Cushman & Wakefield plc — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; comparative periods ended September 30, 2017. The company is a global commercial real estate services firm operating through Americas, EMEA and APAC segments. Results are unaudited and subject to seasonality.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,076.0m | $1,709.3m | $5,818.0m | $4,871.2m |
| Fee revenue (non-GAAP) | $1,508.5m | $1,291.7m | $4,198.9m | $3,697.0m |
| Operating income (loss) | $11.0m | $(54.6)m | $(37.2)m | $(210.9)m |
| Net loss | $(48.7)m | $(78.6)m | $(172.9)m | $(245.6)m |
| Adjusted EBITDA (non-GAAP) | $179.0m | $102.2m | $423.6m | $261.9m |
| Adjusted EBITDA margin on Fee revenue | 11.9% | 7.9% | 10.1% | 7.1% |
| Basic and diluted loss per share | $(0.26) | $(0.55) | $(1.09) | $(1.71) |
Q3 revenue increased 21% year over year, while Fee revenue increased 17% in U.S. dollars and 18% in local currency. Nine-month revenue rose 19%; Fee revenue rose 14% in U.S. dollars and 13% in local currency. The filing does not present a gross profit margin; it emphasizes Fee revenue and Adjusted EBITDA margin as non-GAAP measures.
- Operating trends: Q3 Fee revenue growth was strongest in Leasing (+30%) and Capital markets (+34%); Property, facilities and project management rose 6%, while Valuation and other declined 1%. For the nine months, Fee revenue grew across Leasing (+22%), Capital markets (+32%) and Property, facilities and project management (+6%); Valuation and other was essentially flat.
- Segment Adjusted EBITDA, Q3: Americas $128.8m (up from $76.3m); EMEA $29.0m (up from $13.0m); APAC $21.2m (up from $12.9m). Management attributed margin improvement to revenue mix and operating leverage.
- Interest and tax: Net interest expense was $92.7m in Q3 and $189.1m for the nine months, increased substantially by debt-refinancing and extinguishment charges. Income-tax benefits were $32.9m and $49.5m, respectively.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $(40.1)m, investing cash flow $(175.3)m and financing cash flow $744.2m. The comparable 2017 amounts were $(242.5)m, $(93.0)m and $168.0m.
- Cash and cash equivalents were $939.0m at September 30, 2018, versus $405.6m at December 31, 2017; cash, cash equivalents and restricted cash totaled $997.2m. Capital expenditures were $61.5m; acquisitions, net of cash acquired, used $22.2m.
- Management reported liquidity exceeding $1.7bn: $939.0m cash plus an undrawn $810.0m revolving facility. Net debt was approximately $1.7bn. Balance-sheet total liabilities were $5,023.3m, total equity $1,409.1m and total assets $6,432.4m.
- In August 2018, the company refinanced its prior credit agreements with a $2.7bn first-lien term loan and $810m revolver. The term loan matures in August 2025, bears variable interest at one-month LIBOR plus 3.25% (5.5% effective rate at quarter end), and requires quarterly principal payments. No revolver amounts were drawn; the company reported compliance with its credit terms.
Material changes, outlook and risks
- The company completed its IPO on August 6, 2018, selling 51.75m shares at $17 per share, and a concurrent private placement to Vanke Service. The two transactions generated approximately $1.0bn net proceeds. IPO proceeds were used in part to repay the $450m second-lien loan and fund the Cassidy Turley deferred payment obligation and management-services-agreement termination.
- Topic 606 adoption increased reported revenue by $123.0m in Q3 and $351.4m for the nine months, mainly from gross presentation of reimbursed client costs and earlier recognition of certain Leasing revenue. It increased net income by $7.4m and $15.9m, respectively, compared with the filing’s prior-guidance pro forma; the gross presentation of reimbursed costs did not affect Fee revenue or cash flows.
- Debt refinancing produced $50.4m of debt-extinguishment expense in the nine months. The quarter also included an $11.9m fee to terminate the related-party management services agreement. Restructuring charges were $2.8m for the nine months, compared with $12.7m in 2017.
- No numerical earnings or revenue guidance is provided. Management said it believed available liquidity and expected internally generated cash flow were adequate for working-capital and funding needs. It cautioned that results are seasonal, with Leasing and Capital markets transactions generally concentrated near year-end and historically the fourth quarter strongest.
- Key exposures include economic and commercial real estate market conditions, interest-rate and foreign-exchange movements, substantial indebtedness, client and employee retention, acquisitions, litigation and claims, technology and cybersecurity, and seasonality. The company recorded $114.1m of contingent liabilities at quarter end; ultimate settlements could exceed recorded amounts. Guarantees had maximum potential future payments of approximately $37.5m, although management considered payment risk remote.
- The company reported no material changes to previously disclosed risk factors, no material subsequent events through November 13, 2018, and effective disclosure controls as of September 30, 2018. The new lease standard was expected to have a significant balance-sheet effect from recognition of right-of-use assets and lease liabilities.
Investor verification priorities
- Verify how much of reported revenue and earnings growth reflects underlying activity versus Topic 606 timing and gross-versus-net presentation; focus on Fee revenue and cash conversion.
- Assess sustainability of Adjusted EBITDA growth and margin expansion, including the substantial exclusions for acquisition/integration costs, pre-IPO compensation and deferred purchase obligations.
- Review debt-service capacity and sensitivity to LIBOR changes, scheduled amortization, refinancing terms and the springing leverage covenant.
- Track operating cash flow, working-capital needs, IPO-proceeds deployment and future payments under the Cassidy Turley obligation.
- Monitor seasonality, regional and service-line trends, tax estimates under the Tax Act, and the potential settlement exposure from claims and contingencies.