Updates financial outlook
Third quarter highlights:
- Revenues up 34%
- EBITDA up 29%
- Adjusted EPS up 32%
TORONTO, Jan. 29 /CNW/ - FirstService Corporation (TSX: FSV; Nasdaq: FSRV; preferred shares - TSX: FSV.PR.U) today reported results for its third quarter ended December 31, 2007. All amounts are in US dollars.
Third quarter revenues were $502.2 million, an increase of 34% relative to the same period last year. EBITDA (see definition and reconciliation below) increased 29% to $35.4 million. Adjusted diluted earnings per common share from continuing operations (see definition and reconciliation below) were up 32% to $0.29 for the quarter, versus $0.22 in the prior year period, adjusting for the $0.08 per common share pro forma impact of the preferred dividends on prior period results.
For the nine months ended December 31, 2007, revenues were $1.349 billion, an increase of 30% relative to the same period last year. EBITDA (see definition and reconciliation below) increased 28% to $126.5 million. Adjusted diluted earnings per common share from continuing operations (see definition and reconciliation below) were up 27% to $1.33 for the nine months, versus $1.05 in the prior year period, adjusting for the $0.14 per common share pro forma impact of the preferred dividends on prior period results.
"Our core operations in Commercial Real Estate, Property Management and Integrated Security segments generated solid results during our third quarter, while our Property Improvement segment delivered an extremely strong performance primarily from newly acquired Field Asset Services, one of North America's leading players in the foreclosure servicing business," said Jay S. Hennick, Founder and Chief Executive Officer of FirstService Corporation. "Given current market conditions, our new capability of managing foreclosed residential properties for large US financial institutions and residential mortgage service companies has given us another strong growth engine in an otherwise challenging US economy."
About FirstService Corporation
------------------------------
FirstService is a leader in the rapidly growing property services sector, providing services in the following four areas: commercial real estate; residential property management; integrated security and property improvement services. Industry-leading service platforms include: Colliers International, the third largest global player in commercial real estate; FirstManagement Partners, the largest manager of residential properties in North America; FirstService Security, the fifth largest integrated security company in North America; and The Franchise Company, the second largest property improvement services organization in North America.
FirstService is a diversified property services company with more than US$1.7 billion in annualized revenues and more than 16,000 employees worldwide. More information about FirstService is available at www.firstservice.com.
Segmented Quarterly Results
---------------------------
Revenues in Commercial Real Estate Services totalled $253.7 million for the quarter, an increase of 34%. Internal growth was 14%, due primarily to robust brokerage activity in the Asia Pacific and Central European markets, and 7% attributable to foreign exchange. The balance of the revenue growth was the result of acquisitions, including those completed during the quarter. Third quarter EBITDA was $14.6 million, up 7% versus $13.6 million in the year-ago period. EBITDA was impacted by a non-cash mark-to-market loss of $4.3 million recorded at the end of the quarter on interest rate derivatives used to hedge fixed-rate commercial first mortgages. Excluding the impact of the mark-to-market loss, third quarter EBITDA in this segment would have been $18.9 million, up 39% versus the year-ago period.
Residential Property Management revenues increased to $126.0 million for the quarter, 24% higher than in the prior year period. Internal growth of 8% was primarily attributable to property management contract wins in various markets, particularly Florida and the Southwest. The balance of revenue growth resulted from acquisitions in the California and Texas markets completed during the first quarter. EBITDA for the quarter was $10.1 million, up 19% from $8.5 million one year ago.
Revenues in Property Improvement Services totalled $67.3 million, an increase of 90% over the prior year period, primarily attributable to the October 2007 acquisition of Field Asset Services. EBITDA in the third quarter was $9.8 million, up 147% from $4.0 million last year.
Integrated Security Services revenues in the third quarter were $55.1 million, an increase of 16% relative to the prior year period, with 6% attributable to systems installation activity and 10% due to foreign exchange. Quarterly EBITDA was $3.5 million relative to $4.2 million in the prior year, primarily due to timing.
Quarterly corporate costs were $6.9 million versus $3.5 million recorded in the prior year period, as a result of $3.3 million in additional compensation expense recorded in the quarter to revise stock option measurement dates relating to the period from 1995 to 2006 as described below under "Review of Historical Stock Option Grants".
A comparison of segmented EBITDA to operating earnings is provided below.
Canadian Mortgage Securitization Operations
-------------------------------------------
The Company entered the Canadian mortgage securitization business in 2005 and enjoyed early success generating considerable transaction flow from the Colliers real estate broker channel as well as other borrowers requiring mortgage financing. The nature of this business was to underwrite pools of conventional first mortgages, using capital provided primarily by co-lenders, and then securitize and sell them to investors in the form of mortgage-backed securities.
As previously noted, the Company recorded a $4.3 million non-cash charge in the quarter ($5.8 million year to date) on these operations. This charge relates to interest rate hedges covering fixed rate mortgage assets held by the Company as well as its co-lenders. Due to credit market conditions, there is currently very limited liquidity for commercial mortgage-backed securities. The Company does not expect conditions to improve in the near term. As a result, after the end of the third quarter, the Company decided to wind down these operations. The Company's $21.5 million in mortgage assets, which are secured by high quality commercial properties, are expected to be sold as market conditions permit. The cost to wind down these operations, other than future volatility in the value of the hedges, is not expected to be significant.
Review of Historical Stock Option Grants
----------------------------------------
Following receipt of an inquiry from its primary securities regulator, the Company's senior management and Board of Directors conducted a comprehensive review of historical stock option granting processes and the related accounting for the 13 year period from 1995 to 2007. In this regard, the Board established a Special Committee of independent directors to complete the review and make recommendations to the Board. The Special Committee was assisted in its review by independent legal and accounting advisors in both Canada and the United States.
The Company's stock option plans require that the exercise price of stock option grants to be no less than the closing market price of the Company's shares on the Toronto Stock Exchange on the effective date of the grant, and also contain a self-amending mechanism should any term of a stock option grant be found not to be in compliance. Management's historical practice was to grant stock options effective on the date which was the lowest monthly trading price on either the TSX or the NASDAQ in the month immediately preceding the date of the grant. The Special Committee concluded that this practice was applied consistently throughout the relevant period and was not used selectively to benefit any one group or individual. The Special Committee also concluded that it did not find any intentional or other wrongdoing on the part of any director, senior officer or employee of the Company.
The Special Committee found that the practice followed by the Company was not accounted for correctly and recommended that the Company revise the measurement dates of certain option grants for accounting purposes. With regard to options granted from 1995 to 2006, the Company revised the measurement dates and recorded a one-time, non-material and non-cash incremental compensation expense in the amount of $3.3 million. Since the amount was not material to the current period or any prior period, the Company determined that restatement was not required. In August 2006, in connection with its documentation and testing of internal controls, the Company changed its process with regard to stock option grants. The Special Committee did not identify any deficiencies occurring after that date.
Financial Outlook
-----------------
Based on the results for the nine months ended December 31, 2007, FirstService is updating the outlook for fiscal 2008 issued on October 30, 2007. The Company will be providing a preliminary outlook for its fiscal year ending March 31, 2009 at a later date subsequent to completion of its budgeting process.
(in millions of US dollars, except
per share amounts) Year ending March 31, 2008
Updated Previous
------- --------
Revenues $1,700 - $1,750 $1,625 - $1,725
EBITDA(1) $145 - $155 $149 - $159
Adjusted EPS(2) $1.30 - $1.40 $1.37 - $1.49
Notes:
1. The updated EBITDA outlook includes the estimated impact of the non-
cash mark-to-market loss on interest rate hedges used to hedge fixed-
rate commercial mortgages held for resale. As of December 31, 2007,
this impacted EBITDA and EPS by $5.8 million and $0.10, respectively
for the year-to-date period and by $4.3 million and $0.07,
respectively for the quarter. The previous outlook assumed that a
gain upon securitization would be realized before March 31, 2008,
offsetting any hedging loss. Consistent with prior reporting of
EBITDA, the amounts are before stock-based compensation, and exclude
the additional compensation expense of $3.3 million recorded as a
result of the Company's review of historical stock option grants.
2. Adjusted EPS refers to adjusted diluted earnings per share from
continuing operations, before considering (i) backlog amortization
and (ii) the $0.11 per share impact of the additional $3.3 million of
stock-based compensation expense recorded during the third quarter.
See definition below.
3. The updated outlook assumes (i) no further acquisitions or
divestitures completed during the outlook period and (ii) current
economic conditions in the markets in which the Company operates
remaining unchanged and in particular the market for commercial real
estate services. Actual results may differ materially. The Company
undertakes no obligation to continue to update this information.
Conference Call
---------------
FirstService will be holding a conference call on Tuesday, January 29, 2008 at 11:00 am Eastern Time to discuss results for the third quarter. The call will be simultaneously web cast and can be accessed live or after the call at www.firstservice.com in the "Investor Relations / News and Media" section.
Forward-looking Statements
--------------------------
This press release includes forward-looking statements. Forward-looking statements include the Company's financial performance outlook and statements regarding goals, beliefs, strategies, objectives, plans or current expectations. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Such factors include: (i) general economic and business conditions, which will, among other things, impact demand for the Company's services and the cost of providing services; (ii) the ability of the Company to implement its business strategy, including the Company's ability to acquire suitable acquisition candidates on acceptable terms and successfully integrate newly acquired businesses with its existing businesses; (iii) changes in or the failure to comply with government regulations; and (iv) other factors which are described in the Company's filings with the Ontario Securities Commission.
FIRSTSERVICE CORPORATION
Condensed Consolidated Statements of Earnings
---------------------------------------------
(in thousands of US dollars, except per share amounts)
(unaudited)
Three months ended Nine months ended
December 31 December 31
------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenues $ 502,152 $ 374,757 $ 1,349,194 $ 1,038,942
Cost of revenues 297,800 247,044 813,327 669,275
Selling, general and
administrative expenses 173,271 100,897 416,965 273,515
Depreciation and
amortization other than
backlog 10,640 6,592 25,004 16,554
Amortization of
brokerage backlog (1) 1,615 2,720 4,133 6,870
------------ ------------ ------------ ------------
Operating earnings 18,826 17,504 89,765 72,728
Interest expense, net 4,172 2,395 10,841 7,702
Other income (1,327) (2,546) (3,821) (4,929)
------------ ------------ ------------ ------------
15,981 17,655 82,745 69,955
Income taxes 3,609 5,254 25,642 22,962
------------ ------------ ------------ ------------
12,372 12,401 57,103 46,993
Minority interest
share of earnings 4,387 4,644 15,421 13,130
------------ ------------ ------------ ------------
Net earnings from
continuing operations 7,985 7,757 41,682 33,863
Discontinued operations,
net of tax (2) - - 2,078 -
------------ ------------ ------------ ------------
Net earnings before
cumulative effect of
change in accounting
principle 7,985 7,757 43,760 33,863
Cumulative effect of
change in accounting
principle, net of tax (3) - - - (1,353)
------------ ------------ ------------ ------------
Net earnings $ 7,985 $ 7,757 $ 43,760 $ 32,510
Preferred dividends 2,616 - 4,336 -
------------ ------------ ------------ ------------
Net earnings available
to common shareholders $ 5,369 $ 7,757 $ 39,424 $ 32,510
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net earnings per
common share
Basic
Continuing
operations $ 0.18 $ 0.26 $ 1.25 $ 1.14
Discontinued
operations - - 0.07 -
Cumulative effect
of change in
accounting
principle - - - (0.05)
------------ ------------ ------------ ------------
$ 0.18 $ 0.26 $ 1.32 $ 1.09
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted (4)
Continuing
operations $ 0.15 $ 0.25 $ 1.14 $ 1.06
Discontinued
operations - - 0.07 -
Cumulative effect
of change in
accounting
principle - - - (0.04)
------------ ------------ ------------ ------------
$ 0.15 $ 0.25 $ 1.21 $ 1.02
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common
shares outstanding:
(in thousands) Basic 29,905 29,844 29,879 29,899
Diluted 30,466 30,237 30,417 30,338
Net earnings per common
share, adjusted
diluted continuing
operations (5) $ 0.29 $ 0.22 $ 1.33 $ 1.05
------------ ------------ ------------ ------------
Notes to Condensed Consolidated Statements of Earnings
(1) Amortization of short-lived brokerage backlog intangible assets
recognized upon the acquisitions of Commercial Real Estate Services
businesses in the past twelve months. Brokerage backlog represents the
fair value of pending commercial real estate brokerage transactions and
listings as at the acquisition date. Amortization is recorded to coincide
with the completion of the related brokerage transactions.
(2) Reflects gain on the settlement of a liability in connection with the
March 2006 disposal of the Company's Business Services operations.
(3) Cumulative effect of the adoption of SFAS No. 123(R), Share Based
Payment, on April 1, 2006.
(4) Numerators for diluted earnings per share calculations have been
adjusted to reflect dilution from stock options at subsidiaries. The
adjustment for the quarter ended December 31, 2007 was $743 (2006 - $247)
and nine months ended December 31, 2007 was $2,491 (2006 - $1,549).
(5) See "Reconciliation of operating earnings, net earnings and net
earnings per share to adjusted operating earnings, adjusted net earnings
and adjusted net earnings per share" below.
Reconciliation of Operating Earnings, Net Earnings and Net Earnings Per
Share to Adjusted Operating Earnings, Adjusted Net Earnings and Adjusted
Net Earnings Per Share
-------------------------------------------------------------------------
(in thousands of US dollars, except per share amounts)
(unaudited)
The Company is presenting adjusted earnings measures to (i) eliminate the impact of amortization of the short-lived brokerage backlog intangible asset recognized upon the acquisitions of Commercial Real Estate Services businesses within the past twelve months and (ii) eliminate the impact of the incremental compensation expense related to the review of historical stock option grants. In addition, the Company is presenting the pro forma impact of the preferred dividends on comparative periods. The preferred dividend obligation commenced on August 1, 2007 upon the issuance of the Preferred Shares. All of the adjustments are non-cash and are considered "non-GAAP financial measures" under OSC and SEC guidelines. The following tables provide a reconciliation of the adjusted measures:
Three months ended Nine months ended
December 31 December 31
------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Operating earnings $ 18,826 $ 17,504 $ 89,765 $ 72,728
Incremental stock option
expense 3,278 - 3,278 -
Amortization of brokerage
backlog 1,615 2,720 4,133 6,870
------------ ------------ ------------ ------------
Adjusted operating
earnings $ 23,719 $ 20,224 $ 97,176 $ 79,598
------------ ------------ ------------ ------------
Net earnings from
continuing operations $ 7,985 $ 7,757 $ 41,682 $ 33,863
Incremental stock option
expense 3,278 - 3,278 -
Amortization of
brokerage backlog 1,615 2,720 4,133 6,870
Deferred income tax (455) (826) (1,097) (2,321)
Minority interest (195) (320) (507) (746)
------------ ------------ ------------ ------------
Adjusted net earnings
from continuing
operations $ 12,228 $ 9,331 $ 47,489 $ 37,666
------------ ------------ ------------ ------------
Diluted net earnings
per common share
from continuing
operations $ 0.15 $ 0.25 $ 1.14 $ 1.06
Incremental stock
option expense 0.11 - 0.11 -
Amortization of
brokerage backlog,
net of tax 0.03 0.05 0.08 0.13
Pro forma impact of
preferred dividends
on comparative periods - (0.08) - (0.14)
------------ ------------ ------------ ------------
Adjusted diluted net
earnings per common
share from continuing
operations $ 0.29 $ 0.22 $ 1.33 $ 1.05
------------ ------------ ------------ ------------
Reconciliation of EBITDA to Operating Earnings
----------------------------------------------
(in thousands of US dollars)
(unaudited)
EBITDA is defined as net earnings from continuing operations before minority interest share of earnings, income taxes, interest, depreciation and amortization and stock-based compensation expense. The Company uses EBITDA to evaluate operating performance. EBITDA is an integral part of the Company's planning and reporting systems. Additionally, the Company uses multiples of current and projected EBITDA in conjunction with discounted cash flow models to determine its overall enterprise valuation and to evaluate acquisition targets. The Company believes EBITDA is a reasonable measure of operating performance because of the low capital intensity of its service operations. The Company believes EBITDA is a financial metric used by many investors to compare companies, especially in the services industry, on the basis of operating results and the ability to incur and service debt. EBITDA is not a recognized measure of financial performance under United States generally accepted accounting principles (GAAP), and should not be considered as a substitute for operating earnings, net earnings or cash flows from operating activities, as determined in accordance with GAAP. The Company's method of calculating EBITDA may differ from other issuers and accordingly, EBITDA may not be comparable to measures used by other issuers. A reconciliation of EBITDA to operating earnings appears below.
Three months ended Nine months ended
December 31 December 31
------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Operating earnings $ 18,826 $ 17,504 $ 89,765 $ 72,728
Depreciation and
amortization other
than backlog 10,640 6,592 25,004 16,554
Amortization of
brokerage backlog 1,615 2,720 4,133 6,870
------------ ------------ ------------ ------------
31,081 26,816 118,902 96,152
Stock-based compensation
expense 4,346 734 7,598 2,570
------------ ------------ ------------ ------------
EBITDA $ 35,427 $ 27,550 $ 126,500 $ 98,722
------------ ------------ ------------ ------------
Condensed Consolidated Balance Sheets
-------------------------------------
(in thousands of US dollars)
(unaudited)
December 31 March 31
2007 2007
------------ ------------
Assets
------
Cash and cash equivalents $ 102,036 $ 99,038
Restricted cash 9,582 16,930
Accounts receivable 236,478 163,581
Mortgage loans receivable 21,499 13,716
Inventories 35,354 31,768
Other current assets 47,849 37,324
------------ ------------
Current assets 452,798 362,357
Fixed assets 84,113 66,297
Other non-current assets 37,544 41,405
Goodwill and intangibles 485,006 346,939
------------ ------------
Total assets $ 1,059,461 $ 816,998
------------ ------------
------------ ------------
Liabilities and shareholders' equity
------------------------------------
Accounts payable and accrued liabilities $ 280,461 $ 205,529
Other current liabilities 27,949 29,179
Long term debt - current 22,516 22,119
------------ ------------
Current liabilities 330,926 256,827
Long term debt - non-current 308,832 213,030
Other non-current liabilities 10,495 4,876
Deferred income taxes 31,841 29,084
Minority interest 65,206 48,306
Shareholders' equity 312,161 264,875
------------ ------------
Total liabilities and equity $ 1,059,461 $ 816,998
------------ ------------
------------ ------------
Total debt $ 331,348 $ 235,149
------------ ------------
Total debt, net of cash 229,312 136,111
------------ ------------
Condensed Consolidated Statements of Cash Flows
(in thousands of US dollars)
(unaudited)
Three months ended Nine months ended
December 31 December 31
2007 2006 2007 2006
------------ ------------ ------------ ------------
Operating activities
Net earnings from
continuing operations $ 7,985 $ 7,757 $ 41,682 $ 33,863
Items not affecting cash:
Depreciation and
amortization 12,255 9,312 29,137 23,424
Deferred income taxes (1,536) (607) (4,201) (3,941)
Minority interest
share of earnings 4,387 4,644 15,421 13,130
Other 4,324 (849) 7,015 133
Changes in operating
assets and liabilities 9,334 34,912 (17,834) 13,047
------------ ------------ ------------ ------------
Net cash provided by
operating activities 36,749 55,169 71,220 79,656
------------ ------------ ------------ ------------
Investing activities
Acquisitions of
businesses, net of
cash acquired (60,370) (23,953) (136,647) (64,939)
Purchases of fixed
assets, net (10,465) (4,716) (27,668) (15,469)
Other investing
activities 10 5,415 7,418 4,065
Discontinued operations - - (1,036) -
------------ ------------ ------------ ------------
Net cash used in
investing (70,825) (23,254) (157,933) (76,343)
------------ ------------ ------------ ------------
Financing activities
Increase (decrease) in
long-term debt, net 69,653 (353) 95,146 (15,318)
Other financing
activities (6,874) (9,426) (11,810) (17,128)
------------ ------------ ------------ ------------
Net cash provided by
(used in) financing 62,779 (9,779) 83,336 (32,446)
------------ ------------ ------------ ------------
Effect of exchange
rate changes on cash (1,243) (1,799) 6,375 (1,524)
------------ ------------ ------------ ------------
Increase (decrease) in
cash and cash
equivalents 27,460 20,337 2,998 (30,657)
Cash and cash
equivalents, beginning
of period 74,576 116,944 99,038 167,938
------------ ------------ ------------ ------------
Cash and cash
equivalents, end of
period $ 102,036 $ 137,281 $ 102,036 $ 137,281
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Segmented Revenues, EBITDA and Operating Earnings
(in thousands of US dollars)
(unaudited)
Property
Commercial Residential Improve- Integrated
Real Estate Property ment Security Corpo- Consoli-
Services Management Services Services rate dated
----------------------------------------------------------------
Three months
ended December 31
2007
Revenues $ 253,691 $ 125,959 $ 67,299 $ 55,087 $ 116 $ 502,152
EBITDA 14,575 10,100 9,781 3,505 (6,880) 31,081
Stock-based
compensation 4,346
----------
35,427
Operating
earnings 7,294 7,365 8,325 2,797 (6,955) 18,826
2006
Revenues $ 189,972 $ 101,726 $ 35,373 $ 47,610 $ 76 $ 374,757
EBITDA 13,603 8,469 3,957 4,217 (3,430) 26,816
Stock-based
compensation 734
----------
27,550
Operating
earnings 8,721 6,213 2,523 3,544 (3,497) 17,504
Property
Commercial Residential Improve- Integrated
Real Estate Property ment Security Corpo- Consoli-
Services Management Services Services rate dated
----------------------------------------------------------------
Nine months
ended December 31
2007
Revenues $ 637,339 $ 404,452 $ 156,664 $ 150,457 $ 282 $1,349,194
EBITDA 46,716 40,216 35,295 9,811 (13,136) 118,902
Stock-based
compensation 7,598
----------
126,500
Operating
earnings 30,757 32,838 31,367 8,153 (13,350) 89,765
2006
Revenues $ 470,260 $ 316,075 $ 121,066 $ 131,320 $ 221 $1,038,942
EBITDA 37,636 31,655 28,613 8,443 (10,195) 96,152
Stock-based
compensation 2,570
----------
98,722
Operating
earnings 25,443 26,320 24,984 6,383 (10,402) 72,728