business’s fee revenue depends on AUM, which can change with markets, foreign exchange, investment performance, subscriptions and redemptions. Management noted no material change to previously disclosed risk factors or market-risk disclosures.
- The company had a $5.1 million co-investment commitment alongside GRP-TE, of which approximately $3.3 million had been funded; the timing of the remaining funding was unknown. The unfunded amount was not recorded as a liability.
- Operating lease obligations totaled $85.2 million. Management reported no pending legal matter it believed could materially affect results, cash flows or financial condition.
- Cash and cash equivalents included $83.4 million held by foreign subsidiaries, which the company intended to permanently reinvest. The company also noted credit exposure to deposits held at three major financial institutions.
Important facts for investors to verify
- Whether AUM inflows and the 11% organic growth rate persist, particularly in light of lower average AUM and falling advisory fees.
- How compensation costs, including stock-based compensation and accelerated vesting, affect operating margins.
- The effect of LPX’s deconsolidation and other sponsored-fund ownership changes on reported results and comparability.
- The drivers of negative operating cash flow and the expected timing of the unfunded GRP-TE commitment.
- Whether the expected 38% tax rate and management’s liquidity assessment remain consistent with subsequent results and cash needs.