Jones Lang LaSalle Incorporated (JLL) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. JLL provides real estate services through Americas, EMEA and Asia Pacific segments, and investment management through LaSalle.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,277.2m | $989.4m | $2,314.6m | $1,845.4m |
| Operating income | $91.7m | $65.8m | $76.4m | $85.9m |
| Net income attributable to JLL | $71.9m | $46.5m | $87.8m | $59.7m |
| Diluted EPS | $1.58 | $1.03 | $1.94 | $1.32 |
| Net interest expense | $7.7m | $9.0m | $14.3m | $17.0m |
Q2 fee revenue increased 20% in U.S. dollars and 18% in local currency to $1,086.0m; fee-based operating expenses rose 18% in U.S. dollars. Management’s fee-revenue operating margin was 9.0%, versus 8.0%. For the first half, fee revenue rose 16% in local currency to $1,963.7m and the comparable margin was 6.0%, versus 5.7%. These fee measures exclude gross contract costs and differ from reported consolidated revenue and operating income.
Q2 revenue growth was broad-based: Americas fee revenue rose 22% in local currency, EMEA 24%, Asia Pacific 8%, and LaSalle segment revenue 13%. Asia Pacific capital markets and hotels revenue fell 29% in local currency in Q2. LaSalle reported $50.0bn of assets under management at June 30, up from $47.6bn at year-end, and raised $1.4bn in equity commitments during Q2.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was negative $146.4m, compared with negative $244.6m in 2013. Management cited improved earnings and working-capital management; payment of prior-year accrued incentive compensation remained a major cash use.
- Investing cash flow was negative $83.9m, including $67.6m of capital expenditures and $20.2m for acquisitions. Financing provided $228.3m. Cash declined $2.0m to $150.7m.
- At June 30, total assets were $4.78bn and total equity was $2.33bn. The current ratio was approximately 1.27, based on current assets of $1.83bn and current liabilities of $1.45bn.
- Credit-facility borrowings were $410.0m, up from $155.0m at December 31, 2013; $767.6m of additional capacity remained under the $1.2bn facility, which matures in 2018. Short-term borrowings were $24.7m and senior notes were $275.0m, bearing 4.4% and due in 2022. JLL reported compliance with facility covenants.
- Warehouse receivables and the corresponding warehouse facility were each $100.9m. JLL had $295.6m invested in real estate ventures and reported maximum potential unfunded co-investment commitments of $211.1m.
Changes, outlook and risks
- Compared with the prior year, Q2 operating income increased 39%, while first-half operating income decreased 11%. First-half results included $41.4m of restructuring and acquisition charges, versus $9.8m; this included a $34.5m indemnification-asset write-off offset by an equal tax benefit, with no net-income effect.
- First-half net income improved despite lower reported operating income, reflecting the tax benefit and higher equity earnings from real estate ventures. Management attributed higher equity earnings mainly to fair-value increases and gains on asset sales.
- JLL did not provide specific full-year revenue or earnings guidance. It cautioned that quarterly results are seasonal and not indicative of full-year results; transaction fees, performance fees, co-investment gains, incentive compensation and geographic mix of income can cause substantial period-to-period variation. Management’s estimated 2014 effective tax rate was approximately 25%, excluding the offsetting tax benefit noted above.
- Market and execution risks include economic and geopolitical conditions, real estate and credit markets, interest rates, foreign exchange movements, competition, and litigation. Foreign operations generated 59% of first-half revenue. The revolving facility is variable-rate debt; JLL uses foreign-exchange forwards for certain exposures and does not use derivatives for speculation.
- JLL said ordinary-course litigation was not expected, based on information then available, to materially affect financial position, results or liquidity, though claims may exceed insurance coverage. It reported no material change to previously disclosed risk factors.
- After quarter-end, JLL acquired CLEO Construction Management on July 31, 2014, expanding its healthcare project-management services. The filing does not provide the purchase price.
Important facts for investors to verify
- Whether fee-revenue growth and margin expansion persist, particularly as Q2 results benefited from strong regional activity and LaSalle gains and incentive fees.
- How operating cash flow and working capital develop after first-half incentive-compensation payments, and whether higher capital spending continues.
- Facility utilization, borrowing costs and covenant headroom as debt stood above its December 2013 level.
- The realization and timing of up to $211.1m in unfunded co-investment commitments and up to $32.2m in potential acquisition earn-outs.
- The effects of foreign-exchange changes, property-market conditions, potential litigation and the CLEO acquisition; the filing provides no CLEO purchase-price figure.