Cushman & Wakefield plc — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement figures are unaudited. The company provides global commercial real estate services across the Americas, EMEA and APAC.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $1,743.6 million | $2,121.7 million | $3,639.0 million | $4,024.7 million |
| Operating income (loss) | $(62.8) million | $53.2 million | $(148.3) million | $27.2 million |
| Net income (loss) | $(100.8) million | $6.3 million | $(155.9) million | $(14.6) million |
| Basic and diluted EPS | $(0.46) | $0.03 | $(0.71) | $(0.07) |
| Adjusted EBITDA | $118.8 million | $174.5 million | $189.1 million | $262.9 million |
| Adjusted EBITDA margin* | 10.2% | 11.1% | 7.6% | 8.9% |
*Non-GAAP margin, measured against service-line fee revenue. Adjusted EBITDA is also non-GAAP.
- Revenue and service lines: Q2 revenue fell 18% year over year (16% in local currency); first-half revenue fell 10% (8% in local currency). Q2 service-line fee revenue declined 26%: Leasing fell 46% and Capital markets 52%, while Property, facilities and project management fell 6%. Gross contract reimbursables, which generate substantially no margin, increased 5%.
- Segments: Q2 revenue declined 16% in the Americas, 10% in EMEA and 27% in APAC. Q2 Adjusted EBITDA was $53.8 million, $26.1 million and $38.9 million, respectively. EMEA and APAC EBITDA rose year over year, while Americas EBITDA fell 56%.
- Cash flow: First-half operating cash use was $299.9 million, versus $158.3 million used in 2019. Investing activities used $223.7 million, versus $300.2 million. Financing activities provided $602.2 million, compared with $31.9 million used, largely reflecting the new notes issuance. Cash, cash equivalents and restricted cash totaled $942.5 million at June 30; cash and cash equivalents alone were $875.5 million.
- Debt and liquidity: The company reported approximately $1.9 billion of liquidity: $875.5 million cash and an undrawn $1.0 billion revolver. Long-term debt was $3.243 billion, plus $38.1 million of short-term borrowings/current debt. Management reported net debt of approximately $2.4 billion, up approximately $562.6 million from year-end. The company stated it was in compliance with credit agreement covenants.
- Balance sheet: Total assets were $7.076 billion and total equity $1.030 billion at June 30, compared with $7.163 billion and $1.301 billion at December 31, 2019. The allowance for receivables was $74.1 million, up from $58.4 million.
Material changes and notable items
- Management attributed the sharp brokerage downturn primarily to COVID-19 and reduced transaction activity. Cost savings and efficiency initiatives partly offset weaker fee revenue.
- In May, the company issued $650 million of 6.75% senior secured notes due 2028; net proceeds were about $638.5 million. In January, it refinanced its first-lien term loan at a lower spread; the reported effective rate was 3.0% at June 30.
- The company recorded $29.2 million of first-half restructuring charges, primarily severance and employment-related costs tied to efficiency initiatives. Total first-half restructuring, impairment and related charges were $31.9 million.
- Formation of the Cushman & Wakefield Vanke Service joint venture in China generated a $36.9 million gain in the first half. The company owns 35%; contributing its China property and facilities management business also affected APAC comparisons.
- Other income included the JV gain in the first half; Q2 other expense was $8.6 million, reflecting losses on disposals of holding companies as part of the strategic realignment.
Outlook, risks and contingencies
- The filing gives no quantified revenue, earnings or EBITDA guidance. Management said it could not reliably estimate COVID-19’s future effect, which depends on the pandemic, restrictions, economic recovery and client demand. It described liquidity as sufficient to continue operations during uncertain conditions.
- Management reported no operational or client-service disruption to date, but noted that renewed outbreaks, restrictions, reduced client demand and clients’ ability to pay could further affect results, financial position and liquidity.
- Other key risks include substantial indebtedness and debt-service capacity, variable interest rates, foreign-exchange movements, economic and real-estate market conditions, and litigation. The company uses interest-rate swaps and foreign-exchange forwards to manage certain exposures.
- Recorded contingent liabilities for claims totaled $134.3 million at June 30 ($108.8 million current and $25.5 million non-current). The filing cautions that ultimate settlements could materially exceed recorded amounts. Guarantees had aggregate maximum potential future payments of $38.3 million; management considered payment or performance under them remote.
- The company estimated that $36.3 million of pre-tax interest-rate hedge losses would be reclassified to interest expense over the next 12 months. No material subsequent events were identified through August 6, 2020.
Important facts for investors to verify
- Whether Leasing and Capital markets activity recovered or weakened further after the quarter, and how that affected fee revenue and Adjusted EBITDA.
- Cash generation, working-capital movements and liquidity, particularly given first-half operating cash use and the decline in equity.
- Debt levels, interest costs, covenant headroom and the terms and use of proceeds from the 2020 notes issuance.
- The sustainability and cash cost of restructuring and efficiency savings, and the effects of the China joint venture on reported growth and earnings.
- Potential changes in receivable credit losses, claims liabilities and other contingencies as economic conditions evolve.