Cushman & Wakefield Ltd. quarterly report, Q2 FY2018

Business context and reporting period

Cushman & Wakefield plc’s unaudited Form 10-Q covers the three and six months ended June 30, 2018; comparisons are with the same 2017 periods. The global commercial real estate services firm operates through the Americas, EMEA and APAC segments and four main service lines. Its IPO and public trading began in August 2018, after the reporting period.

Financial performance and liquidity

Q2 revenue increased 16% year over year and fee revenue rose 11% in U.S. dollars (10% in local currency). First-half revenue increased 18% and fee revenue rose 12% in U.S. dollars (10% in local currency). Q2 operating margin was approximately 1.6%, versus a loss margin of approximately 2.1% a year earlier; first-half operating margin was approximately negative 1.3%, versus negative 4.9%.

At June 30, cash and cash equivalents were $382.4 million, compared with $405.6 million at year-end 2017. Management reported approximately $868 million of liquidity, comprising cash and an undrawn $486 million revolving facility. Debt was approximately $3.0 billion, and management cited net debt of approximately $2.6 billion. Total assets were $5.85 billion and total equity was $440.6 million. First-half investing activities used $36.9 million; financing activities provided $181.1 million. Capital expenditures were $31.3 million.

Material changes versus the prior comparable period

• Q2 net loss narrowed by $15.1 million and first-half net loss narrowed by $42.8 million. Management attributed the improvement primarily to fee revenue growth exceeding growth in fee-based operating expenses.
• Adjusted EBITDA increased 30% in Q2 and 53% in the first half in U.S. dollars; reported local-currency growth was 28% and 51%, respectively. Margin gains reflected revenue mix and operating leverage.
• Americas fee revenue increased 11% in both periods. APAC fee revenue rose 10% in Q2 and 11% in the first half; its Adjusted EBITDA also increased. EMEA fee revenue grew 11% in Q2 in U.S. dollars, but only 4% in local currency, while EMEA Adjusted EBITDA declined 10% in U.S. dollars in the quarter.
• Interest expense rose to $52.0 million in Q2 from $44.0 million and to $96.4 million in the first half from $85.7 million, reflecting higher average borrowings; the first-half amount included a $3.4 million debt-modification charge.
• Operating cash use improved year over year, but remained substantial. Management attributed cash use to working-capital needs and the seasonal pattern of the business.

Accounting, outlook, risks and unusual items

The company adopted Topic 606 on January 1, 2018 using the modified retrospective method; prior-year comparisons were not restated. Adoption increased reported revenue by $99.2 million in Q2 and $228.4 million in the first half. Most of the increase reflected gross presentation of reimbursed client expenses, with no impact on fee revenue or profit; earlier recognition of leasing-related variable consideration contributed $15.2 million and $24.9 million, respectively. The adoption reduced reported net loss by $5.2 million in Q2 and $8.5 million in the first half compared with presentation under prior guidance.

No numerical earnings or revenue guidance is provided. Management cautions that results are seasonal: fee revenue and operating profit have historically been lowest in Q1 and highest in Q4. Performance is exposed to commercial real estate activity, interest rates, credit availability, economic and geopolitical conditions, foreign exchange movements, competition, client retention, acquisition integration and the ability to retain revenue-producing staff. The company also identifies leverage and floating-rate debt, covenant restrictions, litigation and regulatory compliance, technology and cybersecurity, and the influence of its principal shareholders as risks.

After quarter-end, the company completed its IPO, issuing 51.75 million shares at $17 per share for approximately $823.9 million of net proceeds, and a concurrent private placement to Vanke Service generated approximately $170.6 million net. The company repaid its $450 million Second Lien Loan with IPO proceeds and, in August, entered a new $2.7 billion term loan and $810 million revolving facility, replacing the prior First Lien facility. The new term loan matures August 21, 2025 and initially bears interest at the Eurodollar Rate plus 3.25%. These subsequent transactions do not describe debt outstanding at June 30.

Other notable items include a $34.5 million cash settlement from monetizing interest-rate caps, followed by entry into replacement cap agreements, and a $6.5 million Q2 restructuring credit. Recorded contingent liabilities were $121.5 million at June 30; the filing warns ultimate settlements may materially exceed recorded amounts. Client-service guarantees had maximum potential future payments of approximately $40.5 million, with payment considered remote by management.

Important facts for investors to verify

• Reconcile Topic 606’s effect on reported revenue, leasing revenue timing and comparisons with prior periods; distinguish GAAP revenue from fee revenue.
• Assess operating cash use, working-capital requirements and seasonal liquidity needs, including the role and terms of the receivables securitization.
• Confirm post-IPO debt balances, interest costs, covenant terms, and actual use of IPO and private-placement proceeds.
• Review the sustainability of Adjusted EBITDA growth and margin improvement, particularly EMEA’s weaker Q2 local-currency performance; Adjusted EBITDA is a non-GAAP measure.
• Monitor litigation and claims reserves, guarantees, and the potential for settlements above recorded liabilities.
• Consider IPO-related dilution, share-sale restrictions and principal-shareholder control; the filing states the company does not anticipate dividends in the foreseeable future.