UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20132014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36155
MARCUS & MILLICHAP, INC.
(Exact Namename of Registrantregistrant as Specifiedspecified in Itsits Charter)
Delaware | 35-2478370 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer | |
Identification No.) |
23975 Park Sorrento, Suite 400 Calabasas, California | 91302 | |
(Address of Principal Executive Offices) | (Zip Code) |
(818) 212-2250
(Registrant’s Telephone Number, Including Area Code)telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨x No x¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
AsNumber of November 22, 2013, the registrant had 36,600,897 shares of common stock, par value $0.001 per share, of the registrant issued and outstanding.outstanding as of August 8, 2014 was 36,623,781 shares.
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
Table of ContentsTABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | ||||||||||
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Notes to Condensed Consolidated Financial Statements (Unaudited) | 8 | |||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||||
Item 3. | 33 | |||||||||
Item 4. | 33 | |||||||||
PART II. OTHER INFORMATION | ||||||||||
Item 1. | Legal Proceedings | 34 | ||||||||
Item 1A. | Risk Factors | 34 | ||||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 34 | ||||||||
Item 3. | Defaults Upon Senior Securities | 34 | ||||||||
Item 4. | Mine Safety Disclosures | 34 | ||||||||
Item 5. | Other Information | 34 | ||||||||
Item 6. | Exhibits | 34 | ||||||||
ITEM 1. FINANCIAL1.FINANCIAL STATEMENTS
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except per share amounts)
September 30, 2013 (Unaudited) | December 31, 2012 | |||||||||||||||
June 30, 2014 (Unaudited) | December 31, 2013 | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 28,679 | $ | 3,107 | $ | 104,613 | $ | 100,952 | ||||||||
Commissions receivable, net of allowance for doubtful accounts of $100 and $129 at September 30, 2013 and December 31, 2012, respectively | 4,308 | 5,764 | ||||||||||||||
Commissions and other receivables, net of allowance for doubtful accounts of $73 and $99 at June 30, 2014 and December 31, 2013, respectively | 5,827 | 4,115 | ||||||||||||||
Employee notes receivable | 156 | 807 | 223 | 229 | ||||||||||||
Prepaid expenses and other current assets | 6,769 | 2,903 | 6,273 | 5,204 | ||||||||||||
Deferred tax assets, net | 6,838 | 8,663 | ||||||||||||||
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Total current assets | 39,912 | 12,581 | 123,774 | 119,163 | ||||||||||||
Prepaid rent | 4,909 | 2,855 | 4,236 | 4,999 | ||||||||||||
Investments held in rabbi trust account | 3,832 | 2,905 | ||||||||||||||
Property and equipment, net of accumulated depreciation of $18,370 and $17,917 at September 30, 2013 and December 31, 2012, respectively | 8,476 | 6,688 | ||||||||||||||
Due from affiliates | — | 60,389 | ||||||||||||||
Investments held in rabbi trust | 4,280 | 4,067 | ||||||||||||||
Property and equipment, net of accumulated depreciation of $20,438 and $19,412 at June 30, 2014 and December 31, 2013, respectively | 8,261 | 8,560 | ||||||||||||||
Employee notes receivable | 228 | 350 | 199 | 189 | ||||||||||||
Deferred tax assets, net | 27,446 | 27,185 | ||||||||||||||
Other assets | 3,431 | 3,965 | 3,920 | 3,146 | ||||||||||||
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Total assets | $ | 60,788 | $ | 89,733 | $ | 172,116 | $ | 167,309 | ||||||||
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Liabilities and stockholders’ equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued expenses | $ | 6,821 | $ | 14,350 | $ | 6,330 | $ | 6,911 | ||||||||
Accounts payable and accrued expenses – related party | 74 | 506 | ||||||||||||||
Income tax payable | 4,937 | 6,459 | ||||||||||||||
Notes payable to former stockholders | 894 | 851 | ||||||||||||||
Commissions payable | 12,103 | 22,584 | 15,017 | 25,086 | ||||||||||||
Due to affiliates | 13,528 | — | ||||||||||||||
Accrued employee expenses | 10,215 | 17,519 | ||||||||||||||
Accrued bonuses and other employee related expenses | 13,656 | 16,947 | ||||||||||||||
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Total current liabilities | 42,667 | 54,453 | 40,908 | 56,760 | ||||||||||||
Deferred compensation and commissions | 9,430 | 9,121 | 30,468 | 32,177 | ||||||||||||
Notes payable to former stockholders | 10,610 | 11,504 | ||||||||||||||
Other liabilities | 5,007 | 4,529 | 5,350 | 4,371 | ||||||||||||
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Total liabilities | 57,104 | 68,103 | 87,336 | 104,812 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Series A redeemable preferred stock, $10.00 par value: | 10 | 10 | ||||||||||||||
Authorized shares – 1,000; issued and outstanding shares – 1,000 at September 30, 2013 and December 31, 2012; $10.00 redemption value per share at September 30, 2013 and December 31, 2012 | ||||||||||||||||
Common stock, $1.00 par value: | ||||||||||||||||
Authorized shares – 1,000,000; issued and outstanding shares –234,489 and 233,739 at September 30, 2013 and December 31, 2012, respectively | 235 | 234 | ||||||||||||||
Preferred stock, $0.0001 par value: | — | — | ||||||||||||||
Authorized shares – 25,000,000; issued and outstanding shares – none at June 30, 2014 and December 31, 2013, respectively | ||||||||||||||||
Common Stock $0.0001 par value: | ||||||||||||||||
Authorized shares – 150,000,000; issued and outstanding shares – 36,623,781 and 36,600,897 at June 30, 2014 and December 31, 2013, respectively | 4 | 4 | ||||||||||||||
Additional paid-in capital | 2,675 | 24,718 | 73,143 | 70,445 | ||||||||||||
Stock notes receivable from employees | (13 | ) | (150 | ) | (9 | ) | (13 | ) | ||||||||
Retained earnings (accumulated deficit) | 777 | (3,182 | ) | 11,639 | (7,939 | ) | ||||||||||
Accumulated other comprehensive income | 3 | — | ||||||||||||||
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Total stockholders’ equity | 3,684 | 21,630 | 84,780 | 62,497 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 60,788 | $ | 89,733 | $ | 172,116 | $ | 167,309 | ||||||||
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See accompanying notes to condensed consolidated financial statements.
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSNET AND COMPREHENSIVE INCOME
(UNAUDITED)
(dollar and share amounts in thousands)thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Real estate brokerage commissions | $ | 101,757 | $ | 82,620 | $ | 258,720 | $ | 216,029 | $ | 123,278 | $ | 95,765 | $ | 228,026 | $ | 156,963 | ||||||||||||||||
Financing fees | 6,783 | 5,195 | 18,671 | 13,413 | 8,384 | 6,874 | 14,484 | 11,888 | ||||||||||||||||||||||||
Other revenues | 3,413 | 3,413 | 9,403 | 8,636 | 2,603 | 2,832 | 6,345 | 5,990 | ||||||||||||||||||||||||
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Total revenues | 111,953 | 91,228 | 286,794 | 238,078 | 134,265 | 105,471 | 248,855 | 174,841 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Cost of services | 67,718 | 54,194 | 170,395 | 138,903 | 79,601 | 61,456 | 147,997 | 102,677 | ||||||||||||||||||||||||
Selling, general, and administrative expense | 30,863 | 25,007 | 84,687 | 70,907 | 32,127 | 29,092 | 65,484 | 53,824 | ||||||||||||||||||||||||
Depreciation and amortization expense | 747 | 732 | 2,261 | 2,227 | 811 | 754 | 1,586 | 1,514 | ||||||||||||||||||||||||
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Total operating expenses | 99,328 | 79,933 | 257,343 | 212,037 | 112,539 | 91,302 | 215,067 | 158,015 | ||||||||||||||||||||||||
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Operating income | 12,625 | 11,295 | 29,451 | 26,041 | 21,726 | 14,169 | 33,788 | 16,826 | ||||||||||||||||||||||||
Other income, net | 247 | 41 | 496 | 324 | 330 | 7 | 269 | 249 | ||||||||||||||||||||||||
Interest expense | (401 | ) | — | (805 | ) | — | ||||||||||||||||||||||||||
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Income before provision for income taxes | 12,872 | 11,336 | 29,947 | 26,365 | 21,655 | 14,176 | 33,252 | 17,075 | ||||||||||||||||||||||||
Provision for income taxes | 5,597 | 4,931 | 13,025 | 11,469 | 8,859 | 6,167 | 13,674 | 7,428 | ||||||||||||||||||||||||
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Net income | $ | 7,275 | $ | 6,405 | $ | 16,922 | $ | 14,896 | 12,796 | 8,009 | 19,578 | 9,647 | ||||||||||||||||||||
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Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Foreign currency translation (loss) gain, net of tax of $28, $0, $2, and $0 for the three months ended June 30, 2014 and 2013 and the six months ended June 30, 2014 and 2013, respectively | (39 | ) | — | 3 | — | |||||||||||||||||||||||||||
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Total other comprehensive income (loss) | (39 | ) | — | 3 | — | |||||||||||||||||||||||||||
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Comprehensive income | $ | 12,757 | $ | 8,009 | $ | 19,581 | $ | 9,647 | ||||||||||||||||||||||||
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Earnings per share (1): | ||||||||||||||||||||||||||||||||
Basic | $ | 0.33 | $ | 0.50 | ||||||||||||||||||||||||||||
Diluted | $ | 0.33 | $ | 0.50 | ||||||||||||||||||||||||||||
Weighted average common shares outstanding (1): | ||||||||||||||||||||||||||||||||
Basic | 38,847 | 38,847 | ||||||||||||||||||||||||||||||
Diluted | 38,926 | 38,917 |
(1) | Earnings per share information has not been presented for periods prior to the IPO on October 31, 2013 as it was not meaningful. |
See accompanying notes to condensed consolidated financial statements.
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(dollar amounts in thousands, except share amounts)thousands)
Series A Redeemable Preferred Stock | Common Stock | Additional Paid-In Capital | Stock Notes Receivable From Employees | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
Balance as of December 31, 2012 | 1,000 | $ | 10 | 233,739 | $ | 234 | $ | 24,718 | $ | (150 | ) | $ | (3,182 | ) | $ | 21,630 | ||||||||||||||||
Net income | — | — | — | — | — | — | 16,922 | 16,922 | ||||||||||||||||||||||||
Preferred dividends declared and paid | — | — | — | — | (24,718 | ) | — | (6,463 | ) | (31,181 | ) | |||||||||||||||||||||
Preferred dividends declared | — | — | — | — | — | — | (6,500 | ) | (6,500 | ) | ||||||||||||||||||||||
Deemed capital contribution from MMC | — | — | — | — | 2,655 | — | — | 2,655 | ||||||||||||||||||||||||
Issuance of restricted stock | — | — | 750 | 1 | 20 | (21 | ) | — | — | |||||||||||||||||||||||
Payments on stock notes receivable from employees | — | — | — | — | — | 158 | — | 158 | ||||||||||||||||||||||||
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Balance as of September 30, 2013 | 1,000 | $ | 10 | 234,489 | $ | 235 | $ | 2,675 | $ | (13 | ) | $ | 777 | $ | 3,684 | |||||||||||||||||
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Preferred Stock |
Common Stock | Additional Paid-In Capital | Stock Notes Receivable From Employees | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance as of December 31, 2013 | — | $ | — | 36,600,897 | $ | 4 | $ | 70,445 | $ | (13 | ) | $ | (7,939 | ) | $ | — | $ | 62,497 | ||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 19,578 | 3 | 19,581 | |||||||||||||||||||||||||||
Issuance of unvested restricted stock awards | — | — | 22,884 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,858 | — | — | — | 1,858 | |||||||||||||||||||||||||||
Tax benefit of deductible IPO transaction costs | — | — | — | — | 840 | — | — | — | 840 | |||||||||||||||||||||||||||
Reduction of stock notes receivable from employees. | — | — | — | — | — | 4 | — | — | 4 | |||||||||||||||||||||||||||
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Balance as of June 30, 2014 | — | $ | — | 36,623,781 | $ | 4 | $ | 73,143 | $ | (9 | ) | $ | 11,639 | $ | 3 | $ | 84,780 | |||||||||||||||||||
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See accompanying notes to condensed consolidated financial statements.
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended September 30, | ||||||||||||||||
2013 | 2012 | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | |||||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 16,922 | $ | 14,896 | $ | 19,578 | $ | 9,647 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization expense | 2,261 | 2,227 | 1,586 | 1,514 | ||||||||||||
Provision for bad debt expense | 8 | 174 | (26 | ) | — | |||||||||||
Stock-based compensation, net of taxes | 2,655 | 2,228 | ||||||||||||||
Stock-based compensation | 1,858 | 1,494 | ||||||||||||||
Deferred taxes, net | 1,564 | — | ||||||||||||||
Other non-cash items | 40 | 16 | 63 | (127 | ) | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Commissions receivable | 1,484 | (2,032 | ) | |||||||||||||
Commissions and other receivables | (1,687 | ) | 830 | |||||||||||||
Prepaid expenses and other current assets | (709 | ) | (267 | ) | (1,069 | ) | (204 | ) | ||||||||
Prepaid rent | (2,053 | ) | 195 | 763 | (743 | ) | ||||||||||
Investments in rabbi trust account | (927 | ) | (442 | ) | ||||||||||||
Investments in rabbi trust | (213 | ) | (765 | ) | ||||||||||||
Other assets | 497 | 155 | (799 | ) | 326 | |||||||||||
Due to (from) affiliates | 67,418 | 9,827 | ||||||||||||||
Due from affiliates | — | 63,303 | ||||||||||||||
Accounts payable and accrued expenses | (8,537 | ) | (2,728 | ) | (581 | ) | (8,537 | ) | ||||||||
Accounts payable and accrued expenses – related party | (432 | ) | — | |||||||||||||
Income tax payable | (682 | ) | — | |||||||||||||
Commissions payable | (10,482 | ) | (1,488 | ) | (10,069 | ) | (10,678 | ) | ||||||||
Accrued employee expenses | (7,303 | ) | (441 | ) | ||||||||||||
Accrued bonuses and other employee related expenses | (3,291 | ) | (11,270 | ) | ||||||||||||
Deferred compensation and commissions | 309 | 125 | (1,709 | ) | (784 | ) | ||||||||||
Other liabilities | 509 | (1,921 | ) | 994 | 296 | |||||||||||
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Net cash provided by operating activities | 62,092 | 20,524 | 5,848 | 44,302 | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Payments on employee notes receivable | 1,119 | 411 | ||||||||||||||
Payments received on employee notes receivable | 56 | 1,096 | ||||||||||||||
Issuances of employee notes receivable | (345 | ) | (625 | ) | (60 | ) | (306 | ) | ||||||||
Purchase of property and equipment | (3,697 | ) | (2,921 | ) | (1,317 | ) | (2,420 | ) | ||||||||
Proceeds from sale of property and equipment | 32 | 25 | 1 | 32 | ||||||||||||
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Net cash used in investing activities | (2,891 | ) | (3,110 | ) | (1,320 | ) | (1,598 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||
Principal payments on notes payable to former stockholders | (851 | ) | — | |||||||||||||
Payments on obligations under capital leases | (32 | ) | (155 | ) | (16 | ) | (21 | ) | ||||||||
Payments of initial public offering costs | (2,574 | ) | — | — | (1,819 | ) | ||||||||||
Dividends paid to MMC | (31,181 | ) | (15,654 | ) | ||||||||||||
Repayment of stock notes receivable from employees | 158 | 86 | ||||||||||||||
Dividends paid to Marcus & Millichap Company | — | (24,718 | ) | |||||||||||||
Payments received on stock notes receivable from employees | — | 109 | ||||||||||||||
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Net cash used in financing activities | (33,629 | ) | (15,723 | ) | (867 | ) | (26,449 | ) | ||||||||
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Net increase in cash and cash equivalents | 25,572 | 1,691 | 3,661 | 16,255 | ||||||||||||
Cash and cash equivalents at beginning of period | 3,107 | 3,158 | 100,952 | 3,107 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 28,679 | $ | 4,849 | $ | 104,613 | $ | 19,362 | ||||||||
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MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in thousands)
Nine months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Supplemental disclosures of cash flow information | ||||||||
Interest paid during the period | $ | 1 | $ | 3 | ||||
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Income taxes paid to MMC | $ | 19,694 | $ | 12,061 | ||||
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Supplemental disclosures of noncash investing and financing activities | ||||||||
Deferred offering costs included in accounts payable and other accrued expenses | $ | 583 | — | |||||
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Property and equipment included in accounts payable and accrued expenses | $ | 425 | — | |||||
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Issuance of restricted stock for notes receivable | $ | 21 | $ | 90 | ||||
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Deemed capital contribution from MMC | $ | 2,655 | $ | 2,228 | ||||
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Preferred dividends declared but not paid | $ | 6,500 | — | |||||
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Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Supplemental disclosures of cash flow information | ||||||||
Interest paid during the period | $ | 619 | $ | — | ||||
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Income taxes paid (paid to former parent in 2013) | $ | 12,795 | $ | 11,640 | ||||
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Supplemental disclosures of noncash investing and financing activities | ||||||||
Tax benefit of deductible IPO transaction costs included in income tax payable | $ | 840 | — | |||||
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Deferred offering costs | $ | — | $ | 168 | ||||
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Net change in accounts payable and accrued expenses related to property and equipment additions | $ | (3 | ) | — | ||||
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Issuance of restricted stock for notes receivable | $ | — | 21 | |||||
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Deemed capital contribution from Marcus & Millichap Company | $ | — | $ | 1,494 | ||||
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See accompanying notes to condensed consolidated financial statements.
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
1. | Description of business, basis of presentation and recent accounting |
Description of businessBusiness
Marcus and& Millichap, Real Estate Investment Services, Inc., (the “Company”, “MMREIS”, “we”, “us”“Marcus & Millichap”, or “our”“MMI”), a Delaware corporation, is a brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. MMREISMMI operates 77 offices in the United States and Canada through its two wholly-owned subsidiaries, Marcus & Millichap Real Estate Investment Services, Inc. (“MMREIS”) and Marcus & Millichap Capital Corporation (“MMCC”).
Reorganization and Initial Public Offering
MMI was incorporatedformed in 1976 and prior to the completion of its initial public offering (the “IPO”) on November 5,June 2013 the Company was majority-owned byin preparation for Marcus & Millichap Company (“MMC”) andto spin-off its majority owned subsidiary, MMREIS (“Spin-Off”). Prior to the initial public offering (“IPO”) of MMI stock on October 30, 2013, all of the Company’s preferred and common stock outstanding was held bystockholders of MMREIS (including MMC and its affiliates or officers and employees of MMREIS) contributed all of their outstanding shares to the Company. In June 2013,Company, in preparationexchange for new MMI common stock, and MMREIS became MMI’s wholly-owned subsidiary. Thereafter, MMC distributed 80.0% of the spin-offshares of MMI common stock to MMC’s shareholders and exchanged the remaining portion of its real estate investment services business, orshares of MMI common stock for cancellation of indebtedness of MMC.
Prior to the Spin-Off, MMC formed Marcus & Millichap, Inc.MMI and MMREIS were affiliates under common control, and the assets and liabilities of MMREIS were recorded at carryover basis at the Spin-Off date. The historical financial statements of MMREIS, as the Company’s predecessor, have been presented as the historical financial statements of the Company for all periods prior to the Spin-Off from the beginning of the earliest period presented.
On November 5, 2013, MMI completed its Initial Public Offering (“Marcus & Millichap” or “MMI”IPO”). See Note 9 - Subsequent Events for additional information. of 6,900,000 shares of common stock at a price to the public of $12.00 per share.
Basis of Presentation
The financial information presented in the accompanying unaudited condensed consolidated financial statements, as of September 30, 2013, and for the three and nine month periods ended September 30, 2013 and 2012, have been prepared in accordance with rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10–Q and Article 10-01 of Regulation S-X. Accordingly, somethey do not include all of the information and footnote disclosuresfootnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements have been condensed or omitted.statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the calendar year ending December 31, 2013, or for other interim periods or future years. These unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2013 included in MMI’s Final Prospectusthe Company’s Annual Report on Form 10-K filed on March 21, 2014, with the SEC on October 31, 2013 pursuant to Rule 424(b)(5)SEC. The results of the Securities Actthree and six months ended June 30, 2014 are not necessarily indicative of 1933.the results to be expected for the fiscal year ending December 31, 2014, or for other interim periods or future years.
Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly ownedwholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain prior-period amounts in the condensed consolidated statements of cash flows have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations, financial condition, stockholders’ equity or on cash flows subtotals.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash due from affiliate, and receivables.cash equivalents and commissions receivable. Cash is placed with high-credit quality financial institutions. To reduce its credit risk, the Company monitors the credit standing of the financial institutions that hold the Company’s cash and cash equivalents. The Company historically has not experienced any losses in its cash and cash equivalent or due from affiliate. Theequivalents. For commissions receivable, the Company maintains allowances for estimated credit losses based on management’s assessment of the likelihood of collection. As of SeptemberJune 30, 20132014 and December 31, 2012,2013, no individual transaction accounted for 10% or more of commissions receivable.
The Company derives its revenues from a broad range of real estate investors owners, and usersowners in the United States and Canada, none of which individually represents a significant concentration of credit risk. For the three and ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, no individual customer represented 10% or more of total revenues.
Recent Accounting Pronouncements
MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers(dollar amounts“ASU 2014-09”), which supersedes virtually all of the current revenue recognition guidance under U.S. GAAP, and requires entities to recognize revenue for transfer to customer of promised goods or services in thousands, except share amounts)
Accounting Policies
Referan amount that reflects the consideration to MMI’s Final Prospectuswhich the entity expects to be entitled to receive in exchange for a complete discussionthose goods or services. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. ASU 2014-09 permits two implementation approaches, one requiring retrospective application of all significant accounting policies. See Note 9 - Subsequent Events for additional information related to income taxesthe new standard with restatement of prior years and stock-based compensation.one requiring prospective application of the new standard with disclosure of results under old standards. For MMI, the new standard will be effective January 1, 2017. The Company is currently evaluating the impact of this new standard.
2. | Property and Equipment |
Property and equipment, net consist of the following:following (in thousands):
September 30, | December 31, | |||||||||||||||
2013 | 2012 | |||||||||||||||
June 30, 2014 | December 31, 2013 | |||||||||||||||
Computer software and hardware equipment | $ | 7,489 | $ | 6,211 | $ | 8,729 | $ | 8,442 | ||||||||
Furniture, fixtures, and equipment | 19,357 | 18,394 | 19,970 | 19,530 | ||||||||||||
Less accumulated depreciation and amortization | (18,370 | ) | (17,917 | ) | ||||||||||||
Less: accumulated depreciation and amortization | (20,438 | ) | (19,412 | ) | ||||||||||||
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$ | 8,476 | $ | 6,688 | $ | 8,261 | $ | 8,560 | |||||||||
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Furniture,The cost and accumulated depreciation of assets subject to capital leases is recorded in furniture, fixtures and equipment with a net book value of $39 and $160, are recorded under capital leaseswas not material as of September 30, 2013 and December 31, 2012, respectively.2013. The related depreciationCompany does not have any remaining capital lease obligations as of these assets is included in depreciation expense.June 30, 2014.
Payments for certain improvements to the Company’s leased office space are recorded as prepaid rent. Amortization of prepaid rent is recorded using the straight-line method over the shorter of the estimated economic life or lease term as an increasea charge to rent expense using the straight-line method.expense.
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. | Selected Balance Sheet Data |
Commissions Receivableand Other Receivables, Net
Commissions receivableand other receivables, net consisted of the following:following (in thousands):
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Commissions due from buyer/seller | $ | 3,288 | $ | 5,205 | ||||
Due from sales agents | 1,120 | 688 | ||||||
Less allowance for doubtful accounts | (100 | ) | (129 | ) | ||||
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$ | 4,308 | $ | 5,764 | |||||
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June 30, 2014 | December 31, 2013 | |||||||
Commissions due from buyer/seller | $ | 3,993 | $ | 3,241 | ||||
Due from independent contractors(1) | 1,907 | 973 | ||||||
Less: allowance for doubtful accounts | (73 | ) | (99 | ) | ||||
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$ | 5,827 | $ | 4,115 | |||||
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(1) | Represents commissions due from the Company’s sales and financing professionals. |
The following table presents the changes in the allowance for doubtful accounts:accounts for the six months ended June 30, 2014 and 2013 (in thousands):
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Balance at beginning of period | $ | (129 | ) | $ | (143 | ) | ||
Provision for losses on commissions receivable | — | — | ||||||
Write-off of uncollectible commissions receivable | 29 | 14 | ||||||
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Balance at end of period | $ | (100 | ) | $ | (129 | ) | ||
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MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
Prepaid Expenses and Other Current Assets
Deferred Offering Costs
Deferred offering costs, consisting of legal, accounting and other fees and costs relating to the initial public offering, are capitalized and included in prepaid expenses and other current assets in the consolidated balance sheets. The deferred offering costs will be offset against the initial public offering proceeds upon the closing of the IPO which occurred on November 5, 2013. There were $3,157 of capitalized deferred offering costs as of September 30, 2013 and no similar costs as of December 31, 2012.
June 30, 2014 | June 30, 2013 | |||||||
Balance at beginning of period | $ | (99 | ) | $ | (129 | ) | ||
Reduction (provision) for bad debt expense | 26 | — | ||||||
Write-off of uncollectible commissions receivable | — | — | ||||||
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Balance at end of period | $ | (73 | ) | $ | (129 | ) | ||
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Other Assets
Other assets consisted of the following:following (in thousands):
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Commission notes receivable | $ | 290 | $ | 739 | ||||
Due from sales agents | 590 | 376 | ||||||
Agent recruiting receivable | 1,459 | 1,766 | ||||||
Security deposits and other | 1,092 | 1,084 | ||||||
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$ | 3,431 | $ | 3,965 | |||||
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Other Liabilities
Other liabilities consisted of the following:
June 30, 2014 | December 31, 2013 | |||||||
Commission notes receivable | $ | 40 | $ | 82 | ||||
Due from independent contractors(1) | 514 | 566 | ||||||
Security deposits | 1,153 | 1,126 | ||||||
Other | 2,213 | 1,372 | ||||||
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$ | 3,920 | $ | 3,146 | |||||
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September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Long term deferred rent | $ | 3,530 | $ | 2,703 | ||||
Accrued legal | 1,351 | 1,826 | ||||||
Other | 126 | — | ||||||
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$ | 5,007 | $ | 4,529 | |||||
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(1) | Represents amounts advanced on behalf of the Company’s sales and financing professionals. |
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
Deferred Compensation and Commissions
Deferred compensation and commissions consisted of the following:following (in thousands):
September 30, 2013 | December 31, 2012 | June 30, 2014 | December 31, 2013 | |||||||||||||
SARs liability | $ | 20,472 | $ | 19,970 | ||||||||||||
Commissions payable | $ | 6,070 | $ | 6,700 | 6,196 | 8,623 | ||||||||||
Deferred compensation liability | 3,360 | 2,421 | 3,800 | 3,584 | ||||||||||||
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$ | 9,430 | $ | 9,121 | $ | 30,468 | $ | 32,177 | |||||||||
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DuringSARs Liability
Prior to the fiscal year endedIPO, certain employees of MMI were granted stock appreciation rights (“SARs”) under a stock-based compensation program assumed by MMC (“Program”). The SARs agreements were revised and the MMC liability of $20.0 million for the SARs was frozen at March 31, 2001,2013, and was ultimately transferred to MMI through a capital contribution. The SARs liability will be settled with each participant in installments upon retirement or departure. Under the revised agreements, MMI is required to accrue interest on the outstanding balance beginning on January 1, 2014 at a rate based on the 10-year treasury note plus 2%. The rate resets annually. The rate at January 2, 2014 was 5.03%, and MMI recorded interest expense related to this liability of $251,000 and $502,000 for the three and six months ended June 30, 2014, respectively.
Commissions Payable
Certain investment sales professionals have the ability to earn additional commissions after meeting certain annual revenue thresholds. These commissions are recognized as cost of services in the period in which they are earned. The Company establishedhas the MMREIS ability to defer payment of certain commissions, at its election, for up to three years. Commissions payable that are not expected to be paid within twelve months are classified as long-term liabilities.
Deferred Compensation Plan (the Deferred Compensation Plan) for aLiability
A select group of management. Themanagement is eligible to participate in a Deferred Compensation Plan has similar characteristics ofPlan. The plan is a 401(k)409A plan and providespermits the Deferred Compensation Plan participants additional flexibility in terms of contribution and distribution elections. Participants may electparticipant to invest in various equity and debt securities offered withindefer compensation up to limits as determined by the Deferred Compensation Plan program.plan. The Company choseelected to fund the Deferred Compensation Plan through variable life insurance policies purchased for the participants’ benefit. The Deferred Compensation Plan is managed by a third-party institutional fund manager, and the deferred compensation and investment earnings are held as a Company asset in a rabbi trust. This trust, accountwhich is recorded in investments held in rabbi trust caption in the accompanying condensed consolidated balance sheets. The assets in the trust are restricted unless the Company becomes insolvent, as defined in the Deferred Compensation Plan, in which case the Deferred Compensation Plan’strust assets are subject to the claims of the Company’sMMI’s creditors. The Company may also, in its sole and absolute discretion, elect to withdraw at any time all or a portion of the trust assets by an amount by which the fair market value of the Deferred Compensation Plan’strust assets exceeds 110% of the aggregate amount credited to the Deferred Compensation Plan’s participants’ accounts, as defined by the Deferred Compensation Plan.accounts.
The deferred compensation liability is included in other liabilities on the consolidated balance sheets as reflected above. The net change in the carrying value of the investment assets and the related obligation are recorded in other income, net and selling, general, and administrative expense, respectively in the condensed consolidated statements of operations.
Amounts due from (to) affiliates consisted ofnet and comprehensive income and were not material during the following:
September 30, 2013 | December 31, 2012 | |||||||
Cash sweep receivable from MMC | $ | — | $ | 71,905 | ||||
Dividends payable to MMC | (6,500 | ) | — | |||||
Taxes payable to MMC | (6,490 | ) | (11,133 | ) | ||||
General and administrative expenses payable to MMC | (538 | ) | (383 | ) | ||||
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$ | (13,528 | ) | $ | 60,389 | ||||
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Prior tothree and six months ended June 30, 2013, the majority of the cash generated2014 and used in the Company’s operations was held in bank accounts with one financial institution that were included in a sweep arrangement with MMC. Pursuant to a treasury management service agreement with that financial institution, the cash was swept daily into MMC’s money market account. The Company collected interest income from MMC at the same interest rate as MMC earned on the money market account. Historically, other than for a 2-week period around MMC’s March 31 fiscal year end, the Company had a receivable from MMC for the cash that was swept. When the sweep arrangement was not in effect, during the week before and the week after March 31, the Company’s cash balances remained in the Company’s bank accounts. As of June 30, 2013, the sweep arrangement with MMC was permanently terminated.2013.
MMC has a credit agreement under which, the Company, along with many other entities controlled by MMC, was a guarantor as of September 30, 2013. The credit agreement comprises two components, a line of credit and a term loan which mature on September 26, 2015 and June 1, 2019, respectively. There are certain covenants that the Company is required to comply with, such as providing an annual audit report, and quarterly financial statements. The Company would be required to satisfy the outstanding obligation upon an event of default as defined in the credit agreement. Under the terms of the guarantee, there is not a specific allocation of liability related to the Company as all guarantors would be combined for paying specific claims. The Company’s guarantee for each component of the credit agreement expires on the respective maturity date. The maximum amount of future
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)Other Liabilities
Other liabilities consisted of the following (in thousands):
June 30, 2014 | December 31, 2013 | |||||||
Long term deferred rent | $ | 2,465 | $ | 2,952 | ||||
Accrued legal | 2,849 | 1,351 | ||||||
Other | 36 | 68 | ||||||
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$ | 5,350 | $ | 4,371 | |||||
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payments
4. | Notes Payable to Former Stockholders |
In conjunction with the Spin-Off and IPO, notes payable to certain former stockholders of MMREIS that were issued in settlement of restricted stock and SARs awards that were redeemed by MMREIS upon the termination of employment by these former stockholders (“the Notes”), and had been previously assumed by MMC, were transferred to the Company. The Notes are unsecured and bear interest at 5% with annual principal and interest installments payable until April 14, 2020. Accrued interest pertaining to the Notes was $108,000 and $425,000 as of June 30, 2014 and December 31, 2013, respectively and was recorded in accounts payable and accrued expenses caption in the accompanying condensed consolidated balance sheets. During the three and six months ended June 30, 2014, interest expense in the amount of $151,000 and $303,000, respectively was recorded in the accompanying condensed consolidated statements of net and comprehensive income. During the six months ended June 30, 2014, the Company could be requiredmade payments of $1.5 million and of this amount, $851,000 pertained to makeprincipal and $618,000 pertained to interest.
5. | Credit Agreement |
On June 18, 2014, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (“Bank”), dated as of June 1, 2014 (the “Credit Agreement”). The Credit Agreement provides for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of the Company’s domestic subsidiaries (the “Credit Facility”) and matures on June 1, 2017. The Company may borrow, repay and reborrow amounts under the guaranteeCredit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. In connection with executing the Credit Agreement, the Company paid bank fees and other expenses in the aggregate amount of $224,000, which are being amortized over the term of the Credit Agreement. The amortization is included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income. The Company must pay a commitment fee of up to 0.1% per annum, payable quarterly, based on the amount of unutilized commitments under the Credit Facility. As of June 30, 2014, there were no amounts outstanding under the Credit Agreement.
Borrowings under the Credit Agreement are available for general corporate purposes and working capital. The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit. Borrowings under the Credit Facility will bear interest, at the Company’s option, at either the (i) Base Rate (defined as the highest of (a) the Bank’s prime rate, (b) the Federal Funds Rate plus 1.5% and (c) one-month LIBOR plus 1.5%), or (ii) at a variable rate between 0.875% and 1.125% above LIBOR, based upon the total funded debt to EBITDA ratio.
The Credit Facility contains customary covenants, including financial and other covenants (which require the Company, on a combined basis with its guarantors, to maintain (i) an EBITDAR Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25:1.0 as of September 30, 2013each quarter end on a rolling 4-quarter basis and (ii) total funded debt to EBITDA not greater than 2.0:1.0) as of each quarter end on a rolling 4-quarter basis, reporting requirements and events of default. The Credit Facility is equal to the amount outstanding of $56,900 ($39,400 outstanding on the line of credit and $17,500 advanced under the term loan componentsecured by substantially all assets of the line)Company, including pledges of 100% of the stock or other equity interest of each subsidiary except for the capital stock of a controlled foreign corporation (as defined in the Internal Revenue Code). The maximum amountAs of future payments thatJune 30, 2014, the Company could be required to make under the guarantee as of December 31, 2012 was equal to the amount outstanding of $49,700 ($30,700 outstanding on the line of credit and $19,000 advanced under the term loan component of the line). At December 31, 2012 and September 30, 2013, MMC was in compliance with all debt covenants under the terms of the line of credit agreement. The Company was released from the guaranty effective November 5, 2013 in connection with the Spin-Offfinancial and the IPO.non-financial covenants.
Total dividends declared
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. | Related-Party Transactions |
Shared and paid for the nine months ended September 30, 2013 and 2012 were $31,181 and $15,654, respectively. Total dividends declared but not paid for nine months ended September 30, 2013 and 2012 were $6,500 and $0, respectively. In October 2013, dividends in the amount of $6,500 were paid.Transition Services
Under a shared services arrangement with MMC, MMC providedMMREIS was charged $1.0 million for reimbursement of health insurance premiums, $109,000 for general and administrative expenses and $186,000 in shared services to the Company. Duringduring the three months ended SeptemberJune 30, 2013 and 2012, the Company incurred $493MMREIS was charged $1.8 million for reimbursement of health insurance premiums, $389,000 for general and $486, respectively under theadministrative expenses and $403,000 in shared services arrangement. Duringduring the ninesix months ended SeptemberJune 30, 2013 and 2012, the Company incurred $896 and $834, respectively, to MMC pursuant to this arrangement. 2013.
In connection with the IPO, the shared services arrangement with MMC was replaced by a Transition Services Agreement between MMIthe Company and MMC that became effective uponon October 31, 2013 whereby MMC provides certain services to the completionCompany for a limited period of time. During the IPO. In accordance with the Transition Services Agreement,three and six months ended June 30, 2014, $0 and $1.0 million, respectively was incurred for reimbursement to MMC will continue to incur certainfor health insurance premiums and $53,000 and $187,000, respectively for other costs, which are included in selling, general, and administrative expenses on behalfexpense in the accompanying condensed consolidated statements of MMI. See Note 9 - Subsequent Events for additional information.
Amounts representingnet and comprehensive income. Effective April 2014, MMI has its own health insurance premiums incurred byplan. As of June 30, 2014 and December 31, 2013, $74,000 and $506,000, respectively, remains unpaid and included in accounts payable and other accrued expenses – related party in the accompanying condensed consolidated balance sheets.
Financing and Brokerage Services with the Subsidiaries of MMC on behalf of the Company for three months ended September 30, 2013 and 2012 were $1,018, and $1,090, respectively. Amounts representing health insurance premiums incurred by MMC on behalf of the Company for nine months ended September 30, 2013 and 2012 were $2,823, and $2,661, respectively. Such expenses, paid by MMC on behalf of the Company, were allocated based on individual employee coverage costs.
DuringFor the three months ended SeptemberJune 30, 2014 and 2013, the Company recorded real estate brokerage commissions and 2012, MMC incurred $112 and $112, respectively in general and administrative expenses on behalf of the Company. During the nine months ended September 30, 2013 and 2012, MMC incurred $501 and $470, respectively in general and administrative expenses on behalf of the Company. Expenses incurred by MMC, such as rent, corporate compensation, and other corporate costs, are allocated on a pro rata basis.
The Company earned interest income from MMCfinancing fees of $0 and $35 for the three months ended September 30, 2013$67,500, respectively, and 2012, respectively. The Company earned interest incomecost of services of $0 and $40,500, respectively from MMC of $74 and $95 for the nine months ended September 30, 2013 and 2012, respectively.
The Company issues loans to employees and concurrently recognizes an employee notes receivable. At September 30, 2013 and December 31, 2012, the aggregate principal amount outstanding was $384 and $1,157, respectively, which are included in employee notes receivable in the consolidated balance sheets.
MMC has wholly or majority owned subsidiaries that buy and sell commercial real estate properties. The Company has performed financing and brokerage services related to these transactions with thecertain subsidiaries of MMC. FinancingFor the six months ended June 30, 2014 and 2013, the Company recorded real estate brokerage service revenuecommissions and financing fees of $60,000 and $382,000, respectively, and cost of services of $36,000 and $228,000, respectively from these transactions with thecertain subsidiaries of MMC.
Operating Lease with MMC totaled $0 and $394 for the three months ended September 30, 2013 and September 30, 2012, respectively and $382 and $1,013 for the nine months ended September 30, 2013 and September 30, 2012, respectively. Commission expense for these transactions totaled $0 and $212 for the three months ended September 30, 2013 and 2012, respectively and $238 and $591 for the nine months ended September 30, 2013 and September 30, 2012, respectively.
The Company has an operating lease with MMC for an office located in Palo Alto, California. The lease expires April 30, 2015. Rent expense for this office totaled $109 and $69$109,500 for each of the three months ended SeptemberJune 30, 2014 and 2013, respectively which is included in selling, general, and 2012, respectively.administrative expense in the accompanying condensed consolidated statements of net and comprehensive income. Rent expense totaled $289$219,000 and $208$179,000 for the ninesix months ended SeptemberJune 30, 2014 and 2013, respectively, which is included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income.
Other
Following the IPO, Mr. Marcus, the Company’s founder and Co-Chairman, continues to own indirectly approximately 67% of the Company’s fully diluted shares, including shares to be issued upon settlement of vested deferred stock units, or DSUs.
Total dividends declared and paid to MMC for the six months ended June 30, 2013 were $24.7 million.
Prior to its termination on June 30, 2013, the Company was subject to a cash sweep arrangement with MMC. Under the arrangement, the Company’s cash was swept daily into an MMC money market account. The Company received interest on the balances held in the sweep accounts. The Company earned interest of $33,000 and September$74,000 on the balances for the three and six months ended June 30, 2012,2013, respectively.
The Company, from time-to-time makes advances to non-executive employees. At June 30, 2014 and December 31, 2013, the aggregate principal amount for employee loans outstanding was $423,000 and $419,000, respectively which is included in employee notes receivable in the accompanying condensed consolidated balance sheets.
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
The Company is part of a consolidated federal income tax return and a combined unitary California tax return that is filed by MMC. The Company and MMC have a tax-sharing agreement whereby the Company provides for income taxes in its consolidated statements of income using an effective tax rate of 43.5%. The amount derived represents a receivable or obligation of the Company from (to) MMC that the Company generally settles on a current basis. In addition, all deferred tax assets and liabilities are recorded by MMC. As part of the IPO, the tax sharing agreement with MMC was terminated effective October 31, 2013. See Note 4 – Related-Party Transactions and Note 9 - Subsequent Events for additional information.
The provision for income taxes attributable to the Company consists of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Federal | $ | 4,910 | $ | 4,325 | $ | 11,425 | $ | 10,060 | ||||||||
State | 687 | 606 | 1,600 | 1,409 | ||||||||||||
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$ | 5,597 | $ | 4,931 | $ | 13,025 | $ | 11,469 | |||||||||
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The provision (benefit) for income taxes for the three and nine months ended September 30, 2013 and 2012, differs from the amounts computed by applying the statutory federal corporate income tax rate of 35% to earnings before income taxes as a result of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Computed expected tax expense | $ | 4,504 | $ | 3,967 | $ | 10,480 | $ | 9,228 | ||||||||
State taxes (net of federal tax effect) | 630 | 555 | 1,467 | 1,292 | ||||||||||||
Permanent differences | (15 | ) | (24 | ) | 42 | (17 | ) | |||||||||
Difference due to tax-sharing rate | 478 | 433 | 1,036 | 966 | ||||||||||||
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Provision for income taxes | $ | 5,597 | $ | 4,931 | $ | 13,025 | $ | 11,469 | ||||||||
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7. | Fair Value Measurements |
ASC 820,Fair Value Measurement (“ASC 820”) establishes the accounting guidance for fair value is defined asmeasurements that applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Under the priceaccounting guidance, the Company makes fair value measurements that would be received to sell an assetare classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or paid to transfer a liabilityliabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the principal or most advantageous market for anfull term of the asset or liability, in an orderly transaction betweenor
Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The hierarchy below lists three levels ofConsideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Investments held in a rabbi trust are carried at fair value based on the extentand considered to which inputs used in measuring fair value are observablebe in the market. We categorize eachLevel 1 classification.
Fair Value of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. This hierarchy prioritizes the inputs into three broad levels as follows:
MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
Financial Instruments
The fair values of the Company’s financial instruments, including such items in the condensed consolidated financial statement captions as cash and cash equivalents, commissions and notes receivable, due from (to) affiliates,other receivables, net, accounts payable and accrued expenses and commissions payable, approximate their carrying valuesare carried at cost, which approximates fair value based on their nature,immediate or short-term maturities and terms that approximate current market terms and interest rates, which approximate current fair value market rates andthese financial instruments are considered to be in the Level 1 classification.
Investments heldAs the Company’s obligations under notes payable to former stockholders and certain employee and agent notes receivable bear fixed interest rates that approximate the rates currently offered to the Company for similar debt instruments, the Company has determined that the carrying value on these instruments approximates fair value. As the Company’s obligations under SARs liability (included in a rabbi trust accountdeferred compensation and commissions caption) bear variable interest rates, the Company has determined that the carrying value approximates the fair value. These are considered to be in the Level 1 classification. See Note 3 – Selected Balance Sheet Data for additional information.
8. | Stockholders’ Equity |
Common Stock
As of June 30, 2014 and December 31, 2013, there were 36,623,781 and 36,600,897 shares of common stock, $0.0001 par value, issued and outstanding, respectively, including 52,884 and 30,000 restricted stock awards issued to the non-employee directors.
The Company currently does not intend to pay a regular dividend. The Company will evaluate its dividend policy in the future. Any declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of the board of directors and will depend on many factors, including the Company’s financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that the board of directors deems relevant.
Preferred Stock
The Company has 25,000,000 authorized shares of preferred stock with a par value $0.0001 per share. At June 30, 2014 and December 31, 2013, there were no preferred shares issued or outstanding.
MARCUS & MILLICHAP, REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
Prior to the IPO
Restricted Common Stock and SARs
Prior to the CompanyIPO, MMREIS granted options and SARs under a stock-based compensation award program (the “Program”). The options were exercisable into shares of unvested restricted common stock. The Program was administered by the board of directors. The board determined the terms of an award, including the amount, number of rights or shares, and vesting period, among others. Options issued generally had terms of one year or less and the restrictedless. Restricted common stock issued upon exercise of thestock options generally vested over three to five years.years, and stock options typically were exercised immediately for a note receivable. The exercise price of the options was based upon a formula equivalent to the net book value of common stock as of the end of the fiscal year immediately preceding the date of issuance. The Company had not formally reserved any shares of its common stock for future stock awards under
During the Program.
In prior yearsthree and during the ninesix months ended SeptemberJune 30, 2013, employees of the CompanyMMREIS exercised 0 and 750 stock options, respectively, through the issuance of notes receivable. Cash payments on notes receivable were presented as an increase in consolidated stockholders’ equity. Such notes bore interest at a rate of 5% or 6% per annum and were due in defined installments on various remaining dates through April 15, 2016, which was consistent with the vesting periods of the restricted common stock.
There were no redemptions or cancelations of stock options during the three and ninesix months ended SeptemberJune 30, 2013 or September 30, 2012.
The following is a summary of the Company’s stock option activity:
Nine months Ended September 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Shares Under Options | Weighted- Average Exercise Price | Shares Under Options | Weighted- Average Exercise Price | |||||||||||||
Options outstanding at beginning of period: | 750 | $ | 28.86 | 3,500 | $ | 25.67 | ||||||||||
Exercised | (750 | ) | 28.86 | (3,500 | ) | 25.67 | ||||||||||
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Options outstanding at end of period | — | $ | — | — | $ | — | ||||||||||
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The following is a summary of the Company’s restricted common stock activity:
Nine months Ended September 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Restricted Stock | Weighted- Average Grant Date Fair Value | Restricted Stock | Weighted- Average Grant Date Fair Value | |||||||||||||
Restricted common stock outstanding at beginning of period: | 27,999 | $ | 23.36 | 24,499 | $ | 23.36 | ||||||||||
Issued upon exercise of stock options | 750 | 28.86 | 3,500 | 25.67 | ||||||||||||
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Restricted common stock outstanding at end of period | 28,749 | $ | 23.76 | 27,999 | $ | 23.67 | ||||||||||
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Restricted common stock vested at end of period | 26,605 | 22,682 | ||||||||||||||
Restricted common stock unvested at end of period | 2,144 | 5,317 |
MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
The following is a summary of the Company’s SARs activity:
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
SARs outstanding at beginning and end of period: | 28,733 | 27,983 | ||||||
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SARs vested at end of period | 26,589 | 22,666 | ||||||
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MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
2013.
Stock-basedStock-Based Compensation Expense and Deemed Capital Contribution (Distribution) From MMC
Historically, MMC assumed the Company’sMMREIS’s obligation with respect to any appreciation in the value of the underlying vested awards and SARs in excess of the employees’ exercise price. MMC was deemed to make a capital contribution to the Company’sMMREIS’s additional paid-in capital equal to the amount of compensation expense recorded, net of the applicable taxes. Based on the tax-sharing agreement between the CompanyMMREIS and MMC, the tax deduction on the compensation expense recorded by the CompanyMMREIS was allocated to MMC. MMC recorded the liability related to the appreciation in the value of the underlying stock and SARs in its consolidated financial statements. To the extent of any depreciation in the value of the underlying vested awards and SARs (limited to the amount of any appreciation previously recorded from the employees’ original exercise price), compensation expense was reduced and MMC was deemed to receive a capital distribution.
The total compensation cost related to unvested stock and SARs was generally recognized over approximately four years. Restricted common stock issued upon exercise of stock options was generally vested over three to five years and stock options typically were exercised immediately for a note receivable.
The total formula-settlement value and total compensation cost related to non-vested stock and SARs are as follows:
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Stock | $ | 271 | $ | 421 | ||||
Rights under SARs | $ | 225 | $ | 313 |
During the three months ended September 30, 2013 and 2012, total stock based compensation expense was $2,053 and $1,760, respectively. During the nine months ended September 30, 2013 and 2012, total stock based compensation expense was $4,679 and $3,943, respectively.
The total fair value of stock and SARs that vested during the nine months ended September 30 was as follows:
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Stock | $ | 470 | $ | 695 | ||||
Rights under SARs | $ | 405 | $ | 566 |
In conjunction with the IPO, the vesting of all unvested restricted stock and all unvested SARs was accelerated. See Note 9 - Subsequent Events for additional information.
MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
Series A Redeemable Preferred Stock
Prior to the IPO, the Company had 1,000 shares of Series A Redeemable Preferred Stock (Series A Preferred) issued and outstanding as of September 30, 2013 and December 31, 2012. The terms are discussed below.
Following the IPO, MMI has 25,000 authorized shares of preferred stock with a par value $0.0001 per share. See Note 9 - Subsequent Events for additional information.
Dividends
Prior to the IPO, the stockholders of Series A Preferred were entitled to receive dividends, payable in preference and priority to any distribution on common stock, at a rate determined by the Board of Directors, when and as declared by the Board of Directors. The right to dividends on the Series A Preferred was not cumulative, and no right accrued to the holders of Series A Preferred by reason of the fact that dividends on such shares were not declared and paid in any prior year, nor are any undeclared or unpaid dividends entitled to bear or accrue interest. No dividends were paid with respect to common stock unless Series A Preferred stockholders received a dividend return in such year in the amount of $10 for each outstanding share of Series A Preferred. To the extent that dividends were declared on any common share, a dividend in an equal amount was to be paid on each outstanding share of Series A Preferred.
Total preferred dividends declared and paid for the nine months ended September 30, 2013 and 2012 were $31,181 and $15,654, respectively. Total preferred dividends declared on the Series A Preferred but not paid for nine months ended September 30, 2013 and 2012 were $6,500, and $0, respectively. No dividends were declared for common stock for the nine months ended September 30, 2013 and 2012. In October 2013, dividends in the amount of $6,500 were paid for Series A Preferred.
Liquidation Preference
In the event of voluntary or involuntary liquidation, the Series A Preferred stockholders were entitled to be paid, before any payment was to be made in respect of the Company’s common stock, an amount equal to $10 per share of Series A Preferred plus all accrued but unpaid dividends for each share of Series A Preferred. If, upon liquidation, the assets of the Company available for distribution to its stockholders were insufficient to pay the holders of Series A Preferred, the entire remaining assets of the Company available for distribution would have been distributed ratably among the holders of the Series A Preferred in proportion to the full amount to which they would have otherwise been respectively entitled.
After the payment or setting apart for payment to the holders of the Series A Preferred, the remaining assets and funds of the Company available for distribution to the stockholders would have been distributed among the holders of common stock pro rata on the basis of the number of shares of common stock then outstanding.
Redemption
The Company was permitted to redeem any or all shares of Series A Preferred by paying an amount equal to $10 per share plus all declared and unpaid dividends with respect to such shares at the redemption date. Series A Preferred shares were not convertible into common stock.
Voting Rights
The Series A Preferred stockholders did not have voting rights.
MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
Dividends
Prior to the IPO, the Company distributed substantially all of its net income to MMC in the form of cash dividends. Following the IPO, MMI does not intend to pay a regular dividend. We will evaluate our dividend policy in the future. Any declaration and payment of future dividends to holders of MMI common stock will be at the discretion of the board of directors and will depend on many factors, including MMI’s financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our board of directors deems relevant.
The Spin-Off and Initial Public Offering
On November 5, 2013, MMI completed its IPO of 6,900,000 shares of common stock at a price to the public of $12.00 per share. MMI sold 4,173,413 shares of common stock in the IPO, including 900,000 shares of common stock pursuant to the exercise of the underwriters’ option to purchase additional shares. Selling stockholders sold an aggregate of 2,726,587 shares in the IPO at the same price to the public. MMI did not receive any proceeds from the sale of the shares by the selling stockholders.
The IPO generated net proceeds to MMI of approximately $42,701, including the underwriters’ full exercise of their option to purchase additional shares and after deducting the underwriters’ discount of $3,506 and IPO related expenses estimated to be $3,874. Prior to the completion of the IPO, the shareholders of MMREIS contributed all of the outstanding shares of capital stock of MMREIS to MMI in exchange for MMI common stock, pursuant to which MMREIS became MMI’s wholly owned subsidiary, Thereafter, MMC distributed 80.0% of the shares of MMI common stock to MMC’s shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness.
Following the IPO, MMI has 25,000 authorized shares of preferred stock with a par value $0.0001 per share, none of which are outstanding.
Related Party Transactions
The Company was historically part of a consolidated federal income tax return and a combined unitary California tax return that were filed by MMC. The Company and MMC had a tax-sharing agreement whereby the Company provided for income taxes in its consolidated statements of income using an effective tax rate of 43.5%. As part of the IPO, the Company’s tax sharing agreement with MMC was terminated effective October 31, 2013.
The Company will file as a stand-alone tax entity in the future and will account for income taxes under the asset and liability method. Deferred tax assets and liabilities will be recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and tax credit carryforwards, if any. Deferred tax assets and liabilities will be measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
As part of the IPO, MMI and MMC entered into a transition services agreement, pursuant to which MMC will provide certain services to the Company for a limited period of time, including, but not limited to, the sharing of costs relating to certain insurance coverages and health plans, legal services and information technology management.
Amendments to Restricted Stock and SARs
In conjunction with the IPO, the vesting of all unvested restricted stock and all unvested SARs was accelerated. Following the IPO, future equity award issuances are recorded by the Company.
During the three and six months ended June 30, 2013, the Company recorded a capital contribution, net of taxes of $1.2 million and $1.5 million, respectively related to total stock based compensation expense of $2.2 million and $2.6 million, respectively.
Amendments to Restricted Stock and SARs
The SARs were frozen at the liability amount, calculated as of March 31, 2013, which will be paid out to each participant in installments upon retirement or departure under the terms of the existing program. The frozen SAR account balances will be credited with interest on an annual basis.revised SARs agreements. See Note 3-“Selected Balance Sheet Data” for additional information. To replace beneficial ownership in the SARs, the difference between the book value liability and the fair value of the awards was granted to plan participants in the form of deferred stock units, or DSUs, which were fully vested upon receipt and will be settled in actual stock at a rate of 20% per year if the participant remains employed by the Company during that period (or otherwise all unsettled shares of stock upon termination of employment will be settled five years from the termination date). In addition, the formula settlement value of all outstanding shares of stock held by the plan participants was removed, and all such shares of stock will
MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except share amounts)
beare subject to sales restrictions that lapse at a rate of 20% per year for five years if the participant remains employed by the Company. Additionally, in the event of death or termination of employment after reaching the age of 67, 100% of the DSUs will be settled and 100% of the shares of stock will be released from the resale restriction. Further, 100% of the shares of stock will be released from the resale restriction upon the consummation of a change of control of the Company.
The modification, grant
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the IPO
2013 Omnibus Equity Incentive Plan
In October 2013, the board of replacement awards and acceleration of vesting of restricted stock and SARs and grants of other stock-based compensation awards pursuant todirectors adopted the 2013 Omnibus Equity Incentive Plan or(the “2013 Plan”), which became effective upon the Company’s IPO. The 2013 Plan, in general authorizes for the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards (RSAs), restricted stock units (RSUs), performance units and performance shares to the Company’s employees, independent contractors, directors and consultants and subsidiary corporations’ employees and consultants as selected from time to time by the Company’s board of directors at its discretion.
In connection with the approval of the 2013 Plan, are expected to result in non-cash stock-based compensation charges of approximately $30,000 to $35,000 in the fourth quarter of 2013. Following the IPO, grant of replacement awards and future equity award issuances will be recorded by MMI and will no longer result in a deemed capital contribution (distribution) to MMC.
2013 Omnibus Equity Incentive Plan
MMICompany reserved 5,500,000 shares of common stock for the issuance of awards under the 2013 Plan. At June 30, 2014, there were 2,237,587 shares available for future equitygrants under the Plan.
In February 2014, the Company granted an aggregate of 38,088 RSUs to certain sales and financing professionals, who are exclusive independent contractors. The awards issuancesvest 20% per year on the grant anniversary date beginning in 2015. The unvested awards are canceled upon termination of service.
In May 2014, the Company granted an aggregate of 41,314 RSUs to certain sales and 366,667 sharesfinancing professionals, who are exclusive independent contractors and aggregate of 6,991 RSUs to certain employees. In each case, the awards vest 20% per year on the grant anniversary date beginning in 2015. The unvested awards are canceled upon termination of service.
In May 2014, the Company granted an aggregate of 22,884 RSAs to non-employee directors. RSAs are issued and outstanding and vest 33-1/3% per year on the grant anniversary date beginning in 2015. The unvested awards are canceled upon termination of service.
RSUs/ RSAs
The following table summarizes the Company’s vested and nonvested RSU and RSA activity under the 2013 Plan for future issuancesthe six month period ended June 30, 2014 (dollars in thousands, except per share data):
RSA Grants to Non-employee Directors | RSU Grants to Employees | RSU Grants to Independent Contractors | Total | Weighted- Average Grant Date Fair Value Per Share | ||||||||||||||||
Nonvested shares at December 31, 2013 | 30,000 | 313,155 | 570,760 | 913,915 | $ | 14.46 | ||||||||||||||
Granted | 22,884 | 6,991 | 79,402 | 109,277 | 15.74 | |||||||||||||||
Transferred | — | (5,158 | ) | 5,158 | — | 14.54 | ||||||||||||||
Forfeited/canceled | — | (24,756 | ) | (11,770 | ) | (36,526 | ) | 14.65 | ||||||||||||
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Nonvested shares at June 30, 2014 | 52,884 | 290,232 | 643,550 | 986,666 | $ | 14.59 | ||||||||||||||
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Unrecognized stock-based compensation expense as of June 30, 2014(1) | $ | 624 | $ | 3,471 | $ | 14,073 | $ | 18,168 | ||||||||||||
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Weighted average remaining vesting period as of June 30, 2014 | 2.57 | 4.52 | 4.54 | 4.43 | ||||||||||||||||
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(1) | The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 4.43 years. |
RSUs granted to independent contractors are grants made to the Company’s sales and financing professionals, who are considered non-employees under ASC 718. Accordingly, such awards are required to be measured at fair value at the end of each reporting period until settlement. During the six months ended June 30, 2014, stock-based compensation expense was impacted by an increase in the Company’s common stock price from $14.90 at December 31, 2013 to $25.51 at June 30, 2014.
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2014, there were 2,275,747 fully vested outstanding DSUs. See “Amendments to Restricted Stock and SARs” section above and Note 11 – “Earnings Per Share” for additional information.
Employee Stock Purchase Plan
In 2013, the Company adopted the 2013 Employee Stock Purchase Plan pursuant to(“2013 ESPP Plan”). The 2013 ESPP Plan had 366,667 shares of common stock reserved and available for issuance at June 30, 2014. The ESPP Plan qualifies under Section 423 of the 2013 Plan. In connection withIRS Code and provides for consecutive, nonoverlapping 6-month offering periods. The offering periods generally start on the IPO, first trading day on or after May 15 and November 15 of each year. The first offering period began on May 15, 2014.
MMI issueddetermined the following equity awards: (A) DSUs for an aggregatefair value of 2,192,409 shares granted as replacement awards to the MMREIS managing directors, (B) DSUs for 83,333ESPP shares to be granted to Mr. Millichap, and (C) 30,000 shares of restricted stock toacquired during the non-employee directors, in each case,first offering period using the Black Scholes option pricing model. MMI calculated the expected volatility based on the historical volatility of the Company’s common stock and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant both consistent with the term of the offering period. The expected dividend yield was 0%. See Note 8 – “Stockholders’ Equity” for additional information on dividends.
At June 30, 2014, total unrecognized compensation cost related to the ESPP Plan was $67,124 and is expected to be recognized over a weighted-average period of 0.38 years.
Stock-Based Compensation
The following table summarizes the components of stock-based compensation included in the condensed consolidated statements of net and comprehensive income (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Restricted stock and SARs (prior to IPO) | $ | — | $ | 2,190 | $ | — | $ | 2,626 | ||||||||
Employee stock purchase plan | 23 | — | 23 | — | ||||||||||||
RSAs – non-employee directors | 46 | — | 76 | — | ||||||||||||
RSUs – employees | 146 | — | 346 | — | ||||||||||||
RSUs – independent contractors | 926 | — | 1,413 | — | ||||||||||||
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$ | 1,141 | $ | 2,190 | $ | 1,858 | $ | 2,626 | |||||||||
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10. | Income Taxes |
The Company’s effective tax rate for the three and six months ended June 30, 2014 is 40.9% and 41.1%, respectively, compared to 43.5% for each of the three and six months ended June 30, 2013. The Company’s forecasted tax rate for 2014 is 40.5%. The Company provides for the effects of income taxes in interim financial statements based on the Company’s estimate of the effective tax rate for the full year, which is based on forecasted income by country where the Company operates, adjusted by the tax effects of items that relate discretely to the period, if any. The difference between the statutory tax rate and the Company’s effective tax rate is largely attributable to state income taxes and a full valuation allowance with respect to the deferred tax assets of the Company’s Canadian operations.
The Company completed an analysis related to tax deductibility of IPO pricetransaction costs during the three months ended June 30, 2014, which resulted in a tax benefit of $12.00.$840,000. This benefit is recognized as an increase to additional paid-in capital and a reduction in current income tax payable.
MMI will recognize equity-based awards expense based upon their grant date fair values
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prior to November 1, 2013, MMREIS was part of a consolidated federal income tax return and various combined and consolidated state tax returns that were filed by MMC. MMREIS and MMC had a tax-sharing agreement whereby MMREIS was charged for income taxes using an effective tax rate of 43.5%. As part of the IPO, the tax-sharing agreement with MMC was terminated effective October 31, 2013. The amount determined under the tax-sharing agreement represented a receivable or obligation of MMREIS from (to) the MMC that MMREIS generally settled on a straight-linecurrent basis.
11. | Earnings Per Share |
Earnings per share information has not been presented for periods prior to the IPO, as the holders of MMREIS Series A Redeemable Preferred Stock (issued and outstanding shares were cancelled subsequent to the IPO) were entitled to receive dividends at a rate determined by the Board of Directors, payable in preference and priority to any distribution on MMREIS common stock. Since MMREIS typically distributed its earnings to the Series A Preferred stockholders on a quarter-in-arrears basis, overearnings per common share information for MMREIS common stock was not meaningful.
The following table sets forth the requisitecomputation of basic and diluted earnings per share for the three and six months ended June 30, 2014 (in thousands, except per share data):
Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 | |||||||
Numerator (Basic and Diluted): | ||||||||
Net income | $ | 12,796 | $ | 19,578 | ||||
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Denominator: | ||||||||
Basic | ||||||||
Weighted average common shares issued and outstanding | 36,615 | 36,608 | ||||||
Deduct: Unvested RSAs(1) | (44 | ) | (37 | ) | ||||
Add: Fully vested DSUs(2) | 2,276 | 2,276 | ||||||
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Weighted Average Common Shares Outstanding | 38,847 | 38,847 | ||||||
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Basic earnings per common share | $ | 0.33 | $ | 0.50 | ||||
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Diluted | ||||||||
Weighted Average Common Shares Outstanding from above | 38,847 | 38,847 | ||||||
Add: Dilutive effect of RSUs and RSAs | 79 | 70 | ||||||
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Weighted Average Common Shares Outstanding | 38,926 | 38,917 | ||||||
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Diluted earnings per common share | $ | 0.33 | $ | 0.50 | ||||
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(1) | RSAs were issued and outstanding to the non-employee directors and have a three year vesting term subject to service requirements. See Note 9 – “Stock-Based Compensation” for additional information. |
(2) | DSUs of 2.3 million shares are included in weighted average common shares outstanding as the DSUs were fully vested upon receipt and will be settled in actual stock issued at a rate of 20% per year if the participant remains employed by the Company during that period (or otherwise all unsettled shares of stock upon termination of employment will be settled five years from the termination date). See Note 9 – “Stock-Based Compensation” for additional information. |
RSUs totaling 644,000 shares and 639,000 shares, primarily pertaining to grants to the Company’s independent contractors, were excluded from the calculation of diluted earnings per common share for the three and six months ended June 30, 2014, respectively, as the effects were antidilutive.
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. | Commitments and Contingencies |
Litigation
The Company is subject to various legal proceeding and clams that arise in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by insurance which contain deductibles, exclusions, claim limits and aggregate policy limits. While the ultimate liability for these legal proceeding cannot be determined, the Company reviews the need for its accrual for loss contingencies quarterly and records an accrual for litigation related losses where the likelihood of loss is generallyboth probable and estimable. The Company believes that the vesting periodultimate resolution of the awards.legal proceedings will not have a material adverse effect on its financial condition or results of operations. The Company accrues legal fees for litigation as the legal services are provided.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, the words “Marcus & Millichap,” “Marcus & Millichap Real Estate Investment Services,” “MMREIS,” “we,” the “Company,” “us” and “our” refer to Marcus & Millichap, Inc., Marcus & Millichap Real Estate Investment Services, Inc. and its other consolidated subsidiaries.
Forward-Looking Statements
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and ninesix months ended SeptemberJune 30, 20132014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013,2014, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Final ProspectusAnnual Report on Form 10-K for the year ended December 31, 2013 filed pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission October 30, 2013,SEC on March 21, 2014, including the “Risk Factors” section and the consolidated financial statements and notes included therein.
Overview
We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions over the last 10 years, based on data from CoStar and Real Capital Analytics. We haveAs of June 30, 2014, we had more than 1,1001,300 investment sales and financing professionals in 7377 offices who provide investment brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to our clients. In 2012,For the three and six months ended June 30, 2014, we closed more than 6,100 sales1,900 and financing transactions with total volume of approximately $22.0 billion. For the three months ended September 30, 2013, we closed more than 1,6003,500 sales, financing and other transactions with total volume of approximately $6.0 billion. For$7.1 billion and $13.3 billion, respectively. During the nine monthsyear ended September 30,December 31, 2013, we closed more than 4,6006,600 sales, financing and other transactions with total volume of approximately $16.0$24.0 billion.
We generate revenues by collecting real estate brokerage commissions upon the sale and fees upon the financing of commercial properties and, in addition, by providing consulting and advisory services. Real estate brokerage commissions are typically based upon the value of the property, and financing fees are typically based upon the size of the loan. In 2012,For each of the three and six months ended June 30, 2014, approximately 91%92% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 3%2% from other fees, including consulting and advisory services. Forrevenues. During the three monthsyear ended September 30,December 31, 2013, approximately 91%90% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 3% from other fees, including consulting and advisory services. For the nine months ended September 30, 2013, approximately 90% of our revenues were generated from real estate brokerage commissions, 7% from financing fees and 3%4% from other fees, including consulting and advisory services.
The Spin-Off and Initial Public Offering
On November 5, 2013, MMI completed its initial public offering (the “IPO”) of 6,900,000 shares of common stock at a price to the public of $12.00 per share. MMI sold 4,173,413 shares of common stock in the IPO, including 900,000 shares of common stock pursuant to the exercise of the underwriters’ option to purchase additional shares. Selling stockholders sold an aggregate of 2,726,587 shares in the IPO at the same price to the public. MMI did not receive any proceeds from the sale of the shares by the selling stockholders.
The IPO generated net proceeds to MMI of approximately $42.7 million, including the underwriters’ full exercise of their option to purchase additional shares and after deducting the underwriters’ discount of $3.5 million and IPO related expenses estimated to be $3.9 million. Prior to the completion of the IPO, the shareholders of MMREIS contributed all of the outstanding shares of capital stock of MMREIS to the MMI in exchange for MMI common stock, pursuant to which MMREIS became MMI’s wholly owned subsidiary, Thereafter, MMC distributed 80.0% of the shares of MMI common stock to MMC’s shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness.
Factors Affecting Our Business
Our business and our operating results, financial condition and liquidity are significantly affected by the number and size of commercial real estate sales and financing transactions. The number and size of these transactions is affected by our ability to recruit and retain sales and financing professionals and by the general trends in the economy and real estate industry, particularly including:
• | Economic and commercial real estate market conditions. Our business is dependent on economic conditions and the demand for commercial real estate and related services in the markets in which we operate. Changes in the economy on a national, regional or local basis can have a positive or negative impact on our business. Fluctuations in acquisition and |
disposition activity, as well as general commercial real estate investment activity, can impact commissions for arranging such transactions, as well as impacting fees for arranging financing for acquirers and property owners that are seeking to recapitalize their existing properties. |
• | Credit and liquidity in the financial markets. Since real estate purchases are often financed with debt, credit and liquidity issues in the financial markets have a direct impact on flow of capital to the commercial real estate markets as well as transaction activity and prices. |
• | Demand for investment in commercial real estate. The willingness of private investors to invest in commercial real estate is affected by factors beyond our control, including the performance of real estate assets when compared with the performance of other investments. |
• | Fluctuations in interest rates. Changes in interest rates as well as steady and protracted movements of interest rates in one direction (increases or decreases) could adversely or positively affect the operation and income of commercial real estate properties, as well as the demand from investors for commercial real estate investments. In particular, increased interest rates may cause prices to decrease due to the increased costs of obtaining financing and could lead to decreases in purchase and sale activities, thereby reducing the amounts of investment sales and loan originations. In contrast, decreased interest rates will generally decrease the costs of obtaining financing which could lead to increases in purchase and sales activities. |
Operating Segments
An
Seasonality
Our real estate brokerage commissions and financing fees are seasonal, which can affect an investor’s ability to compare our financial condition and results of operation on a quarter-by-quarter basis. Historically, this seasonality has caused our revenue, operating segmentincome, net income and cash flows from operating activities to be lower in the first six months of the year and higher in the second half of the year, particularly in the fourth quarter. The concentration of earnings and cash flows in the last six months of the year, particularly in the fourth quarter, is defined as a componentdue to an industry-wide focus of an enterprise that engages in business activities from which it may earn revenues and incur expenses whose separate financial information is available and is evaluated regularly byclients to complete transactions towards the end of the calendar year. In addition, our chief operating decision maker, or CODM,margins are typically lower during the second half of each year due to perform resource allocations and performance assessments. Our CODM is our Chief Executive Officer and Chief Financial Officer. Our CODM reviews financial information presented on an office-by-office basiscommission structure for purposes of making operating decisions, assessing financial performance and allocating resources. Based on the evaluationsome of our financial information, our management believessenior sales and financing professionals. These senior sales and financing professionals are on a graduated commission schedule that ourresets annually in which higher commissions are paid for higher sales volumes.
Operating Segments
Management has determined that each of the Company’s offices represent individual operating segments with similar economic characteristics that meet the criteria for aggregation into a single reportable segment for financial statement purposes. OurThe Company’s financing operations also represent an individual operating segment, which does not meet the thresholds to be presented as a separate reportable segment.
Key Financial Measures and Indicators
Revenues
Our revenues are primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenues from financing fees and from other revenues, which are primarily comprised of consulting and advisory fees.
• | Real estate brokerage commissions. We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenues from real estate brokerage commissions are recognized at the earlier of the close of escrow or the transfer of title between the seller and buyer. |
• | Financing fees. We earn financing fees by securing financing on purchase transactions as well as by refinancing our clients’ existing mortgage debt. We recognize financing fee revenues at the time the loan closes and we have no remaining significant obligations for performance in connection with the transaction. To a lesser extent, we also earn ancillary fees associated with financings activities. |
• | Other revenues. Other revenues include fees generated from consulting and advisory services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed. |
Substantially all of our transactions are success based, with a small percentage including retainer fees (such retainer fees are credited against a success-based fee upon the closing of a transaction) and/or breakage fees. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee we would have received had the transaction closed. The amount and timing of all of the fees paid vary by the type of transaction and are generally negotiated on a transaction-by-transaction basis.
Operating Expenses
Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization expenses.expense. The significant components of our expenses are further described below.
• | Cost of services.The majority of our cost of services expense is commission expense. Commission expenses are directly attributable to providing services to our clients for investment sales and mortgage brokerage services. Most of our |
transaction professionals are independent contractors and are paid commissions; however, there are some who are initially paid a salary and as such, these expenses also include employee-related compensation, employer taxes and benefits. In addition, some of our most senior investment sales professionals have the ability to earn additional commissions at an increased rate after meeting certain annual revenue thresholds. These additional commissions are recognized as cost of services in the period in which they are earned. Payment of a portion of these additional commissions are generally deferred for a period of three years, at the Company’s election and paid at the beginning of the fourth calendar year. Cost of services also includes referral fees paid to other real estate brokers. |
• | Selling, general & administrative expenses.The largest expense component within selling, general and administrative expenses is personnel expenses for our management team and support staff. In addition, these costs include facilities costs (excluding depreciation and amortization), staff related expenses, sales, marketing, legal, telecommunication, network, data sources and other administrative expenses. Also included in selling, general and administrative are expenses |
Prior to theour IPO, we issued stock options and stock appreciation rights, or SARs, to key employees through a book value, stock-based compensation award program. The program gave certain employees the option to acquire unvested restricted stock and issued an equivalent number of unvested SARs, typically in exchange for a nonrecourse note receivable. Awards under the program typically vested over a three to five-year period, and could be redeemed or repurchased upon the occurrence of certain events, including termination of employment. Compensation expense was recognized over the vesting term based upon the formula settlement value of the awards. See Note 9 - Subsequent Events to the “NotesIPO, we grant share-based awards to our independent contractors, employees and non-employee board of directors under the 2013 Omnibus Equity Incentive Plan. The Company values its restricted stock units and restricted stock awards based on the grant date closing price of the Company’s common stock. The awards granted to our non-employee sales and financing professionals require remeasurement at the end of each reporting period until settlement. The awards typically vest over a three to five-year period. The Company recognizes the related expense on a straight-line basis over the requisite service period for each grant, subject to periodic adjustments to ensure that the cumulative amount of expense recognized through the end of any reporting period is at least equal to the Condensed Consolidated Financial Statements” for additional information.portion of the grant date value of the award that has vested through that date.
As a result of being a public company, our costs for such items as insurance, accounting and legal advice will increasehas increased relative to our historical costs for such services. We will also incur costs which we have not previously incurred for directors fees, increased directors and officers insurance, investor relations fees, expenses for compliance with the Sarbanes-Oxley Act, and new rules implemented byof the Securities and Exchange Commission, and the New York Stock Exchange, and various other costs of a public company.
• | Depreciation and amortization expense. Depreciation and amortization expense consists of depreciation and amortization recorded on our |
Other Income, and Expenses, Net
Other income primarily consists of gains or losses, net on ourof deferred compensation plan assets, interest income, foreign currency gains and losses and other non-operating gains orand losses.
Interest Expense
Interest expense consists of interest expense associated with SARs liability, notes payable to former stockholders and our credit agreement. See Notes to Condensed Consolidated Financial Statements for additional information.
Provision for Income Taxes
ForFrom inception through the three and nine months ended September 30,effective date of the IPO on October 31, 2013, and 2012, our provision for income taxes was based on a tax-sharing agreement between us and MMC, which stipulated an effective tax rate annual rate of 43.5% and was utilized to compute the our income tax provision (benefit) and the resulting amount due (from) to MMC, which were net ofincluded deferred tax assets and liabilities. The tax-sharing agreement with MMC was terminated effective October 31, 2013. We willnow file as a stand-alone tax entity for tax purposes inbeginning with the future. When we file asperiod ending December 31, 2013. As a stand-alone tax entity, our future taxable income will beis subject to the applicable U.S. federal and state and local tax rates in the jurisdictions in which the taxable income is generated. The change to a stand-alone entity for tax purposes may result in material changes to our income tax provision in future years.
Results of Operations
Following is a discussion of our results of operations for the three and ninesix months ended SeptemberJune 30, 20132014 and 2012.2013. The tables included in the period comparisons below provide summaries of our results of operations. The period-to-period comparisons of financial results are not necessarily indicative of future results.
Key Operating Metrics
We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. For the three and six months ended June 30, 2014, we closed more than 1,900 and 3,500 sales, financing and other transactions with total volume of approximately $7.1 billion and $13.3 billion, respectively. For the three and six months ended June 30, 2013, we closed more than 1,600 and 2,900 sales, financing and other transactions with total volume of approximately $5.9 billion and $10.1 billion, respectively. Such key metrics include the following:for Real Estate Brokerage and Financing are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
Real Estate Brokerage Commissions | 2013 | 2012 | 2013 | 2012 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||
Average Number of Sales Professionals | 1,139 | 985 | 1,101 | 977 | 1,265 | 1,102 | 1,251 | 1,082 | ||||||||||||||||||||||||
Average Number of Transactions per Sales Professional | 1.0 | 1.0 | 2.9 | 2.8 | 1.1 | 1.1 | 2.1 | 1.9 | ||||||||||||||||||||||||
Average Commission per Transaction | $ | 86,749 | $ | 82,046 | $ | 80,573 | $ | 79,335 | $ | 88,562 | $ | 81,364 | $ | 88,622 | $ | 77,018 | ||||||||||||||||
Average Transaction Size | $ | 3,790,048 | $ | 3,559,733 | $ | 3,568,151 | $ | 3,449,256 | $ | 3,997,137 | $ | 3,465,110 | $ | 3,882,042 | $ | 3,440,436 | ||||||||||||||||
Total Number of Transactions | 1,173 | 1,007 | 3,211 | 2,723 | 1,392 | 1,177 | 2,573 | 2,038 | ||||||||||||||||||||||||
Total Sales Volume (in millions) | $ | 4,446 | $ | 3,585 | $ | 11,457 | $ | 9,392 | $ | 5,564 | $ | 4,078 | $ | 9,988 | $ | 7,012 |
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
Financing Fees | 2013 | 2012 | 2013 | 2012 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||
Average Number of Financing Professionals | 72 | 58 | 69 | 57 | 78 | 69 | 77 | 68 | ||||||||||||||||||||||||
Average Number of Transactions per Financing Professional | 4.2 | 3.7 | 12.3 | 10.6 | 4.5 | 4.6 | 8.3 | 8.1 | ||||||||||||||||||||||||
Average Fee per Transaction | $ | 22,609 | $ | 24,276 | $ | 22,017 | $ | 22,207 | $ | 24,024 | $ | 21,819 | $ | 22,738 | $ | 21,691 | ||||||||||||||||
Average Transaction Size | $ | 2,381,822 | $ | 2,435,981 | $ | 2,224,446 | $ | 2,294,702 | $ | 2,571,936 | $ | 2,280,751 | $ | 2,385,968 | $ | 2,138,292 | ||||||||||||||||
Total Number of Transactions | 300 | 214 | 848 | 604 | 349 | 315 | 637 | 548 | ||||||||||||||||||||||||
Total Dollar Volume (in millions) | $ | 715 | $ | 521 | $ | 1,886 | $ | 1,386 | $ | 898 | $ | 718 | $ | 1,520 | $ | 1,172 |
Comparison of Three Months Ended SeptemberJune 30, 20132014 and 20122013
Three Months Ended September 30, 2013 | Percentage of Revenue | Three Months Ended September 30, 2012 | Percentage of Revenue | Total Dollar Change | Total Percentage Change | Three Months Ended June 30, 2014 | Percentage of Revenue | Three Months Ended June 30, 2013 | Percentage of Revenue | Total Dollar Change | Total Percentage Change | |||||||||||||||||||||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate brokerage commissions | $ | 101,757 | 90.9 | % | $ | 82,620 | 90.6 | % | $ | 19,137 | 23.2 | % | $ | 123,278 | 91.8 | % | $ | 95,765 | 90.8 | % | $ | 27,513 | 28.7 | % | ||||||||||||||||||||||||
Financing fees | 6,783 | 6.1 | 5,195 | 5.7 | 1,588 | 30.6 | 8,384 | 6.3 | 6,874 | 6.5 | 1,510 | 22.0 | ||||||||||||||||||||||||||||||||||||
Other revenues | 3,413 | 3.0 | 3,413 | 3.7 | 0 | 0.0 | 2,603 | 1.9 | 2,832 | 2.7 | (229 | ) | (8.1 | ) | ||||||||||||||||||||||||||||||||||
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Total revenues | 111,953 | 100.0 | 91,228 | 100.0 | 20,725 | 22.7 | 134,265 | 100.0 | 105,471 | 100.0 | 28,794 | 27.3 | ||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost of services | 67,718 | 60.5 | 54,194 | 59.4 | 13,524 | 25.0 | 79,601 | 59.3 | 61,456 | 58.3 | 18,145 | 29.5 | ||||||||||||||||||||||||||||||||||||
Selling, general, and administrative expense | 30,863 | 27.6 | 25,007 | 27.4 | 5,856 | 23.4 | 32,127 | 23.9 | 29,092 | 27.6 | 3,035 | 10.4 | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense | 747 | 0.7 | 732 | 0.8 | 15 | 2.0 | 811 | 0.6 | 754 | 0.7 | 57 | 7.6 | ||||||||||||||||||||||||||||||||||||
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Total operating expenses | 99,328 | 88.8 | 79,933 | 87.6 | 19,395 | 24.3 | 112,539 | 83.8 | 91,302 | 86.6 | 21,237 | 23.3 | ||||||||||||||||||||||||||||||||||||
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Operating income | 12,625 | 11.2 | 11,295 | 12.4 | 1,330 | 11.8 | 21,726 | 16.2 | 14,169 | 13.4 | 7,557 | 53.3 | ||||||||||||||||||||||||||||||||||||
Other income (expense), net | 247 | 0.2 | 41 | 0.0 | 206 | 502.4 | ||||||||||||||||||||||||||||||||||||||||||
Other income, net | 330 | 0.2 | 7 | 0.0 | 323 | — | ||||||||||||||||||||||||||||||||||||||||||
Interest expense | (401 | ) | (0.3 | ) | — | — | (401 | ) | — | |||||||||||||||||||||||||||||||||||||||
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Income before provision for income taxes | 12,872 | 11.4 | 11,336 | 12.4 | 1,536 | 13.5 | 21,655 | 16.1 | 14,176 | 13.4 | 7,479 | 52.8 | ||||||||||||||||||||||||||||||||||||
Provision for income taxes | 5,597 | 5.0 | 4,931 | 5.4 | 666 | 13.5 | 8,859 | 6.6 | 6,167 | 5.8 | 2,692 | 43.7 | ||||||||||||||||||||||||||||||||||||
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Net income | $ | 7,275 | 6.4 | % | $ | 6,405 | 7.0 | % | $ | 870 | 13.6 | % | $ | 12,796 | 9.5 | % | $ | 8,009 | 7.6 | % | $ | 4,787 | 59.8 | % | ||||||||||||||||||||||||
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Adjusted EBITDA (1) | $ | 24,007 | 17.9 | % | $ | 17,077 | 16.2 | % | $ | 6,930 | 40.6 | % | ||||||||||||||||||||||||||||||||||||
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Adjusted EBITDA (1) | $ | 15,668 | 14.0 | % | $ | 13,791 | 15.1 | % | $ | 1,877 | 13.6 | % | ||||||||||||||||||||||||||||||||||||
Earnings per share (2): | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic | 0.33 | |||||||||||||||||||||||||||||||||||||||||||||||
Diluted | 0.33 | |||||||||||||||||||||||||||||||||||||||||||||||
Weighted average common share outstanding (2): | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic | 38,847 | |||||||||||||||||||||||||||||||||||||||||||||||
Diluted | 38,926 |
(1) | Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see |
(2) | Earnings per share information has not been presented for periods prior to the IPO on October 31, 2013 as it was not meaningful. See Note 11 – “Earnings Per Share” of our Notes to Condensed Consolidated Financial Statements for additional information on earnings per share. |
Revenues.
Our total revenues were $112.0$134.3 million for the three months ended SeptemberJune 30, 20132014 compared to $91.2$105.5 million for the same period in 2012,2013, an increase of $20.7$28.8 million, or 22.7%27.3%. Total revenues increased primarily as a result of increases in real estate brokerage commissions, which contributed 92.3%95.6% of the total increase, as well as increases in financing fees.fees and other revenues.
• | Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to |
• | Financing fees. Revenues from financing fees increased to |
• | Other revenues. Other revenues |
Total operating expenses.
Our total operating expenses were $99.3$112.5 million for the three months ended SeptemberJune 30, 20132014 compared to $79.9$91.3 million for the same period in 2012,2013, an increase of $19.4$21.2 million, or 24.3%23.3%. Expenses increased primarily due to an increase in cost of services, which is primarily variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Selling, general and administrative costs increased as well, as described below.
• | Cost of services. Cost of services for the three months ended |
• | Selling, general and administrative expense. Selling, general and administrative expense for the three months ended |
• | Depreciation and amortization |
Provision forOther income, taxes. netIncome tax expense totaled $5.6
Other income, net increased $0.3 million to $0.3 million for the three months ended SeptemberJune 30, 20132014 from approximately $7,000 for the same period in 2013. The increase was primarily impacted by the net change in the carrying value of the investment assets held in the rabbi trust.
Interest expense.
Interest expense was $0.4 million and related to interest expense associated with the SARs liability and notes payable to former stockholders. There were no similar costs for the same period in 2013. See Notes to Condensed Consolidated Financial Statements for additional information.
Provision for income taxes.
The provision for income taxes was $8.9 million for the three months ended June 30, 2014 as compared to $4.9$6.2 million in same period in 2012,2013, an increase of $0.7$2.7 million or 13.5%43.7%. The increase was attributable to the higher pre-taxeffective income duringtax rate for the three months ended SeptemberJune 30, 2013 as2014 was 40.9%, compared to 2012.
with 43.5% for the same period in 2013. The effective tax rate for the three months ended June 30, 2014 is based on our forecasted tax rate for 2014. During the three months ended SeptemberJune 30, 2013, and 2012, our income tax expense was based on athe rate specified in the tax-sharing agreement between us and MMC. As specified byMMC, which was terminated effective October 31, 2013 in conjunction with the agreement,IPO.
We calculate our provision for income taxes using an effective tax rate was 43.5%based on projected taxable income for the three months ended September 30, 2013year adjusted for the effects of permanent items and 2012. Subsequent to the completion of the IPO, wediscrete items. We anticipate our effective tax rate as a stand-alone tax entity to be approximately 41.0%.40.5% in 2014. Deferred taxes are adjusted for significant changes in temporary items in the period in which they occur. The future effective tax rate may vary from this estimated annual effective rate due to several factors, including but not limited to, the level of state specific and foreign jurisdiction activity, future changes in tax laws, the amount of future book versus income tax items that are permanent in nature and changes, if any, in a valuation allowance as it relates to deferred tax assets.
Comparison of NineSix Months Ended SeptemberJune 30, 20132014 and 20122013
Nine Months Ended September 30, 2013 | Percentage of Revenue | Nine Months Ended September 30, 2012 | Percentage of Revenue | Total Dollar Change | Total Percentage Change | Six Months Ended June 30, 2014 | Percentage of Revenue | Six Months Ended June 30, 2013 | Percentage of Revenue | Total Dollar Change | Total Percentage Change | |||||||||||||||||||||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate brokerage commissions | $ | 258,720 | 90.2 | % | $ | 216,029 | 90.8 | % | $ | 42,691 | 19.8 | % | $ | 228,026 | 91.6 | % | 156,963 | 89.8 | % | $ | 71,063 | 45.3 | % | |||||||||||||||||||||||||
Financing fees | 18,671 | 6.5 | 13,413 | 5.6 | 5,258 | 39.2 | 14,484 | 5.9 | 11,888 | 6.8 | 2,596 | 21.8 | ||||||||||||||||||||||||||||||||||||
Other revenues | 9,403 | 3.3 | 8,636 | 3.6 | 767 | 8.9 | 6,345 | 2.5 | 5,990 | 3.4 | 355 | 5.9 | ||||||||||||||||||||||||||||||||||||
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Total revenues | 286,794 | 100.0 | 238,078 | 100.0 | 48,716 | 20.5 | 248,855 | 100.0 | 174,841 | 100.0 | 74,014 | 42.3 | ||||||||||||||||||||||||||||||||||||
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Cost of services | 170,395 | 59.4 | 138,903 | 58.3 | 31,492 | 22.7 | 147,997 | 59.5 | 102,677 | 58.7 | 45,320 | 44.1 | ||||||||||||||||||||||||||||||||||||
Selling, general, and administrative expense | 84,687 | 29.5 | 70,907 | 29.8 | 13,780 | 19.4 | 65,484 | 26.3 | 53,824 | 30.8 | 11,660 | 21.7 | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense | 2,261 | 0.8 | 2,227 | 0.9 | 34 | 1.5 | 1,586 | 0.6 | 1,514 | 0.9 | 72 | 4.8 | ||||||||||||||||||||||||||||||||||||
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Total operating expenses | 257,343 | 89.7 | 212,037 | 89.0 | 45,306 | 21.4 | 215,067 | 86.4 | 158,015 | 90.4 | 57,052 | 36.1 | ||||||||||||||||||||||||||||||||||||
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Operating income | 29,451 | 10.3 | 26,041 | 11.0 | 3,410 | 13.1 | 33,788 | 13.6 | 16,826 | 9.6 | 16,962 | 100.8 | ||||||||||||||||||||||||||||||||||||
Other income (expense), net | 496 | 0.2 | 324 | 0.1 | 172 | 53.1 | ||||||||||||||||||||||||||||||||||||||||||
Other income, net | 269 | 0.1 | 249 | 0.1 | 20 | 8.0 | ||||||||||||||||||||||||||||||||||||||||||
Interest expense | (805 | ) | (0.3 | ) | — | — | (805 | ) | — | |||||||||||||||||||||||||||||||||||||||
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Income before provision for income taxes | 29,947 | 10.5 | 26,365 | 11.1 | 3,582 | 13.6 | 33,252 | 13.4 | 17,075 | 9.7 | 16,177 | 94.7 | ||||||||||||||||||||||||||||||||||||
Provision for income taxes | 13,025 | 4.5 | 11,469 | 4.8 | 1,556 | 13.6 | 13,674 | 5.5 | 7,428 | 4.2 | 6,246 | 84.1 | ||||||||||||||||||||||||||||||||||||
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Net income | $ | 16,922 | 6.0 | % | $ | 14,896 | 6.3 | % | $ | 2,026 | 13.6 | % | $ | 19,578 | 7.9 | % | $ | 9,647 | 5.5 | % | $ | 9,931 | 102.9 | % | ||||||||||||||||||||||||
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Adjusted EBITDA (1) | $ | 37,497 | 15.1 | % | $ | 21,131 | 12.1 | % | $ | 16,366 | 77.5 | % | ||||||||||||||||||||||||||||||||||||
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Adjusted EBITDA (1) | $ | 36,799 | 12.8 | % | $ | 32,425 | 13.6 | % | $ | 4,374 | 13.5 | % | ||||||||||||||||||||||||||||||||||||
Earnings per share (2): | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic | 0.50 | |||||||||||||||||||||||||||||||||||||||||||||||
Diluted | 0.50 | |||||||||||||||||||||||||||||||||||||||||||||||
Weighted average common shares outstanding (2): | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic | 38,847 | |||||||||||||||||||||||||||||||||||||||||||||||
Diluted | 38,917 |
(1) | Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see |
(2) | Earnings per share information has not been presented for periods prior to the IPO on October 31, 2013. See Note 11 – “Earnings Per Share” of our Notes to Condensed Consolidated Financial Statements for additional information on earnings per share. |
Revenues.
Our total revenues were $286.8$248.9 million for the ninesix months ended SeptemberJune 30, 20132014 compared to $238.1$174.8 million for the same period in 2012,2013, an increase of $48.7$74.0 million, or 20.5%42.3%. Total revenues increased primarily as a result of increases in real estate brokerage commissions, which contributed 87.6%96.0% of the total increase, as well as increases in financing fees and other revenues. TheA portion of the six months ended June 30, 2014 year-over-year growth was caused by the fears of the “fiscal cliff” which lead to abnormally low sales volumes during the three months ended March 31, 2013 included the impacts of the fiscal cliff and the associated uncertainty surrounding the potential impacts to the U.S. tax code, which resulted in transactions beingas some sales were accelerated into the three months ended December 31, 2012 that may have otherwise occurred during the first three months of 2013. As a result, we do not expect to see the same level of growth in the three months ended December 31, 2013.2012.
• | Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to |
• | Financing fees.Revenues from financing fees increased to |
• | Other revenues.Other revenues increased to |
Total operating expenses.
Our total operating expenses were $257.3$215.1 million for the ninesix months ended SeptemberJune 30, 20132014 compared to $212.0$158.0 million for the same period in 2012,2013, an increase of $45.3$57.1 million, or 21.4%36.1%. Expenses increased primarily due to an increase in cost of services, which areis primarily variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Selling, general and administrative costs increased as well, as described below.
• | Cost of services. Cost of services for the |
• | Selling, general and administrative expense.Selling, general and administrative expense for the |
• | Depreciation and amortization |
Other income, net
There were no significant changes in other income, net for the six months ended June 30, 2014 as compared to the same period in 2013.
Interest expense.
Interest expense was $0.8 million for the six months ended June 30, 2014 and related to interest expense associated with the SARs liability and notes payable to former stockholders. There were no similar costs for the same period in 2013. See Notes to Condensed Consolidated Financial Statements for additional information on SARs liability and notes payable to former stockholders, respectively.
Provision for income taxes.Income tax expense totaled $13.0
The provision for income taxes was $13.7 million for the ninesix months ended SeptemberJune 30, 20132014 as compared to $11.5$7.4 million in same period in 2012,2013, an increase of $1.6$6.2 million or 13.6%84.1%. The increase was attributable toeffective income tax rate for the higher pre-tax income during the ninesix months ended SeptemberJune 30, 2013 as2014 was 41.1%, compared to 2012.
with 43.5% for the same period in 2013. The effective tax rate for the six months ended June 30, 2014 is based on our forecasted tax rate for 2014. During the ninesix months ended SeptemberJune 30, 2013, and 2012, our income tax expense was based on athe rate specified in the tax-sharing agreement between us and MMC. As specified byMMC, which was terminated effective October 31, 2013 in conjunction with the agreement,IPO.
We calculate our provision for income taxes using an effective tax rate was 43.5%based on projected taxable income for the nine months ended September 30, 2013year adjusted for the effects of permanent items and 2012. Subsequent to the completion of the IPO, wediscrete items. We anticipate our effective tax rate as a stand-alone tax entity to be approximately 41.0%.
Seasonality
Our real estate brokerage commissions and financing fees40.5% in 2014. Deferred taxes are seasonal, which can affect an investor’s ability to compare our financial condition and results of operation on a quarter-by-quarter basis. Historically, this seasonality has caused our revenue, operating income, net income and cash flows from operating activities to be loweradjusted for significant changes in temporary items in the first nine months of the year and higherperiod in the second half of the year, particularly in the fourth quarter.which they occur. The concentration of earnings and cash flows in the last nine months of the year, particularly in the fourth quarter, isfuture effective tax rate may vary from this estimated annual effective rate due to an industry-wide focusseveral factors, including but not limited to, the level of clientsstate specific and foreign jurisdiction activity, future changes in tax laws, the amount of future book versus income tax items that are permanent in nature and changes, if any, in a valuation allowance as it relates to complete transactions towards the end of the calendar year. In addition, our operating margins are typically lower during the second half of each year due to our commission structure for some of our senior sales agents. These senior sales agents are on a graduated commission schedule that resets annually in which higher commissions are paid for higher sales volumes.deferred tax assets.
Non-GAAP Financial Measure
In this Form 10-Q, we include a non-GAAP financial measure, adjusted earnings before interest income/expense, taxes, depreciation and amortization and stock-based compensation, or Adjusted EBITDA. We define Adjusted EBITDA as net income before (i) interest income/expense, (ii) income tax expense, (iii) depreciation and amortization and (iv) stock-based compensation expense. We use Adjusted EBITDA in our business operations to, among other things, evaluate the performance of itsour business, develop budgets and measure our performance against those budgets. We also believe that analysts and investors use Adjusted EBITDA as supplemental measures to evaluate our overall operating performance. However, Adjusted EBITDA has material limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. We find Adjusted EBITDA as a useful tool to assist in evaluating performance because it eliminates items related to capital structure and taxes and non-cash stock-based compensation charges. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. Because Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.
A reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, net income, to Adjusted EBITDA is as follows:follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||||||||||||
Net income | $ | 7,275 | $ | 6,405 | $ | 16,922 | $ | 14,896 | $ | 12,796 | $ | 8,009 | $ | 19,578 | $ | 9,647 | ||||||||||||||||
Adjustments: | ||||||||||||||||||||||||||||||||
Interest income | (4 | ) | (37 | ) | (88 | ) | (110 | ) | (1 | ) | (43 | ) | (4 | ) | (84 | ) | ||||||||||||||||
Interest expense | 401 | — | 805 | — | ||||||||||||||||||||||||||||
Provision for income taxes | 5,597 | 4,931 | 13,025 | 11,469 | 8,859 | 6,167 | 13,674 | 7,428 | ||||||||||||||||||||||||
Depreciation and amortization | 747 | 732 | 2,261 | 2,227 | 811 | 754 | 1,586 | 1,514 | ||||||||||||||||||||||||
Stock-based compensation | 2,053 | 1,760 | 4,679 | 3,943 | 1,141 | 2,190 | 1,858 | 2,626 | ||||||||||||||||||||||||
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Adjusted EBITDA | $ | 15,668 | $ | 13,791 | $ | 36,799 | $ | 32,425 | $ | 24,007 | $ | 17,077 | $ | 37,497 | $ | 21,131 | ||||||||||||||||
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Liquidity and Capital Resources
In connectionOn June 18, 2014, the Company entered into a $60.0 million principal amount senior secured revolving credit facility Credit Agreement with Wells Fargo Bank, National Association dated as of June 1, 2014 (the “Credit Agreement”) and matures on June 1, 2017. As of June 30, 2014, there were no amounts outstanding under the Credit Agreement. See Note 5 – “Credit Agreement” of our IPO, we received aggregate net proceeds of approximately $42.7 million, including the underwriters’ full exercise of their optionNotes to purchaseCondensed Consolidated Financial Statements for additional shares and after deducting the underwriters’ discount and IPO related expenses.information.
Prior to our IPO, ourOur primary sources of liquidity wereare cash and cash equivalents on hand, and cash flows from operations. In the future,operations and, as necessary borrowings under our Credit Agreement. Although we intend to fundhave historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through cash flows from our operating activities and proceeds fromoperations or availability under our IPO. In addition, we may determine that obtaining debt financing to be advantageous to our business in the future.Credit Agreement.
Our total cash and cash equivalents balance increased by $3.7 million or 3.6 % to $104.6 million at June 30, 2014, compared to $101.0 million at December 31, 2013. The following table sets forth our summary cash flows for the ninesix months ended SeptemberJune 30, 20132014 and 2012 (in thousands):2013:
Cash Flows
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2013 | 2012 | ||||||||||||||
2014 | 2013 | |||||||||||||||
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Net cash provided by operating activities | $ | 62,092 | $ | 20,524 | $ | 5,848 | $ | 44,302 | ||||||||
Net cash used in investing activities | (2,891 | ) | (3,110 | ) | (1,320 | ) | (1,598 | ) | ||||||||
Net cash used in financing activities | (33,629 | ) | (15,723 | ) | (867 | ) | (26,449 | ) | ||||||||
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Net increase in cash and cash equivalents | 25,572 | 1,691 | 3,661 | 16,255 | ||||||||||||
Cash and cash equivalents at beginning of period | 3,107 | 3,158 | 100,952 | 3,107 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 28,679 | $ | 4,849 | $ | 104,613 | $ | 19,362 | ||||||||
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Prior to its termination on June 30, 2013, the majority ofCompany was subject to a cash sweep arrangement with MMC and the cash generated and usedchange in the Company’s operationscash held by MMC was held in bank accounts with one financial institution that were included in a sweepconsidered to be an operating activity. Under the arrangement, with MMC. Pursuant to a treasury management service agreement with that financial institution, the Company’s cash was swept daily into MMC’san MMC money market account. The Company collectedreceived interest income from MMC aton the balances held in the sweep accounts. The Company earned interest of $0.1 million on the balances for the six months ended June 30, 2013.
Operating Activities
Cash flows provided by operating activities were $5.8 million for the six months ended June 30, 2014, as compared to $44.3 million for the same interest rate as MMC earned onperiod in 2013. Net cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in net working capital. For the money market account. Historically, other than for a 2-week period around MMC’s March 31 fiscal year end, the Company had a receivable from MMC for the cash that was swept. When the sweep arrangement was not in effect, during the week before and the week after March 31, the Company’s cash balances remained in the Company’s bank accounts. As ofsix months ended June 30, 2013, the sweep arrangement with MMC was permanently terminated.
Operating Activities
Cashcash flows from operating activities were $62.1 million for the nine months ended September 30, 2013, compared to $20.5 million for the nine months ended September 30, 2012. The increase in cash flows from operating activities was primarily due toimpacted positively by a $39.2 million increase in net working capital changes and a higher net income of $2.0 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The net working capital changes were principally due a $57.6 million increasedecrease in due from affiliates primarily driven by($63.3 million) principally as a result of the return of cash related to the termination of the cash sweep arrangement discussed above as well as increases in commissions receivable. These increases werewith MMC partially offset by decreasesa reduction in deferred compensation and commissions and commissions payable ($11.5 million), accrued bonuses and other employee related expenses ($11.3 million) and accounts payable and accrued expenses ($8.5 million). For the six months ended June 30, 2014, cash flows from operating activities were primarily impacted by decreases in commissions payable ($10.1 million), accrued bonuses and other employee related expenses ($3.3 million), deferred compensation and commissions ($1.7 million), and income tax payable ($0.7 million) due to the timing of payments including the increasepartially offset by increases in bonus payments during the nine months ended September 30, 2013 compared to the same period in 2012.commissions receivable and prepaid expenses and other current assets ($2.8 million).
Investing Activities
Cash flows used for investing activities were $2.9$1.3 million for the ninesix months ended SeptemberJune 30, 2013,2014, as compared to $3.1$1.6 million for the nine months ended September 30, 2012.same period in 2013. The decrease in cash flows used for investing activities for the ninesix months ended SeptemberJune 30, 2013,2014, as compared to the nine months ended September 30, 2012same period in 2013 was primarily due to a $1.0 increase$1.1 million decrease in cash paid for investment in information technology, computer hardware and software and furniture, fixtures and equipment partially offset by a $0.8 million decrease related to employee notes receivable collections, net of issuances, partially offset by a $0.8 increase in investment in information technology, computer equipment and furniture.issuances.
Financing Activities
Cash flows used for financing activities were $33.6$0.9 million for the ninesix months ended SeptemberJune 30, 2013,2014 as compared to $15.7$26.4 million for the ninesix months ended SeptemberJune 30, 2012.2013. The increasedecrease in cash flows used for financing activities was primarily due to higher dividend payments to MMC during the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 and payments of IPOinitial public offering costs totaling $26.5 million during the ninesix months ended SeptemberJune 30, 2013 with no such comparable costspayments during the ninesame period in 2014. This decrease was partially offset by a $0.9 million in principal payments on notes payable to former stockholders during the six months ended SeptemberJune 30, 2012.2014 with no such comparable payments during the same period in 2013.
Prior toWe believe that our IPO, we distributed substantially all of our net income to MMC in the formexisting balances of cash dividends. Followingand cash equivalents, cash flows expected to be generated from our operations and borrowings available under the IPO, we do not intend to pay a regular dividend. We intend to evaluate our dividend policy in the future. Any declaration and payment of future dividends to holders of our common stockCredit Agreement will be sufficient to satisfy our operating requirements for at least the discretionnext twelve months. If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could prevent us from, among other factors, to fund acquisitions or to otherwise finance our growth or operations. In addition, our notes payable to former stockholders and SARs liability have provisions, which could accelerate repayment of outstanding principal and accrued interest and adversely impact our board of directors and will depend on many factors, including our financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our board of directors deems relevant.liquidity.
Contractual Obligations and Commitments
There werehave been no material changes in our commitments under contractual obligations, as disclosed in our Final Prospectus filed pursuant to Rule 424(b)(5) underAnnual Report on Form 10-K for the Securities Act of 1933, as amended, with the Securities and Exchange Commission on Octoberyear ended December 31, 2013.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements at this time.
Inflation
Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by general economic conditions including inflation. However, to date, we do not believe that general inflation has had a material impact upon our operations.
Critical Accounting Policies; Use of Estimates
We prepare our financial statements in accordance with U.S. generally accepted accounting principles. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change negatively based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. There were no material changes in our critical accounting policies, as disclosed in in our Final Prospectus filed pursuant to Rule 424(b)(5) underAnnual Report on Form 10-K for the Securities Act of 1933, as amended, with the Securities and Exchange Commission on Octoberyear ended December 31, 2013.
Recent Accounting Pronouncements
There have been no new accounting standards applicableSee Note 1 – “Description of Business, Basis of Presentation and Recent Accounting Pronouncements” of our Notes to us that have been adopted during the three and nine months ended September 30, 2013.Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments, consist primarily of short-term cash investments which are exposed to concentrations of credit risk consist primarily of short-term cash investments.and to a limited extent foreign currency exchange risk. Due to the nature of our business and the manner in which we conduct our operations, we believe we do not face any material interest rate risk, foreign currency exchange rate risk, equity price risk or other market risk.risks.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2013,2014, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of SeptemberJune 30, 2013,2014, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial during the quarter ended SeptemberJune 30, 20132014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved in claims and legal actions arising in the ordinary course of our business.business some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by insurance which contain deductibles, exclusions, claim limits and aggregate policy limits. Such litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial relationships, standard brokerage disputes like the alleged failure to disclose physical or environmental defects or property expenses or contracts, the alleged inadequate disclosure of matters relating to the transaction like the relationships among the parties to the transaction, potential claims or losses pertaining to the asset, vicarious liability based upon conduct of individuals or entities outside of our control, general fraud claims, conflicts of interest claims, employment law claims, including claims challenging the classification of our sales professionals as independent contractors, and claims alleging violations of state consumer fraud statutes. While the results of such claims andultimate liability for these legal actionsproceeding cannot be predicted with certainty, wedetermined, the Company reviews the need for its accrual for loss contingencies quarterly and records an accrual for litigation related losses where the likelihood of loss is both probable and estimable. We do not believe based on information currently available to us that the final outcome of these proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows. We carry standard errors and omissions insurance designed to cover certain acts of broker malpractice.
InvestingThere have been no material changes from the risk factors described in our common stock involves a high degree of risk. You should carefully considerAnnual Report on Form 10-K for the risks and uncertainties described in MMI’s Final Prospectus filed pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on Octoberyear ended December 31, 2013, before deciding whether to invest in our common stock.2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) | Unregistered Sales of Equity Securities |
Not Applicable.
(b) | Use of Proceeds |
On October 30, 2013, our registration statement on Form S-1 (File No. 333-191316) was declared effective by the SEC for our IPO. On November 5, 2013, we completed our IPO pursuant to which we sold an aggregate of 4,173,413 shares of our common stock at a price to the public of $12.00 per share, including 900,000 shares of common stock pursuant to the exercise of the underwriters’ option to purchase additional shares. Selling stockholders in the IPO sold an aggregate of 2,726,587 shares at the same price to the public. We did not receive any proceeds from the sale of the shares by the selling stockholders. Citigroup and Goldman, Sachs & Co. acted as joint book-running managers.
As a result of the IPO, including the underwriters’ option to purchase additional shares, we received net proceeds of approximately $42.7 million, after deducting total expenses of approximately $7.4 million, consisting of $3.5 million of underwriters’ discounts and commissions and offering related expenses reasonably estimated to be $3.9 million. None of these expenses consisted of direct or indirect payments to any of our directors of officers or their associates, to persons owning 10% or more of our common stock, or to any of our affiliates.
There has been no material change in the planned use of proceeds from our IPO as described in our Final Prospectus filed pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on October 31, 2013.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
None.
The documents listed in the Exhibit Index of this quarterly report on Form 10-Q are incorporated by reference or are filed with this quarterly report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 ofRegulation S-K).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Marcus & Millichap, Inc.
Date: |
| By: |
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John J. Kerin | ||||||||||
President and Chief Executive Officer | ||||||||||
(Principal Executive Officer) | ||||||||||
Date: |
| By: |
| |||||||
Martin E. Louie | ||||||||||
Chief Financial Officer | ||||||||||
(Principal Financial Officer) |
Exhibit No. | Description | |
| ||
31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema Document | |
101.CAL** | XBRL Taxonomy Calculation Linkbase Document | |
101.DEF** | XBRL Taxonomy Extension Definition Document | |
101.LAB** | XBRL Taxonomy Label Linkbase Document | |
101.PRE** | XBRL Taxonomy Presentation Linkbase Document |
* | Filed herewith. |
** | The following financial information in the Registrant’s Quarterly Report on Form 10-Q for the quarter ended |
38