rmax_CurrentFolio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2016.

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      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      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

 

(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  

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 July 29, 2016 was 17,645,696 and 1, respectively.

 

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page No.

 

 

PART I. – FINANCIAL INFORMATION

 

 

 

 

 

Item 1. 

 

Financial Statements

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and June 30, 2015

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and June 30, 2015

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2016

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and June 30, 2015

 

 

 

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

 

 

 

 

Item 2. 

 

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

28 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risks

46 

 

 

 

 

Item 4. 

 

Controls and Procedures

47 

 

 

 

 

 

 

PART II. – OTHER INFORMATION

 

 

 

 

 

Item 1. 

 

Legal Proceedings

48 

 

 

 

 

Item 1A. 

 

Risk Factors

48 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

49 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

49 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

49 

 

 

 

 

Item 5. 

 

Other Information

49 

 

 

 

 

Item 6. 

 

Exhibits

50 

 

 

 

 

 

 

SIGNATURES

51 

 

 

2


 

Table of Contents

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)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2016

    

2015

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

97,574

 

$

110,212

Accounts and notes receivable, current portion, less allowances of $4,543 and $4,483, respectively

 

 

19,276

 

 

16,769

Income taxes receivable

 

 

981

 

 

 —

Assets held for sale

 

 

 —

 

 

354

Other current assets

 

 

3,117

 

 

4,079

Total current assets

 

 

120,948

 

 

131,414

Property and equipment, net of accumulated depreciation of $13,397 and $13,183, respectively

 

 

2,592

 

 

2,395

Franchise agreements, net of accumulated amortization of $107,474 and $100,499, respectively

 

 

60,593

 

 

61,939

Other intangible assets, net of accumulated amortization of $8,531 and $8,929, respectively

 

 

6,242

 

 

4,941

Goodwill

 

 

75,977

 

 

71,871

Deferred tax assets, net

 

 

106,356

 

 

109,365

Other assets, net of current portion

 

 

2,139

 

 

1,861

Total assets

 

$

374,847

 

$

383,786

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

595

 

$

449

Accounts payable to affiliates

 

 

20

 

 

66

Accrued liabilities

 

 

9,392

 

 

16,082

Income taxes payable

 

 

97

 

 

451

Deferred revenue and deposits

 

 

17,467

 

 

16,501

Current portion of debt

 

 

10,765

 

 

14,805

Current portion of payable pursuant to tax receivable agreements

 

 

7,158

 

 

8,478

Liabilities held for sale

 

 

 —

 

 

351

Other current liabilities

 

 

28

 

 

71

Total current liabilities

 

 

45,522

 

 

57,254

Debt, net of current portion

 

 

176,218

 

 

185,552

Payable pursuant to tax receivable agreements, net of current portion

 

 

91,557

 

 

91,557

Deferred tax liabilities, net

 

 

134

 

 

120

Other liabilities, net of current portion

 

 

9,779

 

 

9,889

Total liabilities

 

 

323,210

 

 

344,372

Commitments and contingencies (note 12)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 17,645,696 shares issued and outstanding as of June 30, 2016; 17,584,351 shares issued and outstanding as of December 31, 2015

 

 

2

 

 

2

Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of June 30, 2016 and December 31, 2015

 

 

 —

 

 

 —

Additional paid-in capital

 

 

446,256

 

 

445,081

Retained earnings

 

 

11,265

 

 

4,693

Accumulated other comprehensive income (loss), net of tax

 

 

158

 

 

(105)

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

 

 

457,681

 

 

449,671

Non-controlling interest

 

 

(406,044)

 

 

(410,257)

Total stockholders' equity

 

 

51,637

 

 

39,414

Total liabilities and stockholders' equity

 

$

374,847

 

$

383,786

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

Table of Contents

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing franchise fees

 

$

19,846

 

$

18,268

 

$

38,753

 

$

35,928

Annual dues

 

 

8,046

 

 

7,875

 

 

15,950

 

 

15,677

Broker fees

 

 

10,384

 

 

9,247

 

 

17,585

 

 

15,667

Franchise sales and other franchise revenue

 

 

5,128

 

 

5,485

 

 

13,921

 

 

13,911

Brokerage revenue

 

 

 —

 

 

3,402

 

 

112

 

 

7,301

Total revenue

 

 

43,404

 

 

44,277

 

 

86,321

 

 

88,484

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, operating and administrative expenses

 

 

18,842

 

 

19,730

 

 

42,074

 

 

44,801

Depreciation and amortization

 

 

3,872

 

 

3,808

 

 

7,593

 

 

7,619

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

 

 

(11)

 

 

(617)

 

 

96

 

 

(615)

Total operating expenses

 

 

22,703

 

 

22,921

 

 

49,763

 

 

51,805

Operating income

 

 

20,701

 

 

21,356

 

 

36,558

 

 

36,679

Other expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(2,091)

 

 

(2,301)

 

 

(4,372)

 

 

(5,110)

Interest income

 

 

35

 

 

33

 

 

86

 

 

100

Foreign currency transaction gains (losses)

 

 

20

 

 

37

 

 

184

 

 

(1,384)

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

(136)

 

 

(94)

Equity in earnings of investees

 

 

 —

 

 

390

 

 

 —

 

 

602

Total other expenses, net

 

 

(2,036)

 

 

(1,841)

 

 

(4,238)

 

 

(5,886)

Income before provision for income taxes

 

 

18,665

 

 

19,515

 

 

32,320

 

 

30,793

Provision for income taxes

 

 

(4,285)

 

 

(3,457)

 

 

(7,544)

 

 

(5,605)

Net income

 

$

14,380

 

$

16,058

 

$

24,776

 

$

25,188

Less: net income attributable to non-controlling interest

 

 

7,419

 

 

11,088

 

 

12,875

 

 

17,500

Net income attributable to RE/MAX Holdings, Inc.

 

$

6,961

 

$

4,970

 

$

11,901

 

$

7,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.39

 

$

0.41

 

$

0.68

 

$

0.64

Diluted

 

$

0.39

 

$

0.40

 

$

0.67

 

$

0.62

Weighted average shares of Class A common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,636,590

 

 

12,225,678

 

 

17,610,470

 

 

12,022,769

Diluted

 

 

17,668,995

 

 

12,399,527

 

 

17,653,433

 

 

12,346,834

Cash dividends declared per share of Class A common stock

 

$

0.1500

 

$

0.1250

 

$

0.3000

 

$

1.7500

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


 

Table of Contents

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Net income

 

$

14,380

 

$

16,058

 

$

24,776

 

$

25,188

Change in cumulative translation adjustment

 

 

 —

 

 

75

 

 

564

 

 

(458)

Other comprehensive income (loss), net of tax

 

 

 —

 

 

75

 

 

564

 

 

(458)

Comprehensive income

 

 

14,380

 

 

16,133

 

 

25,340

 

 

24,730

Less: comprehensive income attributable to non-controlling interest

 

 

7,419

 

 

11,742

 

 

13,176

 

 

17,801

Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax

 

$

6,961

 

$

4,391

 

$

12,164

 

$

6,929

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5


 

Table of Contents

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

 

    

 

    

 

    

Accumulated other

    

 

    

 

 

 

Class A

 

Class B

 

Additional

 

 

 

comprehensive

 

Non-

 

Total

 

 

common stock

 

common stock

 

paid-in

 

Retained

 

income (loss),

 

controlling

 

stockholders'

 

 

Shares

 

Amount

 

Shares

 

Amount

 

capital

 

earnings

 

net of tax

 

interest

 

equity

Balances, January 1, 2016

 

17,584,351

 

$

2

 

1

 

$

 —

 

$

445,081

 

$

4,693

 

$

(105)

 

$

(410,257)

 

$

39,414

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

11,901

 

 

 —

 

 

12,875

 

 

24,776

Distributions paid to non-controlling unitholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,912)

 

 

(8,912)

Equity-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,311

 

 

 —

 

 

 —

 

 

 —

 

 

1,311

Dividends paid to Class A common stockholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(5,285)

 

 

 —

 

 

 —

 

 

(5,285)

Change in accumulated other comprehensive income (loss)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

263

 

 

301

 

 

564

Issuance of Class A common stock, equity-based compensation plans

 

71,745

 

 

 —

 

 —

 

 

 —

 

 

101

 

 

 —

 

 

 —

 

 

 —

 

 

101

Payroll taxes related to net settled restricted stock units

 

(10,400)

 

 

 —

 

 —

 

 

 —

 

 

(360)

 

 

 —

 

 

 —

 

 

 —

 

 

(360)

Cumulative effect adjustment from change in accounting principle

 

 —

 

 

 —

 

 —

 

 

 —

 

 

123

 

 

(44)

 

 

 —

 

 

(51)

 

 

28

Balances, June 30, 2016

 

17,645,696

 

$

2

 

1

 

$

 —

 

$

446,256

 

$

11,265

 

$

158

 

$

(406,044)

 

$

51,637

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

Table of Contents

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 

 

    

2016

    

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

24,776

 

$

25,188

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

 

 

 

 

 

 

Depreciation and amortization

 

 

7,593

 

 

7,619

Bad debt expense

 

 

109

 

 

487

Loss (gain) on sale or disposition of assets, net

 

 

96

 

 

(615)

Loss on early extinguishment of debt

 

 

136

 

 

94

Equity-based compensation expense

 

 

1,311

 

 

668

Non-cash interest expense

 

 

223

 

 

209

Deferred income tax expense and other

 

 

2,529

 

 

1,083

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts and notes receivable, current portion

 

 

(2,569)

 

 

(3,516)

Advances from/to affiliates

 

 

(65)

 

 

333

Other current and noncurrent assets

 

 

844

 

 

903

Other current and noncurrent liabilities

 

 

(6,501)

 

 

113

Income taxes receivable/payable

 

 

(1,012)

 

 

2,025

Deferred revenue and deposits, current portion

 

 

906

 

 

1,976

Payment pursuant to tax receivable agreements

 

 

(1,344)

 

 

 —

Net cash provided by operating activities

 

 

27,032

 

 

36,567

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property, equipment and software

 

 

(2,106)

 

 

(919)

Proceeds from sale of property and equipment

 

 

 —

 

 

11

Capitalization of trademark costs

 

 

(16)

 

 

(41)

Acquisitions, net of cash acquired of $131

 

 

(9,869)

 

 

 —

Dispositions

 

 

200

 

 

20

Cost to sell assets

 

 

(146)

 

 

(71)

Net cash used in investing activities

 

 

(11,937)

 

 

(1,000)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on debt

 

 

(13,734)

 

 

(8,360)

Capitalized debt amendment costs

 

 

 —

 

 

(555)

Distributions paid to non-controlling unitholders

 

 

(8,912)

 

 

(34,357)

Dividends paid to Class A common stockholders

 

 

(5,285)

 

 

(20,912)

Payments on capital lease obligations

 

 

(51)

 

 

(154)

Proceeds from exercise of stock options

 

 

101

 

 

2,013

Payment of payroll taxes related to net settled restricted stock units

 

 

(360)

 

 

 —

Net cash used in financing activities

 

 

(28,241)

 

 

(62,325)

Effect of exchange rate changes on cash

 

 

508

 

 

(165)

Net decrease in cash and cash equivalents

 

 

(12,638)

 

 

(26,923)

Cash and cash equivalents, beginning of year

 

 

110,212

 

 

107,199

Cash and cash equivalents, end of period

 

$

97,574

 

$

80,276

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for interest and debt amendment costs

 

$

4,251

 

$

4,901

Net cash paid for income taxes

 

 

5,957

 

 

2,367

Schedule of non-cash investing and financing activities:

 

 

 

 

 

 

Note receivable received as consideration for sale of brokerage operations assets

 

$

150

 

$

430

Capital leases for property and equipment

 

 

33

 

 

412

Increase in accounts payable for capitalization of trademark costs and purchases of property, equipment and software

 

 

625

 

 

459

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

7


 

Table of Contents

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 its consolidated 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. During the fourth quarter of 2015, RIHI, Inc. (“RIHI”) redeemed 5,175,000 common units in RMCO in exchange for newly issued shares of RE/MAX Holdings’ Class A common stock on a one-for-one basis. Immediately upon redemption, RIHI sold its 5,175,000 shares of Class A common stock at $36.00 per share, less underwriting discounts and commissions (the “Secondary Offering”). As of June 30, 2016, RE/MAX Holdings owns 58.42% 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. RE/MAX Holdings and its consolidated subsidiaries, including RMCO, are referred to hereinafter as the “Company.”

The Company is one of the leading franchisors of residential and commercial real estate brokerage services throughout the U.S. and globally. Through 2015, the Company operated a small number of real estate brokerage offices in the U.S. As discussed in Note 5, Acquisitions and Dispositions, the Company sold certain operating assets and liabilities of these brokerage offices during 2015 and the first quarter of 2016 and, subsequent thereto, no longer operates any real estate brokerage offices and no longer recognizes brokerage revenue (which consisted of fees assessed by the Company’s previously owned brokerages for services provided to their affiliated real estate agents). The Company’s revenue is derived from continuing franchise fees (which consist of fixed contractual fees paid monthly by regional franchise owners and franchisees based on the number of agents in the respective franchised region or office), annual dues from agents, broker fees (which consist of fees paid by regional franchise owners and franchisees for real estate commissions paid by customers when an agent sells a home), 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, prior to the sale of the Company’s brokerage offices during 2015 and the first quarter of 2016, brokerage revenue. The Company, as a franchisor, grants each 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 consolidated 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 June 30, 2016 and December 31, 2015, the results of its operations and comprehensive income for the three and six months ended June 30, 2016 and 2015, changes in its stockholders’ equity for the six months ended June 30, 2016 and results of its cash flows for the six months ended June 30, 2016 and 2015. Interim results may not be indicative of full year performance. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 trade accounts and notes receivable, the determination of the estimated lives of intangible assets, the estimates for amounts accrued for litigation matters, 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 due to RIHI and Oberndorf Investments LLC (“Oberndorf”) 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.

Reclassifications

In conjunction with the adoption of several recent accounting pronouncements, certain items in the accompanying condensed consolidated financial statements as of December 31, 2015 and for the six months ended June 30, 2015 have been reclassified to conform to the 2016 presentation.  These reclassifications did not affect the Company’s consolidated results of operations.

Segment Reporting

Prior to 2016, the Company operated in two reportable segments, (1) Real Estate Franchise Services and (2) Brokerages. The Real Estate Franchise Services reportable segment comprised the operations of the Company’s owned and independent global franchising operations under the RE/MAX brand name, intersegment revenue from the Company’s previously owned brokerages and corporate-wide professional services expenses. The Brokerages reportable segment contained the operations of the Company’s previously owned brokerage offices in the U.S., the results of operations of a mortgage brokerage company in which the Company previously owned a non-controlling interest and reflected the elimination of intersegment revenue and other consolidation entries. During 2015 and the first quarter of 2016, the Company sold its 21 previously owned brokerage offices, as discussed in Note 5, Acquisitions and Dispositions. These dispositions resulted in the cessation of operations for the Company’s Brokerages reportable segment. Thus, during the first quarter of 2016, the Company began to operate in one reportable segment, Real Estate Franchise Services. All prior segment information has been reclassified to reflect the Company’s new segment structure.

Principles of Consolidation

RE/MAX Holdings holds an approximate 60% economic interest in RMCO and, 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 and comprehensive income attributable to the non-controlling interest in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income, respectively.

Emerging Growth Company Status 

Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company. The Company 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 and the Company has not been subject to the requirement of Section 404(b) of the Sarbanes-Oxley Act of 2002 (“SOX”). The Company will no longer qualify as an emerging growth company as of the end of 2016.  Therefore, pursuant to Section 404(b) of SOX, the Company will be 

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

required to include an opinion from an independent registered public accounting firm regarding the effectiveness of the Company’s internal controls in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016. 

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies certain aspects of accounting for share-based payment transactions, including income tax consequences, statutory tax withholding requirements, forfeitures and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016.  Early adoption is permitted in any interim or annual reporting period. The standard requires the guidance related to forfeitures and the timing of when excess tax benefits are recognized to be applied using a modified retrospective transition method, the guidance related to the accounting for income taxes to be applied prospectively, and the guidance related to the presentation of excess tax benefits on the statement of cash flows to be applied either prospectively or retrospectively. The Company early adopted ASU 2016-09 in the first quarter of 2016 and elected to account for forfeitures as they occur.  As a result, the Company recorded a cumulative-effect adjustment of $44,000 to “Retained earnings” in the accompanying Condensed Consolidated Balance Sheets and Statements of Stockholders’ Equity.  Furthermore, the Company elected to apply the retrospective transition method to the amendments related to the presentation of excess tax benefits in the statements of cash flows.  This resulted in an increase in cash flows provided by operating activities of $2,361,000 and a decrease of $2,361,000 in cash flows used in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016.  During the six months ended June 30, 2016, the Company recorded a $201,000 income tax benefit relating to the exercise of stock options and vesting of restricted stock units in “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income.  Prior to 2016, such excess tax benefits were recorded in “Additional paid-in capital” in the accompanying Condensed Consolidated Balance Sheets.     

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize the assets and liabilities that arise from all leases on the consolidated balance sheets. ASU 2016-02 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual reporting period. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company has not yet determined the effect of the standard on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. ASU 2015-17 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. The standard permits the use of either the retrospective or prospective transition method and permits early adoption as of the beginning of an interim or annual reporting period. The Company elected to early adopt this standard retrospectively in the first quarter of 2016 and $3,332,000 previously presented in “Other current assets” was reclassified to “Deferred tax assets, net” in the accompanying Condensed Consolidated Balance Sheets and related disclosures as of December 31, 2015, but the Company’s consolidated results of operations were not affected.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting Measurement-Period Adjustments, which eliminates the requirement for an entity to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is completed. ASU 2015-16 became effective prospectively for the Company on January 1, 2016.  The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

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RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, which both clarifies and simplifies content in the FASB Accounting Standards Codification and corrects unintended application of U.S. GAAP. ASU 2015-10 became effective for the Company on January 1, 2016. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures. 

In April 2015, the FASB issued ASU 2015-05, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on fees paid in a cloud computing arrangement and clarifies the accounting for a software license element of a cloud computing arrangement. ASU 2015-05 became effective prospectively for the Company on January 1, 2016.  The adoption of this standard did not have a significant impact on the consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs related to a debt liability as a direct deduction from the debt liability rather than as an asset. ASU 2015-03 is effective retrospectively for the Company on January 1, 2016. The adoption of this standard impacted the presentation of “Debt, net of current portion” in the accompanying Condensed Consolidated Balance Sheets and related disclosures by $1,527,000 as of December 31, 2015, but did not affect the Company’s consolidated results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the guidance in ASU 2014-09 by one year. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarification on identifying performance obligations and accounting for licenses of intellectual property.  In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition.  These standards are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within such annual reporting periods. 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.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also provides guidance on the financial statement presentation and disclosures of discontinued operations. ASU 2014-08 became effective prospectively for the Company on January 1, 2015 and none of the dispositions that occurred during 2015 and the first quarter of 2016 qualified as a discontinued operation. See Note 5, Acquisitions and Dispositions, for additional information. 

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 58.42% and 58.33% economic interest in RMCO as of June 30, 2016 and December 31, 2015, respectively, and records a non-controlling interest for the remaining 41.58% and 41.67% economic interest in RMCO held by RIHI as of June 30, 2016 and December 31, 2015, respectivelyRE/MAX Holdings’ economic interest in RMCO increased due to an increase in common units, which were issued concurrently with the issuance of shares of Class A common stock upon the exercise of 28,057 stock options and the vesting of 33,288 restricted stock units, net of shares withheld and cancelled, as discussed in Note 10, Equity-Based CompensationRE/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 non-controlling interest” in the accompanying Condensed Consolidated Statements of Income represents the portion of earnings attributable to the economic interest in RMCO held by the non-controlling unitholders. As of October 7, 2013, “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets represented the carryover basis of RIHI’s capital account in RMCO. Subsequent thereto, the non-controlling interest balance has been and will continue to be adjusted to reflect tax and other cash distributions made to, and the income allocated to, the non-controlling unitholders, as well as future redemptions of common units in RMCO pursuant to the Fourth Amended and Restated Limited Liability Company Agreement (“RMCO, LLC Agreement”). The ownership of the common units in RMCO is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2016

 

2015

 

 

    

Shares

    

Ownership %

    

Shares

    

Ownership %

 

Non-controlling unitholders ownership of common units in RMCO

 

12,559,600

 

41.58

%

12,559,600

 

41.67

%

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

 

17,645,696

 

58.42

%

17,584,351

 

58.33

%

Total common units in RMCO

 

30,205,296

 

100.00

%

30,143,951

 

100.00

%

 

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The weighted average ownership percentages for the applicable reporting periods are used to calculate the net income attributable to RE/MAX Holdings.  RE/MAX Holdings’ weighted average ownership percentage in RMCO was 58.41% and 40.81% for the three months ended June 30, 2016 and 2015, respectively and 58.37% and 40.40% for the six months ended June 30, 2016 and 2015, respectively.  RE/MAX Holdings’ economic interest in RMCO increased due to the increase in common units from the issuance of shares of Class A common stock as a result of the Secondary Offering described in Note 1, Business and Organization.  A reconciliation of “Net income attributable to RE/MAX Holdings, Inc.” in the accompanying Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

 

2016

    

2015

 

2016

 

2015

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

 

$

10,900

 

$

7,964

 

 

18,865

 

 

12,440

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

 

 

(3,939)

 

 

(2,994)

 

 

(6,964)

 

 

(4,752)

Net income attributable to RE/MAX Holdings, Inc.

 

$

6,961

 

$

4,970

 

$

11,901

 

$

7,688

 

 

A reconciliation of the “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

 

2015

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

 

$

(3,939)

 

$

(2,994)

 

$

(6,964)

 

$

(4,752)

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

 

 

(346)

 

 

(463)

 

 

(580)

 

 

(853)

Provision for income taxes

 

$

(4,285)

 

$

(3,457)

 

$

(7,544)

 

$

(5,605)

(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’ proportionate share of the net assets of RMCO of the taxes imposed directly on RE/MAX, LLC and its consolidated subsidiaries (“RE/MAX, LLC”), a wholly-owned subsidiary of RMCO, related primarily to tax liabilities in certain foreign jurisdictions of $493,000 and $316,000 for the three months ended June 30, 2016 and 2015, respectively, and $828,000 and $578,000 for the six months ended June 30, 2016 and 2015, 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 primarily in certain foreign jurisdictions that are allocated to the non-controlling interest.

Distributions and Other Payments to Non-controlling Unitholders

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 RMCO, LLC Agreement, RMCO makes cash distributions to non-controlling unitholders.  Discretionary cash distributions may be made to non-controlling unitholders based on their ownership percentage in RMCO as determined in accordance with the RMCO, LLC Agreement.  These discretionary distributions are paid on a quarterly basis equal to the dividend payments to the stockholders of the Company’s Class A common stock or otherwise on a discretionary

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

basis as necessary.  In addition, RMCO is generally required to distribute cash on a pro-rata basis to its members to the extent necessary to cover each member’s estimated tax liabilities, if any, with respect to their allocable share of RMCO earnings, but only to the extent that any other discretionary distributions from RMCO for the relevant period were otherwise insufficient to enable each member to cover its estimated tax liabilities.  Upon completion of its tax returns with respect to the prior year, RMCO may make other discretionary true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the prior year.  For the six months ended June 30, 2016 and 2015, respectively, total distributions paid or payable to or on behalf of non-controlling unitholders under the RMCO, LLC Agreement were $8,912,000 and $34,357,000,  of which $3,768,000 and $31,036,000 were related to dividend distributions as discussed in Note 4, Earnings Per Share and Dividends.  The aforementioned distributions are recorded in “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity and the paid portion is reported in “Distributions paid to non-controlling unitholders” in the accompanying Condensed Consolidated Statements of Cash Flows. 

On August 3, 2016, the Company declared a distribution to non-controlling unitholders of $1,884,000, which is payable on August 31, 2016. No other distributions were paid to non-controlling unitholders during the six months ended June 30, 2016 and 2015.   

Payments Pursuant to the Tax Receivable Agreements

At the time of the IPO, RE/MAX Holdings entered into separate TRAs with RMCO’s historical owners, RIHI and Weston Presidio V, L.P. (“Weston Presidio”). During the second quarter of 2015, Weston Presidio assigned, transferred and conveyed to Oberndorf all of its rights, title and interest in and to, and all of its liabilities and obligations under, the TRA dated as of October 7, 2013 by and between RE/MAX Holdings and Weston Presidio. In connection therewith, the Company entered into a joinder to the TRA on May 29, 2015 with Western Presidio and Oberndorf (the “Joinder Agreement”). Neither the assignment and transfer nor the Joinder Agreement impacted the financial position, results of operations or cash flows of the Company. 

As of June 30, 2016, the Company reflected a liability of $98,715,000, representing the payments due to RIHI and Oberndorf, under the terms of the TRAs (see current and non-current portion of “Payable pursuant to tax receivable agreements” in the accompanying Condensed Consolidated Balance Sheets). 

As of June 30, 2016, the Company estimates that amounts payable pursuant to the TRAs within the next 12-month period will be approximately $7,158,000,  of which $2,580,000 is related to RE/MAX Holdings’ 2014 federal and state tax returns and the remainder is related to RE/MAX Holdings’ 2015 federal and state tax returns. To determine the current amount of the payments due to RIHI and Oberndorf, the Company estimated the amount of taxable income that RE/MAX Holdings generated during 2015 and 2014 and the amount of the specified deductions subject to the TRAs which were realized by RE/MAX Holdings in its 2015 and 2014 federal and state tax returns. This amount was then used as a basis for determining the Company’s increase in estimated tax cash savings as a result of such deductions on which a current TRA obligation became due (i.e. payable within 12 months of the Company’s year-end). These calculations are performed pursuant to the terms of the TRAs. The Company paid $1,344,000 and $0 pursuant to the terms of the TRAs during the six months ended June 30, 2016 and 2015, respectively.

The timing and amount of the payments to be made under the TRAs are subject to certain contingencies, including RE/MAX Holdings having sufficient taxable income to utilize all of the tax benefits defined in the TRAs. If the Company elects to terminate the TRAs early, the Company would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRAs, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.

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 “Provision for income taxes” in the

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

accompanying Condensed Consolidated Statements of Income. In general, items of income, gain, loss and deduction are allocated on the basis of the members’ ownership interests pursuant to the 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Numerator

 

 

 

 

 

 

 

 

   

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

 

$

6,961

 

$

4,970

 

$

11,901

 

$

7,688

Denominator for basic net income per share of Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,636,590

 

 

12,225,678

 

 

17,610,470

 

 

12,022,769

Denominator for diluted net income per share of Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,636,590

 

 

12,225,678

 

 

17,610,470

 

 

12,022,769

Add dilutive effect of the following:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

4,360

 

 

146,638

 

 

10,047

 

 

301,928

Restricted stock units

 

 

28,045

 

 

27,211

 

 

32,916

 

 

22,137

Weighted average shares of Class A common stock outstanding, diluted

 

 

17,668,995

 

 

12,399,527

 

 

17,653,433

 

 

12,346,834

Earnings per share of Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.39

 

$

0.41

 

$

0.68

 

$

0.64

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

 

$

0.39

 

$

0.40

 

$

0.67

 

$

0.62

 

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.

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Dividends

The Company’s Board of Directors declared quarterly dividends of $0.15 per share on all outstanding shares of Class A common stock in both the first and second quarters of 2016, or $5,285,000 in total dividends.  Of this amount, $2,638,000 was paid on March 23, 2016 and $2,647,000 was paid on June 2, 2016.  The Company made corresponding distributions to non-controlling unitholders of $1,884,000 on both March 23, 2016 and June 2, 2016.  The Company’s Board of Directors declared quarterly dividends of $0.125 per share on all outstanding shares of Class A common stock in both the first and second quarters of 2015, or $3,029,000 in total dividends.  Of this amount, $1,500,000 was paid on April 8, 2015 and $1,529,000 was paid on June 4, 2015.  The Company made corresponding distributions to non-controlling unitholders of $2,217,000 on both April 8, 2015 and June 4, 2015.  Additionally, during the six months ended June 30, 2015, the Company’s Board of Directors declared a special dividend of $1.50 per share on all outstanding shares of Class A common stock, or $17,883,000 in total dividends, which along with a corresponding distribution to non-controlling unitholders of $26,602,000 was paid on April 8, 2015. 

On August 3, 2016, the Company’s Board of Directors declared a quarterly dividend of $0.15 per share on all outstanding shares of Class A common stock, which is payable on August 31, 2016 to shareholders of record at the close of business on August 17, 2016. 

 

5. Acquisitions and Dispositions

Acquisitions

Acquisition of RE/MAX of Alaska, Inc.

 

On April 1, 2016, RE/MAX, LLC acquired certain assets of RE/MAX of Alaska, Inc. (“RE/MAX of Alaska”), including the regional franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of Alaska. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used $1,500,000 in cash generated from operations to fund the acquisition. The assets acquired constitute a business and were accounted for using the fair value acquisition method.  The total purchase price was allocated to the assets acquired based on their estimated fair values.  The excess of the total purchase price over the preliminary fair value of the identifiable assets acquired was recorded as goodwill.  The goodwill recognized for RE/MAX of Alaska is attributable to expected synergies and projected long term revenue growth.  All of the goodwill recognized is tax deductible. 

Purchase Price Allocation

The following table summarizes the preliminary estimated fair value of the assets acquired at the acquisition date (in thousands):

 

 

 

 

Franchise agreements

 

529

Goodwill

 

971

Total purchase price

$

1,500

The regional franchise agreements acquired were preliminarily valued using an income approach and are being amortized over the remaining contractual term of approximately five years using the straight-line method. The preliminary estimated fair value of the assets acquired is subject to adjustments based on the Company’s final assessment of the fair values of the franchise agreements and other assets, which are the acquired assets with the highest likelihood of changing upon finalization of the valuation process. 

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Acquisition of RE/MAX of New York, Inc.

On February 22, 2016, RE/MAX, LLC acquired certain assets of RE/MAX of New York, Inc. (“RE/MAX of New York”), including the regional franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of New York. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used $8,500,000 in cash generated from operations to fund the acquisition. The assets acquired constitute a business and were accounted for using the fair value acquisition method. The total purchase price was allocated to the assets acquired based on their estimated fair values. The excess of the total purchase price over the preliminary fair value of the identifiable assets acquired was recorded as goodwill. The goodwill recognized for RE/MAX of New York is attributable to expected synergies and projected long term revenue growth. All of the goodwill recognized is tax deductible.  

Purchase Price Allocation

The following table summarizes the preliminary estimated fair value of the assets acquired at the acquisition date (in thousands):

 

 

 

 

Cash and cash equivalents

$

131

Franchise agreements

 

5,100

Other assets

 

350

Goodwill

 

2,919

Total purchase price

$

8,500

The regional franchise agreements acquired were preliminarily valued using an income approach and are being amortized over the remaining contractual term of approximately eleven years using the straight-line method. The preliminary estimated fair value of the assets acquired is subject to adjustments based on the Company’s final assessment of the fair values of the franchise agreements and other assets, which are the acquired assets with the highest likelihood of changing upon finalization of the valuation process. 

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 RE/MAX of New York and RE/MAX of Alaska had occurred on January 1, 2015. The historical financial information has been adjusted to give effect to events that are (1) directly attributed to the acquisitions, (2) factually supportable and (3) expected to have a continuing impact on the combined results, including 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 

 

June 30, 

 

2016

    

2015

 

2016

    

2015

 

(In thousands, except per share amounts)

Total revenue

$

43,441

 

$

44,849

 

$

86,741

 

$

89,548

Net income attributable to RE/MAX Holdings, Inc.

$

7,077

 

$

5,020

 

$

12,147

 

$

7,804

Basic earnings per common share

$

0.40

 

$

0.41

 

$

0.69

 

$

0.65

Diluted earnings per common share

$

0.40

 

$

0.40

 

$

0.69

 

$

0.63

 

17


 

Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Dispositions

Disposition of STC Northwest, LLC d/b/a RE/MAX Northwest Realtors

On January 20, 2016, the Company sold certain operating assets and liabilities related to three owned brokerage offices located in the U.S., of STC Northwest, LLC d/b/a RE/MAX Northwest Realtors, a wholly owned subsidiary of the Company. The Company recognized a loss on the sale of the assets and the liabilities transferred of approximately $90,000 during the first quarter of 2016, which is reflected in “(Gain) loss on sale or disposition of assets, net” in the accompanying Condensed Consolidated Statements of Income. In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue.

Disposition of Sacagawea, LLC d/b/a RE/MAX Equity Group

On December 31, 2015, the Company sold certain operating assets and liabilities related to 12 owned brokerage offices located in the U.S., of Sacagawea, LLC d/b/a RE/MAX Equity Group, a wholly owned subsidiary of the Company. The Company recognized a gain on the sale of the assets of approximately $2,794,000 during the fourth quarter of 2015, which is reflected in “(Gain) loss on sale or disposition of assets, net” in the Consolidated Statements of Income included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue.

Disposition of RB2B, LLC d/b/a RE/MAX 100

On April 10, 2015, the Company sold certain operating assets and liabilities related to six owned brokerage offices located in the U.S., of RB2B, LLC d/b/a RE/MAX 100, a wholly owned subsidiary of the Company. The Company recognized a gain on the sale of the assets and the liabilities transferred of $615,000 during the second quarter of 2015, which is reflected in “(Gain) loss on sale or disposition of assets, net” in the Consolidated Statements of Income included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue.

 

 

6. Intangible Assets and Goodwill

The following table provides the components of the Company’s intangible assets, other than goodwill (in thousands, except weighted average amortization period in years):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Weighted

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Average

 

As of June 30, 2016

 

As of December 31, 2015

 

 

Amortization

 

Initial

 

Accumulated

 

Net

 

Initial

 

Accumulated

 

Net

 

 

Period

 

Cost

 

Amortization

 

Balance

 

Cost

 

Amortization

 

Balance

Franchise agreements

 

12.7

 

$

168,067

 

$

(107,474)

 

$

60,593

 

$

162,438

 

$

(100,499)

 

$

61,939

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software (a)

 

3.1

 

$

11,759

 

$

(6,843)

 

$

4,916

 

$

10,885

 

$

(7,325)

 

$

3,560

Trademarks

 

14.4

 

 

3,014

 

 

(1,688)

 

 

1,326

 

 

2,985

 

 

(1,604)

 

 

1,381

Total other intangible assets

 

6.4

 

$

14,773

 

$

(8,531)

 

$

6,242

 

$

13,870

 

$

(8,929)

 

$

4,941

(a)

As of June 30, 2016 and December 31, 2015, capitalized software development costs of $4,057,000 and $3,165,000, respectively, were recorded in “Other intangible assets” in the accompanying Condensed Consolidated Balance Sheets. As of these dates, the associated information technology infrastructure projects were not complete and ready for their intended use and thus were not subject to amortization.

 

18


 

Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Amortization expense for the three months ended June 30, 2016 and 2015 was $3,656,000 and $3,549,000, respectively.

Amortization expense for the six months ended June 30, 2016 and 2015 was $7,170,000 and $7,098,000, respectively.

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

 

 

 

 

 

 

As of June 30:

    

 

 

Remainder of 2016

 

$

7,641

2017

    

 

12,054

2018

 

 

8,438

2019

 

 

7,997

2020

 

 

6,865

Thereafter

 

 

23,840

 

 

$

66,835

 

During 2015, the Company performed its annual assessment of goodwill, and the fair values of the Company’s reporting units significantly exceeded their respective carrying values. No interim indicators of impairment have been identified. The following table presents changes to goodwill for the six months ended June 30, 2016 (in thousands):

 

 

 

 

 

 

Balance, January 1, 2016

    

$

71,871

Goodwill recognized in acquisition

 

 

3,890

Effect of changes in foreign currency exchange rates

 

 

216

Balance, June 30, 2016

 

$

75,977

 

 

 

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30, 

 

December 31, 

 

 

2016

 

2015

Accrued payroll and related employee costs (a)

 

$

5,694

 

$

8,040

Accrued property taxes

 

 

834