RE/MAX Holdings Reports Third Quarter 2014 Results

Third Quarter 2014 Highlights
(As compared to the third quarter 2013 unless otherwise noted)

  • Agent count of 97,647, up 5.3%
  • Revenue of $44.2 million, up 9.7%
  • Adjusted EBITDA1 of $23.4 million, up 5.9%
  • Adjusted EBITDA1 margin of 52.8%, down from 54.8%
  • Adjusted basic and diluted earnings per share ("EPS") of $0.44 and $0.43, respectively  
  • Announced quarterly dividend of $0.0625 per share of Class A common stock

DENVER - Nov. 13, 2014 // PRNewswire // - RE/MAX Holdings, Inc. (the "Company" or "RE/MAX") (NYSE: RMAX), one of the world's leading franchisors of real estate brokerage services, today announced operating results for the third quarter ended September 30, 2014.

"Our continued efforts to bring value to our agents and brokers, resulted in strong agent gain in the U.S. and across our network during the quarter," stated Margaret Kelly, Chief Executive Officer of RE/MAX. "While the housing market continues to be mixed, our business fundamentals remain solid. As a result, we expect to deliver agent count and revenue at the high end of our full year outlook and we are improving our expense and Adjusted EBITDA margin estimates for the full year. We continue to direct our resources to the opportunities that we believe will allow us to grow over the long-term."

Third Quarter 2014 Operating Results

Agent Count

Total agent count grew by 4,916 agents to 97,647 agents or 5.3% compared to the third quarter of 2013. In the United States ("U.S."), agent count increased by 2,959 agents to 57,181 agents or 5.5% compared to the prior year quarter. In Canada, agent count increased by 84 agents to 19,107 agents or 0.4% compared to the prior year quarter. Outside the U.S. and Canada, agent count increased by 1,873 agents to 21,359 agents or 9.6% compared to the prior year quarter. For the nine months ended September 30, 2014, the Company grew total agent count by 4,419 agents or 4.7%.

Revenue

RE/MAX generated revenue of $44.2 million during the third quarter of 2014, a 9.7% increase compared to $40.3 million for the same period in 2013, driven by an increase in agent count and incremental revenue from the Southwest and Central Atlantic regions acquired in October 2013. Recurring revenue streams, which include continuing franchise fees and annual dues, accounted for 59.3% of revenues in the third quarter of 2014 compared to 58.4% in the prior year quarter.

Revenue from continuing franchise fees was $18.5 million, up $2.4 million or 15.1% over the prior year quarter primarily due to growth in agent count and incremental revenue as a result of the acquisition of the Southwest and Central Atlantic regions.

Revenue from annual dues was $7.7 million, up $0.2 million or 3.2% due to an increase in total agent count of 4,916 from the prior year quarter, of which 3,043 agents were located in the U.S. and Canada, and the January 1, 2014 increase in annual dues membership fees for the Company's U.S. and Canadian agents.

Revenue from broker fees was $8.3 million, up $1.1 million or 14.9% compared to the prior year quarter. The increase was driven by growth in agent count and incremental revenue that resulted from the acquisition of the Southwest and Central Atlantic regions.

Franchise sales and other franchise revenue was $5.5 million, up $0.4 million or 7.8% compared to the prior year quarter primarily due to increased revenue associated with regional and national network related events and increased franchise revenue from office sales in the U.S. and Canada.

Brokerage revenue, which principally represents fees assessed by the Company's owned brokerages for services provided to their affiliated real estate agents, was $4.3 million, a decrease of $0.2 million or 4.8% from the prior year quarter. The decrease was due to a reduction in the number of closed transaction sides and home sales volume at the Company's owned brokerage offices.

Operating Expenses

Total operating expenses were $24.3 million in the third quarter of 2014, a decrease of $1.4 million or 5.6% compared to the prior year quarter. Selling, operating and administrative expenses were $20.6 million, down $1.5 million or 7.0% from the prior year quarter. Selling, operating and administrative expenses were 46.5% of revenue in the third quarter of 2014 compared to 54.8% in the prior year quarter. The reduction in operating expenses is primarily due to lower professional fees compared to the prior year quarter due to costs incurred in connection with the Company's initial public offering ("IPO").

Adjusted EBITDA

Adjusted EBITDA margin was 52.8% for the third quarter of 2014 compared to 54.8% in the prior year quarter. Adjusted EBITDA was $23.4 million in the third quarter of 2014, up 5.9% or $1.3 million from the prior year quarter. The increase in Adjusted EBITDA was largely driven by revenue growth attributable to an increase in agent count and incremental contributions from the acquired Southwest and Central Atlantic regions. The continued weakening of the Canadian dollar against the U.S. dollar and the effect of foreign currency transaction losses primarily related to cash held in Canadian dollars decreased Adjusted EBITDA margin by approximately 240 basis points. A reconciliation of Adjusted EBITDA to net income is included in Table 5.

Net Income

Reported net income was $14.1 million for the third quarter of 2014, an increase of $6.4 million or 82.6% compared to the prior year quarter. The increase was primarily due to higher operating income and lower interest expense as a result of the Company's 2013 debt refinancing, partially offset by losses associated with foreign currency transactions and a higher provision for income taxes.

Adjusted net income2 was $12.9 million for the third quarter 2014, an increase of $2.8 million or 27.3% compared to the prior year quarter. Adjusted basic and diluted EPS were $0.44 and $0.43 for the third quarter of 2014, respectively, compared to $0.35 and $0.34 for the third quarter of 2013, respectively.

Net income attributable to RE/MAX Holdings, Inc. was $4.3 million for the third quarter of 2014. This amount excludes net income attributable to non-controlling interest. Reported basic and diluted EPS attributable to RE/MAX Holdings, Inc. were $0.37 and $0.35, respectively. Refer to Table 1 for the share counts used in the calculation of basic and diluted EPS attributable to RE/MAX Holdings, Inc. in accordance with U.S. GAAP.

The ownership structure used to calculate Adjusted basic and diluted EPS for the three and nine months ended September 30, 2014 reflects RE/MAX owning 100% of RMCO, LLC ("RMCO"). The weighted average ownership RE/MAX had of RMCO was 39.50% for the three months ended September 30, 2014. Refer to Table 6 in this press release for a reconciliation of Adjusted net income to net income and the share counts used in the Adjusted basic and diluted EPS calculations.

Balance Sheet

As of September 30, 2014, the Company had a cash balance of $98.1 million, an increase of $9.8 million from December 31, 2013. The Company had $212.2 million of term loans outstanding, net of unamortized discount as of September 30, 2014, down from $228.4 million as of December 31, 2013.

Dividend

The Company's Board of Directors approved a quarterly dividend of $0.0625 per share of Class A common stock. The dividend is payable on December 4, 2014 to shareholders of record at the close of business on November 20, 2014.

Outlook

Based on the Company's performance through the first nine months of this year, the Company is providing the following outlook for its fourth quarter and its full-year 2014:

Fourth Quarter 2014 Outlook:

  • Agent count is estimated to increase by 4% to 5% over fourth quarter 2013;
  • Revenue is estimated to increase by 4% to 5% over fourth quarter 2013;
  • Selling, operating and administrative expenses are estimated to be 50% to 51% of revenue;
  • Adjusted EBITDA margin is estimated to be in the 49% to 50% range; and
  • Capital expenditure of $1.4 million.

Full-Year 2014 Outlook:

  • Agent count is estimated to increase by 4% to 5% over 2013 (trending to the high end);
  • Revenue is estimated to increase by 6% to 7% over 2013 (trending to the high end);
  • Improving selling, operating and administrative expenses estimate to 51% to 52% of revenue from 52% to 54% of 2014 revenue;
  • Increasing Adjusted EBITDA margin estimate to 49% to 49.5% from 47% to 49%; and
  • Capital expenditure of $2.5 million.

The increased capital expenditure is due to two technology related projects that will start in the fourth quarter of 2014 and will help streamline our internal operations.

Revenue, Selling, operating and administrative expenses and Adjusted EBITDA margin are subject to currency exchange rate fluctuations principally related to changes in the Canadian dollar to U.S. dollar exchange rate.

Basis of Presentation

Subsequent to the IPO, RE/MAX began to operate and control all of the business affairs of RMCO. As a result, RE/MAX began to consolidate RMCO on October 7, 2013, and because RE/MAX and RMCO are entities under common control, such consolidation has been reflected for all periods presented. Unless otherwise noted, the results presented in this press release are consolidated and exclude adjustments attributable to the non-controlling interest.

These historical results do not purport to reflect what the results of operations of RE/MAX would have been had the IPO and related reorganization and other transactions occurred prior to such periods.

Webcast and Conference Call

The Company will host a conference call for interested parties today, November 13, 2014, beginning at 5:00 p.m. Eastern Time. Interested parties are able to access the conference call using the following dial-in numbers:

U.S.  1-877-512-8755

Canada  1-855-669-9657

International  1-412-902-4144

Interested parties can access the live webcast through the Investor Relations section of the Company's website at www.remax.com. Please dial-in or join the webcast 10 minutes before the start of the conference call.

A replay of the call will be available approximately one hour after the end of the call on November 13, 2014 through November 28, 2014, by dialing 1-877-344-7529 (U.S.), 1-855-669-9658 (Canada) or 1-412-317-0088 (International) and entering the pass code 10054082. An archive of the webcast will be available on the Company's website for a limited time as well.

About the RE/MAX Network

RE/MAX was founded in 1973 by David and Gail Liniger, with an innovative, entrepreneurial culture affording its agents and franchisees the flexibility to operate their businesses with great independence. Over 97,000 agents provide RE/MAX a global reach of more than 95 countries. Nobody sells more real estate than RE/MAX.

RE/MAX, LLC, one of the world's leading franchisors of real estate brokerage services, is a wholly-owned subsidiary of RMCO, which is controlled and managed by RE/MAX Holdings, Inc. (NYSE: RMAX).

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of the "safe harbor" provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "anticipate," "believe," "intend," "expect," "estimate," "plan," "outlook," "project" and other similar words and expressions that predict or indicate future events or trends that are not statements of historical matters. These forward-looking statements include statements regarding the Company's outlook for the fourth quarter and full fiscal year, expectations regarding agent count and Adjusted EBITDA margins for its full fiscal year, the Company's belief that business fundamentals remain strong, as well as other statements regarding the Company's strategic and operational plans. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward looking statements are based on information available at the time those statements are made and/or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward looking statements. Such risks and uncertainties include, without limitation, (1) changes in business and economic activity in general, (2) changes in the real estate market, including changes due to interest rates and availability of financing, (3) the Company's ability to attract and retain quality franchisees, (4) the Company's franchisees' ability to recruit and retain agents, (5) changes in laws and regulations that may affect the Company's business or the real estate market, (6) failure to maintain, protect and enhance the RE/MAX brand, as well as those risks and uncertainties described in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operation" in the most recent Form 10-K filed with the Securities and Exchange Commission ("SEC") and similar disclosures in subsequent reports filed with the SEC, which are available on the investor relations page of the Company's website at www.remax.com and on the SEC website at www.sec.gov. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. Except as required by law, the Company does not intend, and undertakes no duty, to update this information to reflect future events or circumstances.

1Non-GAAP measures. See Table 5 for a reconciliation of net income to Adjusted EBITDA. See the end of this press release for a definition of Non-GAAP measures.

2Non-GAAP measure. Adjusted net income measure assumes RE/MAX owns 100% of RMCO. As of September 30, 2014 RE/MAX actually owned 39.53% of RMCO. See Table 6 for a reconciliation of Adjusted net income and Adjusted EPS to net income. See the end of this press release for a definition of Non-GAAP measures.

 

TABLE 1

RE/MAX Holdings, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 
 

Three months ended September 30,

 

Nine months ended 
September 30,

 

2014

 

2013

    

2014

    

2013

Revenue:

             

Continuing franchise fees

$      18,523

 

$ 16,093

 

$      54,251

 

$ 47,037

Annual dues

7,697

 

7,455

 

22,846

 

22,052

Broker fees

8,279

 

7,204

 

21,853

 

18,704

Franchise sales and other franchise revenue

5,472

 

5,076

 

17,935

 

17,823

Brokerage revenue

4,269

 

4,484

 

11,534

 

13,012

Total revenue

44,240

 

40,312

 

128,419

 

118,628

Operating expenses:

             

Selling, operating and administrative expenses

20,559

 

22,105

 

65,321

 

70,088

Depreciation and amortization

3,767

 

3,656

 

11,517

 

11,088

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

-

 

(3)

 

(1)

 

41

Total operating expenses

24,326

 

25,758

 

76,837

 

81,217

Operating income

19,914

 

14,554

 

51,582

 

37,411

Other expenses, net:

             

Interest expense

(2,255)

 

(5,128)

 

(7,007)

 

(12,053)

Interest income

58

 

82

 

205

 

224

Foreign currency transaction (losses) gains 

(811)

 

281

 

(504)

 

(135)

Loss on early extinguishment of debt

-

 

(1,664)

 

(178)

 

(1,798)

Equity in earnings of investees

265

 

274

 

394

 

736

Total other expenses, net

(2,743)

 

(6,155)

 

(7,090)

 

(13,026)

Income before provision for income taxes

17,171

 

8,399

 

44,492

 

24,385

Provision for income taxes

(3,116)

 

(702)

 

(8,130)

 

(1,733)

Net income

$      14,055

 

$   7,697

 

$      36,362

 

$ 22,652

Less: net income attributable to non-controlling interest

9,780

 

7,697

 

25,299

 

22,652

Net income attributable to RE/MAX Holdings, Inc.

$        4,275

 

$          -

 

$      11,063

 

$           -

Comprehensive income:

             

Net income

$      14,055

 

$   7,697

 

$      36,362

 

$ 22,652

Change in cumulative translation adjustment

(245)

 

114

 

(236)

 

(184)

Other comprehensive (loss) income 

(245)

 

114

 

(236)

 

(184)

Comprehensive income

13,810

 

7,811

 

36,126

 

22,468

Less: comprehensive income attributable to non-controlling interest

9,632

 

7,811

 

25,156

 

22,468

Comprehensive income attributable to RE/MAX Holdings, Inc.

$        4,178

 

$          -

 

$      10,970

 

$         -

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

             

Basic

$          0.37

     

$          0.95

   

Diluted

$          0.35

     

$          0.90

   

Weighted average shares of Class A common stock outstanding

             

Basic

11,579,669

     

11,593,738

   

Diluted

12,229,010

     

12,235,160

   

Cash dividends declared per share of Class A common stock

$      0.0625

     

$      0.1875

   

 

TABLE 2

RE/MAX Holdings, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 
 

September 30, 2014

      

December 31, 
2013

Assets

     

Current assets:

     

Cash and cash equivalents

$            98,128

 

$          88,375

Escrow cash - restricted

731

 

710

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

17,645

 

15,980

Accounts receivable from affiliates

-

 

5

Income taxes receivable

1,187

 

-

Other current assets

3,715

 

5,010

 Total current assets

121,406

 

110,080

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

2,628

 

2,583

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

78,897

 

89,071

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

1,976

 

2,486

Goodwill

72,616

 

72,781

Deferred tax assets, net

66,387

 

67,791

Investments in equity method investees

3,750

 

3,642

Debt issuance costs, net

1,974

 

2,353

Other assets

1,952

 

2,036

 Total assets

$          351,586

 

$        352,823

Liabilities and stockholders' equity

     

Current liabilities:

     

Accounts payable

$                 849

 

$               731

Accounts payable to affiliates

1,089

 

1,017

Escrow liabilities

731

 

710

Accrued liabilities

7,931

 

9,344

Income taxes and tax distributions payable

215

 

3,000

Deferred revenue and deposits

17,159

 

15,821

Current portion of debt

8,568

 

17,300

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

902

 

902

Other current liabilities

206

 

206

 Total current liabilities

37,650

 

49,031

Debt, net of current portion

203,629

 

211,104

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

67,938

 

67,938

Deferred revenue, net of current portion

117

 

234

Deferred tax liabilities, net

197

 

195

Other liabilities, net of current portion

8,945

 

8,782

 Total liabilities

318,476

 

337,284

Commitments and contingencies

     

Stockholders' equity:

     

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

1

 

1

Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of September 30, 2014 and December 31, 2013

-

 

-

Additional paid-in capital

239,033

 

239,086

Retained earnings

10,396

 

1,506

Accumulated other comprehensive income

1,135

 

1,371

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

250,565

 

241,964

Non-controlling interest

(217,455)

 

(226,425)

 Total stockholders' equity

33,110

 

15,539

 Total liabilities and stockholders' equity

$          351,586

 

$        352,823

 

TABLE 3

RE/MAX Holdings, Inc.

Condensed Consolidated Statements of Cash Flow

(Amounts in thousands)

(Unaudited)

 
 

Nine months ended September 30,

 

2014

 

2013

Cash flows from operating activities:

     

Net income

$ 36,362

 

$  22,652

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

     

Depreciation and amortization

11,517

 

11,088

Bad debt expense

289

 

289

Loss on early extinguishment of debt

178

 

1,798

Equity-based compensation

532

 

701

Non-cash interest expense

273

 

723

Other

1,321

 

232

Changes in operating assets and liabilities:

     

Accounts and notes receivable, current portion

(1,991)

 

(1,678)

Advances to/from affiliates

34

 

(126)

Other current and noncurrent assets

1,394

 

(30)

Other current and noncurrent liabilities

(2,136)

 

1,927

Deferred revenue and deposits

1,225

 

(686)

Net cash provided by operating activities

48,998

 

36,890

Cash flows from investing activities:

     

Purchases of property, equipment and software

(1,017)

 

(676)

Proceeds from sale of property and equipment

2

 

8

Capitalization of trademark costs

(91)

 

(174)

Net cash used in investing activities

(1,106)

 

(842)

Cash flows from financing activities:

     

Proceeds from issuance of debt

-

 

230,000

Payments on debt

(16,278)

 

(234,083)

Debt issuance costs

-

 

(1,301)

Distributions to non-controlling unitholders

(18,881)

 

(20,684)

Dividends to Class A common stockholders

(2,173)

 

-

Payments on capital lease obligations

(156)

 

(211)

Deferred offering costs

-

 

(4,816)

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

179

 

-

Tax withholding payment for vested restricted stock units upon delivery

(818)

 

-

Proceeds from exercise of stock options

54

 

-

Net cash used in financing activities

(38,073)

 

(31,095)

Effect of exchange rate changes on cash

(66)

 

28

Net increase in cash and cash equivalents

9,753

 

4,981

Cash and cash equivalents, beginning of year

88,375

 

68,501

Cash and cash equivalents, end of period

$ 98,128

 

$  73,482

Supplemental disclosures of cash flow information:

     

Cash paid for interest

$   6,692

 

$  11,443

Cash paid for income taxes

6,824

 

1,632

Schedule of non-cash investing and financing activities:

     

Capital leases for property and equipment

$        18

 

$       236

Distributions payable to non-controlling unitholders

-

 

6,650

Increase in accounts payable for capitalization of trademark costs

155

 

15

 

TABLE 4

RE/MAX Holdings, Inc.

Agent Count

(Unaudited)

 
 

As of

 

Sept. 30,

 

June 30,

 

March 31, 

 

Dec. 31, 

 

Sept. 30, 

 

June 30, 

 

March 31, 

 

Dec. 31, 

 

2014

 

2014

 

2014

 

2013

 

2013

 

2013

 

2013

 

2012

Agent Count:

                             

U.S.

                             

Company-owned regions(1)

35,377

 

34,686

 

33,911

 

33,416

 

27,343

 

26,846

 

26,189

 

25,819

Independent regions (1)

21,804

 

21,576

 

21,375

 

21,075

 

26,879

 

26,482

 

26,030

 

25,984

U.S. Total

57,181

 

56,262

 

55,286

 

54,491

 

54,222

 

53,328

 

52,219

 

51,803

Canada

                             

Company-owned regions 

6,258

 

6,212

 

6,117

 

6,084

 

6,089

 

6,106

 

6,073

 

6,070

Independent regions

12,849

 

12,818

 

12,852

 

12,838

 

12,934

 

12,939

 

12,804

 

12,796

Canada Total

19,107

 

19,030

 

18,969

 

18,922

 

19,023

 

19,045

 

18,877

 

18,866

Outside U.S. and Canada

                             

Company-owned regions 

312

 

301

 

323

 

338

 

319

 

316

 

334

 

336

Independent regions

21,047

 

20,496

 

19,807

 

19,477

 

19,167

 

19,120

 

18,542

 

18,003

Outside U.S. and Canada Total

21,359

 

20,797

 

20,130

 

19,815

 

19,486

 

19,436

 

18,876

 

18,339

Total

97,647

 

96,089

 

94,385

 

93,228

 

92,731

 

91,809

 

89,972

 

89,008

 

   

(1)

As of September 30, 2014, June 30, 2014, March 31, 2014 and December 31, 2013, U.S. Company-owned Regions includes agents in the Southwest and Central Atlantic regions which converted from Independent regions to Company-owned regions in connection with the acquisitions of the business assets of HBN, Inc. ("HBN") and Tails, Inc. ("Tails") on October 7, 2013.  As of the acquisition date, the Southwest and Central Atlantic regions had a total of 5,918 agents. 

 

TABLE 5

RE/MAX Holdings, Inc.

Adjusted EBITDA Reconciliation to Net Income

(Amounts in thousands)

(Unaudited)

 
 

Three months ended 
September 30, 

 

Nine months ended 
September 30, 

 

2014

 

2013

 

2014

 

2013

               

Consolidated:

             

Net income (1)

$14,055

 

$  7,697

 

$36,362

 

$22,652

Depreciation and amortization

3,767

 

3,656

 

11,517

 

11,088

Interest expense

2,255

 

5,128

 

7,007

 

12,053

Interest income

(58)

 

(82)

 

(205)

 

(224)

Provision for income taxes

3,116

 

702

 

8,130

 

1,733

EBITDA

23,135

 

17,101

 

62,811

 

47,302

Gain on sale or disposition of assets and sublease (2)

(52)

 

(164)

 

(277)

 

(411)

Loss on early extinguishment of debt (3)

-

 

1,664

 

178

 

1,798

Non-recurring equity-based compensation (4)

-

 

-

 

-

 

701

Non-cash straight-line rent expense (5)

197

 

261

 

614

 

970

Chairman executive compensation (6)

-

 

750

 

-

 

2,250

Acquisition integration costs (7)

87

 

27

 

150

 

249

Public offering related expenses (8)

-

 

2,436

 

-

 

5,916

Adjusted EBITDA

$23,367

 

$22,075

 

$63,476

 

$58,775

Adjusted EBITDA Margin

52.8%

 

54.8%

 

49.4%

 

49.5%

 

   

(1)

Consolidated net income excludes all adjustments associated with the non-controlling interest and presents the results of operations as if all outstanding common units of RMCO were exchanged for or converted into shares of the Company's Class A common stock on a one-for-one basis for the entire period presented.

(2)

Represents losses (gains) on the sale or disposition of assets as well as the gain on the sublease of a portion of the Company's corporate headquarters office building.

(3)

Represents losses incurred on early extinguishment of debt on the Company's 2013 Senior Secured Credit Facility and the Company's previous senior secured credit facility for the nine months ended September 30, 2014 and 2013 as well as losses incurred related to the entire repayment of the Company's previous senior secured credit facility during the three and nine months ended September 30, 2013.

(4)

Non-recurring equity-based compensation includes non-cash compensation expense recorded related to unit options granted to certain employees pursuant to RMCO's 2011 Unit Option Plan during the nine months ended September 30, 2013.

(5)

Represents the non-cash charge to appropriately record rent expense on a straight-line basis over the term of the lease agreement taking into consideration escalation in monthly cash payments.

(6)

Represents the salaries the Company paid to David Liniger, our Chairman and Co-Founder, and Gail Liniger, the Company's Vice Chair and Co-Founder. Such salaries have not been paid subsequent to the IPO, and will not be paid in future periods.

(7)

Acquisition integration costs include fees incurred in connection with the Company's acquisitions of certain assets of HBN and Tails in October 2013. Costs include legal, accounting and advisory fees as well as consulting fees for integration services.

(8)

Represents costs incurred in connection with the IPO.

 

TABLE 6

RE/MAX Holdings, Inc.

Adjusted Net Income and Adjusted Earnings per Share(1)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 
 

Three months ended 
September 30, 

    

Nine months ended 
September 30, 

 

2014

    

2013

 

2014

    

2013

               

Consolidated:

             

Net income 

$      14,055

 

$        7,697

 

$      36,362

 

$22,652

Amortization of franchise agreements

3,391

 

2,967

 

10,174

 

8,899

Non-controlling interest income tax expense & 
RE/MAX Holdings tax provision

3,116

 

702

 

8,130

 

1,733

Add-backs:

             

Gain on sale or disposition of assets and sublease (2)

(52)

 

(164)

 

(277)

 

(411)

Loss on early extinguishment of debt (3)

-

 

1,664

 

178

 

1,798

Non-recurring equity-based compensation (4)

-

 

-

 

-

 

701

Non-cash straight-line rent expense (5)

197

 

261

 

614

 

970

Chairman executive compensation (6)

-

 

750

 

-

 

2,250

Acquisition integration costs (7)

87

 

27

 

150

 

249

Public offering related expenses (8)

-

 

2,436

 

-

 

5,916

Adjusted pre-tax net income

20,794

 

16,340

 

55,331

 

44,757

Less: Provision for income taxes at 38%

(7,902)

 

(6,209)

 

(21,026)

 

(17,008)

Adjusted net income

$      12,892

 

$      10,131

 

$      34,305

 

$27,749

               

Total basic pro forma shares outstanding

29,314,269

 

29,342,571

 

29,328,338

   

Total diluted pro forma shares outstanding

29,963,610

 

29,989,723

 

29,969,760

   
               

Adjusted net income basic earnings per share (9):

$          0.44

 

$          0.35

 

$          1.17

   

Adjusted net income diluted earnings per share (9):

$          0.43

 

$          0.34

 

$          1.14

   

 

   

(1)

Excludes all adjustments associated with the non-controlling interest and presents the results of operations as if all outstanding common units of RMCO were exchanged for or converted into shares of the Company's Class A common stock on a one-for-one basis for the entire period presented.

(2)

Represents losses (gains) on the sale or disposition of assets as well as the gain on the sublease of a portion of the Company's corporate headquarters office building.

(3)

Represents losses incurred on early extinguishment of debt on the Company's 2013 Senior Secured Credit Facility and the Company's previous senior secured credit facility for the nine months ended September 30, 2014 and 2013 as well as losses incurred related to the entire repayment of the Company's previous senior secured credit facility during the three and nine months ended September 30, 2013.

(4)

Non-recurring equity-based compensation includes non-cash compensation expense recorded related to unit options granted to certain employees pursuant to RMCO's 2011 Unit Option Plan during the nine months ended September 30, 2013.

(5)

Represents the non-cash charge to appropriately record rent expense on a straight-line basis over the term of the lease agreement taking into consideration escalation in monthly cash payments.

(6)

Represents the salaries the Company paid to David Liniger, our Chairman and Co-Founder, and Gail Liniger, the Company's Vice Chair and Co-Founder. Such salaries have not been paid subsequent to the IPO, and will not be paid in future periods.

(7)

Acquisition integration costs include fees incurred in connection with the Company's acquisitions of certain assets of HBN and Tails in October 2013. Costs include legal, accounting and advisory fees as well as consulting fees for integration services.

(8)

Represents costs incurred in connection with the IPO.

(9)

Adjusted net income basic and diluted earnings per share are pro-forma for the three months ended September 30, 2013 since RE/MAX Holdings was not a public company during that period.

 

TABLE 7

RE/MAX Holdings, Inc.

Pro Forma Shares Outstanding

(Unaudited)

 
   

Three months ended 
September 30, 2014

    

Nine months ended 
September 30, 2014

Total basic weighted average shares outstanding:

     
 

Weighted average shares of Class A common stock outstanding

11,579,669

 

11,593,738

 

Remaining equivalent weighted average shares of stock outstanding on a pro forma basis assuming RE/MAX Holdings owned 100% of RMCO 

17,734,600

 

17,734,600

 

Total basic pro forma weighted average shares outstanding

29,314,269

 

29,328,338

         

Total diluted weighted average shares outstanding:

     
 

Weighted average shares of Class A common stock outstanding

11,579,669

 

11,593,738

 

Remaining equivalent weighted average shares of stock outstanding on a pro forma basis assuming RE/MAX Holdings owned 100% of RMCO 

17,734,600

 

17,734,600

 

Dilutive effect of stock options(1)

590,285

 

590,736

 

Dilutive effect of unvested restricted stock units(1)

59,056

 

50,686

 

Total diluted pro forma weighted average shares outstanding

29,963,610

 

29,969,760

 

   

(1)

  In accordance with the treasury stock method

Non-GAAP Financial Measures

The Securities and Exchange Commission ("SEC") has adopted rules to regulate the use in filings with the SEC and in public disclosures of financial measures that are not in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), such as Adjusted EBITDA and Adjusted net income and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with U.S. GAAP.

RE/MAX defines Adjusted EBITDA as EBITDA (consolidated net income before depreciation and amortization, interest expense, net and the provision for income taxes, each of which is presented in the Company's condensed consolidated financial statements included elsewhere in this press release), adjusted for the impact of the following items that the Company does not consider representative of the Company's ongoing operating performance: losses (gains) on sale or disposition of assets and sublease, losses on early extinguishment of debt, non-cash straight-line rent expense, salaries paid to David and Gail Liniger that the Company discontinued subsequent to the completion of the IPO, professional fees and non-recurring expenses incurred in connection with the IPO and acquisition integration costs. During the third quarter of 2014, the Company revised its definition of Adjusted EBITDA to no longer adjust for recurring equity-based compensation expense. Adjusted EBITDA in prior periods has been revised to reflect this change for consistency of presentation.

RE/MAX defines Adjusted net income as net income, excluding the impact of amortization expense related to the Company's franchise agreements, non-controlling interest income tax expense and RE/MAX Holdings tax provision, charges incurred related to the early extinguishment of debt, gain on sale or disposition of assets and sublease, non-cash straight-line rent expense, salaries paid to David and Gail Liniger that the Company discontinued subsequent to the completion of the IPO, expenses incurred in connection with the IPO, and acquisition integration costs, but reflects income taxes and is presented as if all outstanding common units of RMCO were exchanged for or converted into shares of the Company's Class A common stock on a one-for-one basis. Assuming the full exchange and conversion, all income of RMCO is treated as if it were allocated to RE/MAX, and the adjusted provision for income taxes represents an estimate of income tax expense at an effective rate reflecting assumed federal, state, and local income tax rates. The estimated effective tax rate was 38%.

Because Adjusted EBITDA and Adjusted net income omit certain non-cash items and other non-recurring cash charges, the Company feels that these metrics are less susceptible to variances that affect the Company's operating performance resulting from depreciation, amortization and other non-cash and non-recurring cash charges or other items and is more reflective of other factors that affect the Company's operating performance. The Company presents Adjusted EBITDA and Adjusted net income because it believes the metrics are useful as supplemental measures in evaluating the performance of the Company's operating businesses and provide greater transparency into the Company's results of operations. The Company's management uses Adjusted EBITDA as a factor in evaluating the performance of their business.

Adjusted EBITDA and Adjusted net income have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyzing results RE/MAX reported under U.S. GAAP. Some of these limitations are:

  • these measures do not reflect changes in, or cash requirements for, the Company's working capital needs;
  • these measures do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
  • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and these measures do not reflect any cash requirements for such replacements;
  • Adjusted EBITDA does not reflect the Company's interest expense, or the cash requirements necessary to service interest or principal payments on the Company's debt;
  • Adjusted EBITDA does not reflect the Company's income tax expense or the cash requirements to pay the Company's taxes;
  • Adjusted EBITDA does not reflect the cash requirements to pay dividends and distributions to non-controlling unitholders; and
  • other companies may calculate these measures differently, so they may not be comparable.

With respect to the Company's outlook with respect to Adjusted EBITDA margin for the fourth quarter and the full fiscal year 2014, the Company is not able to provide a reconciliation of this non-GAAP financial measure to U.S. GAAP because it does not provide specific guidance for the various reconciling non-cash items and other non-recurring cash and non-cash charges, such as gain on sale or disposition of assets and sublease and loss on early extinguishment of debt, among others. Certain items that impact these measures have not yet occurred, are out of the Company's control or cannot be reasonably predicted, and as a result, reconciliation of these non-GAAP guidance measures to U.S. GAAP is not available without unreasonable effort.

SOURCE RE/MAX Holdings, Inc.

###

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