U.S. Xpress Enterprises, Inc. Reports Second Quarter 2018 Results

CHATTANOOGA, Tenn.–()–U.S. Xpress Enterprises, Inc. (NYSE:USX) (the “Company”) today announced results for the second quarter of 2018.

Second Quarter 2018 Highlights

  • Total Operating Revenue of $449.8 million, an increase of 21.4% compared to second quarter 2017
  • Operating Income of $20.0 million compared to $2.7 million in the second quarter 2017
  • Adjusted Operating Income, a non-GAAP measure, of $26.5 million compared to $5.1 million in the second quarter of 2017
  • Operating ratio of 95.5%, a 380 basis point improvement compared to second quarter 2017
  • Adjusted Operating Ratio, a non-GAAP measure, of 93.4%, a 510 basis point improvement compared to second quarter 2017
  • IPO proceeds net of fees and expenses used to reduce net debt by approximately $236.2 million

Second Quarter Financial Performance

  Three Months Ended June 30,   Six Months Ended June 30,
2018   2017 2018   2017
Total Revenue $ 449,758   $ 370,350 $ 875,466   $ 734,026
Revenue, excluding fuel surcharge $ 402,808 $ 338,463 $ 785,666 $ 670,305
Operating Income $ 20,018 $ 2,689 $ 34,872 $ 4,617
Adjusted Operating Income1 $ 26,455 $ 5,050 $ 41,309 $ 6,978
Operating Ratio 95.5 % 99.3 % 96.0 % 99.4 %
Adjusted Operating Ratio1 93.4 % 98.5 % 94.7 % 99.0 %
Net Income (Loss) attributable to controlling interest $ 615 $ (8,452 ) $ 1,774 $ (12,884 )
Adjusted Net Income (Loss) attributable to controlling interest1 $ 11,285 $ (6,977 ) $ 12,444 $ (11,409 )
1 See GAAP to non-GAAP reconciliation in the schedules following this release
 

Eric Fuller, President and CEO, commented, “Over the last three years we have implemented a complete overhaul of the Company’s strategy and operations that we expect will improve execution and profitability. To achieve our goal, we changed the Company’s culture and recruited the expertise necessary to drive our transformation. We also implemented several strategic initiatives focused on improving driver retention, increasing our asset utilization, creating synergies for our customers within our different service offerings and driving a culture of cost management. The early success of our initiatives can clearly be seen in our second quarter results where we delivered our best Adjusted Operating Ratio since 1998. That said, we are not satisfied with our results and believe we can improve as we continue to execute our strategy designed to deliver an operating ratio in line with our peer group.”

Another sign of our successful execution was our initial public offering where our shares began trading on the NYSE on June 14th. Our IPO was the culmination of years of hard work by our employees combined with the strong partnership and support of our customers and partners. Our offering is an important step in the transformation and growth of U.S. Xpress and I am excited with the many opportunities that lie ahead,” concluded Mr. Fuller.

Enterprise Update

Total revenue for the second quarter of 2018 increased by $79.4 million to $449.8 million as compared to the second quarter of 2017. The increase was primarily a result of an 11.4% increase in the Company’s average revenue per loaded mile (excluding fuel surcharge revenue), a 56.2% increase in brokerage revenue to $58.4 million, and a $15.1 million increase in fuel surcharge revenue. Excluding the impact of fuel surcharges, second quarter revenue increased $64.3 million to $402.8 million, an increase of 19.0% as compared to the prior year quarter.

Operating income for the second quarter of 2018 was $20.0 million which compares favorably to the $2.7 million achieved in the second quarter of 2017. Excluding one-time costs related to the Company’s IPO transaction completed in June of 2018, second quarter Adjusted Operating Income was $26.5 million. The second quarter 2018 Adjusted Operating Ratio was 93.4%, representing a 510 basis point improvement as compared to the second quarter of 2017. The Adjusted Operating Ratio of 93.4% for the second quarter is the Company’s lowest operating ratio in 20 years.

Truckload Segment

 

Three Months Ended June 30,

  Six Months Ended June 30,
2018   2017 2018   2017
Over the road    
Average revenue per tractor per week1 $ 3,957 $ 3,302 $ 3,890 $ 3,306
Average revenue per mile1 $ 2.023 $ 1.785 $ 1.997 $ 1.774
Average revenue miles per tractor per week 1,956 1,849 1,952 1,863
Average tractors 3,578 3,837 3,605 3,835
Dedicated
Average revenue per tractor per week1 $ 3,647 $ 3,735 $ 3,598 $ 3,649
Average revenue per mile1 $ 2.234 $ 2.064 $ 2.209 $ 2.076
Average revenue miles per tractor per week 1,632 1,810 1,629 1,757
Average tractors 2,721 2,353 2,672 2,369
Consolidated
Average revenue per tractor per week1 $ 3,823 $ 3,467 $ 3,771 $ 3,437
Average revenue per mile1 $ 2.105 $ 1.890 $ 2.078 $ 1.885
Average revenue miles per tractor per week 1,816 1,834 1,814 1,823
Average tractors 6,299 6,190 6,277 6,204
1 Excluding fuel surcharge revenues

The above table excludes revenue, miles and tractors for services performed in Mexico.

 

Mr. Fuller said, “Overall, we remain optimistic as we continue to execute our strategy and market conditions remain strong. Of note, we experienced improving rates and volumes through the second quarter and expect no catalyst over the near term that would negatively impact current trends. That said, we continue to see an erosion of professional driver availability. As a result, we are continuing to focus on our driver centric initiatives to both retain the professional drivers who have chosen to partner with us and to attract new professional drivers to our team. We believe this focus allowed us to offset the difficult conditions, which have created a significant professional driver supply challenge for the broader industry as we slightly increased our tractor count during the second quarter of 2018 through an 11% reduction in our driver turnover percentage. The environment in the third quarter of 2018 remains strong from a rate and volume perspective and we are currently anticipating rates to further increase on a sequential basis as we continue to implement contract rate increases in both our over the road and dedicated divisions.”

The Truckload segment achieved an Adjusted Operating Ratio of 92.7% for the second quarter of 2018, a 540 basis point improvement as compared to the Adjusted Operating Ratio of 98.1% achieved in the second quarter of 2017. The improvement was due to the continued successful implementation of the Company’s strategic initiatives as well as broader market conditions.

In the over the road division, average revenue per tractor per week increased 19.8% in the second quarter of 2018, as compared to the second quarter of 2017. The increase was primarily the result of a 13.3% increase in the division’s average revenue per loaded mile (excluding fuel surcharge revenue) and a 5.8% increase in the division’s revenue miles per tractor per week. Generally, during a challenging driver market with increased demand, utilization will decline because a greater percentage of tractors are in transition onboarding new professional drivers as compared to being productive and because increased freight selectivity slows down overall velocity.

Despite the challenging market for drivers, utilization increased through the successful execution of numerous operational initiatives gaining traction through the quarter. This strong utilization was impacted by the over the road division’s support of dedicated accounts during the quarter, which negatively impacted over the road utilization by approximately 150 basis points. While supporting the dedicated accounts with the Company’s over the road fleet negatively affected our utilization in the second quarter, management believes that when these accounts are operationally established, U.S. Xpress will be able to recognize this increase in over the road utilization.

The dedicated division’s average revenue per tractor per week (excluding fuel surcharge revenue) decreased 2.4% in the second quarter of 2018 as compared to the second quarter of 2017. The decrease was primarily a result of a 9.8% decrease in the division’s revenue miles per tractor per week partially offset by a 8.2% increase in the division’s average revenue per loaded mile (excluding fuel surcharge revenue). The reduction in our utilization was primarily the result of certain accounts’ shipping patterns that performed differently than expected which affected utilization, driver hiring, and retention, and due in part to mix changes in the portfolio. As a result of negotiations related to these accounts that were underperforming from a utilization standpoint, rate increases have been implemented that were effective as of the end of July 2018. Overall, tractor count in the Company’s dedicated division has increased by 15.6% in the second quarter of 2018 as compared to the same period in the prior year and 3.7% sequentially as compared to the first quarter of 2018.

Brokerage Segment

  Three Months Ended June 30,   Six Months Ended June 30,
2018   2017 2018   2017
Brokerage revenue $ 58,361   $ 37,368 $ 112,902   $ 75,150
Gross margin % 12.2 % 10.9 % 13.1 % 12.3 %
Load Count 42,135 34,700 81,385 68,173
 

Brokerage segment revenues increased 56.2% to $58.4 million in the second quarter of 2018 as compared to $37.4 million in the second quarter of 2017. The increase was primarily the result of a 21.4% increase in load count and higher revenue on a per load basis, and due in part to higher fuel prices. Brokerage gross margins expanded 130 basis points to 12.2% in the second quarter of 2018 as compared to 10.9% in the second quarter of 2017.

The brokerage segment continues to provide additional selectivity for the Company’s assets to optimize yield while at the same time offering more capacity solutions to our customers.

Liquidity and Capital Resources

As of June 30, 2018, U.S. Xpress had $122.6 million of cash and availability under our revolving credit facility, $385.8 million of net debt and $213.6 million of total stockholders’ equity. IPO proceeds net of fees and expenses were used to reduce net debt by approximately $236.2 million during the quarter. U.S. Xpress is committed to continuing its efforts to strengthen its balance sheet and reducing the Company’s leverage ratio which we believe will further position the Company for future opportunities as they arise. As a result of the significant decrease in debt combined with the new capital structure put in place in conjunction with the IPO, consolidated interest expense in the third quarter of 2018 is expected to approximate $5.0 million as compared to $12.9 million in the third quarter of 2017.

Capital expenditures, net of proceeds, were $28.8 million in the current year quarter and $47.5 million year to date. For 2018, U.S. Xpress expects net capital expenditures will be between $170.0 and $190.0 million. Note, that for 2018 total net capital expenditures are higher than the Company’s normalized annualized replacement requirements. This is primarily a result of the mix of this year’s equipment replacements that will be 100% purchased with none planned for off-balance sheet leases. This ratio results in a higher net capital expenditures number for 2018 than if the Company’s fleet had rotated based on the overall fleet financing profile of approximately two thirds owned and one third leased.

Conference Call

As previously announced, the Company will hold a conference call to discuss its second quarter results at 5:00 p.m. (Eastern Time) on August 2nd, 2018. The conference call can be accessed live over the by phone dialing 1-877-876-9176 or, for international callers, 1-785-424-1667 and requesting to be joined to the U.S. Xpress Second Quarter Earnings Conference Call. A replay will be available starting at 8:00 p.m. (Eastern Time) on August 2nd, 2018 and can be accessed by dialing 1-844-512-2921 or, for international callers, 1-412-317-6671. The passcode for the replay is 130463. The replay will be available until 11:59 p.m. (Eastern Time) on August 9th, 2018.

Interested investors and other parties may also listen to a simultaneous webcast of the conference call by logging onto the investor relations section of the Company’s website at investor.usxpress.com. The online replay will remain available for a limited time beginning immediately following the call. Supplementary information for the conference call also will be available on this website.

Non-GAAP Financial Measures

In addition to our net income determined in accordance with U.S. generally accepted accounting principles (‘‘GAAP’’), we evaluate operating performance using certain non-GAAP measures, including Adjusted Operating Ratio, Adjusted Operating Expenses, Adjusted Operating Income (on both a consolidated and segment basis), and Adjusted Net Income. Management believes the use of non-GAAP measures assists investors and securities analysts in understanding the ongoing operating performance of our business by allowing more effective comparison between periods. The non-GAAP information provided is used by our management and may not be comparable to similarly titled measures disclosed by other companies. The non-GAAP measures used herein have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Management compensates for these limitations by relying primarily on GAAP results and using non-GAAP financial measures on a supplemental basis.

About U.S. Xpress Enterprises

Founded in 1985, U.S. Xpress Enterprises, Inc. is the nation’s fifth largest asset-based truckload carrier by revenue, providing services primarily throughout the United States. We offer customers a broad portfolio of services using our own truckload fleet and third‐party carriers through our non‐asset‐based truck brokerage network. Our modern fleet of tractors is backed up by a team of committed professionals whose focus lies squarely on meeting the needs of our customers and our drivers.

Forward-Looking Statements

This press release contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. Such statements may be identified by their use of terms or phrases such as “expects,” “estimates,” “projects,” “believes,” “anticipates,” “plans,” “intends,” “outlook,” “strategy,” “focus,” “continue,” “will,” “could,” “should,” “may,” and similar terms and phrases. In this press release, such statements may include, but are not limited to, statements concerning: any projections of earnings, revenues, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, or objectives for future operations; any statements regarding future economic or industry conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. Forward-looking statements are based upon the current beliefs and expectations of our management and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. The following factors, among others, could cause actual results to differ materially from those in the forward-looking statements: general economic conditions, including inflation and consumer spending; political conditions and regulations, including future changes thereto; changes in tax laws or in their interpretations and changes in tax rates; future insurance and claims experience, including adverse changes in claims experience and loss development factors, or additional changes in management’s estimates of liability based upon such experience and development factors that cause our expectations of insurance and claims expense to be inaccurate or otherwise impacts our results; impact of pending or future legal proceedings; future market for used revenue equipment and real estate; future revenue equipment prices; future capital expenditures, including equipment purchasing and leasing plans and equipment turnover (including expected trade-ins); expected fleet age; future depreciation and amortization; changes in management’s estimates of the need for new tractors and trailers; future ability to generate sufficient cash from operations and obtain financing on favorable terms to meet our significant ongoing capital requirements; our ability to maintain compliance with the provisions of our credit agreement; expected freight environment, including freight demand, rates, capacity, and volumes; future asset utilization; loss of one or more of our major customers; our ability to renew dedicated service offering contracts on the terms and schedule we expect; surplus inventories, recessionary economic cycles, and downturns in customers’ business cycles; strikes, work slowdowns, or work stoppages at the Company, customers, ports, or other shipping related facilities; increases or rapid fluctuations in fuel prices, as well as fluctuations in surcharge collection, including, but not limited to, changes in customer fuel surcharge policies and increases in fuel surcharge bases by customers; interest rates, fuel taxes, tolls, and license and registration fees; increases in compensation for and difficulty in attracting and retaining qualified professional drivers and independent contractors; seasonal factors such as harsh weather conditions that increase operating costs; competition from trucking, rail, and intermodal competitors; regulatory requirements that increase costs, decrease efficiency, or reduce the availability of drivers, including revised hours-of-service requirements for drivers and the Federal Motor Carrier Safety Administration’s Compliance, Safety, Accountability program that implemented new driver standards and modified the methodology for determining a carrier’s Department of Transportation safety rating; future safety performance; our ability to reduce, or control increases in, operating costs; future third-party service provider relationships and availability; execution of the Company’s current business strategy or changes in the Company’s business strategy; the ability of the Company’s infrastructure to support future organic or inorganic growth; our ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations; and our ability to adapt to changing market conditions and technologies. Readers should review and consider these factors along with the various disclosures by the Company in its press releases, stockholder reports, and filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information.

 
Condensed Consolidated Income Statements (unaudited)
 
  Three Months Ended June 30,   Six Months Ended June 30,
(in thousands, except per share data) 2018   2017 2018   2017
Operating Revenue:
Revenue, excluding fuel surcharge $ 402,808 $ 338,463 $ 785,666 $ 670,305
Fuel surcharge   46,950     31,887     89,800     63,721  
Total operating revenue   449,758     370,350     875,466     734,026  
Operating Expenses:
Salaries, wages and benefits 139,701 135,214 272,625 265,465
Fuel and fuel taxes 57,704 51,712 116,093 102,180
Vehicle rents 19,393 14,773 39,415 40,168
Depreciation and amortization, net of (gain) loss 24,149 26,510 48,855 45,758
Purchased transportation 118,681 68,828 220,457 137,853
Operating expense and supplies 29,073 33,167 58,864 64,539
Insurance premiums and claims 19,165 17,582 39,335 35,024
Operating taxes and licenses 3,509 3,097 6,910 6,464
Communications and utilities 2,425 1,953 4,891 3,921
General and other operating   15,940     14,825     33,149     28,037  
Total operating expenses   429,740     367,661     840,594     729,409  
Operating Income 20,018 2,689 34,872 4,617
Other Expenses (Income):
Interest Expense, net 12,298 12,906 24,956 23,424
Early extinguishment of debt 7,753 7,753
Equity in (income) loss of affiliated companies (119 ) 657 177 1,000
Other, net   242     (216 )   167     (808 )
  20,174     13,347     33,053     23,616  
Income (loss) Before Income Taxes (156 ) (10,658 ) 1,819 (18,999 )
Income Tax Benefit   (1,191 )   (2,261 )   (598 )   (6,195 )
Net Income (loss)   1,035     (8,397 )   2,417     (12,804 )
Net Income attributable to non-controlling interest   420     55     643     80  
Net Income (loss) attributable to controlling interest $ 615   $ (8,452 ) $ 1,774   $ (12,884 )
 
Income (loss) Per Share
Basic earnings (loss) per share $ 0.04 $ (1.32 ) $ 0.17 $ (2.02 )
Basic weighted average shares outstanding   14,214     6,385     10,321     6,385  
Diluted earnings (loss) per share $ 0.04 $ (1.32 ) $ 0.17 $ (2.02 )
Diluted weighted average shares outstanding   14,456     6,385     10,443     6,385  
 
   
Condensed Consolidated Balance Sheets (unaudited)
   
June 30, December 31,
(in thousands) 2018 2017
Assets
Current assets:
Cash and cash equivalents $ 6,508 $ 9,232
Customer receivables, net of allowance of $69 and $122, respectively 206,558 186,407
Other receivables 22,240 21,637
Prepaid insurance and licenses 7,574 7,070
Operating supplies 9,432 8,787
Assets held for sale 9,720 3,417
Other current assets   15,892     12,170  
Total current assets   277,924     248,720  
Property and equipment, at cost 844,533 835,814
Less accumulated depreciation and amortization   (388,877 )   (371,909 )
Net property and equipment   455,656     463,905  
Other assets:
Goodwill 57,708 57,708
Intangible assets, net 29,827 30,742
Other   21,110     19,496  
Total other assets   108,645     107,946  
Total assets $ 842,225   $ 820,571  
Liabilities, Redeemable Restricted Units and Stockholder’s Equity (Deficit)
Current liabilities:
Accounts payable $ 74,944 $ 80,555
Book overdraft 3,537
Accrued wages and benefits 24,885 20,530
Claims and insurance accruals 46,839 47,641
Other accrued liabilities 5,420 13,901
Current maturities of long-term debt   110,062     132,332  

Total current liabilities

  262,150     298,496  
Long-term debt, net of current maturities 282,209 480,472
Less unamortized discount and debt issuance costs   (1,508 )   (7,266 )
Net long-term debt   280,701     473,206  
Deferred income taxes 14,787 15,630
Other long-term liabilities 12,901 14,350
Claims and insurance accruals, long-term 58,124 56,713
Commitments and contingencies:
Redeemable restricted units 3,281
Stockholder’s Equity (Deficit):
Common Stock 483 64
Additional paid-in capital 250,607 1
Accumulated deficit   (40,460 )   (43,459 )
Stockholder’s equity (deficit) 210,630 (43,394 )
Noncontrolling interest   2,932     2,289  
Total stockholder’s equity (deficit)   213,562     (41,105 )
Total liabilities, redeemable restricted units and stockholder’s equity $ 842,225   $ 820,571  
 
   
Condensed Consolidated Cash Flow Statements (unaudited)
 
  Six Months Ended June 30,
(in thousands) 2018 2017
Operating activities
Net income (loss) $ 2,417 $ (12,804 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Early extinguishment of debt 7,753
Equity in loss of affiliated companies 177 1,000
Deferred income tax benefit (959 ) (7,077 )
Provision for losses on receivables 36
Depreciation and amortization 46,792 44,976
Losses on sale of property and equipment 2,063 782
Restricted unit amortization 629 259
Original issue discount and deferred financing amortization 1,387 1,456
Interest paid-in-kind (7,516 ) 953
Purchase commitment interest (income) expense 171 (366 )
Changes in operating assets and liabilities
Receivables (17,531 ) (7,246 )
Prepaid insurance and licenses (504 ) (284 )
Operating supplies (1,042 ) (66 )
Other assets (3,777 ) (1,361 )
Accounts payable and other accrued liabilities (15,353 ) (12,934 )
Accrued wages and benefits   4,356     (471 )
Net cash provided by operating activities   19,099     6,817  
Investing activities
Payments for purchases of property and equipment (62,864 ) (227,380 )
Proceeds from sales of property and equipment 15,355 15,270
Acquisition of business (2,219 )
Other   (500 )   (618 )
Net cash used in investing activities   (48,009 )   (214,947 )
Financing activities
Borrowings under lines of credit 214,432 198,590
Payments under lines of credit (243,765 ) (158,204 )
Borrowings under long-term debt 244,677 216,808
Payments of long-term debt (427,341 ) (55,051 )
Payments of financing costs and original issue discount (4,151 ) (195 )
Proceeds from issuance of 16,668,000 shares, net of expenses 247,098
Payments of long-term consideration for business acquisition (1,010 )
Repurchase of membership units (217 ) (340 )
Book overdraft   (3,537 )   7,432  
Net cash provided by financing activities   26,186     209,040  
Net change in cash and cash equivalents (2,724 ) 910
Cash and cash equivalents
Beginning of year   9,232     3,278  
End of year $ 6,508   $ 4,188  
 
         
Key Operating Factors & Truckload Statistics (unaudited)
 
Quarter Ended June 30, % Six Months Ended June 30, %
2018 2017 Change 2018 2017 Change
Operating Revenue:
Truckload1 $ 344,447 $ 301,095 14.4 % $ 672,764 $ 595,154 13.0 %
Fuel Surcharge 46,950 31,887 47.2 % 89,800 63,722 40.9 %
Brokerage   58,361     37,368   56.2 %   112,902     75,150   50.2 %
Total Operating Revenue $ 449,758 $ 370,350 21.4 % $ 875,466 $ 734,026 19.3 %
 
Operating Income:
Truckload $ 18,590 $ 3,295 464.2 % $ 31,093 $ 4,997 522.2 %
Brokerage $ 1,428   $ (606 ) nm $ 3,779   $ (380 ) nm
$ 20,018 $ 2,689 644.4 % $ 34,872 $ 4,617 655.3 %
 
Operating Ratio:
Operating Ratio 95.5 % 99.3 % -3.8 % 96.0 % 99.4 % -3.4 %
Adjusted Operating Ratio2 93.4 % 98.5 % -5.2 % 94.7 % 99.0 % -4.3 %
 
Truckload Operating Ratio 95.3 % 99.0 % -3.8 % 95.9 % 99.2 % -3.3 %
Adjusted Truckload Operating Ratio2 92.7 % 98.1 % -5.5 % 94.4 % 98.8 % -4.4 %
Brokerage Operating Ratio 97.6 % 101.6 % -4.0 % 96.7 % 100.5 % -3.8 %
 
Truckload Statistics:3
Revenue Per Mile1 $ 2.105 $ 1.890 11.4 % $ 2.078 $ 1.885 10.2 %
 
Average Tractors –
Company Owned 4,955 5,490 -9.7 % 5,054 5,504 -8.2 %
Owner Operators   1,344     700   92.0 %   1,223     700   74.7 %
Total Average Tractors 6,299 6,190 1.8 % 6,277 6,204 1.2 %
 

Average Revenue Miles Per Tractor Per Week

1,816 1,834 -1.0 % 1,814 1,823 -0.5 %
 

Average Revenue Per Tractor Per Week1

$ 3,823 $ 3,467 10.3 % $ 3,771 $ 3,437 9.7 %
 
Total Miles 163,009 162,132 0.5 % 324,066 320,922 1.0 %
 
Total Company Miles 125,206 139,794 -10.4 % 255,532 276,585 -7.6 %
 
Total Independent Contractor Miles 37,803 22,338 69.2 % 68,534 44,337 54.6 %
 
Independent Contractor fuel surcharge 10,514 4,255 147.1 % 18,470 8,642 113.7 %
 
1 Excluding fuel surcharge revenues
2 See GAAP to non-GAAP reconciliation in the schedules following this release
3 Excludes revenue, miles and tractors for services performed in Mexico.
 
 
Non-GAAP Reconciliation – Adjusted Operating Income and Adjusted Operating Ratio (unaudited)
     
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2018 2017 2018 2017
GAAP Presentation:
Total revenue $ 449,758 $ 370,350 $ 875,466 $ 734,026
Total operating expenses   (429,740 )   (367,661 )   (840,594 )   (729,409 )
Operating Income $ 20,018   $ 2,689   $ 34,872   $ 4,617  
Operating ratio   95.5 %   99.3 %   96.0 %   99.4 %
 
Non-GAAP Presentation
Total revenue $ 449,758 $ 370,350 $ 875,466 $ 734,026
Fuel surcharge   (46,950 )   (31,887 )   (89,800 )   (63,721 )
Revenue, excluding fuel surcharge 402,808 338,463 785,666 670,305
 
Total operating expenses 429,740 367,661 840,594 729,409
Adjusted for:
Fuel surcharge (46,950 ) (31,887 ) (89,800 ) (63,721 )
Fuel purchase arrangements (2,361 ) (2,361 )
IPO-related costs1   (6,437 )       (6,437 )    
Adjusted operating expenses   376,353     333,413     744,357     663,327  
Adjusted Operating Income $ 26,455   $ 5,050   $ 41,309   $ 6,978  
Adjusted Operating Ratio   93.4 %   98.5 %   94.7 %   99.0 %
 
Non-GAAP Reconciliation – Truckload Adjusted Operating Income and Adjusted Operating Ratio (unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
(in thousands)   2018     2017     2018     2017  
Truckload GAAP Presentation:
Total Truckload revenue $ 391,397 $ 332,982 $ 762,564 $ 658,876
Total Truckload operating expenses   (372,807 )   (329,687 )   (731,471 )   (653,880 )
Truckload Operating Income $ 18,590   $ 3,295   $ 31,093   $ 4,996  
Truckload Operating ratio   95.3 %   99.0 %   95.9 %   99.2 %
 
Truckload Non-GAAP Presentation
Total Truckload revenue $ 391,397 $ 332,982 $ 762,564 $ 658,876
Fuel surcharge   (46,950 )   (31,887 )   (89,800 )   (63,721 )
Revenue, excluding fuel surcharge 344,447 301,095 672,764 595,155
 
Total Truckload operating expenses 372,807 329,687 731,471 653,880
Adjusted for:
Fuel surcharge (46,950 ) (31,887 ) (89,800 ) (63,721 )
Fuel purchase arrangements (2,361 ) (2,361 )
IPO-related costs1   (6,437 )       (6,437 )    
Truckload Adjusted operating expenses   319,420     295,439     635,234     587,798  
Truckload Adjusted Operating Income $ 25,027   $ 5,656   $ 37,530   $ 7,357  
Truckload Adjusted operating ratio   92.7 %   98.1 %   94.4 %   98.8 %
 

1 During the second quarter, we incurred one time expenses for the IPO related to pay out of our SAR program and deal bonuses totaling $6,437.

 

       
Non-GAAP Reconciliation – Adjusted Net Income (unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except per share data) 2018 2017 2018 2017
GAAP: Net Income (Loss) attributable to controlling interest $ 615 $ (8,452 ) $ 1,774 $ (12,884 )
Adjusted for:
Income tax benefit   (1,191 )   (2,261 )   (598 )   (6,195 )
Income (loss) before income taxes attributable to controlling interest $ (576 ) $ (10,713 ) $ 1,176   $ (19,079 )
Fuel purchase arrangements 2,361 2,361
Debt extinguishment costs in conjunction with IPO1 7,753 7,753
IPO-related costs2   6,437         6,437      
Adjusted income (loss) before income taxes   13,614     (8,352 )   15,366     (16,718 )
Adjusted income tax provision (benefit)   2,329     (1,375 )   2,922     (5,309 )
Non-GAAP: Adjusted Net Income(Loss) attributable to controlling interest $ 11,285   $ (6,977 ) $ 12,444   $ (11,409 )
 
1 In connection with the IPO, we recognized an early extinguishment of debt charge related to our then existing term loan.

2 During the second quarter, we incurred one time expenses for the IPO related to pay out of our SAR program and deal bonuses totaling $6,437.

 

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Fortive Declares Regular Quarterly Dividend on its Common Stock and Initial Quarterly Dividend on its Preferred Stock

EVERETT, Wash.–()–Fortive Corporation (“Fortive”) (NYSE: FTV) announced today that its Board of Directors declared a regular quarterly cash dividend of $0.07 per share of its common stock, par value $0.01 per share, payable on September 28, 2018 to common stockholders of record on August 31, 2018. In addition, Fortive announced today that its Board of Directors declared an initial quarterly cash dividend of $12.78 per share of its 5.00% Mandatory Convertible Preferred Stock, Series A, par value $0.01 per share, payable on October 1, 2018 to preferred stockholders of record on September 15, 2018. Although Fortive expects to pay dividends on a quarterly basis, any subsequent declaration of dividends, including the amount, the record dates and the payment dates for any such future dividend payments, is subject to the discretion of the Board of Directors.

ABOUT FORTIVE

Fortive is a diversified industrial growth company comprised of Professional Instrumentation and Industrial Technologies businesses that are recognized leaders in attractive markets. With 2017 revenues of $6.7 billion, Fortive’s well-known brands hold leading positions in field instrumentation, transportation, sensing, product realization, automation and specialty, and franchise distribution. Fortive is headquartered in Everett, Washington and employs a team of more than 26,000 research and development, manufacturing, sales, distribution, service and administrative employees in more than 50 countries around the world. With a culture rooted in continuous improvement, the core of our company’s operating model is the Fortive Business System. For more information please visit: www.fortive.com.

FORWARD-LOOKING STATEMENTS

Statements in this release that are not strictly historical, including the statements regarding the expected future timing of any dividend payments and the Company’s expectations on paying dividends at any level in the future, and any other statements identified by their use of words like “expect,” or other words of similar meaning are “forward-looking” statements within the meaning of the federal securities laws. There are a number of important factors that could cause dividend payments and dividend schedule to differ materially from those suggested or indicated by such forward-looking statements and you should not place undue reliance on any such forward-looking statements. These factors include, among other things: deterioration of or instability in the economy, the markets we serve, international trade policies, and the financial markets, changes in trade relations with China, contractions or lower growth rates and cyclicality of markets we serve, competition, changes in industry standards and governmental regulations, our ability to successfully identify, consummate, integrate and realize the anticipated value of appropriate acquisitions and successfully complete divestitures and other dispositions, our ability to consummate the pending transaction with Altra Industrial Motion on a timely basis, our ability to develop and successfully market new products, software, and services and expand into new markets, the potential for improper conduct by our employees, agents or business partners, contingent liabilities relating to acquisitions and divestitures, impact of changes to tax laws, our compliance with applicable laws and regulations and changes in applicable laws and regulations, risks relating to international economic, political, legal, compliance and business factors, risks relating to potential impairment of goodwill and other intangible assets, currency exchange rates, tax audits and changes in our tax rate and income tax liabilities, the impact of our debt obligations on our operations, litigation and other contingent liabilities including intellectual property and environmental, health and safety matters, our ability to adequately protect our intellectual property rights, risks relating to product, service or software defects, product liability and recalls, risks relating to product manufacturing, our relationships with and the performance of our channel partners, commodity costs and surcharges, our ability to adjust purchases and manufacturing capacity to reflect market conditions, reliance on sole sources of supply, security breaches or other disruptions of our information technology systems, adverse effects of restructuring activities, labor matters, disruptions relating to man-made and natural disasters, impact of our separation from Danaher on our operations or financial results, and impact of our indemnification obligation to Danaher. Additional information regarding the factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2017 and our Quarterly Report on Form 10-Q for the quarters ended March 30, 2018 and June 29, 2018. These forward-looking statements speak only as of the date of this release, and Fortive does not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.

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Terreno Realty Corporation Increases Quarterly Dividend and Files Second Quarter 2018 Financial Statements

SAN FRANCISCO–()–The Board of Directors of Terreno Realty Corporation (NYSE:TRNO), an acquirer, owner and operator of industrial real estate in six major coastal U.S. markets, declared a regular cash dividend for the quarter ending September 30, 2018 of $0.24 per common share; an increase of 9% over the prior dividend level. The dividend will be payable on October 19, 2018 to common stockholders of record at the close of business on October 5, 2018.

Terreno Realty Corporation filed its quarterly report on Form 10-Q for the quarter ended June 30, 2018 with the U.S. Securities and Exchange Commission. The financial statements and supplemental financial information are available in the Investors & Media section of Terreno Realty Corporation’s website, www.terreno.com.

Terreno Realty Corporation acquires, owns and operates industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C.

Additional information about Terreno Realty Corporation is available on the company’s website at www.terreno.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws. We caution investors that forward-looking statements are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “project”, “result”, “should”, “will”, “seek”, “target”, “see”, “likely”, “position”, “opportunity”, “outlook” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control, including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2017 and our other public filings. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

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Eclipse Resources Corporation Announces Second Quarter 2018 Operational and Financial Results

STATE COLLEGE, Pa.–()–Eclipse Resources Corporation (NYSE:ECR) (the “Company” or “Eclipse Resources”) today announced its second quarter 2018 financial and operational results, along with reaffirming guidance for full year 2018. In conjunction with this release, the Company has posted an updated corporate presentation in the Investor Center section of its website at www.eclipseresources.com.

Second Quarter 2018 Highlights:

  • Average net daily production was 305.5 MMcfe per day, consisting of 72% natural gas and 28% liquids.
  • Realized an average natural gas price, before the impact of cash settled derivatives and firm transportation expenses, of $2.72 per Mcf, a $0.08 per Mcf discount to the average monthly NYMEX settled natural gas price during the quarter.
  • Realized an average oil price, before the impact of cash settled derivatives, of $61.64 per barrel, a $6.43 per barrel discount to the average daily NYMEX WTI oil price during the quarter.
  • Realized an average natural gas liquids (“NGL”) price, before the impact of cash settled derivatives, of $22.99 per barrel, or approximately 34% of the average daily NYMEX WTI oil price during the quarter.
  • Per unit cash production costs (including lease operating, transportation, gathering and compression, production and ad valorem taxes)were $1.47 per Mcfe, including $0.41 per Mcfe in firm transportation expenses.
  • Net loss for the second quarter of 2018 was ($19.0) million and Adjusted EBITDAX1 for the second quarter of 2018 was $51.1 million.

1Non-GAAP measure. See reconciliation for details

Benjamin W. Hulburt, Chairman, President and CEO, commented on the Company’s second quarter 2018 results, “This was another solid earnings report with our continued focus on execution, innovation and efficiency, which resulted in the Company delivering what we believe to be another tremendous quarter with cash flows above expectations, capital expenditures below expectations, production above the top end of our guidance range, operating expenses below the low end of our guidance and continued strong well performance in both the dry gas and condensate areas of our acreage.

We have continued our relentless pursuit for industry leading innovation, and have set a new internal record for production on our recent Rolland C 5H “super-lateral”, which we drilled to a total measured depth of 26,027 feet with a 15,285 foot completable lateral in our Utica Dry Gas area. This well was initially turned to sales late in the second quarter of 2018 and flowed at a target rate of approximately 40 Mmcf per day before recently being shut in for offset operator activity. In addition, we continue to be excited with the potential for our Flat Castle acreage in north central Pennsylvania and are currently in the final stages of completion operations on our first operated well, the Painter 2H, which we intend to place into sales during the third quarter of 2018.

For the second quarter of 2018, the Company was able to achieve revenue of $103.6 million, a 20% increase over the second quarter of 2017, while also posting a 29% increase in adjusted EBITDAX1 over the second quarter of 2017, which came in at $51.1 million. We continued to capitalize on our industry leading well costs and operational capabilities, while our per unit cash production costs of $1.47 were better than our second quarter 2018 guidance. From a capital spending perspective, the Company is continuing to manage its plan consistent with the revised $250 million guidance that was previously provided and we believe that our proven operational performance, continued gain in efficiency and financial flexibility leave us well positioned to deliver upon the full year 2018 production guidance that we have issued.

Our strategic and financial review process continues. As we have previously discussed, there is no timetable for the completion of the strategic review process nor any assurance that the review process will result in a transaction or other strategic alternative. The Company will provide further information when and if disclosure is appropriate or required.”

1Non-GAAP measure. See reconciliation for details

Operational Discussion

The Company’s production for the three and six months ended June 30, 2018 and 2017 is set forth in the following table:

   
Three Months Ended Six Months Ended
June 30, June 30,
2018   2017 2018   2017
Production:
Natural gas (MMcf) 19,985.4 20,127.8 40,328.7 39,509.4
NGLs (Mbbls) 813.6 662.1 1,586.2 1,327.1
Oil (Mbbls) 489.1 347.8 1,054.6 801.9
Total (MMcfe) 27,801.6 26,187.2 56,173.5 52,283.4
 
Average daily production volume:
Natural gas (Mcf/d) 219,620 221,185 222,810 218,284
NGLs (Bbls/d) 8,941 7,276 8,764 7,332
Oil (Bbls/d) 5,375 3,822 5,827 4,430
Total (MMcfe/d) 305.5 287.8 310.4 288.9
 

Market Conditions

Prices for various quantities of natural gas, NGLs and oil that we produce significantly impact our revenues and cash flows. Prices for commodities, such as hydrocarbons, are inherently volatile. The following table lists average daily, high, low and average monthly settled NYMEX Henry Hub prices for natural gas and average daily, high and low NYMEX WTI prices for oil for the three and six months ended June 30, 2018 and 2017:

   
Three Months Ended Six Months Ended
June 30, June 30,
2018   2017 2018   2017
NYMEX Henry Hub High ($/MMBtu) $ 3.08 $ 3.27 $ 6.24 $ 3.71
NYMEX Henry Hub Low ($/MMBtu) 2.74 2.85 2.49 2.44
Average Daily NYMEX Henry Hub ($/MMBtu) 2.85 3.08 2.96 3.05
Average Monthly Settled NYMEX Henry Hub ($/MMBtu) 2.80 3.18 2.90 3.25
 
NYMEX WTI High ($/Bbl) $ 77.41 $ 53.38 $ 77.41 $ 54.48
NYMEX WTI Low ($/Bbl) 62.03 42.48 59.20 42.48
Average Daily NYMEX WTI ($/Bbl) 68.07 48.10 65.55 49.85
 

Financial Discussion

Revenue for the three months ended June 30, 2018 totaled $103.6 million, compared to $86.2 million for the three months ended June 30, 2017. Adjusted Revenue2, which includes the impact of cash settled derivatives and excludes brokered natural gas and marketing revenue, totaled $100.8 million for the three months ended June 30, 2018 compared to $83.6 million for the three months ended June 30, 2017. Net Loss for the three months ended June 30, 2018 was ($19.0) million, or ($0.06) per share, compared to Net Income of $11.5 million, or $0.04 per share, for the three months ended June 30, 2017. Adjusted Net Income2 (Loss) for the three months ended June 30, 2018 was $2.5 million, or $0.01 per share, compared to $(2.8) million, or $(0.01) per share, for the three months ended June 30, 2017. Adjusted EBITDAX2 was $51.1 million for the three months ended June 30, 2018 compared to $39.6 million for the three months ended June 30, 2017.

2Adjusted Revenue, Adjusted Net Income (Loss) and Adjusted EBITDAX are non-GAAP financial measures. Tables reconciling Adjusted Revenue, Adjusted Net Income (Loss) and Adjusted EBITDAX to the most directly comparable GAAP measures can be found at the end of the financial statements included in this press release.

Average realized price calculations for the three and six months ended June 30, 2018 and 2017 are set forth in the table below:

   
Three Months Ended Six Months Ended
June 30, June 30,
2018   2017 2018   2017

Average realized price (excluding cash settled derivatives and firm transportation)

Natural gas ($/Mcf) $ 2.72 $ 2.98 $ 2.80 $ 3.07
NGLs ($/Bbl) 22.99 16.84 24.24 21.26
Oil ($/Bbl) 61.64 43.57 58.89 45.02
Total average prices ($/Mcfe) 3.71 3.29 3.80 3.55
 

Average realized price (including cash settled derivatives, excluding firm transportation)

Natural gas ($/Mcf) $ 2.84 $ 2.86 $ 2.94 $ 2.94
NGLs ($/Bbl) 22.99 16.38 23.64 20.23
Oil ($/Bbl) 51.94 43.57 52.12 45.11
Total average prices ($/Mcfe) 3.62 3.19 3.76 3.42
 

Average realized price (including firm transportation, excluding cash settled derivatives)

Natural gas ($/Mcf) $ 2.16 $ 2.52 $ 2.33 $ 2.56
NGLs ($/Bbl) 22.99 16.84 24.24 21.26
Oil ($/Bbl) 61.64 43.57 58.89 45.02
Total average prices ($/Mcfe) 3.31 2.94 3.46 3.16
 

Average realized price (including cash settled derivatives and firm transportation)

Natural gas ($/Mcf) $ 2.27 $ 2.41 $ 2.47 $ 2.43
NGLs ($/Bbl) 22.99 16.38 23.64 20.23
Oil ($/Bbl) 51.94 43.57 52.12 45.11
Total average prices ($/Mcfe) 3.22 2.84 3.42 3.04
 

Per unit cash production costs, which include $0.41 per Mcfe of firm transportation expense, were $1.47 per Mcfe for the second quarter of 2018 and increased by 8% compared to the second quarter of 2017. The Company’s cash production costs (which include lease operating, transportation, gathering and compression, production and ad valorem taxes) are shown in the table below.

General and administrative expense was $10.7 million for each of the three months ended June 30, 2018 and 2017 and is shown in the table below. Cash general and administrative expense3, which exclude stock-based compensation expense, were $8.7 million and $8.4 million for the three months ended June 30, 2018 and 2017 respectively. General and administrative expense per Mcfe was $0.38 in the three months ended June 30, 2018 compared to $0.41 in the three months ended June 30, 2017. Cash general and administrative expense3 per Mcfe was $0.31 in the three months ended June 30, 2018 compared to $0.32 in the three months ended June 30, 2017.

3Cash general and administrative expense is a non-GAAP financial measure. A table reconciling cash general and administrative expense to the most directly comparable GAAP measure can be found at the end of the financial statements included in this press release.

   
Three Months Ended Six Months Ended
June 30, June 30,
2018   2017 2018   2017
Operating expenses (in thousands):
Lease operating $ 7,324 $ 4,568 $ 16,714 $ 6,911
Transportation, gathering and compression 31,371 28,969 59,060 61,846
Production and ad valorem taxes 2,178 2,033 4,623 3,964
Depreciation, depletion and amortization 32,760 25,152 63,916 51,341
General and administrative 10,697 10,730 20,454 20,862
Operating expenses per Mcfe:
Lease operating $ 0.26 $ 0.17 $ 0.30 $ 0.13
Transportation, gathering and compression 1.13 1.11 1.06 1.19
Production and ad valorem taxes 0.08 0.08 0.08 0.08
Depreciation, depletion and amortization 1.18 0.96 1.14 0.98
General and administrative 0.38 0.41 0.36 0.40
 

Capital Expenditures

Second quarter 2018 capital expenditures were $69.3 million, including $65.6 million for drilling and completions, $5.2 million for midstream expenditures, $(1.9) million for land-related expenditures (which include proceeds associated with the sale of acreage), and $0.4 million for corporate-related expenditures.

During the second quarter of 2018, the Company commenced drilling 6 gross (2.2 net) operated Utica Shale wells, commenced completions of 9 gross (4.2 net) operated wells and turned to sales 9 gross (6.2 net) operated wells.

Financial Position and Liquidity

As of June 30, 2018, the Company’s liquidity was $143.4 million, consisting of $12.0 million in cash and cash equivalents and $131.4 million in available borrowing capacity under the Company’s revolving credit facility (after giving effect to outstanding letters of credit issued by the Company of $33.6 million and $60 million in outstanding borrowings).

Matthew R. DeNezza, Executive Vice President and Chief Financial Officer, commented, “We are again pleased with the level of EBITDAX generated in the second quarter and continue to anticipate strong cash flow growth in the full year 2018. From a pricing perspective, the gas marketing team was able to capture a strong differential through the optimization of our natural gas, while continuing to assume an increase during the second half of 2018 in our operating expenses associated with the Company’s Rover pipeline capacity being fully utilized. As a means of providing additional certainty of cash flows, the majority of our estimated 2018 natural gas production is hedged with an average floor price of $2.93 per MMbtu.”

Commodity Derivatives

The Company engages in a number of different commodity trading program strategies as a risk management tool to attempt to mitigate the potential negative impact on cash flows caused by price fluctuations in natural gas, NGL and oil prices. Below is a table that illustrates the Company’s hedging activities as of June 30, 2018:

Natural Gas Derivatives

 

Volume

    Weighted Average
Description

 

(MMBtu/d)

Production Period Price ($/MMBtu)
Natural Gas Swaps:
30,000 July 2018 – March 2019 $ 2.90
20,000 July 2018 – December 2018 $ 2.80
20,000 July 2018 – September 2018 $ 2.81
40,000 October 2018 – December 2019 $ 2.80
50,000 January 2019 – December 2019 $ 2.87
Natural Gas Three-way Collars:
Floor purchase price (put) 30,000 July 2018 – March 2019 $ 3.00
Ceiling sold price (call) 30,000 July 2018 – March 2019 $ 3.40
Floor sold price (put) 30,000 July 2018 – March 2019 $ 2.50
Floor purchase price (put) 40,000 July 2018 – December 2018 $ 3.11
Floor purchase price (put) 60,000 July 2018 – December 2018 $ 2.80
Ceiling sold price (call) 100,000 July 2018 – December 2018 $ 3.36
Floor sold price (put) 100,000 July 2018 – December 2018 $ 2.50
Floor purchase price (put) 20,000 October 2018 – December 2019 $ 2.75
Ceiling sold price (call) 20,000 October 2018 – December 2019 $ 3.10
Floor sold price (put) 20,000 October 2018 – December 2019 $ 2.30
Floor purchase price (put) 57,500 January 2019 – December 2019 $ 2.72
Ceiling sold price (call) 57,500 January 2019 – December 2019 $ 3.02
Floor sold price (put) 57,500 January 2019 – December 2019 $ 2.30
Natural Gas Call/Put Options:
Call sold 40,000 July 2018 – December 2018 $ 3.75
Call sold 30,000 January 2019 – March 2019 $ 3.50
Call sold 30,000 April 2019 – December 2019 $ 3.00
Call sold 10,000 January 2019 – December 2019 $ 4.75
Basis Swaps:
Appalachia – Dominion 12,500 April 2019 – October 2019 $ (0.52 )
Appalachia – Dominion 12,500 April 2020 – October 2020 $ (0.52 )
Appalachia – Dominion 20,000 January 2020 – December 2020 $ (0.59 )
 

Oil Derivatives

  Volume     Weighted Average
Description (Bbls/d) Production Period Price ($/Bbl)
Oil Swaps:
1,000 July 2018 – March 2019 $ 61.00
Oil Three-way Collars:
Floor purchase price (put) 4,000 July 2018 – December 2018 $ 45.00
Ceiling sold price (call) 4,000 July 2018 – December 2018 $ 53.47
Floor sold price (put) 4,000 July 2018 – December 2018 $ 35.00
Floor purchase price (put) 2,000 January 2019 – December 2019 $ 50.00
Ceiling sold price (call) 2,000 January 2019 – December 2019 $ 60.56
Floor sold price (put) 2,000 January 2019 – December 2019 $ 40.00
 

Guidance

The Company has also reaffirmed full year 2018 guidance as set forth in the table below:

 
FY 2018
Production MMcfe/d 325 – 335
% Gas 72% – 75%
% NGL 13% – 17%
% Oil 10% – 13%
Gas Price Differential ($/Mcf)1,2 $(0.25) – $(0.35)
Oil Differential ($/Bbl)1 $(6.25) – $(7.25)
NGL Prices (% of WTI)1 30% – 35%
Cash Production Costs ($/Mcfe)3 $1.55 – $1.60
Cash G&A ($mm)4 $35 – $37
CAPEX ($mm) ~$250
 
 

1

 

Excludes impact of hedges

2

Excludes the cost of firm transportation

3

Includes lease operating, transportation, gathering and compression, production and ad valorem taxes

4

Non-GAAP measure which excludes non-cash compensation, see reconciliation to the most comparable GAAP measure at the end of the financial statements included in this press release

 

Conference Call

A conference call to review the Company’s financial and operational results is scheduled for Friday, August 3, 2018 at 10:00 a.m. Eastern Time. To participate in the call, please dial 877-709-8150 or 201-689-8354 for international callers and reference Eclipse Resources Second Quarter Earnings Call. A replay of the call will be available through October 3, 2018. To access the phone replay dial 877-660-6853 or 201-612-7415 for international callers. The conference ID is 13681846. A live webcast of the call may be accessed through the Investor Center on the Company’s website at www.eclipseresources.com. The webcast will be archived for replay on the Company’s website for six months.

 
ECLIPSE RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
June 30, December 31,
2018 2017
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,049 $ 17,224
Accounts receivable 112,166 77,609
Assets held for sale 206
Other current assets   7,263   12,023
Total current assets 131,478 107,062
 
PROPERTY AND EQUIPMENT AT COST
Oil and natural gas properties, successful efforts method:
Unproved properties 547,963 459,549
Proved oil and gas properties, net 716,292 647,881
Other property and equipment, net   6,949   6,942
Total property and equipment, net 1,271,204 1,114,372
 
OTHER NONCURRENT ASSETS
Other assets   3,117   2,093
TOTAL ASSETS $ 1,405,799 $ 1,223,527
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable $ 111,230 $ 76,174
Accrued capital expenditures 13,689 10,658
Accrued liabilities 49,326 41,662
Accrued interest payable   21,891   21,100
Total current liabilities 196,136 149,594
 
NONCURRENT LIABILITIES
Debt, net of unamortized discount and debt issuance costs 496,397 495,021
Credit facility 60,000
Asset retirement obligations 6,554 6,029
Other liabilities   3,348   529
Total liabilities 762,435 651,173
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY

Preferred stock, 50,000,000 authorized, no shares issued and outstanding

Common stock, $0.01 par value, 1,000,000,000 authorized, 302,325,028 and 262,740,355 shares issued and outstanding, respectively

3,040 2,637
Additional paid in capital 2,061,365 1,967,958

Treasury stock, shares at cost; 1,661,915 and 992,315 shares, respectively

(3,236 ) (2,096 )
Accumulated deficit   (1,417,805 )   (1,396,145 )
Total stockholders’ equity   643,364   572,354
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,405,799 $ 1,223,527
 
   
ECLIPSE RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2018   2017 2018   2017
REVENUES
Natural gas, oil and natural gas liquids sales $ 103,257 $ 86,194 $ 213,441 $ 185,625
Brokered natural gas and marketing revenue   365   (3 )   373   2,428
Total revenues 103,622 86,191 213,814 188,053
 
OPERATING EXPENSES
Lease operating 7,324 4,568 16,714 6,911
Transportation, gathering and compression 31,371 28,969 59,060 61,846
Production and ad valorem taxes 2,178 2,033 4,623 3,964
Brokered natural gas and marketing expense 430 6 477 2,466
Depreciation, depletion and amortization 32,760 25,152 63,916 51,341
Exploration 9,620 8,997 24,898 20,577
General and administrative 10,697 10,730 20,454 20,862
Accretion of asset retirement obligations 162 128 317 252
(Gain) loss on sale of assets   (1,553 )   6   (1,820 )   1
Total operating expenses   92,989   80,589   188,639   168,220
OPERATING INCOME (LOSS) 10,633 5,602 25,175 19,833
OTHER INCOME (EXPENSE)
Gain (loss) on derivative instruments (16,577 ) 18,177 (20,792 ) 43,274
Interest expense, net (13,092 ) (12,285 ) (26,043 ) (24,747 )
Other income (expense)         (19 )
Total other income (expense), net   (29,669 )   5,892   (46,835 )   18,508
INCOME (LOSS) BEFORE INCOME TAXES (19,036 ) 11,494 (21,660 ) 38,341
INCOME TAX BENEFIT (EXPENSE)        
NET INCOME (LOSS) $ (19,036 ) $ 11,494 $ (21,660 ) $ 38,341
 
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (0.06 ) $ 0.04 $ (0.07 ) $ 0.15
Diluted $ (0.06 ) $ 0.04 $ (0.07 ) $ 0.15
 
WEIGHTED AVERAGE COMMON SHARES

OUTSTANDING

Basic 301,936 262,423 297,717 261,768
Diluted 301,936 264,420 297,717 264,321
 

Adjusted Revenue

Adjusted revenue is a non-GAAP financial measure. The Company defines adjusted revenue as follows: total revenues plus net cash receipts or payments on settled derivative instruments less brokered natural gas and marketing revenue. The Company believes adjusted revenue provides investors with helpful information with respect to the performance of the Company’s operations and management uses adjusted revenue to evaluate its ongoing operations and for internal planning and forecasting purposes. See the table below, which reconciles adjusted revenue and total revenues.

   
For the Three Months Ended For the Six Months Ended
June 30, June 30,
$ thousands 2018   2017 2018   2017
Total revenues $ 103,622 $ 86,191 $ 213,814 $ 188,053
Net cash receipts (payments) on derivative instruments (2,488 ) (2,644 ) (2,347 ) (6,633 )
Brokered natural gas and marketing revenue   (365 )   3   (373 )   (2,428 )
Adjusted revenue $ 100,769 $ 83,550 $ 211,094 $ 178,992
 

Adjusted Net Income (Loss)

Adjusted net income (loss) represents income (loss) before income taxes adjusted for certain non-cash items as set forth in the table below. We believe adjusted net income (loss) is used by many investors and published research in making investment decisions and evaluating operational trends of the Company and its performance relative to other oil and gas producing companies. Adjusted net income (loss) is not a measure of net income (loss) as determined by GAAP. See the table below for a reconciliation of adjusted net income (loss) and net income (loss).

   
Three Months Ended

Six Months Ended

June 30,

June 30,

$ thousands 2018   2017 2018   2017
Income (loss) before income taxes, as reported $ (19,036 ) $ 11,494 $ (21,660 ) $ 38,341
(Gain) loss on derivative instruments 16,577 (18,177 ) 20,792 (43,274 )
Net cash receipts (payments) on derivative instruments (2,488 ) (2,644 ) (2,347 ) (6,633 )
Dry hole and other 2 79 96 942
Stock-based compensation 1,979 2,348 3,960 4,429
Impairment of unproved properties 6,971 4,125 13,667 8,250
Other (income) expense 19
(Gain) loss on sale of assets   (1,553 )   6   (1,820 )   1
Loss before income taxes, as adjusted   2,452   (2,769 )   12,688   2,075
Adjusted net income (loss) $ 2,452 $ (2,769 ) $ 12,688 $ 2,075
 
Net income (loss) per Common Share
Basic $ (0.06 ) $ 0.04 $ (0.07 ) $ 0.15
Diluted $ (0.06 ) $ 0.04 $ (0.07 ) $ 0.15
 
Adjusted net income (loss) per Common Share
Basic $ 0.01 $ (0.01 ) $ 0.04 $ 0.01
Diluted $ 0.01 $ (0.01 ) $ 0.04 $ 0.01
 
Weighted Average Common Shares Outstanding
Basic 301,936 262,423 297,717 261,768
Diluted 301,936 264,420 297,717 264,321
 

Adjusted EBITDAX

Adjusted EBITDAX is a supplemental non-GAAP measure that is used by the Company to evaluate its financial results. The Company defines Adjusted EBITDAX as net income or loss before interest expense; income taxes; impairments; depreciation, depletion and amortization (“DD&A”); gain (loss) on derivative instruments, net cash receipts (payments on settled derivative instruments, and premiums (paid) received on options that settled during the period); non-cash compensation expense; gain or loss from sale of interest in gas properties; exploration expenses; and other unusual or infrequent items set forth in the table below. Adjusted EBITDAX is not a measure of net income or loss as determined by GAAP. See the table below for a reconciliation of Adjusted EBITDAX to net income or net loss.

   
Three Months Ended Six Months Ended
June 30, June 30,
$ thousands 2018   2017   2018   2017
Net income (loss) $ (19,036 ) $ 11,494 $ (21,660 ) $ 38,341
Depreciation, depletion and amortization 32,760 25,152 63,916 51,341
Exploration expense 9,620 8,997 24,898 20,577
Stock-based compensation 1,979 2,348 3,960 4,429
Accretion of asset retirement obligations 162 128 317 252
(Gain) loss on sale of assets (1,553 ) 6 (1,820 ) 1
(Gain) loss on derivative instruments 16,577 (18,177 ) 20,792 (43,274 )
Net cash receipts (payments) on settled derivatives (2,488 ) (2,644 ) (2,347 ) (6,633 )
Interest expense, net 13,092 12,285 26,043 24,747
Other (income) expense         19
Adjusted EBITDAX $ 51,113 $ 39,589 $ 114,099 $ 89,800
 

Cash General and Administrative Expenses

Cash General and Administrative Expenses is a non-GAAP financial measure used by the Company in the Guidance Table to provide a measure of administrative expenses used by many investors and published research in making investment decisions and evaluating operational trends of the Company. See the table below for a reconciliation of Cash General and Administrative Expenses and General and Administrative Expenses.

     
Guidance
For the Three Months For the Three Months For the Year Ending
$ thousands Ended June 30, 2018 Ended June 30, 2017 December 31, 2018

General and administrative expenses, estimated to be reported

$ 10,697 $ 10,730 $43,500-$47,500
Stock-based compensation expense   (1,979 )   (2,348 ) (8,500 – 10,500)
Cash general and administrative expenses $ 8,718 $ 8,382 $35,000-$37,000
 

About Eclipse Resources

Eclipse Resources is an independent exploration and production company engaged in the acquisition and development of oil and natural gas properties in the Appalachian Basin, including the Utica and Marcellus Shales. For more information, please visit the Company’s website at www.eclipseresources.com.

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this press release, regarding Eclipse Resources’ strategy, future operations, financial position, estimated revenues and income/losses, projected costs and capital expenditures, prospects, plans and objectives of management are forward-looking statements. When used in this press release, the words “plan,” “endeavor,” “will,” “would,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on Eclipse Resources’ current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” in Eclipse Resources’ Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2018 (the “2017 Annual Report”), and in “Item 1A. Risk Factors” of Eclipse Resources’ Quarterly Reports on Form 10-Q.

Forward-looking statements may include, but are not limited to, statements about Eclipse Resources’ business strategy; reserves; general economic conditions; financial strategy, liquidity and capital required for developing its properties and timing related thereto; realized prices for natural gas, NGLs and oil and the volatility of those prices; write-downs of its natural gas and oil asset values due to declines in commodity prices; timing and amount of future production of natural gas, NGLs and oil; its hedging strategy and results; future drilling plans; competition and government regulations, including those related to hydraulic fracturing; the anticipated benefits under its commercial agreements; marketing of natural gas, NGLs and oil; leasehold and business acquisitions and joint ventures; the expiration of primary terms of oil and gas leases before production can be established and as costs to extend such terms; the costs, terms and availability of gathering, processing, fractionation and other midstream services; credit markets; uncertainty regarding its future operating results, including initial production rates and liquid yields in its type curve areas; and plans, objectives, expectations and intentions contained in this press release that are not historical, including, without limitation, the guidance set forth herein..

Eclipse Resources cautions you that all these forward-looking statements are subject to risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control, incident to the exploration for and development, production, gathering and sale of natural gas, NGLs and oil. These risks include, but are not limited to, legal and environmental risks, drilling and other operating risks, regulatory changes, commodity price volatility and the significant decline of the price of natural gas, NGLs, and oil from historical highs, inflation, lack of availability of drilling, production and processing equipment and services, counterparty credit risk, the uncertainty inherent in estimating natural gas, NGLs and oil reserves and in projecting future rates of production, cash flow and access to capital, risks associated with the Company’s level of indebtedness, the timing of development expenditures, and the other risks described under the heading “Risk Factors” in the 2017 Annual Report and in “Item 1A. Risk Factors” of Eclipse Resources’ Quarterly Reports on Form 10-Q.

All forward-looking statements, expressed or implied, included in this press release are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Eclipse Resources or persons acting on the Company’s behalf may issue. Except as otherwise required by applicable law, Eclipse Resources disclaims any duty to update any forward-looking statements to reflect events or circumstances after the date of this press release.

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PennyMac Financial Services, Inc. Reports Second Quarter 2018 Results and Declares Special, One-Time Dividend

WESTLAKE VILLAGE, Calif.–()–PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $68.4 million for the second quarter of 2018, on revenue of $244.3 million. Net income attributable to PFSI common stockholders was $17.8 million, or $0.70 per diluted share. Book value per share increased to $21.19, from $20.74 at March 31, 2018.

Additionally, the PFSI Board of Directors declared a special, one-time cash dividend of $0.40 per share of PFSI Class A common stock. The dividend represents cash that resulted from previous tax-related distributions from Private National Mortgage Acceptance Company, LLC (PNMAC) in excess of PFSI’s tax obligations. This dividend will be paid on August 30, 2018 to Class A common stockholders of record as of August 13, 2018. The Company anticipates that this distribution will be reported as a return of capital for tax purposes, based on the Company’s current expectations regarding its projected taxable earnings and profits for the year 2018.1

Also today, a registration statement is being filed by New PennyMac Financial Services, Inc.2 for a corporate reorganization that, if completed, would simplify the Company’s corporate structure and convert all equity ownership in PFSI and PNMAC into a single class of publicly traded common stock.

Second Quarter 2018 Highlights

  • Pretax income was $74.7 million, up from $73.0 million in the prior quarter
    • Second quarter results reflect continued strong Servicing segment results and a quarterly increase in earnings contribution from the Production segment driven by higher volume
  • Production segment pretax income was $19.0 million, up 11 percent from the prior quarter and down 71 percent from the second quarter of 2017
    • Total loan acquisitions and originations were $15.9 billion in unpaid principal balance (UPB), up 11 percent from the prior quarter and down 9 percent from the second quarter of 2017
    • Correspondent government and direct lending interest rate lock commitments (IRLCs) totaled $11.9 billion in UPB, up 9 percent from the prior quarter and down 12 percent from the second quarter of 2017
  • Servicing segment pretax income was $54.6 million, modestly down from $54.9 million in the prior quarter and up from a loss of $11.2 million from the second quarter of 2017
    • Servicing segment pretax income excluding valuation-related changes was $35.8 million, down 1 percent from the prior quarter and up 134 percent from the second quarter of 20173
    • The servicing portfolio grew to $263.5 billion in UPB, up 3 percent from March 31, 2018, and 15 percent from June 30, 2017
  • Investment Management segment pretax income was $1.1 million, up from $1.0 million in the prior quarter, and down from $2.5 million in the second quarter of 2017
    • Net assets under management were $1.5 billion, essentially unchanged from
      March 31, 2018, and down 3 percent from June 30, 2017
  • Repurchased approximately 236,000 shares of PFSI’s Class A common stock at a cost of $4.8 million and a weighted average cost of $20.41 per share

Notable activity after quarter end

  • Completed or entered into agreements to acquire bulk Ginnie Mae Mortgage Servicing Right (MSR) portfolios with UPB totaling approximately $13.9 billion
    • Completed acquisitions from three sellers totaling $6.5 billion in UPB
    • Also entered into agreements for acquisitions from another three sellers totaling $7.4 billion in UPB that are expected to close in the third quarter4

“We reported solid financial results for the second quarter in a mortgage origination market that is transitioning and remains competitive, with lenders managing capacity and production margins for the higher rate environment,” said President and CEO David Spector. “Our results reflect the strength of our balanced mortgage banking model with production volume and profits up from the prior quarter and the Servicing segment’s continued strong earnings contribution, which benefited from an increase in mortgage rates during the quarter. In the third quarter, we have deployed capital into bulk MSR acquisitions totaling $6.5 billion in UPB and entered into agreements to acquire three additional portfolios totaling $7.4 billion in UPB. We also continue to invest in growth initiatives, such as broker direct lending, non-delegated correspondent, non-portfolio consumer direct origination and jumbo mortgages, which have the potential to meaningfully contribute to our profitability as they gain traction.”

The following table presents the contribution of PennyMac Financial’s Production, Servicing and Investment Management segments to pretax income:

    Quarter ended June 30, 2018
Mortgage Banking      

 

Investment
Management

Production       Servicing       Total     Total
(in thousands)
Revenue
Net gains on mortgage loans held for sale at fair value $ 33,966 $ 26,980 $ 60,946 $ $ 60,946
Loan origination fees 24,428 24,428 24,428
Fulfillment fees from PMT 14,559 14,559 14,559
Net servicing fees 113,689 113,689 113,689
Management fees 5,664 5,664
Carried Interest from Investment Funds (168 ) (168 )
Net interest income (expense):

 

 

Interest income 16,874 38,230 55,104 55,104
Interest expense   1,025   31,576   32,601   15     32,616  
15,849 6,654 22,503 (15 ) 22,488
Other   536   728   1,264   1,428     2,692  
Total net revenue   89,338   148,051   237,389   6,909     244,298  
Direct expenses 49,484 68,160 117,644 799 118,443
Shared services 12,168 16,756 28,924 3,267 32,191
Corporate Overhead 8,668 8,567 17,235 1,731 18,966
Expenses   70,320   93,483   163,803   5,797     169,600  
Pretax income $ 19,018 $ 54,568 $ 73,586 $ 1,112   $ 74,698  

Production Segment

Production includes the correspondent acquisition of newly originated government-insured mortgage loans for PennyMac Financial’s own account, the underwriting and acquisition of loans from correspondent sellers on a non-delegated basis, fulfillment services on behalf of PennyMac Mortgage Investment Trust (NYSE: PMT) and direct lending through the consumer direct and broker direct channels.

PennyMac Financial’s loan production activity for the quarter totaled $15.9 billion in UPB, of which $10.5 billion in UPB was for its own account, and $5.4 billion in UPB was fee-based fulfillment activity for PMT. Correspondent government and direct lending IRLCs totaled $11.9 billion in UPB.

Production segment pretax income was $19.0 million, an increase of 11 percent from the prior quarter and a decrease of 71 percent from the second quarter of 2017. Production revenue totaled $89.3 million, an increase of 5 percent from the prior quarter and a decrease of 32 percent from the second quarter of 2017. The quarter-over-quarter change resulted from a $3.7 million increase in net interest income and a $2.6 million increase in fulfillment fees from PMT, partially offset by a $2.2 million decrease in net gains on mortgage loans held for sale. Net interest income in the second quarter includes $12.5 million in incentives which the Company is currently entitled to receive under one of its master repurchase agreements to finance mortgage loans that satisfy certain consumer relief characteristics, up from $10.2 million in the prior quarter.

The components of net gains on mortgage loans held for sale are detailed in the following table:

     
Quarter ended
June 30,

2018

March 31,

2018

June 30,

2017

(in thousands)
Receipt of MSRs in loan sale transactions $ 153,924 $ 141,873 $ 133,062
Mortgage servicing rights recapture payable to

PennyMac Mortgage Investment Trust

(936 ) (1,425 ) (1,506 )
Provision for representations and warranties, net 143 (379 ) (276 )
Cash investment (1) (106,946 ) (63,594 ) 7,221
Fair value changes of pipeline, inventory and

hedges

  14,761     (5,061 )   (40,410 )
Net gains on mortgage loans held for sale $ 60,946   $ 71,414   $ 98,091  
 
Net gains on mortgage loans held for sale

by segment:

Production $ 33,966   $ 36,198   $ 74,706  
Servicing $ 26,980   $ 35,216   $ 23,385  
 
(1) Net of cash hedge expense
 

PennyMac Financial performs fulfillment services for conventional conforming loans acquired by PMT in its correspondent production business. These services include, but are not limited to: marketing; relationship management; the approval of correspondent sellers and the ongoing monitoring of their performance; reviewing loan data, documentation and appraisals to assess loan quality and risk; pricing; hedging and activities related to the subsequent sale and securitization of loans in the secondary mortgage markets for PMT.

Fees earned from the fulfillment of correspondent loans on behalf of PMT totaled $14.6 million in the second quarter, up 22 percent from the prior quarter and down 31 percent from the second quarter of 2017. The quarter-over-quarter increase in fulfillment fee revenue was driven by higher acquisition volumes by PMT. For the second quarter, the weighted average fulfillment fee rate was 27 basis points, down from 28 basis points in the prior quarter.

Production segment expenses were $70.3 million, a 3 percent increase from the prior quarter and a 10 percent increase from the second quarter of 2017. The quarter-over-quarter increase was primarily driven by higher production volumes.

Servicing Segment

Servicing includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax income was $54.6 million compared with $54.9 million in the prior quarter and an $11.2 million loss in the second quarter of 2017. Servicing segment revenues totaled $148.1 million, an increase of 1 percent from the prior quarter and 128 percent from the second quarter of 2017. The quarter-over-quarter increase reflects a larger servicing portfolio and higher interest income from custodial deposits, partially offset by increased realization of MSR cash flows and a decrease in revenue related to the reperformance of government-insured and guaranteed loans bought out of Ginnie Mae pools in prior periods.

Net loan servicing fees totaled $113.7 million and included $161.9 million in servicing fees reduced by $65.2 million in realization of MSR cash flows. Valuation-related gains totaled $17.0 million, which includes MSR fair value gains of $42.3 million, associated hedging losses of $24.3 million and changes in fair value of the excess servicing spread (ESS) liability resulting in a $1.0 million loss. The MSR fair value gains primarily resulted from expectations for lower prepayment activity in the future due to higher mortgage rates.

The following table presents a breakdown of net loan servicing fees:

      Quarter ended

June 30,
2018

     

March 31,
2018

     

June 30,
2017

(in thousands)
Servicing fees (1) $ 161,942 $ 160,673 $ 134,192
Effect of MSRs:
Amortization and realization of cash flows (65,227 ) (61,176 ) (55,482 )
Change in fair value and provision for/reversal of impairment of MSRs carried at lower of amortized cost or fair value 42,259 127,806 (36,927 )
Change in fair value of excess servicing spread

financing

(996 ) (6,921 ) 7,156
Hedging losses   (24,289 )   (103,593 )   (2,026 )
Total amortization, impairment and change in fair

value of MSRs

  (48,253 )   (43,884 )   (87,279 )
Net loan servicing fees $ 113,689   $ 116,789   $ 46,913  
 
(1) Includes contractually-specified servicing fees

Servicing segment revenue also included $27.0 million in net gains on mortgage loans held for sale from the securitization of reperforming government-insured and guaranteed loans, compared with $35.2 million in the prior quarter and $23.4 million in the second quarter of 2017. These loans were previously purchased out of Ginnie Mae securitizations as early buyout (EBO) loans and brought back to performing status through PennyMac Financial’s successful servicing efforts, primarily with the use of loan modifications. Net interest income totaled $6.7 million, up from net interest expense of $6.3 million in the prior quarter and $5.8 million in the second quarter of 2017. Interest income increased by $9.9 million from the prior quarter, driven by income from custodial deposits and capitalized interest resulting from an increase in modification of EBO loans during the quarter. Interest expense decreased by $3.1 million from the first quarter; interest expense was elevated in the first quarter due to the accelerated recognition of costs related to the refinancing of MSR-backed term notes.

Servicing segment expenses totaled $93.5 million, a 2 percent increase from the prior quarter and a 23 percent increase from the second quarter of 2017. The quarter-over-quarter increase was driven by servicing portfolio growth and an increase in EBO-related expenses resulting from higher volume of buyouts from Ginnie Mae securitizations.

The total servicing portfolio reached $263.5 billion in UPB at June 30, 2018, an increase of 3 percent from the prior quarter end and 15 percent from a year earlier. Servicing portfolio growth during the quarter was driven by the Company’s loan production activities. Of the total servicing portfolio, prime servicing was $262.6 billion in UPB and special servicing was $0.9 billion in UPB. PennyMac Financial subservices and conducts special servicing for $81.2 billion in UPB, an increase of 5 percent from March 31, 2018 and 21 percent from a year earlier. PennyMac Financial’s owned MSR portfolio grew to $178.3 billion in UPB, an increase of 3 percent from the prior quarter end.

The table below details PennyMac Financial’s servicing portfolio UPB:

     

June 30,
2018

     

March 31,
2018

     

June 30,
2017

(in thousands)
Loans serviced at period end:
Prime servicing:
Owned
Mortgage servicing rights
Originated $ 132,307,067 $   125,643,312 $   105,296,264
Acquisitions   45,957,173     47,843,853     51,927,645
178,264,240 173,487,165 157,223,909
Mortgage servicing liabilities 1,569,602 1,766,722 1,698,588
Mortgage loans held for sale   2,448,908     2,512,546     2,915,346
182,282,750 177,766,433 161,837,843
Subserviced for Advised Entities   80,359,635     76,636,300     64,924,592
Total prime servicing   262,642,385     254,402,733     226,762,435
Special servicing:
Subserviced for Advised Entities   854,994     903,138     2,201,340
Total special servicing   854,994     903,138     2,201,340
Total loans serviced $ 263,497,379 $   255,305,871 $   228,963,775
 
Mortgage loans serviced:
Owned
Mortgage servicing rights $ 178,264,240 $ 173,487,165 $ 157,223,909
Mortgage servicing liabilities 1,569,602 1,766,722 1,698,588
Mortgage loans held for sale   2,448,908     2,512,546     2,915,346
182,282,750 177,766,433 161,837,843
Subserviced   81,214,629     77,539,438     67,125,932
Total mortgage loans serviced $ 263,497,379 $   255,305,871 $   228,963,775

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. PennyMac Financial has also managed two private Investment Funds that sold or liquidated all of their remaining assets in 2017 and the six months ended June 30, 2018. Net assets under management were $1.5 billion as of June 30, 2018, essentially unchanged from March 31, 2018, and down 3 percent from June 30, 2017.

Pretax income for the Investment Management segment was $1.1 million, compared with $1.0 million in the prior quarter and $2.5 million in the second quarter of 2017. Management fees, which include base management fees from PMT and the private Investment Funds, decreased 2 percent from the prior quarter and 6 percent from the second quarter of 2017. No incentive fee was paid by PMT during the quarter as in the prior quarter; incentive fees of $0.3 million were paid for the second quarter of 2017.

The following table presents a breakdown of management fees and carried interest:

      Quarter ended

June 30,
2018

     

March 31,
2018

     

June 30,
2017

(in thousands)
Management fees:
PennyMac Mortgage Investment Trust
Base $ 5,728 $ 5,696 $ 5,334
Performance incentive           304
5,728 5,696 5,638
Investment Funds   (64 )   79     369
Total management fees   5,664     5,775     6,007
Carried Interest   (168 )   (180 )   241
Total management fees and Carried Interest $ 5,496   $ 5,595   $ 6,248
 
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust $ 1,545,487 $ 1,542,258 $ 1,454,832
Investment Funds   765     2,668     144,744
$ 1,546,252   $ 1,544,926   $ 1,599,576

Investment Management segment expenses totaled $5.8 million, down 2 percent from the prior quarter and up 50 percent from the second quarter of 2017. The increase from the prior year was primarily due to a change in accounting for expenses reimbursed by PMT under the Company’s management agreement with PMT. Beginning January 1, 2018, PennyMac Financial is required to include such expense reimbursements in its net revenue and the expenses reimbursed in its expenses. Previously, PennyMac Financial accounted for such reimbursements as reductions to its expenses.

Consolidated Expenses

Total expenses for the second quarter were $169.6 million, a 3 percent increase from the prior quarter and an 18 percent increase from the second quarter of 2017. The quarter-over-quarter change was driven by higher expenses in both the Servicing and Production segments due to higher volumes of activity.

Executive Chairman Stanford L. Kurland concluded, “We continue to invest and pursue the buildout of our business model into new market segments, products and channels. We believe we are well-positioned to expand our growth and earnings opportunities with the investments we are making in our Production and Servicing businesses. In consumer direct lending, we are seeing success in non-portfolio and purchase-money originations, both of which are important to growing volumes. Further, our investments in the broker direct channel are beginning to deliver results and demonstrate our ability to access this previously untapped market segment. We are making technology investments across our business, such as in loan servicing where system enhancements will allow us to capture greater scale efficiencies. We also remain mindful of prudent expense management and are monitoring the deployment of our human resources and capital to ensure we continue to operate at high levels of efficiency and continue delivering attractive returns to stockholders.”

Management’s slide presentation will be available in the Investor Relations section of the Company’s website at www.ir.pennymacfinancial.com beginning at 1:10 p.m. (Pacific Daylight Time) on Thursday, August 2, 2018.

About PennyMac Financial Services, Inc.

PennyMac Financial Services, Inc. is a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the production and servicing of U.S. mortgage loans and the management of investments related to the U.S. mortgage market. PennyMac Financial Services, Inc. trades on the New York Stock Exchange under the symbol “PFSI.” Additional information about PennyMac Financial Services, Inc. is available at www.ir.pennymacfinancial.com.

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management’s beliefs, estimates, projections and assumptions with respect to, among other things, the Company’s financial results, future operations, business plans and investment strategies, as well as industry and market conditions, all of which are subject to change. Words like “believe,” “expect,” “anticipate,” “promise,” “plan,” and other expressions or words of similar meanings, as well as future or conditional verbs such as “will,” “would,” “should,” “could,” or “may” are generally intended to identify forward-looking statements. Actual results and operations for any future period may vary materially from those projected herein and from past results discussed herein. Factors which could cause actual results to differ materially from historical results or those anticipated include, but are not limited to: the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; lawsuits or governmental actions that may result from any noncompliance with the laws and regulations applicable to our businesses; the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau and its enforcement of these regulations; our dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines; changes to government mortgage modification programs; the licensing and operational requirements of states and other jurisdictions applicable to the Company’s businesses, to which our bank competitors are not subject; foreclosure delays and changes in foreclosure practices; certain banking regulations that may limit our business activities; our dependence on the multifamily and commercial real estate sectors for future originations of commercial mortgage loans and other commercial real estate related loans; changes in macroeconomic and U.S. real estate market conditions; difficulties inherent in growing loan production volume; difficulties inherent in adjusting the size of our operations to reflect changes in business levels; purchase opportunities for mortgage servicing rights and our success in winning bids; changes in prevailing interest rates; increases in loan delinquencies and defaults; our reliance on PennyMac Mortgage Investment Trust (NYSE: PMT) as a significant source of financing for, and revenue related to, our mortgage banking business; any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all; our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances; our obligation to indemnify PMT and the Investment Funds if its services fail to meet certain criteria or characteristics or under other circumstances; decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees; the extensive amount of regulation applicable to our investment management segment; conflicts of interest in allocating our services and investment opportunities among us and our advised entities; the effect of public opinion on our reputation; our recent growth; our ability to effectively identify, manage, monitor and mitigate financial risks; our initiation of new business activities or investment strategies or expansion of existing business activities or investment strategies; our ability to detect misconduct and fraud; our ability to mitigate cybersecurity risks and cyber incidents; our exposure to risks of loss with real estate investments resulting from adverse weather conditions and man-made or natural disasters; and our organizational structure and certain requirements in our charter documents. You should not place undue reliance on any forward- looking statement and should consider all of the uncertainties and risks described above, as well as those more fully discussed in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time. The Company undertakes no obligation to publicly update or revise any forward-looking statements or any other information contained herein, and the statements made in this press release are current as of the date of this release only.

Non-solicitation

In connection with a proposed reorganization of the Company, the Company’s wholly-owned subsidiary, New PennyMac Financial Services, Inc., will be filing a registration statement on Form S-4 with the SEC, but this registration statement has not yet become effective. The securities registered under this registration statement may not be sold nor may offers to buy these securities be accepted before the time the registration statement becomes effective. This press release shall not constitute an offer to sell or a solicitation of an offer to buy these securities, and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction.

Additional Information and Where to Find It

In connection with the proposed reorganization, New PennyMac Financial Services, Inc. (CIK# 0001745916) will be filing a registration statement on Form S-4 (the “New PennyMac Registration Statement”) that includes a proxy statement of the Company that also constitutes a prospectus of New PennyMac Financial Services, Inc. (which New PennyMac Registration Statement has not yet been declared effective). INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS, AND ANY OTHER RELEVANT DOCUMENTS WHEN THEY BECOME AVAILABLE, BECAUSE THEY CONTAIN, OR WILL CONTAIN, IMPORTANT INFORMATION ABOUT THE COMPANY, NEW PENNYMAC FINANCIAL SERVICES, INC. AND THE REORGANIZATION. A definitive proxy statement will be sent to stockholders of the Company seeking approval of the reorganization after the New PennyMac Registration Statement is declared effective. The proxy statement/prospectus and other documents relating to the reorganization can be obtained free of charge from the SEC website at www.sec.gov.

Participants in Solicitation

This communication is not a solicitation of a proxy from any investor or stockholder. However, the Company, New PennyMac Financial Services, Inc. and certain of their directors and executive officers may be deemed to be participants in the solicitation of proxies in connection with the proposed reorganization under the rules of the SEC. Information regarding the Company’s directors and executive officers may be found in its definitive proxy statement relating to its 2018 Annual Meeting of Stockholders filed with the SEC on April 17, 2018 and in the proxy statement/prospectus included in the New PennyMac Registration Statement. Information regarding New PennyMac Financial Services, Inc.’s directors and executive officers may be found in the proxy statement/prospectus included in the New PennyMac Registration Statement. These documents can be obtained free of charge from the SEC.

 
1

Holders of PFSI Class A common stock who are entitled to receive the dividend should consult with their individual tax advisors regarding the tax treatment of the dividend.

2

Please refer to the Registration Statement on Form S-4 to be filed by New PennyMac Financial Services, Inc. (CIK# 0001745916) on August 2, 2018.

3

Excludes changes in the fair value of MSRs, the ESS liability, and gains (losses) on hedging which were $42.3 million, $(1.0) million, and $(24.3) million, respectively, and a $1.8 million reversal of provision for credit losses on active loans in the second quarter of 2018.

4

These transactions are subject to continuing due diligence and customary closing conditions. There can be no assurance regarding the size of the transactions or that the transactions will be completed at all.

                 

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

June 30,
2018

March 31,
2018

June 30,
2017

(in thousands, except share amounts)
ASSETS
Cash $ 189,663 $ 137,863 $ 75,978
Short-term investments at fair value 98,571 105,890 145,440
Mortgage loans held for sale at fair value 2,527,231 2,584,236 3,037,602
Derivative assets 92,471 89,469 70,075
Servicing advances, net 258,900 284,145 291,907
Carried Interest due from Investment Funds 370 538 71,019
Investment in PennyMac Mortgage Investment Trust at fair value 1,424 1,352 1,372
Mortgage servicing rights 2,486,157 2,354,489 1,951,599
Real estate acquired in settlement of loans 2,300 2,338 822
Furniture, fixtures, equipment and building improvements, net 29,607 30,172 31,418
Capitalized software, net 31,913 28,919 18,197
Assets purchased from PennyMac Mortgage Investment Trust under agreements

to resell pledged to creditors

138,582 142,938 150,000
Receivable from Investment Funds 12 460 1,330
Receivable from PennyMac Mortgage Investment Trust 19,661 27,356 17,725
Loans eligible for repurchase 879,621 1,018,488 462,487
Other   85,223   94,238   77,767
Total assets $ 6,841,706 $ 6,902,891 $ 6,404,738
 
LIABILITIES
Assets sold under agreements to repurchase $ 1,825,813 $ 1,814,282 $ 3,021,328
Mortgage loan participation and sale agreements 528,368 510,443 243,361
Notes payable 1,140,546 1,140,022 429,692
Obligations under capital lease 13,032 16,435 26,641
Excess servicing spread financing payable to PennyMac Mortgage Investment

Trust at fair value

229,470 236,002 261,796
Derivative liabilities 4,094 4,476 16,564
Mortgage servicing liabilities at fair value 10,253 12,063 18,295
Accounts payable and accrued expenses 114,005 113,046 132,053
Payable to Investment Funds 404 26 15,236
Payable to PennyMac Mortgage Investment Trust 99,309 117,987 132,709
Payable to exchanged Private National Mortgage Acceptance Company, LLC

unitholders under tax receivable agreement

46,903 46,037 73,084
Income taxes payable 67,357 58,956 40,672
Liability for loans eligible for repurchase 879,621 1,018,488 462,487
Liability for losses under representations and warranties   20,587   20,429   19,568
Total liabilities   4,979,762   5,108,692   4,893,486
 
STOCKHOLDERS’ EQUITY

Class A common stock—authorized 200,000,000 shares of $0.0001 par value;

issued and outstanding, 25,008,655, 24,277,768 and 23,472,795 shares,

respectively

3 2 2

Class B common stock—authorized 1,000 shares of $0.0001 par value;

issued and outstanding, 45, 45 and 50 shares, respectively

Additional paid-in capital 229,941 221,495 199,146
Retained earnings   299,951   282,114   185,907
Total stockholders’ equity attributable to PennyMac Financial Services, Inc.

common stockholders

  529,895   503,611   385,055
Noncontrolling interests in Private National Mortgage Acceptance

Company, LLC

  1,332,049   1,290,588   1,126,197
Total stockholders’ equity   1,861,944   1,794,199   1,511,252
Total liabilities and stockholders’ equity $ 6,841,706 $ 6,902,891 $ 6,404,738
           

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
Quarter ended

June 30,
2018

     

March 31,
2018

June 30,
2017

(in thousands, except earnings per share)
Revenue
Net gains on mortgage loans held for sale at fair value $ 60,946 $ 71,414 $ 98,091
Mortgage loan origination fees 24,428 24,563 30,193
Fulfillment fees from PennyMac Mortgage Investment Trust 14,559 11,944 21,107
Net mortgage loan servicing fees:
Mortgage loan servicing fees
From non-affiliates 138,871 135,483 112,348
From PennyMac Mortgage Investment Trust 9,431 11,019 10,099
From Investment Funds 3 543
Ancillary and other fees   13,637     14,171     11,202  
161,942 160,673 134,192

Amortization, impairment and change in estimated fair value of mortgage servicing rights and excess servicing spread

 

(48,253

)   (43,884 )   (87,279 )
Net mortgage loan servicing fees   113,689     116,789     46,913  
Management fees:
From PennyMac Mortgage Investment Trust 5,728 5,696 5,638
From Investment Funds   (64 )   79     369  
  5,664     5,775     6,007  
Carried Interest from Investment Funds (168 ) (180 ) 241
Net interest income (expense):
Interest income 55,104 42,615 34,973
Interest expense   32,616     36,745     36,877  
22,488 5,870 (1,904 )

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

108

182

76

Results of real estate acquired in settlement of loans 13 (28 ) (119 )
Other   2,571     1,872     1,116  
Total net revenue   244,298     238,201     201,721  
Expenses
Compensation 98,540 102,013 82,967
Servicing 28,490 26,299 24,702
Technology 15,154 14,620 11,581
Occupancy and equipment 6,507 6,377 5,965
Professional services 5,587 5,738 4,523
Loan origination 5,144 2,115 5,116
Marketing 2,218 2,161 2,483
Other   7,960     5,882     6,424  
Total expenses   169,600     165,205     143,761  
Income before provision for income taxes 74,698 72,996 57,960
Provision for (benefit from) income taxes   6,293     6,070     7,214  
Net income 68,405 66,926 50,746
Less: Net income attributable to noncontrolling interest   50,568     50,307     40,267  
Net income attributable to PennyMac Financial Services, Inc.

common stockholders

$ 17,837   $ 16,619   $ 10,479  
 
Earnings per share
Basic $ 0.71 $ 0.70 $ 0.45
Diluted $ 0.70 $ 0.67 $ 0.44
Weighted-average common shares outstanding
Basic 24,959 23,832 23,388
Diluted 78,825 79,461 77,650

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NFV MANO: Global Market Analysis & Forecast to 2023 by Segments, Components and Regions – ResearchAndMarkets.com

DUBLIN–()–The “Worldwide NFV MANO Market -by Components (NFV Orchestrators (NFVOs), Virtual Network Functions (VNF) Managers (VNFMs), Virtualized Infrastructure Managers (VIMs); by Segments (Software, Services); by Regions: Market Sizes and Forecasts 2018-2023” report has been added to ResearchAndMarkets.com‘s offering.

The report provides an in-depth analysis of the market size, forecasts, and opportunities of NFV MANO Software and Services targeted at service providers. Services analyzed in the study include Design and Consulting, Implementation and Integration, and Maintenance and Support.

The study includes market analysis of NFV MANO, categorized by three types of Components: NFV Orchestrators (NFVOs), Virtual Network Functions Managers (VNFMs), and Virtualized Infrastructure Managers (VIMs). Further to this, the report also provides the market data for NFV MANO across five regions – North America, Europe, Asia-Pacific, Central America, and Latin America (CALA), and Middle-East and Africa (MEA).

This NFV MANO market report also includes insights into key market requirements gathered from service providers, network engineers, IT managers, CIOs, CTOs, IT decision makers, and opinion leaders. This report has been built on a rigorous period of information gathering from both secondary and primary sources through several interviews with industry participants, manufacturers, suppliers, vendors, business owners, consultants, organizations, and regulators.

The data gathered from these interviews and surveys was curated, analyzed, and engineered to understand buying, spending, demand, and supply patterns and to estimate market sizes and forecasts. The resultant data was checked for applicability across value chains through market-data associations and then further validated through multiple check points to check consistencies, error samples, variances.

The analysis in this report will help market participants, vendors, suppliers, system integrators, channel players, manufacturers, and value-added resellers (VARs) to develop strategies, marketing goals and business decisions based on the actionable market intelligence from this report.

Questions Answered in the Report

  • What is the current market size of NFV MANO market?
  • What is the estimated market size of NFV Orchestrators in the next 5 years?
  • What is the revenue opportunity for VNF Managers?
  • What is the regional market opportunity for software and services?
  • What are the companies in this space and what do they offer?

Market Segmentation

  • Segments: Software, Services (Design and Consulting, Implementation and Integration, Maintenance and Support)
  • Components: NFV Orchestrators (NFVOs), VNF Managers (VNFMs), Virtualized Infrastructure Managers (VIMs)
  • Regions: North America, Europe, Asia Pacific, Central America/ Latin America, Middle-East and Africa

Key Topics Covered

1 NFV MANO: Research Overview and Summary

2 NFV MANO: Market Size and Forecast by Segments

3 NFV MANO: Market Size and Forecast by Components

4 NFV MANO: Market Size and Forecasts by Regions

5 NFV MANO Market Players and Offerings

  • 6WIND
  • Accedian
  • ADVA Optical Networking
  • Advisor SLA
  • Affirmed Networks
  • Amdocs
  • Anuta Networks
  • Ciena
  • Cisco
  • Cloudify
  • Dorado Software
  • Enea Software
  • Ericsson
  • Fujitsu
  • Hewlett Packard Enterprise (HPE)
  • Huawei Technologies
  • Iricent
  • Ixia (Keysight)
  • Mirantis
  • MYCOM OSI
  • Netcracker (NEC)
  • Netrounds AB
  • Nokia
  • Oracle
  • Spirent Communications
  • Telco Systems
  • TEOCO
  • Ubuntu
  • Canonical
  • Veryx Technologies
  • VMware
  • Wind River
  • ZTE Corporation
  • ZTEsoft
  • and many more…

For more information about this report visit https://www.researchandmarkets.com/research/lrn5g7/nfv_mano_global?w=4

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Athene Holding Ltd. Reports Second Quarter 2018 Results

PEMBROKE, Bermuda–()–Athene Holding Ltd. (“Athene”) (NYSE: ATH), a leading provider of retirement savings products, today announced financial results for the second quarter 2018.

Net income for the second quarter 2018 was $264 million, or $1.33 per diluted Class A share (“diluted share”), compared to net income for the second quarter 2017 of $326 million, or $1.65 per diluted share.

Adjusted operating income1 for the second quarter 2018 was $290 million, or $1.48 per adjusted operating share, compared to adjusted operating income for the second quarter 2017 of $280 million, or $1.43 per adjusted operating share.

Our strong second quarter results continued our track record of producing consistently growing earnings and high ROEs,” said Jim Belardi, CEO of Athene. “We sourced $2.7 billion of organic deposits, driven by record retail sales of $2.0 billion. Our multi-channel distribution platform allows us to prioritize channels where we meet our mid-teens return targets and is consistent with our opportunistic business model. On June 1 we closed the Voya reinsurance transaction bringing our total invested asset portfolio to approximately $100 billion, a remarkable achievement for a nine-year-old company.”

We have powerful organic growth engines and our inorganic pipeline is as robust as I’ve ever seen. We are extraordinarily well positioned as a solutions provider to the financial services industry as it accelerates its restructuring,” Mr. Belardi continued.

1This news release references certain Non-GAAP measures. See Non-GAAP Measures for additional discussion.

Other Highlights

  • Book value per share increased 2% year-over-year to $43.10; adjusted book value per share increased 18% to $42.60
  • Total invested assets, excluding Germany, increased 40% year-over-year to $98.6 billion
  • Estimated ALRe RBC of 524%1 as of June 30, 2018
  • Estimated U.S. RBC of 438%, as of June 30, 2018
  • Ranked #2 carrier in fixed indexed annuity sales for the each of the seven quarters ended March 31, 20182
  • Closed Voya reinsurance transaction on June 1, 2018
  • Launched Athene AgilitySM product in June 2018, which has been one of the top-illustrated products since launch

1ALRe RBC ratio is used in evaluating our capital position and the amount of capital needed to support our Retirement Services segment, and is calculated by applying the NAIC RBC factors to the statutory financial statements of ALRe and its non-U.S. reinsurance subsidiary, on an aggregate basis.

2Rankings as of March 31, 2018 per LIMRA.

Second Quarter Results

Net income for the second quarter was $264 million, a decrease of $62 million, or 19%, from the prior year. The decrease was driven by unfavorable impacts from assumed reinsurance embedded derivatives due to growth in the reinsurance block from the Voya transaction, increases in U.S. Treasury rates and credit spread widening. Partially offsetting the increase was a favorable change in FIA derivatives due to an increase in discount rates.

Adjusted operating income for the second quarter was $290 million, an increase of $10 million, or 4%, from the prior year. Adjusted operating income, excluding notable items, was $279 million, an increase of $40 million, or 17%. Growth of adjusted operating income, excluding notable items, was driven by an increase in investment income due to invested asset growth, earnings from the Voya reinsurance transaction and increased floating rate investment income. Offsetting this was a higher cost of crediting driven by block growth, including the addition of Voya liabilities, as well as higher income taxes.

Deposit Highlights

In the second quarter, Athene generated deposits of $21.8 billion including inorganic deposits, an increase of 576% compared to the prior year. Despite record sales in our Retail channel, organic deposits of $2.7 billion were down from the prior year, largely due to unfavorable issuance spreads for insurance companies in the funding agreement backed note market.

Retail Sales: In the second quarter, Athene generated a record $2.0 billion of new deposits, up 25% from the prior year driven by channel expansion and new product launches. We continue to execute on our growth strategy to increase penetration within the Financial Institutions channel and year-to-date we have signed 16 new relationships. The launch of new products, including a new national fixed indexed annuity product, Athene AgilitySM, has increased penetration within Financial Institutions.

Flow Reinsurance: In the second quarter, Athene generated $473 million of new deposits, up 121% from the prior year. Deposit growth in the quarter was driven by competitive positioning by our partners as well as the addition of new products to current treaties. Volumes in the quarter included $25 million of annuitizations from Venerable.

Institutional: In the second quarter, Athene generated $179 million of new deposits from a pension risk transfer transaction and the issuance of a funding agreement.

Inorganic: Athene closed the Voya reinsurance transaction on June 1, assuming $19.1 billion of reserve liabilities.

   

Selected Results

 

As of and for the three months ended June 30,

(In millions, except percentages and per share data) 2018     2017
Organic deposits $ 2,690 $ 3,226
Inorganic deposits   19,104      
Total deposits 21,794 3,226
Investments, including related parties 98,669 78,699
Invested assets 98,609 76,279
Debt to capital ratio1 12.1 % %
Adjusted debt to capital ratio1 12.3 % %
Book value per share $ 43.10 $ 42.20
Adjusted book value per share2 $ 42.60 $ 35.95
Common shares outstanding3 197.3 196.3
Adjusted operating common shares outstanding4 196.4 196.7
Total shareholders’ equity $ 8,505 $ 8,284
Adjusted shareholders’ equity 8,367 7,072
ROE 12.3 % 16.4 %
Adjusted ROE 17.5 % 16.2 %
Adjusted operating ROE 14.2 % 16.2 %
 
Retirement Services
Adjusted operating income $ 289 $ 267
Adjusted operating ROE 19.8 % 22.0 %
Investment margin on deferred annuities 2.82 % 2.96 %
 

1In January 2018, we issued $1.0 billion of senior unsecured debt.

2Adjusted book value per share is calculated as the ending AHL adjusted shareholders’ equity divided by the adjusted operating common shares outstanding.

3Represents common shares outstanding for all classes eligible to participate in dividends for each period presented. Utilized for the book value per share calculation.

4Adjusted operating common shares outstanding assumes conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including the impacts of Class B common shares outstanding on a one-for-one basis, the impacts of all Class M common shares outstanding net of the conversion price and any other stock-based awards outstanding, but excluding any awards for which the exercise or conversion price exceeds the market value of Class A common shares on the applicable measurement date. Our Class B common shares are economically equivalent to Class A common shares and can be converted to Class A common shares on a one-for-one basis at any time. Our Class M common shares are in the legal form of shares but economically function as options as they are convertible into Class A shares after vesting and settlement of the conversion price. We believe this non-GAAP measure is an appropriate economic representation of our share counts for use in an economic view of book value metrics.

   
Three months ended June 30,
(In millions, except per share data) 2018     2017
Net income $ 264   $ 326  
Non-operating adjustments
Investment gains (losses), net of offsets (74 ) 58
Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets 75 15
Integration, restructuring and other non-operating expenses (8 ) (11 )
Stock compensation expense (2 ) (13 )
Income tax (expense) benefit – non-operating   (17 )   (3 )
Less: Total non-operating adjustments   (26 )   46  
Adjusted operating income $ 290   $ 280  
 
Adjusted operating income by segment
Retirement Services $ 289 $ 267
Corporate and Other   1     13  
Adjusted operating income $ 290   $ 280  
 
Earnings per share – basic1 $ 1.34 $ 1.66
Earnings per share – diluted Class A2 $ 1.33 $ 1.65
Adjusted operating earnings per share3 $ 1.48 $ 1.43
Weighted average shares outstanding – basic1 197.3 195.7
Weighted average shares outstanding – diluted Class A2 164.8 109.0
Weighted average shares outstanding – adjusted operating3 195.1 195.9
 
Three months ended June 30,
(In millions) 2018 2017
Notable items
Retirement Services adjusted operating income $ 289   $ 267  
Rider reserve and DAC equity market performance (13 ) (44 )
Tax impact of notable items   2     3  
Retirement Services notable items   (11 )   (41 )
Retirement Services adjusted operating income excluding notable items 278 226
Corporate and Other adjusted operating income   1     13  
Adjusted operating income excluding notable items $ 279   $ 239  
 

Basic earnings per share, including basic weighted average shares outstanding includes all classes eligible to participate in dividends for each period presented.

2 Diluted earnings per share on a GAAP basis for Class A common shares, including diluted Class A weighted average shares outstanding, includes the dilutive impacts, if any, of Class B common shares, Class M common shares and any other stock-based awards. Such dilutive securities totaled 369,955 weighted average shares for the quarter. Diluted earnings per share on a GAAP basis for Class A common shares are based on allocated net income of $220 million (83% of net income) and $181 million (55% of net income) for the three months ended June 30, 2018 and 2017, respectively.

3 Weighted average shares outstanding – adjusted operating assumes conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including the impacts of Class B common shares on a one-for-one basis, the impacts of all Class M common shares net of the conversion price and any other stock-based awards, but excluding any awards for which the exercise or conversion price exceeds the market value of Class A common shares on the applicable measurement date. Our Class B common shares are economically equivalent to Class A common shares and can be converted to Class A common shares on a one-for-one basis at any time. Our Class M common shares are in the legal form of shares but economically function as options as they are convertible into Class A shares after vesting and settlement of the conversion price. In calculating Class A diluted earnings per share on a GAAP basis, we are required to apply sequencing rules to determine the dilutive impacts, if any, of our Class B common shares, Class M common shares and any other stock-based awards. To the extent our Class B common shares, Class M common shares and/or any other stock-based awards are not dilutive they are excluded. We believe this non-GAAP measure is an appropriate economic representation of our share counts for use in an economic view of adjusted operating earnings per share.

Segment Results

Retirement Services
Q2 Results

In the second quarter, Retirement Services adjusted operating income was $289 million, an increase of $22 million, or 8%, from the prior year. Adjusted operating income, excluding notable items, was $278 million, an increase of $52 million, or 23%, resulting in an adjusted operating ROE of 19.1%. The increase was driven by growth in investment income of $162 million resulting from invested asset growth, earnings from the Voya reinsurance transaction and an increase in floating rate investment income of $26 million. Partially offsetting this was a higher cost of crediting due to block growth, including the addition of Voya liabilities, as well as higher income tax expense.

Notable items in the current quarter included $13 million of favorable rider reserves and DAC amortization due to equity market performance, compared with a $44 million benefit from equity market performance and out of period actuarial adjustments in the prior year.

Investment margin on deferred annuities was 2.82%, a decrease of 14 basis points from the prior year. The net investment earned rate was 4.74%, a decrease of 11 basis points from the prior year, driven by lower new money rates over the past year and lower returns on the assets from the Voya reinsurance transaction. Partially offsetting this was $26 million, or 14 basis points, of additional floating rate investment income in the quarter. Alternative investments returned 11.28% driven by MidCap and AmeriHome.

Cost of crediting was 1.92%, an increase of 3 basis points compared to the prior year. The increase was driven primarily by a higher rate on the Voya reinsurance liabilities.

Corporate and Other
Q2 Results

In the second quarter, Corporate and Other adjusted operating income was $1 million, a decrease of $12 million over the prior year. The decrease was driven by lower alternative investment income due to a decline in the market value of public equity positions in one of our funds and lower credit fund income.

Conference Call Information

This press release and the second quarter 2018 financial supplement will be posted to the Company’s website at ir.athene.com.

Athene will conduct a conference call on Friday, August 3, 2018 at 9:00 a.m. ET to discuss second quarter 2018 results. Additionally, the company will post an earnings presentation deck on the ir.athene.com website prior to the call on August 3, 2018.

  • Live conference call: Toll-free at 1-888-317-6003 (domestic) or 1-412-317-6061 (international)
  • Participant entry number: 4128349
  • Replay available through August 17, 2018 at 1-877-344-7529 (domestic) or 1-412-317-0088 (international)
  • Replay access code: 10122102
  • Live and archived webcast available at ir.athene.com

About Athene Holding Ltd.

Athene, through its subsidiaries, is a leading retirement services company that issues, reinsures and acquires retirement savings products designed for the increasing number of individuals and institutions seeking to fund retirement needs. The products offered by Athene include:

  • Retail fixed and fixed indexed annuity products;
  • Reinsurance arrangements with third-party annuity providers; and
  • Institutional products, such as funding agreements and group annuity contracts related to pension risk transfers.

Athene had total assets of $114.8 billion as of June 30, 2018. Athene’s principal subsidiaries include Athene Annuity & Life Assurance Company, a Delaware-domiciled insurance company, Athene Annuity and Life Company, an Iowa-domiciled insurance company, Athene Annuity & Life Assurance Company of New York, a New York-domiciled insurance company and Athene Life Re Ltd., a Bermuda-domiciled reinsurer.

Further information about our companies can be found at www.athene.com.

Non-GAAP Measures

In addition to our results presented in accordance with GAAP, our results of operations include certain non-GAAP measures commonly used in our industry. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides information that may enhance an investor’s understanding of our results of operations and the underlying profitability drivers of our business. The majority of these non-GAAP measures are intended to remove from the results of operations the impact of market volatility (other than with respect to alternative investments) as well as integration, restructuring and certain other expenses which are not part of our underlying profitability drivers or likely to re-occur in the foreseeable future, as such items fluctuate from period to period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the GAAP measures. See Non-GAAP Measure Reconciliations for the appropriate reconciliations to the GAAP measures.

Adjusted operating income is a non-GAAP measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation, and other expenses. Our adjusted operating income equals net income adjusted to eliminate the impact of the following (collectively, the “non-operating adjustments”):

  • Investment Gains (Losses), Net of Offsets
  • Change in Fair Values of Derivatives and Embedded Derivatives – FIAs, Net of Offsets
  • Integration, Restructuring, and Other Non-operating Expenses
  • Stock Compensation Expense
  • Bargain Purchase Gain
  • Income Tax (Expense) Benefit – Non-operating

We consider these non-operating adjustments to be meaningful adjustments to net income for the reasons discussed in greater detail above. Accordingly, we believe using a measure which excludes the impact of these items is effective in analyzing the trends in our results of operations. Together with net income, we believe adjusted operating income, provides a meaningful financial metric that helps investors understand our underlying results and profitability. Adjusted operating income should not be used as a substitute for net income.

Adjusted ROE, adjusted operating ROE and adjusted net income are non-GAAP measures used to evaluate our financial performance excluding the impacts of AOCI and funds withheld and modco reinsurance unrealized gains and losses, in each case net of DAC, DSI, rider reserve and tax offsets. Adjusted ROE is calculated as adjusted net income, divided by adjusted shareholders’ equity. Adjusted shareholders’ equity is calculated as the ending shareholders’ equity excluding AOCI and funds withheld and modco reinsurance unrealized gains and losses. Adjusted operating ROE is calculated as the adjusted operating income, divided by adjusted shareholders’ equity. Adjusted net income is calculated as net income excluding funds withheld and modco reinsurance unrealized gains and losses, net of DAC, DSI, rider reserve and tax offsets. These adjustments fluctuate period to period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Once we have reinvested acquired blocks of businesses, we typically buy and hold AFS investments to maturity throughout the duration of market fluctuations, therefore, the period-over-period impacts in unrealized gains and losses are not necessarily indicative of current adjusted operating fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI and funds withheld and modco reinsurance unrealized gains and losses are useful in analyzing trends in our operating results. To enhance the ability to analyze these measures across periods, interim periods are annualized. Adjusted ROE, adjusted operating ROE and adjusted net income should not be used as a substitute for ROE and net income. However, we believe the adjustments to equity are significant to gaining an understanding of our overall results of operations.

Adjusted operating earnings per share, weighted average shares outstanding – adjusted operating and adjusted book value per share are non-GAAP measures used to evaluate our financial performance and financial condition. The non-GAAP measures adjust the number of shares included in the corresponding GAAP measures to reflect the conversion or settlement of all shares and other stock-based awards outstanding. We believe using these measures represents an economic view of our share counts and provides a simplified and consistent view of our outstanding shares. Adjusted operating earnings per share is calculated as the adjusted operating income, over the weighted average shares outstanding – adjusted operating. Adjusted book value per share is calculated as the adjusted shareholders’ equity divided by the adjusted operating common shares outstanding. Our Class B common shares are economically equivalent to Class A common shares and can be converted to Class A common shares on a one-for-one basis at any time. Our Class M common shares are in the legal form of shares but economically function as options as they are convertible into Class A shares after vesting and payment of the conversion price. In calculating Class A diluted earnings per share on a GAAP basis, we are required to apply sequencing rules to determine the dilutive impacts, if any, of our Class B common shares, Class M common shares and any other stock-based awards. To the extent our Class B common shares, Class M common shares and/or any other stock-based awards are not dilutive they are excluded. Weighted average shares outstanding – adjusted operating and adjusted operating common shares outstanding assume conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including the impacts of Class B common shares on a one-for-one basis, the impacts of all Class M common shares net of the conversion price and any other stock-based awards, but excluding any awards for which the exercise or conversion price exceeds the market value of our Class A common shares on the applicable measurement date. For certain historical periods, Class M shares were not included due to issuance restrictions which were contingent upon our IPO. Adjusted operating earnings per share, weighted average shares outstanding – adjusted operating and adjusted book value per share should not be used as a substitute for basic earnings per share – Class A common shares, basic weighted average shares outstanding – Class A or book value per share. However, we believe the adjustments to the shares and equity are significant to gaining an understanding of our overall results of operations and financial condition.

Adjusted debt to capital ratio is a non-GAAP measure used to evaluate our financial condition excluding the impacts of AOCI and funds withheld and modco reinsurance unrealized gains and losses, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total debt excluding consolidated VIEs divided by adjusted shareholders’ equity. Adjusted debt to capital ratio should not be used as a substitute for the debt to capital ratio. However, we believe the adjustments to shareholders’ equity are significant to gaining an understanding of our overall results of operations and financial condition.

Investment margin is a key measurement of the financial health of our Retirement Services core deferred annuities. Investment margin on our deferred annuities is generated from the excess of our net investment earned rate over the cost of crediting to our policyholders. Net investment earned rate is a key measure of investment returns and cost of crediting is a key measure of the policyholder benefits on our deferred annuities. We believe measures like net investment earned rate, cost of crediting and investment margin on deferred annuities are effective in analyzing the trends of our core business operations, profitability and pricing discipline. While we believe net investment earned rate, cost of crediting and investment margin on deferred annuities are meaningful financial metrics and enhance our understanding of the underlying profitability drivers of our business, they should not be used as a substitute for net investment income and interest sensitive contract benefits presented under GAAP.

  • Net investment earned rate is a non-GAAP measure we use to evaluate the performance of our invested assets that does not correspond to GAAP net investment income. Net investment earned rate is computed as the income from our invested assets divided by the average invested assets for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized. The adjustments to arrive at our net investment earned rate add alternative investment gains and losses, gains and losses related to trading securities for CLOs, net VIE impacts (revenues, expenses and noncontrolling interest) and the change in reinsurance embedded derivatives. We include the income and assets supporting our assumed reinsurance by evaluating the underlying investments of the funds withheld at interest receivables and we include the net investment income from those underlying investments which does not correspond to the GAAP presentation of reinsurance embedded derivatives. We exclude the income and assets supporting business that we have exited through ceded reinsurance including funds withheld agreements. We believe the adjustments for reinsurance provide a net investment earned rate on the assets for which we have economic exposure.
  • Cost of crediting is the interest credited to the policyholders on our fixed strategies as well as the option costs on the indexed annuity strategies. With respect to FIAs, the cost of providing index credits includes the expenses incurred to fund the annual index credits, and where applicable, minimum guaranteed interest credited. The interest credited on fixed strategies and option costs on indexed annuity strategies are divided by the average account value of our deferred annuities. Our average account values are averaged over the number of quarters in the relevant period to obtain our cost of crediting for such period. To enhance the ability to analyze these measures across periods, interim periods are annualized.

In managing our business we analyze invested assets, which do not correspond to total investments, including investments in related parties, as disclosed in our consolidated financial statements and notes thereto. Invested assets represent the investments that directly back our policyholder liabilities as well as surplus assets. Invested assets is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Invested assets includes (a) total investments on the consolidated balance sheets with AFS securities at cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) the consolidated VIE assets, liabilities and noncontrolling interest, (f) net investment payables and receivables and (g) policy loans ceded (which offset the direct policy loans in total investments). Invested assets also excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). We include the underlying investments supporting our assumed funds withheld and modco agreements in our invested assets calculation in order to match the assets with the income received. We believe the adjustments for reinsurance provide a view of the assets for which we have economic exposure. Our invested assets are averaged over the number of quarters in the relevant period to compute our net investment earned rate for such period.

Sales statistics do not correspond to revenues under GAAP, but are used as relevant measures to understand our business performance as it relates to deposits generated during a specific period of time. Our sales statistics include deposits for fixed rate annuities and FIAs and align with the LIMRA definition of all money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers).

Safe Harbor for Forward-Looking Statements

This press release contains, and certain oral statements made by our representatives from time to time may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exercise Act of 1934, as amended. Such statements are subject to risks and uncertainties that could cause actual results, events and developments to differ materially from those set forth in, or implied by, such statements. These statements are based on the beliefs and assumptions of AHL’s management and the management of AHL’s subsidiaries. Generally, forward-looking statements include actions, events, results, strategies and expectations and are often identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may,” “will,” “could,” “might,” or “continues” or similar expressions. Factors that could cause actual results, events and developments to differ include, without limitation: the accuracy of our assumptions and estimates; our ability to maintain or improve financial strength ratings; our ability to manage our business in a highly regulated industry; regulatory changes or actions; the impact of our reinsurers failing to meet their assumed obligations; the impact of interest rate fluctuations; changes in the federal income tax laws and regulations; the implementation and the accuracy of our interpretation of the Tax Act, which was enacted on December 22, 2017 and made key changes to the U.S. tax law; litigation (including class action litigation), enforcement investigations or regulatory scrutiny; the performance of third parties; the loss of key personnel; telecommunication, information technology and other operational systems failures; the continued availability of capital; new accounting rules or changes to existing accounting rules; general economic conditions; our ability to protect our intellectual property; the ability to maintain or obtain approval of the Delaware Department of Insurance, the Iowa Insurance Division and other regulatory authorities as required for our operations; and other factors discussed from time to time in AHL’s filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2017, and our quarterly report on Form 10-Q for the three months ended March 31, 2018, which can be found at the SEC’s website www.sec.gov.

All forward-looking statements described herein are qualified by these cautionary statements and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized. We do not undertake any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.

 
Athene Holding Ltd.
Condensed Consolidated Balance Sheets (unaudited)
       

   June 30,   

December 31,
(In millions) 2018 2017
Assets
Investments
Fixed maturity securities, at fair value
Available-for-sale securities $ 59,762 $ 61,012
Trading securities 2,053 2,196
Equity securities, at fair value 216 790
Mortgage loans, net of allowances 7,609 6,233
Investment funds 633 699
Policy loans 504 530
Funds withheld at interest 7,700 7,085
Derivative assets 1,929 2,551
Real estate 624
Short-term investments, at fair value 289 201
Other investments   123   133
Total investments 80,818 82,054
Cash and cash equivalents 3,608 4,888
Restricted cash 178 105
Investments in related parties
Fixed maturity securities, at fair value
Available-for-sale securities 956 406
Trading securities 278 307
Investment funds 1,836 1,310
Funds withheld at interest 14,221
Short-term investments, at fair value 172 52
Other investments 388 238
Accrued investment income 662 652
Reinsurance recoverable 4,847 4,972
Deferred acquisition costs, deferred sales inducements and value of business acquired 4,715 2,930
Other assets 1,265 969
Assets of consolidated variable interest entities
Investments
Fixed maturity securities, trading, at fair value – related party 48 48
Equity securities, at fair value – related party 163 240
Investment funds 593 571
Cash and cash equivalents 2 4
Other assets   5   1
Total assets $ 114,755 $ 99,747
 
Liabilities and Equity
Liabilities
Interest sensitive contract liabilities $ 87,052 $ 67,708
Future policy benefits 13,970 17,507
Other policy claims and benefits 136 211
Dividends payable to policyholders 118 1,025
Short-term debt 183
Long-term debt 991
Derivative liabilities 137 134
Payables for collateral on derivatives 1,746 2,323
Funds withheld liability 389 407
Other liabilities 1,524 1,222
Liabilities of consolidated variable interest entities   4   2
Total liabilities   106,250   90,539
Equity
Common stock
Additional paid-in capital 3,492 3,472
Retained earnings 4,887 4,321
Accumulated other comprehensive income   126   1,415
Total shareholders’ equity   8,505   9,208
Total liabilities and equity $ 114,755 $ 99,747
 
 
Athene Holding Ltd.
Condensed Consolidated Statements of Income (unaudited)
 
    Three months ended June 30,
(In millions) 2018     2017
Revenue
Premiums

$

726

$ 379
Product charges 106 85
Net investment income 958 821
Investment related gains (losses) (2 ) 460
OTTI investment losses
OTTI losses (12 )
OTTI losses (gains) recognized in OCI       1  
Net OTTI losses (11 )
Other revenues 6 8
Revenues of consolidated variable interest entities
Net investment income 14 10
Investment related gains (losses)   (11 )   11  
Total revenues   1,797     1,763  
Benefits and Expenses
Interest sensitive contract benefits 332 553
Amortization of DSI 23 11
Future policy and other policy benefits 857 578
Amortization of DAC and VOBA 92 67
Dividends to policyholders 9 49
Policy and other operating expenses 153 168
Operating expenses of consolidated variable interest entities   1      
Total benefits and expenses   1,467     1,426  
Income before income taxes 330 337
Income tax expense (benefit)   66     11  
Net income $ 264   $ 326  
 

Non-GAAP Measure Reconciliations

The reconciliation of net income to adjusted operating income excluding notable items is as follows:

   
Three months ended June 30,
(In millions) 2018     2017
Net income $ 264 $ 326
Less: Total non-operating adjustments   (26 )   46  
Adjusted operating income 290 280
Notable Items   (11 )   (41 )
Adjusted operating income excluding notable items $ 279   $ 239  
 
Retirement Services adjusted operating income $ 289   $ 267  
Rider reserve and DAC equity market performance (13 ) (44 )
Tax impact of notable items   2       3  
Retirement Services notable items   (11 )     (41 )
Retirement Services adjusted operating income excluding notable items 278 226
Corporate and Other adjusted operating income   1     13  
Adjusted operating income excluding notable items $ 279   $ 239  
 

The reconciliation of basic earnings per Class A common share to adjusted operating earnings per share is as follows:

   

  Three Months Ended  
June 30,

2018     2017
Basic earnings per share – Class A common shares $ 1.34 $ 1.66
Non-operating adjustments
Investment gains (losses), net of offsets (0.38 ) 0.29
Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets 0.39 0.08
Integration, restructuring and other non-operating expenses (0.05 ) (0.06 )
Stock compensation expense (0.02 ) (0.07 )
Income tax (expense) benefit – non-operating   (0.09 )   (0.02 )
Less: Total non-operating adjustments (0.15 ) 0.22
Less: Effect of items convertible to or settled in Class A common shares   0.01     0.01  
Adjusted operating earnings per share $ 1.48   $ 1.43  
 

The reconciliation of basic weighted average Class A shares to weighted average shares outstanding – adjusted operating, is as follows:

   

  Three Months Ended  
June 30,

(In millions) 2018     2017
Basic weighted average shares outstanding – Class A 164.5 106.3
Conversion of Class B shares to Class A shares 25.5 82.9
Conversion of Class M shares to Class A shares 4.7 6.2
Effect of other stock compensation plans 0.4 0.5
Weighted average shares outstanding – adjusted operating 195.1 195.9
 

The reconciliation of shareholders’ equity to adjusted shareholders’ equity included in adjusted book value per share, adjusted debt to capital ratio, adjusted ROE and adjusted operating ROE is as follows:

   
June 30,
(In millions)

   2018   

   

   2017   

Total shareholders’ equity

$

8,505 $ 8,284
Less: AOCI 126 1,060
Less: Accumulated reinsurance unrealized gains and losses   12   152
Total adjusted shareholders’ equity $ 8,367 $ 7,072
 
Retirement Services $ 6,114 $ 5,013
Corporate and Other   2,253   2,059
Total adjusted shareholders’ equity $ 8,367 $ 7,072
 

The reconciliation of net income to adjusted net income included in adjusted ROE is as follows:

   

Three Months Ended
June 30,

(In millions)

   2018   

   

   2017   

Net income $ 264 $ 326
Reinsurance unrealized gains and losses   95   (45 )
Adjusted net income $ 359 $ 281  
 

The reconciliation of basic Class A shares outstanding to adjusted operating common shares outstanding is as follows:

   
June 30,
(In millions)

   2018   

   

   2017   

Class A common shares outstanding 164.5 119.3
Conversion of Class B shares to Class A shares 25.5 70.1
Conversion of Class M shares to Class A shares 5.4 6.4
Effect of other stock compensation plans 1.0 0.9
Adjusted operating common shares outstanding 196.4 196.7
 

The reconciliation of book value per share to adjusted book value per share is as follows:

   
June 30,

    2018    

   

    2017    

Book value per share $ 43.10 $ 42.20
AOCI (0.64 ) (5.40 )
Accumulated reinsurance unrealized gains and losses (0.06 ) (0.77 )
Effect of items convertible to or settled in Class A common shares   0.20     (0.08 )
Adjusted book value per share $ 42.60   $ 35.95  
 

The reconciliation of debt to capital ratio to adjusted debt to capital ratio is as follows:

   
June 30,

    2018    

   

    2017    

Total debt $ 1,174 $
Total shareholders’ equity   8,505     8,284  
Total capitalization 9,679 8,284
Less: AOCI 126 1,060
Less: Accumulated reinsurance unrealized gains and losses   12     152  
Total adjusted capitalization $ 9,541   $ 7,072  
 
Debt to capital ratio 12.1 % %
AOCI 0.2 % %
Accumulated reinsurance unrealized gains and losses   %   %
Adjusted debt to capital ratio   12.3 %   %
 

The reconciliation of net investment income to net investment earnings and earned rate is as follows:

   
Three months ended June 30,
2018     2017
(In millions) Dollar     Rate Dollar     Rate
GAAP net investment income $ 958   4.47 % $ 821   4.38 %
Reinsurance embedded derivative impacts 72 0.34 % 52 0.28 %
Net VIE earnings 1 % 21 0.11 %
Alternative income gain (loss) (1 ) % 6 0.03 %
Other   (21 ) (0.10 )%   (15 ) (0.08 )%
Total adjustments to arrive at net investment earnings/earned rate   51   0.24 %   64   0.34 %
Total net investment earnings/earned rate $ 1,009   4.71 % $ 885   4.72 %
 
Retirement Services $ 983 4.74 % $ 821 4.85 %
Corporate and Other   26   3.71 %   64   3.53 %
Total net investment earnings/earned rate $ 1,009   4.71 % $ 885   4.72 %
 
Retirement Services average invested assets $ 82,879 $ 67,577
Corporate and Other average invested assets   2,848     7,345  
Average invested assets $ 85,727   $ 74,922  
 

The reconciliation of interest sensitive contract benefits to Retirement Services’ cost of crediting on deferred annuities, and the respective rates, is as follows:

   
Three months ended June 30,
2018     2017
(In millions)

Dollar

    Rate Dollar     Rate
GAAP interest sensitive contract benefits $ 332   2.00 % $ 553   3.95 %
Interest credited other than deferred annuities (41 ) (0.25 )% (42 ) (0.30 )%
FIA option costs 206 1.25 % 149 1.07 %
Product charges (strategy fees) (23 ) (0.14 )% (17 ) (0.12 )%
Reinsurance embedded derivative impacts 3 0.02 % 9 0.06 %
Change in fair values of embedded derivatives – FIAs (168 ) (1.01 )% (399 ) (2.85 )%
Negative VOBA amortization 7 0.04 % 10 0.07 %
Unit linked change in reserve % 1 0.01 %
Other changes in interest sensitive contract liabilities   2   0.01 %     %
Total adjustments to arrive at cost of crediting on deferred annuities   (14 ) (0.08 )%   (289 ) (2.06 )%
Retirement Services cost of crediting on deferred annuities $ 318   1.92 % $ 264   1.89 %
Average account value on deferred annuities $ 66,241   $ 56,001  
 

The reconciliation of total investments, including related parties, to invested assets is as follows:

   
June 30,
(In millions)

   2018   

   

   2017   

Total investments, including related parties $ 98,669   $ 78,699  
Derivative assets (1,929 ) (1,808 )
Cash and cash equivalents (including restricted cash) 3,786 3,583
Accrued income 662 566
Derivative collateral (1,746 ) (1,860 )
Reinsurance funds withheld and modified coinsurance (130 ) (444 )
VIE and VOE assets, liabilities and noncontrolling interest 809 949
AFS unrealized (gain) loss (370 ) (2,335 )
Ceded policy loans (284 ) (332 )
Net investment receivables (payables)   (858 )   (739 )
Total adjustments to arrive at invested assets   (60 )   (2,420 )
Total invested assets $ 98,609   $ 76,279  
 

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Willdan Group Reports Second Quarter 2018 Results

ANAHEIM, Calif.–()–Willdan Group, Inc. (“Willdan”) (NASDAQ: WLDN), a provider of professional technical and consulting services, today reported financial results for its second quarter ended June 29, 2018.

Second Quarter 2018 Highlights

  • Total Contract Revenue of $59.8 million
  • Net Revenue of $34.3 million
  • Net Income of $3.3 million
  • Diluted earnings per share of $0.36
  • Adjusted diluted earnings per share of $0.50
  • Cash flow from operations of $10.8 million

For the second quarter of 2018, Willdan reported total contract revenue of $59.8 million and net income of $3.3 million, or $0.36 per diluted share. This compares with total contract revenue of $71.8 million and net income of $3.3 million, or $0.36 per diluted share, for the second quarter of 2017. For the second quarter of 2018, Net Revenue, defined as revenue, net of subcontractor services and other direct costs (see “Use of Non-GAAP Financial Measures” below), was $34.3 million, up 13.7% compared to the same period in fiscal year 2017.

“We executed well in the second quarter and delivered strong year-over-year growth in Net Revenue and Adjusted Diluted EPS,” said Tom Brisbin, Willdan’s Chairman and Chief Executive Officer. “All of our major energy efficiency programs are performing well and we saw the ramp-up in revenue that we expected from Integral Analytics, our provider of energy data analytics software. Our current revenue mix and new business pipeline reflects a broader range of work as we continue to diversify both geographically and by project type. In addition, this quarter we generated $10.8 million in cash flow from operations and a 21.3% adjusted EBITDA net margin, both company records.”

“In addition to our traditional energy efficiency services and engineering work, we are seeing more opportunities for projects related to microgrids, fuel cells, and natural gas load pockets. Advancements in technology and policy are transforming the global electricity system, and we believe we are well positioned to help utilities, businesses and governments make the transformation. The electrification of our transportation systems will place a greater demand on the electric grid, and change when and where electricity is needed. Use of renewables and battery storage will increase, generating two-way power flow that transacts with the grid, creating significant new engineering and market challenges.”

Second Quarter 2018 Financial Highlights

Total contract revenue for the second quarter of 2018 was $59.8 million, a decrease of 16.7% from $71.8 million for the second quarter of 2017. Contract revenue for the Energy segment was $41.7 million for the second quarter of 2018, a decline of 22.3%, which was primarily attributable to the reduction in pass-through subcontractor costs, for which the Company receives little or no margin. Contract revenue for the Engineering and Consulting segment was $18.1 million, relatively unchanged from the second quarter of 2017.

Net Revenue for the second quarter of 2018 was $34.3 million, an increase of 13.7% from $30.2 million for the second quarter of 2017. The increase was primarily due to a ramp up in new programs within the Energy segment replacing high revenue and high pass-through cost projects with lower revenue and lower pass-through cost projects, as well as revenue contributed from Integral Analytics and Newcomb Anderson McCormick, Inc. (“NAM”), two firms acquired over the past year. Net Revenue in the Energy segment was $20.2 million for the second quarter of 2018, an increase of 21.8% over the same period last year. Net Revenue in the Engineering and Consulting segment was $14.0 million for the second quarter of 2018, an increase of 3.8% over the same period last year.

Direct costs of contract revenue were $36.7 million for the second quarter of 2018, a decrease of 30.9%, from $53.0 million for the second quarter of 2017. The decrease was primarily due to reduced pass-through subcontractor expenses related to certain Energy segment projects.

Total general and administrative expenses for the second quarter of 2018 was $19.0 million, an increase of 33.3% from $14.2 million for the second quarter of 2017, driven primarily by the employees and offices added through the acquisitions of Integral Analytics and NAM, an increase in salaries and wages as a result of rate changes and an increase in stock-based compensation.

Income tax expense was $0.9 million in the second quarter of 2018, compared to $1.2 million for the prior year period. The quarter over quarter decrease of $0.4 million, or 28.8% is due to a reduction in the corporate tax rate for 2018.

Net income for the second quarter of 2018 was $3.3 million, or $0.36 per diluted share, as compared to net income of $3.3 million, or $0.36 per diluted share, for the second quarter of 2017. The increase in operating performance was offset by higher non-cash stock-based compensation expense.

Adjusted EBITDA (see “Use of Non-GAAP Financial Measures” below) was $7.3 million for the second quarter of 2018, an increase of 16.6% from $6.2 million for the second quarter of 2017. Adjusted EBITDA as a percentage of Net Revenue, was 21.3% in the second quarter of 2018, as compared with 20.7% for the second quarter of 2017.

Adjusted Net Income (see “Use of Non-GAAP Financial Measures” below) was $5.0 million for the second quarter of 2018, an increase of 26.6% from $3.9 million for the second quarter of 2017. The increase in Adjusted Net Income was primarily due to higher operating performance and a lower effective tax rate, as compared to the second quarter of 2017. Adjusted Diluted EPS (see “Use of Non-GAAP Financial Measures” below) for the second quarter of 2018 was $0.50, an increase of 22.0% from $0.41 for the second quarter of 2017.

Six Months 2018 Financial Highlights

Total contract revenue for the six months ended June 29, 2018 was $114.4 million, a decrease of 18.4% from $140.2 million for the six months ended June 30, 2017. Contract revenue for the Energy segment was $79.1 million for the six months ended June 29, 2018, a decline of 23.9% from $103.8 million for the six months ended June 30, 2017. The decrease was primarily attributable to the reduction in pass-through subcontractor costs, for which the Company receives little or no margin. Contract revenue for the Engineering and Consulting segment was $35.4 million for the six months ended June 29, 2018, a decline of 2.7% from $36.3 million for the six months ended June 30, 2017.

Net Revenue for the six months ended June 29, 2018 was $64.8 million, an increase of 10.6% from $58.6 million for the six months ended June 30, 2017. The increase was primarily due to a ramp up in new programs within the Energy segment replacing high revenue and high pass-through cost projects with lower revenue and higher margin projects, as well as revenue contributed from Integral Analytics and NAM, two firms acquired over the past year. Net Revenue in the Energy segment was $36.6 million for the six months ended June 29, 2018, an increase of 16.9% from $31.3 million for the six months ended June 30, 2017. Net Revenue in the Engineering and Consulting segment was $28.2 million for the six months ended June 29, 2018, an increase of 3.4% from $27.3 million for the six months ended June 30, 2017.

Direct costs of contract revenue were $71.7 million for the six months ended June 29, 2018, a decrease of 30.8%, from $103.7 million for the six months ended June 30, 2017. The decrease was primarily due to reduced pass-through subcontractor expenses related to our Energy segment work.

Total general and administrative expenses for the six months ended June 29, 2018 was $36.5 million, an increase of 22.0% from $29.9 million for the six months ended June 30, 2017, driven primarily by the employees and offices added through the acquisitions of Integral Analytics and NAM, an increase in salaries and wages as a result of rate changes and an increase in stock-based compensation.

Income tax expense was $0.6 million for the six months ended June 29, 2018, compared to $0.5 million for the six months ended June 30, 2017. For both six month periods the difference between the tax expense recorded and the expense that would be recorded by applying each year’s federal statutory rate was attributable to various tax deductions.

Net income for the six months ended June 29, 2018 was $5.5 million, or $0.60 per diluted share, as compared to net income of $6.0 million, or $0.66 per diluted share, for the six months ended June 30, 2017. The decrease was primarily due to an increase in non-cash stock-based compensation.

Adjusted EBITDA (see “Use of Non-GAAP Financial Measures” below) was $11.8 million for the six months ended June 29, 2018, an increase of 20.0% from $9.8 million for the six months ended June 30, 2017. Adjusted EBITDA as a percentage of Net Revenue, was 18.2% for the six months ended June 29, 2018, as compared with 16.7% for the six months ended June 30, 2017.

Adjusted Net Income (see “Use of Non-GAAP Financial Measures” below) was $8.2 million for the six months ended June 29, 2018, an increase of 17.0% from $7.0 million for the six months ended June 30, 2017. The increase in Adjusted Net Income was primarily due to an increase in Net Revenue, as compared to the six months ended June 30, 2017. Adjusted Diluted EPS (see “Use of Non-GAAP Financial Measures” below) was $0.86 for the six months ended June 29, 2018, an increase of 11.7% from $0.77 for the six months ended June 30, 2017.

Balance Sheet

Willdan reported $11.2 million in cash and cash equivalents at June 29, 2018, as compared to $14.4 million at December 29, 2017. The decrease in cash and cash equivalents was primarily due to net cash used in financing and investing activities of $3.8 million and $3.5 million, respectively, offset by net cash provided by operating activities of $4.0 million. The net cash used in financing activities was primarily payments of contingent consideration related to our prior acquisitions and the net cash used in investing activities was primarily cash paid for an acquisition, net of cash acquired.

Outlook

Willdan reaffirmed its financial targets and updated its amortization target for fiscal year 2018:

  • Total Net Revenue of $130 – $140 million
  • Adjusted Diluted EPS of $1.95 – $2.05
  • Effective tax rate of approximately 23%
  • Diluted share count of 9.3 million shares
  • Depreciation of approximately $2.0 million
  • Amortization of approximately $3.1 million

Over the long-term, Willdan continues to target both organic and acquisitive Net Revenue growth of greater than 10%, resulting in total Net Revenue growth of greater than 20% per year.

Conference Call Details and Investor Report

Chief Executive Officer Thomas Brisbin and Chief Financial Officer Stacy McLaughlin will host a conference call today, August 2, 2018, at 5:30 p.m. Eastern/2:30 p.m. Pacific to discuss Willdan’s financial results and provide a business update.

Interested parties may participate in the conference call by dialing 866-548-4713 and providing conference ID 8413254. The conference call will be webcast simultaneously on Willdan’s website at www.willdan.com under Investors: Events and the replay will be archived for at least 12 months.

The telephonic replay of the conference call may be accessed following the call by dialing 888-203-1112 and entering the passcode 8413254. The replay will be available through August 16, 2018.

An Investor Report containing supplemental financial information can also be accessed on the home page of Willdan’s investor relations website.

About Willdan Group, Inc.

Willdan provides professional technical and consulting services, including comprehensive energy efficiency services, for utilities, private industry and public agencies throughout the United States. Willdan’s service offerings span a broad range of complementary services including energy efficiency and sustainability, engineering, construction management and planning, economic and financial consulting and national preparedness and interoperability. Willdan provides integrated technical solutions to extend the reach and resources of its clients and provides all services through its subsidiaries specialized in each segment. For additional information, visit Willdan’s website at www.willdan.com.

Use of Non-GAAP Financial Measures

“Net Revenue,” a non-GAAP financial measure, is a supplemental measure that Willdan believes enhances investors’ ability to analyze our business trend and performance because it substantially measures the work performed by our employees. In the course of providing services, Willdan routinely subcontracts various services. Generally, these subcontractor services and other direct costs are passed through to our clients and, in accordance with U.S. generally accepted accounting principles (“GAAP”) and industry practice, are included in our revenue when it is our contractual responsibility to procure or manage these activities. Because subcontractor services and other direct costs can vary significantly from project to project and period to period, changes in revenue may not necessarily be indicative of our business trends. Accordingly, Willdan segregates costs from revenue to promote a better understanding of our business by evaluating revenue exclusive of costs associated with external service providers. A reconciliation of contract revenue as reported in accordance with GAAP to revenue, net of subcontractor services and other direct costs is provided at the end of this news release.

“Adjusted EBITDA” is a supplemental measure used by Willdan’s management to measure its operating performance. Willdan defines Adjusted EBITDA as net income (loss) plus interest expense (income), income tax expense (benefit), stock-based compensation, interest accretion and depreciation and amortization. Adjusted EBITDA is not a measure of net income (loss) determined in accordance with GAAP. Willdan believes Adjusted EBITDA is useful because it allows Willdan’s management to evaluate its operating performance and compare the results of its operations from period to period and against its peers without regard to its financing methods, capital structure and non-operating expenses. Willdan uses Adjusted EBITDA to evaluate its performance for, among other things, budgeting, forecasting and incentive compensation purposes.

Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s costs of capital, stock-based compensation, as well as the historical costs of depreciable assets. Willdan’s definition of Adjusted EBITDA may also differ from those of many companies reporting similarly named measures. Willdan believes Adjusted EBITDA is useful to investors, research analysts, investment bankers and lenders because it removes the impact of certain non-operational items from its operational results, which may facilitate comparison of its results from period to period. A reconciliation of net income as reported in accordance with GAAP to Adjusted EBITDA is provided at the end of this news release.

“Adjusted Net Income” is a supplemental measure used by Willdan’s management to measure its operating performance. Willdan defines Adjusted Net Income as net income plus stock-based compensation. Adjusted Net Income has limitations as an analytical tool and should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP. A reconciliation of net income as reported in accordance with GAAP to Adjusted Net Income is provided at the end of this news release.

“Adjusted Diluted EPS” is a supplemental measure used by Willdan’s management to measure its operating performance. Willdan defines Adjusted Diluted EPS as Adjusted Net Income divided by the diluted weighted-average shares outstanding. Adjusted Diluted EPS has limitations as an analytical tool and should not be considered as an alternative to, or more meaningful than, diluted EPS as determined in accordance with GAAP. A reconciliation of diluted EPS as reported in accordance with GAAP to Adjusted Diluted EPS is provided at the end of this news release.

Willdan’s definition of Net Revenue, Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS may differ from other companies reporting similarly named measures. These measures should be considered in addition to, and not as a substitute for, or superior to, other measures of financial performance prepared in accordance with GAAP, such as contract revenue and net income.

Forward Looking Statements

Statements in this press release that are not purely historical, including statements regarding Willdan’s intentions, hopes, beliefs, expectations, representations, projections, estimates, plans or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding Willdan’s targets for fiscal year 2018 and the expected benefits of Willdan’s acquisitions of Integral Analytics, Inc. and NAM. The forward-looking statements involve risks and uncertainties including, but not limited to, the risk that Willdan will not be able to expand its services or meet the needs of customers in markets in which it operates. It is important to note that Willdan’s actual results could differ materially from those in any such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, Willdan’s ability to adequately complete projects in a timely manner, Willdan’s ability to compete successfully in the highly competitive energy market, changes in state, local and regional economies and government budgets, Willdan’s ability to win new contracts, to renew existing contracts and to compete effectively for contracts awards through bidding processes and Willdan’s ability to successfully integrate its acquisitions and execute on its growth strategy. Willdan’s business could be affected by a number of other factors, including the risk factors listed from time to time in Willdan’s reports filed with the Securities and Exchange Commission, including, but not limited to, the Annual Report on Form 10-K filed for the year ended December 29, 2017 and the Quarterly Report on Form 10-Q for the quarter ended June 29, 2018. Willdan cautions investors not to place undue reliance on the forward-looking statements contained in this press release. Willdan disclaims any obligation to, and does not undertake to, update or revise any forward-looking statements in this press release.

   
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 29, December 29,
2018 2017
Assets
Current assets:
Cash and cash equivalents $ 11,225,000 $ 14,424,000
Accounts receivable, net of allowance for doubtful accounts of $714,000 and $369,000 at June 29, 2018 and December 29, 2017, respectively 22,896,000 38,441,000
Contract assets 42,410,000 24,732,000
Other receivables 777,000 1,833,000
Prepaid expenses and other current assets   3,242,000   3,760,000
Total current assets 80,550,000 83,190,000
Equipment and leasehold improvements, net 5,142,000 5,306,000
Goodwill 40,342,000 38,184,000
Other intangible assets, net 11,201,000 10,666,000
Other assets   920,000   826,000
Total assets $ 138,155,000 $ 138,172,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 14,024,000 $ 20,826,000
Accrued liabilities 24,198,000 23,293,000
Contingent consideration payable 4,224,000 4,246,000
Contract liabilities 6,163,000 7,321,000
Notes payable 383,000
Capital lease obligations   237,000   289,000
Total current liabilities 48,846,000 56,358,000
Contingent consideration payable 3,650,000 5,062,000
Notes payable 2,000,000 2,500,000
Capital lease obligations, less current portion 192,000 160,000
Deferred lease obligations 631,000 614,000
Deferred income taxes, net 2,404,000 2,463,000
Other noncurrent liabilities   468,000   363,000
Total liabilities   58,191,000   67,520,000
 
Commitments and contingencies
 
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding
Common stock, $0.01 par value, 40,000,000 shares authorized;

8,857,000 and 8,799,000 shares issued and outstanding at June 29, 2018 and December 29, 2017, respectively

89,000 88,000
Additional paid-in capital 54,216,000 50,976,000
Retained earnings   25,659,000   19,588,000
Total stockholders’ equity   79,964,000   70,652,000
Total liabilities and stockholders’ equity $ 138,155,000 $ 138,172,000
 
 
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
       
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2018   2017   2018   2017  
 
Contract revenue $ 59,833,000   $ 71,833,000   $ 114,428,000   $ 140,184,000  
 
Direct costs of contract revenue (inclusive of directly related depreciation and amortization):
Salaries and wages 11,127,000 11,368,000 22,125,000 22,169,000
Subcontractor services and other direct costs   25,544,000     41,676,000   49,613,000   81,571,000  
Total direct costs of contract revenue   36,671,000     53,044,000   71,738,000   103,740,000  
 
General and administrative expenses:
Salaries and wages, payroll taxes and employee benefits 10,725,000 8,086,000 20,750,000 17,401,000
Facilities and facility related 1,386,000 1,119,000 2,595,000 2,243,000
Stock-based compensation 1,662,000 620,000 2,726,000 1,096,000
Depreciation and amortization 1,111,000 934,000 2,175,000 1,843,000
Other   4,073,000     3,467,000   8,265,000   7,334,000  
Total general and administrative expenses   18,957,000     14,226,000   36,511,000   29,917,000  
Income from operations   4,205,000     4,563,000   6,179,000   6,527,000  
 
Other income (expense):
Interest expense, net (30,000 ) (32,000 ) (53,000 ) (65,000 )
Other, net   9,000     1,000   19,000   38,000  
Total other expense, net   (21,000 )   (31,000 ) (34,000 ) (27,000 )
Income before income taxes 4,184,000 4,532,000 6,145,000 6,500,000
 
Income tax expense   869,000   1,220,000     627,000   547,000  
Net income $ 3,315,000   $ 3,312,000   $ 5,518,000   $ 5,953,000  
 
Earnings per share:
Basic $ 0.38   $ 0.38   $ 0.63   $ 0.70  
Diluted $ 0.36   $ 0.36   $ 0.60   $ 0.66  
 
Weighted-average shares outstanding:
Basic 8,796,000 8,603,000 8,775,000 8,505,000
Diluted 9,288,000 9,082,000 9,247,000 9,078,000
 
 
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
   
Six Months Ended
June 29, June 30,
2018   2017  
Cash flows from operating activities:
Net income $ 5,518,000 $ 5,953,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,243,000 1,870,000
Deferred income taxes, net (792,000 ) 745,000
Gain on sale of equipment (14,000 )
Provision for doubtful accounts 344,000 (20,000 )
Stock-based compensation 2,726,000 1,096,000
Accretion and fair value adjustments of contingent consideration 622,000 281,000
Changes in operating assets and liabilities, net of effects from business acquisitions:
Accounts receivable 16,294,000 2,164,000
Contract assets (16,910,000 ) (10,750,000 )
Other receivables 1,056,000 (851,000 )
Prepaid expenses and other current assets 385,000 (545,000 )
Other assets (94,000 ) 29,000
Accounts payable (6,915,000 ) 5,172,000
Accrued liabilities 722,000 3,247,000
Contract liabilities (1,158,000 ) (1,279,000 )
Deferred lease obligations   17,000     (33,000 )
Net cash provided by operating activities   4,044,000     7,079,000  
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (511,000 ) (1,410,000 )
Proceeds from sale of equipment 36,000
Cash paid for acquisitions, net of cash acquired   (2,994,000 )    
Net cash used in investing activities   (3,469,000 )   (1,410,000 )
Cash flows from financing activities:
Payments on contingent consideration (3,199,000 ) (1,509,000 )
Payments on notes payable (383,000 ) (2,302,000 )
Repayments under line of credit (500,000 )
Principal payments on capital lease obligations (207,000 ) (222,000 )
Proceeds from stock option exercise 341,000 1,675,000
Proceeds from sales of common stock under employee stock purchase plan 616,000 344,000
Unregistered sales of equity securities and use of proceeds   (442,000 )    
Net cash used in financing activities   (3,774,000 )   (2,014,000 )
Net (decrease) increase in cash and cash equivalents (3,199,000 ) 3,655,000
Cash and cash equivalents at beginning of period   14,424,000     22,668,000  
Cash and cash equivalents at end of period $ 11,225,000   $ 26,323,000  
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 53,000 $ 65,000
Income taxes 215,000 1,628,000
Supplemental disclosures of noncash investing and financing activities:
Equipment acquired under capital leases 187,000 147,000
 
 
Willdan Group, Inc. and Subsidiaries
Reconciliation of GAAP Revenue to Net Revenue

(Non-GAAP Measure)

       
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
Consolidated 2018 2017 2018 2017
Contract revenue $ 59,833,000 $ 71,833,000 $ 114,428,000 $ 140,184,000
Subcontractor services and other direct costs   25,544,000   41,676,000   49,613,000   81,571,000
Net Revenue $ 34,289,000 $ 30,157,000 $ 64,815,000 $ 58,613,000
 
 
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
Energy segment 2018 2017 2018 2017
Contract revenue $ 41,726,000 $ 53,733,000 $ 79,058,000 $ 103,846,000
Subcontractor services and other direct costs   21,486,000   37,109,000   42,476,000   72,550,000
Net Revenue $ 20,240,000 $ 16,624,000 $ 36,582,000 $ 31,296,000
 
 
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
Engineering and Consulting segment 2018 2017 2018 2017
Contract revenue $ 18,107,000 $ 18,100,000 $ 35,370,000 $ 36,338,000
Subcontractor services and other direct costs   4,058,000   4,567,000   7,137,000   9,021,000
Net Revenue $ 14,049,000 $ 13,533,000 $ 28,233,000 $ 27,317,000
 
 
Willdan Group, Inc. and Subsidiaries
Reconciliation of GAAP Net Income to Adjusted EBITDA

(Non-GAAP Measure)

       
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2018   2017 2018   2017
Net income $ 3,315,000 $ 3,312,000 $ 5,518,000 $ 5,953,000
Interest expense 30,000 32,000 53,000 65,000
Income tax expense 869,000 1,220,000 627,000 547,000
Stock-based compensation 1,662,000 620,000 2,726,000 1,096,000
Interest accretion(1) 284,000 114,000 622,000 281,000
Depreciation and amortization 1,142,000 951,000 2,243,000 1,870,000
Gain on sale of equipment   (14,000 )     (14,000 )  
Adjusted EBITDA $ 7,288,000   $ 6,249,000 $ 11,775,000   $ 9,812,000

_____________________

(1)

  Interest accretion represents the imputed interest on the earn-out payments to be paid by us in connection with the acquisitions of Abacus Resource Management Company and substantially all of the assets of 360 Energy Engineers, LLC in January 2015, the acquisition of Integral Analytics, Inc. in July 2017 and NAM in April 2018.
 
Willdan Group, Inc. and Subsidiaries
Reconciliation of GAAP Net Income to Adjusted Net Income and Adjusted Diluted EPS

(Non-GAAP Measure)

       
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2018 2017 2018 2017
Net income $ 3,315,000 $ 3,312,000 $ 5,518,000 $ 5,953,000
Adjustment for stock-based compensation   1,662,000   620,000   2,726,000   1,096,000
Adjusted Net Income 4,977,000 3,932,000 8,244,000 7,049,000
 
Diluted weighted-average shares outstanding   9,288,000   9,082,000   9,247,000   9,078,000
 
Diluted earnings per share $ 0.36 $ 0.36 $ 0.60 $ 0.66
Impact of adjustment:
Stock-based compensation, net of tax   0.14   0.05   0.26   0.11
Adjusted Diluted EPS $ 0.50 $ 0.41 $ 0.86 $ 0.77
 
 
Willdan Group, Inc. and Subsidiaries
Reconciliation of Diluted EPS to Adjusted Diluted EPS Guidance

(Non-GAAP Measure)

 
2018 Guidance
High   Low
Diluted earnings per share $ 1.50 $ 1.60
Stock-based compensation, net of tax   0.45   0.45
Adjusted Diluted EPS $ 1.95 $ 2.05

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Seritage Growth Properties Reports Second Quarter 2018 Operating Results

NEW YORK–()–Seritage Growth Properties (NYSE:SRG) (the “Company”), a national owner of 248 retail properties totaling approximately 39 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the three and six months ended June 30, 2018.

Summary of Financial Results

For the three months ended June 30, 2018:

  • Net loss attributable to common shareholders of $8.0 million, or $0.23 per diluted share
  • Total Net Operating Income (“Total NOI”) of $36.5 million
  • Funds from Operations (“FFO”) of $6.5 million, or $0.12 per diluted share
  • Company FFO of $8.5 million, or $0.15 per diluted share

For the six months ended June 30, 2018:

  • Net income attributable to common shareholders of $1.1 million, or $0.03 per diluted share
  • Total Net Operating Income (“Total NOI”) of $73.3 million
  • Funds from Operations (“FFO”) of $17.5 million, or $0.31 per diluted share
  • Company FFO of $21.0 million, or $0.38 per diluted share

We are pleased with our strong second quarter highlighted by 853,000 square feet of newly signed leases and the commencement of five new redevelopment projects and one expansion project for a total investment of $58.2 million. Our annual base rent from diversified, non-Sears tenants is now approximately $127.3 million, or 57% of total rent, including all signed leases, and a 190% increase since our inception three years ago,” said Benjamin Schall, President and Chief Executive Officer. “Additionally, as we continue to position Seritage as a preferred partner for institutional capital providers, we were pleased to form two new joint ventures with equity partners this quarter to own and redevelop our properties in La Jolla, California and West Hartford, Connecticut. And, subsequent to the quarter end, we announced a new $2.0 billion term loan with Berkshire Hathaway, a transformational step for the company and one that provides our platform with enhanced liquidity and flexibility to further capitalize on our pipeline of opportunities.”

Operating Highlights

During the quarter ended June 30, 2018, including the Company’s proportional share of its unconsolidated joint ventures:

  • Signed new leases totaling 853,000 square feet at an average rent of $14.19 PSF. Since the Company’s inception in July 2015, new leasing activity has totaled nearly 6.1 million square feet at an average rent of $17.45 PSF.
  • Achieved releasing multiples of 3.6x for space currently or formerly occupied by Sears Holdings Corporation (“Sears Holdings” or “Sears”), with new rents averaging $14.19 PSF compared to $3.96 PSF paid by Sears Holdings. Since inception, releasing multiples have averaged 4.1x, with new rents at $17.58 PSF compared to $4.32 PSF paid by Sears Holdings.
  • Increased annual base rent from diversified, non-Sears tenants to 56.9% of total annual base rent from 44.0% in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured. Diversified, non-Sears rental income has increased by over 190% since inception to $127.3 million, including all signed leases.
  • Annualized Total NOI was an estimated $209.1 million, including all signed leases and net of rent attributable to associated space to be recaptured.

During the quarter ended June 30, 2018:

  • Announced five new redevelopment projects and expanded one previously announced project representing an aggregate incremental investment of $58.2 million. Total redevelopment program to date includes 88 projects completed or commenced representing over $1.3 billion of estimated capital investment.
  • Formed a joint venture partnership to own The Collection at UTC, the 226,200 SF redevelopment of the former Sears store and auto center at Westfield UTC in La Jolla, California. The transaction valued the property at approximately $165.0 million, including costs remaining to complete the project.
  • Formed a joint venture partnership to own The Corbin Collection, the 163,700 SF redevelopment of the former Sears store and auto center in West Hartford, CT. The transaction valued the property at approximately $52.0 million, including costs remaining to complete the project.

In addition, subsequent to the quarter end, the Company entered into a new $2.0 billion term loan facility with Berkshire Hathaway Life Insurance Company. The term loan facility, which matures on July 31, 2023, provided for an initial funding of $1.6 billion at closing and includes a committed $400 million incremental funding facility.

Financial Results

Net Income / Net Loss

For the three months ended June 30, 2018, net loss attributable to Class A and Class C shareholders was $8.0 million, or $0.23 per diluted share, as compared to a net loss of $21.2 million, or $0.63 per diluted share, for the prior year period. For the six months ended June 30, 2018, net income attributable to Class A and Class C shareholders was $1.1 million, or $0.03 per diluted share, as compared to a net loss of $41.1 million, or $1.22 per diluted share, for the prior year period.

Total NOI

For the three months ended June 30, 2018, Total NOI, which includes the Company’s proportional share of NOI from properties owned through investments in its unconsolidated joint ventures, was $36.5 million as compared to $44.7 million for the prior year period. For the six months ended June 30, 2018, Total NOI was $73.3 million as compared to $91.6 million for the prior year period.

The decrease in Total NOI in both periods was driven primarily by reduced rental income under the master lease with Sears Holdings as a result of recapture and termination activity at our wholly-owned properties. Since inception, approximately 13.3 million square feet of leased space, representing approximately $52.2 million of annual base rent, has been taken offline through recapture and termination activity. The Company has signed new leases totaling approximately 6.1 million square feet to diversified, non-Sears tenants for an aggregate annual base rent of approximately $106.0 million. The majority of our remaining signed but not opened (“SNO”) leases, which totaled $70.6 million as of June 30, 2018, are expected to begin paying rent over the next 6-18 months and, subject to additional recapture and termination activity, the Company expects Total NOI to increase as SNO leases convert to rent paying and as the Company signs new leases with diversified, non-Sears tenants to occupy currently unleased space.

In addition, the Company sold its interests in 13 unconsolidated joint venture properties and 50% interests in five wholly-owned properties in the second half of 2017 and sold 50% interests in three wholly-owned properties in the first half of 2018, which contributed to the decrease in Total NOI.

FFO and Company FFO

For the three months ended June 30, 2018, FFO, as calculated in accordance with NAREIT, was $6.5 million, or $0.12 per diluted share, as compared to $23.8 million, or $0.43 per diluted share, for the prior year period. For the six months ended June 30, 2018, FFO was $17.5 million, or $0.31 per diluted share, as compared to $54.8 million, or $0.99 per diluted share, for the prior year period.

For the three months ended, June 30, 2018, Company FFO was $8.5 million, or $0.15 per diluted share, as compared to $25.7 million, or $0.46 per diluted share, for the prior year period. For the six months ended June 30, 2018, Company FFO was $21.0 million, or $0.38 per diluted share, as compared to $52.7 million, or $0.95 per diluted share, for the prior year period.

The decreases in FFO and Company FFO in both periods were driven by the same factors driving the decrease in Total NOI, as well as lower termination fee income, lower straight-line rent as a result of recapture and termination activity at our properties, higher G&A expenses driven by our growing platform and the outperformance of targets related to performance-based restricted stock, and dividends related to preferred equity issued in the fourth quarter of 2017.

Portfolio Summary

As of June 30, 2018, the Company’s portfolio included interests in 248 retail properties totaling approximately 39 million square feet of gross leasable area, including 222 wholly-owned properties and 26 properties owned through investments in unconsolidated joint ventures. The Company’s portfolio includes 119 properties attached to regional malls and 129 shopping center or freestanding properties.

The portfolio was 81.3% leased, including unconsolidated joint ventures at the Company’s proportional share, and included 58 properties leased only to diversified, non-Sears tenants, 85 properties leased to Sears Holdings and one or more diversified, non-Sears tenants, and 81 properties leased only to Sears Holdings; 24 properties in the portfolio were vacant as of June 30, 2018. Of the properties leased to Sears Holdings, 124 operated under the Sears brand and 42 operated under the Kmart brand.

The unleased space as of June 30, 2018 included approximately 2.1 million SF of remaining lease-up at announced redevelopment projects, and approximately 4.7 million SF of additional leasing opportunity at properties in the Company’s redevelopment pipeline.

During the quarter ended June 30, 2018, the Company formed two new joint venture partnerships to own The Collection at UTC and the Corbin Collection, redevelopments of former Sears stores in La Jolla, CA and West Hartford, CT, respectively, and sold a former Sears store and redeveloped auto center in Hagerstown, MD.

Leasing Update

During the quarter ended June 30, 2018, the Company signed new leases totaling 853,000 square feet at an average annual base rent of $14.19 PSF. On a same-space basis, new rents averaged 3.6x prior rents for space currently or formerly occupied by Sears Holdings, increasing to $14.19 PSF for new tenants compared to $3.96 PSF paid by Sears Holdings across 853,000 square feet.

The table below provides a summary of the Company’s leasing activity since inception, including unconsolidated joint ventures presented at the Company’s proportional share:

         
(in thousands except number of leases and PSF data)
           
Total Release of Sears Holdings Space
Leased Annual Annual Leased Annual Annual Releasing
Period Leases GLA Rent Rent PSF Leases GLA Rent Rent PSF Multiple
2015 9 154 $ 4,650 $ 30.28 6 130 $ 3,820 $ 29.41 4.4 x
2016 65 2,070 36,600 17.68 59 1,882 33,610 17.86 4.5 x
2017 94 2,606 44,717 17.16 86 2,476 43,299 17.49 4.0 x
Q1 2018 20 391 7,915 20.24 19 389 7,891 20.29 4.1 x
Q2 2018 43 853   12,100   14.19 43 853   12,100   14.19 3.6 x
Total 231 6,074 $ 105,982 $ 17.45 213 5,730 $ 100,720 $ 17.58 4.1 x
 

During the quarter ended June 30, 2018, the Company added $12.1 million of new diversified, non-Sears income and increased annual base rent attributable to diversified, non-Sears tenants to 56.9% of total annual base rent from 44.0% as of June 30, 2017, including all signed leases and net of rent attributable to the associated space to be recaptured.

The table below provides a summary of all the Company’s signed leases as of June 30, 2018, including unconsolidated joint ventures presented at the Company’s proportional share:

               
(in thousands except number of leases and PSF data)
Number of Leased % of Total Annual % of Total Annual
Tenant Leases GLA Leased GLA Rent Annual Rent Rent PSF
Sears Holdings (1) 166 21,253 71.9 % $ 96,567 43.1 % $ 4.54
In-place diversified, non-Sears leases 234 4,355 14.7 % 56,778 25.4 % 13.04
SNO diversified, non-Sears leases 144 3,963 13.4 %   70,560 31.5 %   17.80
Sub-total diversified, non-Sears leases 378 8,318 28.1 %   127,338 56.9 %   15.31
Total 544 29,571 100.0 % $ 223,905 100.0 % $ 7.57

____________________

(1)   Leases reflects number of properties subject to the Master Lease and JV Master Leases.
 

Development Update

Wholly-Owned Properties

During the quarter ended June 30, 2018, the Company commenced five new redevelopment projects representing an estimated total investment of $53.4 million and expanded one previously announced project representing an estimated incremental and total investment of $4.8 million and $11.3 million, respectively.

The table below summarizes project commencements in the Company’s wholly-owned portfolio since inception:

                               
(in thousands) Estimated Estimated
Number Project Development Project
Quarter of Projects Square Feet Costs (1) Costs (1)
Acquired (2) 15 $ 63,600 $ 63,600
2015 5 352 51,500 64,200
2016 (3) 28 2,677 353,600 370,700
2017 (3) 30 3,517 650,000 693,600
Q1 2018 5 822 96,900 99,300
Q2 2018 5 547   53,400   53,400
Total 88 7,915 $ 1,269,000 $ 1,344,800

____________________

(1)   Total estimated development costs exclude, and total estimated project costs include, termination fees to recapture 100% of certain properties.
(2) Projects were in various stages of development when acquired by the Company in July 2015.
(3) Includes subsequent expansions to previously announced projects.
 

As of June 30, 2018, the Company had originated 73 wholly-owned projects since the Company’s inception. These projects represent an estimated total investment of $1,281 million ($1,179 million at share), of which an estimated $881 million ($818 million at share) remains to be spent, and are expected to generate an incremental yield on cost of approximately 11.0%.

The table below provides additional information regarding the Company’s wholly-owned development activity from inception through June 30, 2018:

                   
(in thousands)
Estimated Estimated Estimated
Number Project Development Project Projected Annual Income (2) Incremental
Estimated Project Costs (1) of Projects Square Feet Costs (1) Costs (1) Total Existing Incremental Yield (3)
< $10,000 25 1,684 $ 118,200 $ 118,200 $ 20,500 $ 4,700 $ 15,800
$10,001 – $20,000 (4) 29 3,001 380,700 400,600 57,200 15,200 41,800
> $20,001 19 3,230   706,500   762,400   104,300   21,800   82,500  
Announced projects 73 7,915 $ 1,205,400 $ 1,281,200 $ 182,000 $ 41,700 $ 140,100 10.5-11.5%
Acquired projects 15   63,600   63,600
Total projects 88 $ 1,269,000 $ 1,344,800

____________________

(1)   Total estimated development costs exclude, and total estimated project costs include, termination fees to recapture 100% of certain properties.
(2) Projected annual income includes assumptions on stabilized rents to be achieved for space under redevelopment. There can be no assurance that stabilized rent targets will be achieved.
(3) Projected incremental annual income divided by total estimated project costs.
(4) Includes Saugus, MA project which has been temporarily postponed while the Company identifies a new lead tenant.
 

The tables below provide brief descriptions of each of the redevelopment projects originated on the Company’s platform since its inception:

 
Total Project Costs under $10 Million
                        Total     Estimated   Estimated
Project Construction Substantial
Property Description Square Feet   Start Completion
King of Prussia, PA Repurpose former auto center space for Outback Steakhouse, Yard House and small shop retail 29,100 Complete
Merrillville, IN Termination property; redevelop existing store for At Home and small shop retail 132,000 Complete
Elkhart, IN Termination property; existing store has been released to Big R Stores 86,500 Complete
San Antonio, TX Recapture and repurpose auto center space for Orvis, Jared’s Jeweler, Shake Shack and small shop retail 18,900 Complete
Bowie, MD Recapture and repurpose auto center space for BJ’s Brewhouse 8,200 Complete
Troy, MI Partial recapture; redevelop existing store for At Home 100,000 Complete
Roseville, MI Partial recapture; redevelop existing store for At Home 100,400 Complete
Rehoboth Beach, DE Partial recapture; redevelop existing store for andThat! and PetSmart 56,700 Complete
Henderson, NV Termination property; redevelop existing store for At Home, Seafood City, Blink Fitness and additional retail 144,400 Complete
Cullman, AL Termination property; redevelop existing store for Bargain Hunt, Tractor Supply and Planet Fitness 99,000 Complete
Albany, NY Recapture and repurpose auto center space for BJ’s Brewhouse, Ethan Allen and additional small shop retail 28,000 Substantially complete
Hagerstown, MD Recapture and repurpose auto center space for BJ’s Brewhouse, Verizon and additional retail

Note: property sold in Q2 2018

15,400 Substantially complete
Jefferson City, MO Termination property; redevelop existing store for Orscheln Farm and Home 96,000 Substantially complete
Kearney, NE Termination property; redevelop existing store for Marshall’s, PetSmart and additional junior anchors 92,500 Substantially complete
Ft. Wayne, IN Site densification (project expansion); new outparcels for BJ’s Brewhouse and Chick-Fil-A 12,000 Substantially complete
Guaynabo, PR Partial recapture; redevelop existing store for Planet Fitness, Capri and additional retail and restaurants 56,100 Underway Q3 2018
Florissant, MO Site densification; new outparcel for Chick-Fil-A 5,000 Underway Q3 2018
Dayton, OH Recapture and repurpose auto center space for Outback Steakhouse and additional restaurants 14,100 Underway Q4 2018
New Iberia, LA Termination property; redevelop existing store for Rouses Supermarkets, Hobby Lobby and small shop retail 93,100 Underway Q1 2019
North Little Rock, AR Recapture and repurpose auto center space for LongHorn Steakhouse and additional small shop retail 17,300 Underway Q2 2019
St. Clair Shores, MI 100% recapture; demolish existing store and develop site for new Kroger grocery store 107,200 Underway Q2 2019
Hopkinsville, KY Termination property; redevelop existing store for Bargain Hunt, Farmer’s Furniture and additional junior anchors and small shop retail 87,900 Q3 2018 Q2 2019
Mt. Pleasant, PA Termination property; redevelop existing store for Aldi, Big Lots and additional retail 86,300 Q3 2018 Q3 2019
Oklahoma City, OK Site densification; new fitness center for Vasa Fitness 59,500 Q3 2018 Q3 2019
Gainesville, FL Termination property; redevelop existing store for Florida Clinical Practice Association / University of Florida College of Medicine 139,100 Q4 2018 Q4 2019
 
 
Total Project Costs $10 – $20 Million
                        Total     Estimated   Estimated
Project Construction Substantial
Property Description Square Feet   Start Completion
Braintree, MA 100% recapture; redevelop existing store for Nordstrom Rack, Saks OFF 5th and additional retail 90,000 Complete
Honolulu, HI 100% recapture; redevelop existing store for Longs Drugs (CVS), PetSmart and Ross Dress for Less 79,000 Complete
Anderson, SC 100% recapture (project expansion); redevelop existing store for Burlington Stores, Gold’s Gym, Sportsman’s Warehouse, additional retail and restaurants 111,300 Complete
West Jordan, UT Partial recapture; redevelop existing store and attached auto center for Burlington Stores and additional retail 81,400 Substantially complete
Madison, WI Partial recapture; redevelop existing store for Dave & Busters, Total Wine & More, additional retail and restaurants 75,300 Substantially complete
Thornton, CO Termination property; redevelop existing store for Vasa Fitness and additional junior anchors 191,600 Substantially complete
Springfield, IL Termination property; redevelop existing store for Burlington Stores, Binny’s Beverage Depot, Marshall’s, Orangetheory Fitness, Outback Steakhouse, CoreLife Eatery and additional small shop retail 133,400 Substantially complete
Orlando, FL 100% recapture; demolish and construct new buildings for Floor & Décor, Orchard Supply Hardware, LongHorn Steakhouse, Mission BBQ, Olive Garden and additional small shop retail and restaurants 139,200 Substantially complete
Cockeysville, MD Partial recapture; redevelop existing store for HomeGoods, Michael’s Stores, additional junior anchors and restaurants 83,500 Underway Q3 2018
Charleston, SC 100% recapture (project expansion); redevelop existing store and detached auto center for Burlington Stores and additional retail 126,700 Underway Q3 2018
North Hollywood, CA Partial recapture; redevelop existing store for Burlington Stores and Ross Dress for Less 79,800 Underway Q3 2018
Salem, NH Site densification; new theatre for Cinemark

Recapture and repurpose auto center for restaurant space

71,200 Underway Q3 2018
Paducah, KY Termination property; redevelop existing store for Burlington Stores, Ross Dress for Less and additional retail 102,300 Underway Q3 2018
Fairfax, VA Partial recapture; redevelop existing store and attached auto center for Dave & Busters, Seasons 52, additional junior anchors and restaurants 110,300 Underway Q4 2018
North Miami, FL 100% recapture; redevelop existing store for Blink Fitness, Burlington Stores, Michael’s and Ross Dress for Less 124,300 Underway Q4 2018
Hialeah, FL 100% recapture; redevelop existing store for Bed, Bath & Beyond, Ross Dress for Less and dd’s Discounts to join current tenant, Aldi 88,400 Underway Q4 2018
Warwick, RI Termination property (project expansion); redevelop existing store and detached auto center for At Home, BJ’s Brewhouse, Raymour & Flanigan and additional retail 190,700 Underway Q4 2018
Temecula, CA Partial recapture; redevelop existing store and detached auto center for Round One, small shop retail and restaurants 65,100 Underway Q4 2018
Canton, OH Partial recapture; redevelop existing store for Dave & Busters and restaurants 83,900 Underway Q2 2019
North Riverside, IL Partial recapture; redevelop existing store and detached auto center for Blink Fitness, Round One and additional junior anchors, small shop retail and restaurants 103,900 Underway Q2 2019
Olean, NY Termination property (project expansion); redevelop existing store for Marshall’s, Ollie’s Bargain Basement and additional retail 125,700 Underway Q2 2019
Las Vegas, NV Partial recapture; redevelop existing store for Round One and additional retail 78,800 Q3 2018 Q3 2019
Yorktown Heights, NY Partial recapture; redevelop existing store for 24 Hour Fitness and additional retail 85,200 Q3 2018 Q4 2019
Santa Cruz, CA Partial recapture; redevelop existing store for TJ Maxx, HomeGoods and additional junior anchors 62,200 Q4 2018 Q4 2019
El Paso, TX Termination property; redevelop existing store for Ross Dress for Less, dd’s Discounts and additional retail 114,700 Q4 2018 Q4 2019
Warrenton, VA Termination property; redevelop existing store for Homegoods and additional retail 97,300 Q1 2019 Q3 2019
Pensacola, FL Termination property; redevelop existing store for Lucky’s Market, large format retail and restaurants 134,700 Q1 2019 Q1 2020
Vancouver, WA Partial recapture; redevelop existing store for Round One and additional retail and restaurants 72,400 Q1 2019 Q2 2020
 
 
Total Project Costs over $20 Million
Total Estimated Estimated
Project Construction Substantial
Property Description Square Feet   Start Completion
Memphis, TN 100% recapture; demolish and construct new buildings for LA Fitness, Nordstrom Rack, Ulta Beauty, Hopdoddy Burger Bar and additional junior anchors, restaurants and small shop retail 135,200 Substantially complete
West Hartford, CT 100% recapture; redevelop existing store and detached auto center for Buy Buy Baby, Cost Plus World Market, REI, Saks OFF Fifth, other junior anchors, Shake Shack and additional small shop retail

Note: contributed to West Hartford JV in Q2 2018

147,600 Substantially complete
St. Petersburg, FL 100% recapture; demolish and construct new buildings for Dick’s Sporting Goods, Lucky’s Market, PetSmart, Five Below, Chili’s Grill & Bar, Pollo Tropical, LongHorn Steakhouse, Verizon and additional small shop retail and restaurants 142,400 Substantially complete
Wayne, NJ Partial recapture (project expansion); redevelop existing store and detached auto center for Cinemark, Dave & Busters and additional junior anchors and restaurants

Note: contributed to GGP II JV in Q3 2017

156,700 Underway Q3 2018
Carson, CA 100% recapture (project expansion); redevelop existing store for Burlington Stores, Ross Dress for Less, Gold’s Gym and additional retail 163,800 Underway Q1 2019
Watchung, NJ 100% recapture; demolish full-line store and detached auto center and construct new buildings for Cinemark, HomeSense, Sierra Trading Post, Ulta Beauty and small shop retail and restaurants 126,700 Underway Q2 2019
Santa Monica, CA 100% recapture; redevelop existing building into premier, mixed-use asset featuring unique, small-shop retail and creative office space

Note: contributed to Mark 302 JV in Q1 2018

96,500 Underway Q4 2019
Aventura, FL 100% recapture; demolish existing store and construct new, multi-level open air retail destination featuring a leading collection of experiential shopping, dining and entertainment concepts alongside a treelined esplanade and activated plazas 216,600 Underway Q4 2019
San Diego, CA 100% recapture; redevelop existing store into two highly-visible, multi-level buildings with exterior facing retail space leased to Equinox Fitness and a premier mix of experiential shopping, dining, and entertainment concepts

Note: contributed to UTC JV in Q2 2018

206,000 Underway Q4 2019
Roseville, CA Termination property (project expansion): redevelop existing store and auto center for Cinemark, Round One, AAA Auto Repair Center and restaurants 147,400 Underway Q2 2020
Austin, TX 100% recapture (project expansion); redevelop existing store for AMC Theatres, additional junior anchors and restaurants 177,400 Underway Q3 2019
Greendale, WI Termination property; redevelop existing store and attached auto center for Dick’s Sporting Goods, Round One and additional junior anchors and restaurants 223,800 Underway Q4 2019
East Northport, NY Termination property; redevelop existing store and attached auto center for AMC Theatres, 24 Hour Fitness, Floor & Decor and small shop retail 179,700 Underway Q4 2019
Anchorage, AK 100% recapture; redevelop existing store for Guitar Center, Safeway, Planet Fitness and additional retail to join current tenant, Nordstrom Rack 142,500 Q3 2018 Q4 2019
El Cajon, CA 100% recapture; redevelop existing store and auto center for Ashley Furniture, Bob’s Discount Furniture, Burlington Stores and additional retail and restaurants 242,700 Q3 2018 Q3 2019
Tucson, AZ 100% recapture; redevelop existing store and auto center for Round One and additional retail 224,300 Q3 2018 Q4 2019
Reno, NV 100% recapture; redevelop existing store and auto center for Round One and additional retail 169,800 Q3 2018 Q4 2019
Fairfield, CA 100% recapture (project expansion); redevelop existing store and auto center for Dave & Busters, AAA Auto Repair Center and additional retail 146,500 Q3 2018 Q1 2020
Plantation, FL 100% recapture (project expansion); redevelop existing store and auto center for GameTime, Powerhouse Gym, additional retail and restaurants 184,400 Q4 2018 Q1 2020
 

Balance Sheet and Liquidity

As of June 30, 2018, the Company’s total market capitalization was approximately $3.6 billion. Total market capitalization is calculated as the sum of total debt and the market value of the Company’s outstanding shares of common stock, assuming conversion of operating partnership units.

Total debt to total market capitalization was 34.1% and net debt to Adjusted EBITDA was 8.2x. The Company deducts both unrestricted and restricted cash from total debt when calculating net debt. Reconciliations of net income attributable to common shareholders to EBITDA and Adjusted EBITDA, are provided in the tables accompanying this press release.

As of June 30, 2018, the Company had $100.4 million of unrestricted cash and restricted cash of $166.5 million, the substantial majority of which was held in reserve accounts for redevelopment, re-leasing and operating expenses at the Company’s properties.

During the quarter ended June 30, 2018, the Company reduced amounts outstanding under its mortgage loan by $58.4 million and added $7.1 million to its redevelopment reserve as a result of the new joint ventures in La Jolla, CA and West Hartford, CT and the disposition of its property in Hagerstown, MD.

New Term Loan Facility

Subsequent to June 30, 2018, the Company entered into a $2.0 billion term loan facility (the “Term Loan Facility”) with Berkshire Hathaway Life Insurance Company of Nebraska.

The Term Loan Facility, which matures on July 31, 2023, provided for an initial funding of $1.6 billion at closing (the “Initial Funding”) and includes a committed $400 million incremental funding facility (the “Incremental Funding Facility”). Funded amounts under the Term Loan Facility bear interest at a fixed annual rate of 7.00%, while amounts available under Incremental Funding Facility will be subject to a 1.00% annual fee until drawn.

The Company used a portion of the proceeds from the Initial Funding to fully repay its outstanding mortgage loan and unsecured term loan. Net proceeds from the Initial Funding, combined with existing balance sheet cash and the release of cash reserves held by the previous lender as of June 30, 2018, provide the Company with over $600 million of cash liquidity, in addition to access to the $400 million Incremental Funding Facility.

Dividends

The Company expects annual common dividends to adhere to REIT requirements with respect to taxable income which includes both ordinary income and capital gains from the sale of real estate.

On July 24, 2018, the Company’s Board of Trustees declared a third quarter common stock dividend of $0.25 per each Class A and Class C common share. The common dividend will be paid on October 11, 2018 to shareholders of record on September 28, 2018. Holders of units in Seritage Growth Properties, L.P. (the “Operating Partnership”) are entitled to an equal distribution per each Operating Partnership unit held as of September 28, 2018. On July 24, 2018, the Company’s Board of Trustees also declared a preferred stock dividend of $0.4375 per each Series A Preferred Share. The preferred dividend will be paid on October 15, 2018 to holders of record on September 28, 2018.

On April 24, 2018, the Company’s Board of Trustees declared a second quarter common stock dividend of $0.25 per each Class A and Class C common share. The common dividend was paid on July 12, 2018 to shareholders of record on June 29, 2018. Holders of units in the Operating Partnership were entitled to an equal distribution per each Operating Partnership unit held as of June 29, 2018. On April 24, 2018, the Company’s Board of Trustees also declared a preferred stock dividend of $0.4375 per each Series A Preferred Share. The preferred dividend was paid on July 16, 2018 to holders of record on June 29, 2018.

Supplemental Report

A Supplemental Report will be available in the Investors section of the Company’s website, www.seritage.com.

Non-GAAP Financial Measures

The Company makes reference to NOI, Total NOI, EBITDA, Adjusted EBITDA, FFO and Company FFO which are financial measures that include adjustments to accounting principles generally accepted in the United States (“GAAP”).

None of Total NOI, EBITDA, Adjusted EBITDA, FFO or Company FFO, are measures that (i) represent cash flow from operations as defined by GAAP; (ii) are indicative of cash available to fund all cash flow needs, including the ability to make distributions; (iii) are alternatives to cash flow as a measure of liquidity; or (iv) should be considered alternatives to net income (which is determined in accordance with GAAP) for purposes of evaluating the Company’s operating performance. Reconciliations of these measures to the respective GAAP measures we deem most comparable have been provided in the tables accompanying this press release.

Net Operating Income (“NOI”), Total NOI and Annualized Total NOI

NOI is defined as income from property operations less property operating expenses. The Company believes NOI provides useful information regarding Seritage, its financial condition, and results of operations because it reflects only those income and expense items that are incurred at the property level.

The Company also uses Total NOI, which includes its proportional share of unconsolidated properties. This form of presentation offers insights into the financial performance and condition of the Company as a whole given the Company’s ownership of unconsolidated properties that are accounted for under GAAP using the equity method. The Company also considers Total NOI to be a helpful supplemental measure of its operating performance because it excludes from NOI variable items such as termination fee income, as well as non-cash items such as straight-line rent and amortization of lease intangibles.

Annualized Total NOI is an estimate, as of the end of the reporting period, of the annual Total NOI to be generated by the Company’s portfolio including all signed leases and modifications to the Company’s master lease with Sears Holdings with respect to recaptured space. We calculate Annualized Total NOI by adding or subtracting current period adjustments for leases that commenced or expired during the period to Total NOI (as defined) for the period and annualizing, and then adding estimated annual Total NOI attributable to SNO leases and subtracting estimated annual Total NOI attributable to Sears Holdings’ space to be recaptured.

Annualized Total NOI is a forward-looking non-GAAP measure for which the Company does not believe it can provide reconciling information to a corresponding forward-looking GAAP measure without unreasonable effort.

Earnings before Interest Expense, Income Tax, Depreciation, and Amortization for Real Estate (“EBITDAre”) and Company EBITDA

EBITDAre is calculated in accordance with the definition set forth by the National Association of Real Estate Investment Trusts (“NAREIT”), which may not be comparable to measures calculated by other companies who do not use the NAREIT definition of EBITDA. EBITDAre is calculated as net income computed in accordance with GAAP, excluding interest expense, income tax expense, depreciation and amortization, gains (or losses) from property sales and impairment charges on depreciable real estate assets. The Company believes EBITDAre provides useful information to investors regarding our results of operations because it removes the impact of the Company’s capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). Management also believes the use of EBITDAre facilitates comparisons between us and other equity REITs and real property owners that are not REITs.

The Company makes certain adjustments to EBITDAre, which it refers to as Company EBITDA, to account for certain non-cash and non-comparable items, such as termination fee income, unrealized loss on interest rate cap, litigation charges, acquisition-related expenses and certain up-front-hiring and personnel costs that it does not believe are representative of ongoing operating results.

Funds from Operations (“FFO”) and Company FFO

FFO is calculated in accordance with NAREIT which defines FFO as net income computed in accordance with GAAP, excluding gains (or losses) from property sales, real estate related depreciation and amortization, and impairment charges on depreciable real estate assets. The Company considers FFO a helpful supplemental measure of the operating performance for equity REITs and a complement to GAAP measures because it is a recognized measure of performance by the real estate industry.

The Company makes certain adjustments to FFO, which it refers to as Company FFO, to account for certain non-cash and non-comparable items, such as termination fee income, unrealized loss on interest rate cap, litigation charges, acquisition-related expenses, amortization of deferred financing costs and certain up-front-hiring and personnel costs, that it does not believe are representative of ongoing operating results. The Company previously referred to this metric as Normalized FFO; the definition and calculation remain the same.

Forward-Looking Statements

This document contains forward-looking statements, which are based on the current beliefs and expectations of management and are subject to significant risks, assumptions and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: competition in the real estate and retail industries; our significant exposure to Sears Holdings; Sears Holdings’ termination and other rights under its master lease with us; risks relating to our recapture and redevelopment activities; contingencies to the commencement of rent under leases; the terms of our indebtedness; restrictions with which we are required to comply in order to maintain REIT status and other legal requirements to which we are subject; and our relatively limited history as an operating company. For additional discussion of these and other applicable risks, assumptions and uncertainties, see the “Risk Factors” and forward-looking statement disclosure contained in filings with the Securities and Exchange Commission. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law.

About Seritage Growth Properties

Seritage Growth Properties is a publicly-traded, self-administered and self-managed REIT with 222 wholly-owned properties and 26 joint venture properties totaling approximately 39 million square feet of space across 49 states and Puerto Rico. The Company was formed to unlock the underlying real estate value of a high-quality retail portfolio it acquired from Sears Holdings in July 2015. Pursuant to a master lease, the Company has the right to recapture certain space from Sears Holdings for retenanting or redevelopment purposes. The Company’s mission is to create and own revitalized shopping, dining, entertainment and mixed-use destinations that provide enriched experiences for consumers and local communities, and create long-term value for our shareholders.

       
SERITAGE GROWTH PROPERTIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
June 30, 2018 December 31, 2017
ASSETS

 

Investment in real estate
Land $ 711,261 $ 799,971
Buildings and improvements 860,739 829,168
Accumulated depreciation   (157,991 )   (139,483 )
1,414,009 1,489,656
Construction in progress   209,237   224,904
Net investment in real estate 1,623,246 1,714,560
Real estate held for sale 15,139
Investment in unconsolidated joint ventures 392,743 282,990
Cash and cash equivalents 100,448 241,569
Restricted cash 166,458 175,665
Tenant and other receivables, net 43,911 30,787
Lease intangible assets, net 251,303 310,098
Prepaid expenses, deferred expenses and other assets, net   21,360   20,148
Total assets $ 2,614,608 $ 2,775,817
 
LIABILITIES AND EQUITY
Liabilities
Mortgage loans payable, net $ 1,073,762 $ 1,202,314
Unsecured term loan, net 144,111 143,210
Accounts payable, accrued expenses and other liabilities   97,541   109,433
Total liabilities   1,315,414   1,454,957
 
Commitments and contingencies
 
Shareholders’ Equity
Class A common shares $0.01 par value; 100,000,000 shares

authorized; 35,678,749 and 32,415,734 shares issued and

outstanding as of June 30, 2018 and December 31, 2017,

respectively

356 324
Class B common shares $0.01 par value; 5,000,000 shares

authorized; 1,322,365 and 1,328,866 shares issued and

outstanding as of June 30, 2018 and December 31, 2017,

respectively

13 13
Class C common shares $0.01 par value; 50,000,000 shares

authorized; 850 and 3,151,131 shares issued and

outstanding as of June 30, 2018 and December 31, 2017,

respectively

31
Series A preferred shares $0.01 par value; 10,000,000 shares

authorized; 2,800,000 shares issued and outstanding as of

June 30, 2018 and December 31, 2017; liquidation

preference of $70,000

28 28
Additional paid-in capital 1,122,251 1,116,060
Accumulated deficit   (246,650 )   (229,760 )
Total shareholders’ equity 875,998 886,696
Non-controlling interests   423,196   434,164
Total equity   1,299,194   1,320,860
Total liabilities and equity $ 2,614,608 $ 2,775,817
 
       
SERITAGE GROWTH PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
REVENUE
Rental income $ 35,839 $ 42,185 $ 72,918 $ 91,359
Tenant reimbursements 12,517 15,708 29,215 31,932
Management and other fee income   914     914  
Total revenue   49,270   57,893   103,047   123,291
EXPENSES
Property operating 6,533 4,932 13,774 9,674
Real estate taxes 9,217 11,950 20,598 24,372
Depreciation and amortization 49,551 50,571 84,218 109,234
General and administrative 8,673 5,093 16,470 11,367
Provision for doubtful accounts   109   12   170   51
Total expenses   74,083   72,558   135,230   154,698
Operating loss (24,813 ) (14,665 ) (32,183 ) (31,407 )
Equity in loss of unconsolidated joint

ventures

(2,158 ) (1,542 ) (4,740 ) (540 )
Interest and other income 456 42 1,136 120
Interest expense (17,862 ) (18,431 ) (34,281 ) (35,023 )
Unrealized loss on interest rate cap   (172 )   (124 )   (7 )   (595 )
Loss before income taxes (44,549 ) (34,720 ) (70,075 ) (67,445 )
Provision for income taxes   (240 )   (147 )   (344 )   (266 )
Loss before gain on sale of real estate (44,789 ) (34,867 ) (70,419 ) (67,711 )
Gain on sale of real estate   34,187     76,018  
Net income (loss) (10,602 ) (34,867 ) 5,599 (67,711 )
Net (income) loss attributable to

non-controlling interests

  3,831   13,648   (2,042 )   26,654
Net income (loss) attributable to Seritage $ (6,771 ) $ (21,219 ) $ 3,557 $ (41,057 )
Preferred dividends   (1,225 )     (2,453 )  
Net income (loss) attributable to Seritage common

shareholders

$ (7,996 ) $ (21,219 ) $ 1,104 $ (41,057 )
 
Net income (loss) per share attributable to Seritage

Class A and Class C common shareholders – Basic

$ (0.23 ) $ (0.63 ) $ 0.03 $ (1.22 )
Net income (loss) per share attributable to Seritage

Class A and Class C common shareholders – Diluted

$ (0.23 ) $ (0.63 ) $ 0.03 $ (1.22 )
Weighted average Class A and Class C common

shares outstanding – Basic

  35,483   33,766   35,449   33,638
Weighted average Class A and Class C common

shares outstanding – Diluted

  35,483   33,766   35,588   33,638
 
       

Reconciliation of Net Loss to NOI and Total NOI (in thousands)

 
Three Months Ended June 30, Six Months Ended June 30,
NOI and Total NOI   2018   2017 2018   2017
Net income (loss) $ (10,602 ) $ (34,867 ) $ 5,599 $ (67,711 )
Termination fee income (628 ) (174 ) (6,764 )
Management and other fee income (914 ) (914 )
Depreciation and amortization 49,551 50,571 84,218 109,234
General and administrative expenses 8,673 5,093 16,470 11,367
Equity in loss (income) of unconsolidated

joint ventures

2,158 1,542 4,740 540
Gain on sale of real estate (34,187 ) (76,018 )
Interest and other income (456 ) (42 ) (1,136 ) (120 )
Interest expense 17,862 18,431 34,281