Jones Lang LaSalle Incorporated — Q3 2013 Form 10-Q
Business context and reporting period: Global commercial real estate services and investment management company. Unaudited quarter and nine months ended September 30, 2013; amounts below are U.S. dollars. Year-over-year comparisons are against 2012.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,106.8m (+17%) | $949.5m | $2,952.2m (+10%) | $2,684.1m |
| Operating income | $87.1m (+32%) | $65.9m | $173.0m (+25%) | $138.5m |
| Net income attributable to company | $62.9m (+27%) | $49.5m | $122.5m (+21%) | $101.0m |
| Diluted EPS | $1.39 | $1.10 | $2.71 | $2.25 |
| Net interest expense | $9.6m | $10.0m | $26.6m | $24.8m |
Q3 revenue increased 19% in local currency; nine-month revenue increased 11%. Disclosed fee-based operating margin, excluding restructuring and acquisition charges and King Sturge intangible amortization, was 9.4% versus 8.3% in Q3 and 7.1% in both nine-month periods. Nine-month reported operating cash flow was an outflow of $99.9m, versus inflow of $34.3m in 2012. Investing cash outflow was $112.2m; financing cash inflow was $179.6m. Cash declined $32.5m to $119.7m.
Segments and material changes
- Real Estate Services: Q3 fee revenue grew 11% in the Americas, 24% in EMEA and 19% in Asia Pacific in local currency. EMEA operating income rose to $17.9m from $4.6m; Americas operating income increased to $44.9m from $42.4m; Asia Pacific increased to $18.9m from $12.2m.
- Investment Management: Q3 segment revenue fell 9% in local currency and operating income declined to $16.8m from $24.2m, mainly due to lower equity earnings and incentive fees. Assets under management were $46.7bn at quarter end; the segment raised $3.3bn of capital in the first nine months.
- Capital Markets & Hotels was a key growth driver, with local-currency revenue up 46% in Q3 and 40% year to date. Companywide fee revenue rose 15% in local currency in Q3. Currency weakness in major Asia Pacific currencies reduced reported U.S.-dollar growth.
- Restructuring and acquisition charges declined to $4.9m in Q3 and $14.7m year to date, from $6.8m and $32.4m, respectively, in 2012.
Liquidity, debt and commitments
At September 30, cash was $119.7m; credit-facility borrowings were $445.0m, long-term senior notes were $275.0m, and short-term borrowings were $35.5m. The company reported $634.5m of additional capacity under its then-existing facility. On October 4, after quarter end, it renewed and expanded the revolving facility to $1.2bn, extended maturity to October 2018 and reduced pricing to LIBOR plus 1.00%–1.75%. The $275m senior notes mature in 2022 and carry a 4.4% coupon. The company reported compliance with debt covenants at quarter end.
Real estate venture investments totaled $287.7m. Maximum potential unfunded co-investment commitments were $198.5m. Deferred acquisition obligations were $130.3m, and potential earn-out payments on 11 acquisitions totaled up to $32.9m. The company paid $70.5m of deferred acquisition obligations in the first nine months, including $34.6m related to Staubach.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management cautions that quarterly results are seasonal and affected by transaction timing, incentive compensation accruals, investment performance fees and asset sales; interim results are not indicative of full-year performance.
- Management attributed operating-cash-flow deterioration mainly to receivables and other working-capital needs supporting revenue growth, and higher cash incentive payments following termination of the stock ownership plan.
- Key exposures include economic and property-market conditions, transaction-volume volatility, foreign exchange, interest rates, litigation and changes in legislation or regulation. Foreign operations generated 55% of nine-month revenue; currency effects materially affected reported growth. Forward contracts are used to manage certain currency exposures, not for speculation.
- Real estate venture valuations and acquisition earn-outs rely partly on Level 3 assumptions. The company recorded $3.0m of its share of venture impairment charges in the first nine months of 2013. Litigation claims may be substantial, though management did not expect their resolution to materially adversely affect financial position, results or liquidity.
- On October 3, the Americas segment CEO resigned; the global CEO assumed direct oversight. A $0.22-per-share semiannual dividend was declared October 28 for payment December 13, 2013.
Important facts for investors to verify
- Whether revenue growth and margin gains persist, particularly given transaction-driven Capital Markets growth and weaker Investment Management results.
- Whether working-capital requirements and incentive payments continue to pressure operating cash flow.
- Facility terms and covenant headroom following the October 4 refinancing, as well as the effect of higher facility borrowings on interest expense.
- The timing and funding of $198.5m in unfunded co-investment commitments, acquisition obligations and earn-outs.
- Exposure to currency movements, real estate investment impairments, Level 3 valuation assumptions and litigation or insurance claims.