EX-99.1 2 exh_991.htm EXHIBIT 99.1

Exhibit 99.1

 

 

 

 

 

 

 

COLLIERS INTERNATIONAL

GROUP INC.

 

 

 

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

June 30, 2019

 

 

Page 2 of 21

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

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

 

   Three months   Six months 
   ended June 30   ended June 30 
   2019   2018   2019   2018 
                 
Revenues  $745,517   $667,350   $1,380,640   $1,219,823 
                     
Cost of revenues (exclusive of depreciation and                    
amortization shown below)   484,220    430,725    905,570    793,025 
Selling, general and administrative expenses   175,058    169,032    348,130    325,348 
Depreciation   8,540    7,504    16,489    14,773 
Amortization of intangible assets   15,238    8,779    29,958    17,368 
Acquisition-related items (note 5)   5,263    5,741    9,898    7,995 
Operating earnings   57,198    45,569    70,595    61,314 
                     
Interest expense, net   8,257    3,939    15,476    6,856 
Other expense (income), net (note 6)   179    (33)   (322)   (460)
Earnings before income tax   48,762    41,663    55,441    54,918 
                     
Income tax expense (note 7)   13,187    12,859    14,402    17,575 
Net earnings   35,575    28,804    41,039    37,343 
                     
Non-controlling interest share of earnings   6,586    3,547    7,831    4,216 
Non-controlling interest redemption increment (note 13)   5,205    1,410    7,962    4,314 
Net earnings attributable to Company  $23,784   $23,847   $25,246   $28,813 
                     
Net earnings per common share (note 14)                    
                     
Basic  $0.60   $0.61   $0.64   $0.74 
Diluted  $0.60   $0.60   $0.63   $0.72 

 

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

 

 

Page 3 of 21

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(Unaudited)

(in thousands of US dollars)

 

   Three months   Six months 
   ended June 30   ended June 30 
   2019   2018   2019   2018 
                 
Net earnings  $35,575   $28,804   $41,039   $37,343 
                     
Foreign currency translation gain (loss)   (1,946)   (10,205)   (54)   (7,089)
Unrealized gain (loss) on interest rate swaps, net of tax   (3,343)   393    (4,285)   1,457 
Pension liability adjustments, net of tax   21    -    (4)   - 
Comprehensive earnings   30,286    18,992    36,700    31,711 
                     
Less: Comprehensive earnings attributable to                    
non-controlling shareholders   10,233    9,438    15,629    12,227 
                     
Comprehensive earnings attributable to Company  $20,053   $9,554   $21,071   $19,484 

 

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

 

 

Page 4 of 21

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands of US dollars)

 

   June 30, 2019   December 31, 2018 
Assets          
Current Assets          
Cash and cash equivalents  $102,092   $127,032 
Accounts receivable, net of allowance of $11,446 (December 31, 2018 -          
$30,789)   259,734    455,232 
Contract assets   100,116    99,468 
Income tax recoverable   10,418    13,090 
Prepaid expenses and other current assets (note 12)   131,530    65,491 
    603,890    760,313 
           
Other receivables   13,456    12,088 
Contract assets   12,756    10,964 
Other assets   62,292    60,713 
Fixed assets   102,264    93,483 
Operating lease right-of-use assets (note 8)   274,857    - 
Deferred income tax, net   38,954    34,195 
Intangible assets   481,254    497,930 
Goodwill   902,524    887,894 
    1,888,357    1,597,267 
   $2,492,247   $2,357,580 
           
Liabilities and shareholders' equity          
Current Liabilities          
Accounts payable and accrued expenses  $214,728   $251,375 
Accrued compensation   333,294    469,563 
Income taxes payable   10,303    30,034 
Contract liabilities   33,590    28,773 
Long-term debt - current (note 9)   2,356    1,834 
Contingent acquisition consideration - current (note 12)   21,997    17,122 
Operating lease liabilities (note 8)   70,953    - 
    687,221    798,701 
           
Long-term debt - non-current (note 9)   690,048    670,289 
Contingent acquisition consideration (note 12)   62,953    76,743 
Deferred rent   -    27,137 
Operating lease liabilities (note 8)   238,602    - 
Other liabilities   22,655    21,826 
Deferred income tax, net   23,525    27,550 
    1,037,783    823,545 
Redeemable non-controlling interests (note 13)   338,405    343,361 
           
Shareholders' equity          
Common shares   430,084    415,805 
Contributed surplus   58,784    54,717 
Retained earnings (deficit)   1,516    (21,751)
Accumulated other comprehensive loss   (65,397)   (61,218)
Total Company shareholders' equity   424,987    387,553 
Non-controlling interests   3,851    4,420 
Total shareholders' equity   428,838    391,973 
   $2,492,247   $2,357,580 

 

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

 

 

Page 5 of 21

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

(in thousands of US dollars, except share information)

 

Six months ended June 30, 2019
                             
   Common shares           Accumulated         
   Issued and           Retained   other   Non-   Total 
   outstanding       Contributed   earnings   comprehensive   controlling   shareholders' 
   shares   Amount   surplus   (deficit)   loss   interests   equity 
                             
Balance, December 31, 2018   39,213,136   $415,805   $54,717   $(21,751)  $(61,218)  $4,420   $391,973 
                                    
Net earnings   -    -    -    41,039    -    -    41,039 
Pension liability adjustment,                                   
net of tax   -    -    -    -    (4)   -    (4)
Foreign currency translation loss   -    -    -    -    (54)   -    (54)
Unrealized loss on interest rate                                   
swaps, net of tax   -    -    -    -    (4,285)   -    (4,285)
Other comprehensive earnings                                   
attributable to NCI   -    -    -    -    164    202    366 
NCI share of earnings   -    -    -    (7,831)   -    932    (6,899)
NCI redemption increment   -    -    -    (7,962)   -    -    (7,962)
Distributions to NCI   -    -    -    -    -    (1,495)   (1,495)
Acquisition of businesses, net   -    -    -    -    -    (208)   (208)
                                    
Subsidiaries’ equity transactions   -    -    2,556    -    -    -    2,556 
                                    
Subordinate Voting Shares:                                   
Stock option expense   -    -    3,640    -    -    -    3,640 
Stock options exercised   371,675    14,279    (2,129)   -    -    -    12,150 
Dividends   -    -    -    (1,979)   -    -    (1,979)
Balance, June 30, 2019   39,584,811   $430,084   $58,784   $1,516   $(65,397)  $3,851   $428,838 

 

Three months ended June 30, 2019
                             
   Common shares           Accumulated         
   Issued and           Retained   other   Non-   Total 
   outstanding       Contributed   earnings   comprehensive   controlling   shareholders' 
   shares   Amount   surplus   (deficit)   loss   interests   equity 
                             
Balance, March 31, 2019   39,482,811   $426,456   $56,266   $(20,289)  $(61,688)  $3,801   $404,546 
                                    
Net earnings   -    -    -    35,576    -    -    35,576 
Pension liability adjustment,                                   
net of tax   -    -    -    -    21    -    21 
Foreign currency translation loss   -    -    -    -    (1,946)   -    (1,946)
Unrealized loss on interest rate                                   
swaps, net of tax   -    -    -    -    (3,343)   -    (3,343)
Other comprehensive earnings                                   
attributable to NCI   -    -    -    -    1,559    144    1,703 
NCI share of earnings   -    -    -    (6,587)   -    454    (6,133)
NCI redemption increment   -    -    -    (5,205)   -    -    (5,205)
Distributions to NCI   -    -    -    -    -    (516)   (516)
Acquisition of businesses, net   -    -    -    -    -    (32)   (32)
                                    
Subsidiaries’ equity transactions   -    -    2,166    -    -    -    2,166 
                                    
Subordinate Voting Shares:                                   
Stock option expense   -    -    809    -    -    -    809 
Stock options exercised   102,000    3,628    (457)   -    -    -    3,171 
Dividends   -    -    -    (1,979)   -    -    (1,979)
Balance, June 30, 2019   39,584,811   $430,084   $58,784   $1,516   $(65,397)  $3,851   $428,838 

 

 

Page 6 of 21

Six months ended June 30, 2018
                             
   Common shares           Accumulated         
   Issued and               other   Non-   Total 
   outstanding       Contributed       comprehensive   controlling   shareholders' 
   shares   Amount   surplus   Deficit   loss   interests   equity 
                             
Balance, December 31, 2017   38,934,161   $406,984   $50,219   $(115,489)  $(43,157)  $4,457   $303,014 
                                    
Net earnings   -    -    -    37,343    -    -    37,343 
Pension liability adjustment,                                   
net of tax   -    -    -    -    -    -    - 
Foreign currency translation loss   -    -    -    -    (7,089)   -    (7,089)
Unrealized gain on interest rate                                   
swaps, net of tax   -    -    -    -    1,457    -    1,457 
Other comprehensive earnings                                   
attributable to NCI   -    -    -    -    (3,697)   69    (3,628)
NCI share of earnings   -    -    -    (4,216)   -    600    (3,616)
NCI redemption increment   -    -    -    (4,314)   -    -    (4,314)
Distributions to NCI   -    -    -    -    -    (1,327)   (1,327)
Acquisition of businesses, net   -    -    -    -    -    (220)   (220)
                                    
Subsidiaries’ equity transactions   -    -    (23)   -    -    -    (23)
                                    
Subordinate Voting Shares:                                   
Stock option expense   -    -    3,701    -    -    -    3,701 
Stock options exercised   260,625    8,318    (1,433)   -    -    -    6,885 
Dividends   -    -    -    (1,961)   -    -    (1,961)
Balance, June 30, 2018   39,194,786   $415,302   $52,464   $(88,637)  $(52,486)  $3,579   $330,222 

 

Three months ended June 30, 2018
                             
   Common shares           Accumulated         
   Issued and               other   Non-   Total 
   outstanding       Contributed       comprehensive   controlling   shareholders' 
   shares   Amount   surplus   Deficit   loss   interests   equity 
                             
Balance, March 31, 2018   39,143,661   $413,105   $51,377   $(110,523)  $(38,191)  $4,766   $320,534 
                                    
Net earnings   -    -    -    28,802    -    -    28,802 
Foreign currency translation loss   -    -    -    -    (10,205)   -    (10,205)
Unrealized gain on interest rate                                   
swaps, net of tax   -    -    -    -    393    -    393 
Other comprehensive earnings                                   
attributable to NCI   -    -    -    -    (4,483)   (215)   (4,698)
NCI share of earnings   -    -    -    (3,546)   -    222    (3,324)
NCI redemption increment   -    -    -    (1,409)   -    -    (1,409)
Distributions to NCI   -    -    -    -    -    (1,194)   (1,194)
Acquisition of businesses, net   -    -    -    -    -    -    - 
                                    
Subsidiaries’ equity transactions   -    -    -    -    -    -    - 
                                    
Subordinate Voting Shares:                                   
Stock option expense   -    -    1,487    -    -    -    1,487 
Stock options exercised   51,125    2,197    (400)   -    -    -    1,797 
Dividends   -    -    -    (1,961)   -    -    (1,961)
Balance, June 30, 2018   39,194,786   $415,302   $52,464   $(88,637)  $(52,486)  $3,579   $330,222 

 

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

 

 

Page 7 of 21

COLLIERS INTERNATIONAL GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands of US dollars)

 

   Three months ended   Six months ended 
   June 30   June 30 
   2019   2018   2019   2018 
Cash provided by (used in)                    
                     
Operating activities                    
Net earnings  $35,575   $28,804   $41,039   $37,343 
                     
Items not affecting cash:                    
Depreciation and amortization   23,778    16,283    46,447    32,141 
Deferred income tax   (3,025)   1,792    (7,044)   1,399 
Earnings from equity method investments   (374)   (242)   (740)   (569)
Stock option expense   809    1,487    3,640    3,701 
Allowance for uncollectible accounts receivable   1,112    334    2,218    1,771 
Amortization of advisor loans   5,034    4,201    10,066    8,082 
Other   9,133    2,937    15,457    3,558 
                     
Net changes from operating assets / liabilities                    
Accounts receivable   (26,039)   (12,612)   17,297    38,655 
Contract assets   (299)   20    4,771    9,674 
Prepaid expenses and other current assets   (2,117)   (503)   (10,375)   (5,301)
Accounts payable and accrued expenses   (20,574)   1,731    (64,556)   (36,614)
Accrued compensation   (5,648)   (3,870)   (143,238)   (116,578)
Contract liabilities   12,189    10,088    4,043    (4,692)
Other liabilities   (883)   (89)   3,564    457 
                     
Contingent acquisition consideration paid   (5,101)   -    (5,213)   (2,856)
Sale proceeds from AR Facility, net of repurchases (note 10)   119,425    -    119,425    - 
Net cash provided by (used in) operating activities   142,995    50,361    36,801    (29,829)
                     
Investing activities                    
Acquisitions of businesses, net of cash acquired (note 4)   (10,433)   (18,848)   (23,677)   (98,580)
Purchases of fixed assets   (13,685)   (7,781)   (24,064)   (13,990)
Advisor loans issued   (6,000)   (12,716)   (10,906)   (15,509)
Cash collections of AR Facility deferred purchase price   7,337    -    7,337    - 
Other investing activities   (403)   (782)   (4,696)   (2,451)
Net cash provided by (used in) investing activities   (23,184)   (40,127)   (56,006)   (130,530)
                     
Financing activities                    
Increase in long-term debt   101,132    225,994    319,613    459,867 
Repayment of long-term debt   (214,602)   (485,404)   (298,189)   (532,444)
Issuance of senior notes   -    244,938    -    244,938 
Purchase of non-controlling interests, net   (4,061)   -    (6,765)   (73)
Contingent acquisition consideration paid   (4,379)   (137)   (8,394)   (7,743)
Proceeds received on exercise of options   3,171    1,798    12,150    6,885 
Dividends paid to common shareholders   -    -    (1,961)   (1,947)
Distributions paid to non-controlling interests   (13,363)   (7,399)   (19,557)   (12,603)
Financing fees paid   (1,337)   (1,830)   (1,357)   (1,830)
Net cash provided by (used in) financing activities   (133,439)   (22,040)   (4,460)   155,050 
                     
Effect of exchange rate changes on cash   (1,627)   4,403    (1,275)   1,032 
                     
Increase (decrease) in cash and cash equivalents   (15,255)   (7,403)   (24,940)   (4,277)
                     
Cash and cash equivalents, beginning of period   117,347    111,649    127,032    108,523 
                     
Cash and cash equivalents, end of period  $102,092   $104,246   $102,092   $104,246 

 

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

 

 

Page 8 of 21

COLLIERS INTERNATIONAL GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(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 35 countries around the world (68 countries including affiliates and franchisees). Colliers’ primary services are outsourcing and advisory services, lease brokerage, sales brokerage and investment management. Operationally, Colliers is organized into four distinct segments: Americas; Europe, Middle East and Africa (“EMEA”); Asia and Australasia (“Asia Pacific”) and Investment Management (“IM”).

 

2.       SUMMARY OF PRESENTATION – These unaudited Interim 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 Colliers for the year ended December 31, 2018.

 

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 June 30, 2019 and the results of operations and its cash flows for the three and six month periods ended June 30, 2019 and 2018. All such adjustments are of a normal recurring nature. The results of operations for the six month period ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.

 

Prior year comparatives in relation to accounts payable and accrued expenses, accrued compensation and contract liabilities on the consolidated balance sheets and consolidated statements of cash flows have been restated to better reflect the classification of certain liabilities and to improve comparability with 2019. The amounts have no net impact on current liabilities or operating cash flows.

 

These Financial Statements follow the same accounting policies as the most recent audited consolidated financial statements of Colliers, except as noted in notes 3, 10 and 12. The accounting policy for leases is shown below and the accounting for the accounts receivable facility is shown in notes 10 and 12.

 

Leases

The Company is (i) a lessee in relation to premises and equipment and (ii) acts as a lessor in relation to certain premises that it owns or leases from third parties.

 

(a)As a lessee

The Company recognizes an operating lease right-of-use (“ROU”) asset and a lease liability on the consolidated balance sheet at the lease commencement date. Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term adjusted for lease pre-payments and lease incentives. As most of the Company’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used to determine the present value of lease payments. The Company uses the implicit rate when readily determinable. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating leases ROU assets are amortized to selling, general and administrative expenses (“SG&A”) straight-line over the lease term.

 

 

Page 9 of 21

Finance leases are included in fixed assets and long-term debt on the consolidated balance sheet. Finance lease assets are depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of lease term.

 

Variable lease payments and variable payments related to non-lease components are recorded to SG&A as incurred. Variable lease payments include amounts related to changes in payments associated with changes in an index or rate but which are not also associated with a remeasurement of the lease liability.

 

The Company has operating lease agreements with lease and non-lease components, and the Company has elected to apply the practical expedient to not separate lease and nonlease components and therefore the ROU assets and lease liabilities include payments related to services included in the lease agreement. Additionally, for certain leases the Company has elected to group leases that commence at the same time and where accounting does not materially differ from accounting for the leases individually as a portfolio of leases.

 

The Company has elected not to recognize ROU assets and lease liabilities for leases that have a term of twelve months or less. Similarly, the Company will be applying the practical expedient to not recognize assets or liabilities related to a business combination when the acquired lease has a remaining term of twelve months or less at the acquisition date. The payments associated with these leases are recorded to SG&A on a straight-line basis over the remaining lease term.

 

(b)As a lessor

When the Company acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease the Company makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. All of the Company’s lessor arrangements are classified as operating leases.

 

When the Company is a sublessor, it accounts for its interests in the head lease and the sublease separately. It assesses the lessor classification of a sublease with reference to the underlying asset rather than with reference to the right-of-use asset. The Company recognizes lease payments received under operating leases as income on a straight-line basis over the lease term as other revenue.

 

 

3.       IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

Recently adopted accounting guidance

 

Leases

The Financial Accounting Standards Board (“FASB”) has issued two Accounting Standards Updates (“ASU”) related to leases (collectively, “ASC 842”). In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU affects all aspects of lease accounting and has a significant impact to lessees as it requires the recognition of a right-of use asset and a lease liability for virtually all leases including operating leases. In addition to balance sheet recognition, additional quantitative and qualitative disclosures is required.

 

In July 2018, the FASB issued ASU No. 2018-11, Codification Improvements to Topic 842, Leases. This ASU affects narrow aspects of the guidance issued in ASU 2016-02 providing an additional (and optional) alternative transition method to adopt the new leases standard. Under this transition method, an entity initially applies ASC 842 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

 

The Company has adopted ASC 842 effective January 1, 2019, with the election of the new optional transition method offered under ASU 2018-11 to apply the new lease standard at the adoption date without restating comparative figures. Therefore, the comparative information has not been restated and continues to be reported under previous GAAP. In transitioning to ASC 842, the Company has also elected to apply the practical expedient package which permits the Company to (i) not reassess whether expired or existing contracts are or contain leases, (ii) not reassess the lease classification between operating and finance leases for any expired or existing leases and (iii) not reassess initial direct costs for any existing leases.

 

 

Page 10 of 21

The most significant impact is the increase in operating lease right-of-use assets and operating lease liabilities. A summary of the adjustments to the Company’s consolidated balance sheet as at adoption on January 1, 2019 were as follows:

  

             
   December 31, 2018   ASC 842 adjustment   January 1, 2019 
Balance sheet               
                
Accounts receivable, net of allowance  $455,232   $(2,189)  $453,043 
Prepaid expenses and other current assets   65,491    (1,662)   63,829 
Operating lease right-of-use assets   -    279,591    279,591 
Accounts payable and accrued expenses   251,375    (4,591)   246,784 
Operating lease liabilities (current)        59,831    59,831 
Deferred rent   27,137    (27,137)   - 
Operating lease liabilities (non-current)   -    247,637    247,637 

  

Related balance sheet ratios were also impacted; however, covenant ratio calculations under the Company’s Revolving Credit Facility and Senior Notes were not impacted, as the underlying debt agreements contain provisions that nullify the impact of changes in accounting standards. See notes 2 and 8 for further details on leases.

 

Hedging activities

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which increases the scope of hedge accounting for both financial and nonfinancial strategies. The Company adopted the new standard effective January 1, 2019 with no material impact on the Financial Statements. The Company’s interest rate swaps are accounted for as cash flow hedges, are deemed to be effective as hedges and are reported in other comprehensive income.

  

Recently issued accounting guidance, not yet adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. This ASU creates a new framework to evaluate financial instruments, such as trade receivables, for expected credit losses. This new framework replaces the existing incurred loss approach and is expected to result in more timely recognition of credit losses. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other: Simplifying the Accounting for Goodwill Impairment to remove Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under this guidance, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the US federal corporate income tax rate (or portion thereof) is recorded. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

 

Page 11 of 21

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). This ASU aligns the capitalizing of implementation costs incurred in relation to a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. It also requires these capitalized costs to be expensed over the term of the hosting arrangement and to the same line as the hosting arrangement. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

  

4.       ACQUISITIONS – During the six months ended June 30, 2019, the Company acquired controlling interests in three businesses, two operating in Americas (Virginia; North Carolina) and one operating in EMEA (Sweden). The acquisition date fair value of consideration transferred consisted of $23,179 in cash (net of cash acquired of $3,571). The Company acquired $2,310 of net assets, excluding cash, and recognized goodwill of $14,530, intangible assets of $13,857 and redeemable non-controlling interest of $7,518 in its preliminary purchase price allocation.

 

The primary factors contributing to goodwill are assembled workforces, synergies with existing operations and future growth prospects. Acquired intangible assets consist of customer relationships, revenue backlog and property management contracts with estimated useful lives ranging from 3 months to 15 years. These acquisitions were accounted for by the acquisition method of accounting for business combinations.

 

During the six months ended June 30, 2018, the Company acquired controlling interests in six businesses for cash consideration of $98,580 (net of cash acquired of $14,984) and contingent consideration of $10,160.

 

The Company typically structures its business acquisitions to include contingent consideration. 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 five-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 on the acquisition date and is re-measured to fair value each subsequent reporting period. The fair value recorded on the consolidated balance sheet as at June 30, 2019 was $84,950 (see note 12). The liability recorded on the balance sheet for the compensatory element of contingent consideration arrangements as of June 30, 2019 was $17,920. The estimated range of outcomes (undiscounted) for all contingent consideration arrangements, including those with an element of compensation, is $169,418 to a maximum of $199,315. The contingencies will expire during the period extending to March 2023.

 

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

 

   Three months ended   Six months ended 
   June 30   June 30 
   2019   2018   2019   2018 
                 
Transaction costs  $1,175   $3,225   $2,299   $4,940 
Contingent consideration fair value adjustments   430    611    858    (337)
Contingent consideration compensation expense   3,658    1,905    6,742    3,392 
   $5,263   $5,741   $9,899   $7,995 

 

 

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

 

   Three months ended   Six months ended 
   June 30   June 30 
   2019   2018   2019   2018 
                 
(Gain) loss on investments  $84   $10   $(92)  $(80)
Fair value adjustment on DPP (note 10)   455    -    455    - 
Equity earnings from non-consolidated investments   (374)   (242)   (740)   (569)
Other   13    199    54    189 
   $178   $(33)  $(323)  $(460)

 

7.       INCOME TAX – The provision for income tax for the six months ended June 30, 2019 reflected an effective tax rate of 26.0% (2018 - 32.0%) relative to the combined statutory rate of approximately 26.5% (2018 - 26.5%). The income tax rate of both the current period and prior period was impacted by the foreign tax rate differential, non-deductible expenses and non-deductible contingent acquisition consideration. The effective income tax rate of the current period was also reduced by the tax effect of non-wholly owned flow through entities.

 

8.       LEASES – The Company enters into premise leases and equipment leases as a lessee.

 

a)Premise leases

The Company leases office space where the remaining lease term ranges from less than one year to eleven years. Leases generally include an initial contract term but some leases include an option to renew the lease for additional period at the end of this initial term. These renewal periods range in length up to a period equivalent to the initial term of the lease. All of the Company’s premise leases are classified as operating leases.

 

b)Equipment leases

The Company leases certain equipment in its operations, including furniture and equipment, computer equipment and vehicles. Equipment leases may consist of operating leases or finance leases based upon the assessment of the facts at the commencement date of the lease. The remaining lease terms for equipment leases range from one year to five years. Certain leases may have the option to extend the leases for a short period or to purchase the asset at the end of the lease term.

 

The components of lease expense were as follows:

 

   Three months ended  Six months ended
   June 30  June 30
   2019  2019
       
Operating lease cost  $19,629   $38,317 
Finance lease cost          
Amortization of right-of-use assets   249    469 
Interest on lease liabilities   14    30 
Variable lease cost   5,375    13,068 
Short term lease cost   1,462    2,495 
           
Total lease expense  $26,729   $54,379 
           
Sublease revenues   (718)   (1,273)
Total lease cost, net of sublease revenues  $26,011   $53,106 

  

 

Page 13 of 21

Supplemental information related to leases was as follows:

 

   Six months ended
   June 30
   2019
    
Right-of-use assets obtained in exchange for lease obligations:     
Operating leases recognized on transition to ASC 842   279,591 
Operating leases commencing in 2019   22,732 
Finance leases   266 
      
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $(38,878)
Operating cash flows from finance leases   (30)
Financing cash flows from finance leases   (593)

 

Supplemental balance sheet information related to leases was as follows:

 

   As at June 30, 2019
    
Operating leases     
Operating lease right-of-use assets  $274,857 
Operating lease liabilities - current  $(70,953)
Operating lease liabilities - non-current   (238,602)
Total operating lease liabilities  $(309,555)
      
Finance leases     
Fixed assets, gross  $5,583 
Accumulated depreciation   (4,630)
Fixed assets, net  $953 
      
Long-term debt - current  $(719)
Long-term debt - non-current   (293)
Total finance lease liabilities  $(1,012)

 

Maturities of lease liabilities were as follows:

 

   One
year		  Two
years		  Three
years		  Four
years		  Five
years		  Thereafter  Total
                      
Operating leases  $79,455   $67,017   $55,357   $42,529   $33,983   $62,937   $341,278 
                                    
Present value of operating lease liabilities              309,555 
Difference between undiscounted cash flows and discounted cash flows             $31,723 
                                    
Finance leases  $690   $273   $51   $5   $-   $-   $1,019 
                                    
Present value of finance lease liabilities              1,012 
Difference between undiscounted cash flows and discounted cash flows             $7 

 

 

Page 14 of 21

   June 30
   2019
    
Weighted average remaining lease term   
Operating leases  5.6 years
Finance leases  1.9 years
    
Weighted average discount rate   
Operating leases  3.4%
Finance leases  1.5%

 

As of June 30, 2019, the Company has additional operating leases, primarily for premises, that have not yet commenced of $29,204. These operating leases will commence within the next twelve months and have lease terms ranging from one to eleven years.

 

As previously disclosed in the audited consolidated financial statements for the year ended December 31, 2018 and in accordance with ASC 840, Leases, the minimum operating lease payments due in each of the next five years and thereafter are presented in the following table.

 

 

2019  $86,376 
2020   76,169 
2021   62,171 
2022   51,011 
2023   38,103 
Thereafter   97,631 
   $411,461 

 

9.       LONG-TERM DEBT – On April 4, 2019, the Company entered into an amended and restated credit agreement with a syndicate of banks to provide a multi-currency senior unsecured revolving credit facility (the “Revolving Credit Facility”) of $1,000,000. The Revolving Credit Facility has a 5-year term ending April 30, 2024 and bears interest at an applicable margin of 1.25% to 2.50% over floating reference rates, depending on financial leverage ratios. The weighted average interest rate for the six months ended June 30, 2019 was 3.4% (2018 - 3.1%). The Revolving Credit Facility had $540,067 of available un-drawn credit as at June 30, 2019. As of June 30, 2019, letters of credit in the amount of $7,922 were outstanding ($7,624 as at December 31, 2018). The Revolving Credit Facility requires a commitment fee of 0.25% to 0.5% of the unused portion, depending on certain leverage ratios. At any time during the term, the Company has the right to increase the Revolving Credit Facility by up to $250,000 on the same terms and conditions.

 

The Company has outstanding €210,000 of senior unsecured notes with a fixed interest rate of 2.23% (the “Senior Notes”), which are held by a group of institutional investors. The Senior Notes have a 10-year term ending May 30, 2028.

 

The Revolving Credit Facility and the Senior Notes rank equally in terms of seniority and have similar financial covenants. The Company is required to maintain financial covenants including leverage and interest coverage. The Company was in compliance with these covenants as of June 30, 2019. The Company is limited from undertaking certain mergers, acquisitions and dispositions without prior approval.

 

10.       AR FACILITY – On April 12, 2019, the Company established a structured accounts receivable facility (the “AR Facility”) with committed availability of $125,000 and an initial term of 364 days, unless extended or an earlier termination event occurs. Under the AR Facility, certain of the Company's subsidiaries continuously sell trade accounts receivable (the “Receivables”) to wholly owned special purpose entities at fair market value. The special purpose entities then sell 100% of the receivables to a third-party financial institution (the “Purchaser”). Although the special purpose entities are wholly owned subsidiaries of the Company, they are separate legal entities with their own separate creditors who will be entitled, upon their liquidation, to be satisfied out of their assets prior to any assets or value in such special purpose entities becoming available to their equity holders and their assets are not available to pay other creditors of the Company. As of June 30, 2019 the Company had drawn $119,425 of the committed capacity, the proceeds of which were used to repay outstanding indebtedness under the Revolving Credit Facility.

 

 

Page 15 of 21

All transactions under the AR Facility are accounted for as a true sale in accordance with ASC 860, Transfers and Servicing (“ASC 860”). Following the sale and transfer of the Receivables to the Purchaser, the Receivables are legally isolated from the Company and its subsidiaries, and the Company sells, conveys, transfers and assigns to the Purchaser all its rights, title and interest in the Receivables. Receivables sold are derecognized from the consolidated balance sheet. The Company continues to service, administer and collect the Receivables on behalf of the Purchaser, and recognizes a servicing liability in accordance with ASC 860. The Company has elected the amortization method for subsequent measurement of the servicing liability, which is assessed for impairment or increased obligation at each reporting date. As of April 12, 2019 and June 30, 2019, the servicing liability was nil.

 

Under the AR Facility, the Company receives a cash payment and a deferred purchase price (“DPP”) for sold Receivables. The DPP is paid to the Company in cash on behalf of the Purchaser as the Receivables are collected; however, due to the revolving nature of the AR Facility, cash collected from the Company's customers is reinvested by the Purchaser monthly in new Receivable purchases under the AR Facility. For the quarter ended June 30, 2019, Receivables sold under the AR Facility were $382,946 and cash collections from customers on Receivables sold were $304,317, all of which were reinvested in new Receivables purchases and are included in cash flows from operating activities in the consolidated statement of cash flows. As of June 30, 2019, the outstanding principal on receivables sold under the AR Facility was $173,079. See note 12 for fair value information on the DPP.

 

For the quarter ended June 30, 2019, the Company recognized a loss related to Receivables sold of $455 that was recorded in other expense in the consolidated statement of earnings. Based on the Company’s collection history, the fair value of the Receivables sold subsequent to the initial sale approximates carrying value.

 

The non-cash investing activities associated with the DPP for the three months ended June 30, 2019 were $60,991.

  

11.       VARIABLE INTEREST ENTITIES – The Company holds variable interests in certain Variable Interest Entities (“VIE”) in its Investment Management segment which are not consolidated as it was determined that the Company is not the primary beneficiary. The Company’s involvement with these entities is in the form of equity co-investments and fee arrangements.

 

The following table provides the maximum exposure to loss related to the VIEs which are not consolidated:

 

   June 30, 2019  December 31, 2018
       
Investments in unconsolidated subsidiaries  $610   $- 
Co-investment commitments   8,281    - 
Maximum exposure to loss  $8,891   $- 

 

 

Page 16 of 21

12.       FAIR VALUE MEASUREMENTS – The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2019:

 

   Carrying value at  Fair value measurements
   June 30, 2019  Level 1  Level 2  Level 3
             
Assets                    
Prepaid expenses and other current assets                    
DPP on AR Facility (note 10)  $53,654   $-   $-   $53,654 
Investments in equity securities   8,846    3,498    5,348    - 
Investments in debt securities   150    -    -    150 
                     
Liabilities                    
Contingent acquisition consideration  $84,950   $-   $-   $84,950 
Other liabilities                    
Interest rate swaps   4,904    -    4,904    - 

 

The Company recorded a DPP under its AR Facility upon the initial sale of Receivables. The DPP represents the difference between the fair value of the Receivables sold and the cash purchase price and is recognized at fair value as part of the sale transaction. The DPP is remeasured each reporting period in order to account for activity during the period, including the seller’s interest in any newly transferred Receivables, collections on previously transferred Receivables attributable to the DPP and changes in estimates for credit losses. Changes in the DPP attributed to changes in estimates for credit losses are expected to be immaterial, as the underlying Receivables are short-term and of high credit quality. The DPP is valued using Level 3 inputs, primarily discounted cash flows, with the significant inputs being discount rates ranging from 2.5% to 4.0% depending on the aging of the Receivables. See note 10 for information on the AR Facility.

 

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 3.0% to 9.1%, with a weighted average of 6.1%). 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 3.8% and 8.7% levels. A 2% increase in the weighted average discount rate would reduce the fair value of contingent consideration by $4,100.

 

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

 

   2019
Balance, January 1  $93,865 
Fair value adjustments   858 
Resolved and settled in cash   (9,727)
Other   (46)
Balance, June 30  $84,950 
      
Less: Current portion   21,997 
Non-current portion  $62,953 

 

The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair values due to the short maturity of these instruments, unless otherwise indicated. The inputs to the measurement of the fair value of long term debt are Level 3 inputs. The fair value measurements were made using a net present value approach; significant model inputs were expected future cash outflows and discount rates.

 

 

Page 17 of 21

   June 30, 2019  December 31, 2018
   Carrying  Fair  Carrying  Fair
   amount  value  amount  value
             
Other receivables  $13,456   $13,456   $12,088   $12,088 
Advisor loans receivable (non-current)   46,441    46,441    46,661    46,661 
Long-term debt, excluding Senior Notes (non-current)   451,641    451,641    430,712    430,712 
Senior Notes   238,115    256,549    239,577    268,838 

 

13.       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:

 

   2019
    
Balance, January 1  $343,361 
RNCI share of earnings   6,898 
RNCI redemption increment   7,962 
Distributions paid to RNCI   (18,062)
Purchase of interests from RNCI, net   (9,272)
RNCI recognized on business acquisitions   7,518 
Balance, June 30  $338,405 

 

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 June 30, 2019 was $299,633 (June 30, 2018 - $135,598). 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 June 30, 2019, approximately 4,400,000 such shares would be issued.

 

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

 

14.       NET EARNINGS 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  Six months ended
(in thousands)  June 30  June 30
   2019  2018  2019  2018
             
Basic shares   39,532    39,168    39,416    39,108 
Assumed exercise of Company stock options   421    674    472    644 
Diluted shares   39,954    39,842    39,887    39,752 

 

 

Page 18 of 21

15.       STOCK-BASED COMPENSATION – 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 Chairman & CEO who has a Long Term Arrangement as described in note 16. 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 June 30, 2019, there were 1,292,000 options available for future grants.

 

Grants under the Company’s stock option plan are equity-classified awards.

 

There were 515,000 stock options granted during the six months ended June 30, 2019 (2018 - 455,000). Stock option activity for the six months ended June 30, 2019 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   1,897,425   $45.08           
Granted   515,000    68.28           
Exercised   (371,675)   32.69           
Forfeited   (185,500)   60.43           
Shares issuable under options -                    
End of period   1,855,250   $52.47    2.88   $35,528 
Options exercisable - End of period   851,875   $43.70    1.98   $23,787 

 

The amount of compensation expense recorded in the statement of earnings for the six months ended June 30, 2019 was $3,640 (2018 - $3,701). As of June 30, 2019, there was $9,742 of unrecognized compensation cost related to non-vested awards which is expected to be recognized over the next 4 years. During the six month period ended June 30, 2019, the fair value of options vested was $5,327 (2018 - $4,020).

  

16.       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.

 

Pursuant to an agreement approved in February 2004 and restated on June 1, 2015, the Company agreed that it will make payments to Jay S. Hennick, its Chairman & Chief Executive Officer (“CEO”), that are contingent upon the arm’s length acquisition of control of the Company or upon a distribution of the Company’s assets to shareholders. The payment amounts will be determined with reference to the price per Subordinate Voting Share received by shareholders upon an arm’s length sale or upon a distribution of assets. The right to receive the payments may be transferred among members of the Chairman & CEO’s family, their holding companies and trusts. The agreement provides for the Chairman & CEO to receive each of the following two payments. The first payment is an amount equal to 5% of the product of: (i) the total number of Subordinate and Multiple Voting Shares outstanding on a fully diluted basis at the time of the sale and (ii) the per share consideration received by holders of Subordinate and Multiple Voting Shares minus a base price of C$3.324. The second payment is an amount equal to 5% of the product of (i) the total number of shares outstanding on a fully diluted basis at the time of the sale and (ii) the per share consideration received by holders of Subordinate Voting Shares minus a base price of C$6.472. Assuming an arm’s length acquisition of control of the Company took place on June 30, 2019, the amount required to be paid to the Chairman & CEO, based on a market price of C$93.63 per Subordinate Voting Share, would be US$281,115.

 

 

Page 19 of 21

17.       REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Disaggregated Revenue

Colliers has disaggregated its revenue from contracts with customers by type of service and region as presented in the following table.

 

OPERATING SEGMENT REVENUES

 

         Asia  Investment      
   Americas  EMEA  Pacific  Management  Corporate  Consolidated
                   
Three months ended June 30                              
                               
2019                              
Lease brokerage  $188,250   $35,958   $28,916   $-   $250   $253,374 
Sales brokerage   95,103    39,466    29,034    -    -    163,603 
Property management   65,476    19,432    34,931    -    -    119,839 
Valuation and advisory   37,308    25,033    16,202    -    -    78,543 
Project management   30,949    30,894    12,726    -    -    74,569 
IM - Advisory   -    -    -    41,884    -    41,884 
IM - Incentive Fees   -    -    -    4,321    -    4,321 
IM - Transaction and Other   -    -    -    697    -    697 
Other   4,299    812    3,290    -    286    8,687 
Total Revenue  $421,385   $151,595   $125,099   $46,902   $536   $745,517 
                               
2018                              
Lease brokerage  $161,074   $33,640   $26,992   $-   $-   $221,706 
Sales brokerage   104,983    39,951    40,737    -    -    185,671 
Property management   54,941    23,190    33,141    -    -    111,272 
Valuation and advisory   36,736    24,201    16,556    -    -    77,493 
Project management   27,107    24,175    8,438    -    -    59,720 
IM - Advisory   -    -    -    2,174    -    2,174 
IM - Transaction and Other   -    -    -    361    -    361 
Other   3,766    1,872    2,932    -    383    8,953 
Total Revenue  $388,607   $147,029   $128,796   $2,535   $383   $667,350 
                               
Six months ended June 30                              
                               
2019                              
Lease brokerage  $328,039   $57,662   $49,207   $-   $250   $435,158 
Sales brokerage   181,706    71,691    62,071    -    -    315,468 
Property management   129,272    38,581    69,936    -    -    237,789 
Valuation and advisory   73,060    44,088    30,041    -    -    147,189 
Project management   59,358    58,005    21,105    -    -    138,468 
IM - Advisory   -    -    -    73,313    -    73,313 
IM - Incentive Fees   -    -    -    15,508    -    15,508 
IM - Transaction and Other   -    -    -    1,171    -    1,171 
Other   8,776    2,032    5,056    -    712    16,576 
Total Revenue  $780,211   $272,059   $237,416   $89,992   $962   $1,380,640 
                               
2018                              
Lease brokerage  $281,448   $57,481   $50,469   $-   $-   $389,398 
Sales brokerage   193,586    62,808    71,554    -    -    327,948 
Property management   110,232    46,265    65,815    -    -    222,312 
Valuation and advisory   69,529    45,404    27,837    -    -    142,770 
Project management   53,119    45,448    15,296    -    -    113,863 
IM - Advisory   -    -    -    4,130    -    4,130 
IM - Transaction and Other   -    -    -    1,139    -    1,139 
Other   9,194    2,607    5,660    -    802    18,263 
Total Revenue  $717,108   $260,013   $236,631   $5,269   $802   $1,219,823 

 

 

Page 20 of 21

Contract balances

As at June 30, 2019, the Company had contract assets totaling $112,872 of which $100,116 was current (as at December 31, 2018 - $111,432 of which $99,468 was current). During the six months ended June 30, 2019, approximately 70% of the current contract assets were moved to accounts receivable.

 

As at June 30, 2019, the Company had contract liabilities (all current) totaling $33,590 (As at December 31, 2018 - $28,773). Revenue recognized for the three months ended June 30, 2019 totaled $2,450 (2018 - $1,047) and the six months ended June 30, 2019 totaled $25,496 (2018 - $13,205) that was included in the contract liability balance at the beginning of the year.

 

Certain constrained brokerage fees, outsourcing and advisory fees and investment management fees may arise from services that began in a prior reporting period. Consequently, a portion of the fees the Company recognizes in the current period may be partially related to the services performed in prior periods. In particular, generally less than 5% of brokerage revenue recognized in a period had previously been constrained and substantially all investment management incentive fees, including carried interest, recognized in the period were previously constrained.

 

18.       SEGMENTED INFORMATION – Colliers has identified four reportable operating segments. Three segments are grouped geographically into Americas, Asia Pacific and EMEA. The Investment Management segment includes Harrison Street Real Estate Capital, LLC (“Harrison Street”) and the Company’s existing European investment management business which was reported in EMEA prior to the acquisition of Harrison Street in July 2018. The groupings are 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  Investment      
   Americas  EMEA  Pacific  Management  Corporate  Consolidated
                   
Three months ended June 30               
                   
2019                              
Revenues  $421,385   $151,595   $125,099   $46,902   $536   $745,517 
Depreciation and amortization   9,019    5,759    1,436    6,629    935    23,778 
Operating earnings (loss)   25,619    10,842    12,539    12,249    (4,051)   57,198 
                               
2018                              
Revenues  $388,607   $147,029   $128,796   $2,535   $383   $667,350 
Depreciation and amortization   7,797    6,059    1,693    9    725    16,283 
Operating earnings (loss)   26,800    14,727    13,471    (777)   (8,652)   45,569 

 

         Asia  Investment      
   Americas  EMEA  Pacific  Management  Corporate  Consolidated
                   
Six months ended June 30                              
                               
2019                              
Revenues  $780,211   $272,059   $237,416   $89,992   $962   $1,380,640 
Depreciation and amortization   17,280    11,341    2,894    13,239    1,693    46,447 
Operating earnings (loss)   41,787    696    21,755    15,886    (9,529)   70,595 
                               
2018                              
Revenues  $717,108   $260,013   $236,631   $5,269   $802   $1,219,823 
Depreciation and amortization   14,820    12,701    3,250    21    1,349    32,141 
Operating earnings (loss)   46,806    5,581    22,845    (1,202)   (12,716)   61,314 

 

 

Page 21 of 21

GEOGRAPHIC INFORMATION

 

   Three months ended  Six months ended
   June 30  June 30
   2019  2018  2019  2018
             
United States                    
Revenues  $363,535   $291,924   $675,577   $532,682 
Total long-lived assets                    
Long-lived assets excluding operating lease                    
right-of-use assets             954,687    300,678 
Operating lease right-of-use assets             126,553    - 
                     
Canada                    
Revenues  $85,917   $84,677   $160,065   $159,358 
Total long-lived assets                    
Long-lived assets excluding operating lease                    
right-of-use assets             66,282    63,499 
Operating lease right-of-use assets             23,657    - 
                     
Euro currency countries                    
Revenues  $82,859   $82,233   $155,014   $150,486 
Total long-lived assets                  - 
Long-lived assets excluding operating lease                    
right-of-use assets             260,842    279,421 
Operating lease right-of-use assets             40,676    - 
                     
Australia                    
Revenues  $54,918   $59,683   $98,323   $105,511 
Total long-lived assets                    
Long-lived assets excluding operating lease                    
right-of-use assets             46,990    47,467 
Operating lease right-of-use assets             36,582    - 
                     
United Kingdom                    
Revenues  $39,364   $42,525   $70,885   $73,953 
Total long-lived assets                    
Long-lived assets excluding operating lease                    
right-of-use assets             68,373    72,325 
Operating lease right-of-use assets             16,823    - 
                     
Other                    
Revenues  $118,924   $106,308   $220,776   $197,833 
Total long-lived assets                    
Long-lived assets excluding operating lease                    
right-of-use assets             88,867    58,760 
Operating lease right-of-use assets             30,566    - 
                     
Consolidated                    
Revenues  $745,517   $667,350   $1,380,640   $1,219,823 
Total long-lived assets             -    - 
Long-lived assets excluding operating lease                    
right-of-use assets             1,486,041    822,150 
Operating lease right-of-use assets             274,857    - 

 

 

 

COLLIERS INTERNATIONAL GROUP INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE six MONTH PERIOD ENDED June 30, 2019

(in US dollars)

August 2, 2019

 

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 six month periods ended June 30, 2019 and the Company’s audited consolidated financial statements and MD&A for the year ended December 31, 2018. 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 six month periods ended June 30, 2019 up to and including August 2, 2019.

 

Additional information about the Company can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

 

This MD&A includes references to “adjusted EBITDA” and “adjusted EPS”, which are financial measures that are not calculated in accordance with GAAP. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures, see “Reconciliation of non-GAAP financial measures”.

 

Consolidated review

 

We reported solid revenue growth for the second quarter ended June 30, 2019 due to a combination of recent business acquisitions and internal growth. Consolidated revenue growth was 12% relative to the same quarter in the prior year (15% measured in local currencies). Diluted net earnings per common share were $0.60, flat versus $0.60 in the prior year quarter, as higher earnings and a lower tax rate were offset by higher non-controlling interest share of earnings (due to earnings mix). Adjusted earnings per share, which excludes the non-controlling interest redemption increment and amortization of intangible assets (among other items - see “Reconciliation of non-GAAP measures” below) for the second quarter was $1.10, up 16% from $0.95 in the prior year quarter. Adjusted earnings per share and GAAP net earnings per share for the three and six month periods ended June 30, 2019 would have been approximately $0.04 and $0.05 higher, respectively excluding changes in foreign exchange rates.

 

During the first six months of 2019, the Company acquired a majority interest in a commercial real estate services firm operating in central and southeast Virginia and completed acquisitions of Colliers International affiliates in Charlotte, North Carolina and Sweden. The total initial cash consideration for these acquisitions, net of cash acquired, was $23.7 million.

 

In April 2019, the Company established a structured accounts receivable facility (the “AR Facility”) with committed availability of $125 million and an initial term of 364 days and includes continuous sales of selected US and Canadian trade accounts receivable (the “Receivables”). Under the AR Facility, the Company receives a cash payment and a deferred purchase price for sold Receivables. Cash proceeds from the AR Facility in the amount of $119.4 million were used to repay outstanding indebtedness under Colliers’ multi-currency senior unsecured revolving credit facility (the “Revolving Credit Facility”).

 

For both the three and six month periods ended June 30, 2019, revenue growth was led by our Investment Management segment, with significant contribution from Harrison Street Real Estate Capital, LLC (“Harrison Street”) acquired in July 2018, as well as Lease Brokerage and Outsourcing & Advisory service lines in all three geographic regions.

 

Page 2 of 13

 

   Three months ended        Six months ended      
(in thousands of US$)  June 30  Growth  Growth  June 30  Growth  Growth
(LC = local currency)    2019      2018    in US$ %  in LC %    2019      2018    in US$ %  in LC %
                         
Outsourcing & Advisory  $281,638    257,438    9%   13%  $540,022    497,208    9%   13%
Lease Brokerage   253,374    221,706    14%   17%   435,158    389,398    12%   14%
Sales Brokerage   163,603    185,671    -12%   -9%   315,468    327,948    -4%   -1%
Investment Management   46,902    2,535    NM    NM    89,992    5,269    NM    NM 
                                         
Total revenues  $745,517    667,350    12%   15%  $1,380,640    1,219,823    13%   17%

 

Results of operations - three months ended June 30, 2019

 

Revenues for our second quarter were $745.5 million, 12% higher than the comparable prior year quarter (15% measured in local currencies). Recent acquisitions, including Harrison Street, contributed 10% to revenue growth. Internally generated revenues measured in local currencies were up 5%, led by Lease Brokerage and Outsourcing & Advisory, partially offset by declines in Sales Brokerage in all three geographic regions.

 

Operating earnings for the second quarter were $57.2 million, versus $45.6 million in the prior year period. The operating earnings margin was 7.7% versus 6.8% in the prior year quarter driven primarily by incremental earnings from Harrison Street and other recent acquisitions and partially offset by amortization of intangible assets related to the acquisition of Harrison Street, higher investments in talent acquisition and revenue mix. Adjusted EBITDA (see “Reconciliation of non-GAAP measures” below) for the second quarter was $87.3 million, up 26% versus $69.4 million reported in the prior year quarter. Adjusted EBITDA margin improved to 11.7% of revenues, compared to 10.4% in the prior year quarter.

 

Depreciation expense was $8.5 million, versus $7.5 million recorded in the prior year quarter, with the increase largely attributable to increased investments in office leaseholds and the impact of recent business acquisitions.

 

Amortization expense was $15.2 million, versus $8.8 million recorded in the prior year quarter, with the increase primarily attributable to the acquisition of Harrison Street.

 

Net interest expense was $8.3 million, versus $3.9 million recorded in the prior year quarter, attributable to increased borrowings over the past year to fund business acquisitions, in particular, Harrison Street and an increase in interest rates due to higher financial leverage. The average interest rate on debt during the quarter was 3.9%, relative to 3.5% in the prior year quarter.

 

The consolidated income tax expense for the quarter was $13.2 million, relative to $12.9 million the prior year quarter, reflecting effective tax rates of 27% and 31%, respectively impacted by the earnings mix, with an increase in earnings before income tax in certain low tax rate jurisdictions. The effective tax rate for the full year is expected to be approximately 28% to 30%.

 

Net earnings for the quarter were $35.6 million, versus $28.8 million in the prior year quarter.

 

The Americas region’s revenues totaled $421.4 million for the second quarter compared to $388.6 million in the prior year quarter, up 8% (up 9% on a local currency basis). Local currency revenue growth was comprised of 5% growth from acquisitions and 4% internal growth. Internal growth for the quarter was driven by Lease Brokerage, particularly in the US Northeast and Southwest regions, offset by a reduction in higher margin Sales Brokerage, especially in Canada. Outsourcing & Advisory revenues were up 7% on a local currency internal growth basis across the region. Adjusted EBITDA was $36.2 million, flat versus $36.2 million in the prior year quarter, and was impacted by the change in service mix noted above, as well as ongoing incremental investments in talent acquisition relative to the prior year. GAAP operating earnings were $25.6 million, versus $26.8 million in the prior year period.

 

Page 3 of 13

EMEA region revenues totaled $151.6 million for the second quarter compared to $147.0 million in the prior year quarter, up 3% (up 9% on a local currency basis). Local currency revenue growth was comprised of 7% internal growth and 2% growth from acquisitions. Internal revenue growth was attributable to an increase in Outsourcing & Advisory services across the entire region, particularly workplace solutions and project management. Foreign exchange headwinds negatively impacted revenue growth by 6%. Adjusted EBITDA was $19.0 million, versus $22.2 million in the prior year quarter, impacted by planned investments in talent acquisition in corporate solutions and capital markets practice areas and a change in revenue mix with workplace solutions and project management carrying lower margins than other services. GAAP operating earnings were $10.8 million, versus $14.7 million in the prior year quarter.

 

Asia Pacific region revenues totaled $125.1 million for the second quarter compared to $128.8 million in the prior year quarter, down 3% (up 3% on a local currency basis). Local currency revenue growth was comprised of 1% growth from acquisitions and 2% internal growth. Internal growth was led by Outsourcing & Advisory but was offset by a decline in Sales Brokerage. Foreign exchange headwinds negatively impacted revenue growth by 6%. Adjusted EBITDA was $14.2 million, relative to $15.4 million in the prior year quarter, and was impacted by revenue mix. GAAP operating earnings were $12.5 million, versus $13.5 million in the prior year period.

 

Investment Management revenues for the second quarter were $46.9 million, of which $4.3 million represented pass-through revenue from historical carried interest. Revenues reflected significant incremental management fees from new capital commitments completed during the quarter. The carried interest recognized during the quarter was payable to former owners of Harrison Street and certain long-serving employees, affecting reported margin but having no impact on earnings. Adjusted EBITDA was $19.2 million. Operating earnings, which are impacted by acquisition-related intangible asset amortization, were $12.2 million in the quarter. Assets under management were $30.3 billion as of June 30, 2019.

 

The global corporate segment GAAP operating loss for the second quarter was $4.1 million, relative to $8.7 million in the prior period. Corporate segment costs as reported in adjusted EBITDA were $1.3 million in the second quarter, relative to $3.6 million in the prior year period.

 

Results of operations - six months ended June 30, 2019

 

Revenues for the six months ended June 30, 2019 were $1.38 billion, 13% higher than the comparable prior year period (17% measured in local currencies). Acquisitions contributed 12% to local currency revenue growth and internally generated revenues were up 5%.

 

Operating earnings for the six month period were $70.6 million, relative to $61.3 million in the prior year period. Our operating earnings margin for the six months ended June 30, 2019 was approximately flat at 5.1% versus 5.0% in the period year period. Year to date Adjusted EBITDA (see “Reconciliation of non-GAAP measures” below) was $130.9 million, up 24% versus $105.6 million reported in the prior year period. Our Adjusted EBITDA margin was 9.5% of revenues versus 8.7% of revenues in the prior year period, primarily due to the impact of higher margin Investment Management revenues.

 

We recorded depreciation expense of $16.5 million for the six month period relative to $14.8 million for the comparable prior year period. The increase was attributable to increased investments in office leaseholds and the impact of business acquisitions in the past year.

 

We recorded amortization expense of $30.0 million for the six month period relative to $17.4 million for the prior year period, with the increase primarily attributable to the acquisition of Harrison Street

 

Net interest expense for the six month period was $15.5 million, up from $6.9 million recorded in the prior year period. The increase reflects incremental borrowings over the past year to fund business acquisitions and an increase in interest rates due to higher financial leverage. The average interest rate on debt during the period was 3.8%, versus 3.1% in the prior year period.

 

Page 4 of 13

Consolidated income tax expense for the six month period was $14.4 million, relative to $17.6 million in the prior year period, reflecting effective tax rates of 26% and 32%, respectively attributable to higher earnings before income taxes from lower tax jurisdictions.

 

Net earnings for the six month period were $41.0 million, versus $37.3 million in the prior year period.

 

The Americas region’s revenues totaled $780.2 million for the six months ended June 30, 2019 compared to $717.1 million in the prior year period, up 9% (up 10% on a local currency basis). Local currency revenue growth was comprised of 7% growth from acquisitions and 3% internal growth. Internal growth was primarily driven by strong performance in Canada and the United States in our Lease Brokerage and Outsourcing and Advisory service lines. Adjusted EBITDA was $62.4 million, flat versus $62.6 million reported in the prior year period. Operating leverage was constrained in the first half due to a reduction in higher margin Sales Brokerage and incremental investments in talent acquisition relative to the prior year period. GAAP operating earnings were $41.8 million, versus $46.8 million in the prior year period, primarily due to higher amortization of intangible assets related to recent acquisitions and other acquisition-related costs.

 

EMEA region revenues totaled $272.1 million for the six months ended June 30, 2019 compared to $260.0 million in the prior year period, up 5% (up 12% on a local currency basis). Local currency revenue growth was comprised of 10% internal growth and 2% growth from recent acquisitions. Internal revenue growth was driven by an increase in Outsourcing & Advisory services, especially project management. Foreign exchange headwinds impacted revenue growth by 7%. Adjusted EBITDA was $16.5 million versus $22.2 million in the prior year period due to the impact of ongoing planned investments in talent acquisition in major markets and revenue mix favoring lower margin project management services. GAAP operating earnings were $0.7 million, versus $5.6 million in the prior year period primarily attributable to acquisition-related costs.

 

Asia Pacific region revenues totaled $237.4 million for the six months ended June 30, 2019 compared to $236.6 million in the prior year period, up less than 1% (up 7% on a local currency basis), with growth driven by Outsourcing & Advisory services. Local currency revenue growth was comprised of 5% internal growth and 2% growth from recent acquisitions. Foreign exchange headwinds impacted revenue growth by 6%. Adjusted EBITDA was $25.1 million versus $26.6 million in the prior year period. GAAP operating earnings were $21.8 million, versus $22.8 million in the prior year period, impacted by revenue mix.

 

Investment Management revenues for the six months ended June 30, 2019 were $90.0 million, of which $15.5 million represented pass-through revenue from historical carried interest. Adjusted EBITDA was $29.5 million. Operating earnings were $15.9 million impacted by the significant increase in acquisition-related intangible asset amortization.

 

The global corporate segment GAAP operating loss was $9.5 million, relative to $12.7 million in the prior period. Corporate costs as presented in adjusted EBITDA were $2.6 million, relative to $4.7 million in the comparable prior year period.

 

 

 

Page 5 of 13

Summary of quarterly results (unaudited)

 

The following table sets forth our unaudited quarterly consolidated results of operations data. 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.

 

 

Quarter  Q1  Q2  Q3  Q4
(in thousands of US$, except per share amounts)            
             
YEAR ENDING DECEMBER 31, 2019            
Revenues  $635,123   $745,517           
Operating earnings   13,398    57,198           
Net earnings   5,463    35,575           
Diluted net earnings per common share   0.04    0.60           
                     
YEAR ENDED DECEMBER 31, 2018                    
Revenues  $552,473   $667,350   $715,721   $889,883 
Operating earnings   15,745    45,569    41,956    98,128 
Net earnings   8,541    28,804    25,382    65,847 
Diluted net earnings per common share   0.13    0.60    0.41    1.33 
                     
YEAR ENDED DECEMBER 31, 2017                    
Revenues  $466,263   $586,233   $618,798   $763,905 
Operating earnings   12,840    41,229    34,458    78,849 
Net earnings   6,800    25,958    20,361    40,955 
Diluted net earnings (loss) per common share   0.04    0.29    0.16    0.82 
                     
OTHER DATA (see "Reconciliation of non-GAAP measures")                    
Adjusted EBITDA - 2019  $43,571   $87,323           
Adjusted EBITDA - 2018   36,140    69,427   $72,665   $133,203 
Adjusted EBITDA - 2017   31,252    60,258    55,281    96,033 
Adjusted EPS - 2019   0.51    1.10           
Adjusted EPS - 2018   0.45    0.95    0.92    1.77 
Adjusted EPS - 2017   0.36    0.77    0.66    1.36 

 

Seasonality and quarterly fluctuations

 

The Company generates peak revenues and earnings in the month of December followed by a low in January and February primarily as a result of the timing of closings on sales brokerage transactions. Revenues and earnings during the balance of the year are relatively even. These sales brokerage operations comprise approximately 25% 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, adjusted to exclude: (i) income tax; (ii) other expense (income); (iii) interest expense; (iv) depreciation and amortization; (v) acquisition-related items; (vi) restructuring costs and (vii) 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 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 to adjusted EBITDA appears below.

 

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   Three months ended  Six months ended
(in thousands of US$)  June 30  June 30
     2019      2018      2019      2018  
             
Net earnings  $35,575   $28,804   $41,039   $37,343 
Income tax   13,187    12,859    14,402    17,575 
Other income, net   179    (33)   (322)   (460)
Interest expense, net   8,257    3,939    15,476    6,856 
Operating earnings   57,198    45,569    70,595    61,314 
Depreciation and amortization   23,778    16,283    46,447    32,141 
Acquisition-related items   5,263    5,741    9,898    7,995 
Restructuring costs   275    347    314    416 
Stock-based compensation expense   809    1,487    3,640    3,701 
Adjusted EBITDA  $87,323   $69,427   $130,894   $105,567 

 

Adjusted earnings per share is defined as diluted net earnings per common share, 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) restructuring costs and (v) 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, 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 to adjusted net earnings and of diluted net earnings per share to adjusted earnings per share appears below.

 

 

 

 

 

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   Three months ended  Six months ended
(in thousands of US$)  June 30  June 30
     2019      2018      2019      2018  
             
Net earnings  $35,575   $28,804   $41,039   $37,343 
Non-controlling interest share of earnings   (6,586)   (3,547)   (7,831)   (4,216)
Amortization of intangible assets   15,238    8,779    29,958    17,368 
Acquisition-related items   5,263    5,741    9,898    7,995 
Restructuring costs   275    347    314    416 
Stock-based compensation expense   809    1,487    3,640    3,701 
Income tax on adjustments   (4,212)   (2,550)   (8,216)   (4,973)
Non-controlling interest on adjustments   (2,346)   (1,206)   (4,592)   (2,050)
Adjusted net earnings  $44,016   $37,855   $64,210   $55,584 

 

   Three months ended  Six months ended
(in US$)  June 30  June 30
     2019      2018      2019      2018  
             
Diluted net earnings per common share  $0.60   $0.60   $0.63   $0.72 
Non-controlling interest redemption increment   0.13    0.03    0.20    0.11 
Amortization of intangible assets, net of tax   0.23    0.14    0.46    0.28 
Acquisition-related items   0.12    0.13    0.22    0.18 
Restructuring costs, net of tax   -    0.01    0.01    0.01 
Stock-based compensation expense, net of tax   0.02    0.04    0.09    0.09 
Adjusted earnings per share  $1.10   $0.95   $1.61   $1.39 

 

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.

 

Percentage revenue variances presented on a local currency basis are calculated by translating the current period results of our non-US dollar denominated operations to US dollars using the foreign currency exchange rates from the periods against which the current period results are being compared. Percentage revenue variances presented on an internal growth basis are calculated assuming no impact from acquired entities in the current and prior periods. Revenue from acquired entities, including any foreign exchange impacts, are treated as acquisition growth until the respective anniversaries of the acquisitions. We believe that these revenue growth rate methodologies provide a framework for assessing the Company’s performance and operations excluding the effects of foreign currency exchange rate fluctuations and acquisitions. Since these revenue growth rate measures are not calculated under GAAP, they may not be comparable to similar measures used by other issuers.

 

We use the term assets under management (“AUM”) as a measure of the scale of our Investment Management operations. AUM is defined as the gross market value of operating assets and the projected gross cost of development properties of the funds, partnerships and accounts to which we provide management and advisory services, including capital that such funds, partnerships and accounts have the right to call from investors pursuant to capital commitments. Our definition of AUM may differ from those used by other issuers and as such may not be directly comparable to similar measures used by other issuers.

 

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Liquidity and capital resources

 

The Company generated cash flow from operating activities of $36.8 million for the six month period ended June 30, 2019 compared to a usage of $29.8 million used in the prior year period. Excluding the cash proceeds generated from the AR Facility, net cash used in operating activities for the six month period ended June 30, 2019 was $82.6 million. The increased cash usage is primarily attributable to timing of accounts payable and accrued expenses as well as the collection of accounts receivable. 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.

 

For the six months ended June 30, 2019, capital expenditures were $23.7 million. Based on our current operations, capital expenditures for the year ending December 31, 2019 are expected to be $45 - $50 million.

 

Net indebtedness as at June 30, 2019 was $590.3 million, versus $545.1 million at December 31, 2018. 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, the purchase price for recent acquisitions and capital expenditures. We are in compliance with the covenants contained in our financing agreements as at June 30, 2019 and, based on our outlook for the balance of the year, we expect to remain in compliance with these covenants. We had $540.1 million of available unused credit as of June 30, 2019.

 

On April 4, 2019, we extended the credit agreement for our Revolving Credit Facility of $1.0 billion with a new 5- year term maturing on April 30, 2024 (from April 30, 2023) and certain amendments were made to increase the flexibility of the Company’s debt capital structure.

 

On April 4, 2019, we amended our Euro-denominated 2.23% senior unsecured notes due 2028 (the “Senior Notes”) to make certain amendments to increase the flexibility of our debt capital structure. These amendments were similar to the amendments made to our Revolving Credit Facility, which ranks equal in seniority to the Senior Notes.

 

The AR Facility generated cash proceeds of $119.4 million during the quarter ended June 30, 2019. These proceeds were used to repay indebtedness under our Revolving Credit Facility. In addition to cash proceeds, we also received a deferred purchase price (“DPP”) related to the sold accounts receivable in the amount of $53.7 million as of June 30, 2019. The AR Facility is recorded as a sale of accounts receivable, and accordingly the sold Receivables are derecognized from the consolidated balance sheet.

 

On May 16, 2019, the Company’s Board of Directors declared a dividend of $0.05 per Common Share (being the Subordinate Voting Shares and Multiple Voting Shares) to shareholders of record on June 28, 2019. This dividend was paid on July 9, 2019.

 

In relation to acquisitions completed during the past three years, we have outstanding contingent consideration, assuming all contingencies are satisfied and payment is due in full, totalling $199.3 million as at June 30, 2019 (December 31, 2018 - $206.9 million). 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 fair value of contingent consideration recorded on the consolidated balance sheet as at June 30, 2019 was $85.0 million (December 31, 2018 - $93.9 million). The contingent consideration is based on achieving specified earnings levels, and is paid or payable after the end of the contingency period, which extends to March 2023. We estimate that approximately 85% of the contingent consideration outstanding as of June 30, 2019 will ultimately be paid.

 

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The following table summarizes our contractual obligations as at June 30, 2019:

 

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  $691,392   $1,637   $66   $451,575   $238,115 
Interest on long-term debt   115,877    23,231    46,351    25,498    20,797 
Finance lease obligations   1,013    719    287    6    - 
Contingent acquisition consideration   84,950    21,997    59,019    3,933    - 
Operating leases obligations   370,482    83,176    129,807    83,033    74,466 
Purchase commitments   27,724    16,610    11,113    -    - 
Co-investment commitments   8,281    8,281    -    -    - 
                          
Total contractual obligations  $1,299,719   $155,652   $246,644   $564,045   $333,378 

 

At June 30, 2019, we had commercial commitments totaling $7.9 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 shares, as the case may be. The total value of the minority shareholders’ interests (the “redemption amount”), as calculated in accordance with the shareholders’ agreements as of June 30, 2019, was $299.6 million (December 31, 2018 - $316.0 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. Increases or decreases to the formula price of the underlying shares are recognized in the statement of earnings as the NCI redemption increment. As at June 30, 2019, the RNCI recorded on the balance sheet was $338.4 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 for the six months ended June 30, 2019 would be $0.32 and the accretion to adjusted EPS would be $0.12.

 

Off-balance sheet arrangements

 

The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial performance or financial condition other than the payments which may be required to be made under the sale of control arrangement contained in the restated management services agreement with Colliers, Jayset Management CIG Inc. and Jay S. Hennick, a description of which is set out in Note 16 to the June 30, 2019 unaudited consolidated financial statements.

 

Critical accounting 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 estimates have been reviewed and discussed with our Audit & Risk Committee. There have been no material changes to our critical accounting estimates from those disclosed in our MD&A for the year ended December 31, 2018.

 

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Quarterly income tax provision

 

Each quarter, we estimate our income tax on the interim consolidated 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.

 

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

 

Impact of recently adopted accounting standards

 

On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 842, Leases (“ASC 842”). ASC 842 requires the recognition of operating lease right-of-use assets and lease liabilities for virtually all premises and equipment leases on the consolidated balance sheet, with no impact on earnings. The Company adopted ASC 842 effective January 1, 2019 without adjusting comparative periods and recorded a $274.9 million right-of-use asset and corresponding $309.6 million lease liability as of June 30, 2019. The recognition of the lease liability did not impact the Company’s financial covenants under our Revolving Credit Facility or Senior Notes, since the underlying debt agreements include provisions that nullify the impact of changes in accounting standards.

 

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, with no material impact on its consolidated financial statements.

 

Impact of recently issued accounting standards, not yet adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. This ASU creates a new framework to evaluate financial instruments, such as trade receivables, for expected credit losses. This new framework replaces the existing incurred loss approach and is expected to result in more timely recognition of credit losses. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other: Simplifying the Accounting for Goodwill Impairment to remove Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under this guidance, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in (or portion thereof) is recorded. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). This ASU aligns the capitalizing of implementation costs incurred in relation to a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. It also requires that these capitalized costs are to be expensed over the term of the hosting arrangement and to the same line as the hosting arrangement. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

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Impact of IFRS

 

On January 1, 2011, many Canadian companies were required to adopt IFRS. In 2004, in accordance with the rules of the CSA, our predecessor, FirstService Corporation (“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. On April 11, 2017 we entered into interest rate swap agreements to convert the LIBOR floating interest rate on $100.0 million of US dollar denominated debt into a fixed interest rate of 1.897%. In December 2018, the Company entered into interest rate swap agreements to convert the LIBOR floating interest rate on $100 million of US dollar denominated debt into a fixed interest rate of 2.7205% plus the applicable margin. Hedge accounting is being applied to these interest rate swaps.

 

Transactions with related parties

 

As at June 30, 2019, the Company had $4.8 million of loans receivable from non-controlling shareholders (December 31, 2018 - $6.5 million). The majority of the loans receivable represent amounts assumed in connection with acquisitions and amounts issued to non-controlling interests to finance the sale of non-controlling interests in subsidiaries to senior managers. The loans are of varying principal amounts and interest rates which range from nil to 4.0%. These loans are due on demand or mature on various dates up to 2026, but are open for repayment without penalty at any time.

 

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 38,259,117 Subordinate Voting Shares and 1,325,694 Multiple Voting Shares. In addition, as at the date hereof 1,855,250 Subordinate Voting Shares are issuable upon exercise of options granted under the Company’s stock option plan.

 

On July 16, 2019, the Company announced a Normal Course Issuer Bid (“NCIB”) effective from July 18, 2019 to July 17, 2020. The Company is entitled to repurchase up to 2,900,000 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.

 

Page 12 of 13

Changes in internal controls over financial reporting

 

There have been no changes in our internal controls over financial reporting during the three and six month periods ended June 30, 2019 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.

 

Spin-off risk

 

On June 1, 2015, the predecessor to our Company, FirstService Corporation (“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 new FirstService Corporation (“FirstService”), a North American leader in residential property management and related services. Under the Spinoff, Old FSV shareholders received one Colliers share and one FirstService share of the same class as each Old FSV share previously held.

 

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 Management Information Circular of Old FSV dated March 16, 2015 which is available under Colliers’ SEDAR profile 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 Company’s Annual Information Form:

 

·Economic conditions, especially as they relate to commercial and consumer credit conditions and business spending, particularly in regions where our operations 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.
·The impact of changes in the market value of assets under management on the performance of our Investment Management business.
·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.

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·Integration of the recently acquired Harrison Street operations and any further Investment Management acquisitions.
·The ability to attract new clients and to retain major clients and renew related contracts.
·The ability to retain and incentivize advisors.
·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 Euro, Canadian dollar, Australian dollar and UK pound sterling 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, elections, referenda, trade policy changes, immigration policy changes and any outbreak or escalation of hostilities or terrorism and the impact thereof on our business.
·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 about Colliers, including our Annual Information Form for the year ended December 31, 2018, is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. Further information about us can also be obtained at www.colliers.com.