10-Q 1 rmax-10q_20140331.htm 10-Q

 

 

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 March 31, 2014.

OR

¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                 to                 .

Commission file number 001-36101

 

RE/MAX Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0937145

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

5075 South Syracuse Street
Denver, Colorado

 

80237

(Address of principal executive offices)

 

(Zip Code)

 

(303) 770-5531

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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 shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “ smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

Non-accelerated filer

 

x (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s Class A common stock, par value $0.0001 per share, and Class B common stock, par value $0.0001, as of May 15, 2014 was 11,607,971 and 1, respectively.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page No.

 

 

PART I. – FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2014 and March 31, 2013

4

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2014

5

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and March 31, 2013

6

 

 

 

RE/MAX Holdings, Inc. Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

31

 

 

 

 

Item 4.

 

Controls and Procedures

31

 

 

 

 

 

 

PART II. – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

32

 

 

 

 

Item 1a.

 

Risk Factors

32

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

 

Item 3.

 

Defaults upon Senior Securities

32

 

 

 

 

Item 4.

 

Mine Safety Disclosures

32

 

 

 

 

Item 5.

 

Other Information

32

 

 

 

 

Item 6.

 

Exhibits

33

 

 

 

 

 

 

Signatures

34

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

RE/MAX HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

March 31,
2014

 

 

December 31,
2013

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

97,169

 

 

$

88,375

 

Escrow cash - restricted

 

849

 

 

 

710

 

Accounts and notes receivable, current portion, less allowances of $4,149 and $4,122, respectively

 

17,607

 

 

 

15,980

 

Accounts receivable from affiliates

 

15

 

 

 

5

 

Other current assets

 

3,767

 

 

 

5,010

 

Total current assets

 

119,407

 

 

 

110,080

 

Property and equipment, net of accumulated depreciation of $19,733 and $19,400, respectively

 

2,595

 

 

 

2,583

 

Franchise agreements, net of accumulated amortization of $77,155 and $73,764, respectively

 

85,680

 

 

 

89,071

 

Other intangible assets, net of accumulated amortization of $8,095 and $7,912, respectively

 

2,355

 

 

 

2,486

 

Goodwill

 

72,650

 

 

 

72,781

 

Deferred tax assets, net

 

67,389

 

 

 

67,791

 

Investments in equity method investees

 

3,426

 

 

 

3,642

 

Debt issuance costs, net

 

2,277

 

 

 

2,353

 

Other assets

 

1,948

 

 

 

2,036

 

Total assets

$

357,727

 

 

$

352,823

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,924

 

 

$

731

 

Accounts payable to affiliates

 

1,055

 

 

 

1,017

 

Escrow liabilities

 

849

 

 

 

710

 

Accrued liabilities

 

7,729

 

 

 

9,344

 

Income taxes and tax distributions payable

 

5,412

 

 

 

3,000

 

Dividends and other distributions payable

 

1,834

 

 

 

-

 

Deferred revenue and deposits

 

16,348

 

 

 

15,821

 

Current portion of debt

 

16,927

 

 

 

17,300

 

Current portion of payable to related parties pursuant to tax receivable agreements

 

902

 

 

 

902

 

Other current liabilities

 

205

 

 

 

206

 

Total current liabilities

 

53,185

 

 

 

49,031

 

Debt, net of current portion

 

210,915

 

 

 

211,104

 

Payable to related parties pursuant to tax receivable agreements, net of current portion

 

67,938

 

 

 

67,938

 

Deferred revenue, net of current portion

 

117

 

 

 

234

 

Deferred tax liabilities, net

 

194

 

 

 

195

 

Other liabilities, net of current portion

 

8,785

 

 

 

8,782

 

Total liabilities

 

341,134

 

 

 

337,284

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 11,607,971 shares issued and outstanding

   as of March 31, 2014 and December 31, 2013

 

1

 

 

 

1

 

Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of March 31, 2014 and December 31, 2013

 

-

 

 

 

-

 

Additional paid-in capital

 

239,344

 

 

 

239,086

 

Retained earnings

 

3,189

 

 

 

1,506

 

Accumulated other comprehensive income

 

1,194

 

 

 

1,371

 

Total stockholders' equity attributable to RE/MAX Holdings, Inc.

 

243,728

 

 

 

241,964

 

Non-controlling interest

 

(227,135

)

 

 

(226,425

)

Total stockholders' equity

 

16,593

 

 

 

15,539

 

Total liabilities and stockholders' equity

$

357,727

 

 

$

352,823

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

3


 

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Income and Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 

 

Three months ended March 31,

 

 

2014

 

 

2013

 

Revenue:

 

 

 

 

 

 

 

Continuing franchise fees

$

17,704

 

 

$

15,105

 

Annual dues

 

7,506

 

 

 

7,553

 

Broker fees

 

5,558

 

 

 

4,673

 

Franchise sales and other franchise revenue

 

7,909

 

 

 

8,153

 

Brokerage revenue

 

3,203

 

 

 

3,591

 

Total revenue

 

41,880

 

 

 

39,075

 

Operating expenses:

 

 

 

 

 

 

 

Selling, operating and administrative expenses

 

25,287

 

 

 

25,991

 

Depreciation and amortization

 

3,938

 

 

 

3,725

 

Gain on sale or disposition of assets, net

 

(1

)

 

 

(1

)

Total operating expenses

 

29,224

 

 

 

29,715

 

Operating income

 

12,656

 

 

 

9,360

 

Other expenses, net:

 

 

 

 

 

 

 

Interest expense

 

(2,466

)

 

 

(3,514

)

Interest income

 

81

 

 

 

74

 

Foreign currency transaction losses

 

(529

)

 

 

(71

)

Loss on early extinguishment of debt

 

-

 

 

 

(134

)

Equity in (losses) earnings of investees

 

(59

)

 

 

146

 

Total other expenses, net

 

(2,973

)

 

 

(3,499

)

Income before provision for income taxes

 

9,683

 

 

 

5,861

 

Provision for income taxes

 

(1,885

)

 

 

(454

)

Net income

$

7,798

 

 

$

5,407

 

Less: net income attributable to non-controlling interest

 

5,390

 

 

 

5,407

 

Net income attributable to RE/MAX Holdings, Inc.

$

2,408

 

 

$

-

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

$

7,798

 

 

$

5,407

 

Change in cumulative translation adjustment

 

(177

)

 

 

(108

)

Other comprehensive loss

 

(177

)

 

 

(108

)

Comprehensive income

 

7,621

 

 

 

5,299

 

Less: comprehensive income attributable to non-controlling interest

 

5,283

 

 

 

5,299

 

Comprehensive income attributable to RE/MAX Holdings, Inc.

$

2,338

 

 

$

-

 

Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock

 

 

 

 

 

 

 

Basic

$

0.21

 

 

 

 

 

Diluted

$

0.20

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

 

 

 

 

 

Basic

 

11,607,971

 

 

 

 

 

Diluted

 

12,254,474

 

 

 

 

 

Cash dividends declared per share of Class A common stock

$

0.0625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

4


 

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

Class A common stock

 

 

Class B common stock

 

 

Additional

paid-in

 

 

Retained

 

 

Accumulated other

comprehensive

 

 

Non-

controlling

 

 

Total

stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

earnings

 

 

income

 

 

Interest

 

 

equity

 

Balances, December 31, 2013

 

11,607,971

 

 

$

1

 

 

 

1

 

 

$

-

 

 

$

239,086

 

 

$

1,506

 

 

$

1,371

 

 

$

(226,425

)

 

$

15,539

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,408

 

 

 

-

 

 

 

5,390

 

 

 

7,798

 

Distributions payable to non-controlling unitholders

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,100

)

 

 

(6,100

)

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

258

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

258

 

Dividends payable to Class A common stockholders

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(725

)

 

 

-

 

 

 

 

 

 

 

(725

)

Change in accumulated other comprehensive income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(177

)

 

 

-

 

 

 

(177

)

Balances, March 31, 2014

 

11,607,971

 

 

$

1

 

 

 

1

 

 

$

-

 

 

$

239,344

 

 

$

3,189

 

 

$

1,194

 

 

$

(227,135

)

 

$

16,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

5


 

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three months ended March 31,

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

7,798

 

 

$

5,407

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

3,938

 

 

 

3,725

 

Bad debt expense

 

201

 

 

 

189

 

Loss on early extinguishment of debt

 

-

 

 

 

134

 

Equity-based compensation

 

258

 

 

 

380

 

Non-cash interest expense

 

89

 

 

 

288

 

Other

 

650

 

 

 

387

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and notes receivable

 

(1,898

)

 

 

(1,420

)

Advances to affiliates

 

72

 

 

 

(108

)

Other current and noncurrent assets

 

1,304

 

 

 

659

 

Other current and noncurrent liabilities

 

(333

)

 

 

141

 

Deferred revenue

 

416

 

 

 

(675

)

Net cash provided by operating activities

 

12,495

 

 

 

9,107

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, equipment and software

 

(452

)

 

 

(142

)

Capitalization of trademark costs

 

(25

)

 

 

(46

)

Net cash used in investing activities

 

(477

)

 

 

(188

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments on debt

 

(575

)

 

 

(8,650

)

Distributions to non-controlling unitholders

 

(2,552

)

 

 

(10

)

Payments on capital lease obligations

 

(54

)

 

 

(73

)

Deferred offering costs

 

-

 

 

 

(584

)

Net cash used in financing activities

 

(3,181

)

 

 

(9,317

)

Effect of exchange rate changes on cash

 

(43

)

 

 

34

 

Net increase (decrease) in cash and cash equivalents

 

8,794

 

 

 

(364

)

Cash and cash equivalents, beginning of year

 

88,375

 

 

 

68,501

 

Cash and cash equivalents, end of period

$

97,169

 

 

$

68,137

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

2,324

 

 

$

3,210

 

Cash paid for income taxes

 

1,097

 

 

 

832

 

Schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Capital leases for property and equipment

$

18

 

 

$

73

 

Distributions payable to non-controlling unitholders

 

6,100

 

 

 

-

 

Dividends payable to Class A common stockholders

 

725

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Business and Organization

RE/MAX Holdings, Inc. (“RE/MAX Holdings”) was formed as a Delaware corporation on June 25, 2013 and was capitalized on July 8, 2013. On October 7, 2013, RE/MAX Holdings completed an initial public offering (the “IPO”) of 11,500,000 shares of Class A common stock at a public offering price of $22.00 per share. A portion of the proceeds received by RE/MAX Holdings from the IPO was used to acquire the net business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”), which were subsequently contributed to RMCO, LLC and subsidiaries (“RMCO”), and the remaining proceeds were used to purchase common membership units in RMCO. After the completion of the IPO and as of March 31, 2014, RE/MAX Holdings owns 39.56% of the common membership units in RMCO. RE/MAX Holdings’ only business is to act as the sole manager of RMCO and, in that capacity, RE/MAX Holdings operates and controls all of the business and affairs of RMCO.  As a result, RE/MAX Holdings consolidates the financial position and results of operations of RMCO, and because RE/MAX Holdings and RMCO are entities under common control, such consolidation has been reflected for all periods presented. RE/MAX Holdings and its consolidated subsidiaries, including RMCO, are referred to hereinafter as “the Company.”

The Company is one of the world’s leading franchisors of residential and commercial real estate brokerage services throughout the United States (“U.S.”) and globally. The Company also operates real estate brokerages in the U.S. The Company’s revenue is derived from continuing franchise fees, annual dues from agents, broker fees, franchise sales and other franchise revenue (which consist of fees from initial sales and renewals of franchises, regional franchise fees, preferred marketing arrangements, approved supplier programs and event-based revenue from training and other programs) and brokerage revenue (which consists of fees assessed by the Company’s owned brokerages for services provided to their affiliated real estate agents). A franchise grants the broker-owner a license to use the RE/MAX brand, trademark, promotional and operating materials and concepts.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and comprise the condensed consolidated financial statements of the Company and have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements are presented on a consolidated basis and include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2014 and December 31, 2013, the results of its operations and cash flows for the three months ended March 31, 2014 and 2013, and changes in its stockholders’ equity for the three months ended March 31, 2014. Interim results may not be indicative of full year performance.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant areas in which management uses assumptions include, among other things, the establishment of the allowance for doubtful accounts and notes receivable, the determination of the estimated lives of intangible assets, equity-based compensation, the estimates of the fair value of reporting units used in the annual assessment of goodwill, the fair value of assets acquired and the amounts payable pursuant to the terms of the Tax Receivable Agreements (“TRAs”) discussed in more detail in Note 3, Non-controlling Interest. Actual results could differ from those estimates.

Principles of Consolidation

On October 7, 2013, RE/MAX Holdings completed its IPO and now holds a 39.56% economic interest in RMCO, but as managing member controls the operations, management and activities of RMCO. As a result, RE/MAX Holdings consolidates RMCO and records a non-controlling interest on its Condensed Consolidated Balance Sheets.

 

 

7


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company. The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. There were no significant new accounting pronouncements that the Company adopted during the three months ended March 31, 2014.

Critical Accounting Judgments and Estimates

There have been no changes in the Company’s critical accounting judgments and estimates from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, it is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

3. Non-controlling Interest

The Company is the sole managing member of RMCO. As a result, the Company operates and controls all of the management, business and affairs of RMCO while owning a 39.56% minority economic interest in RMCO. Therefore, beginning on October 7, 2013, the Company began to consolidate the financial results of RMCO and its subsidiaries and recorded a non-controlling interest for the remaining 60.44% economic interest in RMCO held by RIHI, Inc. (“RIHI”). The Company’s only sources of cash flow from operations are distributions from RMCO and management fees received pursuant to the management services agreement between the Company and RMCO. Net income attributable to the non-controlling interest on the Condensed Consolidated Statements of Income and Comprehensive Income represents the portion of earnings attributable to the economic interest in RMCO held by the non-controlling unitholders. As of October 7, 2013, the non-controlling interest represented the carryover basis of RIHI’s capital account in RMCO. Prospectively, the non-controlling interest on the accompanying Condensed Consolidated Balance Sheets has been adjusted to reflect the distributions to and the income allocated to the non-controlling unitholders. The ownership of the common units in RMCO is summarized as follows:

 

 

Non-controlling unitholders ownership of common units in RMCO

 

 

RE/MAX Holdings outstanding Class A common stock (equal to RE/MAX Holdings common units in RMCO)

 

 

Total

 

As of March 31, 2014 and December 31, 2013

 

17,734,600

 

 

 

11,607,971

 

 

 

29,342,571

 

 

 

60.44

%

 

 

39.56

%

 

 

100.00

%

 

Distributions and Other Payments to Non-controlling Unitholders

Distributions for Taxes

As a limited liability company (treated as a partnership for income tax purposes), RMCO does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the Fourth Amended and Restated RMCO Limited Liability Company Agreement (the “New RMCO, LLC Agreement”), RMCO is required to distribute cash, generally, on a pro rata basis, to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to their share of RMCO earnings. RMCO makes such tax distributions to its members based on an estimated tax rate which is based on the terms of the New RMCO, LLC Agreement. Upon completion of its tax returns with respect to the prior year, RMCO may make true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the prior year. Distributions for taxes to RMCO’s non-controlling unitholders were also required, but calculated differently, in accordance with the Third Amended and Restated RMCO Limited Liability Company Agreement (the “Old RMCO, LLC Agreement”).  Distributions for taxes paid to non-controlling unitholders during the three months ended March 31, 2014 and 2013 were $2,552,000 and $0, respectively.

8


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Other Distributions

Cash distributions are also made to non-controlling unitholders based on their ownership percentage in RMCO as determined in accordance with the New RMCO, LLC Agreement.  Future cash distributions will be made to non-controlling unitholders pro rata on a quarterly basis equal to the anticipated dividend payments to the holders of the Company’s Class A common stock. The Company made a distribution of $1,108,000 to non-controlling unitholders on April 17, 2014.  On May 8, 2014, the Company declared a distribution to non-controlling unitholders of $1,108,000, which is payable on June 5, 2014. Cash distributions were also required to be made to non-controlling unitholders in an amount equal to the lesser of (1) the amount of excess cash flow payment required to be paid as a mandatory prepayment pursuant to the Company’s previous senior secured credit facility and (2) $8,000,000 in accordance with the Old RMCO, LLC Agreement. No other distributions were paid to non-controlling unitholders during the three months ended March 31, 2014 and 2013.  

Payments Pursuant to the Tax Receivable Agreements

As of March 31, 2014, the Company recorded a liability of $68,840,000, representing the payments due to RMCO’s historical owners RIHI and Weston Presidio V., L.P. (“Weston Presidio”) under the TRAs (see current and non-current portion of “Payable to related parties pursuant to tax receivable agreements” on the Company’s accompanying Condensed Consolidated Balance Sheets).  

Within the next 12 month period, the Company expects to pay $902,000 of the total amount of the estimated TRA liability. No amounts were paid pursuant to the terms of the TRAs during the three months ended March 31, 2014.

Payments are anticipated to be made under the TRAs indefinitely, with the first potential payment becoming due on the original due date of RE/MAX Holdings’ initial federal income tax return. The payments are to be made in accordance with the terms of the TRAs. The timing of the payments is subject to certain contingencies including RE/MAX Holdings having sufficient taxable income to utilize all of the tax benefits defined in the TRAs.

Obligations pursuant to the TRAs are obligations of RE/MAX Holdings. They do not impact the non-controlling interest. These obligations are not income tax obligations and have no impact on the tax provision or the allocation of taxes. In general, items of income, gain, loss and deduction are allocated on the basis of the members’ ownership interests pursuant to the New RMCO, LLC Agreement after taking into consideration all relevant sections of the Internal Revenue Code.

 

4. Earnings Per Share and Dividends

Earnings Per Share

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The treasury stock method is used to determine the dilutive potential of stock options and restricted stock units.

9


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except shares and per share information):

 

 

Three months ended

March 31, 2014

 

Numerator

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

$

2,408

 

Denominator for basic net income per share of Class A

   common stock

 

 

 

Weighted average shares of Class A common stock

   outstanding

 

11,607,971

 

Denominator for diluted net income per share of Class A

   common stock

 

 

 

Weighted average shares of Class A common stock

   outstanding

 

11,607,971

 

Add dilutive effect of the following:

 

 

 

     Stock options

 

602,217

 

     Restricted stock units

 

44,286

 

Weighted average shares of Class A common stock

   outstanding, diluted

 

12,254,474

 

Earnings per share of Class A common stock

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

   per share of Class A common stock, basic

$

0.21

 

Net income attributable to RE/MAX Holdings, Inc.

   per share of Class A common stock, diluted

$

0.20

 

 

EPS information is not applicable for reporting periods prior to the completion of the IPO which became effective on October 7, 2013. The one share of Class B common stock outstanding does not share in the earnings of RE/MAX Holdings and is therefore not a participating security. Accordingly, basic and diluted net income per share of Class B common stock has not been presented.

Dividends Declared

During the first quarter of 2014, the Company’s Board of Directors declared a quarterly dividend of $0.0625 per share on outstanding shares of Class A common stock, which was paid on April 18, 2014.  No dividends were declared or paid during the three months ended March 31, 2013.  On May 8, 2014, the Company’s Board of Directors declared a quarterly dividend of $0.0625 per share on all outstanding shares of Class A common stock, which is payable on June 5, 2014 to shareholders of record at the close of business on May 22, 2014.

 

5. Acquisitions

Acquisition of HBN and Tails

In connection with the IPO effective October 7, 2013, RE/MAX Holdings acquired the net assets, excluding cash, of HBN and Tails for consideration paid of $7,130,000 and $20,175,000, respectively and contributed the assets to RMCO in order to expand RMCO’s owned and operated regional franchising operations in the Southwest and Central Atlantic regions of the U.S. HBN and Tails were owned in part by related parties, but were not under common control with RE/MAX Holdings and RMCO. As a result, the assets acquired constitute businesses that were accounted for using the fair value acquisition method, and the total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the total purchase price over the fair value of the identifiable assets acquired and liabilities assumed was recorded as goodwill. The goodwill recognized for HBN and Tails is attributable to expected synergies and projected long term revenue growth and relates entirely to the Company’s Real Estate Franchise Services reportable segment.

10


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisitions of HBN and Tails had occurred on January 1, 2013. The historical financial information has been adjusted to give effect to events that are (1) directly attributed to the acquisition, (2) factually supportable and (3) expected to have a continuing impact on the combined results. Such items include additional amortization expense associated with the valuation of the acquired franchise agreement. This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the acquisitions had actually occurred on that date, nor of the results that may be obtained in the future.

 

 

Three months ended March 31, 2013

 

 

(unaudited)

 

 

(in thousands)

 

Total revenue

$

40,883

 

Net income

 

6,290

 

 

 

6.  Intangible Assets and Goodwill

The following table provides the components of the Company’s intangible assets (in thousands):

 

 

Initial Weighted

Average

Amortization

 

 

March 31, 2014

 

 

December 31, 2013

 

 

Period

(in years)

 

 

Initial Cost

 

 

Accumulated Amortization

 

 

Net
Balance

 

 

Initial Cost

 

 

Accumulated Amortization

 

 

Net
Balance

 

Franchise agreements

 

12.0

 

 

$

162,835

 

 

$

(77,155

)

 

$

85,680

 

 

$

162,835

 

 

$

(73,764

)

 

$

89,071

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

4.2

 

 

$

7,491

 

 

$

(6,772

)

 

$

719

 

 

$

7,463

 

 

$

(6,633

)

 

$

830

 

Trademarks

 

14.9

 

 

 

2,959

 

 

 

(1,323

)

 

 

1,636

 

 

 

2,935

 

 

 

(1,279

)

 

 

1,656

 

Total other intangible assets

 

 

 

 

$

10,450

 

 

$

(8,095

)

 

$

2,355

 

 

$

10,398

 

 

$

(7,912

)

 

$

2,486

 

 

Amortization expense for the three months ended March 31, 2014 and 2013 was $3,576,000 and $3,328,000, respectively.

The estimated future amortization of intangible assets, other than goodwill, is as follows (in thousands):

 

Year ending December 31:

 

 

 

Remainder of 2014

$

10,654

 

2015

 

14,022

 

2016

 

13,782

 

2017

 

9,877

 

2018

 

6,269

 

Thereafter

 

33,431

 

 

$

88,035

 

 

Amounts recorded as goodwill in the Company’s accompanying Condensed Consolidated Balance Sheets are attributable to the Company’s Real Estate Franchise Services reportable segment. During 2013, the Company performed its annual assessment of goodwill and the fair value of the Company’s reporting units significantly exceeded the carrying value and no interim indicators of impairment have been identified. The following table presents changes to goodwill for the three months ended March 31, 2014 (in thousands):

 

Balance, January 1, 2014

$

72,781

 

Effect of changes in foreign currency exchange rates

 

(131

)

Balance, March 31, 2014

$

72,650

 

11


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

March 31,

2014

 

 

December 31,

2013

 

Accrued payroll and related employee costs

$

3,586

 

 

$

4,746

 

Accrued property taxes

 

731

 

 

 

1,159

 

Accrued professional fees

 

844

 

 

 

573

 

Lease-related accruals

 

747

 

 

 

853

 

Other

 

1,821

 

 

 

2,013

 

 

$

7,729

 

 

$

9,344

 

 

 

8. Debt

Debt consists of the following (in thousands):

 

 

March 31,

2014

 

 

December 31,

2013

 

2013 Senior Secured Credit Facility, principal of $575

   payable quarterly, matures in July 2020, net of

   unamortized discount of $433 and $446 as of

   March 31, 2014 and December 31, 2013,

   respectively

$

227,842

 

 

$

228,404

 

Less current portion

 

(16,927

)

 

 

(17,300

)

 

$

210,915

 

 

$

211,104

 

 

Maturities of debt are as follows (in thousands):

 

As of March 31:

 

 

 

Remainder of 2014

$

16,352

 

2015

 

2,300

 

2016

 

2,300

 

2017

 

2,300

 

2018

 

2,300

 

Thereafter

 

202,723

 

 

$

228,275

 

 

On July 31, 2013, the Company entered into a new credit agreement with several lenders and administered by a bank, referred to herein as the “2013 Senior Secured Credit Facility.” In connection therewith, proceeds received were used to re-pay existing indebtedness pursuant to the Company’s previous credit facility. The 2013 Senior Secured Credit Facility consists of a $230,000,000 term loan facility and a $10,000,000 revolving loan facility. The proceeds provided by these term loans were used to refinance and repay existing indebtedness and for working capital, capital expenditures and general corporate purposes. Interest rates with respect to the term and revolving loans are based, at the Company’s option, on (a) adjusted LIBOR, provided that LIBOR shall be no less than 1% plus a maximum applicable margin of 3% or (b) ABR, provided that ABR shall be no less than 2%, which is equal to the greater of (1) JPMorgan Chase Bank, N.A.’s prime rate; (2) the Federal Funds Effective Rate plus 0.5% or (3) calculated Eurodollar Rate plus 1%, plus a maximum applicable margin of 2%.  The applicable margin is subject to quarterly adjustments beginning in the first quarter of 2014 based on the Company’s total leverage ratio as defined in the 2013 Senior Secured Credit Facility.

12


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company is required to make principal payments out of excess cash flow, as defined in the 2013 Senior Secured Credit Facility, as well as from the proceeds of certain asset sales, proceeds from the issuance of indebtedness and from insurance recoveries. The Company made an excess cash flow payment of $14,627,000 on April 9, 2014. Mandatory principal payments of $575,000 are due quarterly until the facility matures on July 31, 2020. During the three months ended March 31, 2013, the Company made a mandatory principal excess cash flow prepayment of $8,000,000 in accordance with the Company’s previous credit facility. The Company accounted for this mandatory principal prepayment as an early extinguishment of debt and recorded a loss during the three month period ended March 31, 2013 of approximately $134,000 related to unamortized debt discount and issuance costs. The Company may make optional prepayments of the term loan at any time; however, no such optional prepayments were made during the three months ended March 31, 2014 or 2013.

The estimated fair value of the Company’s debt as of March 31, 2014 and December 31, 2013 represents the amount that would be paid to transfer or redeem the debt in an orderly transaction between market participants at those dates and maximizes the use of observable inputs. The fair value of the Company’s debt was estimated using a market approach based on the amount at the measurement date that the Company would pay to enter into the identical liability, since quoted prices for the Company’s debt instruments are not available. As a result, the Company has classified the fair value of its 2013 Senior Secured Credit Facility as Level 2 of the fair value hierarchy. The carrying amounts of the Company’s 2013 Senior Secured Credit Facility are included in the accompanying Condensed Consolidated Balance Sheets in “Current portion of debt” and “Debt, net of current portion.” The carrying value of the Senior Secured Credit Facility was $227,842,000 and $228,404,000 as of March 31, 2014 and December 31, 2013, respectively. The fair value of the 2013 Senior Secured Credit Facility was $228,275,000 and $229,422,000 as of March 31, 2014 and December 31, 2013, respectively.

The Company had no borrowings drawn on the revolving loan facility during the three months ended March 31, 2014 or 2013 and had $10,000,000 available under the revolving loan facility as of March 31, 2014. The Company must pay a quarterly commitment fee equal to 0.5% on the average daily amount of the unused portion of the revolving loan facility.

 

9. Income Taxes

RE/MAX Holdings is subject to U.S. federal and state income taxation on its allocable portion of the income of RMCO.  The “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2014 is based on an estimate of the Company’s annualized effective income tax rate. The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiaries operate as a series of limited liability companies which are not themselves subject to federal income tax. Accordingly, the portion of the Company’s subsidiaries earnings attributable to the non-controlling interest are subject to tax when reported as a component of the non-controlling interests’ taxable income. Prior to October 7, 2013, the Company had not been subject to U.S. federal income taxes as RMCO is organized as a limited liability company; however, RMCO was, and continues to be, subject to certain other foreign, state and local taxes. The provision for income taxes for the three months ended March 31, 2013 represents foreign income taxes of certain foreign corporate subsidiaries.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. As of March 31, 2014, the Company does not believe it has any significant uncertain tax positions.

 

10. Equity-Based Compensation

On September 30, 2013, the Company’s Board of Directors adopted the RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan (the “2013 Incentive Plan”) that provides for the grant of incentive stock options to the Company’s employees, and for the grant of shares of RE/MAX Holdings’ Class A common stock, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to employees, directors and consultants of RE/MAX Holdings and RMCO.

For the three months ended March 31, 2014, the Company recognized equity-based compensation expense of $258,000 resulting from restricted stock units that were granted on the IPO date in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.  For the three months ended March 31, 2013, the Company recognized equity-based compensation expense of $380,000 related to 31,500 RMCO Class B common unit options that were granted to certain employees on November 15, 2012. On October 1, 2013 and in connection with the IPO, the Class B common unit options were split 25 for 1 and then substituted for 787,500 options to acquire shares of RE/MAX Holdings’ Class A common stock.  

13


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes equity-based compensation activity for the three months ended March 31, 2014:  

 

 

Restricted Stock Units

 

 

Options

 

Balance as of January 1, 2014

 

241,854

 

 

 

787,500

 

Granted

 

-

 

 

 

-

 

Exercised

 

-

 

 

 

-

 

Forfeited

 

(3,184

)

 

 

-

 

Balance as of March 31, 2014

 

238,670

 

 

 

787,500

 

 

 

 

 

 

 

 

 

Vested

 

107,971

 

 

 

787,500

 

Unvested

 

130,699

 

 

 

-

 

At March 31, 2014, there were 1,642,282 additional shares available for the Company to grant under the 2013 Incentive Plan.

 

11. Commitments and Contingencies

Commitments

The Company leases offices and equipment under noncancelable operating leases, subject to certain provisions for renewal options and escalation clauses.

Litigation

The Company is subject to litigation claims arising in the ordinary course of business. The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), the Company has determined that it does not have material exposure, or it is unable to develop a range of reasonably possible losses.

 

12. Guarantees

In May 2013, the Company entered into a guarantee of the full and prompt payment and performance when due of all obligations due to a financial institution under a commercial line-of-credit agreement and note entered into by the Company’s equity-method investee, in which the Company has a 50% interest. The term of the line-of-credit agreement is twelve months and the total amount of advances requested and unpaid principal balance cannot exceed $12,500,000. The line of credit bears interest at 0.5% over the financial institution’s base rate with a floor of 4%. The Company had entered into a similar guarantee during May 2012, which expired as of May 2013. The outstanding balance on the line of credit was approximately $4,180,000 and $4,256,000 as of March 31, 2014 and December 31, 2013, respectively. The Company did not incur any payments under this guarantee in the three months ended March 31, 2014, or in any prior periods, and does not anticipate that it will incur any payments through the duration of the guarantee.

 

13.  Related-Party Transactions

The Company’s real estate brokerage operations pay advertising fees to regional and international advertising funds, which promote the RE/MAX brand. These advertising funds are corporations owned by a majority stockholder of RIHI as trustee for RE/MAX agents. This stockholder does not receive any compensation from these corporations, as all funds received by the corporations are required to be spent on advertising for the respective regions. During each of the three months ended March 31, 2014 and 2013, the Company’s real estate brokerage operations paid $283,000 to these advertising funds. These payments are included in “Selling, operating and administrative” expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.

14


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Prior to October 7, 2013, the Company’s real estate brokerage operations in the Washington, DC area paid regional continuing franchise fees, broker fees and franchise sales revenue, as do all other RE/MAX franchisees in the Central Atlantic region, to Tails. Several of the Company’s officers and stockholders of RIHI were also stockholders and officers of Tails, and as such, prior to October 7, 2013, Tails was a related party to the Company. As described in Note 5, Acquisitions, a portion of the proceeds raised during the IPO was used to purchase certain assets of Tails. For the three months ended March 31, 2013, the real estate brokerage operations expensed $71,000 in fees to Tails. These payments are included in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. The Company’s owned real estate brokerage operations in the Washington, DC area recorded a payable to Tails’ affiliated regional advertising fund. As of March 31, 2014 and December 31, 2013, the amount of the payable was $988,000 and $945,000, respectively and is included in “Accounts payable to affiliates” in the accompanying Condensed Consolidated Balance Sheets.

The Company receives continuing franchise fees, broker fees, franchise sales and other franchise revenue from regional franchisors. Several of the Company’s officers and stockholders of RIHI were also stockholders and officers of two of these regional franchisors, HBN and Tails. The business assets of HBN and Tails were acquired by RE/MAX Holdings on October 7, 2013 as described in Note 5, Acquisitions. During the three months ended March 31, 2013, the Company received $803,000 in revenue from these entities. These amounts are included in continuing franchise fees, broker fees and franchise sales and other franchise revenue in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.

The Company’s majority stockholders have made and continue to make a golf course they own available to the Company for business purposes. During the three months ended March 31, 2014 and 2013, the Company used the golf course for business purposes at no charge.

The Company also provides services to certain affiliated entities such as accounting, legal, marketing, technology, human resources and public relations as it allows these companies to share its leased office space. During the three months ended March 31, 2014 and 2013, the total amounts allocated for services rendered and rent for office space provided on behalf of affiliated entities were $562,000 and $769,000, respectively. In these cases, the Company bills affiliated companies for their actual or pro rata share of such expenses. Such amounts are generally paid within 30 days and no such amounts were outstanding at March 31, 2014 or December 31, 2013.

The activity in the Company’s “Accounts receivable from affiliates” and “Accounts payable to affiliates” in the accompanying Condensed Consolidated Balance Sheets consist of the following (in thousands):

 

 

March 31,

2014

 

 

December 31,

2013

 

Accounts receivable from affiliates:

 

 

 

 

 

 

 

RE/MAX of Texas Advertising Fund

$

(1

)

 

$

(6

)

International Advertising Fund

 

(1

)

 

 

(10

)

Other

 

17

 

 

 

21

 

Total accounts receivable from affiliates

 

15

 

 

 

5

 

Accounts payable to affiliates:

 

 

 

 

 

 

 

Other

$

(1,055

)

 

$

(1,017

)

Total accounts payable to affiliates

 

(1,055

)

 

 

(1,017

)

Net accounts payable to affiliates

$

(1,040

)

 

$

(1,012

)

 

 

14.  Segment Information

The Company has two reportable segments: Real Estate Franchise Services and Brokerage and Other. Management evaluates the operating results of its reportable segments based upon revenue and adjusted earnings before interest, the provision for income taxes, depreciation and amortization and certain other non-cash and non-recurring cash charges (“Adjusted EBITDA”). The Company’s presentation of Adjusted EBITDA may not be comparable to similar measures used by other companies. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

15


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Adjusted EBITDA for the reportable segments excludes depreciation, amortization, interest expense, net and the provision for income taxes and is then adjusted for certain other non-cash and non-recurring cash charges. Adjusted EBITDA for the reportable segments is also a key factor that is used by the Company’s internal decision makers to (i) determine how to allocate resources to segments and (ii) evaluate the effectiveness of management for purposes of annual and other incentive compensation plans. The additional items that are adjusted to determine Adjusted EBITDA for the reportable segments include losses (gains) on the sale or disposition of assets and sublease activity, losses on the early extinguishment of debt, equity-based compensation, non-cash straight-line rent expense, salaries paid to David and Gail Liniger that the Company discontinued subsequent to the IPO, professional fees and non-recurring expenses incurred in connection with the IPO and acquisition integration costs. The Company’s Real Estate Franchise Services segment comprises the operations of the Company’s owned and independent global franchising operations under the RE/MAX® brand name. All of the Company’s brokerage offices in its Real Estate Franchise Services segment are franchised. The Company’s Brokerage and Other reportable segment includes the Company’s brokerage services business, the elimination of intersegment revenue and other consolidation entries as well as corporate-wide professional services expenses.

The following tables present the results of the Company’s reportable segments for the three months ended March 31, 2014 and 2013, respectively:

 

 

Revenue (a)

 

 

Three months ended March 31,

 

 

2014

 

 

2013

 

 

(in thousands)

 

Real Estate Franchise Services

$

39,099

 

 

$

35,650

 

Brokerage and Other

 

2,781

 

 

 

3,425

 

Total segment reporting revenues

$

41,880

 

 

$

39,075

 

 

(a)

Transactions between the Real Estate Franchise Services and the Brokerage and Other reportable segments are eliminated in consolidation. Revenues for the Real Estate Franchise Services segment include intercompany amounts paid from the Company’s brokerage services business of $422,000 and $353,000 for the three months ended March 31, 2014 and 2013, respectively. Such amounts are eliminated through the Brokerage and Other reportable segment.

 

 

Adjusted EBITDA

 

 

Three months ended March 31,

 

 

2014

 

 

2013

 

 

(in thousands)

 

Real Estate Franchise Services

$

18,675

 

 

$

16,246

 

Brokerage and Other

 

(2,424

)

 

 

(813

)

Total segment reporting adjusted EBITDA

$

16,251

 

 

$

15,433

 

 

16


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

A reconciliation of the Company’s Adjusted EBITDA for its reportable segments to the Company’s consolidated balances is as follows:

 

 

Three months ended March 31,

 

 

2014

 

 

2013

 

 

(in thousands)

 

Segment Adjusted EBITDA

$

16,251

 

 

$

15,433

 

Less:

 

 

 

 

 

 

 

Depreciation and amortization

 

3,938

 

 

 

3,725

 

Interest expense, net

 

2,385

 

 

 

3,440

 

Gain on sale or disposition of assets and sublease

 

(178

)

 

 

(143

)

Loss on early extinguishment of debt

 

-

 

 

 

134

 

Equity-based compensation

 

258

 

 

 

380

 

Non-cash straight-line rent expense

 

147

 

 

 

339

 

Chairman executive compensation

 

-

 

 

 

750

 

Acquisition integration costs

 

18

 

 

 

-

 

Public offering related expenses

 

-

 

 

 

947

 

Income before provision for income taxes

 

9,683

 

 

 

5,861

 

Provision for income taxes

 

1,885

 

 

 

454

 

Net income

$

7,798

 

 

$

5,407

 

 

 

Changes in Reportable Segments

As a result of changes in management’s process to assess performance and allocate resources, the Company implemented a new segment structure beginning in the second quarter of 2014.  The changes in the Company’s segment structure relate to certain corporate-wide professional services expenses, which were previously reflected in the Brokerage and Other reportable segment and, beginning in the second quarter of 2014, are being reflected in the Real Estate Franchise Services reportable segment.

 

 

 

17


 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of our operations should be read together with the condensed consolidated financial statements and the related notes of RE/MAX Holdings, Inc. included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and the related notes of RE/MAX Holdings, Inc. included in our most recent Annual Report on Form 10-K for the year ended December 31, 2013.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. For example, forward-looking statements include statements we make relating to:

our expectations regarding consumer trends in residential real estate transactions;

our expectations regarding overall economic and demographic trends, including the continued recovery of the U.S. residential real estate market;

our expectations regarding our performance during future downturns in the housing sector;

our growth strategy of increasing our agent count;

our ability to expand our network of franchises at higher than average rates in both new and existing but underpenetrated markets;

our expectations regarding agent count and productivity;

our growth strategy of increasing our number of closed transaction sides and transaction sides per agent;

our expectations of the effects of the reacquisitions of the regional franchise rights in the Southwest and Central Atlantic regions of the U.S. on our results of operations;

the continued strength of our brand both in the U.S. and Canada and in the rest of the world;

the pursuit of future reacquisitions of Independent Regions;

our future financial performance;

the effects of laws applying to our business;

our ability to retain our senior management and other key employees;

our intention to pursue additional intellectual property protections;

our future compliance with U.S. or state franchise regulations; and

other plans and objectives for future operations, growth, initiatives or strategies.

Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our most recent Annual Report on Form 10-K for the year ended December 31, 2013. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

The historical results of operations discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of RMCO, LLC (“RMCO”) and its consolidated subsidiaries prior to October 7, 2013 and RE/MAX Holdings, Inc. (“RE/MAX Holdings”) and its consolidated subsidiaries, including RMCO, commencing on October 7, 2013 (collectively, the “Company,” “we,” “our” or “us”), the effective date of our initial public offering (the “IPO”).  Subsequent to the IPO, RE/MAX Holdings began to operate and control all of the business affairs of RMCO.  As a result, RE/MAX Holdings began to consolidate RMCO on October 7, 2013, and because RE/MAX Holdings and RMCO are entities under common control, such consolidation has been reflected for all periods presented.  

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Business Overview

We are one of the world’s leading franchisors of real estate brokerage services. Our business strategy is to recruit and retain agents and sell franchises. Our franchisees operate under the RE/MAX brand name which has held the number one market share in the U.S. and Canada since 1999 as measured by total residential transaction sides completed by our agents.

Our financial results are driven by the number of agents in our global network. The majority of our revenue is derived from fixed, contractual fees and dues paid to us based on the number of agents in our franchise network.

Our current growth strategies include the following initiatives:

·

Increase our total agent count.

·

Continue to drive franchise sales growth and agent recruitment and retention.

·

Reacquire select RE/MAX regional franchises in the U.S. and Canada.

·

Increase franchise and agent fees.

As a franchisor (less than 1% of the brokerages in the U.S. RE/MAX system are owned by us), we maintain a low fixed-cost structure which enables us to generate high margins and helps us drive significant operating leverage through incremental revenue growth as reflected in our financial results.

We operate in two reportable segments, (1) Real Estate Franchise Services and (2) Brokerage and Other. The Real Estate Franchise Services reportable segment comprises the operations of our owned and independent global franchising operations. The Brokerage and Other reportable segment contains the operations of our 21 owned brokerage offices in the U.S. which represent less than 1% of RE/MAX brokerages in the U.S., the results of operations of a mortgage brokerage company in which we own a non-controlling interest, the elimination of intersegment revenue and other consolidation entities, as well as corporate and professional services expenses. Our reportable segments represent our operating segments for which separate financial information is available and which is utilized on a regular basis by our management to assess performance and to allocate resources.

As a result of changes in management’s process to assess performance and allocate resources, we implemented a new segment structure beginning in the second quarter of 2014.  The changes in our segment structure relate to certain corporate-wide professional services expenses, which were previously reflected in the Brokerage and Other reportable segment and, beginning in the second quarter of 2014, are being reflected in the Real Estate Franchise Services reportable segment.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of financial and operating measures that affect our operating results, including agent count, franchise sales, revenue and Adjusted EBITDA.

Agent Count. Agent count reflects the number of licensed agents who have active, independent contractual relationships with RE/MAX offices at a particular time. The majority of our revenue is derived from recurring fixed fee streams we receive from our franchisees and agents that are closely correlated to our aggregate agent count.

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The following table shows our agent count at the end of the periods indicated:

 

 

As of

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

June 30,

 

 

March 31,

 

 

December 31,

 

 

2014

 

 

2013

 

 

2013

 

 

2013

 

 

2013

 

 

2012

 

Agent Count: