Jones Lang LaSalle Incorporated — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited. Unless otherwise stated, dollar amounts below are in millions.
Business context
JLL provides commercial real estate services across the Americas, EMEA and Asia Pacific, and investment management through LaSalle. Results are seasonal and transaction-sensitive; incentive fees and co-investment gains can vary significantly with asset sales and client performance.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,366.0 | $1,106.8 | $3,680.6 | $2,952.2 |
| Operating income | $127.5 | $87.1 | $203.8 | $173.0 |
| Net income | $104.7 | $63.1 | $193.2 | $125.8 |
| Net income attributable to JLL | $104.3 | $62.9 | $192.1 | $122.5 |
| Diluted EPS | $2.30 | $1.39 | $4.24 | $2.71 |
| Net interest expense | $7.4 | $9.6 | $21.7 | $26.6 |
- Revenue increased 23% in both U.S. dollars and local currency in Q3; for the first nine months it rose 25% in U.S. dollars and 24% in local currency. Fee revenue, excluding gross contract costs, grew 19% in local currency in Q3 and 17% year to date.
- Management-reported operating margin on fee revenue was 10.8% in Q3 versus 9.4% a year earlier, and 7.8% year to date versus 7.0%. These margins exclude gross contract costs and restructuring and acquisition charges.
- LaSalle was a major growth driver: Q3 segment revenue was $162.4 million versus $73.9 million, including $70.6 million of incentive fees versus $9.3 million. Its nine-month incentive fees were $79.5 million versus $10.5 million.
- Americas Q3 operating income rose 7% in local currency; EMEA fell 7% and Asia Pacific fell 19%. Asia Pacific weakness included a 16% local-currency decline in Q3 Capital Markets & Hotels revenue.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was positive $38.6 million, compared with negative $99.9 million in 2013. Investing cash use was $111.5 million, including $103.7 million of capital additions; financing provided $82.8 million. Cash increased $9.8 million to $162.6 million.
- At September 30, cash was $162.6 million and current assets were $1,994.2 million against current liabilities of $1,760.3 million. Trade receivables were $1,216.3 million.
- Debt included $250.0 million drawn under the revolving facility, $275.0 million of senior notes due 2022, and $43.3 million of short-term borrowings. The $1.2 billion facility had $927.6 million of additional borrowing capacity; JLL reported covenant compliance. The notes bear 4.4% interest; facility pricing was LIBOR plus 1.13% at quarter-end.
- Investments in real estate ventures totaled $290.7 million. Maximum unfunded co-investment commitments were $203.6 million. Potential earn-outs on 15 acquisitions totaled up to $38.1 million, of which $22.0 million was accrued.
Material changes and unusual items
- Nine-month restructuring and acquisition charges were $41.4 million, including a $34.5 million write-off of a prior-acquisition indemnification asset. An equal previously unrecognized tax benefit offset the write-off, so it had no net-income effect. Q3 had no such charges.
- Q3 equity earnings from real estate ventures increased to $19.6 million from $6.6 million; nine-month equity earnings rose to $40.9 million from $21.1 million, mainly due to asset-sale gains and fair-value increases.
- Foreign currency translation reduced other comprehensive income by $90.6 million in Q3 and $51.6 million for the first nine months. Management noted that foreign-exchange movements affect reported results; 59% of nine-month revenue came from outside the U.S.
- Capital expenditures rose to $103.7 million from $55.2 million, primarily reflecting information-technology investment and $23.7 million of property spending by consolidated variable-interest entities.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management said quarterly and year-to-date results are not indicative of full-year results, citing seasonality, transaction timing, incentive compensation accruals, and variable LaSalle fees and co-investment gains.
- Management’s estimated 2014 effective tax rate was approximately 25%, excluding the offsetting indemnification-asset write-off and tax benefit. The reported nine-month tax provision was $29.9 million on $223.1 million of pretax income.
- Key exposures include real estate and credit-market conditions, geopolitical and regulatory developments, foreign exchange and variable interest rates, and litigation. JLL uses currency forwards and reported no material expected litigation impact based on information available; actual outcomes remain uncertain.
- JLL disclosed maximum unfunded real-estate investment commitments of $203.6 million and potential acquisition earn-outs. Certain foreign-country restrictions applied to assets representing about 5% of total net assets.
- Subsequent events: JLL acquired London residential broker WA Ellis on October 1, 2014. On October 29, the board declared a $0.25-per-share semiannual dividend, payable December 15, 2014. The board’s dividend declaration is not a commitment to future dividends.
Important facts for investors to verify
- Whether LaSalle incentive fees and real-estate venture gains are repeatable, and how results perform without these items.
- Whether revenue growth converts into sustained operating-margin and cash-flow improvement, particularly in EMEA and Asia Pacific.
- The effect of higher capital spending, working-capital movements and acquisition obligations on future cash generation and facility borrowing.
- The assumptions behind the $203.6 million co-investment commitments, $38.1 million maximum earn-outs, and fair-value estimates based substantially on Level 3 inputs.
- How foreign-exchange movements, seasonality, tax-rate changes and transaction-market conditions affect subsequent periods.