Cushman & Wakefield plc — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; it also provides unaudited quarterly results. The company is a global commercial real estate services firm with approximately 53,000 employees, 400 offices in 60 countries, and more than 4.1 billion square feet under management.
Business context and performance
The company operates in the Americas, EMEA, and APAC, across Property, facilities and project management; Leasing; Capital markets; and Valuation and other. Its model combines recurring management contracts with more transaction-sensitive brokerage and advisory services. Reported revenue includes gross client-reimbursed costs that carry substantially no margin, so fee revenue is also a key performance measure.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $8,751.0 million | $8,219.9 million |
| Service line fee revenue | $6,400.1 million | $5,950.6 million |
| Operating income | $187.3 million | $12.6 million |
| Net income (loss) | $0.2 million | $(185.8) million |
| Adjusted EBITDA (non-GAAP) | $724.4 million | $659.1 million |
| Adjusted EBITDA margin on fee revenue (non-GAAP) | 11.3% | 11.1% |
| Cash provided by (used in) operating activities | $269.3 million | $(2.2) million |
| Capital expenditures | $80.3 million | $84.2 million |
| Cash and cash equivalents at year-end | $813.2 million | $895.3 million |
| Total debt | $2,659.6 million | $2,684.1 million |
Revenue increased 6% in U.S. dollars (8% in local currency); fee revenue rose 8% (9% in local currency). Adjusted EBITDA increased 10% in U.S. dollars (11% in local currency). Revenue growth was led by Property, facilities and project management fee revenue, up 12% in U.S. dollars, and Capital markets, up 7%. Gross contract reimbursables were $2,350.9 million in 2019 and are reported at substantially no margin.
Operating income improved substantially, while GAAP net income was nearly breakeven. The $42.6 million income tax expense was close to pretax earnings of $42.8 million. Net interest expense declined to $150.6 million from $228.8 million, including $53.8 million of 2018 debt refinancing and extinguishment charges. Adjusted EBITDA is non-GAAP and excludes, among other items, $112.5 million of merger integration costs, $43.9 million of pre-IPO stock-based compensation, and $56.1 million of acquisition and efficiency costs.
Year-end liquidity was approximately $1.8 billion: $813.2 million cash and a fully undrawn $1.0 billion revolver. Net debt was approximately $1.8 billion. The company reported $269.3 million of operating cash flow, offset by $274.9 million of investing cash outflow, including $275.9 million of net acquisition spending. Debt is primarily floating-rate; the term loan’s effective interest rate was 5.3% at year-end and it matures in 2025. The company was in compliance with its credit agreement and its revolver covenant had not been triggered.
Contractual obligations totaled $3,456.2 million, including $2,666.3 million of debt, $685.1 million of operating leases, and $84.1 million of defined-benefit pension obligations. The filing estimates annual interest payments of approximately $137.9 million at year-end rates. Operating lease assets and liabilities were recognized on the balance sheet following adoption of the new lease standard in 2019.
Material changes and quarterly results
- Americas fee revenue rose 9% in local currency and Adjusted EBITDA rose 11%; margin improved to 11.4% from 11.1%.
- EMEA fee revenue rose 9% in local currency, but Adjusted EBITDA declined 4% in local currency and margin fell to 10.8% from 12.2%, as expenses grew faster than fees. Foreign exchange reduced reported EMEA revenue growth.
- APAC fee revenue rose 12% in local currency; Adjusted EBITDA increased 26% and margin rose to 11.3% from 9.9%. Foreign exchange reduced reported revenue growth.
- Fourth-quarter 2019 revenue was $2,607.5 million, operating income $123.1 million, and net income $3.1 million, compared with revenue of $2,401.9 million, operating income of $43.2 million, and a net loss of $18.0 million in fourth-quarter 2018. The company notes that results are seasonal, with revenue and operating income historically lowest in Q1 and highest in Q4.
- The company spent $275.9 million net on acquisitions during 2019 and recorded $184.5 million of acquisition-related goodwill. It acquired Quality Solutions, Inc.; its 2019 revenue was $198.6 million.
Outlook, risks and contingencies
No specific numerical earnings or revenue guidance is provided. Management stated that cash on hand, operating cash flow, and available revolver capacity were expected to meet anticipated requirements for at least the next 12 months, absent a large strategic acquisition or other extraordinary event. Its stated priorities include growing revenue and profitability, expanding margins through operational improvements, investing in technology, and pursuing infill acquisitions. The filing cites an industry estimate of approximately 5% annual global commercial real estate services market growth, but this is not company guidance.
In January 2020, after year-end, the company refinanced its $2.7 billion term loan on substantially similar terms and the same August 2025 maturity, lowering the stated LIBOR margin by 0.50 percentage point. Key risks include economic and commercial real estate downturns, transaction and credit-market weakness, seasonality, foreign exchange volatility, Brexit uncertainty, competition, employee retention, client cancellations and pricing pressure, acquisition integration, cybersecurity and technology disruption, regulation, litigation, environmental liabilities, and substantial floating-rate debt. The filing also identifies coronavirus as a potential source of disruption to managed properties and economic conditions.
Management said ordinary-course litigation was not expected to materially affect consolidated financial position or results, but noted outcomes are inherently uncertain. Recorded contingent liabilities were $97.3 million at year-end, primarily for errors and omissions, workers’ compensation, and other claims; actual settlements could exceed reserves. The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Its critical audit matter concerned realizability of U.S. operating-loss and disallowed-interest carryforwards; the company reported $99.8 million of these carryforwards as deferred tax assets, subject to valuation allowances where applicable. The auditor’s internal-control audit excluded QSI during its first year of consolidation.
Most important facts for investors to verify
- Whether fee revenue growth translates into durable GAAP earnings and cash generation, given near-zero 2019 net income and significant non-GAAP adjustments.
- Whether EMEA’s margin decline is temporary and whether Americas and APAC margin gains can be sustained.
- Debt service capacity and sensitivity to floating interest rates, including the effect of the January 2020 refinancing and the availability of the revolver.
- Acquisition returns and integration progress, including the performance of Quality Solutions, and future contingent or deferred acquisition payments.
- Tax-asset recoverability, uncertain tax positions, and the potential for cash settlement of tax liabilities; the filing reports $88.0 million of current and non-current tax liabilities, of which $54.5 million was reasonably estimated to require settlement within one year.
- Exposure to seasonal cash-flow needs, client contract cancellations, foreign exchange, litigation and self-insured claims, and cybersecurity or operational disruptions.