Business context and reporting period
Jones Lang LaSalle Incorporated’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2012. The firm provides real estate services across the Americas, EMEA and Asia Pacific, and global investment management services. Results are seasonal and transaction-sensitive; management cautions that first-half results are not indicative of full-year results.
Financial performance and liquidity
Unless noted otherwise, amounts are in U.S. dollars. Revenue includes gross contract costs, which increased reported revenue and expense but do not affect operating income.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $921.3m | $845.3m | $1,734.6m | $1,533.2m |
| Operating income | $58.1m | $65.6m | $72.7m | $77.6m |
| Net income | $37.7m | $45.1m | $51.9m | $46.7m |
| Net income attributable to common shareholders | $37.2m | $43.9m | $51.2m | $45.4m |
| Diluted EPS | $0.83 | $0.99 | $1.14 | $1.02 |
| Net interest expense | $7.5m | $9.6m | $14.9m | $17.6m |
- Revenue increased 9% in Q2 and 13% in the first half in U.S. dollars; local-currency growth was 13% and 16%, respectively. Fee revenue, excluding gross contract costs, rose 7% in Q2 and 11% year to date in U.S. dollars.
- Q2 operating income declined despite revenue growth, reflecting higher operating costs and restructuring and acquisition charges. The filing reports adjusted year-to-date operating margin on fee revenue of 6.4%, versus 5.9% in 2011, excluding restructuring and acquisition charges and specified King Sturge intangible amortization.
- First-half operating cash flow was an outflow of $122.6m, compared with an outflow of $136.3m in 2011. Investing activities used $25.9m, versus $257.9m; financing activities provided $79.6m, versus $238.0m. Cash declined by $69.0m to $115.5m.
- At June 30, cash was $115.5m, current assets $1,155.5m and current liabilities $991.3m. Total assets were $3,794.1m and total liabilities $2,039.4m.
- Credit-facility borrowings were $619.0m, up from $463.0m at year-end 2011; short-term borrowings were $19.6m. The unsecured $1.1bn revolving facility matures in June 2016. The firm reported covenant compliance. Management said net debt, including deferred acquisition obligations, declined $66m during Q2 to $802m.
Material changes and segment results
- Americas: Q2 fee revenue grew 12% in U.S. dollars and operating income rose to $38.4m from $32.5m; first-half operating income was $50.2m versus $41.1m.
- EMEA: Q2 fee revenue grew 14% in U.S. dollars (23% in local currency) and operating income rose to $13.0m from $6.4m. First-half operating income was $2.4m, compared with a $6.7m loss.
- Asia Pacific: Q2 fee revenue declined 3% in U.S. dollars but grew 1% in local currency; operating income fell to $13.2m from $21.6m. The firm cited weaker transactional activity, including lower Capital Markets and Hotels revenue.
- Investment Management: Q2 segment revenue was $59.3m versus $68.6m and operating income was $10.1m versus $15.3m. First-half operating income increased to $37.2m from $24.4m, helped by investment-venture earnings associated primarily with asset sales in Japan. Assets under management were $47bn at quarter-end.
- Restructuring and acquisition charges were $16.6m in Q2 and $25.6m for the first half, versus $6.1m in each comparable 2011 period; these primarily related to King Sturge integration and office lease exits.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided. Management forecasts 2012 co-investment net funding of $40m–$50m and an effective tax rate of approximately 25.4%. It expects adequate liquidity from the revolving facility, local borrowing facilities and operating cash flows.
- The firm expects quarterly revenue and profits generally to rise as the year progresses, but stresses that transaction volumes, incentive fees and asset-sale timing can produce significant variability.
- Potential unfunded co-investment commitments totaled a maximum of $280.5m. Maximum potential earn-out payments on 13 acquisitions were $139.8m, with most expected to come due by the end of 2013 if performance conditions are met. Deferred business acquisition obligations were $278.1m.
- Litigation claims may be substantial and may exceed available insurance; management does not expect their resolution to materially affect financial position, results or liquidity. Real estate venture impairments were $4.3m for the first half, and management notes further charges are possible if property values decline.
- Key exposures include global economic and real estate-market conditions, transaction activity, foreign exchange and variable interest rates. Foreign operations generated 56% of first-half revenue. The firm uses foreign-currency forwards but had no interest-rate swaps outstanding at quarter-end.
- The Stock Ownership Program was terminated in Q2. Management expects this to change the timing and number of restricted stock grants and said the change increased Q2 compensation expense by approximately $4m. At least 15% of annual incentive compensation for Global Executive Committee members will continue to be paid in restricted stock units.
- Two acquisitions were completed in July 2012. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth translates into improved operating income and margins as transaction-sensitive activity and restructuring costs evolve.
- Facility borrowing levels, covenant headroom, and the firm’s reported $802m net debt measure, which includes deferred acquisition obligations.
- Timing and cash impact of the $280.5m maximum unfunded co-investment commitments, acquisition obligations and conditional earn-outs.
- Performance and valuation of real estate venture investments, including impairment exposure and the timing of asset-sale-related earnings.
- How ending the Stock Ownership Program affects compensation expense, cash requirements and share dilution.
- Management’s full-year co-investment funding and tax-rate estimates, and the effects of seasonality, foreign exchange and market conditions.