Jones Lang LaSalle Incorporated — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results. JLL provides real estate services across the Americas, EMEA and Asia Pacific, and investment management through LaSalle. Results are seasonal; management cautions that first-half performance is not fully indicative of full-year results.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,834.7m | $1,603.6m | $3,449.9m | $2,940.4m |
| Operating income | $104.3m | $113.9m | $126.6m | $143.3m |
| Net income attributable to common shareholders | $78.2m | $78.8m | $89.0m | $104.5m |
| Diluted EPS | $1.71 | $1.73 | $1.95 | $2.30 |
| Adjusted EBITDA | $158.2m | $159.8m | $232.1m | $244.8m |
| Net cash used in operating activities | Not separately provided | Not separately provided | $14.8m | $282.8m |
Q2 revenue rose 14% in U.S. dollars and 17% in local currency; first-half revenue rose 17% and 21%, respectively. Fee revenue, a company-defined non-GAAP measure, increased 17% in local currency in both periods. Operating income declined 8% in Q2 and 12% in the first half; adjusted EBITDA declined 2% and 5%, respectively. Q2 common-shareholder net margin was 4.3%, versus 4.9% a year earlier. The filing gives differing Q2 adjusted EBITDA margin figures in its discussion and table; verify the intended figure against the underlying filing.
At June 30, cash and cash equivalents were $250.3m, versus $258.5m at year-end 2016. Current assets were $3,399.3m and current liabilities $2,851.8m. Total debt, including short-term borrowings, the credit facility and long-term debt, was $1,396.6m, versus $1,267.6m at year-end; warehouse facilities were separately reported at $791.0m. The $2.75bn unsecured revolving facility had $675.0m drawn and $11.9m of letters of credit outstanding. JLL reported compliance with debt and warehouse-facility covenants.
First-half investing cash outflow was $84.5m, compared with $199.1m in 2016; financing cash inflow was $84.2m, compared with $477.5m. First-half operating cash flow remained negative, primarily reflecting the seasonal payment of accrued incentive compensation, though working-capital management and lower incentive payments improved cash flow year over year. The $393.2m net proceeds from newly issued euro notes were used to reduce credit-facility borrowings. The notes comprise €175m due 2027 at 1.96% and €175m due 2029 at 2.21%.
Changes, drivers and management commentary
- RES drove growth: Q2 revenue increased 19% in U.S. dollars; local-currency growth was 22%. Property & Facility Management led service-line growth, supported particularly by the Integral UK acquisition, completed in August 2016. Leasing also grew strongly.
- LaSalle revenue fell 41% in local currency in Q2, largely because the prior-year quarter included substantial incentive fees from asset sales. First-half LaSalle revenue declined 27% in local currency, also reflecting lower transaction fees. LaSalle AUM was $57.6bn at June 30, down 1% in U.S. dollars from March 31.
- EMEA revenue growth included Integral, but segment operating income declined; management cited the service-mix shift and ongoing integration, along with investments in data, technology and people. Americas delivered higher operating income and margins; Asia Pacific revenue grew, while its Q2 margin declined with the service-mix shift.
- Four strategic acquisitions were completed in the first half. Management said it would continue to consider acquisitions supporting market position, profitability and organic growth. Acquisition-related costs, integration, higher depreciation and increased interest expense weighed on results.
- JLL declared a $0.35-per-share semiannual dividend, paid June 15. No share repurchases were made in the first half; 1,563,100 shares remained authorized for repurchase.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management emphasizes seasonality, transaction timing, variable incentive compensation and the potential variability of LaSalle performance fees and co-investment earnings.
- Key exposures include economic and geopolitical conditions, real estate and credit-market activity, competition, litigation, interest rates and foreign exchange. Foreign operations generated 57% of first-half revenue. A 50-basis-point increase in short-term rates during 2017 was estimated to increase interest expense by $6.1m.
- Potential earn-out payments on completed acquisitions total up to $436.0m undiscounted, subject to performance conditions; $225.6m was accrued at fair value. Unfunded co-investment commitments were $215.3m. Management expects earn-outs, if achieved, to be paid over approximately six years.
- JLL said ordinary-course litigation is not expected to materially adversely affect financial position, results or liquidity, while noting claims may exceed insurance or be subject to large deductibles. No material risk-factor changes were reported.
- Management anticipated that adoption of ASC 606 would accelerate revenue recognition for certain fees and materially increase gross presentation for some property and facility management contracts; implementation analysis was ongoing. Lease accounting adoption was expected to increase reported assets and liabilities, but the impact had not been quantified.
- Foreign-currency translation contributed $129.1m of first-half other comprehensive income. Four new acquisitions resulted in preliminary goodwill of $24.0m and identifiable intangibles of $9.5m; purchase-price allocations remained subject to refinement.
Important facts for investors to verify
- Reconcile the filing’s differing Q2 adjusted EBITDA margin disclosures and review the non-GAAP reconciliations.
- Assess whether RES growth, particularly Integral-related Property & Facility Management revenue, translates into improved segment profitability and cash generation.
- Monitor LaSalle incentive and transaction fees, AUM movements, and the effect of their volatility on consolidated earnings.
- Review leverage, variable-rate facility exposure, debt maturities, warehouse-facility capacity and covenant headroom, including the effect of temporary capacity arrangements.
- Evaluate potential cash requirements from acquisition earn-outs, deferred acquisition obligations and unfunded co-investment commitments.
- Track ASC 606 and lease-standard implementation effects, as well as currency movements and contingent litigation or lending-loss exposures.