JONES LANG LASALLE INC quarterly report, Q3 FY2011

Jones Lang LaSalle Incorporated — Q3 2011 Form 10-Q

Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. The company provides real estate services across the Americas, EMEA and Asia Pacific, and global investment management. Results are seasonal: revenue and profits have historically risen later in the year, so interim performance is not necessarily indicative of full-year results.

Financial performance

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Revenue	$903.2m	$708.4m	$2,436.4m	$1,969.4m
Operating income	$54.4m	$61.9m	$132.0m	$137.2m
Net income attributable to the company	$33.9m	$37.1m	$79.5m	$69.3m
Diluted EPS	$0.76	$0.84	$1.79	$1.57
Net interest expense	$9.7m	$11.5m	$27.2m	$35.7m

Revenue increased 27% in Q3 and 24% year to date in U.S. dollars; local-currency growth was 23% and 19%, respectively. Growth reflected gains across operating segments and acquisitions.
Operating income declined 12% in Q3 and 4% year to date. Operating margin was approximately 6.0% in Q3 versus 8.7% a year earlier, and 5.4% year to date versus 7.0%.
Net income attributable to the company fell 9% in Q3 but rose 15% year to date. The nine-month comparison benefited from improved equity results from real estate ventures and lower interest expense.
Operating cash flow was negative $41.2m for the first nine months, versus positive $108.1m in 2010. Investing cash outflow was $336.2m, and financing provided $211.1m. Cash declined to $85.7m from $251.9m at year-end 2010.
At September 30, assets were $3.76bn and total liabilities $2.12bn. Current assets were $1.19bn and current liabilities $1.14bn. Credit-facility borrowings were $567.0m, short-term borrowings $53.9m, and a separate $119.5m warehouse facility was matched by $119.5m of warehouse receivables.

Material changes versus prior period

EMEA revenue rose 46% in Q3 (38% in local currency), with approximately $60m contributed by King Sturge; the segment reported Q3 operating income of $0.6m, compared with $3.2m. Year-to-date EMEA operating loss was $6.0m.
Americas revenue rose 23% in Q3, while operating income was essentially flat at $37.2m. Asia Pacific revenue rose 22% and operating income increased to $13.9m from $7.4m.
Investment Management segment revenue increased 21% in Q3 and operating income rose 55%. The company reported $47.9bn of assets under management and nearly $5bn of net equity raised during 2011.
Operating expenses rose faster than revenue in Q3, including $16.0m of restructuring and acquisition charges. Nine-month charges were $22.1m, principally King Sturge retention bonuses, lease termination costs and transaction expenses.
Cash used in operations and investing increased, primarily reflecting incentive compensation payments, working-capital needs, acquisitions and higher capital expenditures. Nine-month acquisition-related cash payments were $234.0m; capital expenditures were $55.9m.

Outlook, risks and unusual items

No specific full-year revenue or earnings guidance is provided. Management said the credit facility, local borrowing facilities and operating cash flow were expected to provide adequate liquidity for current needs, while cautioning that quarterly results are seasonal and transaction-dependent.
In June 2011, the company amended its unsecured credit facility: the revolving commitment increased to $1.1bn and maturity extended to June 2016. The company had $567.0m outstanding and reported compliance with covenants. The facility requires leverage no greater than 3.50:1 through September 2013 and 3.25:1 thereafter, plus minimum cash-interest coverage of 3.00:1.
Acquisitions completed during the first nine months included King Sturge and businesses in the Americas, EMEA and Asia Pacific. The King Sturge purchase-price allocation remained preliminary. October acquisitions of Pacific Real Estate Partners and DST were subsequent events.
Potential earn-out payments on 14 acquisitions totaled a maximum $165.2m, contingent on future performance. Deferred acquisition obligations on the balance sheet totaled approximately $292m. Unfunded commitments to LIC I and LIC II could reach $281.1m; the company also disclosed up to $8.6m of other venture commitments.
Real estate venture investments were $222.2m. Nine-month equity earnings included $5.2m of impairment charges; further charges could arise if real estate values decline. Goodwill was $1.75bn, and the company’s annual impairment assessment found no indicators of impairment.
Foreign exchange, variable interest rates, macroeconomic and real estate market conditions, transaction volumes, and litigation are key risks. The company reported a $14.5m gross net liability on foreign-currency forwards, substantially offset in earnings by gains on hedged intercompany loans. It reported no material adverse effect expected from ordinary-course litigation, based on information available.
The board declared a $0.15-per-share semi-annual dividend payable December 15, 2011; future dividends remain subject to board approval. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

How much of reported revenue growth and earnings reflects acquired businesses, especially King Sturge, versus organic growth; and whether EMEA profitability improves as integration progresses.
Whether operating margins recover as acquisition, compensation and growth-related costs develop, given operating expenses grew faster than revenue in Q3.
Cash conversion and liquidity trends, including working-capital needs, incentive compensation payments, debt balances and covenant headroom.
The timing and potential cash impact of deferred acquisition obligations, contingent earn-outs and unfunded co-investment commitments.
Exposure to real estate investment impairments, currency movements, variable interest rates and the assumptions supporting goodwill valuations.