Jones Lang LaSalle Incorporated — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. JLL provides real estate services through Americas, EMEA and Asia Pacific, and investment management through LaSalle.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1,603.6 million | $1,373.5 million | $2,940.4 million | $2,577.0 million |
| Fee revenue, excluding gross contract costs | $1,345.4 million | $1,181.8 million | $2,462.9 million | $2,210.9 million |
| Operating income | $113.9 million | $103.0 million | $143.3 million | $155.6 million |
| Net income attributable to JLL common shareholders | $78.8 million | $90.1 million | $104.5 million | $132.0 million |
| Diluted EPS | $1.73 | $1.98 | $2.30 | $2.91 |
| Adjusted EBITDA | $159.8 million | $156.0 million | $244.8 million | $244.4 million |
| Adjusted EBITDA margin on fee revenue | 11.6% | 13.2% | 9.6% | 11.1% |
Q2 revenue increased 17% reported and 19% in local currency; fee revenue rose 15%. For the first half, revenue increased 14% reported and 17% in local currency, while fee revenue grew 11% reported and 13% in local currency. Gross contract costs included in reported revenue were $258.2 million in Q2 and $477.5 million for the first half; they are reimbursable client costs and are excluded from fee revenue.
Operating income for the first half declined 8% reported (11% in local currency), despite higher revenue. Higher expenses, restructuring and acquisition charges, and lower equity earnings weighed on results. Net interest expense increased to $10.9 million in Q2 and $19.8 million for the half, reflecting higher average borrowings. The effective tax rate was 24.8%.
Cash flow, balance sheet and debt
- First-half operating cash flow was negative $282.8 million, versus negative $214.9 million a year earlier. Management cited annual incentive compensation payments and working-capital changes as major factors.
- Investing cash flow was negative $199.1 million, including $114.2 million of net capital additions, $93.0 million for new acquisitions, and $63.0 million of contributions to real estate ventures, partly offset by distributions and other items.
- Financing cash flow was positive $477.5 million, primarily reflecting net borrowings. Cash was $213.7 million at June 30, compared with $216.6 million at year-end 2015.
- Current assets were $2.45 billion and current liabilities $1.95 billion at June 30. Total assets were $6.34 billion; total liabilities were $3.52 billion.
- Credit-facility borrowings were $830.0 million gross ($808.5 million net of issuance costs), with $18.2 million of letters of credit. The facility was expanded from $2.0 billion to $2.75 billion and extended to June 2021; stated pricing was LIBOR plus 1.05% at quarter-end. JLL reported covenant compliance.
- Long-term senior notes were $275.0 million principal, due November 2022, at 4.4%. Short-term borrowings were $20.6 million. The filing reports $1.1 billion of principal borrowings across the facility and notes, in addition to short-term borrowings.
Segments and material changes
- Americas: First-half fee revenue rose 14%, but operating income declined 5% to $77.8 million. Growth was broad-based; higher costs and investment spending offset revenue gains.
- EMEA: First-half fee revenue increased 5%, while operating income fell 73% to $8.0 million. UK transactional activity weakened amid Brexit-related market and political uncertainty; Capital Markets & Hotels fee revenue declined 13% for the half.
- Asia Pacific: First-half fee revenue increased 10%, but operating income declined 21% to $16.2 million. Q2 operating income increased 13% year over year.
- LaSalle: First-half segment revenue increased 23% to $249.1 million and operating income rose 24% to $81.4 million, supported by incentive and transaction fees. Equity earnings fell to $21.6 million from $36.8 million. Assets under management were $59.1 billion at June 30.
Q2 LaSalle incentive fees included $51.9 million, largely from client asset sales. Across JLL, Project & Development Services and Property & Facility Management were key growth drivers; Capital Markets & Hotels was comparatively weak. Adjusted EBITDA was nearly flat for the first half, while its margin fell 1.5 percentage points to 9.6%.
Outlook, risks and unusual items
- The filing gives no specific numerical earnings or revenue guidance. Management cautions that first-half results are not indicative of full-year performance: the business is seasonal, incentive compensation is estimated through the year, and transaction and investment performance fees can vary with timing.
- Management cited ongoing investment in technology, data, people and regional platforms, as well as organic growth and acquisitions. It expects to continue considering acquisitions and co-investment opportunities.
- Brexit was added as a risk factor. Potential effects include market and currency volatility, weaker European or global conditions, and costs or uncertainty from divergent UK and EU regulation. JLL noted that a stronger U.S. dollar can adversely affect reported results.
- Other disclosed risks include macroeconomic and real estate market conditions, interest-rate and foreign-exchange movements, competition, litigation, and regulatory changes. Litigation is described as arising in the ordinary course; management did not expect its ultimate resolution to materially harm financial position, results or liquidity.
- Q2 included $10.3 million of restructuring and acquisition charges, versus $1.8 million a year earlier; first-half charges were $17.9 million versus $2.6 million. A $13.3 million gain on sale in a consolidated real estate venture contributed to other income and net income.
- JLL completed 16 acquisitions in the first half. After quarter-end, it closed the Integral UK acquisition for $251 million cash consideration, excluding working capital, with potential total consideration up to $341 million. Four additional announced acquisitions could involve up to $100 million in consideration.
Most important facts for investors to verify
- Whether revenue growth converts to improved operating profit and margins, particularly in EMEA and across the full year.
- The sustainability and timing of LaSalle incentive fees, co-investment gains and other transaction-driven revenue.
- Working-capital needs and seasonal incentive-compensation payments, given negative first-half operating cash flow.
- Debt use, interest expense, covenant headroom and acquisition-related cash and earn-out commitments. Potential earn-out payments were up to $301.4 million undiscounted at June 30; the fair-value accrual was $169.6 million.
- The financial contribution and integration costs of Integral UK and other acquisitions, and the effect of Brexit and currency movements on EMEA results.