Jones Lang LaSalle Incorporated — Q2 2011 Form 10-Q
Business context and period: Global real estate services and investment management company. This unaudited report covers the quarter and six months ended June 30, 2011, compared with the same 2010 periods. Results are seasonal: revenue and profit have historically been higher in the second half, so first-half results are not necessarily indicative of full-year performance.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data. Revenue growth percentages are reported-dollar growth unless noted.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $845.3 | $680.3 | $1,533.2 | $1,261.0 |
| Operating income | $65.6 | $57.3 | $77.6 | $75.3 |
| Net income attributable to the Company | $44.1 | $32.0 | $45.6 | $32.2 |
| Diluted EPS | $0.99 | $0.72 | $1.02 | $0.73 |
| Net interest expense | $9.6 | $12.9 | $17.6 | $24.2 |
| Equity earnings (losses) from real estate ventures | $4.1 | $(2.8) | $2.2 | $(8.9) |
- Revenue grew 24% in Q2 and 22% in the first half; growth in local currency was 17% in both periods. Management attributed growth to strength across the Real Estate Services regions.
- Operating margin was approximately 7.8% in Q2 2011 versus 8.4% a year earlier, and 5.1% for the first half versus 6.0%. Operating expenses rose 25% in reported dollars in Q2 and 23% in the first half, reflecting growth-related costs, business development and acquisition-related expenses.
- Q2 diluted EPS rose to $0.99 from $0.72; first-half diluted EPS was $1.02 versus $0.73.
- Improved results from real estate ventures reflected asset-sale gains and lower impairment charges. Venture-related impairment charges were $2.9 million in the first half, compared with $8.7 million in 2010.
Cash flow, debt and liquidity
- First-half operating cash flow was a use of $136.3 million, versus a use of $80.4 million in 2010. Management cited higher incentive compensation payments and increased working-capital needs accompanying revenue growth.
- Investing activities used $257.9 million, including $222.5 million for acquisitions and $36.2 million of capital expenditures. Financing activities provided $238.0 million, principally reflecting net borrowing.
- Cash and equivalents were $95.6 million at June 30, 2011, down from $251.9 million at December 31, 2010. The filing reports a current ratio of neither period; based on stated balance-sheet totals, current assets were below current liabilities at June 30.
- Credit-facility debt was $444.0 million and short-term borrowings were $45.2 million at quarter-end. In June, the company amended its unsecured facility: revolving capacity increased to $1.1 billion, the $195 million term loan was terminated, and maturity was extended to June 2016. Facility pricing was LIBOR plus 162.5 basis points; the reported effective debt rate was 1.9% in Q2, versus 4.0% in Q2 2010.
- The company said it was in compliance with all debt covenants and believed its facility, local borrowing facilities and operating cash flow would provide adequate liquidity. The facility requires leverage and interest-coverage tests. The company had $45.2 million of short-term borrowings, including $31.3 million of local overdrafts.
Material changes, outlook and risks
- Acquisitions: The company completed several acquisitions in the first half, including UK-based King Sturge in May, and increased its ownership of its Indian operation from 80% to 90%. Acquisitions contributed to goodwill and identifiable intangible assets; King Sturge purchase accounting remained preliminary. The UK Office of Fair Trading was reviewing the transaction, with completion expected by mid-September 2011.
- Outlook: The filing provides no specific full-year revenue or earnings guidance. Management expected 2011 net co-investment funding of $40–$50 million and noted that business generation and operating costs were supporting anticipated second-half activity. The company cautioned that results are seasonal and transactional revenue can vary substantially.
- Commitments: Maximum potential earn-out payments on 13 acquisitions were $155.4 million, subject to performance conditions over the following four years. Deferred business acquisition obligations totaled $438.8 million. Maximum potential unfunded commitments to LIC I and LIC II were $317.9 million; additional commitments to other real estate ventures were up to $8.6 million.
- Risks and contingencies: Real estate market declines could lead to further investment impairments. Other key exposures include transaction volumes, foreign-exchange movements, variable interest rates, self-insured claims and litigation. Management did not expect ordinary-course litigation to materially affect financial position, results or liquidity, based on information then available. Future dividends remained subject to Board approval.
- Subsequent event: In August 2011, the company acquired Trinity Funds Management, an Australian property fund manager with approximately $690 million of assets under management.
Important facts for investors to verify
- Whether second-half revenue growth and margins offset the first-half operating-margin decline, given seasonality and rising expenses.
- Cash conversion and working-capital trends, including incentive compensation payments, while cash balances have declined and acquisition spending has increased.
- Debt, covenant headroom and financing costs after the credit-facility amendment; the filing states covenant compliance but does not provide actual covenant ratios here.
- Final King Sturge purchase accounting, integration costs and the outcome of the UK competition review.
- Potential cash requirements from acquisition obligations, earn-outs, co-investment commitments and future real estate investment impairments.