Jones Lang LaSalle Incorporated — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Amounts are U.S. dollars; financial statement figures are in millions unless noted. The filing reports unaudited interim results.
Business context and results
Jones Lang LaSalle provides real estate services through its Americas, EMEA and Asia Pacific regions, and provides global investment management through LaSalle. The company notes that revenue and profits are typically weighted toward the second half of the year; interim results are not necessarily indicative of full-year results.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $989.4 | $921.3 | $1,845.4 | $1,734.6 |
| Operating income | $65.8 | $58.1 | $85.9 | $72.7 |
| Net income attributable to the company | $46.5 | $37.4 | $59.7 | $51.5 |
| Diluted EPS | $1.03 | $0.83 | $1.32 | $1.14 |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(244.6) | $(122.6) |
Q2 revenue increased 7% in reported dollars and 8% in local currency; fee revenue rose 7% in local currency. Q2 operating income increased 13%. Approximate operating margin was 6.7% versus 6.3% in Q2 2012; approximate net income attributable to the company as a share of revenue was 4.7% versus 4.1%. For the first half, reported revenue increased 6% and operating income 18%; approximate operating margin was 4.7% versus 4.2%.
Drivers and material changes
- Capital Markets & Hotels was the leading growth driver: fee revenue increased 37% in local currency in both Q2 and the first half, supported by stronger transaction activity across regions.
- Property & Facility Management fee revenue grew 8% in local currency in Q2 and 7% for the first half. Leasing was flat in local currency in Q2; management cited hesitant corporate occupiers and weaker market volumes.
- Investment Management Q2 operating income rose to $19.7 million from $10.1 million, mainly reflecting higher equity earnings from asset sales and increased transaction and incentive fees. First-half operating income declined to $32.9 million from $37.2 million, principally because significant incentive fees recognized in Q1 2012 did not recur.
- First-half restructuring and acquisition charges fell to $9.8 million from $25.6 million. Q2 charges were $6.6 million, primarily severance and King Sturge integration costs.
- Net interest expense increased to $9.0 million in Q2 and $17.0 million in the first half, versus $7.5 million and $14.9 million, respectively, reflecting the 2012 issuance of $275 million of 4.4% senior notes, partly offset by lower accretion on acquisition obligations.
Cash, debt and liquidity
- Cash was $121.9 million at June 30, down from $152.2 million at year-end 2012. First-half operating cash outflow was $244.6 million, compared with $122.6 million in the prior-year period. Management attributed the outflow mainly to payment of annual incentive compensation and working-capital movements, including lower receivables collections.
- Investing activities used $62.8 million, including $45.3 million for acquisitions and related payments; financing activities provided $277.0 million, primarily through net credit-facility borrowings. Cash decreased by $30.3 million over the half-year.
- At June 30, the $1.1 billion revolving facility had $479.0 million outstanding and $600.5 million of additional borrowing capacity. Short-term borrowings were $50.7 million; senior notes were $275.0 million, due 2022 and bearing 4.4% interest. The warehouse facility liability of $98.2 million was matched by warehouse receivables.
- Total assets were $4.17 billion and total liabilities $2.24 billion. The company reported compliance with credit-facility and senior-note covenants. The revolving facility matures in June 2016 and bears variable-rate interest; the filing states pricing was LIBOR plus 162.5 basis points at quarter-end.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management said new corporate outsourcing clients were expected to begin generating revenue in the second half of 2013, following upfront transition costs. It anticipated 2013 net co-investment funding of $25 million to $35 million.
- LaSalle raised $1.8 billion of capital during Q2. Assets under management were $46.3 billion at June 30, down from $47.7 billion at March 31, primarily due to foreign-exchange movements.
- Foreign-currency translation adjustments reduced other comprehensive income by $87.8 million in the first half, compared with a $6.3 million reduction in the prior-year period. The company also reported that a weaker Japanese yen reduced reported-dollar growth in Asia Pacific.
- Potential unfunded co-investment commitments totaled up to $196.6 million. Potential acquisition earn-out payments were up to $27.8 million, with most expected over the following three years if performance conditions are met.
- The company identified exposure to economic and real estate market conditions, transaction timing, foreign exchange, variable interest rates and litigation. It believed ordinary-course litigation would not materially affect financial position, results or liquidity, while noting claims may exceed insurance coverage and deductibles.
- Management concluded disclosure controls were effective as of June 30, 2013, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether growth in transaction-driven Capital Markets & Hotels revenue continues and offsets weaker leasing activity.
- Whether new outsourcing contracts convert into revenue in the second half as management expected, and how transition costs affect margins.
- Operating cash conversion, receivables collection and the timing of incentive-compensation payments.
- Credit-facility utilization, borrowing capacity and covenant compliance as debt balances change.
- Realization of investment gains, incentive fees and the stated co-investment funding expectations; review the company’s exposure to unfunded commitments and acquisition earn-outs.
- Foreign-exchange effects on reported results and equity, and the sensitivity of variable-rate borrowings to interest-rate changes.