Cushman & Wakefield plc — Q3 2020 Form 10-Q
Period: Quarter and nine months ended September 30, 2020. Unless stated otherwise, amounts are U.S. dollars. The filing is for Cushman & Wakefield plc.
Business context and reporting period
The global commercial real estate services firm operates across the Americas, EMEA and APAC, with services in property, facilities and project management; leasing; capital markets; and valuation and other. Results were materially affected by COVID-19, particularly weaker transaction-related brokerage activity. The company also contributed its China property and facilities management business to a joint venture in early 2020.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,931.6 million | $2,118.8 million | $5,570.6 million | $6,143.5 million |
| Operating income (loss) | $(0.3) million | $37.0 million | $(148.6) million | $64.2 million |
| Net income (loss) | $(37.3) million | $11.7 million | $(193.2) million | $(2.9) million |
| Basic and diluted EPS | $(0.17) | $0.05 | $(0.88) | $(0.01) |
| Adjusted EBITDA (non-GAAP) | $117.1 million | $168.5 million | $306.2 million | $431.4 million |
| Adjusted EBITDA margin* | 8.8% | 10.9% | 8.0% | 9.6% |
| Net cash used in operating activities | — | $(222.5) million | $(100.6) million |
*Non-GAAP margin measured against service-line fee revenue. Q3 revenue declined 9%; service-line fee revenue declined 14%, while gross contract reimbursables, which carry substantially no margin, increased 6%. For the first nine months, revenue fell 9% and service-line fee revenue fell 15%.
- Service lines: Q3 leasing revenue declined 32% and capital markets 35% year over year. Property, facilities and project management revenue grew 3%. Nine-month leasing and capital markets revenue fell 33% and 32%, respectively; property/facilities/project management was broadly flat.
- Segments: Q3 revenue declined 6% in the Americas, 5% in EMEA and 21% in APAC. Segment Adjusted EBITDA was $81.2 million, $11.5 million and $24.4 million, respectively; APAC EBITDA increased 6% despite lower revenue.
- Cash flows: Nine-month investing cash use was $236.8 million, while financing activities provided $581.5 million, principally from the new notes. Cash, cash equivalents and restricted cash totaled $995.1 million at September 30; balance-sheet cash and cash equivalents were $916.8 million.
Balance sheet, debt and liquidity
Total assets were $7.13 billion and total equity was $1.05 billion at September 30, 2020. Total current assets were $2.71 billion versus current liabilities of $1.95 billion. Long-term debt was $3.24 billion, with $37.4 million of short-term borrowings and current debt. The company reported approximately $1.9 billion of liquidity: $916.8 million cash and an undrawn $1.0 billion revolver. Management estimated net debt at approximately $2.3 billion, up about $516.6 million from year-end 2019.
In May 2020, the company issued $650 million of 6.75% senior secured notes due 2028, generating net proceeds of $638.5 million. The first-lien term loan had a 3.2% effective rate and matures in 2025; it is variable-rate debt, with interest-rate swaps used to hedge exposure. The company stated it complied with credit agreement covenants at quarter-end.
Outlook, commentary, risks and unusual items
- Management said liquidity was sufficient for operations but could not reliably estimate COVID-19’s future effects. No quantified earnings or revenue guidance is provided in the filing.
- Management attributed lower results chiefly to pandemic-related weakness in brokerage, partly offset by cost reductions, efficiency measures and more stable property/facilities management activity. It noted real estate market conditions, client demand and pandemic duration as significant uncertainties.
- Operating-efficiency initiatives generated $42.1 million of restructuring charges in the first nine months, primarily severance; $11.0 million remained accrued at September 30.
- The China joint venture formation generated a $36.9 million gain included in nine-month other income. The company owns 35% and accounts for the investment using the equity method.
- Recorded contingent liabilities were $140.5 million at quarter-end, including errors-and-omissions, workers’ compensation and other claims. The company cautioned ultimate settlements could materially exceed recorded amounts. Client-service guarantees had maximum potential payments of $41.3 million; management considered payment risk remote.
- Other key exposures include substantial indebtedness, variable interest rates, foreign exchange movements, litigation and the possibility that prolonged economic disruption reduces client demand or payment capacity.
Important facts for investors to verify
- Whether leasing and capital-markets activity and client demand recover, and how much of the weakness persists beyond the pandemic period.
- Cash generation, working-capital movements and the company’s ability to service debt as operating cash use increased year over year.
- Debt terms, interest-rate exposure, covenant headroom and the sustainability of reported liquidity.
- Whether cost savings offset lower fee revenue, and the full cost and timing of restructuring and efficiency initiatives.
- The valuation and performance of the China joint venture, and potential outcomes for recorded claims and contingencies.