Business context and reporting period
Cushman & Wakefield plc’s Form 10-K covers the fiscal year ended December 31, 2018, with comparisons to 2017. The global commercial real estate services firm reported approximately 51,000 employees, 400 offices in 70 countries, and management of about 3.6 billion square feet. Services include property, facilities and project management; leasing; capital markets; and valuation and other advisory work.
The company completed its IPO in August 2018, raising approximately $993.6 million net of offering costs, and listed on the NYSE as CWK. The filing’s audited financial statements received an unqualified opinion from KPMG.
Financial performance and liquidity
Amounts below are in U.S. dollars; millions except per-share data. Fee revenue and Adjusted EBITDA are non-GAAP measures.
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Revenue | $8,219.9 | $6,923.9 | Up 19% |
| Fee revenue | $5,950.6 | $5,319.8 | Up 12%; excludes reimbursed client costs with substantially no margin |
| Operating income (loss) | $12.6 | ($171.1) | Returned to positive operating income |
| Net loss attributable to the company | ($185.8) | ($221.3) | Loss narrowed; loss per share was $1.09 versus $1.54 |
| Adjusted EBITDA | $659.1 | $528.5 | Up 25% as reported; 26% in local currency |
| Adjusted EBITDA margin | 11.1% | 9.9% | Calculated using Fee revenue |
| Net cash from operating activities | ($2.2) | $4.4 | Operating cash flow was slightly negative |
Cash and cash equivalents were $895.3 million at year-end, versus $405.6 million a year earlier. Including restricted cash, cash-flow-statement cash was $965.4 million. Total debt was $2.684 billion and net debt approximately $1.8 billion. The company reported $1.7 billion of liquidity, including $810 million available under an undrawn revolver. Capital expenditures were $84.2 million; investing activities used $218.0 million and financing activities provided $725.9 million.
In August, the company refinanced its debt with a $2.7 billion term loan and an $810 million revolving facility. The term loan bears floating-rate interest (1-month LIBOR plus 3.25% at year-end), had a 6.0% effective rate at December 31, 2018, and matures in 2025. Net interest expense was $228.8 million, including $53.8 million of debt refinancing and extinguishment charges. The company was in compliance with its credit agreement at year-end and had not drawn on the revolver.
Material changes versus the prior year
- Fee revenue growth was led by capital markets, up 29% in local currency, and leasing, up 16%; property, facilities and project management rose 6%. Capital markets growth was driven principally by the Americas.
- Adjusted EBITDA increased, with margin expansion overall. Americas margin rose to 11.1% from 9.6%; APAC rose to 9.9% from 8.0%. EMEA Adjusted EBITDA was broadly flat in local currency and its margin declined to 12.2% from 13.9%.
- Topic 606 adoption increased reported 2018 revenue by $432.8 million, including $400.2 million from presenting certain reimbursed costs gross and $32.6 million from earlier recognition of variable consideration, primarily in leasing. The gross presentation substantially did not affect Fee revenue, net loss or cash flow; the timing change reduced reported net loss by $6.4 million.
- The smaller income-tax benefit ($25.0 million versus $120.5 million) reflected the prior-year tax-reform benefit, lower pretax losses and additional valuation allowances. IPO proceeds helped reduce net debt by approximately $0.6 billion from year-end 2017.
- Operating cash flow was affected by a $124.1 million payment related to the Cassidy Turley deferred purchase obligation. Integration and acquisition-related costs remained significant: $244.7 million was added back in the Adjusted EBITDA reconciliation.
For the fourth quarter, revenue was $2,401.9 million, operating income $43.2 million, and net loss $18.0 million. In fourth-quarter 2017, the corresponding figures were $2,052.7 million, $37.2 million, and net income of $22.2 million.
Outlook, commentary, risks and unusual items
The filing provides no specific quantitative revenue or earnings guidance. Management stated that cash on hand, operating cash flow and revolver availability 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 organic growth, margin improvement, technology investment and selective “infill” acquisitions. The company does not expect to pay cash dividends in the foreseeable future.
- Key risks include economic and commercial real estate market downturns, weaker leasing and transaction activity, credit availability, interest-rate and foreign-exchange exposure, and Brexit-related uncertainty.
- Substantial floating-rate debt creates debt-service and refinancing exposure. Credit-agreement restrictions, covenant compliance and the ability to generate cash for debt service warrant attention.
- Other material risks include retaining revenue-producing professionals and clients, acquisition integration, competition, cybersecurity and data protection, regulatory and tax compliance, litigation and environmental liabilities. The company disclosed prior cybersecurity attacks, including ransomware incidents.
- The company is controlled by principal shareholders, who held approximately 64% of ordinary shares at year-end and can appoint a majority of board seats. This may limit other shareholders’ influence and create potential conflicts.
- Pending and threatened ordinary-course litigation was described as not expected by management to materially affect consolidated financial position or results, but outcomes remain uncertain. Recorded contingent liabilities included $69.5 million current and $23.4 million non-current; guarantees had maximum potential payments of about $36.7 million, with payment considered remote by management.
- On January 2, 2019, the company acquired Quality Solutions, Inc. for $250.7 million net cash consideration; purchase accounting was incomplete when the filing was issued.
- Other notable items include the $11.9 million termination fee for the former sponsor management-services agreement and retrospective adoption of a stock-based compensation accounting policy change. Adjusted EBITDA excludes substantial expenses and is not a GAAP profit measure.
Disclosure controls and procedures were concluded effective at year-end. The filing did not include management’s assessment or auditor attestation of internal control over financial reporting because of the newly public company transition period.
Important facts for investors to verify
- How much of reported revenue growth reflects underlying fee growth versus Topic 606 gross presentation, and how will comparable-period trends be interpreted?
- Whether operating cash flow improves after the Cassidy Turley payment, given seasonal working-capital needs and the modest 2018 operating cash flow.
- Debt-service sensitivity to floating rates, hedge coverage, covenant headroom and the company’s ability to reduce net debt while pursuing acquisitions.
- Whether EMEA margin pressure persists and whether Americas and APAC growth and margin gains are sustainable.
- The effects of the QSI acquisition, future integration and acquisition costs, contingent consideration, and the company’s other legal, tax and operational exposures.
- How concentrated ownership, share sales under registration rights, equity compensation and the absence of expected dividends affect shareholder returns and governance.