Jones Lang LaSalle Incorporated — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. All figures are unaudited; dollar amounts below are in millions unless stated otherwise. The firm provides real estate services across the Americas, EMEA and Asia Pacific, and global investment management. Results are seasonal, and management cautions that nine-month results are not indicative of full-year performance.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $949.5 | $903.2 | $2,684.1 | $2,436.4 |
| Operating income | $65.9 | $54.4 | $138.5 | $132.0 |
| Net income | $49.7 | $33.9 | $101.6 | $80.6 |
| Net income attributable to the Company | $49.5 | $33.9 | $101.0 | $79.5 |
| Diluted EPS | $1.10 | $0.76 | $2.25 | $1.79 |
- Growth and margins: Q3 revenue rose 5% in U.S. dollars and 8% in local currency; fee revenue increased 2% and 5%, respectively. Nine-month revenue rose 10% in U.S. dollars and 13% in local currency; fee revenue grew 8% and 10%. Nine-month operating margin on fee revenue was 7.1%, versus 7.0% in 2011.
- Cash flow: Nine-month operating cash flow was $34.3, compared with cash used of $41.2 in 2011. Investing used $135.6, mainly for capital contributions to real estate ventures and capital expenditures; financing provided $42.5. Cash declined $58.7 to $125.7.
- Balance sheet and liquidity: At September 30, cash was $125.7 and total assets were $4,054.0. Current assets of $1,269.1 were below current liabilities of $1,313.4. Credit-facility borrowings were $572.0, up from $463.0 at year-end 2011; short-term borrowings were $30.8. The company reported $510.7 of remaining capacity on its $1.1 billion revolving facility, which matures in June 2016, and said it was compliant with its covenants.
- Other balance-sheet items: Deferred business acquisition obligations totaled about $290.2, current and noncurrent. Investments in real estate ventures were $295.5; goodwill was $1,816.9. Total equity was $1,858.9.
Material changes and segment results
- Americas: Q3 fee revenue grew 9% and operating income rose to $42.6 from $37.2. Nine-month operating income was $92.9, up from $78.3.
- EMEA: Q3 fee revenue declined 3% in local currency, chiefly on lower Capital Markets & Hotels activity; operating income was $4.4 versus $0.6. Nine-month operating income improved to $6.8 from a $6.0 loss.
- Asia Pacific: Q3 fee revenue grew 9% in local currency, but operating income fell to $12.2 from $13.9. Nine-month operating income declined to $32.3 from $41.0, with lower higher-margin transaction activity and increased costs pressuring margins.
- Investment Management: Q3 segment revenue was $82.3 and operating income was $24.2, up from $19.2. Nine-month operating income rose to $61.4 from $43.6. Asset-sale-related equity earnings were a key contributor; assets under management were $47 billion.
- Q3 equity earnings from real estate ventures were $10.7, compared with $0.5 in 2011; nine-month amounts were $22.5 versus $2.7, primarily reflecting asset sales. Nine-month restructuring and acquisition charges increased to $32.4 from $22.1, while Q3 charges fell to $6.8 from $16.0.
Outlook, risks and unusual items
- Management forecast a 2012 effective tax rate of approximately 25.4%, but provided no specific full-year revenue or earnings guidance. Management expects quarterly revenue and profits generally to build as the year progresses, while emphasizing transaction timing and performance fees make results variable.
- The Stock Ownership Program was terminated for 2012 performance. Management said this would change the timing and number of restricted stock grants and increase 2012 compensation expense relative to prior-year program accounting; Q3 compensation expense was about $3 higher as a result.
- At September 30, potential earn-out payments on 14 acquisitions had a maximum amount of $148.0; most could come due by the end of 2013 if performance conditions are met. Unfunded real estate co-investment commitments were up to $196.0. The company also disclosed an unquantifiable potential 2014 payment tied to an Indian acquisition.
- Real estate venture impairment charges included in equity earnings were $5.9 for the first nine months. Management warned that declines in real estate values could result in additional impairment or fair-value losses. Goodwill impairment testing found no indicators of impairment as of the quarter-end.
- Key risks include macroeconomic and real estate-market volatility, timing of transactions and incentive fees, foreign-exchange movements, variable interest rates, and litigation. The company reported foreign operations generated 55% of nine-month revenue and uses foreign-currency forwards; it had no interest-rate swaps outstanding.
- Management said ordinary-course litigation is not expected to materially affect financial position, results or liquidity, while noting claims may exceed insurance coverage. The board declared a $0.20-per-share semiannual dividend after quarter-end, payable December 14, 2012.
Important facts for investors to verify
- Whether revenue and fee-revenue growth, particularly in leasing and property/facility management, persisted beyond Q3, and whether EMEA and Asia Pacific margins recovered.
- How much of the increase in earnings came from asset-sale-related venture earnings, and whether those gains are repeatable.
- Cash conversion and working-capital trends, given the improvement in operating cash flow and the decline in cash balances.
- Debt, covenant headroom and funding needs for acquisition obligations, earn-outs and up to $196 million of co-investment commitments.
- The actual effects of ending the Stock Ownership Program on compensation expense, dilution and cash incentives.
- Developments in real estate valuations, venture impairments, litigation and other contingencies.