RE/MAX(RMAX) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's H1 2023 financial statements reflect significant declines in revenue, net income, and operating cash flow due to challenging market conditions Condensed Consolidated Balance Sheets As of June 30, 2023, total assets, liabilities, and stockholders' equity all decreased compared to December 31, 2022 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $655,020 | $695,234 | | Cash and cash equivalents | $96,757 | $108,663 | | Goodwill | $259,712 | $258,626 | | Total Liabilities | $630,995 | $663,532 | | Debt, net of current portion | $441,846 | $443,720 | | Total Stockholders' Equity | $24,025 | $31,702 | Condensed Consolidated Statements of Income (Loss) Q2 and H1 2023 saw significant year-over-year declines in total revenue and net income attributable to RE/MAX Holdings Q2 2023 vs Q2 2022 Income Statement (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Total Revenue | $82,447 | $92,172 | | Operating Income | $13,150 | $16,909 | | Net Income | $3,244 | $10,275 | | Net Income attributable to RE/MAX Holdings, Inc. | $2,010 | $5,829 | | Diluted EPS | $0.11 | $0.30 | Six Months 2023 vs 2022 Income Statement (in thousands, except per share data) | Metric | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | | Total Revenue | $167,848 | $183,176 | | Operating Income | $20,061 | $24,511 | | Net Income | $2,565 | $13,220 | | Net Income attributable to RE/MAX Holdings, Inc. | $1,339 | $7,280 | | Diluted EPS | $0.07 | $0.38 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities sharply decreased in H1 2023, leading to a significant overall reduction in cash and equivalents Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,242 | $38,919 | | Net cash used in investing activities | ($2,397) | ($6,144) | | Net cash used in financing activities | ($24,198) | ($36,919) | | Net decrease in cash | ($23,692) | ($4,590) | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail the franchisor model, declining revenue, significant debt, ongoing antitrust litigation, and segment performance - The company operates as a 100% franchisor for both RE/MAX and Motto brokerages, not owning any operating entities[25][26] - Multiple class action antitrust lawsuits, including Moehrl-related litigations, challenge NAR rules on buyer broker compensation, with a trial scheduled for October 2023, and the financial impact is currently unestimable[86][87][92] - The Senior Secured Credit Facility includes a $460.0 million term loan maturing in 2028, with an interest rate of 7.8% as of June 30, 2023[67][71] Adjusted EBITDA by Segment (in thousands) | Segment | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Real Estate | $28,721 | $36,331 | | Mortgage | ($1,457) | ($1,164) | | Other | ($620) | ($36) | | Consolidated | $26,644 | $35,131 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue and profit declines to challenging market conditions, impacting liquidity and influencing capital allocation priorities Financial and Operational Highlights Q2 2023 highlights include revenue and Adjusted EBITDA declines, global agent growth offsetting U.S. and Canada decreases, and Motto expansion Q2 2023 Key Metrics vs. Q2 2022 | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $82.4M | $92.2M | -10.6% | | Adjusted EBITDA | $26.6M | $35.1M | -24.2% | | Total Agent Count | 144,510 | 143,939 | +0.4% | | U.S. & Canada Agent Count | 82,205 | 85,679 | -4.1% | | Motto Open Offices | 235 | 200 | +17.5% | - Challenging market conditions, including rising interest rates and tight housing supply, have led to declines in U.S. agent count and total revenue[112] Results of Operations Q2 and H1 2023 revenue declines were driven by reduced broker and franchise fees, with operating expenses increasing as a percentage of revenue Q2 2023 vs Q2 2022 Revenue Breakdown (in thousands) | Revenue Stream | Q2 2023 | Q2 2022 | Change % | | :--- | :--- | :--- | :--- | | Continuing franchise fees | $32,101 | $34,128 | (5.9)% | | Broker fees | $14,321 | $19,317 | (25.9)% | | Marketing Funds fees | $21,077 | $22,909 | (8.0)% | | Total Revenue | $82,447 | $92,172 | (10.6)% | - The decrease in Broker fees was attributed to lower average transactions per agent and a decline in U.S. agent count[122] - Selling, operating, and administrative expenses increased as a percentage of revenue to 48.8% in Q2 2023 from 44.2% in Q2 2022[127] Liquidity and Capital Resources Liquidity tightened significantly in H1 2023 due to lower operating cash flow, impacting capital allocation priorities including share repurchases and dividends - Cash provided by operating activities decreased due to a $17.0 million decrease in Adjusted EBITDA and a $9.5 million increase in interest payments in H1 2023[173] - The Total Leverage Ratio was 3.20:1 as of June 30, 2023, below the 3.50:1 covenant, permitting unlimited restricted payments[164] - A $100 million share repurchase program, authorized in January 2022, has $62.5 million remaining as of June 30, 2023[179] - A quarterly dividend of $0.23 per share was declared on August 1, 2023[178] Quantitative and Qualitative Disclosures About Market Risks The company faces increased credit risk from franchisees, significant interest rate risk on its variable-rate debt, and managed currency risk - Bad debt expense increased to 2.1% of revenue in H1 2023 from 0.2% in H1 2022, indicating heightened franchisee credit risk[188] - A hypothetical 0.25% increase in interest rates on $450.8 million in variable-rate term loans would add $1.1 million in annual interest expense[190][191] - A hypothetical 5% change in the USD/CAD exchange rate would impact operating income by approximately $0.8 million for H1 2023[192][193] Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - Disclosure controls and procedures were concluded to be effective as of June 30, 2023, by the Principal Executive and Financial Officers[195] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2023[196] PART II – OTHER INFORMATION Legal Proceedings The company faces significant class action antitrust lawsuits challenging industry rules, with an unpredictable outcome and unestimable financial impact - The company is a defendant in multiple class action antitrust lawsuits, including Moehrl, Burnett, and Nosalek, regarding NAR rules on buyer broker compensation[86][92] - A trial in the Burnett case is scheduled for October 2023, with plaintiffs seeking trebled damages for buyer commissions paid by sellers in four MLSs[87] - The company is unable to reasonably estimate the financial impact of the litigation or predict its material effect on financial position[92] Risk Factors No material changes have occurred to the risk factors previously disclosed in the 2022 Annual Report on Form 10-K - No material changes to risk factors previously disclosed in the 2022 Annual Report on Form 10-K have occurred[200] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in Q2 2023, with $62.5 million remaining under the $100 million share repurchase program - No shares were repurchased during the three months ended June 30, 2023[201] - As of June 30, 2023, $62.5 million remained available under the company's $100 million share repurchase program[201]