Cohen & Steers, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Cohen & Steers is a global investment manager focused on liquid real assets, preferred securities and other income strategies. Results are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $94.5 million | $89.7 million | +5% |
| Operating income | $37.2 million | $35.5 million | +5% |
| Operating margin | 39.4% | 39.6% | -0.2 percentage points |
| Net income attributable to common stockholders | $27.6 million | $23.0 million | +20% |
| Diluted EPS | $0.59 | $0.49 | +20% |
| Operating cash flow | $(29.1) million | $(1.8) million | More cash used |
Investment advisory and administration fees rose to $84.4 million from $79.6 million, primarily reflecting higher average assets under management across investment vehicles. Expenses increased 6% to $57.2 million, including higher compensation and general and administrative costs. The GAAP effective tax rate fell to 22.7% from 35.8%; management attributed the 2018 rate, which was above the 21% federal statutory rate, mainly to state and foreign taxes, partly offset by a benefit related to restricted stock unit deliveries.
Management’s non-GAAP adjusted diluted EPS was $0.62 versus $0.47, and adjusted operating margin was 40.6% versus 39.6%. These measures exclude specified seed-investment, consolidation, transaction-evaluation and tax items; they supplement, not replace, GAAP results.
Liquidity, capital and assets under management
- Cash and cash equivalents were $168.6 million at March 31, 2018, down from $193.5 million at year-end. The company reported no outstanding debt.
- Net liquid assets were $252.0 million, up from $241.6 million at December 31, 2017. Total assets were $428.9 million and total liabilities were $63.5 million.
- Operating cash flow was negative, primarily reflecting working-capital movements, including a $31.2 million reduction in accrued compensation and investment balances in consolidated funds. Financing cash flow was positive $6.7 million, including $34.4 million of contributions from redeemable noncontrolling interests; dividends paid were $15.4 million and share repurchases were $10.5 million.
- Assets under management (AUM) ended the quarter at $58.5 billion, down $3.6 billion, or 6%, from December 31, 2017. The decline reflected $2.6 billion of market depreciation and $934 million of distributions; net outflows were $95 million. AUM was approximately unchanged from $58.5 billion a year earlier. Average AUM was $59.2 billion, up 2% year over year.
- The annualized organic decay rate was approximately 1%. Open-end fund AUM grew year over year, while institutional AUM declined, in part amid outflows and distributions from Japan subadvisory accounts.
Material changes, outlook and risks
- Compared with Q1 2017, revenue and operating income grew, while GAAP operating margin was nearly flat. Compared with Q4 2017, revenue declined 5% and operating income declined 9%, which management attributed mainly to lower average AUM and two fewer days in the quarter.
- Investment losses were $4.5 million, primarily from unrealized losses on investments still held at quarter-end; other gains were $2.5 million, leaving a $0.2 million non-operating loss. The company’s adoption of new financial-instrument guidance moved fair-value changes on equity investments into earnings and produced a $1.1 million cumulative-effect adjustment to opening retained earnings.
- Revenue recognition guidance was adopted retrospectively. It did not materially change revenue-recognition timing but changed gross-versus-net presentation; Q1 2017 comparative figures were recast.
- The company consolidated the Cohen & Steers Funds ICAV after its ownership interest increased. Consolidated fund assets are generally restricted to settling those funds’ obligations, and their creditors have no recourse to the company’s general credit.
- No formal earnings or AUM guidance is provided in the supplied filing text. Management said cash and operating cash flows should be adequate for anticipated requirements. It noted institutional mandates expected to fund over the next three to six months, while one institutional commodities subadvisory client terminated its portfolio.
- Key exposures include market-driven AUM changes, investor flows and distributions, foreign currency movements, and investment valuation. The company disclosed no pending legal matter it believed would have a material adverse effect and reported no material change to its previously disclosed risk factors.
- The company had an unfunded commitment of approximately $1.3 million under a co-investment commitment of up to $5.1 million; timing of further funding was unknown. It also reported a $8.4 million Tax Act transition-tax liability payable over eight years, subject to possible changes in assumptions or guidance.
The board declared a $0.33 per-share quarterly dividend on May 3, 2018, payable June 21, 2018. Q1 dividends declared were also $0.33 per share.
Important facts for investors to verify
- Whether AUM, net flows and market performance recover or continue to pressure fee revenue, particularly in institutional and Japan subadvisory accounts.
- The drivers and potential recurrence of negative operating cash flow, including working-capital movements and consolidated-fund activity.
- The composition and future volatility of seed investments and other non-operating gains or losses, alongside the distinction between GAAP and adjusted results.
- Funding timing for the remaining co-investment commitment and the final amount and payment schedule of the Tax Act transition tax.
- How much of the announced institutional mandates ultimately funds, and whether the expected funding timing changes.