Cohen & Steers, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Cohen & Steers is a global investment manager focused on liquid real assets and income strategies. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Business and operating context
Revenue is primarily asset-based investment advisory and administration fees, so results are sensitive to market performance, foreign exchange, and client subscriptions and redemptions. Assets under management (AUM) were $60.5 billion at quarter-end, up 22% from September 30, 2015 and 3% from June 30, 2016. Q3 net inflows were $2.25 billion; market appreciation added $609 million, while distributions reduced AUM by $1.11 billion. Management reported a 15% annualized organic growth rate for Q3.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $94.4 million | $79.7 million | $260.4 million | $247.0 million |
| Operating income | $37.2 million | $31.5 million | $99.7 million | $97.2 million |
| Operating margin | 39.4% | 39.5% | 38.3% | 39.4% |
| Net income attributable to common stockholders | $23.9 million | $12.3 million | $66.8 million | $52.2 million |
| Diluted EPS | $0.51 | $0.27 | $1.44 | $1.14 |
- Q3 revenue rose 19% year over year, mainly on higher average AUM across institutional, open-end, and closed-end vehicles. Operating expenses also rose 19%, including higher compensation and distribution expenses; margin was nearly unchanged year over year.
- For the first nine months, revenue increased 5% and operating income 3%; operating margin declined 1.1 percentage points. Compensation, distribution, and service expenses were the main expense increases.
- Investment advisory and administration fees were $238.3 million for nine months, up from $228.5 million. Distribution and service fees were $14.2 million, versus $11.9 million.
- Non-operating income was $1.4 million in Q3 and $6.5 million year to date, compared with losses of $7.7 million and $9.2 million, respectively, in 2015. The improvement primarily reflected seed-investment results. Prior-period seed-investment amounts were retrospectively reclassified following an accounting classification change.
- Management’s non-GAAP adjusted diluted EPS was $0.51 for Q3 versus $0.42, and $1.37 for nine months versus $1.30. These measures exclude seed-investment results and certain other items; they supplement, and do not replace, GAAP results.
Cash flow, liquidity, and capital
- Cash and cash equivalents were $163.1 million at September 30, 2016, versus $142.7 million at December 31, 2015. Total assets were $331.5 million; stockholders’ equity was $272.2 million.
- Nine-month operating cash flow was $60.8 million, down from $68.4 million in 2015. Investing cash flow was positive $1.0 million; financing cash outflow was $39.7 million, including $35.9 million of shareholder dividends and $8.0 million of share repurchases for employee tax withholding. Cash increased $22.1 million before foreign-exchange effects.
- The balance sheet presents no borrowings or debt balance. Total liabilities were $58.4 million, including accrued compensation, fees payable, and other operating liabilities.
- Management described liquidity as strong and said cash and operating cash flows should be adequate for anticipated needs. Liquid assets as defined by the company were 80% of total assets. Approximately $88.8 million of cash was held by foreign subsidiaries, which the company currently intends to permanently reinvest.
- Operating-lease commitments totaled $83.2 million. The company had funded $3.3 million of a commitment to co-invest up to $5.1 million alongside GRP-TE; timing of the remaining funding is unknown and the unfunded amount was not recorded as a balance-sheet liability.
Outlook, developments, and risks
- Management expected the full-year 2016 effective tax rate to be approximately 37.2%, excluding discrete items. No revenue, earnings, or AUM guidance was provided.
- On November 2, 2016, the company declared a $0.26 quarterly dividend and a $0.50 special dividend per share, payable December 14 to holders of record November 23.
- The company deconsolidated LPX after its ownership fell below a majority and began accounting for it under the equity method. MLO was reclassified from equity method to available-for-sale after ownership fell below 20% and significant influence ceased. Changes in consolidation and seed-investment accounting affect reported non-operating results and comparability.
- Management reported no pending legal matters it believed would materially affect results, cash flows, or financial condition, and no material changes to previously disclosed risk factors or market-risk disclosures. It cautioned that actual outcomes may differ from forward-looking statements; key business sensitivities include market levels, investment performance, currency movements, and client flows.
- Disclosure controls were assessed as effective as of September 30, 2016, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Whether Q3 net inflows and the reported organic growth rate persist, and how much future AUM growth depends on market appreciation versus client flows.
- How compensation and distribution costs evolve relative to fee revenue, given the lower nine-month GAAP operating margin.
- GAAP earnings versus management’s adjusted measures, particularly the effect and volatility of seed investments and consolidation changes.
- Cash availability and intended reinvestment of foreign-subsidiary cash, alongside lease commitments and the unfunded co-investment commitment.
- The declared special dividend’s payment and the company’s capacity to sustain shareholder distributions alongside business and regulatory capital needs.