EX-99.1 2 exh_991.htm EXHIBIT 99.1

EXHIBIT 99.1

 

 

 

 

 

 

 

 

COLLIERS INTERNATIONAL

GROUP INC.

 

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

Third Quarter

September 30, 2015

 

 

 

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Unaudited)

(in thousands of US dollars, except per share amounts) - in accordance with accounting principles generally accepted in the

United States of America

 

   Three months   Nine months 
   ended September 30   ended September 30, 
   2015   2014   2015   2014 
Revenues  $420,278   $372,576   $1,165,872   $1,040,619 
                     
Cost of revenues   265,510    229,500    713,520    627,388 
Selling, general and administrative expenses   112,496    117,689    355,634    348,997 
Depreciation   5,482    4,766    16,125    14,392 
Amortization of intangible assets   4,312    3,555    11,943    11,476 
Acquisition-related items (note 6)   1,655    3,938    3,696    4,838 
Spin-off stock-based compensation costs (note 13)   -    -    35,400    - 
Spin-off transaction costs   1,013    -    14,147    - 
Operating earnings   29,810    13,128    15,407    33,528 
Interest expense, net   2,631    1,706    6,522    4,634 
Other income, net (note 7)   (461)   (217)   (287)   (936)
Earnings before income tax   27,640    11,639    9,172    29,830 
Income tax (note 8)   9,226    4,623    12,076    8,304 
Net earnings (loss) from continuing operations   18,414    7,016    (2,904)   21,526 
Net earnings from discontinued operations, net of income tax (note 5)   -    15,094    1,104    22,660 
Net earnings (loss)   18,414    22,110    (1,800)   44,186 
Non-controlling interest share of earnings (note 11)   4,566    4,521    13,386    14,656 
Non-controlling interest redemption increment (note 11)   6,185    (6,973)   (2,835)   3,189 
Net earnings (loss) attributable to Company  $7,663   $24,562   $(12,351)  $26,341 
                     
Net earnings (loss) per common share (note 12)                    
Basic                    
Continuing operations  $0.20   $0.26   $(0.37)  $0.10 
Discontinued operations   -    0.42    0.03    0.63 
   $0.20   $0.68   $(0.34)  $0.73 
Diluted                    
Continuing operations  $0.20   $0.26   $(0.37)  $0.10 
Discontinued operations   -    0.42    0.03    0.62 
   $0.20   $0.68   $(0.34)  $0.72 

 

The accompanying notes are an integral part of these financial statements.

 

Page 2 of 15
 

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

(Unaudited)

(in thousands of US dollars) - in accordance with accounting principles generally accepted in the United States of America

 

   Three months   Nine months 
   ended September 30   ended September 30 
   2015   2014   2015   2014 
                 
Net earnings (loss)  $18,414   $22,110   $(1,800)  $44,186 
                     
Foreign currency translation loss   (7,450)   (24,906)   (35,133)   (25,021)
                     
Comprehensive earnings (loss)   10,964    (2,796)   (36,933)   19,165 
Less: Comprehensive earnings (loss) attributable to                    
non-controlling shareholders   12,070    (8,216)   19,233    11,974 
Comprehensive earnings (loss) attributable to Company  $(1,106)  $5,420   $(56,166)  $7,191 

 

The accompanying notes are an integral part of these financial statements.

 

Page 3 of 15
 

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands of US dollars) - in accordance with accounting principles generally accepted in the United States of America

 

   September 30, 2015   December 31, 2014 
Assets          
Current Assets          
Cash and cash equivalents  $98,167   $90,003 
Accounts receivable, net of allowance of $20,350 (December 31, 2014 -          
$18,199)   269,675    294,174 
Income tax recoverable   13,516    13,041 
Inventories   18,227    9,461 
Prepaid expenses and other current assets   33,735    23,461 
Deferred income tax   19,561    26,956 
Assets held for spin-off (note 5)   -    250,723 
    452,881    707,819 
           
Other receivables   832    2,264 
Other assets   21,097    19,332 
Fixed assets   61,770    65,191 
Deferred income tax   90,273    79,067 
Intangible assets   118,312    114,812 
Goodwill   291,898    286,121 
Assets held for spin-off (note 5)   -    364,821 
    584,182    931,608 
   $1,037,063   $1,639,427 
           
Liabilities and shareholders' equity          
Current Liabilities          
Accounts payable  $83,085   $82,662 
Accrued liabilities   305,849    379,256 
Income taxes payable   10,311    9,599 
Unearned revenues   5,375    7,492 
Long-term debt - current (note 9)   3,778    18,671 
Contingent acquisition consideration - current (note 10)   1,531    6,385 
Deferred income tax   110    - 
Liabilities held for spin-off (note 5)   -    126,094 
    410,039    630,159 
           
Long-term debt - non-current (note 9)   316,265    235,320 
Contingent acquisition consideration (note 10)   23,915    14,656 
Other liabilities   23,360    23,341 
Deferred income tax   19,862    21,969 
Liabilities held for spin-off (note 5)   -    330,701 
    383,402    625,987 
Redeemable non-controlling interests (note 11)   134,527    150,066 
           
Shareholders' equity          
Common shares   381,965    310,401 
Contributed surplus   50,740    46,931 
Deficit   (273,294)   (118,242)
Accumulated other comprehensive loss   (57,702)   (13,887)
Total Company shareholders' equity   101,709    225,203 
Non-controlling interests   7,386    8,012 
Total shareholders' equity   109,095    233,215 
   $1,037,063   $1,639,427 

 

The accompanying notes are an integral part of these financial statements.

 

Page 4 of 15
 

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(in thousands of US dollars, except share information)

 

   Common shares           Accumulated         
   Issued and               other   Non-   Total 
   outstanding       Contributed      comprehensive   controlling   shareholders' 
   shares   Amount   surplus   Deficit   loss   interests   equity 
Balance, December 31, 2014   35,806,955   $310,401   $46,931   $(118,242)  $(13,887)  $8,012   $233,215 
Net loss   -    -    -    (1,800)   -    -    (1,800)
Other comprehensive loss   -    -    -    -    (35,133)   -    (35,133)
Other comprehensive earnings                                   
         attributable to NCI   -    -    -    -    (8,682)   (816)   (9,498)
NCI share of earnings   -    -    -    (13,386)   -    2,548    (10,838)
NCI redemption increment   -    -    -    2,835    -    -    2,835 
Distributions to NCI   -    -    -    -    -    (2,390)   (2,390)
Acquisition of businesses, net   -    -    -    -    -    32    32 
Spin-off distribution (note 5)   -    -    -    (139,121)   -    -    (139,121)
Subsidiaries’ equity transactions   -    -    999    -    -    -    999 
Subordinate Voting Shares:                                   
   Issued on exchange for NCI   1,997,956    66,692    -    -    -    -    66,692 
   Stock option expense   -    -    3,463    -    -    -    3,463 
   Stock options exercised   170,400    4,872    (1,128)   -    -    -    3,744 
   Tax benefit on options                                   
      exercised   -    -    475    -    -    -    475 
   Dividends   -    -    -    (3,580)   -    -    (3,580)
Balance, September 30, 2015   37,975,311   $381,965   $50,740   $(273,294)  $(57,702)  $7,386   $109,095 

 

The accompanying notes are an integral part of these financial statements.

 

Page 5 of 15
 

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands of US dollars) - in accordance with accounting principles generally accepted in the United States of America

 

   Three months ended  Nine months ended
   September 30  September 30
   2015  2014  2015  2014
Cash provided by (used in)            
             
Operating activities                    
Net earnings (loss) from continuing operations  $18,414   $7,016   $(2,904)  $21,526 
                     
Items not affecting cash:                    
Depreciation and amortization   9,794    8,321    28,068    25,868 
Spin-off stock based compensation   -    -    35,400    - 
Deferred income tax   14    1,481    (5,475)   899 
Other   1,187    (6,081)   6,298    (4,522)
                     
Changes in non-cash working capital:                    
Accounts receivable   (2,665)   12,954    17,538    25,146 
Inventories   (2,252)   3,158    (10,394)   (2,141)
Prepaid expenses and other current assets   1,775    3,249    (5,535)   (5,778)
Payables and accruals   44,592    3,058    (31,989)   (56,782)
Unearned revenues   (1,274)   (400)   (1,779)   328 
Other liabilities   (23)   (333)   (3,698)   (3,689)
Contingent acquisition consideration   (159)   (256)   (1,332)   (19,785)
Discontinued operations   -    29,770    29,416    50,692 
Net cash provided by operating activities   69,403    61,937    53,614    31,762 
                     
Investing activities                    
Acquisitions of businesses, net of cash acquired (note 4)   (11,626)   (4,975)   (28,900)   (43,966)
Purchases of fixed assets   (4,491)   (3,102)   (15,793)   (19,981)
Other investing activities   (3,778)   11,346    (7,166)   8,827 
Discontinued operations   -    (11,637)   (10,448)   (33,307)
Net cash used in investing activities   (19,895)   (8,368)   (62,307)   (88,427)
                     
Financing activities                    
Increase in long-term debt   752    10,986    593,255    244,945 
Repayment of long-term debt   (55,525)   (51,113)   (599,294)   (142,683)
Purchases of non-controlling interests, net   (4,317)   (1,311)   (5,210)   (12,926)
Contingent acquisition consideration   (209)   -    (4,192)   (5,750)
Proceeds received on exercise of options   88    2,075    3,743    8,606 
Incremental tax benefit on stock options exercised   (1,470)   545    475    3,513 
Dividends paid to common shareholders   -    (3,597)   (3,581)   (10,775)
Distributions paid to non-controlling interests   (5,290)   (5,902)   (12,778)   (19,316)
Repurchases of Subordinate Voting Shares   -    (10,249)   -    (20,355)
Financing fees paid   (83)   -    (3,029)   - 
Net cash (used in) provided by financing activities   (66,054)   (58,566)   (30,611)   45,259 
                     
Effect of exchange rate changes on cash   (9,011)   59    (19,322)   (1,293)
                     
Decrease in cash and cash equivalents   (25,557)   (4,938)   (58,626)   (12,699)
                     
Cash and cash equivalents, beginning of period   123,724    134,943    156,793    142,704 
                     
Cash and cash equivalents, end of period  $98,167   $130,005   $98,167   $130,005 

 

The accompanying notes are an integral part of these financial statements.

 

Page 6 of 15
 

COLLIERS INTERNATIONAL GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

(in thousands of US dollars, except per share amounts)

 

 

1. DESCRIPTION OF THE BUSINESS – Colliers International Group Inc. (“Colliers” or the “Company”) provides commercial real estate services to corporate and institutional clients in 41 countries around the world (67 countries including affiliates and franchisees). Colliers’ primary services are outsourcing & advisory services, lease brokerage, and sales brokerage. Operationally, Colliers is organized into three geographical regions – Americas, Europe, Middle East & Africa (“EMEA”), and Asia Pacific.

 

On June 1, 2015, “old” FirstService Corporation (“Old FSV”) completed a plan of arrangement (the “spin-off”) which separated Old FSV into two independent public companies – Colliers and “new” FirstService Corporation (“FirstService”). Under the spin-off, Old FSV shareholders received one Colliers share and one FirstService share of the same class as each Old FSV share previously held.

 

The historical operations of FirstService, including its results of operations, cash flows, and related assets and liabilities have been reclassified as discontinued operations for all periods presented herein (see note 5).

 

2. SUMMARY OF PRESENTATION – These unaudited Interim Condensed Consolidated Financial Statements (the “Financial Statements”) have been prepared by the Company in accordance with disclosure requirements for the presentation of interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America have been condensed or omitted in accordance with such disclosure requirements, although the Company believes that the disclosures are adequate to make the information not misleading. These Financial Statements should be read in conjunction with the audited consolidated financial statements of Old FSV for the year ended December 31, 2014.

 

These Financial Statements follow the same accounting policies as the most recent audited consolidated financial statements of Old FSV. In the opinion of management, the Financial Statements contain all adjustments necessary to a fair statement of the financial position of the Company as at September 30, 2015 and the results of operations and its cash flows for the three and nine month periods ended September 30, 2015. All such adjustments are of a normal recurring nature. The results of operations for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015.

 

During the three months ended June 30, 2015, a revenue transaction initially recorded in the fourth quarter of 2014 was reversed as it was determined through subsequent events that the revenue was not realized. The impact of this immaterial out of period adjustment was a reduction in revenue of $5,040, a reduction in net earnings of $635 and a reduction in diluted earnings per share from continuing operations of $0.02.

 

3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This ASU clarifies the principles for recognizing revenue and develops a common revenue standard for US GAAP and International Financial Reporting Standards (“IFRS”) and is effective for the Company on January 1, 2018. The Company is currently assessing the impact of this ASU on its financial position and results of operations.

 

In April 2015, FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. This ASU is effective for the Company on January 1, 2016, at which time the guidance will be applied retrospectively.

 

Page 7 of 15
 

4. ACQUISITIONS – During the nine months ended September 30, 2015, the Company acquired controlling interests in six businesses, four operating in the Americas (Texas, the US Northeast, Missouri and Florida) and two operating in EMEA (Belgium and Morocco). The acquisition date fair value of consideration transferred was as follows: cash of $28,900 (net of cash acquired of $1,189) and contingent consideration of $10,049 (2014 - cash of $43,966 and contingent consideration of $12,298). These acquisitions were accounted for by the purchase method of accounting for business combinations and accordingly, the consolidated statements of earnings do not include any revenues or expenses related to these acquisitions prior to their respective closing dates.

 

Certain vendors, at the time of acquisition, are entitled to receive a contingent consideration payment if the acquired businesses achieve specified earnings levels during the one- to four-year periods following the dates of acquisition. The ultimate amount of payment is determined based on a formula, the key inputs to which are (i) a contractually agreed maximum payment; (ii) a contractually specified revenue or earnings level and (iii) the actual revenue or earnings for the contingency period. If the acquired business does not achieve the specified revenue or earnings level, the maximum payment is reduced for any shortfall, potentially to nil.

 

Unless it contains an element of compensation, contingent consideration is recorded at fair value each reporting period. The fair value recorded on the consolidated balance sheet as at September 30, 2015 was $25,446 (see note 10). The estimated range of outcomes (undiscounted) for these contingent consideration arrangements is $33,330 to a maximum of $37,033. The contingencies will expire during the period extending to July 2020. During the nine months ended September 30, 2015, $5,524 was paid with reference to such contingent consideration (2014 - $25,535).

 

5. DISPOSALS – Discontinued operations include three businesses: (i) FirstService (which is comprised of Old FSV’s Residential Real Estate Services and Property Services segments) (ii) a U.S.-based commercial real estate consulting operation (previously reported in Old FSV’s Commercial Real Estate Services segment) and (iii) an REO rental operation (previously reported in Old FSV’s Residential Real Estate Services segment).

 

The spin-off of FirstService was completed on June 1, 2015, resulting in a distribution of one FirstService share of the same class as each Old FSV share previously held to all shareholders. The spin-off distribution was accounted for at the carrying amount, without gain or loss, and resulted in a reduction of shareholders’ equity of $139,121.

 

Colliers and FirstService were separated in to two independent public companies to enable each company to intensify its focus on its distinct brand, customers and industry dynamics and also have the flexibility to pursue independent value creation strategies while optimizing its capital structure and financial resources.

 

In July 2014, the Company completed the sale of the U.S.-based commercial real estate consulting operation for cash consideration of $12,100. The pre-tax gain on disposal was $6,607, before income tax expense of $3,023 resulting in a net gain of $3,584. In April 2014, the Company completed the sale of the REO rental operation for cash consideration of $1,500. The pre-tax loss on disposal was $2,699, before income tax expense of $268 resulting in a net loss of $2,967.

 

Page 8 of 15
 

Operating results of the discontinued operations are shown below:

 

   Three months ended  Nine months ended
   September 30  September 30
   2015  2014  2015  2014
Revenues  $-   $312,029   $479,636   $856,717 
                     
Cost of revenues   -    215,906    340,941    601,134 
Selling, general and administrative expenses   -    64,541    106,894    187,175 
Depreciation   -    3,935    7,566    11,803 
Amortization of intangible assets   -    2,151    4,253    6,549 
Acquisition-related items   -    795    214    1,118 
Operating earnings   -    24,701    19,768    48,938 
                     
Interest expense, net   -    1,733    993    5,193 
Other expense (income)   -    31    147    (97)
Earnings before income tax   -    22,937    18,628    43,842 
                     
Income tax expense   -    5,401    9,216    13,150 
Net operating earnings from discontinued operations   -    17,536    9,412    30,692 
                     
Net gain (loss) on disposal   -    3,283    -    316 
Net earnings from discontinued operations  $-   $20,819   $9,412   $31,008 
                     
Non-controlling interest share of earnings   -    2,855    4,566    5,097 
Non-controlling interest redemption increment   -    2,870    3,742    3,251 
Net earnings (loss) from discontinued operations                    
attributable to Company  $-   $15,094   $1,104   $22,660 
                     
Net earnings per share from discontinued operations                    
Basic  $-   $0.42   $0.03   $0.63 
Diluted   -    0.42    0.03    0.62 

 

The following table shows the assets and liabilities distributed upon the spin-off of FirstService on June 1, 2015 and the assets and liabilities held for spin-off as of December 31, 2014. The amounts allocated to goodwill represent the goodwill within the reporting units comprising the Residential Real Estate Services and Property Services segments of Old FSV.

 

Page 9 of 15
 

   June 1, 2015  December 31, 2014
Cash and cash equivalents  $38,700   $66,790 
Accounts receivable, net of allowance   130,483    115,143 
Income tax recoverable, net   6,027    16,262 
Inventories   12,076    9,489 
Prepaids and other assets   23,461    24,372 
Deferred income tax   18,982    18,667 
Current assets   229,729    250,723 
Capital assets   56,254    55,203 
Other assets and receivables   3,109    4,736 
Deferred income tax   9,153    4,572 
Intangible assets   83,911    82,877 
Goodwill   215,888    217,433 
Non-current assets   368,315    364,821 
Total assets  $598,044   $615,544 
           
Accounts payable  $40,883   $24,687 
Accrued liabilities   59,418    55,563 
Contingent acquisition consideration   4,729    4,586 
Income tax payable, net   -    5,650 
Unearned revenue   31,736    16,079 
Long-term debt   1,006    17,725 
Deferred income tax   1,804    1,804 
Current liabilties   139,576    126,094 
Long-term debt   224,915    221,632 
Contingent acquisition consideration   2,078    1,509 
Deferred income tax   14,023    14,236 
Other liabilities   12,117    12,398 
Non-current liabilities   253,133    249,775 
Redeemable non-controlling interests   66,214    80,926 
Total liabilities  $458,923   $456,795 

 

 

6. ACQUISITION-RELATED ITEMS - Acquisition-related expense is comprised of the following:

 

   Three months ended  Nine months ended
   September 30  September 30
   2015  2014  2015  2014
             
Transaction costs  $1,457   $2,756   $2,508   $3,691 
Contingent consideration fair value adjustments   107    1,067    902    1,032 
Contingent consideration compensation expense   91    115    286    115 
   $1,655   $3,938   $3,696   $4,838 

 

Page 10 of 15
 

7. OTHER INCOME - Other (income) expense is comprised of the following:

 

   Three months ended  Nine months ended
   September 30  September 30
   2015  2014  2015  2014
             
Disposal (gain) loss, net  $(375)  $37   $39   $9 
Unusual loss (gain)   (12)   (146)   39    (548)
Equity loss (earnings)   (74)   (108)   (365)   (397)
   $(461)  $(217)  $(287)  $(936)

 

8. INCOME TAX – The provision for income tax for the nine months ended September 30, 2015 reflected an effective tax rate of 131.7% (2014 - 27.8%) relative to the combined statutory rate of approximately 26.5% (2014 - 26.5%). The current period’s tax rate was impacted by $35,400 in non-tax deductible stock-based compensation costs, foreign tax rate differential and other discrete items. In the prior year period, the difference between the effective rate and the statutory rate was primarily related to foreign tax rate differential and discrete items.

 

9. LONG-TERM DEBT – On June 1, 2015, the Company entered into a credit agreement with a syndicate of banks to provide a multi-currency revolving credit facility (the “Facility”) of $525,000. The Facility has a 5-year term ending June 1, 2020 and bears interest at 1.50% to 2.75% over floating reference rates, depending on certain leverage ratios. The Facility requires a commitment fee of 0.30% to 0.55% of the unused portion, depending on certain leverage ratios. At any time during the term, the Company has the right to increase the Facility by up to $150,000 on the same terms and conditions as the original Facility.

 

The Company has granted the banks various collateral including an interest in all of the assets of the Company. The covenants require the Company to maintain certain ratios including financial leverage, interest coverage and net worth. The Company is limited from undertaking certain mergers, acquisitions and dispositions without prior approval.

 

In May 2015, Old FSV prepaid the remaining $12,500 outstanding balance on its 6.40% senior secured notes due September 2015. On June 1, 2015, in conjunction with the spin-off, Old FSV terminated its existing credit agreement and assigned the $150,000 principal balance of its 3.84% senior secured notes due January 2025 to FirstService.

 

10. FAIR VALUE MEASUREMENTS – The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2015:

 

      Fair value measurements at September 30, 2015
   Carrying value at         
   September 30, 2015  Level 1  Level 2  Level 3
                     
Contingent consideration liability  $25,446   $-   $-   $25,446 

 

The inputs to the measurement of the fair value of contingent consideration related to acquisitions are Level 3 inputs. The fair value measurements were made using a discounted cash flow model; significant model inputs were expected future operating cash flows (determined with reference to each specific acquired business) and discount rates (which range from 4% to 10.1%, with a weighted average of 9%). The wide range of discount rates is attributable to level of risk related to economic growth factors combined with the length of the contingent payment periods; and the dispersion was driven by unique characteristics of the businesses acquired and the respective terms for these contingent payments. Within the range of discount rates, there is data point concentration at the 4% and 10.1% levels. A 2% increase in the weighted average discount rate would reduce the fair value of contingent consideration by $950.

 

Page 11 of 15
 

Changes in the fair value of the contingent consideration liability are comprised of the following:

 

   2015
Balance, January 1  $21,041 
Amounts recognized on acquisitions   10,050 
Fair value adjustments   1,188 
Resolved and settled in cash   (5,524)
Other   (1,309)
Balance, September 30  $25,446 
      
Less: Current portion   1,531 
Non-current portion  $23,915 

 

11. REDEEMABLE NON-CONTROLLING INTERESTS – The minority equity positions in the Company’s subsidiaries are referred to as redeemable non-controlling interests (“RNCI”). The RNCI are considered to be redeemable securities. Accordingly, the RNCI is recorded at the greater of (i) the redemption amount or (ii) the amount initially recorded as RNCI at the date of inception of the minority equity position. This amount is recorded in the “mezzanine” section of the balance sheet, outside of shareholders’ equity. Changes in the RNCI amount are recognized immediately as they occur. The following table provides a reconciliation of the beginning and ending RNCI amounts:

 

 

   2015
      
Balance, January 1  $150,066 
RNCI share of earnings   10,838 
RNCI redemption increment   (2,835)
Distributions paid to RNCI   (10,388)
Purchases of interests from RNCI, net   (5,223)
RNCI exchanged for Subordinate Voting Shares (note 13)   (14,670)
RNCI recognized on business acquisitions   6,808 
Other   (69)
Balance, September 30  $134,527 

 

The Company has shareholders’ agreements in place at each of its non-wholly owned subsidiaries. These agreements allow the Company to “call” the non-controlling interest at a price determined with the use of a formula price, which is usually equal to a fixed multiple of average annual net earnings before extraordinary items, income taxes, interest, depreciation, and amortization. The agreements also have redemption features which allow the owners of the RNCI to “put” their equity to the Company at the same price subject to certain limitations. The formula price is referred to as the redemption amount and may be paid in cash or in Subordinate Voting Shares. The redemption amount as of September 30, 2015 was $125,154. The redemption amount is lower than that recorded on the balance sheet as the formula prices of certain RNCI are lower than the amount initially recorded at the inception of the minority equity position. If all put or call options were settled with Subordinate Voting Shares as at September 30, 2015, approximately 2,900,000 such shares would be issued; this would be accretive to net earnings per common share.

 

Increases or decreases to the formula price of the underlying shares are recognized in the statement of earnings as the NCI redemption increment.

 

Page 12 of 15
 

12. NET EARNINGS (LOSS) PER COMMON SHARE – Earnings per share calculations cannot be anti-dilutive, therefore diluted shares are not used in the denominator when the numerator is in a loss position. The following table reconciles the basic and diluted common shares outstanding:

 

 

   Three months ended  Nine months ended
(in thousands)  September 30  September 30
   2015  2014  2015  2014
             
Basic shares   37,973    35,975    36,825    35,946 
Assumed exercise of Company stock options   458    394    417    400 
Diluted shares   38,431    36,369    37,242    36,346 

 

13. STOCK-BASED COMPENSATION

 

Company stock option plan

The Company has a stock option plan for certain directors, officers and key full-time employees of the Company and its subsidiaries, other than its CEO. Options are granted at the market price for the underlying shares on the date of grant. Each option vests over a four-year term, expires five years from the date granted and allows for the purchase of one Subordinate Voting Share. All Subordinate Voting Shares issued are new shares. As at September 30, 2015, there were 1,294,750 options available for future grants.

 

Grants under the Company’s stock option plan are equity-classified awards. On June 1, 2015, the Company completed the spin-off of FirstService, and in connection with the spin-off, the exercise prices of the Company’s stock options were modified to 58.57% of the Old FSV amounts, reflecting the estimated fair value of the Company relative to Old FSV. All other conditions relating to the stock options including terms and vesting periods remained the same and there was no acceleration of vesting. As no incremental fair value was awarded in connection with the modification, it did not result in additional compensation expense.

 

There were 668,500 stock options granted during the nine months ended September 30, 2015 (2014 - 338,000). Stock option activity for the nine months ended September 30, 2015 was as follows:

 

         Weighted average   
      Weighted  remaining   
   Number of  average  contractual life  Aggregate
   options  exercise price  (years)  intrinsic value
Shares issuable under options -                    
Beginning of period   1,463,900   $20.92           
Granted   668,500    36.30           
Exercised   (170,400)   19.18           
Shares issuable under options -                    
End of period   1,962,000   $26.31    2.95   $28,061 
Options exercisable - End of period   767,650   $21.01    1.84   $15,031 

 

The amount of compensation expense recorded in the statement of earnings for the nine months ended September 30, 2015 was $3,463 (2014 - $1,688). As of September 30, 2015, there was $4,783 of unrecognized compensation cost related to non-vested awards which is expected to be recognized over the next 5 years. During the nine month period ended September 30, 2015, the fair value of options vested was $2,532 (2014 - $7,062).

 

Subsidiary stock option plan

Prior to June 1, 2015, Old FSV had a stock option plan at its Commercial Real Estate Services subsidiary. In conjunction with the spin off, the Company exchanged the redeemable non-controlling interests and stock options at this subsidiary for 1,997,956 Subordinate Voting Shares of the Company. Upon the exchange, the Company reclassified $16,622 of stock-based compensation liability and $14,670 of redeemable non-controlling interests to shareholders’ equity and also recognized $35,400 of stock-based compensation expense. Of the 1,997,956 Subordinate Voting Shares issued, 1,590,000 are subject to contractual retention and escrow periods of one to three years.

 

Page 13 of 15
 

14. CONTINGENCIES – In the normal course of operations, the Company is subject to routine claims and litigation incidental to its business. Litigation currently pending or threatened against the Company includes disputes with former employees and commercial liability claims related to services provided by the Company. The Company believes resolution of such proceedings, combined with amounts set aside, will not have a material impact on the Company’s financial condition or the results of operations.

 

15. SEGMENTED INFORMATION – Upon completion of the spin-off of FirstService on June 1, 2015, the Residential Real Estate Services and Property Services operating segments of Old FSV were distributed to shareholders. The Commercial Real Estate Services segment was retained and comprises the business of Colliers.

 

Effective June 1, 2015, Colliers identified three reportable operating segments, which are grouped geographically and based on the manner in which the segments are managed. Management assesses each segment’s performance based on operating earnings or operating earnings before depreciation and amortization. Corporate includes the costs of global administrative functions and the corporate head office.

 

 

OPERATING SEGMENTS

 

         Asia      
   Americas  EMEA  Pacific  Corporate  Consolidated
                
Three months ended September 30            
                
2015                         
Revenues  $223,870   $107,647   $88,468   $293   $420,278 
Depreciation and amortization   4,674    3,285    1,290    545    9,794 
Operating earnings   17,850    8,538    6,826    (3,404)   29,810 
                          
2014                         
Revenues  $201,913   $72,499   $97,948   $216   $372,576 
Depreciation and amortization   3,358    2,676    1,543    744    8,321 
Operating earnings   11,483    1,374    10,699    (10,428)   13,128 

 

         Asia      
   Americas  EMEA  Pacific  Corporate  Consolidated
                
Nine months ended September 30            
                
2015                         
Revenues  $613,364   $294,493   $257,269   $746   $1,165,872 
Depreciation and amortization   12,806    9,185    3,979    2,098    28,068 
Operating earnings   39,459    18,242    21,983    (64,277)   15,407 
                          
2014                         
Revenues  $568,395   $202,785   $268,848   $591   $1,040,619 
Depreciation and amortization   11,080    8,682    4,049    2,057    25,868 
Operating earnings   32,470    7,267    25,746    (31,955)   33,528 

 

Page 14 of 15
 

GEOGRAPHIC INFORMATION            
                
   United States  Canada  Australia  Other  Consolidated
                
Three months ended September 30            
                
2015                         
Revenues  $160,869   $56,237   $48,605   $154,567   $420,278 
Total long-lived assets   125,991    60,314    36,780    248,895    471,980 
                          
2014                         
Revenues  $127,248   $64,963   $55,207   $125,158   $372,576 
Total long-lived assets   93,353    54,883    52,407    209,873    410,516 

 

 

   United States  Canada  Australia  Other  Consolidated
                
Nine months ended September 30            
                
2015                         
Revenues  $429,820   $162,339   $137,577   $436,136   $1,165,872 
                          
2014                         
Revenues  $361,033   $181,394   $148,891   $349,301   $1,040,619 

 

Page 15 of 15
 

COLLIERS INTERNATIONAL GROUP INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE nine MONTH PERIOD ENDED September 30, 2015

(in US dollars)

November 3, 2015

 

The following Management’s Discussion and Analysis (“MD&A”) should be read together with the unaudited interim consolidated financial statements of Colliers International Group Inc. (the “Company” or “Colliers”) for the three and nine month periods ended September 30, 2015, the audited consolidated financial statements, and MD&A of the Company’s predecessor, FirstService Corporation (“Old FSV”), for the year ended December 31, 2014, and the unaudited pro forma consolidated financial statements of Colliers for the year ended December 31, 2014, as well as Old FSV’s Management Information Circular dated March 16, 2015 (the “Circular”). The interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). All financial information herein is presented in United States dollars.

 

The Company has prepared this MD&A with reference to National Instrument 51-102 – Continuous Disclosure Obligations of the Canadian Securities Administrators (the "CSA"). Under the US/Canada Multijurisdictional Disclosure System, the Company is permitted to prepare this MD&A in accordance with the disclosure requirements of Canada, which requirements are different from those of the United States. This MD&A provides information for the three and nine month periods ended September 30, 2015 and up to and including November 3, 2015.

 

Additional information about the Company, including the Circular and its Annual Information Form, which is included in Old FSV’s Annual Report on Form 40-F, can be found on SEDAR at www.sedar.com and on the US Securities and Exchange Commission website at www.sec.gov.

 

 

Colliers’ business

 

On June 1, 2015, Old FSV completed a plan of arrangement (the “spin-off”) which separated Old FSV into two independent publicly traded companies – Colliers International Group Inc., a global leader in commercial real estate services and a new FirstService Corporation (“FirstService”), the North American leader in residential property management and services. The spin-off was designed to enhance long-term value for shareholders by creating two independent and sustainable companies, each with the ability to pursue and achieve greater success by employing independent value creation strategies best suited to its core businesses and customers. Under the spin-off, Old FSV shareholders received one Colliers share and one FirstService share of the same class as each Old FSV share previously held.

 

Colliers reports its financial performance in three separate and distinct regions: Americas; Europe Middle East and Africa (“EMEA”); and Asia and Australasia (“Asia Pacific”). We split our service offerings into three lines of business: Outsourcing & Advisory, Lease Brokerage and Sale Brokerage. Each of these lines of business are described in detail in the Circular.

 

In conjunction with the spin-off, the Residential Real Estate Services and Property Services segments of Old FSV were transferred to FirstService. Colliers, as the successor to Old FSV, retained Commercial Real Estate Services segment of Old FSV. This MD&A presents the financial and operating results of Colliers on a continuing operations basis for all periods presented. The FirstService operations are presented as a discontinued operation for all periods presented.

 

 
 

Consolidated review

 

We reported strong revenue growth for the third quarter ended September 30, 2015 due to a combination of internal growth and recent acquisitions. Consolidated revenue growth was 13% relative to the same quarter in the prior year (25% measured in local currencies). Adjusted earnings per share (see “Reconciliation of non-GAAP measures” below) for the third quarter was $0.52, up 49% from $0.35 in the prior year quarter. Net earnings per share from continuing operations was $0.20, down from $0.26 in the prior year quarter primarily due to a recovery in the redeemable non-controlling interest (“RNCI”) redemption increment in the prior year period which occurred due to the revaluation of foreign currency denominated RNCI. Both adjusted earnings per share and GAAP earnings per share for the third quarter of 2015 would have been approximately $0.08 higher excluding foreign exchange impacts.

 

During the first nine months of 2015, the Company acquired controlling interests in six businesses, four operating in the Americas (Texas, the US Northeast, Missouri and Florida) and two operating in EMEA (Belgium and Morocco). The total initial cash consideration for these acquisitions was $28.9 million.

 

For both the third quarter and the nine months ended September 30, 2015, revenue growth was led by Outsourcing & Advisory services due to a combination of recent acquisitions of project management firms in France (Q4 2014) and the US Northeast (Q2 2015) and strong internal growth in the project management and valuation service lines in the Americas region.

 

   Three months ended     Nine months ended   
(in thousands of US$)  September 30  Growth  September 30  Growth
(LC = local currency)  2015  2014  in LC %  2015  2014  in LC %
                   
Outsourcing & Advisory  $154,239   $121,683    43%  $443,498   $349,170    42%
Lease Brokerage   136,742    126,709    18%   378,236    346,308    18%
Sales Brokerage   129,297    124,184    17%   344,138    345,141    10%
                               
Total revenues  $420,278   $372,576    25%  $1,165,872   $1,040,619    24%

 

 

Results of operations - three months ended September 30, 2015

 

Revenues for our third quarter were $420.3 million, 13% higher than the comparable prior year quarter (25% measured in local currencies). Internally generated revenues measured in local currencies were up 16% and recent acquisitions contributed 9% to revenue growth.

 

Adjusted EBITDA (see “Reconciliation of non-GAAP measures” below) for the third quarter was $43.0 million versus $31.0 million reported in the prior year quarter. Our Adjusted EBITDA margin was 10.2% of revenues versus 8.3% of revenues in the prior year quarter, primarily as a result of operating leverage from strong revenue growth and recent acquisitions. The operating earnings for the third quarter were $29.8 million, versus operating earnings of $13.1 million in the prior year period. The operating earnings margin was 7.1% versus 3.5% in the prior year quarter.

 

Depreciation expense was $5.5 million, versus $4.8 million recorded in the prior year quarter, with the increase attributable to investments in office leasehold improvements and the impact of business acquisitions in the past year.

 

Amortization expense was $4.3 million, versus $3.6 million recorded in the prior year quarter, as a result of additional intangible assets acquired in conjunction with recent business acquisitions.

 

Net interest expense was $2.6 million, versus $1.7 million recorded in the prior year quarter. The average interest rate on debt during the quarter was 3.1%, up slightly from 2.8% in the prior year quarter.

 

The consolidated income tax expense for the quarter was $9.2 million, relative to $4.6 million the prior year quarter, reflecting effective tax rates of 33.4% and 39.7%, respectively. The effective tax rate in both periods was impacted by foreign tax rate differential and discrete items.

 

The net earnings from continuing operations for the quarter was $18.4 million, versus earnings of $7.0 million in the prior year quarter. The current period’s results were attributable to strong revenue and margin growth in the Americas and EMEA regions, lower stock-based compensation expense and the elimination of $3.3 million of FirstService-related corporate costs incurred in the prior period.

 

Page 2 of 13
 

Net earnings from discontinued operations include FirstService, which was spun off on June 1, 2015, as well as a US-based commercial real estate consulting operation which was sold in July 2014, and a REO rental operation which was sold in April 2014. Revenues of the discontinued operations for period owned during the third quarter of 2015 were nil (2014 - $312.0 million).

 

The Americas region generated $223.9 million of revenues during the third quarter, an increase of 18% from the prior year quarter measured in local currencies. Internal growth was 12% while the balance of growth resulted from recent acquisitions. Internal revenue growth was comprised primarily of increased Sales Brokerage revenues in the US as well as higher Outsourcing & Advisory revenues in the US and Canada, particularly project management and valuations. Third quarter adjusted EBITDA was $22.8 million, up 55% versus the year-ago period, with a margin of 10.2% versus 7.3% in the prior period, primarily due to operating leverage.

 

The EMEA region generated $107.6 million of revenues during the third quarter, an increase of 67% from the prior year quarter measured in local currencies. Internal growth was 30% while the balance of growth came from recent acquisitions. Internal revenue growth was comprised primarily of increased Sales Brokerage and Lease Brokerage in Germany, the UK and Poland, as well as Outsourcing & Advisory revenues, particularly project management. Third quarter adjusted EBITDA was $13.2 million, up 73% versus the year-ago period, at a margin of 12.3% versus 10.5% in the prior year period. Results in the current year period were favorably impacted by operating leverage from internal revenue growth.

 

The Asia Pacific region generated $88.5 million of revenues during the third quarter, an increase of 8% from the prior year quarter measured in local currencies, but down from $97.9 million reported in the prior year period. Revenue growth came entirely from internal sources and was comprised primarily of increased Sales and Lease Brokerage in the Australia and New Zealand markets. Third quarter adjusted EBITDA was $8.7 million, versus $12.4 million in the year-ago period, and was impacted by recruiting costs for new Asia leadership team members as well as transactions costs for an acquisition that was ultimately not completed.

 

Corporate costs were $1.7 million for the third quarter, relative to $3.7 million in the comparable prior year period, and were positively impacted by foreign currency translation of expenses and as well as lower compensation costs due to reduced headcount.

 

Results of operations - nine months ended September 30, 2015

 

Revenues for the nine months ended September 30, 2015 were $1.17 billion, 12% higher than the comparable prior year period (24% measured in local currencies). Internally generated revenues measured in local currencies were up 13% and acquisitions contributed 11% to revenue growth.

 

Year to date Adjusted EBITDA (see “Reconciliation of non-GAAP measures” below) was $102.2 million, up 28% over the comparable prior year period. Our Adjusted EBITDA margin was 8.8% of revenues versus 7.7% of revenues in the prior year period, primarily due to operating leverage in the Americas and EMEA regions. The operating earnings for the period were $15.4 million, relative to $33.5 million in the prior year period, with the difference attributable to spin-off transaction costs and stock-based compensation. Our operating earnings margin was 1.3% (5.7% excluding spin-off charges) versus 3.2% in the prior year period.

 

We recorded depreciation expense of $16.1 million for the nine month period relative to $14.4 million for the comparable prior year period. The increase was attributable to recent investments in office leaseholds in major markets as well as fixed assets acquired with acquisitions during the past year.

 

We recorded amortization expense of $11.9 million for the nine month period relative to $11.5 million for the prior year period. The increase was attributable to short-lived backlog intangible assets acquired in conjunction with recent business acquisitions.

 

Page 3 of 13
 

Net interest expense for the nine month period was $6.5 million, up from $4.6 million recorded in the prior year period. The average interest rate on debt during the period was 2.5%, versus 2.7% in the prior year period, while indebtedness increased $45.9 million as a result of business acquisitions completed since September 30, 2014.

 

Consolidated income tax expense for the nine month period was $12.1 million, relative to $8.3 million the prior year period, reflecting effective tax rates of 131.7% and 27.8%, respectively. The current period’s tax rate was impacted by $35.4 million of non-tax deductible spin-off stock-based compensation costs recorded during the second quarter; excluding this item, the tax rate for the nine month period was 27.1%. The effective tax rate is also impacted by foreign rate differential and other discrete items. The prior period’s tax rate was impacted by foreign rate differential and discrete items.

 

The net loss from continuing operations for the nine month period was $2.9 million, versus earnings of $21.5 million in the prior year period. The change was attributable to the spin-off stock-based compensation costs and spin-off transaction costs totalling $49.5 million recorded in the current period.

 

Net earnings from discontinued operations include FirstService, which was spun off on June 1, 2015, a US-based commercial real estate consulting operation which was sold in July 2014 and the REO rental operation which was sold in April 2014. Revenues of the discontinued operations for the nine months ended September 30, 2015 were $479.6 million (2014 - $856.7 million).

 

The Americas region reported revenues of $613.4 million during the nine months ended September 30, 2015, an increase of 15% measured in local currencies (8% measured in the reporting currency). Internal growth measured in local currencies was 10% and recent acquisitions contributed 5% revenue growth. Adjusted EBITDA for the period was $53.5 million, up from $41.7 million in the year-ago period. The margin was 8.7%, relative to 7.3% in the prior year period, and was favorably impacted by operating leverage and recent acquisitions.

 

The EMEA region reported revenues of $294.5 million during the nine months ended September 30, 2015, an increase of 65% measured in local currencies (45% measured in the reporting currency). Internal growth measured in local currencies was 25% and was driven by strong Sales and Lease Brokerage activity in Germany and the UK. Recent acquisitions contributed 40% revenue growth. Adjusted EBITDA for the period was $31.0 million, up from $19.4 million in the year-ago period. The margin was 10.5%, relative to 9.6% in the prior year period. The current period’s results were favorably impacted by operating leverage.

 

The Asia Pacific region reported revenues of $257.3 million during the nine months ended September 30, 2015, an increase of 9% measured in local currencies (decrease of 4% measured in the reporting currency). Internal growth measured in local currencies was 8% and was driven by Lease and Sales Brokerage activity in Australia and New Zealand. Recent acquisitions contributed 1% revenue growth. Adjusted EBITDA for the period was $26.7 million, versus $29.9 million in the year-ago period. The margin was 10.4%, relative to 11.1% in the prior year period.

 

Corporate costs for the nine month period were $9.0 million, relative to $11.4 million in the prior year period, and were impacted by foreign currency translation of expenses as well as reduced compensation expense from lower headcount.

 

Summary of quarterly results (unaudited)

 

The following table sets forth our unaudited quarterly consolidated results of operations data related to the continuing operations of Colliers. The information in the table below has been derived from unaudited interim consolidated financial statements that, in management’s opinion, have been prepared on a consistent basis and include all adjustments necessary for a fair presentation of information. The information below is not necessarily indicative of results for any future quarter.

 

 

Page 4 of 13
 

Quarter  Q1  Q2  Q3  Q4
(in thousands of US$, except per share amounts)            
             
YEAR ENDING DECEMBER 31, 2015            
Revenues  $335,762   $409,832   $420,278      
Operating earnings (loss)   2,343    (16,748)   29,810      
Net earnings (loss) per share from continuing operations:                    
Basic   0.22    (0.79)   0.20      
Diluted   0.22    (0.79)   0.20      
                     
YEAR ENDED DECEMBER 31, 2014                    
Revenues  $299,518   $368,525   $372,576   $541,652 
Operating earnings   1,737    18,663    13,128    44,628 
Net earnings (loss) per share from continuing operations:                    
Basic   (0.11)   (0.05)   0.26    0.75 
Diluted   (0.11)   (0.05)   0.26    0.74 
YEAR ENDED DECEMBER 31, 2013                    
Revenues  $244,384   $308,496   $320,274   $433,384 
Operating earnings (loss)   (9,656)   8,440    6,427    37,173 
Net earnings (loss) per share from continuing operations:                    
Basic   (0.62)   (0.08)   (0.22)   0.23 
Diluted   (0.62)   (0.08)   (0.22)   0.23 
                     
OTHER DATA                    
Adjusted EBITDA - 2015  $14,583   $44,565   $43,043      
Adjusted EBITDA - 2014   14,353    34,344    31,022   $67,053 
Adjusted EBITDA - 2013   1,117    23,230    23,723    56,918 
Adjusted EPS - 2015   0.10    0.58    0.52      
Adjusted EPS - 2014   0.07    0.44    0.35    0.97 
Adjusted EPS - 2013   (0.28)   0.26    0.33    0.71 

 

Seasonality and quarterly fluctuations

 

The Company generates peak revenues and earnings in the month of December followed by a low in January and February as a result of the timing of closings on commercial real estate sales brokerage transactions. Revenues and earnings during the balance of the year are relatively even. These sales brokerage operations comprise approximately 30% of our annual consolidated revenues. Variations can also be caused by business acquisitions or dispositions which alter the consolidated service mix.

 

Reconciliation of non-GAAP measures

 

In this MD&A, we make reference to “adjusted EBITDA” and “adjusted earnings per share”, which are financial measures that are not calculated in accordance with GAAP.

 

Adjusted EBITDA is defined as net earnings from continuing operations, adjusted to exclude: (i) income tax; (ii) other expense (income); (iii) interest expense; (iv) depreciation and amortization; (v) acquisition-related items; (vi) spin-off stock-based compensation costs; (vii) spin-off transaction costs; (viii) corporate costs allocated to spin-off and (ix) stock-based compensation expense. We use adjusted EBITDA to evaluate our own operating performance and our ability to service debt, as well as an integral part of our planning and reporting systems. Additionally, we use this measure in conjunction with discounted cash flow models to determine the Company’s overall enterprise valuation and to evaluate acquisition targets. We present adjusted EBITDA as a supplemental measure because we believe such measure is useful to investors as a reasonable indicator of operating performance because of the low capital intensity of the Company’s service operations. We believe this measure is a financial metric used by many investors to compare companies, especially in the services industry. This measure is not a recognized measure of financial performance under GAAP in the United States, and should not be considered as a substitute for operating earnings, net earnings from continuing operations or cash flow from operating activities, as determined in accordance with GAAP. Our method of calculating adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers. A reconciliation of net earnings (loss) from continuing operations to adjusted EBITDA appears below.

 

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   Three months ended  Nine months ended
(in thousands of US$)  September 30  September 30
   2015  2014  2015  2014
Net earnings (loss) from continuing operations  $18,414   $7,016   $(2,904)  $21,526 
Income tax   9,226    4,623    12,076    8,304 
Other income, net   (461)   (217)   (287)   (936)
Interest expense, net   2,631    1,706    6,522    4,634 
Operating earnings   29,810    13,128    15,407    33,528 
Depreciation and amortization   9,794    8,321    28,068    25,868 
Acquisition-related items   1,655    3,938    3,696    4,838 
Spin-off stock-based compensation costs   -    -    35,400    - 
Spin-off transaction costs   1,013    -    14,147    - 
Corporate costs allocated to spin-off   -    3,272    2,010    5,817 
Stock-based compensation expense   771    2,363    3,463    9,668 
Adjusted EBITDA  $43,043   $31,022   $102,191   $79,719 

 

Adjusted earnings per share is defined as diluted net earnings (loss) per share from continuing operations, adjusted for the effect, after income tax, of: (i) the non-controlling interest redemption increment; (ii) amortization expense related to intangible assets recognized in connection with acquisitions; (iii) acquisition-related items; (iv) spin-off stock-based compensation costs; (v) spin-off transaction costs; (vi) corporate costs allocated to spin-off and (vii) stock-based compensation expense. We believe this measure is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company and enhances the comparability of operating results from period to period. Adjusted earnings per share is not a recognized measure of financial performance under GAAP, and should not be considered as a substitute for diluted net earnings per share from continuing operations, as determined in accordance with GAAP. Our method of calculating this non-GAAP measure may differ from other issuers and, accordingly, this measure may not be comparable to measures used by other issuers. A reconciliation of net earnings (loss) from continuing operations to adjusted net earnings and of diluted net earnings (loss) per share from continuing operations to adjusted earnings per share appears below.

 

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   Three months ended  Nine months ended
(in thousands of US$)  September 30  September 30
   2015  2014  2015  2014
             
Net earnings (loss) from continuing operations  $18,414   $7,016   $(2,904)  $21,526 
Non-controlling interest share of earnings   (4,566)   (4,521)   (13,386)   (14,656)
Amortization of intangible assets   4,312    3,555    11,943    11,476 
Acquisition-related items   1,655    3,938    3,696    4,838 
Spin-off stock-based compensation costs   -    -    35,400    - 
Spin-off transaction costs   1,013    -    14,147    - 
Corporate costs allocated to spin-off   -    3,295    2,048    5,890 
Stock-based compensation expense   771    2,363    3,463    9,668 
Income tax on adjustments   (1,597)   (2,575)   (9,067)   (6,649)
Non-controlling interest on adjustments   -    (389)   (163)   (970)
Adjusted net earnings  $20,002   $12,682   $45,177   $31,123 

 

 

   Three months ended  Nine months ended
(in US$)  September 30  September 30
   2015  2014  2015  2014
Diluted net earnings (loss) per share from continuing operations  $0.20   $0.26   $(0.37)  $0.10 
Non-controlling interest redemption increment   0.16    (0.19)   (0.08)   0.09 
Amortization of intangible assets, net of tax   0.08    0.07    0.22    0.21 
Acquisition-related items   0.04    0.10    0.10    0.13 
Spin-off stock-based compensation costs   -    -    0.95    - 
Spin-off transaction costs, net of tax   0.02    -    0.27    - 
Corporate costs allocated to spin-off, net of tax   -    0.06    0.04    0.11 
Stock-based compensation expense, net of tax   0.02    0.05    0.08    0.23 
Adjusted earnings per share  $0.52   $0.35   $1.21   $0.86 

 

We believe that the presentation of adjusted EBITDA and adjusted earnings per share, which are non-GAAP financial measures, provides important supplemental information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. We use these non-GAAP financial measures when evaluating operating performance because we believe that the inclusion or exclusion of the items described above, for which the amounts are non-cash or non-recurring in nature, provides a supplemental measure of our operating results that facilitates comparability of our operating performance from period to period, against our business model objectives, and against other companies in our industry. We have chosen to provide this information to investors so they can analyze our operating results in the same way that management does and use this information in their assessment of our core business and the valuation of the Company. Adjusted EBITDA and adjusted earnings per share are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs or benefits associated with the operations of our business as determined in accordance with GAAP. As a result, investors should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP.

 

Liquidity and capital resources

 

Net cash provided by operating activities for the nine month period ended September 30, 2015 was $53.6 million, versus $31.8 million in the prior year period. Excluding discontinued operations, the net cash provided by operating activities in the period was $24.2 million, versus $18.9 million of cash usage in the prior year period (the prior year included $19.8 million of contingent acquisition consideration paid to sellers of a previously acquired business). The cash provided by operations reflects cash generation in the third quarter offsetting seasonal cash usage in the first half of the year consistent with historical patterns. Cash flow from operating activities is expected to be strong in the fourth quarter in line with the seasonal peak of revenues expected to occur in December. We believe that cash from operations and other existing resources will continue to be adequate to satisfy the ongoing working capital needs of the Company.

 

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For the nine months ended September 30, 2015, capital expenditures were $15.8 million. Based on our current operations, capital expenditures for the year ending December 31, 2015 are expected to be $23 to $25 million.

 

On June 17, 2015, the Company’s Board of Directors approved a dividend policy for the Company, which is a dividend of $0.08 per common share (being the Subordinate Voting Shares and Multiple Voting Shares) per annum, payable semi-annually. These dividends will be paid in cash after the end of the second and fourth quarters, beginning with the fourth quarter of 2015, to shareholders of record on the last business day of the quarter. All dividend payments are subject to the discretion of our Board of Directors.

 

Net indebtedness as at September 30, 2015 was $221.9 million, versus $164.0 million at December 31, 2014. Net indebtedness is calculated as the current and non-current portion of long-term debt less cash and cash equivalents. The change in indebtedness was attributable to seasonal working capital usage, capital expenditures and the purchase price for recent acquisitions. We are in compliance with the covenants contained in our financing agreements as at September 30, 2015 and, based on our outlook for the balance of the year, we expect to remain in compliance with these covenants. We had $197.5 million of available unused credit as of September 30, 2015.

 

On June 1, 2015, the Company entered into a credit agreement with a syndicate of 11 banks to provide a committed multi-currency revolving credit facility (the “Facility”) of $525.0 million. The Facility has a 5-year term ending June 1, 2020 and bears interest at 1.50% to 2.75% over floating reference rates, depending on certain leverage ratios. The Facility requires a commitment fee of 0.30% to 0.55% of the unused portion, depending on certain leverage ratios. At any time during the term, we have the right to increase the Facility by up to $150.0 million, on the same terms and conditions as the original Facility.

 

In conjunction with the spin-off, Old FSV (i) terminated its existing credit agreement; (ii) prepaid the remaining $12.5 million outstanding balance on its 6.40% senior secured notes due September 2015 and (iii) assigned its 3.84% senior secured notes due January 2025 to FirstService.

 

In relation to acquisitions completed during the past three years, we have outstanding contingent consideration totalling $37.0 million as at September 30, 2015 ($30.3 million as at December 31, 2014) assuming all contingencies are satisfied and payment is due in full. Such payments, if any, are due during the period extending to July 2020. The contingent consideration liability is recognized at fair value upon acquisition and is updated to fair value each quarter, unless it contains an element of compensation, in which case such element is treated as compensation expense over the contingency period. The contingent consideration is based on achieving specified earnings levels, and is paid or payable at the end of the contingency period. We estimate that, based on current operating results, approximately 90% of the contingent consideration outstanding as of September 30, 2015 will ultimately be paid.

 

The following table summarizes our contractual obligations as at September 30, 2015:

 

Contractual obligations  Payments due by period
(in thousands of US$)     Less than        After
   Total  1 year  1-3 years  4-5 years  5 years
                
Long-term debt  $318,360   $3,039   $41,219   $274,102   $- 
Interest on long-term debt   34,341    7,959    15,263    11,118    - 
Capital lease obligations   1,682    738    709    235    - 
Contingent acquisition consideration   25,446    1,531    23,068    847    - 
Operating leases   254,927    56,621    81,608    53,686    63,012 
                          
Total contractual obligations  $634,757   $69,889   $161,867   $339,989   $63,012 

 

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At September 30, 2015, we had commercial commitments totaling $12.6 million comprised of letters of credit outstanding due to expire within one year.

 

Redeemable non-controlling interests

 

In most operations where managers are also minority owners, the Company is party to shareholders’ agreements. These agreements allow us to “call” the minority position at a value determined with the use of a formula price, which is in most cases equal to a multiple of trailing two-year average earnings, less debt. Minority owners may also “put” their interest to the Company at the same price, with certain limitations including (i) the inability to “put” more than 33.3% or 50% of their holdings in any twelve-month period and (ii) the inability to “put” any holdings for at least one year after the date of our initial acquisition of the business or the date the minority shareholder acquired the stock, as the case may be. The total value of the minority shareholders’ interests (the “redemption amount”), as calculated in accordance with the shareholders’ agreements, was $125.2 million (December 31, 2014 - $149.2 million).

 

The amount recorded on our balance sheet under the caption “Redeemable non-controlling interests” (“RNCI”) is the greater of: (i) the redemption amount (as above) and (ii) the amount initially recorded as RNCI at the date of inception of the minority equity position. As at September 30, 2015, the RNCI recorded on the balance sheet was $134.5 million. The purchase prices of the RNCI may be satisfied in cash or in Subordinate Voting Shares of Colliers. If all RNCI were redeemed with cash on hand and borrowings under the Facility, the estimated accretion to diluted net earnings per share from continuing operations for the nine months ended September 30, 2015 would be $0.21 and the accretion to adjusted EPS would be $0.28.

 

On June 1, 2015, in conjunction with the spin-off, certain minority shareholders and option holders of the former Commercial Real Estate Services subsidiary exchanged their shares and options for 1,997,956 Subordinate Voting Shares of Colliers. As a result of the exchange, the Company reclassified $16.9 million of stock-based compensation liability and $14.7 million of RNCI to shareholders’ equity and also recognized $35.4 million in non-cash stock-based compensation expense. Of the 1,997,956 Subordinate Voting Shares issued, 1,590,000 are subject to contractual retention and escrow periods of one to three years.

 

Off-balance sheet arrangements

 

We do not have any material off-balance sheet arrangements other than those commitments disclosed in notes 14 and 20 to the December 31, 2014 audited consolidated financial statements of Old FSV.

 

Critical accounting policies and estimates

 

The preparation of consolidated financial statements requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates and assumptions are based upon management’s historical experience and are believed by management to be reasonable under the circumstances. Such estimates and assumptions are evaluated on an ongoing basis and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from these estimates. Our critical accounting policies and estimates have been reviewed and discussed with our Audit Committee. There have been no material changes to our critical accounting policies and estimates from those disclosed in Old FSV’s MD&A for the year ended December 31, 2014.

 

Quarterly income tax provision

 

Each quarter, Colliers estimates its income tax on the interim financial statements using an estimate of the effective tax rate for the full year which is based on forecasted earnings by country, expected enacted statutory tax rates, and estimated tax adjustments. We evaluate our annual effective tax rate estimate on a quarterly basis to reflect changes in forecasted earnings, geographical mix of earnings, and legislative actions on statutory tax rates and other relevant matters effective in the quarter and which legislation is enacted.

 

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The geographic mix of earnings can significantly impact our estimate of the annual effective tax rate. The United States combined statutory tax rate of 39% has a significant impact on our effective tax rate. Tax rate jurisdictions with combined statutory tax rates of 26.5% or lower with the most significant impact on our effective tax rate include: the United Kingdom (20.25%), Hong Kong (16.5%), Singapore (17%), The People’s Republic of China (25%) and the Netherlands (25%). Other tax rate jurisdictions with effective rates of 26.5% or lower that impact our global effective tax rate include: Cyprus (12.5%), Poland (19%), and Russia (20%).

 

The tax effect of discrete items occurring in the quarter also impact our effective tax rate.

 

Impact of recently issued accounting standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This ASU clarifies the principles for recognizing revenue and develops a common revenue standard for US GAAP and International Financial Reporting Standards (“IFRS”) and is effective for the Company on January 1, 2018. The Company is currently assessing the impact of this ASU on its financial position and results of operations.

 

In April 2015, FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. This ASU is effective for the Company on January 1, 2016, at which time the guidance will be applied retrospectively.

 

Impact of IFRS

 

On January 1, 2011, many Canadian companies were required to adopt IFRS. In 2004, in accordance the rules of the CSA, Old FSV elected to report exclusively using US GAAP and further elected not to adopt IFRS on January 1, 2011. Under the rules of the CSA, we are permitted to continue preparing financial statements in accordance with US GAAP going forward.

 

Financial instruments

 

We use financial instruments as part of our strategy to manage the risk associated with interest rates and currency exchange rates. We do not use financial instruments for trading or speculative purposes. As of the date of this MD&A, we did not have any financial instruments in place.

 

Transactions with related parties

 

As at September 30, 2015, the Company had $0.8 million of loans receivable from minority shareholders of subsidiaries (December 31, 2014 - $2.3 million) and no loans payable to minority shareholders of subsidiaries (December 31, 2014 - $0.2 million). The business purpose of the loans receivable was to finance the sale of non-controlling interests in subsidiaries to senior managers. The business purpose of the loans payable is to finance purchases of non-controlling interests. The loan amounts are measured based on the formula price of the underlying non-controlling interests, and interest rates are determined based on the Company’s cost of borrowing plus a spread. The loans generally have terms of 5 to 10 years, but are open for repayment without penalty at any time.

 

In conjunction with the spin-off transaction on June 1, 2015, the Company entered into transition services agreement with FirstService which sets out the terms under which certain administrative services, rent and other expenses will be allocated. During the period from the spin-off date to September 30, 2015, the Company received $0.1 million in rent from FirstService.

 

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Outstanding share data

 

The authorized capital of the Company consists of an unlimited number of preference shares, issuable in series, an unlimited number of Subordinate Voting Shares and an unlimited number of Multiple Voting Shares. The holders of Subordinate Voting Shares are entitled to one vote in respect of each Subordinate Voting Share held at all meetings of the shareholders of the Company. The holders of Multiple Voting Shares are entitled to twenty votes in respect of each Multiple Voting Share held at all meetings of the shareholders of the Company. Each Multiple Voting Share is convertible into one Subordinate Voting Share at any time at the election of the holders thereof.

 

As of the date hereof, the Company has outstanding 36,649,617 Subordinate Voting Shares and 1,325,694 Multiple Voting Shares. In addition, as at the date hereof 1,962,000 Subordinate Voting Shares are issuable upon exercise of options granted under the Company’s stock option plan.

 

On June 1, 2015, the Company issued 1,997,956 Subordinate Voting Shares in exchange for shares and options of the former Commercial Real Estate Services subsidiary of Old FSV (see “Redeemable non-controlling interests” above).

 

On July 15, 2015, the Company announced a Normal Course Issuer Bid (“NCIB”) effective from July 17, 2015 to July 16, 2016. The Company is entitled to repurchase up to 3,135,000 Subordinate Voting Shares on the open market pursuant to the NCIB. Any shares purchased under the NCIB will be cancelled.

 

Canadian tax treatment of dividends

 

For the purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends (and deemed dividends) paid by us to Canadian residents on our Subordinate Voting Shares and Multiple Voting Shares are designated as “eligible dividends”. Unless stated otherwise, all dividends (and deemed dividends) paid by us hereafter are designated as “eligible dividends” for the purposes of such rules.

 

Changes in internal controls over financial reporting

 

There have been no changes in our internal controls over financial reporting during the three and nine month periods ended September 30, 2015 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

Legal proceedings

 

Colliers is involved in various legal claims associated with the normal course of operations and believes it has made adequate provision for such legal claims.

 

The Company disclosed on May 27, 2015 that management became aware that an independent contractor, working as a broker in its US operations, may have been involved in an improper payment to a third party (in the amount of $0.5 million) in connection with an unconsummated real estate sale transaction in a foreign jurisdiction. The Company’s Board, through its Audit and Risk Committee, retained independent counsel to assist it in reviewing the matter. The Company informed, and is cooperating with, relevant authorities in the US and Canada.

 

The Audit and Risk Committee’s review was completed on October 26, 2015. Based on that review, it appears that the broker orchestrated a payment, funded by a third party, that the broker believed was intended for an individual associated with a sovereign wealth fund in order to influence a transaction that did not materialize. It also appears that the broker falsified documents, fabricated aspects of the purported transaction and deliberately misled management. The purported transaction was the primary matter on which the broker worked during his brief tenure with the Company. The broker’s conduct directly violated the Company’s established policies, procedures and code of conduct, and he and two associates with whom he worked were immediately terminated. The revenue and related expenses in respect of this transaction recorded in the fourth quarter of 2014 were reversed during the second quarter ended June 30, 2015, the impact of which was not material.

 

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Spin-off risk

 

Although the spin-off is complete, the transaction exposes Colliers to certain ongoing risks. The spin-off was structured to comply with all the requirements of the public company "butterfly rules" in the Income Tax Act (Canada). However, there are certain requirements of these rules that depend on events occurring after the spin-off is completed or that may not be within the control of Colliers and/or FirstService. If these requirements are not met, Colliers could be exposed to significant tax liabilities which could have a material effect on the financial position of Colliers. In addition, Colliers has agreed to indemnify FirstService for certain liabilities and obligations related to its business at the time of the spin-off. These indemnification obligations could be significant. These risks are more fully described in the Circular which is available at www.sedar.com.

 

Forward-looking statements and risks

 

This MD&A contains forward-looking statements with respect to expected financial performance, strategy and business conditions. The words “believe,” “anticipate,” “estimate,” “plan,” “expect,” “intend,” “may,” “project,” “will,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risk and uncertainties. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Factors which may cause such differences include, but are not limited to those set out below, those set out above under “Spin-off risk” and those set out in detail in the “Risk Factors” section of the Circular and Old FSV’s Annual Information Form, which is included in the Old FSV’s Annual Report on Form 40-F:

 

·Economic conditions, especially as they relate to commercial and consumer credit conditions and consumer spending, particularly in regions where our business may be concentrated.
·Commercial real estate property values, vacancy rates and general conditions of financial liquidity for real estate transactions.
·Trends in pricing and risk assumption for commercial real estate services.
·The effect of significant movements in average cap rates across different property types.
·A reduction by companies in their reliance on outsourcing for their commercial real estate needs, which would affect our revenues and operating performance.
·Competition in the markets served by the Company.
·The ability to attract new clients and to retain major clients and renew related contracts.
·The ability to retain and incentivize producers.
·Increases in wage and benefit costs.
·The effects of changes in interest rates on our cost of borrowing.
·Unexpected increases in operating costs, such as insurance, workers’ compensation and health care.
·Changes in the frequency or severity of insurance incidents relative to our historical experience.
·The effects of changes in foreign exchange rates in relation to the US dollar on the Company’s Canadian dollar, Australian dollar, UK pound and Euro denominated revenues and expenses.
·Our ability to identify and make acquisitions at reasonable prices and successfully integrate acquired operations.
·The ability to execute on, and adapt to, information technology strategies and trends.
·The ability to comply with laws and regulations related to our global operations, including real estate licensure, labour and employment laws and regulations, as well as the anti-corruption laws and trade sanctions.
·Political conditions, including political instability and any outbreak or escalation of terrorism or hostilities and the impact thereof on our business.
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·Changes in government laws and policies at the federal, state/provincial or local level that may adversely impact our businesses.

 

We caution that the foregoing list is not exhaustive of all possible factors, as other factors could adversely affect our results, performance or achievements. The reader is cautioned against undue reliance on these forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking statements should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. We note that past performance in operations and share price are not necessarily predictive of future performance. We disclaim any intention and assume no obligation to update or revise any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.

 

Additional information

 

Additional information regarding the Company and Old FSV, including our Annual Information Form, is available on SEDAR at www.sedar.com.

 

 

 

 

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