Cushman & Wakefield plc — Q1 2019 Form 10-Q
Business context and period. Global commercial real estate services provider operating across the Americas, EMEA and APAC. This unaudited report covers the three months ended March 31, 2019; results are seasonal and Q1 is typically the company’s weakest quarter.
Financial performance and liquidity
Unless otherwise stated, amounts are U.S. dollars. Figures are in millions.
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $1,903.0 | $1,767.7 | Up 8% in reported dollars; up 10% in local currency |
| Fee revenue | $1,372.0 | $1,246.0 | Up 10% reported; up 13% in local currency |
| Operating loss | $(26.0) | $(81.9) | Loss narrowed |
| Net loss | $(20.9) | $(92.9) | Loss narrowed by $72.0 |
| Adjusted EBITDA | $88.4 | $74.8 | Up 18% reported; 6.4% of fee revenue versus 6.0% |
| Net cash used in operating activities | $(214.9) | $(170.6) | Greater cash use, principally due to working capital and bonus/commission payments |
| Cash and cash equivalents at period-end | $411.0 | $895.3 at Dec. 31, 2018 | Cash, cash equivalents and restricted cash totaled $463.3 |
- Investing activities used $275.9 million, including $262.2 million for acquisitions, principally Quality Solutions, Inc. (QSI). Financing activities used $12.0 million; the prior-year period included $250.0 million of long-term borrowings.
- Long-term debt was $2.639 billion, plus $38.7 million of short-term borrowings and current debt. Management described outstanding first-lien debt as approximately $2.7 billion and net debt as approximately $2.2 billion. Net debt increased about $478.2 million from year-end, mainly due to QSI and annual bonus payments.
- Reported liquidity was approximately $1.2 billion: $411.0 million cash and an undrawn $810.0 million revolver. The company reported compliance with debt provisions; the springing leverage covenant had not been triggered.
- Current assets were $2.132 billion and current liabilities $1.862 billion at March 31. Adoption of lease accounting added $531.6 million in operating lease assets and $606.8 million in operating lease liabilities; prior-year comparatives were not recast.
Changes and operating trends
- Fee revenue growth was led by Property, facilities and project management and Leasing. By segment, fee revenue grew 11% in the Americas, 22% in EMEA and 8% in APAC on a reported basis; local-currency growth was 11%, 22% and 14%, respectively.
- Americas Adjusted EBITDA rose to $70.3 million; EMEA’s loss narrowed to $0.2 million. APAC Adjusted EBITDA declined to $18.3 million, and its margin fell to 7.3% from 9.0%, as expenses grew faster than fee revenue.
- Foreign exchange reduced reported revenue by $43.9 million overall. Management cited a $16.0 million unfavorable EMEA impact and a $22.4 million unfavorable APAC impact.
- Adjusted EBITDA is a non-GAAP measure. The reconciliation adds back, among other items, $21.4 million of acquisition integration and other costs and $11.6 million of pre-IPO stock compensation in Q1 2019.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said it believed available liquidity was adequate to meet working-capital and funding needs; it cautioned that Q1 results are not necessarily indicative of full-year results.
- Management identified exposure to economic and commercial real estate conditions, interest rates, credit availability, regulation, geopolitical developments and foreign currencies. Acquisitions may add integration costs; seasonality typically concentrates transactions and earnings in Q4.
- The $40.9 million income-tax benefit increased from $32.0 million in Q1 2018; management attributed the increase mainly to geographic earnings mix and releases of valuation allowances.
- Interest expense was $37.2 million, down from $44.4 million. The first-lien loan bears interest at one-month LIBOR plus 3.25%, had a 6.0% effective rate, and matures in August 2025. The company uses interest-rate swaps and foreign-currency forwards to manage exposures.
- Accrued contingent liabilities were $105.7 million in total at March 31, 2019. The company warned settlements could materially exceed recorded amounts. Client-service guarantees had maximum potential future payments of $39.4 million; management considered payment or performance under them remote.
- The company reported no material subsequent events through May 7, 2019 and no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether operating cash flow and working-capital use improve after Q1 bonus and commission payments, and how much cash is available after restricted cash needs.
- QSI’s purchase price, acquired business contribution, integration costs and expected benefits; Q1 acquisition-related cash spending was $262.2 million.
- The sustainability of Adjusted EBITDA growth and segment margins, particularly APAC’s expense growth and margin decline; compare non-GAAP measures with GAAP results.
- Debt service capacity under variable-rate borrowing, continued covenant compliance, and the effect of interest-rate swaps and currency movements.
- Developments in recorded claims and contingencies, including potential settlements above accruals.