Cushman & Wakefield plc — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company provides commercial real estate services globally across property, facilities and project management; leasing; capital markets; and valuation and other services. Amounts below are in U.S. dollars unless noted. Results are unaudited.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,118.8M | $2,076.0M | $6,143.5M | $5,818.0M |
| Fee revenue | $1,549.4M | $1,508.5M | $4,497.5M | $4,198.9M |
| Operating earnings (loss) | $37.0M | $20.6M | $64.2M | $(30.6)M |
| Net income (loss) | $11.7M | $(41.4)M | $(2.9)M | $(167.8)M |
| Adjusted EBITDA | $168.5M | $179.0M | $431.4M | $423.6M |
| Adjusted EBITDA margin on fee revenue | 10.9% | 11.9% | 9.6% | 10.1% |
| Net cash used in operating activities | — | — | $(100.6)M | $(40.1)M |
Growth and profitability: Q3 revenue rose 2% reported and fee revenue rose 3% reported (4% in local currency). Property, facilities and project management and valuation and other grew, while leasing fee revenue fell 9% reported. Adjusted EBITDA declined 6% reported (5% in local currency), and its margin contracted by 1.0 percentage point; management attributed the pressure to expense growth and fee-revenue mix. For the nine-month period, revenue increased 6%, fee revenue 7% reported (9% local currency), and Adjusted EBITDA 2% reported (3% local currency). Adjusted EBITDA margin fell 0.5 percentage point.
Q3 net income improved by $53.1M year over year, primarily because 2018 included $50.4M of debt refinancing and extinguishment charges in interest expense. Nine-month net loss improved by $164.9M, reflecting stronger operating results, lower integration costs and lower interest expense. These comparisons should be viewed alongside the company’s substantial non-GAAP adjustments.
Segments and material changes
- Americas: Q3 fee revenue increased 3% in local currency, but Adjusted EBITDA declined 3% and margin decreased from 12.3% to 11.6%. Nine-month fee revenue rose 8% in local currency and EBITDA rose 2%.
- EMEA: Q3 fee revenue grew 4% in local currency, but EBITDA fell 26% and margin declined from 13.7% to 9.7%. Nine-month fee revenue increased 11% in local currency while EBITDA fell 7%.
- APAC: Q3 fee revenue rose 7% in local currency and EBITDA rose 11%; nine-month fee revenue increased 14% and EBITDA 17% in local currency. Margins improved modestly in both periods.
- Foreign exchange reduced reported revenue by $27.6M in Q3 and $109.0M for the nine months. The company reported nine-month local-currency growth of 15% in property, facilities and project management fee revenue.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $400.1M, down from $895.3M at December 31, 2018. Management reported liquidity of approximately $1.2B, including $400.1M cash and an undrawn $810M revolving facility.
- Long-term debt was $2,625.3M, plus $40.3M of short-term borrowings and current maturities. The company reported approximately $2.7B of first-lien debt and net debt of approximately $2.3B. The $810M revolver was undrawn; debt covenants were reported in compliance.
- The first-lien loan bears interest at one-month LIBOR plus 3.25%, had a 5.5% effective rate at quarter end, and matures in August 2025. The springing leverage covenant is tested if revolver borrowings exceed a specified threshold.
- Nine-month operating cash use was $100.6M, versus $40.1M used in the prior year, driven mainly by working-capital needs, including bonus and commission payments. Investing cash use was $319.4M, including $268.5M for business acquisitions. Financing cash use was $70.9M; 2018 financing had included IPO and private-placement proceeds.
- Net debt increased approximately $506.8M from year-end, primarily due to the QSI acquisition (approximately $250M) and annual bonus payments.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management says it believes current liquidity and internally generated cash, cash on hand and revolver availability are adequate for working-capital and funding needs.
- Management emphasizes seasonality: leasing and capital markets activity is generally concentrated toward calendar year-end; results are typically lowest in Q1 and highest in Q4. Interim results may not indicate full-year performance.
- Key stated risks include economic and commercial real estate market conditions, interest rates, foreign exchange movements, competition, international operating complexity, substantial indebtedness and capacity to service debt, and litigation or reputational exposure.
- QSI acquisition activity affected year-over-year comparability and cash use. Nine-month integration and merger-related costs were $74.1M; acquisition-related costs and other efficiency initiatives were $17.7M. Adjusted EBITDA excludes multiple such items and is not a GAAP measure.
- Adoption of lease accounting in 2019 placed $502.8M of operating lease assets and $468.5M of non-current operating lease liabilities on the balance sheet; prior-year comparative figures were not restated. Operating lease liabilities totaled $584.6M including current amounts.
- Hedge losses contributed to a $143.7M nine-month other comprehensive loss, including $111.0M of designated hedge losses. The company estimated $7.1M of pre-tax hedge losses would be reclassified to interest expense in the next 12 months.
- Recorded contingent liabilities were $105.7M at quarter end; management cautions ultimate settlements could materially exceed recorded amounts. Guarantees had maximum potential payments of $39.6M, with payment considered remote by the company.
Important facts for investors to verify
- Whether working-capital outflows and lower cash balances persist, and whether seasonal Q4 collections meaningfully improve operating cash flow.
- Debt-service capacity under variable-rate borrowing, the status of interest-rate hedges, and headroom under the credit agreement’s springing covenant.
- QSI’s contribution to revenue and profitability, integration progress, and the amount and persistence of acquisition and other excluded costs.
- Whether the sharp EMEA margin decline and lower consolidated Adjusted EBITDA margin recover, and how much reported results remain affected by foreign exchange.
- Potential cash exposure from litigation, claims and guarantees beyond amounts accrued, and the effect of lease commitments on future liquidity.