form10q.htm
United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2007

Or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____

Commission File Number 1-13145

Jones Lang LaSalle Incorporated
(Exact name of registrant as specified in its charter)
 
Maryland
36-4150422
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
200 East Randolph Drive, Chicago,
IL 60601
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: 312/782-5800
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer x
  
Accelerated filer o
  
Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

The number of shares outstanding of the registrant’s common stock (par value $0.01) as of the close of business on October 26, 2007 was 37,032,324 which includes 4,970,232 shares held by a subsidiary of the registrant.
 
1

Table of Contents

Part I
  
Financial Information
    
 
        
Item 1.
    
3
         
     
3
         
     
4
         
     
5
         
     
6
         
     
7
         
Item 2.
    
19
         
Item 3.
    
30
         
Item 4.
    
31
         
Part II
  
Other Information
    
         
Item 1.
    
31
         
Item 1A.
    
31
 
        
Item 2.
    
32
         
Item 5.
    
33
         
Item 6.
    
36
 

Part I
Financial Information
Item 1.
Financial Statements

JONES LANG LASALLE INCORPORATED
Consolidated Balance Sheets
September 30, 2007 and December 31, 2006
($ in thousands, except share data)

   
September 30, 2007
    
December 31,
  
Assets
  
(unaudited)
    
2006
  
Current assets:
            
Cash and cash equivalents
   $
48,172
      
50,612
  
Trade receivables, net of allowances of $17,156 and $7,845
    
656,193
      
630,121
  
Notes and other receivables
    
46,433
      
30,079
  
Prepaid expenses
    
29,348
      
28,040
  
Deferred tax assets
    
52,382
      
49,230
  
Other assets
    
30,010
      
19,363
  
Total current assets
    
862,538
      
807,445
  
                 
Property and equipment, net of accumulated depreciation of $193,116 and $181,959
    
165,484
      
120,376
  
Goodwill, with indefinite useful lives, net of accumulated amortization of $39,649 and $38,701
    
617,748
      
520,478
  
Identified intangibles, with finite useful lives, net of accumulated amortization of $66,257 and $58,594
    
40,055
      
37,583
  
Investments in real estate ventures
    
134,076
      
131,789
  
Long-term receivables, net
    
32,884
      
29,781
  
Deferred tax assets
    
41,512
      
37,465
  
Other assets, net
    
48,288
      
45,031
  
    $
1,942,585
      
1,729,948
  
                 
Liabilities and Shareholders’ Equity
                
Current liabilities:
                
Accounts payable and accrued liabilities
   $
194,971
      
221,356
  
Accrued compensation
    
470,731
      
514,586
  
Short-term borrowings
    
34,520
      
17,738
  
Deferred tax liabilities
    
2,245
      
1,426
  
Deferred income
    
25,541
      
31,896
  
Other current liabilities
    
44,661
      
43,444
  
Total current liabilities
    
772,669
      
830,446
  
                 
Credit facilities
    
83,561
      
32,398
  
Deferred tax liabilities
    
6,978
      
648
  
Deferred compensation
    
49,937
      
30,668
  
Pension liability
    
20,581
      
19,252
  
Deferred business acquisition obligations
    
47,174
      
34,178
  
Other noncurrent liabilities
    
43,254
      
31,978
  
Total liabilities
    
1,024,154
      
979,568
  
                 
Commitments and contingencies
                
                 
Minority interest
    
10,236
      
—
  
Shareholders’ equity:
                
Common stock, $.01 par value per share, 100,000,000 shares authorized; 37,022,323 and 36,592,864 shares issued and outstanding
    
370
      
366
  
Additional paid-in capital
    
664,791
      
676,270
  
Retained earnings
    
396,234
      
255,914
  
Shares held by subsidiary
     (219,359 )     (197,543 )
Shares held in trust
     (1,894 )     (1,427 )
Accumulated other comprehensive income
    
68,053
      
16,800
  
Total shareholders’ equity
    
908,195
      
750,380
  
    $
1,942,585
      
1,729,948
  
 
See accompanying notes to consolidated financial statements.


JONES LANG LASALLE INCORPORATED
Consolidated Statements of Earnings
For the Three and Nine Months Ended September 30, 2007 and 2006
($ in thousands, except share data) (unaudited)

   
Three Months
    
Three Months
    
Nine Months
    
Nine Months
  
   
Ended
    
Ended
    
Ended
    
Ended
  
   
September 30,
    
September 30,
    
September 30,
    
September 30,
  
   
2007
    
2006
    
2007
    
2006
  
                         
Revenue
   $
624,151
      
462,317
      
1,790,291
      
1,309,204
  
                                 
Operating expenses:
                                
Compensation and benefits
    
412,920
      
313,711
      
1,174,842
      
863,326
  
Operating, administrative and other
    
132,828
      
99,796
      
375,082
      
284,353
  
Depreciation and amortization
    
13,893
      
11,523
      
38,828
      
31,877
  
Restructuring credits
    
—
      
—
       (411 )     (670 )
Operating expenses
    
559,641
      
425,030
      
1,588,341
      
1,178,886
  
                                 
Operating income
    
64,510
      
37,287
      
201,950
      
130,318
  
                                 
Interest expense, net of interest income
    
4,378
      
4,112
      
10,046
      
11,799
  
Gain on sale of investments
    
—
      
—
      
6,129
      
—
  
Equity in earnings from real estate ventures
    
4,979
      
773
      
11,480
      
9,422
  
                                 
Income before provision for income taxes and minority interest
    
65,111
      
33,948
      
209,513
      
127,941
  
                                 
Provision for income taxes
    
17,384
      
9,251
      
55,940
      
33,648
  
Minority interest, net of tax
    
1,197
      
—
      
1,197
      
—
  
                                 
Net income before cumulative effect of change in accounting principle
    
46,530
      
24,697
      
152,376
      
94,293
  
Cumulative effect of change in accounting principle, net of tax
    
—
      
—
      
—
      
1,180
  
                                 
Net income
   $
46,530
      
24,697
      
152,376
      
95,473
  
                                 
Net income available to common shareholders (Note 9)
   $
46,530
      
24,697
      
151,704
      
94,951
  
                                 
                                 
Basic earnings per common share
   $
1.44
      
0.77
      
4.73
      
2.99
  
                                 
Basic weighted average shares outstanding
    
32,416,773
      
32,106,994
      
32,060,102
      
31,771,247
  
                                 
                                 
Diluted earnings per common share
   $
1.38
      
0.73
      
4.50
      
2.85
  
                                 
Diluted weighted average shares outstanding
    
33,610,782
      
33,751,054
      
33,701,963
      
33,319,566
  
 
See accompanying notes to consolidated financial statements.


JONES LANG LASALLE INCORPORATED 
Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended September 30, 2007
($ in thousands, except share data) (unaudited)

   
Common Stock
    
Additional
Paid-In
    
Retained
    
Shares
Held by
    
Shares
Held in
    
Accumulated
Other
Comprehensive
        
   
Shares (1)
    
Amount
    
Capital
    
Earnings
    
Subsidiary
    
Trust
    
Income
    
Total
  
                                                 
Balances at December 31, 2006
    
36,592,864
     $
366
      
676,270
      
255,914
       (197,543 )     (1,427 )    
16,800
     $
750,380
  
                                                                 
Net income
    
—
      
—
      
—
      
152,376
      
—
      
—
      
—
      
152,376
  
                                                                 
Shares issued under stock compensation programs
    
857,778
      
8
       (21,341 )    
—
      
—
      
—
      
—
       (21,333 )
                                                                 
Tax benefits of vestings and exercises
    
—
      
—
      
25,807
      
—
      
—
      
—
      
—
      
25,807
  
                                                                 
Amortization of stock compensation
    
—
      
—
      
28,395
      
—
      
—
      
—
      
—
      
28,395
  
                                                                 
Retirement of shares (1)
     (428,319 )     (4 )     (44,340 )    
—
      
—
      
—
      
—
       (44,344 )
                                                                 
Shares acquired by subsidiary (1)
    
—
      
—
      
—
      
—
       (21,816 )    
—
      
—
       (21,816 )
                                                                 
Shares held in trust
    
—
      
—
      
—
      
—
      
—
       (467 )    
—
       (467 )
                                                                 
Dividends declared
    
—
      
—
      
—
       (12,056 )    
—
      
—
      
—
       (12,056 )
                                                                 
Reclassification adjustment for gain on sale of available-for-sale securities realized in net income
    
—
      
—
      
—
      
—
      
—
      
—
       (2,256 )     (2,256 )
                                                                 
Foreign currency translation adjustments
    
—
      
—
      
—
      
—
      
—
      
—
      
53,509
      
53,509
  
                                                                 
Balances at September 30, 2007
    
37,022,323
     $
370
      
664,791
      
396,234
       (219,359 )     (1,894 )    
68,053
     $
908,195
  
 
 
(1)
The 428,319 shares repurchased under our share repurchase programs in the third quarter of 2007 were canceled. The 220,581 shares repurchased under our share repurchase programs in the first six months of 2007 were not canceled, but are held by one of our subsidiaries. At September 30, 2007, 4,970,232 shares are held by one of our subsidiaries and are included in the 37,022,323 total shares outstanding, but are deducted from shares outstanding for purposes of calculating earnings per share.
 
See accompanying notes to consolidated financial statements.
 

JONES LANG LASALLE INCORPORATED
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2007 and 2006
($ in thousands) (unaudited)
 
   
Nine Months
    
Nine Months
  
   
Ended
    
Ended
  
   
September 30,
    
September 30,
  
   
2007
    
2006
  
             
Cash flows from operating activities:
            
Net income
   $
152,376
      
95,473
  
Reconciliation of net income to net cash operating activities:
                
Cumulative effect of change in accounting principle, net of tax
    
—
       (1,180 )
Depreciation and amortization
    
38,828
      
31,877
  
Equity in earnings from real estate ventures
     (11,480 )     (9,422 )
Gain on sale of investments
     (6,129 )    
—
  
Operating distributions from real estate ventures
    
10,592
      
15,243
  
Provision for loss on receivables and other assets
    
8,012
      
4,916
  
Minority interest
    
1,197
      
—
  
Amortization of deferred compensation
    
31,068
      
26,931
  
Amortization of debt issuance costs
    
438
      
519
  
Change in:
                
Receivables
     (41,443 )     (68,752 )
Prepaid expenses and other assets
     (13,325 )     (10,878 )
Deferred tax assets, net
     (798 )     (448 )
Excess tax benefits from share-based payment arrangements
     (25,807 )     (24,475 )
Accounts payable, accrued compensation and other accrued liabilities
    
9,889
      
94,380
  
Net cash provided by operating activities
    
153,418
      
154,184
  
                 
Cash flows from investing activities:
                
Net capital additions – property and equipment
     (71,320 )     (44,126 )
Business acquisitions
     (86,984 )     (182,663 )
Capital contributions and advances to real estate ventures
     (26,841 )     (58,733 )
Distributions, repayments of advances and sale of investments
    
34,523
      
16,551
  
Net cash used in investing activities
     (150,622 )     (268,971 )
                 
Cash flows from financing activities:
                
Proceeds from borrowings under credit facilities
    
763,835
      
715,277
  
Repayments of borrowings under credit facilities
     (695,329 )     (584,454 )
Shares repurchased for payment of employee taxes on stock awards
     (29,282 )     (17,288 )
Shares repurchased under share repurchase program
     (66,160 )     (29,689 )
Excess tax benefits from share-based payment arrangements
    
25,807
      
24,475
  
Common stock issued under stock option plan and stock purchase programs
    
7,949
      
20,504
  
Payment of dividends
     (12,056 )     (8,636 )
Net cash (used in) provided by financing activities
     (5,236 )    
120,189
  
                 
Net (decrease) increase in cash and cash equivalents
     (2,440 )    
5,402
  
Cash and cash equivalents, January 1
    
50,612
      
28,658
  
Cash and cash equivalents, September 30
   $
48,172
      
34,060
  
                 
Supplemental disclosure of cash flow information:
                
Cash paid during the period for:
                
Interest
   $
11,548
      
12,751
  
Income taxes, net of refunds
    
39,624
      
27,562
  
Non-cash financing activities:
                
Deferred business acquisition obligations
    
12,996
      
32,069
  

See accompanying notes to consolidated financial statements.


JONES LANG LASALLE INCORPORATED

Notes to Consolidated Financial Statements (Unaudited)

Readers of this quarterly report should refer to the audited financial statements of Jones Lang LaSalle Incorporated (“Jones Lang LaSalle”, which may also be referred to as “the Company” or as “the Firm,” “we,” “us” or “our”) for the year ended December 31, 2006, which are included in Jones Lang LaSalle’s 2006 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission (“SEC”) and also available on our web site (www.joneslanglasalle.com), since we have omitted from this report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to the “Summary of Critical Accounting Policies and Estimates” section within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained herein, for further discussion of our accounting policies and estimates.


(1) Interim Information

Our consolidated financial statements as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006 are unaudited; however, in the opinion of management, we have included all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements for these interim periods.

Historically, our revenue and profits have tended to be higher in the third and fourth quarters of each year than in the first two quarters. This is the result of a general focus in the real estate industry on completing or documenting transactions by calendar-year-end and the fact that certain expenses are constant throughout the year. Our Investment Management segment earns investment-generated performance fees on clients’ real estate investment returns and co-investment equity gains, generally when assets are sold, the timing of which is geared towards the benefit of our clients. Within our Investor and Occupier Services segments, expansion of capital markets activities has an increasing impact on comparability between reporting periods, as the timing of recognition of revenues relates to the size and timing of our clients’ transactions. Non-variable operating expenses, which are treated as expenses when they are incurred during the year, are relatively constant on a quarterly basis. As a result, the results for the periods ended September 30, 2007 and 2006 are not indicative of the results to be obtained for the full fiscal year.


(2) New Accounting Standards

Accounting for Uncertainty in Income Taxes
Effective January 1, 2007, we adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies and sets forth consistent rules for accounting for uncertain income tax positions in accordance with SFAS 109, “Accounting for Income Taxes.” The Company did not recognize any change to its liability for unrecognized tax benefits as a result of the adoption. Therefore, we have not adjusted our retained earnings as of January 1, 2007. As of the adoption date, the amount of unrecognized tax benefits was $19.9 million, all of which would impact the effective tax rate of the Company if recognized. However, we do not believe that there will be significant changes in the amount of unrecognized tax benefits within the next 12 months.

The Company recognizes interest accrued and penalties, if any, related to income taxes as a component of income tax expense. As of January 1, 2007, $0.3 million of interest expense and no penalties were accrued. As of September 30, 2007, $0.4 million of interest expense and no penalties were accrued.

The Company or one of its subsidiaries files income tax returns in the United States, the United Kingdom including England and Scotland, Australia, Germany, The People’s Republic of China including Hong Kong, France, Japan, and Singapore as well as approximately 40 other jurisdictions. Generally, the Company’s open tax years include those from 2002 to the present, although in a number of jurisdictions reviews of taxing authorities for more recent years have been completed or are in process. Although the ultimate outcome of tax audits is uncertain, we believe adequate amounts of tax and interest have been provided for any adjustments that are expected to result related to these years.

Fair Value Measurements
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to accounting pronouncements that require or permit fair value measurements, except for share-based payment transactions under SFAS 123R. The Company is required to apply the guidance of SFAS 157 beginning January 1, 2008. Management has not yet determined what impact the application of SFAS 157 will have on our consolidated financial statements.
 

Fair Value Option
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company has the option of adopting fair value accounting for financial assets and liabilities in accordance with the guidance of SFAS 159 beginning January 1, 2008. Management has not yet determined what impact the application of SFAS 159 will have on our consolidated financial statements.

Investment Company Accounting
In June 2007, the AICPA issued Statement of Position (“SOP”) 07–1, “Clarification of the Scope of the Audit and Accounting Guide, Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies,” to be effective beginning January 1, 2008. Management has not yet determined the applicability of SOP 07-1 to the Company’s investments in real estate ventures and what impact, if any, the application of SOP 07-1 would have on our consolidated financial statements. In October 2007, the FASB added a project to its agenda to delay the effective date of SOP 07-1 indefinitely.


(3) Revenue Recognition

We categorize our revenues as advisory and management fees, transaction commissions, incentive fees, project and development management and construction management fees. We recognize advisory and management fees related to property management services, valuation services, corporate property services, strategic consulting and money management as income in the period in which we perform the related services. We recognize transaction commissions related to agency leasing services, capital markets services and tenant representation services as income when we provide the related service unless future contingencies exist. If future contingencies exist, we defer recognition of this revenue until the respective contingencies have been satisfied. We recognize incentive fees based on the performance of underlying funds’ investments and the contractual benchmarks, formulas and timing of the measurement period with clients. We recognize project and development management and construction management fees by applying the “percentage of completion” method of accounting. We use the efforts expended method to determine the extent of progress towards completion for project and development management fees and costs incurred to total estimated costs for construction management fees.

Construction management fees, which are gross construction services revenues net of subcontract costs, were $2.3 million and $2.5 million for the three months ended September 30, 2007 and 2006, respectively, and $7.2 million and $9.0 million for the nine months ended September 30, 2007 and 2006, respectively.

Gross construction services revenues totaled $44.2 million and $36.9 million for the three months ended September 30, 2007 and 2006, respectively, and $128.6 million and $103.7 million for the nine months ended September 30, 2007 and 2006, respectively. Subcontract costs totaled $41.9 million and $34.4 million, for the three months ended September 30, 2007 and 2006, respectively, and $121.4 million and $94.7 million for the nine months ended September 30, 2007 and 2006, respectively.

We include costs in excess of billings on uncompleted construction contracts of $9.3 million and $3.2 million in “Trade receivables,” and billings in excess of costs on uncompleted construction contracts of $5.5 million and $6.6 million in “Deferred income,” respectively, in our September 30, 2007 and December 31, 2006 consolidated balance sheets.

In certain of our businesses, primarily those involving management services, our clients reimburse us for expenses incurred on their behalf. We base the treatment of reimbursable expenses for financial reporting purposes upon the fee structure of the underlying contracts. We follow the guidance of EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” when accounting for reimbursable personnel and other costs. We report a contract that provides a fixed fee billing, fully inclusive of all personnel or other recoverable expenses incurred but not separately scheduled, on a gross basis. When accounting on a gross basis, our reported revenues include the full billing to our client and our reported expenses include all costs associated with the client.

We account for a contract on a net basis when the fee structure is comprised of at least two distinct elements, namely (i) a fixed management fee and (ii) a separate component that allows for scheduled reimbursable personnel costs or other expenses to be billed directly to the client. When accounting on a net basis, we include the fixed management fee in reported revenues and net the reimbursement against expenses. We base this accounting on the following factors, which define us as an agent rather than a principal:

 
 
·
The property owner, with ultimate approval rights relating to the employment and compensation of on-site personnel, and bearing all of the economic costs of such personnel, is determined to be the primary obligor in the arrangement;
 
·
Reimbursement to Jones Lang LaSalle is generally completed simultaneously with payment of payroll or soon thereafter;
 
·
Because the property owner is contractually obligated to fund all operating costs of the property from existing cash flow or direct funding from its building operating account, Jones Lang LaSalle bears little or no credit risk; and
 
·
Jones Lang LaSalle generally earns no margin in the reimbursement aspect of the arrangement, obtaining reimbursement only for actual costs incurred.

Most of our service contracts use the latter structure and are accounted for on a net basis. We have always presented the above reimbursable contract costs on a net basis in accordance with U.S. GAAP. These costs aggregated approximately $174.1 million and $139.6 million for the three months ended September 30, 2007 and 2006, respectively, and approximately $537.0 million and $443.4 million for the nine months ended September 30, 2007 and 2006, respectively.  This treatment has no impact on operating income, net income or cash flows.


(4) Business Segments

We manage and report our operations as four business segments:

 
(i)
Investment Management, which offers money management services on a global basis, and

 
The three geographic regions of Investor and Occupier Services ("IOS"):

 
(ii)
Americas,
 
(iii)
Europe, Middle East and Africa (“EMEA”) and
 
(iv)
Asia Pacific.

The Investment Management segment provides money management services to institutional investors and high-net-worth individuals. Each geographic region offers our full range of Investor Services, Capital Markets and Occupier Services. The IOS business consists primarily of tenant representation and agency leasing, capital markets and valuation services (collectively "transaction services") and property management, facilities management, project and development management, energy management and sustainability and construction management services (collectively "management services").

Total revenue by industry segment includes revenue derived from services provided to other segments. Operating income represents total revenue less direct and indirect allocable expenses. We allocate all expenses, other than interest and income taxes, as nearly all expenses incurred benefit one or more of the segments. Allocated expenses primarily consist of corporate global overhead. We allocate these corporate global overhead expenses to the business segments based on the relative operating income of each segment.

Our measure of segment operating results excludes “Restructuring charges (credits),” as we have determined that it is not meaningful to investors to allocate such charges (credits) to our segments. Also, for segment reporting, we continue to show “Equity in earnings (losses) from real estate ventures” within our revenue line, especially since it is an integral part of our Investment Management segment. The Chief Operating Decision Maker of Jones Lang LaSalle measures the segment results without restructuring charges, but with “Equity in earnings (losses) from real estate ventures” included in segment revenues. We define the Chief Operating Decision Maker collectively as our Global Executive Committee, which is comprised of our Global Chief Executive Officer, Global Chief Operating and Financial Officer and the Chief Executive Officers of each of our four reporting segments.

We have reclassified certain prior year amounts to conform to the current presentation.

The following table summarizes unaudited financial information by business segment for the three and nine months ended September 30, 2007 and 2006 ($ in thousands):
 

   
Three Months
    
Three Months
    
Nine Months
    
Nine Months
  
   
Ended
    
Ended
    
Ended
    
Ended
  
   
September 30,
    
September 30,
    
September 30,
    
September 30,
  
Investor and Occupier Services
  
2007
    
2006
    
2007
    
2006
  
Americas
                        
Revenue:
                        
Transaction services
   $
93,242
      
75,159
      
251,001
      
189,906
  
Management services
    
87,436
      
71,774
      
244,388
      
198,836
  
Equity earnings
    
1,262
      
373
      
1,682
      
657
  
Other services
    
6,026
      
2,823
      
18,161
      
8,256
  
     
187,966
      
150,129
      
515,232
      
397,655
  
Operating expenses:
                                
Compensation, operating and administrative services
    
161,285
      
128,159
      
450,959
      
358,097
  
Depreciation and amortization
    
6,501
      
5,852
      
18,507
      
16,435
  
Operating income
   $
20,180
      
16,118
      
45,766
      
23,123
  
                                 
EMEA
                                
Revenue:
                                
Transaction services
   $
184,061
      
138,448
      
484,102
      
326,933
  
Management services
    
37,836
      
27,812
      
105,100
      
71,595
  
Equity earnings (losses)
    
174
      
22
       (21 )     (284 )
Other services
    
2,774
      
3,406
      
9,542
      
10,771
  
     
224,845
      
169,688
      
598,723
      
409,015
  
Operating expenses:
                                
Compensation, operating and administrative services
    
205,892
      
152,518
      
541,448
      
386,113
  
Depreciation and amortization
    
4,704
      
3,518
      
13,151
      
8,867
  
Operating income
   $
14,249
      
13,652
      
44,124
      
14,035
  
                                 
Asia Pacific
                                
Revenue:
                                
Transaction services
   $
74,008
      
45,019
      
275,916
      
118,856
  
Management services
    
58,054
      
32,769
      
150,130
      
88,650
  
Equity earnings (losses)
    
253
       (135 )    
485
      
1,714
  
Other services
    
1,702
      
622
      
5,112
      
3,319
  
     
134,017
      
78,275
      
431,643
      
212,539
  
Operating expenses:
                                
Compensation, operating and administrative services
    
124,764
      
78,339
      
377,480
      
206,639
  
Depreciation and amortization
    
2,368
      
1,819
      
5,998
      
5,579
  
Operating income (loss)
   $
6,885
       (1,883 )    
48,165
      
321
  
                                 
Investment Management
                                
Revenue:
                                
Transaction and other services
   $
9,336
      
4,218
      
17,267
      
19,153
  
Advisory fees
    
63,643
      
45,595
      
171,856
      
126,947
  
Incentive fees
    
6,033
      
14,672
      
57,716
      
145,982
  
Equity earnings
    
3,290
      
513
      
9,334
      
7,335
  
     
82,302
      
64,998
      
256,173
      
299,417
  
Operating expenses:
                                
Compensation, operating and administrative services
    
53,808
      
54,491
      
180,038
      
196,830
  
Depreciation and amortization
    
319
      
334
      
1,171
      
996
  
Operating income
   $
28,175
      
10,173
      
74,964
      
101,591
  
                                 
Segment Reconciling Items:
                                
Total segment revenue
   $
629,130
      
463,090
      
1,801,771
      
1,318,626
  
Reclassification of equity earnings
     (4,979 )     (773 )     (11,480 )     (9,422 )
Total revenue
    
624,151
      
462,317
      
1,790,291
      
1,309,204
  
                                 
Total segment operating expenses
    
559,641
      
425,030
      
1,588,752
      
1,179,556
  
Restructuring credits
    
—
      
—
       (411 )     (670 )
                                 
Operating income
   $
64,510
      
37,287
      
201,950
      
130,318
  
 

(5) Investments in Real Estate Ventures

As of September 30, 2007, we had total investments and loans of $134.1 million in approximately 35 separate property or fund co-investments. Within this $134.1 million are loans of $3.1 million to real estate ventures which bear an 8.0% interest rate and are to be repaid by 2008.

We utilize two investment vehicles to facilitate the majority of our co-investment activity. LaSalle Investment Company I (“LIC I”) is a series of four parallel limited partnerships which serve as our investment vehicle for substantially all co-investment commitments made through December 31, 2005. LIC I is fully committed to underlying real estate ventures. At September 30, 2007, our maximum potential unfunded commitment to LIC I is euro 35.5 million ($50.7 million). LaSalle Investment Company II (“LIC II”), formed in January 2006, consists of two parallel limited partnerships which serve as our investment vehicle for most new co-investments. At September 30, 2007, LIC II has unfunded capital commitments for future funding of co-investments of $325.0 million, of which our 48.78% share is $158.5 million. The $158.5 million commitment is part of our maximum potential unfunded commitment to LIC II at September 30, 2007 of $450.3 million.
 
LIC I and LIC II invest in certain real estate ventures that own and operate commercial real estate. We have an effective 47.85% ownership interest in LIC I, and an effective 48.78% ownership interest in LIC II; primarily institutional investors hold the remaining 52.15% and 51.22% interests in LIC I and LIC II, respectively. Additionally, a non-executive Director of Jones Lang LaSalle is an investor in LIC I on equivalent terms to other investors. We account for our investments in LIC I and LIC II under the equity method of accounting in the accompanying consolidated financial statements.

LIC I’s and LIC II’s exposures to liabilities and losses of the ventures in which they have invested are limited to their existing capital contributions and remaining capital commitments. We expect that LIC I will draw down on our commitment over the next three to five years to satisfy its existing commitments to underlying funds, and we expect that LIC II will draw down on our commitment over the next four to eight years as it enters into new commitments. Our Board of Directors has endorsed the use of our co-investment capital in particular situations to control or bridge finance existing real estate assets or portfolios to seed future investments within LIC II. The purpose is to accelerate capital raising and growth in assets under management. Approvals for such activity are handled consistently with those of the Firm’s co-investment capital.

As of September 30, 2007, LIC I maintains a euro 25 million ($35.7 million) revolving credit facility (the "LIC I Facility"), and LIC II maintains a $200 million revolving credit facility (the "LIC II Facility"), principally for their working capital needs. The capacity in the LIC II Facility contemplates potential bridge financing opportunities. Each facility contains a credit rating trigger and a material adverse condition clause. If either of the credit rating trigger or the material adverse condition clauses becomes triggered, the facility to which that condition relates would be in default and outstanding borrowings would need to be repaid. Such a condition would require us to fund our pro-rata share of the then outstanding balance on the related facility, which is the limit of our liability. The maximum exposure to Jones Lang LaSalle, assuming that the LIC I Facility were fully drawn, would be euro 12.0 million ($17.1 million); assuming that the LIC II Facility were fully drawn, the maximum exposure to Jones Lang LaSalle would be $97.6 million. Each exposure is included within and cannot exceed our maximum potential unfunded commitments to LIC I of euro 35.5 million ($50.7 million) and to LIC II of $450.3 million. As of September 30, 2007, LIC I had euro 0.9 million ($1.2 million) of outstanding borrowings on the LIC I Facility, and LIC II had $38.1 million of outstanding borrowings on the LIC II Facility.

Exclusive of our LIC I and LIC II commitment structures, we have potential obligations related to unfunded commitments to other real estate ventures, the maximum of which is $11.5 million at September 30, 2007.

During the first quarter of 2007, we sold our investment in LoopNet, an investment in available-for-sale securities under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and recognized a “Gain on sale of investments” of $2.4 million. During the second quarter of 2007, we recognized a $3.7 million gain on sale of SiteStuff, Inc., a company in which we had a cost method investment.

We apply the provisions of APB 18, SAB 59, and SFAS 144 when evaluating investments in real estate ventures for impairment, including impairment evaluations of the individual assets underlying our investments. We recorded no impairment charges in the first nine months of 2007 or 2006.


(6) Business Combinations, Goodwill, and Other Intangible Assets

We have $657.8 million of unamortized identified intangibles and goodwill as of September 30, 2007 that are subject to the provisions of SFAS 142, “Goodwill and Other Intangible Assets.” A significant portion of these unamortized intangibles and goodwill are denominated in currencies other than U.S. dollars, which means that a portion of the movements in the reported book value of these balances are attributable to movements in foreign currency exchange rates. The tables below set forth further details on the foreign exchange impact on intangible and goodwill balances. Of the $657.8 million of unamortized intangibles and goodwill, $617.7 million represents goodwill with indefinite useful lives, which we ceased amortizing beginning January 1, 2002. We will amortize the remaining $40.1 million of identifiable intangibles (principally representing customer relationships and management contracts acquired) over their remaining finite useful lives.


In the first quarter of 2007, we acquired 100% interests in each of NSC Corporate, a leading Western Australian agency business, and Hargreaves Goswell, a London agency business. In addition to cash paid at closing, the terms of each transaction included provisions for future consideration subject to certain provisions. We recorded the fair value of future consideration which is subject only to the passage of time as “Deferred business acquisition obligations” on our consolidated balance sheet. We have recorded the fair value of the contract pipeline acquired and certain restrictive agreements as identifiable intangibles with finite useful lives; we attributed the remaining direct costs of acquisition to goodwill. Payment of an earn-out provision in the NSC Corporate acquisition is subject to the achievement of certain performance conditions, which we will record to goodwill at the time those conditions are met; we will not record the earn-out if the related conditions are not achieved. We record additional future consideration subject to employment-related provisions in the Hargreaves Goswell acquisition as compensation expense over the term of those provisions. Also, in the first quarter of 2007, we finalized the purchase accounting allocations for the 2006 Spaulding & Slye acquisition, which included additions to goodwill in the Americas segment.

In the second quarter of 2007, we acquired 100% interests in each of Troostwijk Makelaars, an independent property advisor firm based in the Netherlands that specializes in leasing, capital markets, and advisory and research services, and KHK Group, an English project and development services business. Terms for the two transactions included cash paid at closing totaling approximately $45.6 million, with provisions for additional consideration and earn-outs subject to certain contract provisions and performance. Additional consideration subject only to the passage of time and scheduled to be paid in 2010 is recorded in “Deferred business acquisition obligations” on our consolidated balance sheet at a current fair value of $3.5 million. Earn-out payments are subject to the achievement of certain performance conditions, and will be recorded at the time those conditions are met; we will record each earn-out only if the related conditions are achieved. Intangible assets with finite useful lives, including the value of contract pipeline and certain restrictive agreements, were attributed a total value of $2.7 million, and will be amortized over lives of up to three years. We attributed the remaining direct costs of acquisition to goodwill. Each acquisition also includes provisions for future consideration subject to employment-related conditions, the total of which is up to $9.4 million to be recorded as compensation expense over the next three years.

In the third quarter of 2007, we acquired a 44.8% interest in a firm formerly known as Trammell Crow Meghraj (“TCM”), one of the largest privately held real estate services companies in India, for approximately $28.1 million. We intend to legally merge TCM into our preexisting India business upon local regulatory approval, which is expected in the coming months, and have agreed to acquire the remaining shareholder interests in 2010 and 2012 based on the values of those shares, as defined, at the end of 2009 and 2011, respectively. The acquisition of TCM significantly expands our presence in the growing Indian market; the combined business will operate under the name Jones Lang LaSalle Meghraj, with approximately 2,800 employees in offices in ten cities in India, and 44 million square feet under management across India. Based on the contractual terms of the transaction, the financial results of the former TCM were consolidated in our consolidated financial statements upon acquisition in the beginning of the third quarter of 2007. Intangible assets with finite useful lives, including the value of the contract pipeline, certain restrictive agreements and brand name, were attributed a total value of $2.4 million, and will be amortized over lives of up to six years.  The TCM acquisition resulted in the addition of approximately $23.7 million of goodwill.

Also in the third quarter of 2007, we acquired a 100% interest in Camilli & Veiel, a German-based commercial investment and leasing firm, a 49% interest in a Finnish real estate services firm which previously operated under the licensed name GVA, and a 100% interest in Zietsman Realty Partners, a California-based real estate services and money management firm. Terms of these transactions included cash paid at closing totaling approximately $10.2 million, with provisions for additional consideration and earn-outs subject to certain contract provisions and performance. Earn-out payments are subject to the achievement of certain performance conditions, which we will record at the time those conditions are met; we will record each earn-out only if the related conditions are achieved. Under the terms of the GVA purchase agreement, we expect to acquire the remaining 51% in 2008. Intangible assets with finite useful lives, including the value of the contract pipeline and certain restrictive agreements, were attributed a total value of $0.8 million, and will be amortized over lives of up to four years. These transactions resulted in approximately $7.7 million of goodwill.

We have completed the acquisitions of 13 businesses since January 1, 2006. Eleven of the acquisitions have provided for potential earn-out payments subject to the achievement of certain performance conditions. For nine of those acquisitions, the maximum amount of the potential earn-out payments to be recorded to goodwill in future periods is $79.5 million. We expect those amounts will come due at various times over the next seven years. For the other two of those acquisitions, the amounts of the earn-out payments are based on formulas and are not quantifiable at this time.
 

The following table sets forth, by reporting segment, the current year movements in the gross carrying amount and accumulated amortization of our goodwill with indefinite useful lives ($ in thousands):

   
Investor and Occupier Services
  
               
Asia
    
Investment
        
   
Americas
    
EMEA
    
Pacific
    
Management
    
Consolidated
  
                               
Gross Carrying Amount
                              
                               
Balance as of January 1, 2007
   $
328,628
      
104,494
      
95,563
      
30,494
      
559,179
  
Additions
    
1,037
      
58,037
      
26,971
      
—
      
86,045
  
Impact of exchange rate movements
    
—
      
5,272
      
5,895
      
1,006
      
12,173
  
                                         
Balance as of September 30, 2007
    
329,665
      
167,803
      
128,429
      
31,500
      
657,397
  
                                         
Accumulated Amortization
                                        
                                         
Balance as of January 1, 2007
   $ (15,457 )     (6,429 )     (7,038 )     (9,777 )     (38,701 )
Impact of exchange rate movements
    
—
       (377 )     (413 )     (158 )     (948 )
                                         
Balance as of September 30, 2007
     (15,457 )     (6,806 )     (7,451 )     (9,935 )     (39,649 )
                                         
Net book value as of September 30, 2007
   $
314,208
      
160,997
      
120,978
      
21,565
      
617,748
  
 

The following table sets forth, by reporting segment, the current year movements in the gross carrying amount and accumulated amortization of our intangibles with finite useful lives ($ in thousands):

   
Investor and Occupier Service
  
               
Asia
    
Investment
        
   
Americas
    
EMEA
    
Pacific
    
Management
    
Consolidated
  
                               
Gross Carrying Amount
                              
                               
Balance as of January 1, 2007
   $
82,929
      
4,449
      
2,965
      
5,834
      
96,177
  
Additions
    
—
      
3,994
      
4,205
      
—
      
8,199
  
Impact of exchange rate movements
    
—
      
1,070
      
603
      
263
      
1,936
  
                                         
Balance as of September 30, 2007
    
82,929
      
9,513
      
7,773
      
6,097
      
106,312
  
                                         
Accumulated Amortization
                                        
                                         
Balance as of January 1, 2007
   $ (47,127 )     (2,668 )     (2,965 )     (5,834 )     (58,594 )
Amortization expense
     (4,913 )     (1,187 )     (688 )    
—
       (6,788 )
Impact of exchange rate movements
    
—
       (182 )     (430 )     (263 )     (875 )
                                         
Balance as of September 30, 2007
     (52,040 )     (4,037 )     (4,083 )     (6,097 )     (66,257 )
                                         
Net book value as of September 30, 2007
   $
30,889
      
5,476
      
3,690
      
—
      
40,055
  


Remaining estimated future amortization expense for our intangibles with finite useful lives ($ in millions):

2007 (remaining three months)
   $
3.0
  
2008
    
9.6
  
2009
    
6.0
  
2010
    
4.6
  
2011
    
4.0
  
2012
    
3.5
  
Thereafter
    
9.4
  
Total
   $
40.1
  
 

(7) Stock-based Compensation

We adopted SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) as of January 1, 2006 using the modified prospective approach. The adoption of SFAS 123R primarily impacts “Compensation and benefits” expense in our consolidated statement of earnings by changing prospectively our method of measuring and recognizing compensation expense on share-based awards. We previously recognized forfeitures as incurred; we now estimate forfeitures at the date of grant and accelerate expense recognition for share-based awards to employees who are or will become retirement-eligible prior to the stated vesting period of the award. The effect of the change to estimating forfeitures as it relates to periods prior to 2006 is reflected in “Cumulative effect of change in accounting principle, net of tax” in the consolidated statement of earnings. In the three month period ended March 31, 2006, we recorded a $1.8 million pre-tax, $1.2 million net of tax, gain for the cumulative effect of this accounting change.

Restricted Stock Unit Awards

Along with cash-based salaries and performance-based annual cash incentive awards, restricted stock unit awards represent a primary element of our compensation program for Company officers, managers and professionals.

Restricted stock unit activity for the three months ended September 30, 2007 is as follows:

   
Shares (thousands)
    
Weighted Average Grant Date Fair Value
    
Weighted Average Remaining Contractual Life
    
Aggregate Intrinsic Value ($ in millions)
  
                             
Unvested at June 30, 2007
    
2,648.3
     $
52.97
                  
Granted
    
19.0
      
109.51
                  
Vested
     (845.9 )    
36.81
                  
Forfeited
     (26.2 )    
56.53
                  
Unvested at September 30, 2007
    
1,795.2
     $
61.13
    
1.65 years
     $
74.7
  


Restricted stock unit activity for the nine months ended September 30, 2007 is as follows:

   
Shares (thousands)
    
Weighted Average Grant Date Fair Value
    
Weighted Average Remaining Contractual Life
    
Aggregate Intrinsic Value ($ in millions)
  
                         
Unvested at January 1, 2007
    
2,116.5
     $
40.29
                  
Granted
    
617.2
      
96.40
                  
Vested
     (880.0 )    
36.54
                  
Forfeited
     (58.5 )    
48.86
                  
Unvested at September 30, 2007
    
1,795.2
     $
61.13
    
1.65 years
     $
74.7
  
Unvested shares expected to vest
    
1,685.2
     $
60.45
    
1.60 years
 
   $
71.3
  
 
Compensation expense for restricted stock units included in the “Compensation and benefits” line of the consolidated statement of earnings was $7.9 million and $11.3 million for the three months ended September 30, 2007 and 2006, respectively, and was $28.5 million and $28.6 million for the nine months ended September 30, 2007 and 2006, respectively.

As of September 30, 2007, there was $57.7 million of remaining unamortized deferred compensation related to unvested restricted stock units. This cost will be recognized over the remaining contractual lives of the awards.

Approximately 880,000 restricted stock unit awards vested during the first nine months of 2007, having an aggregate fair value of $99.1 million and intrinsic value of $67.0 million. For the same period in 2006, approximately 746,100 restricted stock unit awards vested having an aggregate fair value of $64.1 million and intrinsic value of $45.4 million. As a result of these vesting events, we recognized tax benefits of $22.6 million and $14.7 million for the nine months ended September 30, 2007 and 2006, respectively.
 

Stock Option Awards

We have generally granted stock options at the market value of our common stock at the date of grant. Our options vest at such times and conditions as the Compensation Committee of our Board of Directors determined and set forth in the award agreement; the most recent options granted (in 2003) vest over periods of up to five years. As a result of a change in compensation strategy, we do not currently use stock option grants as part of our employee compensation programs. We have not granted stock options since 2003.

Stock option activity for the three months ending September 30, 2007 is as follows:

   
Options (thousands)
    
Weighted Average Exercise Price
    
Weighted Average Remaining Contractual Life
    
Aggregate Intrinsic Value ($ in millions)
  
                         
Outstanding at June 30, 2007
    
214.1
     $
19.52
                  
Granted
    
—
      
—
                  
Exercised
     (17.7 )    
23.22
                  
Forfeited
     (5.0 )    
23.00
                  
Outstanding at September 30, 2007
    
191.4
     $
19.08
    
2.44 years
     $
16.0
  

Stock option activity for the nine months ending September 30, 2007 is as follows:

   
Options (thousands)
    
Weighted Average Exercise Price
    
Weighted Average Remaining Contractual Life
    
Aggregate Intrinsic Value ($ in millions)
  
                         
Outstanding at January 1, 2007
    
311.3
     $
18.28
                  
Granted
    
—
      
—
                  
Exercised
     (113.9 )    
16.77
                  
Forfeited
     (6.0 )    
21.21
                  
Outstanding at September 30, 2007
    
191.4
     $
19.08
    
2.44 years
     $
16.0
  
Exercisable at September 30, 2007
    
189.1
     $
19.12
    
2.40 years
     $
15.8
  

As of September 30, 2007, we have approximately 191,400 options outstanding, of which approximately 2,300 options were unvested. We recognized less than $0.02 million in compensation expense related to the unvested options for the first nine months of 2007. Less than $0.01 million of compensation cost remains to be recognized on unvested options through 2008.

The following table summarizes option exercises during the three and nine months ended September 30, 2007 and 2006 ($ in millions):
 
   
Three Months
    
Three Months
    
Nine Months
    
Nine Months
  
   
Ended
    
Ended
    
Ended
    
Ended
  
   
September 30,
    
September 30,
    
September 30,
    
September 30,
  
   
2007
    
2006
    
2007
    
2006
  
                         
Number of options exercised
    
17,723
      
100,451
      
113,920
      
689,830
  
                                 
Intrinsic value
   $
1.4
      
6.4
      
9.8
      
33.6
  
Cash received from options exercised
    
0.8
      
1.9
      
4.9
      
14.2
  
Tax benefit realized from option exercises
    
0.6