10-Q 1 rmax-10q_20140930.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 September 30, 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 November 7, 2014 was 11,632,452 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 September 30, 2014 and December 31, 2013

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and September 30, 2013

4

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2014

5

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and September 30, 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

21

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

38

 

 

 

 

Item 4.

 

Controls and Procedures

39

 

 

 

 

 

 

PART II. – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

40

 

 

 

 

Item 1A.

 

Risk Factors

40

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

 

Item 3.

 

Defaults upon Senior Securities

40

 

 

 

 

Item 4.

 

Mine Safety Disclosures

40

 

 

 

 

Item 5.

 

Other Information

40

 

 

 

 

Item 6.

 

Exhibits

41

 

 

 

 

 

 

SIGNATURES

42

 

 

 

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)

 

 

September 30, 2014

 

 

December 31, 2013

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

98,128

 

 

$

88,375

 

Escrow cash - restricted

 

731

 

 

 

710

 

Accounts and notes receivable, current portion, less allowances of $4,288 and $4,122, respectively

 

17,645

 

 

 

15,980

 

Accounts receivable from affiliates

 

-

 

 

 

5

 

Income taxes receivable

 

1,187

 

 

 

-

 

Other current assets

 

3,715

 

 

 

5,010

 

Total current assets

 

121,406

 

 

 

110,080

 

Property and equipment, net of accumulated depreciation of $20,185 and $19,400, respectively

 

2,628

 

 

 

2,583

 

Franchise agreements, net of accumulated amortization of $83,938 and $73,764, respectively

 

78,897

 

 

 

89,071

 

Other intangible assets, net of accumulated amortization of $8,394 and $7,912, respectively

 

1,976

 

 

 

2,486

 

Goodwill

 

72,616

 

 

 

72,781

 

Deferred tax assets, net

 

66,387

 

 

 

67,791

 

Investments in equity method investees

 

3,750

 

 

 

3,642

 

Debt issuance costs, net

 

1,974

 

 

 

2,353

 

Other assets

 

1,952

 

 

 

2,036

 

Total assets

$

351,586

 

 

$

352,823

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

849

 

 

$

731

 

Accounts payable to affiliates

 

1,089

 

 

 

1,017

 

Escrow liabilities

 

731

 

 

 

710

 

Accrued liabilities

 

7,931

 

 

 

9,344

 

Income taxes and tax distributions payable

 

215

 

 

 

3,000

 

Deferred revenue and deposits

 

17,159

 

 

 

15,821

 

Current portion of debt

 

8,568

 

 

 

17,300

 

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

 

902

 

 

 

902

 

Other current liabilities

 

206

 

 

 

206

 

Total current liabilities

 

37,650

 

 

 

49,031

 

Debt, net of current portion

 

203,629

 

 

 

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

 

197

 

 

 

195

 

Other liabilities, net of current portion

 

8,945

 

 

 

8,782

 

Total liabilities

 

318,476

 

 

 

337,284

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 11,592,452 shares issued and outstanding as of September 30, 2014; 11,607,971 shares issued and outstanding as of 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 September 30, 2014 and December 31, 2013

 

-

 

 

 

-

 

Additional paid-in capital

 

239,033

 

 

 

239,086

 

Retained earnings

 

10,396

 

 

 

1,506

 

Accumulated other comprehensive income

 

1,135

 

 

 

1,371

 

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

 

250,565

 

 

 

241,964

 

Non-controlling interest

 

(217,455

)

 

 

(226,425

)

Total stockholders' equity

 

33,110

 

 

 

15,539

 

Total liabilities and stockholders' equity

$

351,586

 

 

$

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 September 30,

 

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing franchise fees

$

18,523

 

 

$

16,093

 

 

$

54,251

 

 

$

47,037

 

Annual dues

 

7,697

 

 

 

7,455

 

 

 

22,846

 

 

 

22,052

 

Broker fees

 

8,279

 

 

 

7,204

 

 

 

21,853

 

 

 

18,704

 

Franchise sales and other franchise revenue

 

5,472

 

 

 

5,076

 

 

 

17,935

 

 

 

17,823

 

Brokerage revenue

 

4,269

 

 

 

4,484

 

 

 

11,534

 

 

 

13,012

 

Total revenue

 

44,240

 

 

 

40,312

 

 

 

128,419

 

 

 

118,628

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, operating and administrative expenses

 

20,559

 

 

 

22,105

 

 

 

65,321

 

 

 

70,088

 

Depreciation and amortization

 

3,767

 

 

 

3,656

 

 

 

11,517

 

 

 

11,088

 

(Gain) loss on sale or disposition of assets, net

 

-

 

 

 

(3

)

 

 

(1

)

 

 

41

 

Total operating expenses

 

24,326

 

 

 

25,758

 

 

 

76,837

 

 

 

81,217

 

Operating income

 

19,914

 

 

 

14,554

 

 

 

51,582

 

 

 

37,411

 

Other expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,255

)

 

 

(5,128

)

 

 

(7,007

)

 

 

(12,053

)

Interest income

 

58

 

 

 

82

 

 

 

205

 

 

 

224

 

Foreign currency transaction (losses) gains

 

(811

)

 

 

281

 

 

 

(504

)

 

 

(135

)

Loss on early extinguishment of debt

 

-

 

 

 

(1,664

)

 

 

(178

)

 

 

(1,798

)

Equity in earnings of investees

 

265

 

 

 

274

 

 

 

394

 

 

 

736

 

Total other expenses, net

 

(2,743

)

 

 

(6,155

)

 

 

(7,090

)

 

 

(13,026

)

Income before provision for income taxes

 

17,171

 

 

 

8,399

 

 

 

44,492

 

 

 

24,385

 

Provision for income taxes

 

(3,116

)

 

 

(702

)

 

 

(8,130

)

 

 

(1,733

)

Net income

$

14,055

 

 

$

7,697

 

 

$

36,362

 

 

$

22,652

 

Less: net income attributable to non-controlling interest

 

9,780

 

 

 

7,697

 

 

 

25,299

 

 

 

22,652

 

Net income attributable to RE/MAX Holdings, Inc.

$

4,275

 

 

$

-

 

 

$

11,063

 

 

$

-

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

14,055

 

 

$

7,697

 

 

$

36,362

 

 

$

22,652

 

Change in cumulative translation adjustment

 

(245

)

 

 

114

 

 

 

(236

)

 

 

(184

)

Other comprehensive (loss) income

 

(245

)

 

 

114

 

 

 

(236

)

 

 

(184

)

Comprehensive income

 

13,810

 

 

 

7,811

 

 

 

36,126

 

 

 

22,468

 

Less: comprehensive income attributable to non-controlling interest

 

9,632

 

 

 

7,811

 

 

 

25,156

 

 

 

22,468

 

Comprehensive income attributable to RE/MAX Holdings, Inc.

$

4,178

 

 

$

-

 

 

$

10,970

 

 

$

-

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.37

 

 

 

 

 

 

$

0.95

 

 

 

 

 

Diluted

$

0.35

 

 

 

 

 

 

$

0.90

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

11,579,669

 

 

 

 

 

 

 

11,593,738

 

 

 

 

 

Diluted

 

12,229,010

 

 

 

 

 

 

 

12,235,160

 

 

 

 

 

Cash dividends declared per share of Class A common stock

$

0.0625

 

 

 

 

 

 

$

0.1875

 

 

 

 

 

 

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

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,063

 

 

 

-

 

 

 

25,299

 

 

 

36,362

 

Distributions paid to non-controlling unitholders

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16,329

)

 

 

(16,329

)

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

532

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

532

 

Dividends paid to Class A common stockholders

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,173

)

 

 

-

 

 

 

-

 

 

 

(2,173

)

Change in accumulated other comprehensive income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(236

)

 

 

-

 

 

 

(236

)

Excess tax benefit realized on delivery of vested restricted stock units and exercise of stock options

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

179

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

179

 

Cancellation of vested restricted stock units to satisfy statutory tax withholding requirements

 

(30,519

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(818

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(818

)

Exercise of stock options

 

15,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

54

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

54

 

Balances, September 30, 2014

 

11,592,452

 

 

$

1

 

 

 

1

 

 

$

-

 

 

$

239,033

 

 

$

10,396

 

 

$

1,135

 

 

$

(217,455

)

 

$

33,110

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

5


RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

36,362

 

 

$

22,652

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

11,517

 

 

 

11,088

 

Bad debt expense

 

289

 

 

 

289

 

Loss on early extinguishment of debt

 

178

 

 

 

1,798

 

Equity-based compensation

 

532

 

 

 

701

 

Non-cash interest expense

 

273

 

 

 

723

 

Other

 

1,321

 

 

 

232

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and notes receivable, current portion

 

(1,991

)

 

 

(1,678

)

Advances from/to affiliates

 

34

 

 

 

(126

)

Other current and noncurrent assets

 

1,394

 

 

 

(30

)

Other current and noncurrent liabilities

 

(2,136

)

 

 

1,927

 

Deferred revenue and deposits

 

1,225

 

 

 

(686

)

Net cash provided by operating activities

 

48,998

 

 

 

36,890

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, equipment and software

 

(1,017

)

 

 

(676

)

Proceeds from sale of property and equipment

 

2

 

 

 

8

 

Capitalization of trademark costs

 

(91

)

 

 

(174

)

Net cash used in investing activities

 

(1,106

)

 

 

(842

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

-

 

 

 

230,000

 

Payments on debt

 

(16,278

)

 

 

(234,083

)

Debt issuance costs

 

-

 

 

 

(1,301

)

Distributions to non-controlling unitholders

 

(18,881

)

 

 

(20,684

)

Dividends to Class A common stockholders

 

(2,173

)

 

 

-

 

Payments on capital lease obligations

 

(156

)

 

 

(211

)

Deferred offering costs

 

-

 

 

 

(4,816

)

Excess tax benefit realized on delivery of vested restricted stock units and exercise of stock options

 

179

 

 

 

-

 

Tax withholding payment for vested restricted stock units upon delivery

 

(818

)

 

 

-

 

Proceeds from exercise of stock options

 

54

 

 

 

-

 

Net cash used in financing activities

 

(38,073

)

 

 

(31,095

)

Effect of exchange rate changes on cash

 

(66

)

 

 

28

 

Net increase in cash and cash equivalents

 

9,753

 

 

 

4,981

 

Cash and cash equivalents, beginning of year

 

88,375

 

 

 

68,501

 

Cash and cash equivalents, end of period

$

98,128

 

 

$

73,482

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

6,692

 

 

$

11,443

 

Cash paid for income taxes

 

6,824

 

 

 

1,632

 

Schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Capital leases for property and equipment

$

18

 

 

$

236

 

Distributions payable to non-controlling unitholders

 

-

 

 

 

6,650

 

Increase in accounts payable for capitalization of trademark costs

 

155

 

 

 

15

 

 

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”) in the Southwest and Central Atlantic regions of the United States (“U.S.”), respectively, which were subsequently contributed to RMCO, LLC and subsidiaries (“RMCO”), and the remaining proceeds were used to purchase common membership units in RMCO. After completion of the IPO, RE/MAX Holdings owned 39.56% of the common membership units in RMCO and as of September 30, 2014, RE/MAX Holdings owns 39.53% 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 U.S. and globally. The Company also operates a small number of 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). The Company, as a franchisor, 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 RE/MAX Holdings 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 September 30, 2014 and December 31, 2013, the results of its operations for the three and nine months ended September 30, 2014 and 2013, changes in its stockholders’ equity for the nine months ended September 30, 2014 and results of its cash flows for the nine months ended September 30, 2014 and 2013. Interim results may not be indicative of full year performance.

Use of Estimates

The preparation of condensed 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 condensed 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.

 

 

7


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Principles of Consolidation

RE/MAX Holdings holds an approximate 40% economic interest in RMCO, but as its managing member, RE/MAX Holdings controls RMCO’s operations, management and activities. As a result, RE/MAX Holdings consolidates RMCO and records a non-controlling interest in the accompanying Condensed Consolidated Balance Sheets and records net income attributable to the non-controlling interest in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.

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.

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

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

RE/MAX Holdings is the sole managing member of RMCO and subsequent to the IPO, 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. RE/MAX Holdings owns a 39.53% and 39.56% minority economic interest in RMCO as of September 30, 2014 and December 31, 2013, respectively, and records a non-controlling interest for the remaining 60.47% and 60.44% economic interest in RMCO held by RIHI, Inc. (“RIHI”) as of September 30, 2014 and December 31, 2013, respectively. RE/MAX Holdings’ minority economic interest in RMCO decreased due to the cancellation of 30,519 common units in RMCO in May 2014, offset by the increase in common units from the issuance of shares of Class A common stock upon the exercise of 15,000 stock options in September 2014, as referenced in Note 10, Equity-Based Compensation. RE/MAX Holdings’ only sources of cash flow from operations are distributions from RMCO and management fees received pursuant to the management services agreement between RE/MAX Holdings and RMCO. Net income attributable to the non-controlling interest in the accompanying 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 in the accompanying Condensed Consolidated Balance Sheets represented the carryover basis of RIHI’s capital account in RMCO. Prospectively, the non-controlling interest has been adjusted to reflect tax and other cash distributions made to, and the income allocated to, the non-controlling unitholders. The ownership of the common units in RMCO is summarized as follows:

 

 

September 30, 2014

 

 

December 31, 2013

 

 

Shares

 

 

Ownership %

 

 

Shares

 

 

Ownership %

 

Non-controlling unitholders ownership of common units in RMCO

 

17,734,600

 

 

 

60.47

%

 

 

17,734,600

 

 

 

60.44

%

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

 

11,592,452

 

 

 

39.53

%

 

 

11,607,971

 

 

 

39.56

%

 

 

29,327,052

 

 

 

100.00

%

 

 

29,342,571

 

 

 

100.00

%

 

  

8


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The aforementioned ownership percentages are used to calculate the net income attributable to RE/MAX Holdings. A reconciliation from “Income before provision for income taxes” to “Net income attributable to RE/MAX Holdings, Inc.” for the three and nine months ended September 30, 2014 is detailed as follows (in thousands, except percentages):

 

 

Three months ended

September 30, 2014

 

 

Nine months ended

September 30, 2014

 

Income before provision for income taxes

$

17,171

 

 

$

44,492

 

Weighted average ownership percentage of controlling interest

 

39.50

%

 

 

39.53

%

Income before provision for income taxes attributable to RE/MAX Holdings, Inc.

 

6,783

 

 

 

17,588

 

Provision for income taxes attributable to RE/MAX Holdings, Inc.

 

(2,508

)

 

 

(6,525

)

Net income attributable to RE/MAX Holdings, Inc.

$

4,275

 

 

$

11,063

 

 

  

 

 

A reconciliation of the “Provision for income taxes” for the three and nine months ended September 30, 2014 is detailed as follows (in thousands):

 

 

Three months ended

September 30, 2014

 

 

Nine months ended

September 30, 2014

 

Provision for income taxes attributable to RE/MAX Holdings, Inc. (a)

$

(2,508

)

 

$

(6,525

)

Provision for income taxes attributable to entities other than RE/MAX Holdings, Inc. (b)

 

(608

)

 

 

(1,605

)

Provision for income taxes

$

(3,116

)

 

$

(8,130

)

(a)

The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes as well as RE/MAX Holdings’ approximate 40% share of the taxes imposed directly on RE/MAX, LLC, a wholly-owned subsidiary of RMCO, related to tax liabilities in certain foreign jurisdictions of approximately $395,000 and $1,049,000 for the three and nine months ended September 30, 2014, respectively.

(b)

The provision for income taxes attributable to entities other than RE/MAX Holdings represents taxes imposed directly on RE/MAX, LLC related to tax liabilities in certain foreign jurisdictions that are allocated to the non-controlling interest.

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 each members’ tax liabilities, if any, with respect to their allocable share of RMCO earnings. RMCO makes such tax distributions to its members based on an estimated tax rate in accordance with 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 paid to or on behalf of non-controlling unitholders under the New RMCO, LLC Agreement were $15,557,000 during the nine months ended September 30, 2014, and are recorded in “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity. For the nine months ended September 30, 2013, 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 under the Old RMCO, LLC Agreement during the nine months ended September 30, 2013 were $12,684,000.

9


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 distributions of $1,108,000 to non-controlling unitholders on each of April 17, 2014, June 5, 2014 and September 3, 2014, which are recorded in “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity. On November 6, 2014, the Company declared a distribution to non-controlling unitholders of $1,108,000, which is payable on December 4, 2014. Cash distributions were also required to be made to non-controlling unitholders in accordance with the Old RMCO, LLC Agreement 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. Other distributions paid to non-controlling unitholders during the nine months ended September 30, 2013 were $8,000,000.  

Payments Pursuant to the Tax Receivable Agreements

As of September 30, 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 terms of the TRAs (see current and non-current portion of “Payable to related parties pursuant to tax receivable agreements” in the accompanying Condensed Consolidated Balance Sheets).  

The Company estimates that amounts payable pursuant to the TRAs within the next twelve months will be approximately $902,000. No amounts were paid pursuant to the terms of the TRAs during the nine months ended September 30, 2014.

Payments are anticipated to be made under the TRAs indefinitely, with the first payment due no later than January 20, 2015. 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.

10


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

September 30, 2014

 

 

Nine months ended

September 30, 2014

 

Numerator

 

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

$

4,275

 

 

$

11,063

 

Denominator for basic net income per share of Class A

   common stock

 

 

 

 

 

 

 

Weighted average shares of Class A common stock

   outstanding

 

11,579,669

 

 

 

11,593,738

 

Denominator for diluted net income per share of Class A

   common stock

 

 

 

 

 

 

 

Weighted average shares of Class A common stock

   outstanding

 

11,579,669

 

 

 

11,593,738

 

Add dilutive effect of the following:

 

 

 

 

 

 

 

     Stock options

 

590,285

 

 

 

590,736

 

     Restricted stock units

 

59,056

 

 

 

50,686

 

Weighted average shares of Class A common stock

   outstanding, diluted

 

12,229,010

 

 

 

12,235,160

 

Earnings per share of Class A common stock

 

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

   per share of Class A common stock, basic

$

0.37

 

 

$

0.95

 

Net income attributable to RE/MAX Holdings, Inc.

   per share of Class A common stock, diluted

$

0.35

 

 

$

0.90

 

 

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

During the nine months ended September 30, 2014, the Company’s Board of Directors declared quarterly dividends of $0.0625 per share on all outstanding shares of Class A common stock in the first, second and third quarters of 2014, representing $2,173,000 in total dividends. Of this amount, $725,000 was paid on April 18, 2014 and $724,000 was paid on each of June 5, 2014 and September 3, 2014.  No dividends were declared or paid during the nine months ended September 30, 2013.  On November 6, 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 December 4, 2014 to shareholders of record at the close of business on November 20, 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. Prior to the acquisitions, 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.

11


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The valuation of acquired regional franchise agreements was derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation. The regional franchise agreements acquired were valued using an income approach and are being amortized over the remaining contractual term of approximately fourteen years using the straight-line method. For the remaining assets acquired, fair value approximated carrying value.

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 agreements. 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.

 

 

Nine months ended

September 30, 2013

 

 

(unaudited)

 

 

(in thousands)

 

Total revenue

$

124,878

 

Net income

 

26,038

 

 

  

6.  Intangible Assets and Goodwill

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

 

 

Initial Weighted

Average

Amortization

 

 

September 30, 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

 

 

$

(83,938

)

 

$

78,897

 

 

$

162,835

 

 

$

(73,764

)

 

$

89,071

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

4.2

 

 

$

7,500

 

 

$

(7,014

)

 

$

486

 

 

$

7,463

 

 

$

(6,633

)

 

$

830

 

Trademarks

 

14.8

 

 

 

2,870

 

 

 

(1,380

)

 

 

1,490

 

 

 

2,935

 

 

 

(1,279

)

 

 

1,656

 

Total other intangible assets

7.1

 

 

$

10,370

 

 

$

(8,394

)

 

$

1,976

 

 

$

10,398

 

 

$

(7,912

)

 

$

2,486

 

 

Amortization expense for the three months ended September 30, 2014 and 2013 was $3,518,000 and $3,141,000, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 was $10,656,000 and $9,431,000, respectively.

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

 

Year ending December 31:

 

 

 

Remainder of 2014

$

3,548

 

2015

 

14,034

 

2016

 

13,794

 

2017

 

9,879

 

2018

 

6,264

 

Thereafter

 

33,354

 

 

$

80,873

 

  

12


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company performs its annual impairment analysis of goodwill as of August 31 each year or more often if there are indicators of impairment present. The Company tests each reporting unit for goodwill impairment. Reporting units are driven by the level at which management reviews operating results and are one level below the operating segment.  The Company’s impairment assessment begins with a qualitative assessment to determine if it is more likely than not that a reporting unit’s fair value is less than the carrying amount.  The initial qualitative assessment includes comparing the overall financial performance of the reporting units against the planned results as well as other factors which might indicate that the reporting unit’s value has declined since the last assessment date.  If it is determined in the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the standard two-step quantitative impairment test is performed.  The first step of the quantitative impairment test consists of comparing the estimated fair value of each reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, then it is not considered impaired and no further analysis is required. If the first step of the quantitative impairment test indicates that the estimated fair value of a reporting unit is less than its carrying value, then impairment potentially exists and the second step of the quantitative impairment test is performed to measure the amount of goodwill impairment. Goodwill impairment exists when the estimated implied fair value of a reporting unit’s goodwill is less than its carrying value.

The Company performed the qualitative impairment assessment for all of its reporting units by evaluating, among other things, market and general economic conditions, entity-specific events, events affecting a reporting unit and the Company’s results of operations and key performance measures. The results of the qualitative assessment determined it is not more likely than not that the carrying values of any of the Company’s reporting units exceed their respective fair values. As the fair values of the Company’s reporting units significantly exceed their respective carrying values, the Company did not perform the quantitative test, and no indicators of impairment existed.

Amounts recorded as goodwill in the accompanying Condensed Consolidated Balance Sheets are attributable to the Company’s Real Estate Franchise Services reportable segment. The following table presents changes to goodwill for the nine months ended September 30, 2014 (in thousands):

 

Balance, January 1, 2014

$

72,781

 

Effect of changes in foreign currency exchange rates

 

(165

)

Balance, September 30, 2014

$

72,616

 

 

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Accrued payroll and related employee costs

$

4,050

 

 

$

4,746

 

Accrued property taxes

 

1,294

 

 

 

1,159

 

Accrued professional fees

 

313

 

 

 

573

 

Lease-related accruals

 

775

 

 

 

853

 

Other

 

1,499

 

 

 

2,013

 

 

$

7,931

 

 

$

9,344

 

 

 

8. Debt

Debt consists of the following (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

2013 Senior Secured Credit Facility, principal of $538

   payable quarterly, matures in July 2020, net of

   unamortized discount of $375 and $446 as of

   September 30, 2014 and December 31, 2013,

   respectively

$

212,197

 

 

$

228,404

 

Less current portion

 

(8,568

)

 

 

(17,300

)

 

$

203,629