Jones Lang LaSalle Incorporated — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts are U.S. dollars unless stated otherwise. JLL provides real estate services across the Americas, EMEA and Asia Pacific, and investment management through LaSalle.
Financial performance and liquidity
- Q2 revenue: $1.373 billion, up 8% year over year in reported dollars and 16% in local currency. Fee revenue was $1.182 billion, up 9% reported and 17% in local currency.
- Q2 profit: Operating income was $103.0 million versus $91.7 million; net income attributable to JLL was $90.3 million versus $71.9 million. Diluted EPS was $1.98 versus $1.58. Adjusted EBITDA, a non-GAAP measure, was $157.4 million versus $132.4 million.
- First-half revenue and profit: Revenue was $2.577 billion, up 11% reported and 20% in local currency; fee revenue was $2.211 billion, up 13% reported and 20% in local currency. Operating income was $155.6 million versus $76.4 million; net income attributable to JLL was $132.2 million versus $87.8 million. Diluted EPS was $2.91 versus $1.94. Adjusted EBITDA was $247.2 million versus $184.4 million.
- Margins: Adjusted operating income margin on fee revenue was 8.9% in Q2 versus 9.0%; for the first half it was 7.2% versus 6.0%. Adjusted EBITDA margin on fee revenue was 13.3% versus 12.2% in Q2 and 11.2% versus 9.4% for the first half.
- Cash flow: First-half operating cash flow was negative $214.9 million versus negative $147.0 million. Investing cash flow was negative $92.3 million; financing cash flow was positive $255.6 million. Cash fell $59.4 million to $191.0 million.
- Balance sheet and debt: Total assets were $5.043 billion and equity $2.485 billion at June 30. Credit-facility borrowings were $330.0 million, short-term borrowings $22.2 million and senior notes $275.0 million. The notes bear 4.4% interest and mature in 2022. The $2.0 billion revolving facility had $23.0 million of letters of credit outstanding; JLL reported compliance with its covenants.
- Other measures: Real estate venture investments totaled $333.0 million. JLL reported maximum potential unfunded co-investment commitments of $177.8 million.
Material changes and management commentary
- Growth was broad-based. For the first half, Capital Markets & Hotels fee revenue rose 34% in reported dollars, Project & Development Services 17%, Property & Facility Management 2%, and LaSalle revenue 24%.
- LaSalle benefited from incentive fees and gains on legacy investment dispositions: first-half equity earnings were $36.8 million versus $20.3 million. Assets under management reached $56.0 billion, and LaSalle raised $3.0 billion of equity in the first half.
- EMEA and Asia Pacific revenue growth in local currency exceeded reported-dollar growth, reflecting U.S. dollar strength. Q2 adjusted operating margin was affected by technology and platform investments and transaction timing, management said.
- First-half operating cash use reflected payment of prior-year accrued incentives and increased working capital to support revenue growth. First-half capital expenditures were $45.4 million versus $67.6 million.
- The facility was amended in February 2015: capacity increased from $1.2 billion to $2.0 billion and maturity extended to February 2020. Pricing at June 30 was LIBOR plus 1.00%.
Outlook, risks and unusual items
- The filing gives no specific full-year revenue or earnings guidance. Management cautioned that interim results are not indicative of full-year results: the business is seasonal, transaction volumes fluctuate, incentive compensation is estimated through the year, and LaSalle performance fees and investment gains can vary substantially.
- Key exposures include macroeconomic and real estate market conditions, transaction activity, foreign exchange, interest rates, competition, geopolitical conditions, regulation and pending litigation. Foreign operations generated 57% of first-half revenue. JLL used foreign-currency forwards to hedge intercompany exposures and stated it did not use derivatives for speculation.
- First-half 2015 restructuring and acquisition charges were $2.6 million versus $41.4 million in 2014. The 2014 amount included a $34.5 million indemnification-asset write-off offset by an equal previously unrecognized tax benefit, with no net-income effect. The 2015 tax provision was $45.9 million versus a $5.0 million tax benefit in the 2014 first half.
- JLL said ordinary-course litigation was not expected to materially affect financial position, results or liquidity, while noting claims may exceed insurance or be subject to large deductibles. Professional indemnity accruals were $11.9 million at June 30.
- Potential earn-out payments on 18 acquisitions were capped at $55.3 million, with $35.7 million accrued. Subsequent to quarter-end, JLL announced acquisitions with total consideration, including maximum earn-outs, of $80.3 million.
Important facts for investors to verify
- Whether revenue and earnings momentum persists, particularly in transaction-sensitive Capital Markets & Hotels and LaSalle incentive fees and investment gains.
- Whether working-capital needs and incentive compensation payments continue to weigh on operating cash flow, and how cash conversion develops in the second half.
- Facility availability, covenant headroom and debt levels as JLL funds acquisitions, co-investments, dividends and other needs.
- The timing and amount of unfunded co-investment commitments, acquisition earn-outs and post-quarter acquisitions.
- How currency movements, transaction timing and platform investments affect reported growth and margins.
- Developments in litigation, professional indemnity claims and other contingencies.