JLL-2014.6.30-10Q Q2

 
United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014

Or

o 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 1-13145

Jones Lang LaSalle Incorporated
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of incorporation or organization)
36-4150422
(I.R.S. Employer Identification No.)

200 East Randolph Drive, Chicago, IL
 
60601
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code: 312-782-5800

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 o
 
Indicate by check mark 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 (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files). Yes x No o
 
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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer o
 
 
 
 
Non-accelerated filer (Do not check if a smaller reporting company) o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
 
The number of shares outstanding of the registrant's common stock (par value $0.01) as of the close of business on August 4, 2014 was 44,812,401.
 



Table of Contents
 
 
 
 
Part I
 
 
 
 
Item 1.
 
 
 
 
Consolidated Balance Sheets June 30, 2014 (unaudited) and December 31, 2013
 
 
 
 
Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)
 
 
 
 
Consolidated Statement of Changes in Equity For the Six Months Ended June 30, 2014 (unaudited)
 
 
 
 
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2014 and 2013 (unaudited)
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 

2



Part I. Financial Information
Item 1. Financial Statements
JONES LANG LASALLE INCORPORATED
Consolidated Balance Sheets June 30, 2014 (unaudited) and December 31, 2013
(in thousands, except share data)
 
June 30,

 
December 31,

Assets
2014 (unaudited)

 
2013

Current assets:
 
 
 
Cash and cash equivalents
$
150,708

 
152,726

Trade receivables, net of allowances of $24,245 and $18,783
1,195,172

 
1,237,514

Notes and other receivables
172,700

 
94,519

Warehouse receivables
100,922

 

Prepaid expenses
75,859

 
56,491

Deferred tax assets, net
128,901

 
130,822

Other
9,676

 
52,156

Total current assets
1,833,938

 
1,724,228

Property and equipment, net of accumulated depreciation of $418,695 and $374,030
331,850

 
295,547

Goodwill, with indefinite useful lives
1,946,414

 
1,900,080

Identified intangibles, net of accumulated amortization of $122,237 and $116,393
44,146

 
45,579

Investments in real estate ventures, including $88,564 and $78,941 at fair value
295,618

 
287,200

Long-term receivables
62,412

 
65,353

Deferred tax assets, net
69,148

 
104,654

Other
192,730

 
174,712

Total assets
$
4,776,256

 
4,597,353

Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
491,598

 
528,505

Accrued compensation
549,234

 
810,425

Short-term borrowings
24,738

 
24,522

Deferred tax liabilities, net
11,631

 
11,274

Deferred income
111,187

 
104,410

Deferred business acquisition obligations
43,595

 
36,040

Warehouse facility
100,922

 

Other
116,610

 
143,248

Total current liabilities
1,449,515

 
1,658,424

Credit facility
410,000

 
155,000

Long-term senior notes
275,000

 
275,000

Deferred tax liabilities, net
18,029

 
18,029

Deferred compensation
105,743

 
103,199

Deferred business acquisition obligations
69,161

 
99,196

Minority shareholder redemption liability
10,657

 
20,667

Other
97,474

 
77,029

Total liabilities
2,435,579

 
2,406,544

Redeemable noncontrolling interest
13,725

 

Company shareholders' equity:
 

 
 

Common stock, $.01 par value per share, 100,000,000 shares authorized; 44,621,117 and 44,447,958 shares issued and outstanding
446

 
444

Additional paid-in capital
957,763

 
945,512

Retained earnings
1,344,318

 
1,266,967

Shares held in trust
(6,250
)
 
(8,052
)
Accumulated other comprehensive income (loss)
13,750

 
(25,202
)
Total Company shareholders’ equity
2,310,027

 
2,179,669

Noncontrolling interest
16,925

 
11,140

Total equity
2,326,952

 
2,190,809

Total liabilities and equity
$
4,776,256

 
4,597,353


See accompanying Notes to Consolidated Financial Statements.

3



JONES LANG LASALLE INCORPORATED
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2014 and 2013
(in thousands, except share data) (unaudited)
 
Three Months Ended

 
Three Months Ended

 
Six Months
 Ended

 
Six Months
Ended

 
June 30, 2014

 
June 30, 2013

 
June 30, 2014

 
June 30, 2013

Revenue
$
1,277,204

 
989,383

 
2,314,646

 
1,845,371

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Compensation and benefits
761,224

 
634,600

 
1,398,563

 
1,198,320

Operating, administrative and other
396,086

 
262,185

 
753,086

 
512,106

Depreciation and amortization
22,780

 
20,174

 
45,191

 
39,254

Restructuring and acquisition charges
5,458

 
6,602

 
41,416

 
9,770

Total operating expenses
1,185,548

 
923,561

 
2,238,256

 
1,759,450

 
 
 
 
 
 
 
 
Operating income
91,656

 
65,822

 
76,390

 
85,921

 
 
 
 
 
 
 
 
Interest expense, net of interest income
(7,664
)
 
(9,049
)
 
(14,300
)
 
(16,972
)
Equity earnings from real estate ventures
12,491

 
9,076

 
21,393

 
14,558

 
 
 
 
 
 
 
 
Income before income taxes and noncontrolling interest
96,483

 
65,849

 
83,483

 
83,507

 
 
 
 
 
 
 
 
Provision (benefit) for income taxes
24,121

 
16,397

 
(5,024
)
 
20,794

Net income
72,362

 
49,452

 
88,507

 
62,713

 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interest
420

 
2,921

 
663

 
3,027

Net income attributable to the Company
71,942

 
46,531

 
87,844

 
59,686

 
 
 
 
 
 
 
 
Dividends on unvested common stock, net of tax benefit
176

 
241

 
176

 
241

Net income attributable to common shareholders
$
71,766

 
46,290

 
87,668

 
59,445

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.61

 
1.05

 
1.97

 
1.35

Basic weighted average shares outstanding
44,586,095

 
44,101,006

 
44,550,154

 
44,090,942

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
1.58

 
1.03

 
1.94

 
1.32

Diluted weighted average shares outstanding
45,278,494

 
45,141,341

 
45,220,082

 
45,091,245

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Net income attributable to the Company
$
71,942

 
46,531

 
87,844

 
59,686

Foreign currency translation adjustments
25,134

 
(39,128
)
 
38,952

 
(87,753
)
Comprehensive income (loss) attributable to the Company
$
97,076

 
7,403

 
126,796

 
(28,067
)
 
See accompanying Notes to Consolidated Financial Statements.

4



JONES LANG LASALLE INCORPORATED
Consolidated Statement of Changes in Equity
For the Six Months Ended June 30, 2014
(in thousands, except share data) (unaudited)

 
Company Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated

 
 
 
 
 
 
 
 
 
Additional

 
 
 
Shares

 
Other

 
 
 
 
 
Common Stock
 
Paid-In

 
Retained

 
Held in

 
Comprehensive

 
Noncontrolling

 
Total

 
Shares

 
Amount

 
Capital

 
Earnings

 
Trust

 
Income (Loss)

 
Interest

 
Equity

Balances at
December 31, 2013
44,447,958

 
$
444

 
945,512

 
1,266,967

 
(8,052
)
 
(25,202
)
 
11,140

 
$
2,190,809

Net income

 

 

 
87,844

 

 

 
663

 
88,507

Shares issued under stock compensation programs
212,332

 
2

 
1,846

 

 

 

 

 
1,848

Shares repurchased for payment of taxes on stock awards
(39,173
)
 

 
(4,329
)
 

 

 

 

 
(4,329
)
Tax adjustments due to vestings and exercises

 

 
3,559

 

 

 

 

 
3,559

Amortization of stock compensation

 

 
11,175

 

 

 

 

 
11,175

Dividends paid, $0.23 per share

 

 

 
(10,493
)
 

 

 

 
(10,493
)
Shares held in trust

 

 

 

 
1,802

 

 

 
1,802

Foreign currency translation adjustments

 

 

 

 

 
38,952

 

 
38,952

Increase in amount attributable to noncontrolling interest

 

 

 

 

 

 
5,122

 
5,122

Balances at
June 30, 2014
44,621,117

 
$
446

 
957,763

 
1,344,318

 
(6,250
)
 
13,750

 
16,925

 
$
2,326,952


See accompanying Notes to Consolidated Financial Statements.

5



JONES LANG LASALLE INCORPORATED
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2014 and 2013
(in thousands) (unaudited)
 
 
Six Months Ended

 
Six Months Ended

 
June 30, 2014

 
June 30, 2013

Cash flows used in operating activities:
 
 
 
Net income
$
88,507

 
62,713

Reconciliation of net income to net cash used in operating activities:
 

 
 

Depreciation and amortization
45,191

 
39,254

Equity earnings from real estate ventures
(21,393
)
 
(14,558
)
Gain on the sale of assets

 
(3,013
)
Distributions of earnings from real estate ventures
9,627

 
6,212

Provision for loss on receivables and other assets
6,379

 
10,845

Amortization of deferred compensation
11,175

 
13,075

Accretion of interest on deferred business acquisition obligations
2,695

 
3,831

Amortization of debt issuance costs
1,827

 
2,353

Change in:
 

 
 

Receivables
29,984

 
27,123

Prepaid expenses and other assets
(31,226
)
 
(24,637
)
Deferred tax assets, net
37,784

 
7,655

Excess tax benefit from share-based payment arrangements
(3,559
)
 
(548
)
Accounts payable, accrued liabilities and accrued compensation
(323,396
)
 
(374,863
)
Net cash used in operating activities
(146,405
)
 
(244,558
)
 
 
 
 
Cash flows used in investing activities:
 

 
 

Net capital additions – property and equipment
(67,644
)
 
(30,212
)
Proceeds from the sale of assets

 
9,201

Business acquisitions
(20,164
)
 
(45,313
)
Capital contributions to real estate ventures
(18,585
)
 
(13,862
)
Distributions of capital from real estate ventures
22,528

 
17,425

Net cash used in investing activities
(83,865
)
 
(62,761
)
 
 
 
 
Cash flows provided by financing activities:
 

 
 

Proceeds from borrowings under credit facility
1,007,000

 
1,181,991

Repayments of borrowings under credit facility
(754,954
)
 
(853,500
)
Payments of deferred business acquisition obligations
(36,432
)
 
(32,248
)
Debt issuance costs

 
(495
)
Shares repurchased for payment of employee taxes on stock awards
(4,329
)
 
(1,129
)
Excess tax adjustment from share-based payment arrangements
3,559

 
548

Common stock issued under option and stock purchase programs
1,848

 
926

Payment of dividends
(10,493
)
 
(10,020
)
Capital lease payments
(2,175
)
 

Other loan proceeds (payments)
18,277

 
(5,060
)
Noncontrolling interest contributions (distributions), net
5,951

 
(4,002
)
Net cash provided by financing activities
228,252

 
277,011

 
 
 
 
Net decrease in cash and cash equivalents
(2,018
)
 
(30,308
)
Cash and cash equivalents, beginning of the period
152,726

 
152,159

Cash and cash equivalents, end of the period
$
150,708

 
121,851

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
9,780

 
10,430

Income taxes, net of refunds
48,471

 
42,378

Non-cash investing activities:
 

 
 

Business acquisitions, contingent consideration
$
1,184

 
1,602

  Capital leases
18,244

 

Non-cash financing activities:
 
 
 
Deferred business acquisition obligations
$
8,912

 
1,000

Redeemable noncontrolling interest
13,725

 

See accompanying Notes to Consolidated Financial Statements.

6



JONES LANG LASALLE INCORPORATED

Notes to Consolidated Financial Statements (Unaudited)
Readers of this quarterly report should refer to the audited financial statements of Jones Lang LaSalle Incorporated ("JLL," which may also be referred to as "the Company" or as "the firm," "we," "us" or "our") for the year ended December 31, 2013, which are included in our 2013 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission ("SEC") and also available on our website (www.jll.com), since we have omitted from this report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to the "Summary of Critical Accounting Policies and Estimates" section within Item 7 and to Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in our 2013 Annual Report on Form 10-K for further discussion of our significant accounting policies and estimates.

(1)
Interim Information
Our Consolidated Financial Statements as of June 30, 2014, and for the three months and six months ended June 30, 2014 and 2013, are unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements for these interim periods have been included. Certain prior year amounts have been reclassified to conform to the current year presentation.

Historically, our quarterly revenue and profits have tended to increase from quarter to quarter as the year progresses. This is the result of a general focus in the real estate industry on completing transactions by calendar-year-end while we recognize certain expenses evenly throughout the year. Our LaSalle Investment Management ("LaSalle") segment generally earns investment-generated performance fees on clients' real estate investment returns and co-investment equity gains when assets are sold, the timing of which is geared toward the benefit of our clients. Within our Real Estate Services ("RES") segments, revenue for capital markets activities relates to the size and timing of our clients' transactions and can fluctuate significantly from period to period.

A significant portion of our compensation and benefits expense is from incentive compensation plans, which we generally accrue throughout the year based on progress toward annual performance targets. This process can result in significant fluctuations in quarterly compensation and benefit expense from period to period. Non-variable operating expenses, which we treat as expenses when they are incurred during the year, are relatively constant on a quarterly basis.

We provide for the effects of income taxes on interim financial statements based on our estimate of the effective tax rate for the full year, which is based on forecasted income by country and the impact of tax planning activities. Significant changes in the geographic mix of income can greatly impact our estimated effective tax rate.

As a result of the items mentioned above, the results for the periods ended June 30, 2014 and 2013, are not indicative of what our results will be for the full fiscal year.

(2)
New Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or a Tax Credit Carryforward Exists," which provides guidance for the financial statement presentation of such unrecognized tax benefits. ASU 2013-11 became effective for us on January 1, 2014, and resulted in the reclassification of $11.1 million of unrecognized tax benefits to reduce our deferred tax assets. These unrecognized tax benefits were previously classified as current taxes payable within Accounts payable and are now classified as a reduction to net operating loss carryforwards.

On May 28, 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.


7



(3)
Revenue Recognition
We earn revenue from the following principal sources:

Transaction commissions;
Advisory and management fees;
Incentive fees;
Project and development management fees; and
Construction management fees.

We recognize transaction commissions related to leasing services and capital markets services as revenue when we provide the related service unless future contingencies exist. Advisory and management fees related to property and facility management services, valuation services, corporate property services, consulting services and investment management are recognized in the period in which we perform the related services. We recognize incentive fees in the period earned, based on the performance of funds' investments, contractual benchmarks and other contractual formulas. If future contingencies exist, we defer recognition of the related revenue until the respective contingencies have been satisfied.

We recognize project and development management and construction management fees by applying the percentage of completion method of accounting. The efforts expended method is used to determine the extent of progress towards completion for project and development management fees, and the costs incurred to total estimated costs method is used for construction management fees.

Certain construction management fees, which are gross construction services revenue reported net of subcontract costs, were $1.2 million and $1.3 million for the three months ended June 30, 2014 and 2013, respectively, and $2.4 million and $3.0 million for the six months ended June 30, 2014 and 2013, respectively. Gross construction services revenue totaled $23.7 million and $36.7 million for the three months ended June 30, 2014 and 2013, respectively, and $51.2 million and $77.9 million for the six months ended June 30, 2014 and 2013, respectively. Subcontract costs totaled $22.5 million and $35.4 million for the three months ended June 30, 2014 and 2013, respectively, and $48.8 million and $74.9 million for the six months ended June 30, 2014 and 2013, respectively.

We include costs in excess of billings on uncompleted construction contracts of $6.4 million and $4.4 million in Trade receivables, and billings in excess of costs on uncompleted construction contracts of $3.2 million and $7.4 million, in Deferred income, as of June 30, 2014 and December 31, 2013, respectively.

Gross and Net Accounting: We follow the guidance of FASB Accounting Standards Codification ("ASC") 605-45, "Principal and Agent Considerations," when accounting for reimbursements received from clients. In certain of our businesses, primarily those involving management services, our clients reimburse us for expenses incurred on their behalf. We base the treatment of reimbursable expenses for financial reporting purposes upon the fee structure of the underlying contract. Accordingly, we report a contract that provides for fixed fees, fully inclusive of all personnel and other recoverable expenses on a gross basis. When accounting on a gross basis, our reported revenue includes the full billing to our client and our reported expenses include all costs associated with the client. Certain contractual arrangements in our project and development services, including fit-out business activities and our facility management services, tend to have characteristics that result in accounting on a gross basis. In Note 4, Business Segments, for client assignments in property and facility management and in project and development services that are accounted for on a gross basis, we identify the gross contract costs, including vendor and subcontract costs ("gross contract costs"), and present separately their impact on both revenue and operating expense in our Real Estate Services ("RES") segments. We exclude these gross contract costs from revenue and operating expenses in determining "fee revenue" and "fee based operating expenses" in our segment presentation.

We account for a contract on a net basis when the fee structure is comprised of at least two distinct elements, namely (1) a fixed management fee and (2) a separate component that allows for scheduled reimbursable personnel costs or other expenses to be billed directly to the client. When accounting on a net basis, we include the fixed management fee in reported revenue and net the reimbursement against expenses. We base this accounting on the following factors, which define us as an agent rather than a principal:

The property owner or client, with ultimate approval rights relating to the employment and compensation of on-site personnel, and bearing all of the economic costs of such personnel, is determined to be the primary obligor in the arrangement;
Reimbursement to JLL is generally completed simultaneously with payment of payroll or soon thereafter;

8



The property owner is contractually obligated to fund all operating costs of the property from existing cash flow or direct funding from its building operating account, JLL bears little or no credit risk; and
JLL generally earns no margin in the reimbursement aspect of the arrangement, obtaining reimbursement only for actual costs incurred.

We account for the majority of our service contracts on a net basis. These net costs aggregated approximately $425.6 million and $384.7 million for the three months ended June 30, 2014 and 2013, respectively, and $904.5 million and $808.3 million for the six months ended June 30, 2014 and 2013, respectively. The presentation of expenses pursuant to these arrangements under either a gross or net basis has no impact on operating income, net income or cash flows.
 
Contracts accounted for on a gross basis resulted in certain costs reflected in revenue and operating expenses (gross contract costs) of $191.2 million and $81.1 million for the three months ended June 30, 2014, and 2013, respectively, and $350.9 million and $156.6 million for the six months ended June 30, 2014 and 2013, respectively.

(4)
Business Segments
We manage and report our operations as four business segments:

The three geographic regions of RES including:
(1) Americas,
(2) Europe, Middle East and Africa ("EMEA"), and
(3) Asia Pacific;
and
(4) LaSalle, which offers investment management services on a global basis.

Each geographic region offers our full range of real estate services, including agency leasing and tenant representation, capital markets and hotels, property management, facilities management, project and development management, energy management and sustainability, construction management, and advisory, consulting and valuation services. We consider "property management" to be services provided to non-occupying property investors and "facilities management" to be services provided to owner-occupiers. LaSalle provides investment management services to institutional investors and high-net-worth individuals.

Operating income represents total revenue less direct and allocated indirect expenses. We allocate all indirect expenses to our segments, other than interest and income taxes, as nearly all expenses incurred benefit one or more of the segments. Allocated expenses primarily consist of corporate global overhead. We allocate these corporate global overhead expenses to the business segments based on the budgeted operating expenses of each segment.

For segment reporting, we show revenue net of gross contract costs in our RES segments. Excluding these costs from revenue and expenses in a "net" presentation of "fee revenue" and "fee-based operating expense" more accurately reflects how we manage our expense base and operating margins. See Note 3, Revenue Recognition, for additional information on our gross and net accounting policies. For segment reporting we also show Equity earnings from real estate ventures within total segment revenue, since the related activity is an integral part of LaSalle. Finally, our measure of segment results also excludes Restructuring and acquisition costs. These amounts relate to the presentation of revenue and associated expense and have an insignificant impact on previously reported operating income.

The Chief Operating Decision Maker of JLL measures the segment results net of gross contract costs, with Equity earnings from real estate ventures, and without Restructuring and acquisition charges. We define the Chief Operating Decision Maker collectively as our Global Executive Board, which is comprised of our Global Chief Executive Officer, Global Chief Financial Officer and the Chief Executive Officers of each of our reporting segments.


9



Summarized unaudited financial information by business segment for the three and six months ended June 30, 2014 and 2013 is as follows ($ in thousands):

 
Three Months
Ended

 
Three Months
Ended

 
Six Months Ended

 
Six Months Ended

 
June 30, 2014

 
June 30, 2013

 
June 30, 2014

 
June 30, 2013

Real Estate Services
 
 
 
 
 
 
 
Americas
 
 
 
 
 
 
 
Revenue
$
544,082

 
431,492

 
991,164

 
792,959

Equity earnings
967

 
73

 
1,202

 
291

Total segment revenue
545,049

 
431,565

 
992,366

 
793,250

Gross contract costs
(51,479
)
 
(24,190
)
 
(92,262
)
 
(43,468
)
Total segment fee revenue
493,570

 
407,375

 
900,104

 
749,782

Operating expenses:
 

 
 

 
 

 
 

Compensation, operating and administrative expenses
484,750

 
384,659

 
901,759

 
721,218

Depreciation and amortization
13,531

 
11,547

 
26,842

 
22,000

Total segment operating expenses
498,281

 
396,206

 
928,601

 
743,218

Gross contract costs
(51,479
)
 
(24,190
)
 
(92,262
)
 
(43,468
)
Total fee-based segment operating expenses
446,802

 
372,016

 
836,339

 
699,750

Operating income
$
46,768

 
35,359

 
63,765

 
50,032

 
 
 
 
 
 
 
 
EMEA
 
 
 
 
 
 
 
Revenue
$
395,643

 
268,146

 
707,525

 
513,051

Equity losses

 
(536
)
 

 
(536
)
Total segment revenue
395,643

 
267,610

 
707,525

 
512,515

Gross contract costs
(86,673
)
 
(33,519
)
 
(164,525
)
 
(67,725
)
Total segment fee revenue
308,970

 
234,091

 
543,000

 
444,790

Operating expenses:
 

 
 

 
 

 
 

Compensation, operating and administrative expenses
365,360

 
249,497

 
676,706

 
491,022

Depreciation and amortization
5,504

 
5,027

 
10,948

 
10,010

Total segment operating expenses
370,864

 
254,524

 
687,654

 
501,032

Gross contract costs
(86,673
)
 
(33,519
)
 
(164,525
)
 
(67,725
)
Total fee-based segment operating expenses
284,191

 
221,005

 
523,129

 
433,307

Operating income
$
24,779

 
13,086

 
19,871

 
11,483



10



Continued: Summarized unaudited financial information by business segment for the three and six months ended June 30, 2014 and 2013 is as follows ($ in thousands):

 
Three Months
Ended

 
Three Months
Ended

 
Six Months Ended

 
Six Months Ended

 
June 30, 2014

 
June 30, 2013

 
June 30, 2014

 
June 30, 2013

Real Estate Services
 
 
 
 
 
 
 
Asia Pacific
 

 
 

 
 

 
 

Revenue
$
267,477

 
228,443

 
482,182

 
418,343

Equity earnings (losses)
4

 
(124
)
 
(79
)
 
(9
)
Total segment revenue
267,481

 
228,319

 
482,103

 
418,334

Gross contract costs
(53,096
)
 
(23,378
)
 
(94,063
)
 
(45,375
)
Total segment fee revenue
214,385

 
204,941

 
388,040

 
372,959

Operating expenses:
 

 
 

 
 

 
 

Compensation, operating and administrative expenses
248,454

 
211,848

 
458,759

 
396,297

Depreciation and amortization
3,257

 
3,124

 
6,425

 
6,252

Total segment operating expenses
251,711

 
214,972

 
465,184

 
402,549

Gross contract costs
(53,096
)
 
(23,378
)
 
(94,063
)
 
(45,375
)
Total fee-based segment operating expenses
198,615

 
191,594

 
371,121

 
357,174

Operating income
$
15,770

 
13,347

 
16,919

 
15,785

 
 
 
 
 
 
 
 
LaSalle
 

 
 

 
 

 
 

Revenue
$
70,002

 
61,302

 
133,775

 
121,018

Equity earnings
11,520

 
9,663

 
20,270

 
14,812

Total segment revenue
81,522

 
70,965

 
154,045

 
135,830

Operating expenses:
 

 
 

 


 


Compensation, operating and administrative expenses
58,746

 
50,781

 
114,425

 
101,889

Depreciation and amortization
488

 
476

 
976

 
992

Total segment operating expenses
59,234

 
51,257

 
115,401

 
102,881

Operating income
$
22,288

 
19,708

 
38,644

 
32,949

 
 
 
 
 
 
 
 
Segment Reconciling Items:
 

 
 

 
 

 
 

Total segment revenue
$
1,289,695

 
998,459

 
2,336,039

 
1,859,929

Reclassification of equity earnings
12,491

 
9,076

 
21,393

 
14,558

Total revenue
1,277,204

 
989,383

 
2,314,646

 
1,845,371

Total segment operating expenses before restructuring and acquisition charges
1,180,090

 
916,959

 
2,196,840

 
1,749,680

Operating income before restructuring and acquisition charges
97,114

 
72,424

 
117,806

 
95,691

 
 
 
 
 
 
 
 
Restructuring and acquisition charges
5,458

 
6,602

 
41,416

 
9,770

Operating income
$
91,656

 
65,822

 
76,390

 
85,921


11



(5) Business Combinations, Goodwill and Other Intangible Assets

2014 Business Combinations Activity
During the six months ended June 30, 2014, we completed three new acquisitions located in France, Malaysia and Sweden as well as purchased a portion of the minority ownership in our Indian operations, for which we had previously recorded a minority shareholder redemption liability on the balance sheet, increasing our ownership from 90% to 95% . Terms of these acquisitions included: (1) cash paid at closing of $20.2 million, (2) consideration subject only to the passage of time of $8.9 million, (3) consideration subject to provisions that will be paid upon certain conditions being met which are recorded at their acquisition date fair value of $1.2 million and (4) a redeemable noncontrolling interest of $13.7 million. The acquisition we completed in Sweden includes a redeemable noncontrolling interest in the form of an option agreement that allows the Company to purchase, and the noncontrolling shareholder to put to the Company, the remaining noncontrolling interest in the acquired company in annual increments over the next four years based on price determined by the profit generated by this company. The fair value of this redeemable noncontrolling interest at the balance sheet date was determined based on the estimated redemption price and will be carried at the higher of its redemption price or book value.

During the six months ended June 30, 2014, we also paid $36.4 million for deferred acquisition and earn-out obligations for acquisitions completed in prior years.

Earn-Out Payments
At June 30, 2014, we had the potential to make earn-out payments on 14 acquisitions that are subject to the achievement of certain performance conditions. The maximum amount of the potential earn-out payments for these acquisitions was $32.2 million at June 30, 2014. Assuming the achievement of the applicable performance conditions, we anticipate that the majority of these earn-out payments will be paid over the next four years.

Goodwill and Other Intangible Assets
We have $2.0 billion of unamortized intangibles and goodwill at June 30, 2014. A significant portion of these unamortized intangibles and goodwill are denominated in currencies other than the U.S. dollar, which means that a portion of the movements in the reported book value of these balances is attributable to movements in foreign currency exchange rates. The tables below detail the foreign exchange impact on our intangible and goodwill balances. The $2.0 billion of unamortized intangibles and goodwill consists of: (1) goodwill of $1.9 billion with indefinite useful lives that is not amortized, (2) identifiable intangibles of $36.1 million that will be amortized over their remaining finite useful lives, and (3) $8.1 million of identifiable intangibles with indefinite useful lives that is not amortized.

The following table details, by reporting segment, the current year movements in goodwill with indefinite useful lives ($ in thousands):
 
Real Estate Services
 
 
 
 
 
Americas
 
EMEA
 
Asia
Pacific
 
LaSalle
 
Consolidated
Balance as of January 1, 2014
$
995,182

 
647,593

 
237,900

 
19,405

 
1,900,080

Additions, net of adjustments

 
32,617

 
(1,392
)
 

 
31,225

Impact of exchange rate movements
134

 
10,451

 
3,972

 
552

 
15,109

Balance as of June 30, 2014
$
995,316

 
690,661

 
240,480

 
19,957

 
1,946,414


12



The following table details, by reporting segment, the current year movements in the gross carrying amount and accumulated amortization of our identifiable intangibles ($ in thousands):
 
Real Estate Services
 
 
 
 
 
Americas
 
EMEA
 
Asia
Pacific
 
LaSalle
 
Consolidated
Gross Book Value
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2014
$
101,357

 
43,107

 
9,749

 
7,759

 
$
161,972

Additions
142

 
2,429

 

 

 
2,571

Impact of exchange rate movements
8

 
1,233

 
164

 
435

 
1,840

Balance as of June 30, 2014
$
101,507

 
46,769

 
9,913

 
8,194

 
166,383

 
 
 
 
 
 
 
 
 
 
Accumulated Amortization
 

 
 

 
 

 
 

 
 

Balance as of January 1, 2014
$
(78,244
)
 
(29,379
)
 
(8,660
)
 
(110
)
 
(116,393
)
Amortization expense
(3,388
)
 
(1,247
)
 
(257
)
 

 
(4,892
)
Impact of exchange rate movements
(8
)
 
(796
)
 
(146
)
 
(2
)
 
(952
)
Balance as of June 30, 2014
$
(81,640
)
 
(31,422
)
 
(9,063
)
 
(112
)
 
(122,237
)
 
 
 
 
 
 
 
 
 
 
Net book value as of June 30, 2014
$
19,867

 
15,347

 
850

 
8,082

 
$
44,146


We amortize our identifiable intangible assets with finite lives on a straight-line basis over their useful lives. The remaining estimated future amortization expense by year for our identifiable intangible assets with finite useful lives at June 30, 2014, is as follows ($ in thousands):
2014 (6 months)
$
6,221

2015
9,378

2016
5,284

2017
4,590

2018
3,661

2019
3,077

Thereafter
3,855

Total
$
36,066



(6)
Investments in Real Estate Ventures
As of June 30, 2014 and December 31, 2013, we had Investments in real estate ventures of $295.6 million and $287.2 million, respectively. We account for the majority of our investments in real estate ventures under the equity method of accounting. We have elected the fair value option for certain of our investments. Our investments are primarily co-investments in approximately 50 separate property or commingled funds for which we also have an advisory agreement. Our investment ownership percentages in these funds generally range from less than 1% to 15%.

We utilize two investment vehicles, LaSalle Investment Company I ("LIC I") and LaSalle Investment Company II ("LIC II"), to facilitate the majority of our co-investment activity when we do not invest directly into a real estate venture. LIC I and LIC II invest in certain real estate ventures that own and operate commercial real estate. We have an effective 47.85% ownership interest in LIC I, and an effective 48.78% ownership interest in LIC II; primarily institutional investors hold the remaining 52.15% and 51.22% interests in LIC I and LIC II, respectively.

At June 30, 2014, LIC II has unfunded capital commitments to the underlying funds of $193.4 million and a $30.0 million revolving credit facility (the "LIC II Facility"), principally for working capital needs. At June 30, 2014, our maximum potential unfunded commitments to LIC I and LIC II combined were $121.1 million which include our share of commitments to underlying funds and our exposure to funding our proportionate share of the then outstanding balance on the LIC II Facility. LIC I's and LIC II's exposures to liabilities and losses of the ventures are limited to their existing capital contributions and remaining capital commitments. Our unfunded commitment to LIC I will remain in effect until December 31, 2014. We expect that LIC II will draw down on our commitment over the next three to five years to satisfy its existing commitments to underlying funds.

13




The following table summarizes the discussion above relative to LIC I and LIC II at June 30, 2014 ($ in millions):

 
LIC I

LIC II

Our effective ownership interest in co-investment vehicle
47.85
%
48.78
%
Our maximum potential unfunded commitments
$
5.1

$
116.0

Our share of unfunded capital commitments to underlying funds
0.4

94.3

Our maximum exposure assuming facility is fully drawn
          N/A

14.6

Our share of exposure on outstanding borrowings
          N/A

3.2


Exclusive of our LIC I and LIC II commitment structures, we have other potential unfunded commitment obligations, the maximum of which is $90.0 million as of June 30, 2014.

Our investments in real estate ventures include investments in entities classified as variable interest entities ("VIEs") that we analyze for potential consolidation. We had equity method investments, either directly or indirectly, of $5.0 million and $2.6 million at June 30, 2014 and December 31, 2013, respectively, in entities classified as VIEs. We evaluate each of these VIEs to determine whether we might have the power to direct the activities that most significantly impact the entity's economic performance. In certain circumstances, we have determined that we either did not have the power to direct the key activities, or shared power with investors, lenders, or other actively-involved third parties. Additionally, our exposure to loss is limited to our investment in the VIEs. Therefore, we concluded that we would not be deemed to have a controlling financial interest in or be the primary beneficiary of these VIEs and therefore do not consolidate them in our Consolidated Financial Statements. In other circumstances, we have determined we are the primary beneficiary of certain other VIEs and accordingly, consolidate such entities. The assets of the consolidated VIEs are available only for the settlement of the obligations of the respective entities. The mortgage loans of the consolidated VIEs are non-recourse to JLL.

Summarized balance sheets for our consolidated VIEs as of June 30, 2014 and December 31, 2013 are as follows ($ in thousands):
 
June 30, 2014

 
December 31, 2013

Property and equipment, net
$
37,758

 
14,389

Investment in real estate venture
2,094

 

Other assets
1,948

 
1,594

Total assets
$
41,800

 
15,983

 
 
 
 
Mortgage loans payable, included in other long-term liabilities
$
28,895

 
10,647

Due to related party
2,094

 

Total liabilities
30,989

 
10,647

 
 
 
 
Members' equity
10,811

 
5,336

Total liabilities and members' equity
$
41,800

 
15,983


Summarized statements of operations for our consolidated VIEs for the three months and six months ended June 30, 2014 and 2013 are as follows ($ in thousands):
 
Three Months Ended

 
Three Months Ended

 
Six Months
Ended

 
Six Months
Ended

 
June 30, 2014

 
June 30, 2013

 
June 30, 2014

 
June 30, 2013

Revenue
$
1,043

 
232

 
1,545

 
519

Gain on Sale of Investment

 
2,875

 

 
2,875

 
 
 
 
 
 
 
 
Operating and other expenses
(947
)
 
(60
)
 
(1,364
)
 
(120
)
Net income
$
96

 
3,047

 
181

 
3,274



14



The members' equity and net income of the consolidated VIEs are allocated in total to the noncontrolling interest holders as Noncontrolling interest on our Consolidated Balance Sheets and as Net income attributable to noncontrolling interest in our Consolidated Statements of Comprehensive Income, respectively.

Impairment
We review investments in real estate accounted for under the equity method on a quarterly basis for indications of whether we may not be able to recover the carrying value of the real estate assets underlying our investments in real estate ventures and whether our investments are other than temporarily impaired. Our judgments regarding the existence of impairment indicators are based on evaluations of regular updates to future cash flow models, and on factors such as operational performance, market conditions, major tenancy matters, legal and environmental concerns, and our ability and intent to hold, with regard to each underlying asset and investment. Future events could occur which would cause us to conclude that impairment indicators exist and an impairment loss is warranted. When events or changes in circumstances indicate that the carrying amount of the real estate asset underlying one of our investments in real estate ventures may be impaired, we review the recoverability of the carrying amount of the real estate asset in comparison to an estimate of the future undiscounted cash flows expected to be generated by the underlying asset.

When the carrying amount of the real estate asset is in excess of the future undiscounted cash flows, we use a discounted cash flow approach that primarily uses Level 3 inputs to determine the fair value of the asset to compute the amount of the potential impairment. There were no impairment charges included in Equity earnings from real estate ventures during the three months ended June 30, 2014. Equity earnings from real estate ventures included impairment charges of $0.5 million for the three months ended June 30, 2013 and $0.8 million and $2.2 million for the six months ended June 30, 2014 and 2013, respectively, representing our share of the impairment charges against individual assets held by our real estate ventures. We did not recognize any impairment charges related to our equity investments during any of the three or six months ended June 30, 2014 and 2013.

Fair Value
We elected the fair value option for certain investments in real estate ventures, in the ordinary course of business at the time of the initial direct investment, because we believe the fair value accounting method more accurately represents the value and performance of these investments. At June 30, 2014 and December 31, 2013, we had $88.6 million and $78.9 million, respectively, of investments that were accounted for under the fair value method. For investments in real estate ventures for which the fair value option has been elected, we increase or decrease our investment each reporting period by the change in the fair value of these investments. We reflect these fair value adjustments as gains or losses in our Consolidated Statements of Comprehensive Income within Equity earnings from real estate ventures. The fair value of these investments is based on discounted cash flow models and other assumptions that reflect our outlook for the commercial real estate market relative to these real estate assets and is primarily based on inputs that are Level 3 inputs in the fair value hierarchy.

The following table shows the movements in our investments in real estate ventures that are accounted for under the fair value accounting method ($ in thousands):
 
2014

2013

Balances as of January 1,
$
78,941

63,579

Investments
7,014

71

Distributions
(517
)
(1,462
)
Net fair value gain (loss)
2,678

(672
)
Foreign currency translation adjustments, net
448

(2,523
)
Balances as of June 30,
$
88,564

58,993


 


15



(7)
Stock-Based Compensation

Restricted Stock Unit Awards
Along with cash based-salaries and performance-based annual cash incentive awards, restricted stock unit awards represent a crucial element of our compensation program.

Restricted stock unit activity for the three months ended June 30, 2014 and 2013, is as follows:
 
Shares
(thousands)

 
Weighted Average
Grant Date
Fair Value

 
Weighted Average
Remaining
Contractual Life
Unvested at April 1, 2014
1,030.8

 
$
80.92

 
 
Granted
13.1

 
121.12

 
 
Vested
(10.7
)
 
34.13

 
 
Forfeited
(6.2
)
 
79.28

 
 
Unvested at June 30, 2014
1,027.0

 
$
81.93

 
2.15
Unvested shares expected to vest
993.6

 
$
82.10

 
2.16
 
 
 
 
 
 
Unvested at April 1, 2013
1,455.0

 
$
70.99

 
 
Granted
14.6

 
92.77

 
 
Vested
(20.9
)
 
64.85

 
 
Forfeited
(3.5
)
 
80.49

 
 
Unvested at June 30, 2013
1,445.2

 
$
71.27

 
1.87
Unvested shares expected to vest
1,402.9

 
$
71.31

 
1.87


Restricted stock unit activity for the six months ended June 30, 2014 and 2013, is as follows:
 
Shares
(thousands)

 
Weighted Average
Grant Date
Fair Value

 
Weighted Average
Remaining
Contractual Life
Unvested at January 1, 2014
1,025.0

 
$
73.10

 

Granted
148.4

 
118.66

 

Vested
(140.2
)
 
56.36

 

Forfeited
(6.2
)
 
79.28

 

Unvested at June 30, 2014
1,027.0

 
$
81.93

 
2.15
Unvested shares expected to vest
993.6

 
$
82.10

 
2.16
 
 
 
 
 
 
Unvested at January 1, 2013
1,347.0

 
$
68.50

 

Granted
175.2

 
91.15

 

Vested
(59.6
)
 
68.62

 

Forfeited
(17.4
)
 
65.99

 

Unvested at June 30, 2013
1,445.2

 
$
71.27

 
1.87
Unvested shares expected to vest
1,402.9

 
$
71.31

 
1.87


16



We determine the fair value of restricted stock units based on the market price of the Company's common stock on the grant date. As of June 30, 2014, we had $34.2 million of remaining unamortized deferred compensation related to unvested restricted stock units. We will recognize the remaining cost of unvested restricted stock units outstanding at June 30, 2014 over varying periods into 2019.

Shares vested during the three months ended June 30, 2014 and 2013, had grant date fair values of $0.4 million and $1.4 million, respectively, and $7.9 million and $4.1 million, for the six months ended June 30, 2014 and 2013, respectively. Shares granted during the three months ended June 30, 2014 and 2013, had grant date fair values of $1.6 million and $1.4 million, respectively, and $17.6 million and $16.0 million for the six months ended June 30, 2014 and 2013, respectively.

Other Stock Compensation Programs
We also have a stock-based compensation plan for our United Kingdom and Ireland based employees, the Jones Lang LaSalle Savings Related Share Option Plan ("Save as You Earn" or "SAYE"). Under this plan, employees make an annual election to contribute to the plan to purchase stock at a 15% discount from the market price at the beginning of the plan's three and five year vesting periods. No options were issued during the six months ended June 30, 2014 and 2013. The fair value of options granted under the SAYE plan are amortized over their respective vesting periods. There were approximately 144,300 and 227,800 options outstanding under the SAYE plan at June 30, 2014 and December 31, 2013, respectively.

(8)
Retirement Plans
We maintain five contributory defined benefit pension plans in the United Kingdom, Ireland and Holland to provide retirement benefits to eligible employees. It is our policy to fund the minimum annual contributions required by applicable regulations. We use a December 31 measurement date for our plans. 

Net periodic pension (income) cost consisted of the following ($ in thousands):
 
Three Months
Ended

 
Three Months
Ended

 
Six Months
Ended

 
Six Months
 Ended

 
June 30, 2014

 
June 30, 2013

 
June 30, 2014

 
June 30, 2013

Employer service cost - benefits earned during
 the period
$
958

 
947

 
1,915

 
1,901

Interest cost on projected benefit obligation
4,089

 
3,513

 
8,179

 
7,056

Expected return on plan assets
(6,200
)
 
(4,885
)
 
(12,400
)
 
(9,811
)
Net amortization of deferrals
273

 
523

 
546

 
1,051

Recognized actuarial loss
41

 
38

 
83

 
76

Net periodic pension (income) cost
$
(839
)
 
136

 
(1,677
)
 
273


The expected return on plan assets, included in net periodic pension (income) cost, is based on forecasted long-term rates of return on plan assets of each individual plan; expected returns range from 4.1% to 7.0%.

For the three months ended June 30, 2014 and 2013, we made payments of $3.0 million and $2.6 million, respectively, to these plans. For the six months ended June 30, 2014 and 2013, we made payments of $6.6 million and $6.1 million, respectively, to these plans. We expect to contribute an additional $7.0 million to these plans in the last six months of 2014, for a total of $13.6 million in 2014. We made $13.2 million of contributions to these plans during the year ended December 31, 2013.

(9)
Fair Value Measurements
ASC 820, "Fair Value Measurements and Disclosures," establishes a framework for measuring fair value and establishes the following three-tier fair value hierarchy:

Level 1. Observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
There were no transfers among levels of valuations during either of the three or six months ended June 30, 2014 or 2013.


17



Financial Instruments
Our financial instruments include Cash and cash equivalents, Trade receivables, Notes and other receivables, Warehouse receivables, Accounts payable, Short-term borrowings, Warehouse facility, Credit facility, Long-term senior notes and foreign currency exchange contracts. The estimated fair value of Cash and cash equivalents, Trade receivables, Notes and other receivables, Warehouse receivables, Accounts payable, and the Warehouse facility approximates their carrying amounts due to the short maturity of these instruments. The estimated fair value of our Credit facility and Short-term borrowings approximates their carrying value due to their variable interest rate terms and market spreads.

We estimate that the fair value of our Long-term senior notes was $279.2 million and $262.6 million at June 30, 2014 and December 31, 2013, respectively, using dealer quotes that are Level 2 inputs in the fair value hierarchy. The carrying value of our Long-term senior notes was $275.0 million at June 30, 2014 and December 31, 2013.

We record Warehouse receivables at the lower of cost or fair value based on the commitment price, in accordance with ASC 948, "Financial Services-Mortgage Banking." The fair values of our Warehouse receivables are based on the committed purchase price. When applicable, we determine the fair value of Warehouse receivables based on readily observable Level 2 inputs.

Recurring Fair Value Measurements
The following table categorizes by level in the fair value hierarchy our assets and liabilities that are measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013 ($ in thousands):
 
 
 
June 30, 2014
 
December 31, 2013
 
 
 
 Level 2    
   
Level 3    
 
 Level 2    
   
  Level 3    
Assets
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts receivable
 
$
5,730

 

 
$
12,966

 

 
Deferred compensation plan assets
 
96,625

 

 
85,050

 

 
Investments in real estate ventures - fair value
 

 
88,564

 

 
78,941

Total assets at fair value
 
$
102,355

 
88,564

 
$
98,016

 
78,941

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts payable
 
$
2,197

 

 
$
13,094

 

 
Deferred compensation plan liabilities
 
96,729

 

 
85,853

 

Total liabilities at fair value
 
$
98,926

 

 
$
98,947

 


We regularly use foreign currency forward contracts to manage our currency exchange rate risk related to intercompany lending and cash management practices. We determined the fair value of these contracts based on current market rates. The inputs for these valuations are Level 2 inputs in the fair value hierarchy. At June 30, 2014, these forward exchange contracts had a gross notional value of $1.9 billion ($899.5 million on a net basis) and were recorded on our Consolidated Balance Sheet as a current asset of $5.7 million and a current liability of $2.2 million. At December 31, 2013, these forward exchange contracts had a gross notional value of $1.96 billion ($1.01 billion on a net basis) and were recorded on our Consolidated Balance Sheet as a current asset of $13.0 million and a current liability of $13.1 million.

The revaluations of our foreign currency forward contracts resulted in a net gain of $3.5 million and a net loss of $7.9 million for the three months ended June 30, 2014 and 2013, respectively. Gains and losses from the revaluation of these contracts are recognized as a component of Operating, administrative and other expense and are offset by the gains and losses recognized on the revaluation of intercompany loans and other foreign currency balances such that the impact to net income was not significant for either of the three or six months ended June 30, 2014 or 2013.

The asset and liability positions recorded for our foreign currency forward contracts are based on the net payable or net receivable position with the financial institutions from which we purchase these contracts. The $5.7 million asset at June 30, 2014 was comprised of gross contracts with receivable positions of $7.8 million and payable positions of $2.1 million. The $2.2 million liability position at June 30, 2014 was comprised of gross contracts with receivable positions of $1.0 million and payable positions of $3.2 million. At December 31, 2013, the $13.0 million asset was comprised of gross contracts with

18



receivable positions of $13.8 million and payable positions of $0.8 million. The $13.1 million liability position at December 31, 2013, was comprised of gross contracts with receivable positions of $1.3 million and payable positions of $14.4 million.

We maintain a deferred compensation plan for certain of our U.S. employees that allows them to defer portions of their compensation. We invest directly in insurance contracts which yield returns to fund these deferred compensation obligations. We recognize an asset for the amount that could be realized under these insurance contracts at the balance sheet date, and the deferred compensation obligation is adjusted to reflect the changes in the fair value of the amount owed to the employees. The inputs for this valuation are Level 2 inputs in the fair value hierarchy. This plan is recorded on our Consolidated Balance Sheet at June 30, 2014, as Other long-term assets of $96.6 million, long-term Deferred compensation liabilities of $96.7 million, and as a reduction of equity, Shares held in trust, of $6.3 million. This plan is recorded on our Consolidated Balance Sheet at December 31, 2013 as Other long-term assets of $85.1 million, long-term Deferred compensation liabilities of $85.9 million, and as a reduction of equity, Shares held in trust, of $8.1 million.

We have elected the fair value option for certain investments in real estate ventures. We had $88.6 million and $78.9 million at June 30, 2014 and December 31, 2013, respectively, of direct investments in real estate ventures that were accounted for under the fair value method. For these fair value investments in real estate ventures we increase or decrease our investment each reporting period by the change in the fair value of these investments. These fair value adjustments are reflected as gains or losses in our Consolidated Statements of Comprehensive Income within Equity earnings from real estate ventures. We determine the fair value of these investments based on discounted cash flow models that use Level 3 assumptions that reflect our outlook for the commercial real estate market relative to these real estate assets. See Note 6, Investments in Real Estate Ventures, for additional information regarding our investments accounted for under the fair value method.

Non-Recurring Fair Value Measurements
We review our Investments in real estate ventures accounted for under the equity method on a quarterly basis for indications of whether we may not be able to recover the carrying value of the real estate assets underlying our investments and whether our investments are other than temporarily impaired. When the carrying amount of the underlying real estate asset is in excess of the future undiscounted cash flows, we use a discounted cash flow approach to determine the fair value of the asset in computing the amount of the impairment. Our determination of fair value is based on a discounted cash flow approach using primarily Level 3 inputs. See Note 6, Investments in Real Estate Ventures, for additional information regarding our investments accounted for under the equity method.

(10)
Debt

Credit Facility
We have a $1.2 billion unsecured revolving credit facility (the "Facility") that matures in 2018. We had $410.0 million and $155.0 million outstanding under the Facility at June 30, 2014 and December 31, 2013, respectively. Under our Facility, at June 30, 2014, we had the capacity to borrow up to an additional $767.6 million. The average outstanding borrowings under the Facility were $491.8 million and $542.3 million during the three months ended June 30, 2014 and 2013, respectively, and $383.3 million and $423.6 million during the six months ended June 30, 2014 and 2013, respectively.

The pricing on the Facility ranges from LIBOR plus 1.00% to 1.75%. As of June 30, 2014, pricing on the Facility was LIBOR plus 1.13%. The effective interest rate on our credit facility was 1.0% and 1.3% for the three months ended June 30, 2014 and 2013, respectively, and 1.1% and 1.4% during the six months ended June 30, 2014 and 2013, respectively.

We remain in compliance with all covenants under our Facility as of June 30, 2014. The Facility requires us to maintain a leverage ratio that does not exceed 3.50 to 1 and a minimum cash interest coverage ratio of 3.00 to 1.

Included in debt for the calculation of the leverage ratio is the present value of deferred business acquisition obligations and included in Adjusted EBITDA (as defined in the Facility) are, among other things, (1) an add-back for stock compensation expense, (2) the addition of the EBITDA of acquired companies earned prior to acquisition, and (3) add-backs for certain impairment and non-recurring charges. In addition, we are restricted from, among other things, incurring certain levels of indebtedness to lenders outside of the Facility and disposing of a significant portion of our assets. Lender approval or waiver is required for certain levels of cash acquisitions and co-investment.

We will continue to use the Facility for working capital needs (including payment of accrued incentive compensation), co-investment activities, dividend payments, share repurchases, capital expenditures and business acquisitions.


19



Short-Term Borrowings
In addition to our Facility, we have the capacity to borrow up to an additional $51.1 million under local overdraft facilities. We had short-term borrowings (including capital lease obligations and local overdraft facilities) of $24.7 million and $24.5 million at June 30, 2014 and December 31, 2013, respectively, of which $18.4 million and $22.8 million at June 30, 2014 and December 31, 2013, respectively, was attributable to local overdraft facilities.

Long-Term Senior Notes
In November 2012, in an underwritten public offering, we issued $275.0 million of Long-term senior notes due November 2022 (the "Notes"). The Notes bear interest at an annual rate of 4.4%, subject to adjustment if a credit rating assigned to the Notes is downgraded below an investment grade rating (or subsequently upgraded). Interest is payable semi-annually on May 15 and November 15.

(11)
Commitments and Contingencies
We are a defendant in various litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Many of these litigation matters are covered by insurance (including insurance provided through a captive insurance company), but they may nevertheless be subject to large deductibles and the amounts being claimed may exceed the available insurance. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effect on our financial position, results of operations or liquidity.

In order to better manage our global insurance program and support our risk management efforts, we supplement our traditional insurance coverage for certain types of claims by using a wholly-owned captive insurance company. The level of risk retained by our captive insurance company, with respect to professional indemnity claims, is up to $2.5 million per claim, inclusive of the deductible. When a potential loss event occurs, management estimates the ultimate cost of the claim and accrues the related cost when probable and estimable. The accrual for professional indemnity insurance claims facilitated through our captive insurance company, which relates to multiple years, was $8.5 million and $6.2 million as of June 30, 2014 and December 31, 2013, respectively.

(12)
Restructuring and Acquisition Charges
For the three and six months ended June 30, 2014, we recognized $5.5 million and $41.4 million, respectively, of Restructuring and acquisition charges, of which $34.5 million were related to the write-off of an indemnification asset that arose from prior period acquisition activity; this write-off was offset by the recognition of a related previously unrecognized tax benefit of an equal amount in the provision for income taxes, and therefore had no impact on net income. The remaining $6.9 million of expense consisted of (1) severance, (2) lease exit charges and fair value reserve adjustments, and (3) other acquisition and information technology integration costs. For the three and six months ended June 30, 2013, we recognized $6.6 million and $9.8 million, respectively, of expense consisting of (1) severance, (2) King Sturge employee retention bonuses, (3) lease exit charges and fair value changes, and (4) other acquisition and information technology integration costs.

The following table shows the restructuring and acquisition accrual activity, exclusive of the $34.5 million indemnification asset write-off, and the related payments made during the six months ended June 30, 2014 and 2013 ($ in thousands):
 
Severance

 
Retention
Bonuses

 
Lease
Exit

 
Other
Acquisition
Costs

 
Total

January 1, 2014
$
3,798

 
397

 
5,891

 
373

 
$
10,459

Accruals
2,362

 

 
3,204

 
1,324

 
6,890

Payments made
(2,396
)
 
13

 
(2,397
)
 
(1,562
)
 
(6,342
)
June 30, 2014
$
3,764

 
410

 
6,698

 
135

 
$
11,007


January 1, 2013
$
9,991

 
5,188

 
11,963

 
4,235

 
$
31,377

Accruals
5,736

 
896

 
(1,351
)
 
4,489

 
9,770

Payments made
(9,050
)
 
(4,952
)
 
(2,715
)
 
(3,975
)
 
(20,692
)
June 30, 2013
$
6,677

 
1,132

 
7,897

 
4,749

 
$
20,455

 
We expect that the majority of accrued severance, accrued retention bonuses, and other accrued acquisition costs will be paid during 2014. Lease exit payments are dependent on the terms of various leases, which extend into 2017.

20




(13) Subsequent Event
On July 31, 2014, we acquired CLEO Construction Management (CLEO), a prominent California-based construction project management services firm that specializes in medical facilities. The transaction will enable JLL, already a leading provider of comprehensive facility management, advisory and project development services for medical properties, to provide a broader range of services to healthcare organizations and meet the growing needs of this real estate sector.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, for the three and six months ended June 30, 2014, and Jones Lang LaSalle's ("JLL") audited Consolidated Financial Statements and notes thereto for the fiscal year ended December 31, 2013, which are included in our 2013 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission ("SEC") and also available on our website (www.jll.com).You should also refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2013 Annual Report on Form 10-K.

The following discussion and analysis contains certain forward-looking statements generally identified by the words anticipates, believes, estimates, expects, plans, intends and other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause JLL's actual results, performance, achievements, plans and objectives to be materially different from any future results, performance, achievements, plans and objectives expressed or implied by such forward-looking statements. See the Cautionary Note Regarding Forward-Looking Statements included within this section for further information.

We present our quarterly Management's Discussion and Analysis in five sections, as follows:

(1)
A summary of our critical accounting policies and estimates,
(2)
Certain items affecting the comparability of results and certain market and other risks that we face,
(3)
The results of our operations, first on a consolidated basis and then for each of our business segments,
(4)
Consolidated cash flows, and
(5)
Liquidity and capital resources.

Summary of Critical Accounting Policies and Estimates
An understanding of our accounting policies is necessary for a complete analysis of our results, financial position, liquidity and trends. See Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our 2013 Annual Report on Form 10-K for a complete summary of our significant accounting policies.

The preparation of our financial statements requires management to make certain critical accounting estimates and judgments that impact (1) the stated amount of assets and liabilities, (2) disclosure of contingent assets and liabilities at the date of the financial statements, and (3) the reported amount of revenue and expenses during the reporting periods. These accounting estimates are based on management's judgment. We consider them to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to ensure reasonableness. Although actual amounts likely differ from such estimated amounts, we believe such differences are not likely to be material.
 
A discussion of our critical accounting policies and estimates used in the preparation of our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q can be found in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to these critical accounting policies and estimates during the six months ended June 30, 2014.

The following are the critical accounting policies and estimates discussed in Item 7 of our Annual Report on Form 10-K:
Revenue Recognition;
Allowance for Uncollectible Accounts Receivable;
Asset Impairments;
Income Taxes; and
Self-Insurance Programs.

In addition to the aforementioned critical accounting policies, we believe the calculation of our quarterly tax provision is critical to understanding the estimates and assumptions used in preparing the Consolidated Financial Statements in Part I.

21




Quarterly Income Tax Provision
Our fiscal year estimated effective tax rate is based on estimates that are updated each quarter. For the six months ended June 30, 2014, our pre-tax income included restructuring and acquisition charges of $34.5 million related to the write-off of an indemnification asset that arose from prior period acquisition activity. The effect of this on net income was offset by the recognition of a related previously unrecognized tax benefit of an equal amount as previously disclosed in our 2013 Annual Report on Form 10-K. Excluding the offset of this write-off on our provision (benefit) for income taxes, our effective tax rate for the three and six months ended June 30, 2014, and our forecasted tax rate for 2014, is approximately 25.0%. We provide for the effects of income taxes on interim financial statements based on our estimate of the effective tax rate for the full year, which is based on forecasted income by country and the impact of tax planning activities. We evaluate our estimated effective tax rate on a quarterly basis to reflect forecast changes in (1) our geographic mix of income, (2) legislative actions on statutory tax rates effective in the quarter in which the legislation is enacted, and (3) the impact of tax planning.

The geographic mix of our income can significantly impact our effective tax rate. Tax rate jurisdictions with effective national and local combined tax rates of 25% or lower with the most significant impact on our effective tax rate include: Hong Kong (16.5%), Singapore (17%), the United Kingdom (21.5%), and the Netherlands (25%). Other tax rate jurisdictions with effective rates of 25% or lower making meaningful contributions to our global effective tax rate include: Macau (12%), Cyprus (12.5%), Ireland (12.5%), Poland (19%), Turkey (20%), Korea (24.2%) and The People's Republic of China (25%).

Items Affecting Comparability

Macroeconomic Conditions
Our results of operations and the variability of these results are significantly influenced by macroeconomic trends, the geopolitical environment, the global and regional real estate markets as well as the financial and credit markets. These macroeconomic conditions have had, and we expect will continue to have, a significant impact on the variability of our results of operations.

LaSalle Investment Management Revenue
Our investment management business is in part compensated through the receipt of incentive fees where performance of underlying funds' investments exceeds agreed-to benchmark levels. Depending upon performance and the contractual timing of measurement periods with clients, these fees can be significant and vary substantially from period to period.

Equity earnings from real estate ventures also may vary substantially from period to period for a variety of reasons, including as a result of: (1) impairment charges, (2) realized gains (losses) on asset dispositions, or (3) incentive fees recorded as Equity earnings from real estate ventures. The timing of recognition of these items may impact comparability between quarters, in any one year, or compared to a prior year.

The comparability of these items can be seen in Note 4, Business Segments, of the Notes to Consolidated Financial Statements and is discussed further in Segment Operating Results included herein.

Transactional-Based Revenue
Transactional-based fees for real estate investment banking, capital markets activities and other services within our Real Estate Services ("RES") businesses increase the variability of the revenue we receive that relates to the size and timing of our clients' transactions. The timing and the magnitude of these fees can vary significantly from year to year and quarter to quarter, and from region to region.

Foreign Currency
We conduct business using a variety of currencies but report our results in U.S. dollars. As a result, the volatility of currencies against the U.S. dollar may positively or negatively impact our reported results. This volatility can make it more difficult to perform period-to-period comparisons of the reported U.S. dollar results of operations, because such results may indicate a growth or decline rate that might not have been consistent with the real underlying growth or decline rates in the local operations. Consequently, we provide information about the impact of foreign currencies in the period-to-period comparisons of the reported results of operations in our discussion and analysis of our financial condition in the Results of Operations section below.

Seasonality
Our quarterly revenue and profits tend to grow progressively by quarter throughout the year. This is the result of a general focus in the real estate industry on completing or documenting transactions by fiscal year-end and the fact that certain expenses are constant through the year. Historically, we have reported a relatively smaller profit in the first quarter and then increasingly

22



larger profits during each of the following three quarters, excluding the recognition of investment-generated performance fees and co-investment equity gains and losses (each of which can be unpredictable). Such performance fees and co-investment equity gains or losses are generally recognized when assets are sold, the timing of which is geared toward the benefit of our clients. Non-variable operating expenses, which are treated as expenses when they are incurred during the year, are relatively constant on a quarterly basis.

A significant portion of our Compensation and benefits expense is from incentive compensation plans, which we generally accrue throughout the year based on progress toward annual performance targets. This quarterly estimation can result in significant fluctuations in quarterly Compensation and benefit expense from period to period. Consequently, the results for the periods ended June 30, 2014 and 2013, are not indicative of the results to be obtained for the full fiscal year.

Results of Operations

Reclassifications
We report Equity earnings from real estate ventures in our Consolidated Statements of Comprehensive Income after Operating income. However, for segment reporting we reflect Equity earnings from real estate ventures within Total revenue. See Note 4, Business Segments, of the Notes to Consolidated Financial Statements for Equity earnings reflected within segment revenue, as well as discussion of how the Chief Operating Decision Maker (as defined in Note 4) measures segment results with Equity earnings included in segment revenue.

Three and Six Months Ended June 30, 2014 Compared to Three and Six Months Ended June 30, 2013
In order to provide more meaningful year-over-year comparisons of our reported results, we have included in the table below both the U.S. dollar and local currency movements in the Consolidated Statements of Comprehensive Income.
 
Three Months

 
Three Months

 
 
 
 
 
% Change

 
Ended

 
Ended

 
Change in
 
in Local

($ in millions)
June 30, 2014

 
June 30, 2013

 
U.S. dollars
 
Currency

Revenue
 
 
 
 
 
 
 
 
 

Real Estate Services:
 
 
 
 
 
 
 
 
 

Leasing
$
365.2

 
297.2

 
68.0

 
23
%
 
23
%
Capital Markets & Hotels
183.1

 
159.0

 
24.1

 
15
%
 
12
%
Property & Facility Management (1)
257.2

 
210.6

 
46.6

 
22
%
 
22
%
Project & Development Services (1)
102.9

 
86.1

 
16.8

 
20
%
 
19
%
Advisory, Consulting and Other
107.6

 
94.1

 
13.5

 
14
%
 
12
%
LaSalle Investment Management
70.0

 
61.3

 
8.7

 
14
%
 
12
%
Fee revenue
$
1,086.0

 
908.3

 
177.7

 
20
%
 
18
%
Gross contract costs
191.2

 
81.1

 
110.1

 
n.m.

 
n.m.

Total revenue
$
1,277.2

 
989.4

 
287.8

 
29
%
 
28
%
Operating expenses, excluding gross contract costs
988.8

 
835.9

 
152.9

 
18
%
 
17
%
Gross contract costs
191.2

 
81.1

 
110.1

 
n.m.

 
n.m.

Restructuring and acquisition charges
5.5

 
6.6

 
(1.1
)
 
(17
%)
 
(28
%)
Total operating expenses
$
1,185.5

 
923.6

 
261.9

 
28
%
 
27
%
Operating income
$
91.7

 
65.8

 
25.9

 
39
%
 
41
%
(1) Amounts have been adjusted to remove gross contract costs.
 
 
 
 
 
 
 n.m. - not meaningful