Marcus & Millichap(MMI) - 2019 Q1 - Quarterly Report

PART I Item 1. Financial Statements For Q1 2019, Marcus & Millichap reported total revenues of $160.7 million, a 7.9% decrease, and net income of $15.6 million, a 13.2% decrease, with cash and cash equivalents declining by $16.6 million due to operating activities and the balance sheet reflecting new lease accounting standards Condensed Consolidated Balance Sheets As of March 31, 2019, total assets increased to $603.5 million from $566.4 million at year-end 2018, primarily due to the adoption of a new lease accounting standard which added $83.9 million in operating lease right-of-use assets, while total liabilities rose to $177.4 million and stockholders' equity grew to $426.1 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | March 31, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $198,132 | $214,683 | | Operating lease right-of-use assets, net | $83,913 | $— | | Total assets | $603,516 | $566,380 | | Operating lease liabilities | $75,852 | $— | | Total liabilities | $177,424 | $156,806 | | Total stockholders' equity | $426,092 | $409,574 | - The significant increase in assets and liabilities is primarily due to the adoption of a new lease accounting standard, resulting in the recognition of operating lease right-of-use assets and corresponding lease liabilities on the balance sheet for the first time[11][38] Condensed Consolidated Statements of Net and Comprehensive Income For Q1 2019, total revenues decreased 7.9% to $160.7 million, operating income fell 22.1% to $18.3 million, and net income declined 13.2% to $15.6 million, resulting in diluted earnings per share of $0.40 Q1 2019 vs Q1 2018 Performance (in thousands, except per share amounts) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | % Change | | :--- | :--- | :--- | :--- | | Real estate brokerage commissions | $144,937 | $162,525 | (10.8)% | | Financing fees | $13,732 | $9,724 | 41.2% | | Total revenues | $160,707 | $174,541 | (7.9)% | | Operating income | $18,269 | $23,464 | (22.1)% | | Net income | $15,638 | $18,011 | (13.2)% | | Diluted EPS | $0.40 | $0.46 | (13.0)% | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased from $409.6 million at year-end 2018 to $426.1 million as of March 31, 2019, primarily driven by $15.6 million in net income and $2.3 million in stock-based compensation - Stockholders' equity increased by $16.5 million during Q1 2019, primarily due to $15.6 million in net income and $0.8 million in other comprehensive income[16] Condensed Consolidated Statements of Cash Flows For Q1 2019, net cash used in operating activities was $38.6 million, a significant increase from the prior year, while net cash provided by investing activities was $24.1 million, leading to an overall $16.6 million decrease in cash and cash equivalents Summary of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(38,598) | $(12,989) | | Net cash provided by (used in) investing activities | $24,073 | $(6,777) | | Net cash used in financing activities | $(2,026) | $(1,650) | | Net decrease in cash and cash equivalents | $(16,551) | $(21,416) | | Cash and cash equivalents at end of period | $198,132 | $199,370 | Notes to Condensed Consolidated Financial Statements The notes detail the company's accounting policies, including the significant adoption of the new lease standard (ASU 2016-02), which materially impacted the balance sheet, and highlight the $60 million credit facility which remained undrawn - The company adopted the new lease standard ASU 2016-02 effective January 1, 2019, resulting in the recognition of Right-of-Use (ROU) assets and lease liabilities of $76.7 million upon adoption[38] - As of March 31, 2019, the company had a $60.0 million senior secured revolving credit facility, with no amounts outstanding[117][118] - The company's effective tax rate for Q1 2019 was 26.6%, an increase from 25.9% in Q1 2018[112] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 7.9% decline in Q1 2019 revenue to a 10.8% decrease in real estate brokerage commissions, partially offset by a 41.2% increase in financing fees, while net income and Adjusted EBITDA declined by 13.2% and 15.6% respectively, with liquidity remaining strong at $198.1 million in cash Q1 2019 vs Q1 2018 Key Financial Results (in thousands) | Metric | Q1 2019 | Q1 2018 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $160,707 | $174,541 | (7.9)% | | Operating income | $18,269 | $23,464 | (22.1)% | | Net income | $15,638 | $18,011 | (13.2)% | | Adjusted EBITDA | $23,159 | $27,433 | (15.6)% | - The decrease in real estate brokerage commissions was primarily driven by a 10.3% decrease in sales volume, as the average commission rate remained relatively stable[161] - Financing fees increased by 41.2%, driven by a 19.8% increase in the number of financing transactions and a 21.0% increase in average transaction size[162] - The company's strength remains in the private client market ($1-$10 million properties), which contributed approximately 66% of real estate brokerage commissions during the quarter[128] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its $196.1 million investment portfolio, where a 1% increase in interest rates would decrease fair value by approximately $2.5 million, while foreign currency risk is not material - The company's main market risk is interest rate risk on its $196.1 million portfolio of marketable securities[198] Interest Rate Sensitivity on Investment Portfolio (as of March 31, 2019) | Change in Interest Rates | Approximate Change in Fair Value of Investments (in thousands) | | :--- | :--- | | 1% Increase | $(2,451) | | 2% Increase | $(4,902) | | 1% Decrease | $2,452 | | 2% Decrease | $4,904 | Item 4. Controls and Procedures As of March 31, 2019, the CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during Q1 2019 - Management, including the CEO and CFO, concluded that as of March 31, 2019, the company's disclosure controls and procedures were effective[201] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[203] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various ordinary course legal actions, which management does not expect to have a material adverse effect on its financial position, results of operations, or cash flows - The company is involved in ordinary course legal actions, but does not expect them to have a material adverse effect on its financial condition[205] Item 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes from the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2018 have occurred[206] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to the credit agreement and CEO/CFO certifications required by the Sarbanes-Oxley Act - Exhibits filed include the Fourth Amendment to the Credit Agreement and CEO/CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[211]