Form 8-K Marcus & Millichap, Inc. For: Nov 07

November 7, 2018 4:09 PM

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 7, 2018

 

 

MARCUS & MILLICHAP, INC.

(Exact name of Registrant as Specified in its Charter)

 

 

 

Delaware   001-36155   35-2478370

(State or Other Jurisdiction of

Incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification Number)

23975 Park Sorrento, Suite 400

Calabasas, California 91302

(Address of Principal Executive Offices including Zip Code)

(818) 212-2250

(Registrant’s Telephone Number, including Area Code)

Not Applicable

(Former Name or Former Address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

 

 

 


Item 2.02. Results of Operations and Financial Condition.

On November 7, 2018, Marcus & Millichap, Inc. (the “Company”) issued a press release announcing its financial results for the second quarter ended September 30, 2018. A copy of the press release is furnished as Exhibit 99.1 to this Form 8-K and is incorporated herein by reference.

The information furnished on this Form 8-K, including the attached exhibit, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any other filing under the Securities Act of 1933, as amended or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

 

Exhibit

Number

  

Exhibit Title or Description

99.1    Press release issued by the Company entitled “Marcus & Millichap, Inc. Reports Results for Third Quarter 2018” dated November 7, 2018.

 

2


SIGNATURES

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 hereunto duly authorized.

 

    MARCUS & MILLICHAP, INC.
Date: November 7, 2018    

By:

  /s/ Martin E. Louie
      Martin E. Louie
      Chief Financial Officer

 

3

Exhibit 99.1

 

LOGO

MARCUS & MILLICHAP, INC. REPORTS RESULTS FOR

THIRD QUARTER 2018

TOTAL REVENUES INCREASED BY 14.9%

NET INCOME INCREASED BY 34.8%

CALABASAS, Calif., November 7, 2018 — (BUSINESS WIRE) — Marcus & Millichap, Inc. (the “Company”, “Marcus & Millichap”, “MMI”) (NYSE: MMI), a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services, today reported financial results for the third quarter ended September 30, 2018.

Third Quarter 2018 Highlights Compared to Third Quarter 2017

 

   

Total revenues increased by 14.9% to $210.6 million

 

   

Net income increased by 34.8% to $20.9 million

 

   

Financing fees increased by 40.3% supported by recent hiring, the acquisition of the business of Pinnacle Financial Group and expanded lender relationships

 

   

Private Client Market segment brokerage revenue increased by 8.6%

 

   

Brokerage revenue in the Larger Transaction and Middle Market segments increased by 26.7% and 27.1%, respectively, compared to a 13.0% increase and a 1.9% decrease, respectively, in the third quarter of 2017

 

   

Selling, general and administrative expenses increased by 14.5%; or 13.0% excluding stock-based compensation expense

 

   

Acquisitions of the Canadian real estate services of McGill Commercial during the third quarter of 2018 and Primecorp Commercial Realty during the fourth quarter of 2018

Nine Months 2018 Highlights Compared to Nine Months 2017

 

   

Total revenues increased by 13.1% to $584.5 million

 

   

Net income increased by 41.8% to $61.0 million; while adjusted EBITDA grew by 17.2%

 

   

Financing fees increased by 20.8%

 

   

Private Client Market segment brokerage revenue increased by 6.7%

 

   

Brokerage revenue in the Larger Transaction and Middle Market segments increased by 32.7% and 34.3%, respectively, compared to a 16.8% and a 1.1% decrease, respectively, in the same period in 2017

 

   

Selling, general and administrative expenses increased by 12.7%; or 11.1% excluding stock-based compensation expense

 

   

Total sales force expanded by 113 professionals, or 6.4% over the past 12 months

Hessam Nadji, President and CEO stated, “Our team achieved healthy growth in the third quarter, extending this year’s positive results in all market segments. We believe the market’s generally flat sales trend points to overall share gains for MMI given our 13.4% brokerage revenue and 6.6% brokerage transaction growth for the quarter. These results reflect our increased client outreach and marketing campaigns, platform investments and recent acquisitions.”

Mr. Nadji added, “Solid real estate fundamentals, availability of debt and equity and tax law provisions favorable to real estate investors should bode well for the outlook as investors navigate higher interest rates and price expectations. We are helping our clients execute through these dynamics by taking advantage of ample opportunities to sell, exchange, buy and/or refinance assets. Our team remains steadfast on creating long-term shareholder value by leveraging our strong balance sheet to invest in proprietary tools, best-of-class brokerage support and continuing to acquire quality, accretive firms and teams.”

 

Page 1


Third Quarter 2018 Results Compared to Third Quarter 2017

Total revenues for the third quarter of 2018 were $210.6 million compared to $183.3 million for the same period in the prior year, increasing by $27.2 million, or 14.9%. The improvement in total revenues was primarily driven by the increase in real estate brokerage commissions, which grew by 13.4% to $192.0 million. This increase in brokerage commissions was primarily due to a rise in overall sales volume generated by the increase in the number of investment sales transactions and average transaction size. Average commission rates declined due to a higher proportion of transactions from the Larger Transaction and Middle Market segments, which generate lower commission rates.

Total operating expenses for the third quarter of 2018 increased by 15.5% to $183.2 million, compared to $158.7 million for the same period in the prior year. The increase was primarily driven by a 15.8% increase in cost of services and a 14.5% increase in selling, general and administrative expense. Cost of services as a percent of total revenues increased by 50 basis points to 63.1% compared to the same period in the prior year.

Selling, general and administrative expenses for the third quarter of 2018 increased by 14.5% to $48.7 million, compared to the same period in the prior year. The increase was primarily due to increased costs associated with (i) compensation related costs, including salaries and related benefits; (ii) stock-based compensation expense; (iii) other expense categories primarily driven by an increase in professional fees; (iv) sales and promotional marketing expenses; and (v) expansion of existing offices.

Net income for the third quarter of 2018 was $20.9 million, or $0.53 per common share (basic and diluted), compared to net income of $15.5 million, or $0.40 per common share (basic) and $0.39 per common share (diluted) for the same period in the prior year. Adjusted EBITDA for the third quarter of 2018 increased by 12.8% to $32.2 million, compared to adjusted EBITDA of $28.5 million for the same period in the prior year.

Nine Months 2018 Results Compared to Nine Months 2017

Total revenues for the nine months ended September 30, 2018 were $584.5 million, compared to $516.9 million for the same period in the prior year, an increase of $67.6 million, or 13.1%. Total operating expenses for the nine months ended September 30, 2018 increased by 12.6% to $504.7 million compared to $448.2 million for the same period in the prior year. Cost of services as a percent of total revenues decreased to 60.6%, down 30 basis points compared to the first nine months of 2017. The Company reported net income for the nine months ended September 30, 2018 of $61.0 million, or $1.56 per common share (basic) and $1.55 per common share (diluted), compared with net income of $43.0 million, or $1.10 per common share (basic and diluted), for the same period in the prior year. Adjusted EBITDA for the nine months ended September 30, 2018 increased by 17.2% to $93.3 million, from $79.6 million for the same period in the prior year. As of September 30, 2018, the Company had 1,870 investment sales and financing professionals, a net gain of 113 over the prior year.

Business Outlook

We believe that the Company is positioned to gain overall market share by leveraging a number of factors, including our leading national brand predominantly within our Private Client Market segment, as well as growth opportunities in larger transactions and our financing division, Marcus & Millichap Capital Corporation. The firm also benefits from its experienced management team, infrastructure investments and proprietary technology. The size and fragmentation of the Private Client Market segment continues to offer long-term growth opportunities. This market segment consistently accounts for over 80% of commercial property sales transactions and over 60% of the commission pool. The Company’s growth plan also includes further expansion into office, industrial and various specialty property types such as hospitality, self-storage and seniors housing.

Key factors likely to influence the Company’s business during the balance of 2018 include:

 

   

Volatility in market sales and investor sentiment driven by:

 

  o

Slowdown in market sales in the short- to mid-term in view of a maturing cycle, rising interest rates, bid-ask spread gap between buyers and sellers and economic trends

 

  o

Possible boost to investor sentiment and sales activity based on the Tax Cuts and Jobs Act, regulatory easing and economic initiatives which are expected to increase real estate investor demand

 

  o

Possible regional legislation that promotes affordable housing may initially decrease real estate investor demand

 

   

Experienced agents’ larger share of revenue production in a more challenging market environment, resulting in a higher average commission payout

 

   

Volatility in the Company’s Middle and Larger Transaction Market segments

 

   

The potential for acquisition activity and subsequent integration

 

Page 2


In addition, the reduction of MMI’s effective corporate tax rate to the 25.5%-27.5% range from nearly 40% in prior years as a result of the enactment of the Tax Cuts and Jobs Act will continue to affect the Company’s business in 2018. The factors above, as well as the business’s typical transaction closing date variability, highlight the importance of viewing the Company’s business through a long-term, at least annual, perspective.

Conference Call Details

Marcus & Millichap will host a conference call today to discuss the results at 2:00 p.m. Pacific Time/5:00 p.m. Eastern Time. To participate in the conference call, callers from the United States and Canada should dial (877) 407-9208 ten minutes prior to the scheduled call time. International callers should dial (201) 493-6784. For those unable to participate during the live broadcast, a telephonic replay of the call will also be available from 5:00 p.m. Pacific Time/8:00 p.m. Eastern Time on Wednesday, November 7, 2018, through 8:59 p.m. Pacific Time/11:59 p.m. Eastern Time on Wednesday, November 21, 2018, by dialing (844) 512-2921 in the United States and Canada or (412) 317-6671 internationally and entering passcode 13683377.

About Marcus & Millichap, Inc.

Marcus & Millichap, Inc. is a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. As of September 30, 2018, the Company had over 1,800 investment sales and financial professionals in 79 offices who provide investment brokerage and financing services to sellers and buyers of commercial real estate. The Company also offers market research, consulting and advisory services to our clients. Marcus & Millichap closed 6,869 transactions for the nine months ended September 30, 2018, with a sales volume of approximately $33.1 billion. For additional information, please visit www.MarcusMillichap.com.

 

Page 3


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This release includes forward-looking statements, including the Company’s business outlook for 2018 and beyond and expectations for market share growth. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

   

market trends in the commercial real estate market or the general economy;

 

   

our ability to attract and retain qualified managers and investment sales and financing professionals;

 

   

the effects of increased competition on our business;

 

   

our ability to successfully enter new markets or increase our market share;

 

   

our ability to successfully expand our services and businesses and to manage any such expansions;

 

   

our ability to retain existing clients and develop new clients;

 

   

our ability to keep pace with changes in technology;

 

   

any business interruption or technology failure and any related impact on our reputation;

 

   

changes in interest rates, tax laws, including the Tax Cuts and Jobs Act, employment laws or other government regulation affecting our business; and

 

   

other risk factors included under “Risk Factors” in our most recent Annual Report on Form 10-K.

In addition, in this release, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential,” “should” and similar expressions, as they relate to our company, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this release may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date of this release. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

Page 4


MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF NET

AND COMPREHENSIVE INCOME

(dollar and share amounts in thousands, except per share amounts)

(Unaudited)

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2018     2017     2018     2017  

Revenues:

      

Real estate brokerage commissions

   $ 191,980     $ 169,357     $ 536,145     $ 472,069  

Financing fees

     15,947       11,368       41,234       34,131  

Other revenues

     2,663       2,616       7,154       10,724  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     210,590       183,341       584,533       516,924  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Cost of services

     132,896       114,803       354,414       314,827  

Selling, general and administrative expense

     48,659       42,480       145,792       129,393  

Depreciation and amortization expense

     1,651       1,375       4,529       3,975  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     183,206       158,658       504,735       448,195  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     27,384       24,683       79,798       68,729  

Other income (expense), net

     2,127       1,172       5,060       3,005  

Interest expense

     (342     (370     (1,054     (1,126
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     29,169       25,485       83,804       70,608  

Provision for income taxes

     8,315       10,010       22,772       27,564  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20,854       15,475       61,032       43,044  

Other comprehensive (loss) income:

        

Unrealized (losses) gains on marketable securities, net of tax of $(38), $66, $(259) and $242 for the three months ended September 30, 2018 and 2017 and the nine months ended September 30, 2018 and 2017, respectively

     (115     104       (771     325  

Foreign currency translation (loss) gain, net of tax of $0 for each of the three months ended September 30, 2018 and 2017 and each of the nine months ended September 30, 2018 and 2017

     (29     (40     44       (65
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (144     64       (727     260  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 20,710     $ 15,539     $ 60,305     $ 43,304  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.53     $ 0.40     $ 1.56     $ 1.10  

Diluted

   $ 0.53     $ 0.39     $ 1.55     $ 1.10  

Weighted average common shares outstanding:

        

Basic

     39,191       39,033       39,147       38,995  

Diluted

     39,484       39,204       39,359       39,136  

 

Page 5


MARCUS & MILLICHAP, INC.

KEY OPERATING METRICS SUMMARY

(Unaudited)

Total sales volume was $12.0 billion for the three months ended September 30, 2018, encompassing 2,427 transactions consisting of $9.3 billion for real estate brokerage (1,809 transactions), $1.8 billion for financing (434 transactions) and $0.9 billion in other transactions, including consulting and advisory services (184 transactions). Total sales volume was $33.1 billion for the nine months ended September 30, 2018, encompassing 6,869 transactions consisting of $26.2 billion for real estate brokerage (5,146 transactions), $4.4 billion for financing (1,191 transactions) and $2.5 billion in other transactions, including consulting and advisory services (532 transactions). As of September 30, 2018, the Company had 1,765 investment sales professionals and 105 financing professionals. Key metrics for real estate brokerage and financing are as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
Real Estate Brokerage    2018     2017     2018     2017  

Average Number of Investment Sales Professionals

     1,738       1,658       1,701       1,638  

Average Number of Transactions per Investment Sales Professional

     1.04       1.02       3.03       2.94  

Average Commission per Transaction

   $ 106,125     $ 99,798     $ 104,187     $ 98,143  

Average Commission Rate

     2.06     2.12     2.05     2.17

Average Transaction Size (in thousands)

   $ 5,140     $ 4,714     $ 5,084     $ 4,525  

Total Number of Transactions

     1,809       1,697       5,146       4,810  

Total Sales Volume (in millions)

   $ 9,298     $ 8,000     $ 26,162     $ 21,764  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
Financing (1)    2018     2017     2018     2017  

Average Number of Financing Professionals

     104       92       97       95  

Average Number of Transactions per Financing Professional

     4.17       4.45       12.28       12.72  

Average Fee per Transaction

   $ 34,733     $ 27,795     $ 33,326     $ 28,254  

Average Fee Rate

     0.84     0.85     0.90     0.88

Average Transaction Size (in thousands)

   $ 4,112     $ 3,274     $ 3,717     $ 3,224  

Total Number of Transactions

     434       409       1,191       1,208  

Total Financing Volume (in millions)

   $ 1,785     $ 1,339     $ 4,427     $ 3,895  
(1)

Operating metrics calculated excluding certain financing fees not directly associated to transactions.

The following table sets forth the number of transactions, sales volume and revenues by commercial real estate market segment for real estate brokerage:

 

    Three Months Ended September 30,        
    2018     2017     Change  
Real Estate Brokerage   Number     Volume     Revenues     Number     Volume     Revenues     Number     Volume     Revenues  
          (in millions)     (in thousands)           (in millions)     (in thousands)           (in millions)     (in thousands)  

<$1 million

    268     $ 166     $ 7,224       259     $ 166     $ 7,032       9     $ —       $ 192  

Private Client Market ($1—$10 million)

    1,352       4,382       125,898       1,282       3,906       115,959       70       476       9,939  

Middle Market (³$10—$20 million)

    119       1,581       31,158       94       1,284       24,505       25       297       6,653  

Larger Transaction Market (³$20 million)

    70       3,169       27,700       62       2,644       21,861       8       525       5,839  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,809     $ 9,298     $ 191,980       1,697     $ 8,000     $ 169,357       112     $ 1,298     $ 22,623  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Nine Months Ended September 30,        
    2018     2017     Change  
Real Estate Brokerage   Number     Volume     Revenues     Number     Volume     Revenues     Number     Volume     Revenues  
          (in millions)     (in thousands)           (in millions)     (in thousands)           (in millions)     (in thousands)  

<$1 million

    764     $ 489     $ 20,819       762     $ 472     $ 20,110       2     $ 17     $ 709  

Private Client Market ($1—$10 million)

    3,819       12,038       350,062       3,628       11,184       328,177       191       854       21,885  

Middle Market (³$10—$20 million)

    350       4,789       85,984       258       3,501       64,047       92       1,288       21,937  

Larger Transaction Market (³$20 million)

    213       8,846       79,280       162       6,607       59,735       51       2,239       19,545  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    5,146     $ 26,162     $ 536,145       4,810     $ 21,764     $ 472,069       336     $ 4,398     $ 64,076  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 6


MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except per share amounts)

 

     September 30,
2018
(Unaudited)
    December 31,
2017
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 181,020     $ 220,786  

Commissions receivable

     5,548       9,586  

Prepaid expenses

     6,516       9,661  

Income tax receivable

     —         1,308  

Marketable securities, available-for-sale

     120,701       73,560  

Other assets, net

     7,572       5,529  
  

 

 

   

 

 

 

Total current assets

     321,357       320,430  

Prepaid rent

     14,517       15,392  

Property and equipment, net

     18,169       17,153  

Marketable securities, available-for-sale

     85,135       52,099  

Assets held in rabbi trust

     9,115       8,787  

Deferred tax assets, net

     23,635       22,640  

Goodwill and other intangible assets, net

     5,639       —    

Other assets

     32,568       23,163  
  

 

 

   

 

 

 

Total assets

   $ 510,135     $ 459,664  
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable and other liabilities

   $ 8,780     $ 9,202  

Notes payable to former stockholders

     1,087       1,035  

Deferred compensation and commissions

     29,839       49,180  

Income tax payable

     5,963       —    

Accrued bonuses and other employee related expenses

     23,103       23,842  
  

 

 

   

 

 

 

Total current liabilities

     68,772       83,259  

Deferred compensation and commissions

     45,418       49,361  

Notes payable to former stockholders

     6,564       7,651  

Deferred rent and other liabilities

     6,690       4,505  
  

 

 

   

 

 

 

Total liabilities

     127,444       144,776  
  

 

 

   

 

 

 

Commitments and contingencies

     —         —    

Stockholders’ equity:

    

Preferred stock, $0.0001 par value:

    

Authorized shares – 25,000,000; issued and outstanding shares – none at September 30, 2018 and December 31, 2017, respectively

     —         —    

Common stock, $0.0001 par value:

    

Authorized shares – 150,000,000; issued and outstanding shares – 38,651,360 and 38,374,011 at September 30, 2018 and December 31, 2017, respectively

     4       4  

Additional paid-in capital

     97,375       89,877  

Stock notes receivable from employees

     (4     (4

Retained earnings

     285,116       224,071  

Accumulated other comprehensive income

     200       940  
  

 

 

   

 

 

 

Total stockholders’ equity

     382,691       314,888  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 510,135     $ 459,664  
  

 

 

   

 

 

 

 

Page 7


MARCUS & MILLICHAP, INC.

OTHER INFORMATION

(Unaudited)

Adjusted EBITDA Reconciliation

Adjusted EBITDA, which the Company defines as net income before (i) interest income and other, including net realized gains (losses) on marketable securities, available-for-sale and cash and cash equivalents, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation and (vi) non-cash MSR activity. The Company uses Adjusted EBITDA in its business operations to evaluate the performance of its business, develop budgets and measure its performance against those budgets, among other things. The Company also believes that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate its 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 the Company’s results as reported under U.S. generally accepted accounting principles (“U.S. GAAP”). The Company finds Adjusted EBITDA as a useful tool to assist in evaluating performance because Adjusted EBITDA eliminates items related to capital structure and taxes and non-cash items. In light of the foregoing limitations, the Company does not rely solely on Adjusted EBITDA as a performance measure and also considers its U.S. GAAP results. Adjusted EBITDA is not a measurement of the Company’s 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 the most directly comparable U.S. GAAP financial measure, net income, to Adjusted EBITDA is as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2018      2017      2018      2017  

Net income

   $ 20,854      $ 15,475      $ 61,032      $ 43,044  

Adjustments:

           

Interest income and other (1)

     (1,824      (923      (4,626      (2,293

Interest expense

     342        370        1,054        1,126  

Provision for income taxes (2)

     8,315        10,010        22,772        27,564  

Depreciation and amortization

     1,651        1,375        4,529        3,975  

Stock-based compensation

     3,147        2,192        8,919        6,173  

Non-cash MSR activity (3)

     (330      —          (371      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 32,155      $ 28,499      $ 93,309      $ 79,589  
  

 

 

    

 

 

    

 

 

    

 

 

 
(1)

Other for the three and nine months ended September 30, 2018 and 2017 includes net realized gains (losses) on marketable securities, available-for-sale.

(2)

Provision for income taxes for the three and nine months ended September 30, 2018 was calculated using a 21% U.S. federal corporate tax rate due to the enactment of the Tax Cuts and Jobs Act, which reduced the U.S. federal corporate tax rate from 35% to 21%.

(3)

Non-cash mortgage servicing rights activity includes the assumption of servicing obligations following the completion of our business acquisition in 2018.

 

Page 8


Tax Adjusted Net Income Reconciliation

Due to the enactment of the Tax Cuts and Jobs Act, the U.S. federal statutory corporate tax rate was reduced from 35% to 21% starting in 2018. For the three and nine months ended September 30, 2017, the Company calculated tax adjusted net income using the effective income tax rate for the three and nine months ended September 30, 2018 of 28.506% and 27.173%, respectively. The adjustment was made to illustrate what the growth rate would have been had the effective income tax rate been the same in both periods. A reconciliation of the most directly comparable U.S. GAAP financial measure, net income, to tax adjusted net income for the three and nine months ended September 30, 2018 is as follows (in thousands):

 

     Three Months Ended
September 30,
    Change     Nine Months Ended
September 30,
    Change  
     2018     2017     %     2018     2017     %  

Income before provision for income taxes

   $ 29,169     $ 25,485       14.5   $ 83,804     $ 70,608       18.7

Provision for income taxes

     (8,315     (10,010     (16.9     (22,772     (27,564     (17.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 20,854     $ 15,475       34.8   $ 61,032     $ 43,044       41.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

   $ 29,169     $ 25,485       14.5   $ 83,804     $ 70,608       18.7

Provision for income taxes (1)

     (8,315     (7,265     14.5       (22,772     (19,186     18.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tax adjusted net income (1)

   $ 20,854     $ 18,220       14.5   $ 61,032     $ 51,422       18.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1)

Provision for income taxes for the three and nine months ended September 30, 2017 was calculated using the effective income tax rate of 28.506% and 27.173%, respectively consistent with the three and nine months ended September 30, 2018.

Selling, General and Administrative Expense Adjusted for Stock-based Compensation Expense Reconciliation

For the three and nine months ended September 30, 2018, the Company calculated selling, general and administrative expense growth rate adjusted for stock-based compensation expense. The adjustment was made to illustrate what the growth rate would have been excluding effect of non-cash stock-based compensation expense. A reconciliation of the most directly comparable U.S. GAAP financial measure, selling, general and administrative expense growth rate, to selling, general and administrative expense adjusted for stock-based compensation growth rate for the three and nine months ended September 30, 2018 is as follows (in thousands):

 

     Three Months Ended
September 30,
    Change     Nine Months Ended
September 30,
    Change  
     2018     2017     %     2018     2017     %  

Selling, general and administrative expense

   $ 48,659     $ 42,480       14.5   $ 145,792     $ 129,393       12.7

Stock-based compensation

     (3,147     (2,192     43.6       (8,919     (6,173     44.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense, adjusted

   $ 45,512     $ 40,288       13.0   $ 136,873     $ 123,220       11.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Glossary of Terms

 

   

Private Client Market segment: transactions with values from $1 million to up to but less than $10 million

 

   

Middle Market segment: transactions with values from $10 million to up to but less than $20 million

 

   

Larger Transaction Market segment (previously Institutional Market segment): transactions with values of $20 million and above

 

Page 9

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