Cushman & Wakefield plc — Q2 2019 Form 10-Q
Business context and period: Global commercial real estate services firm operating in the Americas, EMEA and APAC, across property, facilities and project management, leasing, capital markets, and valuation. This unaudited report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2,121.7m | $1,974.3m | $4,024.7m | $3,742.0m |
| Operating earnings (loss) | $53.2m | $30.7m | $27.2m | $(51.2)m |
| Net income (loss) | $6.3m | $(33.5)m | $(14.6)m | $(126.4)m |
| Adjusted EBITDA | $174.5m | $169.8m | $262.9m | $244.6m |
| Adjusted EBITDA margin on fee revenue | 11.1% | 11.8% | 8.9% | 9.1% |
| Net cash used in operating activities | — | — | $(158.3)m | $(179.4)m |
- Q2 revenue increased 7% in reported dollars (10% in local currency); fee revenue grew 9% in dollars (11% in local currency). Six-month revenue rose 8% in dollars (10% in local currency), and fee revenue rose 10% (12% in local currency).
- Q2 operating margin was approximately 2.5%, versus 1.6% a year earlier. Six-month operating margin was approximately 0.7%, compared with a loss in the prior-year period. Q2 diluted EPS was $0.03; six-month diluted loss per share was $0.07.
- At June 30, cash and cash equivalents were $423.7m; total assets were $6.76bn and total equity was $1.29bn. Current assets of $2.26bn were below current liabilities of $1.95bn? Correction: current assets exceeded current liabilities by approximately $318.5m.
- Long-term debt was $2.63bn, with $40.1m of short-term borrowings and current debt. The company reported approximately $1.2bn of liquidity, including $423.7m cash and an undrawn $810m revolver; net debt was approximately $2.2bn. It was covenant-compliant, and the revolver’s springing leverage test was not triggered.
- Six-month investing cash outflow was $300.2m, primarily reflecting $268.5m of net acquisition spending. Financing cash outflow was $31.9m. Cash, cash equivalents and restricted cash declined by $488.9m, to $476.5m including restricted cash.
Material changes and management commentary
- Q2 net income improved by $39.8m year over year, attributed mainly to stronger operating results, lower acquisition integration costs and lower interest expense. Six-month net loss improved by $111.8m on similar drivers.
- Fee-revenue growth was strongest in property, facilities and project management and capital markets in Q2; for the first half, growth was led by property, facilities and project management and leasing. Foreign exchange reduced reported revenue growth: management cited an unfavorable impact of $37.6m in Q2 and $81.5m for the first half.
- Q2 Adjusted EBITDA increased, but margin declined to 11.1% from 11.8%, which management attributed to fee-revenue mix. Americas Q2 margin declined to 11.3% from 12.4%; EMEA to 7.5% from 10.1%. APAC improved to 12.7% from 10.6%.
- The company acquired Quality Solutions, Inc. (QSI) for approximately $250m; the acquisition contributed to higher net debt and goodwill. Goodwill increased $173.0m from year-end, primarily due to acquisitions.
- Cash used in operations improved from the prior-year first half, but management cited higher working-capital needs, including bonus and commission payments. The company noted that results are seasonal, with revenue and operating income historically lowest in Q1 and highest in Q4.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EBITDA guidance. Management said it believed available liquidity and internally generated cash flow, supplemented if needed by cash and revolver borrowings, were adequate for funding needs.
- Key stated risks include economic and commercial property-market conditions, interest rates, foreign exchange movements, competition, international operating complexity, substantial indebtedness and litigation. The company uses interest-rate swaps and foreign-exchange forwards to manage exposures; hedge losses contributed to other comprehensive loss.
- Operating cash flows are affected by working-capital timing and seasonal commissions and bonuses. The company also cautions that acquisition integration and transaction costs can affect comparisons and earnings.
- Recorded contingent liabilities were $106.7m at June 30 ($83.1m current and $23.6m non-current), covering claims including errors and omissions and workers’ compensation. Management stated ultimate settlements could materially exceed recorded amounts. Guarantees had maximum potential future payments of $40.8m; expected payment was considered remote.
- Adoption of lease accounting in 2019 resulted in recognition of $525.4m of operating lease assets and $608.7m of operating lease liabilities. This is a balance-sheet change, not a comparable prior-period measure; 2018 figures were not restated.
- The report cites no material subsequent events through August 1, 2019, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30.
Important facts for investors to verify
- Whether fee-revenue growth can continue to outpace fee-based expense growth, and whether the recent margin declines in Q2 reverse.
- QSI’s contribution to revenue, profitability and cash generation, and the effect of acquisition-related costs and integration on future results.
- Working-capital requirements and the timing of bonus and commission payments, given continuing negative operating cash flow.
- Debt service and refinancing exposure: the first-lien loan bears variable interest at one-month LIBOR plus 3.25%, with a stated 5.9% effective rate at June 30, 2019; assess sensitivity alongside the company’s swaps and covenant terms.
- The composition and availability of liquidity, including restricted cash, the undrawn revolver and the receivables securitization arrangement.
- Potential cash impacts from claims and contingencies, and the exposure to foreign exchange and commercial real estate market conditions.