Jones Lang LaSalle Incorporated — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited results; comparisons are with Q1 2011 unless noted. Jones Lang LaSalle provides real estate services across the Americas, EMEA and Asia Pacific, and global investment management services.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $813.3 million | $687.9 million | +18% reported; +19% local currency |
| Fee revenue, excluding gross contract costs | $744.3 million | $641.2 million | +16% reported; +17% local currency |
| Operating income | $14.6 million | $12.1 million | +21% |
| Net income attributable to the Company | $14.0 million | $1.5 million | Up from $1.5 million |
| Diluted earnings per share | $0.31 | $0.03 | Up $0.28 |
| Operating cash flow | $(196.1) million | $(197.2) million | Outflow narrowed slightly |
Operating margin on reported revenue was approximately 1.8%, versus 1.8% in Q1 2011. Net income attributable to the Company was $14.0 million; results included $11.8 million of equity earnings from real estate ventures, versus a $2.0 million loss a year earlier. The filing attributes the increase primarily to a Japanese fund sale. Interest expense, net, was $7.4 million, compared with $8.0 million. The reported effective tax rate was 25.4%.
Operating expenses were $798.7 million, including $9.0 million of restructuring and acquisition charges, primarily associated with King Sturge. Gross contract costs included in both revenue and expenses rose to $69.0 million from $46.7 million; these pass-through costs do not affect operating or net income. On a fee-revenue basis, operating income was $14.6 million, about 2.0% of fee revenue.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $101.8 million at March 31, 2012, down from $184.5 million at December 31, 2011.
- Total assets were $3.83 billion and total liabilities were $2.07 billion. Current assets were $1.13 billion and current liabilities $993.6 million.
- Borrowings under the $1.1 billion unsecured revolving facility were $632.0 million, up from $463.0 million at year-end. Short-term borrowings were $28.6 million. The facility matures in June 2016; its effective debt interest rate was 1.7% for the quarter.
- The Company reported compliance with its credit-facility covenants. Management said the facility, local borrowing capacity and operating cash flow would provide adequate liquidity and financial flexibility.
- Operating activities used $196.1 million of cash, chiefly reflecting payment of accrued annual incentive compensation. Investing activities used $16.1 million; financing activities provided $129.7 million. Cash declined by $82.6 million over the quarter.
Changes versus prior period and segment results
- Revenue grew across all three RES regions and service lines despite lower transaction activity in many core markets. Americas fee revenue rose 15% in local currency; EMEA rose 31%; Asia Pacific rose 14%.
- Americas operating income increased to $11.8 million from $8.6 million; fee-revenue margin improved to 3.6% from 3.0%.
- EMEA reported an operating loss of $10.5 million, improved from a $13.1 million loss. The filing describes Q1 as a seasonally loss-making quarter for the region; it cites King Sturge integration, market-share gains and Tetris growth. Excluding King Sturge intangible amortization, EMEA’s fee-revenue margin was a 4.5% loss versus an 8.9% loss.
- Asia Pacific operating income increased to $7.0 million from $5.5 million; fee-revenue margin improved to 4.3% from 3.9%.
- Investment Management operating income rose to $27.1 million from $9.0 million. Advisory fees declined 7% in reported dollars, while incentive fees were $8.4 million versus $3.5 million. Segment revenue included $11.7 million of equity earnings, compared with a $2.5 million loss. Assets under management were $47 billion.
Outlook, risks and unusual items
- No full-year earnings or revenue guidance is provided. Management cautions that Q1 is not indicative of full-year results: revenue and profits have historically increased as the year progresses, while expenses are incurred relatively evenly.
- Management estimated a 25.4% effective tax rate for 2012. It forecast net co-investment funding of $40–$50 million for 2012 and said it expects to continue pursuing co-investment opportunities.
- The May 1, 2012 dividend announcement declared a semiannual cash dividend of $0.20 per share, payable June 15, 2012 to shareholders of record May 15. Future dividends remain subject to Board approval.
- Potential earn-out payments on 14 acquisitions had a maximum amount of $153.7 million, expected to fall due over about three years if performance conditions are met. Deferred business acquisition obligations totaled $309 million.
- Maximum unfunded co-investment commitments were $356.1 million. The Company’s maximum potential unfunded commitment to LIC II was $261.9 million; other potential unfunded commitments outside LIC I and LIC II were $89.2 million.
- Key exposures include global economic and real estate market conditions, transaction timing and volume, foreign-exchange movements, variable interest rates, litigation and potential real estate investment impairments. The Company reported $1.7 billion gross notional foreign-exchange forwards and stated it does not use derivatives for trading or speculation.
- Ordinary-course litigation includes claims that may exceed insurance or be subject to large deductibles. Management said, based on information available, it does not expect ultimate resolution to materially adversely affect financial position, results or liquidity.
Most important facts for investors to verify
- How much of the profit improvement is repeatable: Q1 included significant real estate venture earnings tied primarily to a fund sale, while related incentive fees were expected to be recognized later when contingencies are satisfied.
- Whether operating cash generation improves after the seasonal first-quarter incentive-compensation outflow, given the $196.1 million operating cash outflow and lower cash balance.
- How higher facility borrowings, deferred acquisition obligations, earn-outs and unfunded co-investment commitments affect leverage and available liquidity.
- Whether segment growth and margins persist, particularly amid weaker transaction volumes and EMEA’s continued operating loss.
- The potential effects of currency changes, market deterioration and future impairment charges on reported results and the substantial goodwill balance.