rmax_CurrentFolio_10Q

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, 2017.

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, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth 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

 

Emerging growth company

 

 

 

 

 

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

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 31, 2017 was 17,696,991 and 1, respectively.

 

 

 

 


 

Table of Contents

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 June  30, 2017 and December 31, 2016

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and June 30, 2016

4

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and June 30, 2016

5

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2017

6

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and June 30, 2016

7

 

 

 

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

8

 

 

 

 

Item 2. 

 

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

24

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risks

39

 

 

 

 

Item 4. 

 

Controls and Procedures

40

 

 

 

 

 

 

PART II. – OTHER INFORMATION

 

 

 

 

 

Item 1. 

 

Legal Proceedings

41

 

 

 

 

Item 1A. 

 

Risk Factors

41

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

41

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

41

 

 

 

 

Item 5. 

 

Other Information

41

 

 

 

 

Item 6. 

 

Exhibits

42

 

 

 

 

 

 

SIGNATURES

43

 

 

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, 

 

 

    

2017

    

2016

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,317

 

$

57,609

 

Accounts and notes receivable, current portion, less allowances of $6,141 and $5,535, respectively

 

 

20,580

 

 

19,419

 

Income taxes receivable

 

 

2,193

 

 

 —

 

Other current assets

 

 

2,972

 

 

4,186

 

Total current assets

 

 

96,062

 

 

81,214

 

Property and equipment, net of accumulated depreciation of $12,623 and $12,196, respectively

 

 

2,987

 

 

2,691

 

Franchise agreements, net

 

 

99,036

 

 

109,140

 

Other intangible assets, net

 

 

9,332

 

 

9,811

 

Goodwill

 

 

127,081

 

 

126,633

 

Deferred tax assets, net

 

 

102,933

 

 

105,770

 

Other assets, net of current portion

 

 

1,729

 

 

1,894

 

Total assets

 

$

439,160

 

$

437,153

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

344

 

$

855

 

Accounts payable to affiliates

 

 

14

 

 

145

 

Accrued liabilities

 

 

8,034

 

 

13,268

 

Income taxes payable

 

 

52

 

 

379

 

Deferred revenue and deposits

 

 

18,003

 

 

16,306

 

Current portion of debt

 

 

2,350

 

 

2,350

 

Current portion of payable pursuant to tax receivable agreements

 

 

11,390

 

 

13,235

 

Total current liabilities

 

 

40,187

 

 

46,538

 

Debt, net of current portion

 

 

227,551

 

 

228,470

 

Payable pursuant to tax receivable agreements, net of current portion

 

 

85,574

 

 

85,574

 

Deferred tax liabilities, net

 

 

143

 

 

133

 

Other liabilities, net of current portion

 

 

15,741

 

 

15,729

 

Total liabilities

 

 

369,196

 

 

376,444

 

Commitments and contingencies (note 13)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 17,696,991 shares issued and outstanding as of June 30, 2017; 17,652,548 shares issued and outstanding as of December 31, 2016

 

 

 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, 2017 and December 31, 2016

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

447,478

 

 

447,001

 

Retained earnings

 

 

22,828

 

 

16,808

 

Accumulated other comprehensive income (loss), net of tax

 

 

188

 

 

(28)

 

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

 

 

470,496

 

 

463,783

 

Non-controlling interest

 

 

(400,532)

 

 

(403,074)

 

Total stockholders' equity

 

 

69,964

 

 

60,709

 

Total liabilities and stockholders' equity

 

$

439,160

 

$

437,153

 

 

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, 

 

    

2017

    

2016

    

2017

    

2016

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing franchise fees

 

$

23,284

 

$

19,846

 

$

46,249

 

$

38,753

Annual dues

 

 

8,320

 

 

8,046

 

 

16,556

 

 

15,950

Broker fees

 

 

12,555

 

 

10,384

 

 

20,789

 

 

17,585

Franchise sales and other franchise revenue

 

 

4,660

 

 

5,128

 

 

13,454

 

 

13,921

Brokerage revenue

 

 

 —

 

 

 —

 

 

 —

 

 

112

Total revenue

 

 

48,819

 

 

43,404

 

 

97,048

 

 

86,321

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, operating and administrative expenses

 

 

20,637

 

 

18,842

 

 

47,431

 

 

42,074

Depreciation and amortization

 

 

5,397

 

 

3,872

 

 

11,392

 

 

7,593

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

 

 

(12)

 

 

(11)

 

 

(25)

 

 

96

Total operating expenses

 

 

26,022

 

 

22,703

 

 

58,798

 

 

49,763

Operating income

 

 

22,797

 

 

20,701

 

 

38,250

 

 

36,558

Other expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(2,462)

 

 

(2,091)

 

 

(4,816)

 

 

(4,372)

Interest income

 

 

25

 

 

35

 

 

50

 

 

86

Foreign currency transaction gains

 

 

39

 

 

20

 

 

16

 

 

184

Loss on early extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(136)

Total other expenses, net

 

 

(2,398)

 

 

(2,036)

 

 

(4,750)

 

 

(4,238)

Income before provision for income taxes

 

 

20,399

 

 

18,665

 

 

33,500

 

 

32,320

Provision for income taxes

 

 

(4,762)

 

 

(4,285)

 

 

(7,792)

 

 

(7,544)

Net income

 

$

15,637

 

$

14,380

 

$

25,708

 

$

24,776

Less: net income attributable to non-controlling

interest

 

 

8,108

 

 

7,419

 

 

13,266

 

 

12,875

Net income attributable to RE/MAX Holdings,

Inc.

 

$

7,529

 

$

6,961

 

$

12,442

 

$

11,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

per share of Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

$

0.39

 

$

0.70

 

$

0.68

Diluted

 

$

0.42

 

$

0.39

 

$

0.70

 

$

0.67

Weighted average shares of Class A common stock

outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,696,842

 

 

17,636,590

 

 

17,679,936

 

 

17,610,470

Diluted

 

 

17,723,802

 

 

17,668,995

 

 

17,720,564

 

 

17,653,433

Cash dividends declared per share of Class A common stock

 

$

0.18

 

$

0.15

 

$

0.36

 

$

0.30

 

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, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Net income

 

$

15,637

 

$

14,380

 

$

25,708

 

$

24,776

 

Change in cumulative translation adjustment

 

 

368

 

 

 —

 

 

463

 

 

564

 

Other comprehensive income, net of tax

 

 

368

 

 

 —

 

 

463

 

 

564

 

Comprehensive income

 

 

16,005

 

 

14,380

 

 

26,171

 

 

25,340

 

Less: comprehensive income attributable to non-controlling interest

 

 

8,303

 

 

7,419

 

 

13,513

 

 

13,176

 

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

 

$

7,702

 

$

6,961

 

$

12,658

 

$

12,164

 

 

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, 2017

 

17,652,548

 

$

 2

 

 1

 

$

 —

 

$

447,001

 

$

16,808

 

$

(28)

 

$

(403,074)

 

$

60,709

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

12,442

 

 

 —

 

 

13,266

 

 

25,708

Distributions to non-controlling unitholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,971)

 

 

(10,971)

Equity-based compensation expense and related dividend equivalents

 

58,426

 

 

 —

 

 —

 

 

 —

 

 

1,293

 

 

(53)

 

 

 —

 

 

 —

 

 

1,240

Dividends to Class A common stockholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(6,369)

 

 

 —

 

 

 —

 

 

(6,369)

Change in accumulated other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

216

 

 

247

 

 

463

Payroll taxes related to net settled restricted stock units

 

(13,983)

 

 

 —

 

 —

 

 

 —

 

 

(816)

 

 

 —

 

 

 —

 

 

 —

 

 

(816)

Balances, June 30, 2017

 

17,696,991

 

$

 2

 

 1

 

$

 —

 

$

447,478

 

$

22,828

 

$

188

 

$

(400,532)

 

$

69,964

 

 

 

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, 

 

    

2017

    

2016

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

25,708

 

$

24,776

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

 

 

 

 

 

 

Depreciation and amortization

 

 

11,392

 

 

7,593

Bad debt expense

 

 

587

 

 

109

Loss on early extinguishment of debt

 

 

 —

 

 

136

Equity-based compensation expense

 

 

1,293

 

 

1,311

Deferred income tax expense

 

 

2,701

 

 

2,529

Fair value adjustments to contingent consideration

 

 

(170)

 

 

 —

Other, net

 

 

231

 

 

319

Changes in operating assets and liabilities

 

 

(8,801)

 

 

(9,741)

Net cash provided by operating activities

 

 

32,941

 

 

27,032

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property, equipment and software

 

 

(1,290)

 

 

(2,106)

Capitalization of trademark costs

 

 

(33)

 

 

(16)

Acquisitions, net of cash acquired of $0 and $131, respectively

 

 

 —

 

 

(9,869)

Other investing activity, net

 

 

 —

 

 

54

Net cash used in investing activities

 

 

(1,323)

 

 

(11,937)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on debt

 

 

(1,175)

 

 

(13,734)

Distributions paid to non-controlling unitholders

 

 

(10,971)

 

 

(8,912)

Dividends and dividend equivalents paid to Class A common stockholders

 

 

(6,422)

 

 

(5,285)

Payments on capital lease obligations

 

 

(5)

 

 

(51)

Proceeds from exercise of stock options

 

 

 —

 

 

101

Payment of payroll taxes related to net settled restricted stock units

 

 

(816)

 

 

(360)

Net cash used in financing activities

 

 

(19,389)

 

 

(28,241)

Effect of exchange rate changes on cash

 

 

479

 

 

508

Net increase (decrease) in cash and cash equivalents

 

 

12,708

 

 

(12,638)

Cash and cash equivalents, beginning of year

 

 

57,609

 

 

110,212

Cash and cash equivalents, end of period

 

$

70,317

 

$

97,574

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

4,904

 

$

4,251

Net cash paid for income taxes

 

$

7,564

 

$

5,957

Schedule of non-cash investing and financing activities:

 

 

 

 

 

 

Note receivable received as consideration for sale of brokerage operations assets

 

$

 —

 

$

150

Capital lease for property and equipment

 

 

 —

 

 

33

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

 

$

199

 

$

625

 

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.  On October 7, 2013, RE/MAX Holdings completed an initial public offering (the “IPO”) of its shares of Class A common stock.  RE/MAX Holdings’ only business is to act as the sole manager of RMCO, LLC (“RMCO”).  As of June 30, 2017, RE/MAX Holdings owns 58.49% of the common membership units in RMCO, while RIHI, Inc. (“RIHI”) owns the remaining 41.51% of common membership units in RMCO. RE/MAX Holdings and its consolidated subsidiaries, including RMCO, are referred to hereinafter as the “Company.”    

The Company is a franchisor in the real estate industry, franchising real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages within the United States (“U.S.”) under the Motto Mortgage brand. RE/MAX, founded in 1973, has over 115,000 agents operating in over 7,000 offices and a presence in more than 100 countries and territories. Motto Mortgage (“Motto”), founded in 2016, is the first nationally franchised mortgage brokerage in the U.S.  The Company sold certain operating assets and liabilities of its owned brokerage offices during 2015 and the first quarter of 2016 to existing RE/MAX franchisees (See Note 5, Acquisitions and Dispositions, for a discussion of the 2016 sales). Since then, the Company is 100% franchised, no longer operates any real estate brokerage offices and no longer recognizes brokerage revenue (which consisted of fees assessed by the Company’s owned brokerages for services provided to their affiliated real estate agents).  While the Company operates through both RE/MAX and Motto, due to the immateriality of revenue earned by Motto, the Company discloses only one reportable segment.

The Company’s revenue is derived as follows:

    Continuing franchise fees which consist of fixed contractual fees paid monthly by regional franchise owners and franchisees based on the number of RE/MAX agents in the respective franchised region or office and the number of Motto offices (no significant continuing franchise fees were generated by Motto during the periods presented); 

    Annual dues from RE/MAX agents; 

    Broker fees, which consist of fees paid by regional RE/MAX 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 RE/MAX and Motto franchises, regional franchise fees, preferred marketing arrangements, approved supplier programs and event-based revenue from training and other programs; and 

    Brokerage revenue prior to the sale of the Company’s brokerage offices during 2015 and the first quarter of 2016.  

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated balance sheet at December 31, 2016, which was derived from the audited consolidated financial statements at that date, and the unaudited interim condensed consolidated financial statements 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

8


 

Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2017 and December 31, 2016, the results of its operations and comprehensive income for the three and six months ended June 30, 2017 and 2016, cash flows for the six months ended June 30, 2017 and 2016, and changes in its stockholders’ equity for the six months ended June 30, 2017. Interim results may not be indicative of full year performance. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

During 2016, the Company completed the acquisitions of six independent regions. Their results of operations, cash flows and financial positions are included in the consolidated financial statements from their respective dates of acquisition. See Note 5, Acquisitions and Dispositions, for additional information.

Reclassifications

 

Certain items in the accompanying condensed consolidated financial statements as of December 31, 2016 have been reclassified to conform to the current year’s presentation. These reclassifications did not affect the Company’s consolidated results of operations.

 

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.  Actual results could differ from those estimates.

Principles of Consolidation

As of June 30, 2017, RE/MAX Holdings owns 58.49% of the common membership units 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.

New Accounting Pronouncements Not Yet Adopted

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. ASU 2017-04 is effective for annual and interim impairment tests beginning January 1, 2020 for the Company and is required to be adopted using a prospective approach. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements and related disclosures.

Also in January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies when transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years, and interim reporting periods within those years, beginning January 1, 2018 for the Company and is required to be adopted using a prospective approach. Early adoption is permitted for transactions not previously reported in issued financial statements. The Company has not yet determined the effect of the standard on its consolidated financial statements and related disclosures.

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies classification for certain cash receipts and cash payments on the consolidated statement of cash flow.  ASU 2016-15 is effective for fiscal years, and interim reporting periods within those years, beginning January 1, 2018 for the Company. Early adoption is permitted in any interim or annual reporting period. The standard requires a retrospective transition method for each period presented. Under the new guidance, the contingent consideration payments related to the purchase of Full House Mortgage Connection, Inc. (“Full House”) will be classified as financing outflows up to the $6.3 million acquisition date fair value and any cash payments paid in excess of the acquisition date fair value will be classified as operating outflows. (See Note 5 Acquisitions and Dispositions).  The Company expects no other material impact on its financial statements and related disclosures upon the adoption of this standard.

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 required to be adopted by the Company on January 1, 2019. 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with several subsequent amendments, 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 Company will adopt this standard on January 1, 2018.  The Company expects the adoption of the new guidance to change the timing of recognition of franchise sales and franchise renewal revenue. Currently the Company recognizes revenue upon completion of a sale or renewal. Under the new guidance, franchise sales and renewal revenue, which are included in Franchise Sales and Other Franchise Revenue in the Consolidated Statement of Income, will be recognized over the contractual term of the franchise agreement. The Company currently anticipates that it will utilize the full retrospective transition method, however, this expectation may change following the completion of its evaluation of the impact of this guidance on its consolidated financial statements and related disclosures.

10


 

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 operates and controls all of the business affairs of RMCO. The ownership of the common units in RMCO is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2017

 

2016

 

 

    

Shares

    

Ownership %

    

Shares

    

Ownership %

 

Non-controlling unitholders ownership of common units in RMCO

 

12,559,600

 

41.51

%

12,559,600

 

41.57

%

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

 

17,696,991

 

58.49

%

17,652,548

 

58.43

%

Total common units in RMCO

 

30,256,591

 

100.00

%

30,212,148

 

100.00

%

The weighted average ownership percentages for the applicable reporting periods are used to calculate the net income attributable to RE/MAX Holdings.  A reconciliation of “Income before provision for income taxes” to “Net Income attributable to RE/MAX Holdings, Inc.” and “Net Income attributable to non-controlling interest” in the accompanying Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands, except for percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

2017

 

2016

 

RE/MAX Holdings, Inc.

 

Non-controlling interest

 

Total

 

 

RE/MAX Holdings, Inc.

 

Non-controlling interest

 

Total

 

Weighted average ownership percentage of RMCO (a)

 

58.49

%

 

41.51

%

 

100.00

%

 

 

58.42

%

 

41.58

%

 

100.00

%

Income before provision for income taxes

$

11,959

 

$

8,440

 

$

20,399

 

 

$

10,900

 

$

7,765

 

$

18,665

 

Provision for income taxes (b)(c)

 

(4,430)

 

 

(332)

 

 

(4,762)

 

 

 

(3,939)

 

 

(346)

 

 

(4,285)

 

Net income

$

7,529

 

$

8,108

 

$

15,637

 

 

$

6,961

 

$

7,419

 

$

14,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

2017

 

2016

 

RE/MAX Holdings, Inc.

 

Non-controlling interest

 

Total

 

 

RE/MAX Holdings, Inc.

 

Non-controlling interest

 

Total

 

Weighted average ownership percentage of RMCO (a)

 

58.47

%

 

41.53

%

 

100.00

%

 

 

58.37

%

 

41.63

%

 

100.00

%

Income before provision for income taxes

$

19,583

 

$

13,917

 

$

33,500

 

 

$

18,865

 

$

13,455

 

$

32,320

 

Provision for income taxes (b)(c)

 

(7,141)

 

 

(651)

 

 

(7,792)

 

 

 

(6,964)

 

 

(580)

 

 

(7,544)

 

Net income

$

12,442

 

$

13,266

 

$

25,708

 

 

$

11,901

 

$

12,875

 

$

24,776

 


(a)    The weighted average ownership percentage of RMCO differs slightly from the allocation of income before provision for income taxes between RE/MAX Holdings and the non-controlling interest as there are certain relatively insignificant expenses recorded at RE/MAX Holdings. 

(b)    The provision for income taxes attributable to RE/MAX Holdings is primarily comprised of U.S. federal and state income taxes on its proportionate share of the pass-through income from RMCO.  However, it also includes its share of 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. 

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RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

(c)    The provision for income taxes attributable to the non-controlling interest represents its share of taxes imposed on RE/MAX, LLC related primarily to tax liabilities in certain foreign jurisdictions.

Distributions and Other Payments to Non-controlling Unitholders

 

Under the terms of RMCO’s fourth amended and restated limited liability company operating agreement (the “New RMCO, LLC Agreement”), RMCO makes cash distributions to non-controlling unitholders.  The distributions paid or payable to or on behalf of non-controlling unitholders under the New RMCO, LLC Agreement are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 

 

 

2017

 

2016

Tax and other distributions

 

$

6,450

 

$

5,144

Dividend distributions

 

 

4,521

 

 

3,768

Total distributions to non-controlling unitholders

 

$

10,971

 

$

8,912

On August 2, 2017, the Company declared a distribution to non-controlling unitholders of $2,261,000, which is payable on August 30, 2017. 

 

Payments Pursuant to the Tax Receivable Agreements

As of June 30, 2017, the Company reflected a total liability of $96,964,000 representing the payments due to RIHI and Oberndorf Investments LLC (“Oberndorf”) under the terms of the tax receivable agreements (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, 2017, the Company estimates that amounts payable pursuant to the TRAs within the next 12-month period will be approximately $11,390,000, of which $2,623,000 is related to RE/MAX Holdings’ 2014 federal and state tax returns, $2,705,000 is related to RE/MAX Holdings’ 2015 federal and state tax returns and the remainder is related to RE/MAX Holdings’ 2016 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 as well as the amount of the specified deductions subject to the TRAs which were realized by RE/MAX Holdings in its 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 85% is owed as a current TRA obligation (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 $1,931,000 and $1,344,000 pursuant to the terms of the TRAs during the six months ended June 30, 2017 and 2016, respectively.

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.

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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, 

 

    

2017

    

2016

    

2017

    

2016

Numerator

 

 

 

 

 

 

 

 

   

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

 

$

7,529

 

$

6,961

 

$

12,442

 

$

11,901

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

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,696,842

 

 

17,636,590

 

 

17,679,936

 

 

17,610,470

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

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,696,842

 

 

17,636,590

 

 

17,679,936

 

 

17,610,470

Add dilutive effect of the following:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 —

 

 

4,360

 

 

 —

 

 

10,047

Restricted stock units

 

 

26,960

 

 

28,045

 

 

40,628

 

 

32,916

Weighted average shares of Class A common stock outstanding, diluted

 

 

17,723,802

 

 

17,668,995

 

 

17,720,564

 

 

17,653,433

Earnings per share of Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.43

 

$

0.39

 

$

0.70

 

$

0.68

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

 

$

0.42

 

$

0.39

 

$

0.70

 

$

0.67

There were no anti-dilutive shares for the three and six months ended June 30, 2017 and 2016.  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 each of the three months ended March 31, 2017 and June 30, 2017, the Company’s Board of Directors declared a quarterly dividend of $0.18 per share on all outstanding shares of Class A common stock, or $6,369,000 in total dividends.  Of this amount, $3,184,000 was paid on March 22, 2017 and $3,185,000 was paid on May 31, 2017.  The Company made corresponding distributions to non-controlling unitholders of $2,261,000 on each of March 22, 2017 and May 31, 2017.  During both the three months ended March 31, 2016 and June 30, 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, 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 each of March 23, 2016 and June 2, 2016.  On August 2, 2017, the Company’s Board of Directors declared a quarterly dividend of $0.18 per share on all outstanding shares of Class A common stock, which is payable on August 30, 2017 to shareholders of record at the close of business on August 16, 2017. 

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

5. Acquisitions and Dispositions

Acquisitions

RE/MAX of Georgia, Inc., RE/MAX of Kentucky/Tennessee, Inc. and RE/MAX of Southern Ohio, Inc.

On December 15, 2016, RE/MAX, LLC acquired certain assets of RE/MAX of Georgia, Inc. (“RE/MAX of Georgia”), RE/MAX of Kentucky/Tennessee, Inc. (“RE/MAX of Kentucky/Tennessee”), and RE/MAX of Southern Ohio, Inc. (“RE/MAX of Southern Ohio”), collectively (“RE/MAX Regional Services”) including the regional franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the states of Georgia, Kentucky and Tennessee and in Southern Ohio for cash consideration of $50,400,000. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company funded the acquisition by refinancing its 2013 Senior Secured Credit Facility (See Note 8, Debt) and using cash from operations.

RE/MAX of New Jersey, Inc.

On December 1, 2016, RE/MAX, LLC acquired certain assets and assumed certain liabilities of RE/MAX of New Jersey, Inc. (“RE/MAX of New Jersey”), including the regional franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of New Jersey for cash consideration of $45,000,000. RE/MAX, LLC acquired these assets and liabilities in order to expand its owned and operated regional franchising operations. The Company used cash generated from operations to fund the acquisition.

Full House Mortgage Connection, Inc.

Motto Franchising, LLC (“Motto Franchising”), a wholly-owned subsidiary of RE/MAX, LLC, was formed and developed to franchise mortgage brokerages. On September 12, 2016, Motto Franchising acquired certain assets of Full House, a franchisor of mortgage brokerages that created concepts used to develop Motto, for initial cash consideration of $8,000,000. Motto Franchising, as a franchisor, grants each franchisee a license to use the Motto Mortgage brand, trademark, promotional and operating materials and concepts. The Company used cash generated from operations to initially fund the acquisition. Additional cash consideration may be required based on future revenues generated. The contingent purchase consideration and its subsequent valuation is more fully described in Note 9, Fair Value Measurements

The following table summarizes the consideration at acquisition (in thousands):

 

 

 

Cash consideration

$

8,000

Contingent purchase consideration (See Note 9)

 

6,300

Total purchase price

$

14,300

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 for cash consideration of $1,500,000. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used cash generated from operations to fund the acquisition.

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 for cash consideration of $8,500,000. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used cash generated from operations to fund the acquisition.

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Table of Contents

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The following table summarizes the allocation of the purchase price to the fair value of assets acquired and liabilities assumed for the aforementioned acquisitions (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RE/MAX Regional Services(a)

 

 

RE/MAX of New Jersey(a)

 

 

Full House

 

 

RE/MAX of Alaska

 

 

RE/MAX of New York

 

 

Total

Cash and cash equivalents

 

$

 -

 

$

335

 

$

 -

 

$

 -

 

$

131

 

$

466

Franchise agreements

 

 

28,000

 

 

28,200

 

 

 -

 

 

529

 

 

5,000

 

 

61,729

Non-compete agreement

 

 

 -

 

 

 -

 

 

2,500

 

 

 -

 

 

 -

 

 

2,500

Other assets

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

340

 

 

340

Goodwill

 

 

22,400

 

 

16,800

 

 

11,800

 

 

971

 

 

3,029

 

 

55,000

Other liabilities

 

 

 -

 

 

(335)

 

 

 -

 

 

 -

 

 

 -

 

 

(335)

Total purchase price

 

$

50,400

 

$

45,000

 

$

14,300

 

$

1,500

 

$

8,500

 

$

119,700


(a)    Purchase price allocation remains preliminary.

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 Regional Services, RE/MAX of New Jersey, Full House, RE/MAX of Alaska and RE/MAX of New York had occurred on January 1, 2016. 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 (in thousands, except per share information).

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 2016

 

June 30, 2016

Total revenue

$

46,309

 

$

92,293

Net income attributable to RE/MAX Holdings, Inc. (a)

$

7,058

 

$

10,965

Basic earnings per common share

$

0.40

 

$

0.62

Diluted earnings per common share

$

0.40

 

$

0.62


(a)

Six months ended June 30, 2016 includes the net impact of $1.0 million in professional fees and debt extinguishment costs incurred related to the amendment of the Company’s credit facility.  See Note 8, Debt