Cushman & Wakefield Ltd. (CWK) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes thereto included elsewhere in this Annual Report.
As discussed in “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in “Risk Factors” in Part I, Item 1A in this Annual Report. Our fiscal year ends December 31. With respect to presentation, all statements asserting an “increase” or “decrease” relate to changes from prior applicable periods of comparison.
Overview
Cushman & Wakefield is a leading global commercial real estate services firm that makes a meaningful impact for our people, clients, communities and world. Led by an experienced executive team and driven by approximately 52,000 employees in nearly 400 offices and approximately 60 countries, we deliver exceptional value for real estate occupiers and owners, managing 6.2 billion square feet of commercial real estate space globally and offering a broad suite of services through our integrated and scalable platform. Our business is focused on meeting the increasing demands of our clients through a comprehensive offering of services including (i) Property, facilities and project management, (ii) Leasing, (iii) Capital markets and (iv) Valuation and other services.
Recent Developments and Outlook
Highlights from full year 2023:
•Revenue of $9.5 billion and service line fee revenue of $6.5 billion for the year ended December 31, 2023 decreased 6% and 10%, respectively, from the year ended December 31, 2022.
◦Property, facilities and project management grew 3%, primarily driven by the Americas and APAC.
◦Leasing, Capital markets and Valuation and other declined 12%, 41% and 12%, respectively.
•Net loss and diluted loss per share for the year ended December 31, 2023 were $35.4 million and $0.16, respectively.
◦Adjusted EBITDA of $570.1 million was down 37% from the year ended December 31, 2022.
•Liquidity as of December 31, 2023 was $1.9 billion, consisting of availability on the Company’s undrawn revolving credit facility of $1.1 billion and cash and cash equivalents of $0.8 billion.
Macroeconomic Trends and Uncertainty
Demand for our services is largely dependent on the relative strength of the global and regional commercial real estate markets, which are highly sensitive to general macroeconomic conditions and the ability of market participants to access credit and the capital markets. There continues to be significant macroeconomic uncertainty in many markets around the world. In 2023, these macroeconomic challenges, including elevated inflation and interest rates, led to ongoing volatility within global capital and credit markets, which contributed to recessionary conditions in the global commercial real estate market and negatively impacted demand for our services. We expect many of these macroeconomic challenges to persist through 2024.
In particular, many of our clients have been unable to procure credit or financing on favorable terms or at all, as lending conditions have tightened and borrowers face higher capital costs. This resulted in lower transaction volumes, and declines in our Capital markets, Leasing and Valuation and other service lines. Clients may continue to delay real estate transaction decisions until property values and economic conditions stabilize, which could continue to reduce the commissions and fees we earn for brokering those transactions. A protracted continuation or further deterioration of these macroeconomic conditions, as well as future uncertainty, weakness or volatility in the credit markets or a decrease in the demand for commercial real estate, could further affect commercial real estate transaction volumes and pricing and, in turn, adversely impact our service line fee revenue. While transactional markets remained under pressure during the year, our Property, facilities and project management service line continued to demonstrate resiliency and grew revenue by 3% over the prior year.
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While the degree to which the Company will be affected by these macroeconomic challenges largely depends on the nature and duration of uncertain and unpredictable events, we believe that we are well suited to endure a shifting macroeconomic environment due to our diversification and resiliency. Refer to Part I, Item 1A. “Risk Factors” in this Annual Report for further information.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP” or “GAAP”), which requires us to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience, current facts and circumstances, and on other factors that we believe to be reasonable. Actual results may differ from those estimates and assumptions. We review these estimates on a periodic basis to ensure reasonableness. We have identified all significant accounting policies in Note 2: Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements. The following are the critical accounting policies where estimates and assumptions could materially affect the application of the policies.
Goodwill
Goodwill is not amortized, but rather tested for impairment at least annually, typically in the fourth quarter. The Company will test more frequently if there are indicators of impairment or whenever business and economic circumstances change, suggesting the carrying value of goodwill may not be recoverable. These indicators may include sustained significant decline in our share price and market capitalization, a decline in our expected future cash flows, or a significant adverse change in legal factors or in the business climate, among others.
The Company performs impairment reviews at the reporting unit (“RU”) level. U.S. GAAP defines an RU as a component of an operating segment if the component constitutes a business, for which discrete financial information is available, and segment management regularly reviews the operating results of that component. When evaluating these assets for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that the RU is impaired. If the Company does not perform a qualitative assessment, or if the Company determines that it is not more likely than not that the fair value of the RU exceeds its carrying amount, then the goodwill impairment test becomes a quantitative analysis. If the fair value of an RU is determined to be greater than the carrying value of the RU, goodwill is recoverable. If the fair value of an RU is less than the carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of the RU, including goodwill, exceeds its fair value, limited to the total amount of the goodwill allocated to the reporting unit.
In determining the fair value of our RUs, the Company uses a discounted cash flow (“DCF”) model based on our most current forecasts. The Company discounts the related cash flow forecasts using the weighted average cost of capital method at the date of evaluation. Preparation of forecasts and selection of certain assumptions including the discount rate, forecasted revenue growth rates, and forecasted profitability margins, for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our RUs and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium.
In 2023, to further validate the reasonableness of the initial quantitative assessment and evaluation, a reconciliation of our market capitalization to the carrying value of our shareholders’ equity was performed by calculating an implied control premium. We concluded that the implied control premium was reasonable based on a comparison to actual control premiums realized in recent comparable market transactions. If our share price declines and such decline is sustained, further evaluation would be necessary and an impairment of our goodwill may result.
In 2022, we performed our goodwill impairment evaluation over five reporting units, resulting in no impairment charges as the estimated fair value of each RU exceeded its carrying value. Effective July 1, 2023, the Company revised the identification of our reporting units used to evaluate goodwill for impairment from five reporting units to four reporting units. Previously, the Americas and C&W Services reporting units comprised the Americas segment, the EMEA reporting unit comprised the EMEA segment, and the APAC and Greater China reporting units comprised the APAC segment. The Company no longer identifies Greater China as a separate RU for purposes of assessing goodwill for impairment, as a result of changes in management and reporting structures, including a change in our Chief Executive Officer in July 2023, and due to similarities in economic characteristics. Effective July 1, 2023, the Company’s reporting units consist of Americas, C&W Services, EMEA and APAC (including Greater China). In 2023,
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we performed our goodwill impairment evaluation over these four RUs, resulting in no impairment charges as the estimated fair value of each RU exceeded its carrying value.
For additional discussion on our goodwill impairment assessment, refer to Note 6: Goodwill and Other Intangible Assets of the Notes to the Consolidated Financial Statements.
Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities and operating loss and tax credit carry forwards. The carrying values of deferred tax assets and liabilities reflect the application of our income tax accounting policies and are based on management’s assumptions and estimates about future operating results and levels of taxable income, and judgments regarding the interpretation of the provisions of current accounting principles.
Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Considerations with respect to the realizability of deferred tax assets include the period of expiration of the deferred tax asset, historical earnings and projected future taxable income by jurisdiction as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Significant management judgment is required in determining the assumptions and estimates related to the amount and timing of future taxable income. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors.
Our future effective tax rate is sensitive to changes in the mix of our geographic earnings, changes in local statutory tax rates, changes in the valuation of deferred taxes, or changes in tax laws, regulations or accounting principles, and could be adversely affected by these items.
Items Affecting Comparability
When reading our financial statements and the information included in this Annual Report, it should be considered that we have experienced, and continue to experience, several material trends and uncertainties that have affected our financial condition and results of operations and could affect future performance. We believe that the following material trends and uncertainties are important to understand the variability of our historical earnings and cash flows and any potential future variability.
Macroeconomic Conditions
Our results of operations are significantly impacted by economic trends, government policies and the global and regional real estate markets. These include the following: overall economic activity, volatility of the financial markets, changes in interest rates, inflation, pressure on the global banking system, the impact of tax and regulatory policies, the cost and availability of credit, changes in employment rates, demand for commercial real estate, and the geopolitical environment.
Our diversified operating model helps to partially mitigate the negative effect of difficult market conditions on our margins as a substantial portion of our costs are variable compensation expenses, specifically commissions and bonuses paid to our professionals in our Leasing and Capital markets service lines. Nevertheless, ongoing adverse economic trends could pose significant risks to our operating performance and financial condition.
Acquisitions
Our results include the incremental impact of completed transactions from the date of acquisition, which may impact the comparability of our results on a year-over-year basis. Additionally, there is generally an adverse impact on net income for a period of time after the completion of an acquisition driven by transaction-related and integration expenses. We have historically used strategic and in-fill acquisitions, as well as joint ventures, to add new service capabilities, to increase our scale within existing capabilities and to expand our presence in new or existing geographic regions globally. We believe that strategic acquisitions and partnerships will increase revenue, provide cost synergies and generate incremental income in the long term.
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Seasonality
A significant portion of our revenue is seasonal, especially for service lines such as Leasing and Capital markets. This impacts the comparison of our financial condition and results of operations on a quarter-by-quarter basis. Generally, our industry is focused on completing transactions by calendar year-end with a high concentration of activity in the last quarter of the calendar year while certain expenses are recognized more evenly throughout the calendar year. Historically, our revenue and operating income typically tend to be lowest in the first quarter, and highest in the fourth quarter of each year. The Property, facilities and project management service line partially mitigates this intra-year seasonality, due to the recurring nature of this service line, which generates more stable revenues throughout the year.
International Operations
Our business consists of service lines operating in multiple regions inside and outside of the U.S. Our international operations expose us to global economic trends as well as foreign government tax, regulatory and policy measures.
Additionally, outside of the U.S., we generate earnings in other currencies and are subject to fluctuations relative to the USD. These currency fluctuations, most notably the Australian dollar, euro and British pound sterling, have positively and adversely affected our operating results measured in USD in the past and are likely to do so in the future. It can be difficult to compare period-over-period financial statements when the movement in currencies against the USD does not reflect trends in the local underlying business as reported in its local currency.
In order to assist our investors and improve comparability of results, we present the year-over-year changes in certain of our non-GAAP financial measures, such as Fee-based operating expenses and Adjusted EBITDA, in “local” currency. The local currency change represents the year-over-year change assuming no movement in foreign exchange rates from the prior year. We believe that this provides our management and investors with a better view of comparability and trends in the underlying operating business.
Key Performance Measures
We regularly review a number of metrics to evaluate our business, measure our progress and make strategic decisions. The measures include Segment operating expenses, Fee-based operating expenses, Adjusted EBITDA, Adjusted EBITDA margin and local currency. Certain of these metrics are non-GAAP measures currently utilized by management to assess performance, and we disclose these measures to investors to assist them in providing a meaningful understanding of our performance. See “Use of Non-GAAP Financial Measures” and “Results of Operations” below.
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Use of Non-GAAP Financial Measures
We have used the following measures, which are considered “non-GAAP financial measures” under SEC guidelines:
i.Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) and Adjusted EBITDA margin;
ii.Segment operating expenses and Fee-based operating expenses; and
iii.Local currency.
Our management principally uses these non-GAAP financial measures to evaluate operating performance, develop budgets and forecasts, improve comparability of results and assist our investors in analyzing the underlying performance of our business. These measures are not recognized measurements under GAAP. When analyzing our operating results, investors should use them in addition to, but not as an alternative for, the most directly comparable financial results calculated and presented in accordance with GAAP. Because the Company’s calculation of these non-GAAP financial measures may differ from other companies, our presentation of these measures may not be comparable to similarly titled measures of other companies.
The Company believes that these measures provide a more complete understanding of ongoing operations, enhance comparability of current results to prior periods and may be useful for investors to analyze our financial performance. The measures eliminate the impact of certain items that may obscure trends in the underlying performance of our business. The Company believes that they are useful to investors for the additional purposes described below.
Adjusted EBITDA and Adjusted EBITDA margin: We have determined Adjusted EBITDA to be our primary measure of segment profitability. We believe that investors find this measure useful in comparing our operating performance to that of other companies in our industry because these calculations generally eliminate unrealized loss on investments, net, integration and other costs related to merger, acquisition related costs and efficiency initiatives, cost savings initiatives, CEO transition costs, servicing liability fees and amortization, certain legal and compliance matters, and other non-recurring items. Adjusted EBITDA also excludes the effects of financings, income tax and the non-cash accounting effects of depreciation and intangible asset amortization. Adjusted EBITDA margin, a non-GAAP measure of profitability as a percent of revenue, is measured against service line fee revenue.
Segment operating expenses and Fee-based operating expenses: Consistent with GAAP, reimbursed costs for certain customer contracts are presented on a gross basis in both revenue and operating expenses for which the Company recognizes substantially no margin. Total costs and expenses include segment operating expenses as well as other expenses such as depreciation and amortization, integration and other costs related to merger, acquisition related costs and efficiency initiatives, cost savings initiatives, CEO transition costs, servicing liability fees and amortization, certain legal and compliance matters, and other non-recurring items. Segment operating expenses includes Fee-based operating expenses and Cost of gross contract reimbursables.
We believe Fee-based operating expenses more accurately reflects the costs we incur during the course of delivering services to our clients and is more consistent with how we manage our expense base and operating margins.
Local currency: In discussing our results, we refer to percentage changes in local currency. These metrics are calculated by holding foreign currency exchange rates constant in year-over-year comparisons. Management believes that this methodology provides investors with greater visibility into the performance of our business excluding the effect of foreign currency rate fluctuations.
Adjustments to U.S. GAAP Financial Measures Used to Calculate Non-GAAP Financial Measures
Unrealized loss on investments, net represents net unrealized losses on fair value investments during the years ended December 31, 2023 and 2022, primarily related to our investment in WeWork.
Integration and other costs related to merger reflects the non-cash amortization expense of certain merger related retention awards that will be amortized through 2026, and the non-cash amortization expense of merger related deferred rent and tenant incentives which will be amortized through 2028.
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Acquisition related costs and efficiency initiatives includes internal and external consulting costs incurred to implement certain distinct operating efficiency initiatives designed to realign our organization to be a more agile partner to our clients, which vary in frequency, amount and occurrence based on factors specific to each initiative. In addition, this includes certain direct costs incurred in connection with acquiring businesses.
Cost savings initiatives primarily reflects severance and other one-time employment-related separation costs related to 2023 actions to reduce headcount across select roles to help optimize our workforce given the current macroeconomic conditions and operating environment, as well as property lease rationalizations.
CEO transition costs reflects accelerated stock-based compensation expense associated with stock awards granted to John Forrester, the Company’s former Chief Executive Officer who stepped down from that position as of June 30, 2023, but who remained employed by the Company as a Strategic Advisor until December 31, 2023. The requisite service period under the applicable award agreements was satisfied upon Mr. Forrester’s retirement from the Company on December 31, 2023. In addition, this includes Mr. Forrester’s salary and bonus accruals for the second half of 2023. We believe the accelerated expense for these stock awards, as well as the salary and bonus accruals, are similar in nature to one-time severance benefits and are not normal, recurring operating expenses necessary to operate the business.
Servicing liability fees and amortization reflects the additional non-cash servicing liability fees accrued in connection with the A/R Securitization (as defined below) amendments during the years ended December 31, 2023 and 2022. The liability will be amortized through June 2026.
Legal and compliance matters includes estimated losses and settlements for certain legal matters which are not considered ordinary course legal matters given the infrequency of similar cases brought against the Company, complexity of the matter, nature of the remedies sought and/or our overall litigation strategy. We exclude such losses from the calculation of Adjusted EBITDA to improve the comparability of our operating results for the current period to prior and future periods.
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Results of Operations
In accordance with Item 303 of Regulation S-K, the Company has excluded the discussion of 2021 results in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as this discussion can be found in our 2022 Annual Report on Form 10-K filed with the SEC under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following table sets forth items derived from our Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 (in millions):
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change in USD | % Change in Local Currency | |||||||
| Revenue: | ||||||||||
| Property, facilities and project management | $ | 3,573.0 | $ | 3,481.1 | 3 | % | 3 | % | ||
| Leasing | 1,826.7 | 2,083.7 | (12) | % | (12) | % | ||||
| Capital markets | 695.0 | 1,187.8 | (41) | % | (41) | % | ||||
| Valuation and other | 436.7 | 495.5 | (12) | % | (11) | % | ||||
| Total service line fee revenue(1) | 6,531.4 | 7,248.1 | (10) | % | (10) | % | ||||
| Gross contract reimbursables(2) | 2,962.3 | 2,857.6 | 4 | % | 4 | % | ||||
| Total revenue | $ | 9,493.7 | $ | 10,105.7 | (6) | % | (6) | % | ||
| Costs and expenses: | ||||||||||
| Cost of services provided to clients | $ | 4,879.3 | $ | 5,295.9 | (8) | % | (8) | % | ||
| Cost of gross contract reimbursables | 2,962.3 | 2,857.6 | 4 | % | 4 | % | ||||
| Total costs of services | 7,841.6 | 8,153.5 | (4) | % | (4) | % | ||||
| Operating, administrative and other | 1,262.8 | 1,261.3 | 0 | % | 0 | % | ||||
| Depreciation and amortization | 145.6 | 146.9 | (1) | % | (1) | % | ||||
| Restructuring, impairment and related charges | 38.1 | 8.9 | n.m. | n.m. | ||||||
| Total costs and expenses | 9,288.1 | 9,570.6 | (3) | % | (3) | % | ||||
| Operating income | 205.6 | 535.1 | (62) | % | (62) | % | ||||
| Interest expense, net of interest income | (281.1) | (193.1) | 46 | % | 45 | % | ||||
| Earnings from equity method investments | 58.1 | 85.0 | (32) | % | (31) | % | ||||
| Other expense, net | (12.6) | (89.0) | (86) | % | (86) | % | ||||
| (Loss) earnings before income taxes | (30.0) | 338.0 | n.m. | n.m. | ||||||
| Provision for income taxes | 5.4 | 141.6 | (96) | % | (96) | % | ||||
| Net (loss) income | $ | (35.4) | $ | 196.4 | n.m. | n.m. | ||||
| Net (loss) income margin | (0.4) | % | 1.9 | % | ||||||
| Adjusted EBITDA | $ | 570.1 | $ | 898.8 | (37) | % | (37) | % | ||
| Adjusted EBITDA margin(3) | 8.7 | % | 12.4 | % |
n.m. not meaningful
(1) Service line fee revenue represents revenue for fees generated from each of our service lines.
(2) Gross contract reimbursables reflects revenue from clients which have substantially no margin.
(3) Adjusted EBITDA margin is measured against Total service line fee revenue.
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Adjusted EBITDA is calculated as follows (in millions):
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| Net (loss) income | $ | (35.4) | $ | 196.4 | |
| Add/(less): | |||||
| Depreciation and amortization | 145.6 | 146.9 | |||
| Interest expense, net of interest income | 281.1 | 193.1 | |||
| Provision for income taxes | 5.4 | 141.6 | |||
| Unrealized loss on investments, net | 27.8 | 84.2 | |||
| Integration and other costs related to merger | 11.2 | 14.0 | |||
| Pre-IPO stock-based compensation | — | 3.1 | |||
| Acquisition related costs and efficiency initiatives | 14.2 | 93.8 | |||
| Cost savings initiatives | 55.6 | — | |||
| CEO transition costs | 8.3 | — | |||
| Servicing liability fees and amortization | 11.7 | 7.9 | |||
| Legal and compliance matters | 23.0 | — | |||
| Other(1) | 21.6 | 17.8 | |||
| Adjusted EBITDA | $ | 570.1 | $ | 898.8 |
(1) For the year ended December 31, 2023, Other primarily reflects non-cash stock-based compensation expense associated with certain one-time retention awards, one-time consulting costs associated with certain legal entity reorganization projects, a loss on disposal of a business, and a one-time impairment of certain customer relationship intangible assets. For the year ended December 31, 2022, Other predominantly includes a loss of $13.8 million related to the disposal of operations in Russia, as well as one-time consulting costs associated with certain statutory reporting and legal entity reorganization projects.
Below is a summary of Total costs and expenses (in millions):
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| Americas Fee-based operating expenses | $ | 4,237.5 | $ | 4,650.3 | |
| EMEA Fee-based operating expenses | 779.3 | 827.6 | |||
| APAC Fee-based operating expenses | 1,008.9 | 962.5 | |||
| Cost of gross contract reimbursables | 2,962.3 | 2,857.6 | |||
| Segment operating expenses: | 8,988.0 | 9,298.0 | |||
| Depreciation and amortization | 145.6 | 146.9 | |||
| Integration and other costs related to merger | 11.2 | 14.0 | |||
| Pre-IPO stock-based compensation | — | 3.1 | |||
| Acquisition related costs and efficiency initiatives | 14.2 | 93.8 | |||
| Cost savings initiatives | 55.6 | — | |||
| CEO transition costs | 8.3 | — | |||
| Servicing liability fees and amortization | 11.7 | 7.9 | |||
| Legal and compliance matters | 23.0 | — | |||
| Other, including foreign currency movements(1) | 30.5 | 6.9 | |||
| Total costs and expenses | $ | 9,288.1 | $ | 9,570.6 |
(1) For the year ended December 31, 2023, Other primarily reflects non-cash stock-based compensation expense associated with certain one-time retention awards, one-time consulting costs associated with certain legal entity reorganization projects, a one-time impairment of certain customer relationship intangible assets and the effects of movements in foreign currency. For the year ended December 31, 2022, Other includes one-time consulting costs associated with certain statutory reporting and legal entity reorganization projects, and the effects of movements in foreign currency.
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Year ended December 31, 2023 compared to year ended December 31, 2022
Revenue
Revenue of $9.5 billion decreased $612.0 million or 6% compared to the year ended December 31, 2022, primarily driven by the Americas which decreased 8%. This decline was principally driven by decreases in Leasing and Capital markets revenue of 12% and 41%, respectively, as a challenging macroeconomic environment and interest rate uncertainty continue to adversely affect commercial real estate transaction volumes and delay occupier decision making. Valuation and other also declined 12% as a result of lower activity in our valuation business, stemming from the slowdown in transactions. In addition, we experienced unfavorable movements in foreign currency of $23.4 million compared to the year ended December 31, 2022 as a result of a stronger USD in 2023. Partially offsetting these trends was the continued growth of our Property, facilities and project management service line, namely in our property management and facilities management businesses, and Gross contract reimbursables revenue, which were up 3% and 4%, respectively.
Costs of services
Costs of services of $7.8 billion decreased $311.9 million or 4% compared to the year ended December 31, 2022. Cost of services provided to clients decreased 8% principally driven by a $450.0 million decrease in commissions, as a result of lower brokerage revenue, offset by an increase of $50.0 million in sub-contractor costs. Cost of gross contract reimbursables increased 4% driven by the continued stability and growth in our Property, facilities and project management service line and cost inflation. Total costs of services as a percentage of total revenue were 83% for 2023 compared to 81% for 2022 due to business mix and cost inflation.
Operating, administrative and other
Operating, administrative and other expenses of $1.3 billion increased $1.5 million compared to the year ended December 31, 2022, principally driven by an increase in stock-based compensation expense of $15.4 million, primarily as a result of the accelerated expense associated with our 2023 CEO transition and new awards granted during 2023, and an increase of $23.0 million in technology and other miscellaneous costs, offset by a decrease of approximately $40.0 million in consulting expenses. Operating, administrative and other expenses as a percentage of total revenue were 13% for 2023 compared to 12% for 2022.
Restructuring, impairment and related charges
Restructuring, impairment and related charges of $38.1 million increased $29.2 million compared to the year ended December 31, 2022 as a result of cost savings initiatives actioned in 2023, including a reduction in headcount across select roles to help optimize our workforce given the current macroeconomic conditions and operating environment, as well as property lease rationalizations. This reflects an increase in severance and employment-related costs of $17.2 million, as well as an increase in impairment charges of $12.0 million.
Interest expense, net of interest income
Interest expense of $281.1 million increased $88.0 million or 46% compared to the year ended December 31, 2022, primarily related to an aggregate loss on debt extinguishment of $41.9 million, as well as $8.7 million of new transaction costs expensed in 2023 in connection with the refinancing of a portion of the borrowings under our 2018 Credit Agreement in both January and August 2023 (see Note 10: Long-Term Debt and Other Borrowings of the Notes to the Consolidated Financial Statements for further information). The increase in interest expense was also partially driven by higher variable interest rates on our Term Loans compared to 2022.
Earnings from equity method investments
Earnings from equity method investments of $58.1 million decreased $26.9 million compared to the year ended December 31, 2022, primarily due to a decline of $29.2 million in earnings recognized from our equity method investment in Cushman Wakefield Greystone LLC (the “Greystone JV”) due to lower transaction volumes as a result of tighter lending conditions given the volatility in interest rates.
Other expense, net
Other expense of $12.6 million decreased $76.4 million or 86% compared to the year ended December 31, 2022, principally driven by lower net unrealized losses on our fair value investments, primarily related to our investment in WeWork. In addition, the Company recognized a loss of $13.8 million in the first quarter of 2022 related to the disposal of our operations in Russia.
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Provision for income taxes
Provision for income taxes for the year ended December 31, 2023 was $5.4 million on a loss before income taxes of $30.0 million. For the year ended December 31, 2022, the provision for income taxes was $141.6 million on earnings before income taxes of $338.0 million. The negative effective tax rate for the year ended December 31, 2023 was principally driven by the increase in the valuation allowance the Company has placed on a portion of our deferred tax assets and permanent nondeductible items. Additionally, the decrease in income tax expense was driven by lower earnings, the utilization of net operating losses and foreign tax credits in 2023, and lower nondeductible losses related to unrealized losses on fair value investments.
Net (loss) income and Adjusted EBITDA
Net loss was $35.4 million compared to net income of $196.4 million for the year ended December 31, 2022. The decrease was principally driven by declines in our Leasing, Capital markets and Valuation and other service lines. An aggregate loss on debt extinguishment, estimated losses accrued during the current period related to certain legal and compliance matters (see Note 16: Commitments and Contingencies of the Notes to the Consolidated Financial Statements) and lower earnings from the Greystone JV also contributed to the year over year decline. These trends were partially offset by our cost savings initiatives.
Adjusted EBITDA of $570.1 million decreased $328.7 million or 37% compared to prior year, driven by the same factors impacting Net loss above, with the exception of the aggregate loss on debt extinguishment and estimated losses accrued during the current period related to certain legal and compliance matters. Adjusted EBITDA margin, measured against service line fee revenue, of 8.7% for the year ended December 31, 2023 decreased 367 basis points compared to 12.4% in the year ended December 31, 2022.
Segment Operations
We report our operations through the following segments: (1) Americas, (2) EMEA and (3) APAC. The Americas consists of operations located in the United States, Canada and key markets in Latin America. EMEA includes operations in the United Kingdom, France, Netherlands and other markets in Europe and the Middle East. APAC includes operations in Australia, Singapore, China and other markets in the Asia Pacific region.
For segment reporting, Service line fee revenue represents revenue for fees generated from each of our service lines. Gross contract reimbursables reflects revenue from clients which have substantially no margin. Our measure of segment profitability, Adjusted EBITDA, excludes the effects of financings, income taxes and depreciation and amortization, as well as unrealized loss on investments, net, integration and other costs related to merger, acquisition related costs and efficiency initiatives, cost savings initiatives, CEO transition costs, servicing liability fees and amortization, certain legal and compliance matters, and other non-recurring items.
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Americas Results
The following table summarizes our results of operations of our Americas operating segment for the years ended December 31, 2023 and 2022 (in millions):
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change in USD | % Change in Local Currency | |||||||
| Revenue: | ||||||||||
| Property, facilities and project management | $ | 2,494.7 | $ | 2,434.0 | 2 | % | 3 | % | ||
| Leasing | 1,420.9 | 1,669.7 | (15) | % | (15) | % | ||||
| Capital markets | 556.5 | 987.1 | (44) | % | (44) | % | ||||
| Valuation and other | 150.0 | 198.1 | (24) | % | (24) | % | ||||
| Total service line fee revenue(1) | 4,622.1 | 5,288.9 | (13) | % | (12) | % | ||||
| Gross contract reimbursables(2) | 2,506.9 | 2,462.1 | 2 | % | 2 | % | ||||
| Total revenue | $ | 7,129.0 | $ | 7,751.0 | (8) | % | (8) | % | ||
| Costs and expenses: | ||||||||||
| Americas Fee-based operating expenses | $ | 4,237.5 | $ | 4,650.3 | (9) | % | (9) | % | ||
| Cost of gross contract reimbursables | 2,506.9 | 2,462.1 | 2 | % | 2 | % | ||||
| Segment operating expenses | $ | 6,744.4 | $ | 7,112.4 | (5) | % | (5) | % | ||
| Net income | $ | 17.8 | $ | 202.6 | (91) | % | (92) | % | ||
| Adjusted EBITDA | $ | 429.6 | $ | 715.5 | (40) | % | (40) | % |
(1) Service line fee revenue represents revenue for fees generated from each of our service lines.
(2) Gross contract reimbursables reflects revenue from clients which have substantially no margin.
Americas: Year ended December 31, 2023 compared to year ended December 31, 2022
Americas revenue for 2023 was $7.1 billion, a decrease of $622.0 million or 8% from the prior year. This decline was principally driven by lower Leasing, Capital markets and Valuation and other revenue which were down 15%, 44% and 24%, respectively, due to a less constructive macroeconomic environment and continued interest rate uncertainty which resulted in lower transaction volumes. Partially offsetting these declines was growth in Property, facilities and project management revenue and Gross contract reimbursables of 2% and 2%, respectively.
Fee-based operating expenses of $4.2 billion decreased 9% principally due to lower commissions expense associated with lower brokerage revenue, as well as our cost savings initiatives. Fee-based operating expenses as a percentage of Total service line fee revenue was 92% in 2023 compared to 88% in 2022.
Adjusted EBITDA of $429.6 million decreased $285.9 million or 40%, primarily driven by declines in transactions-based revenue and a decline in earnings from the Greystone JV due to lower lending volumes. These trends were partially offset by our cost savings initiatives and growth in our Property, facilities and project management revenue.
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EMEA Results
The following table summarizes our results of operations of our EMEA operating segment for the years ended December 31, 2023 and 2022 (in millions):
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change in USD | % Change in Local Currency | |||||||
| Revenue: | ||||||||||
| Property, facilities and project management | $ | 371.4 | $ | 373.7 | (1) | % | (3) | % | ||
| Leasing | 229.6 | 233.9 | (2) | % | (5) | % | ||||
| Capital markets | 83.3 | 142.1 | (41) | % | (43) | % | ||||
| Valuation and other | 174.2 | 177.7 | (2) | % | (4) | % | ||||
| Total service line fee revenue(1) | 858.5 | 927.4 | (7) | % | (10) | % | ||||
| Gross contract reimbursables(2) | 115.2 | 102.7 | 12 | % | 9 | % | ||||
| Total revenue | $ | 973.7 | $ | 1,030.1 | (5) | % | (8) | % | ||
| Costs and expenses: | ||||||||||
| EMEA Fee-based operating expenses | $ | 779.3 | $ | 827.6 | (6) | % | (8) | % | ||
| Cost of gross contract reimbursables | 115.2 | 102.7 | 12 | % | 9 | % | ||||
| Segment operating expenses | $ | 894.5 | $ | 930.3 | (4) | % | (6) | % | ||
| Net loss | $ | (46.5) | $ | (24.7) | 88 | % | 58 | % | ||
| Adjusted EBITDA | $ | 77.4 | $ | 106.0 | (27) | % | (30) | % |
(1) Service line fee revenue represents revenue for fees generated from each of our service lines.
(2) Gross contract reimbursables reflects revenue from clients which have substantially no margin.
EMEA: Year ended December 31, 2023 compared to year ended December 31, 2022
EMEA revenue for 2023 was $1.0 billion, a decrease of $56.4 million or 5% from the prior year. Excluding the favorable impact of foreign currency of $23.2 million, EMEA revenue decreased 8% on a local currency basis. The decline was principally driven by lower Leasing and Capital markets revenue which were down 5% and 43%, respectively, on a local currency basis, due to a less constructive macroeconomic environment and continued interest rate uncertainty which resulted in lower transaction volumes. Partially offsetting these declines was growth in Gross contract reimbursables of 9% on a local currency basis.
Fee-based operating expenses of $779.3 million decreased 8% on a local currency basis principally due to lower employment costs associated with lower brokerage revenue, as well as our cost savings initiatives. Fee-based operating expenses as a percentage of Total service line fee revenue was 91% in 2023 compared to 89% in 2022.
Adjusted EBITDA of $77.4 million decreased $28.6 million or 27%, primarily driven by declines in transactions-based revenue. These trends were partially offset by our cost savings initiatives.
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APAC Results
The following table summarizes our results of operations of our APAC operating segment for the years ended December 31, 2023 and 2022 (in millions):
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change in USD | % Change in Local Currency | |||||||
| Revenue: | ||||||||||
| Property, facilities and project management | $ | 706.9 | $ | 673.4 | 5 | % | 6 | % | ||
| Leasing | 176.2 | 180.1 | (2) | % | 2 | % | ||||
| Capital markets | 55.2 | 58.6 | (6) | % | (2) | % | ||||
| Valuation and other | 112.5 | 119.7 | (6) | % | (2) | % | ||||
| Total service line fee revenue(1) | 1,050.8 | 1,031.8 | 2 | % | 4 | % | ||||
| Gross contract reimbursables(2) | 340.2 | 292.8 | 16 | % | 21 | % | ||||
| Total revenue | $ | 1,391.0 | $ | 1,324.6 | 5 | % | 8 | % | ||
| Costs and expenses: | ||||||||||
| APAC Fee-based operating expenses | $ | 1,008.9 | $ | 962.5 | 5 | % | 7 | % | ||
| Cost of gross contract reimbursables | 340.2 | 292.8 | 16 | % | 21 | % | ||||
| Segment operating expenses | $ | 1,349.1 | $ | 1,255.3 | 7 | % | 10 | % | ||
| Net (loss) income | $ | (6.7) | $ | 18.5 | n.m. | n.m. | ||||
| Adjusted EBITDA | $ | 63.1 | $ | 77.3 | (18) | % | (15) | % |
n.m. not meaningful
(1) Service line fee revenue represents revenue for fees generated from each of our service lines.
(2) Gross contract reimbursables reflects revenue from clients which have substantially no margin.
APAC: Year ended December 31, 2023 compared to year ended December 31, 2022
APAC revenue for 2023 was $1.4 billion, an increase of $66.4 million or 5% from the prior year. Excluding the unfavorable impact of foreign currency of $35.6 million, APAC revenue increased 8% on a local currency basis. Revenue growth in Property, facilities and project management and Gross contract reimbursables of 6% and 21%, respectively, on a local currency basis, driven by increases in facilities management and facilities services, was partially offset by declines in Capital markets and Valuation and other revenue of 2% and 2%, respectively, on a local currency basis, primarily due to a less constructive macroeconomic environment and continued interest rate uncertainty which resulted in lower transaction volumes.
Fee-based operating expenses of $1.0 billion increased 7% on a local currency basis principally due to higher variable costs associated with revenue growth in our Property, facilities and project management service line and higher employment costs, partially offset by our cost savings initiatives. Fee-based operating expenses as a percentage of Total service line fee revenue was 96% in 2023 compared to 93% in 2022.
Adjusted EBITDA of $63.1 million decreased $14.2 million or 18%, primarily driven by declines in transactions-based revenue, higher variable costs and employment costs, and government subsidies in the prior year. These trends were partially offset by our cost savings initiatives.
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Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity under our available credit facilities. Our primary uses of liquidity are operating expenses, acquisitions, investments and debt payments.
While macroeconomic challenges and uncertainty continue to be present, we believe that we have maintained sufficient liquidity to satisfy our working capital and other funding requirements, including capital expenditures, and expenditures for human capital and contractual obligations, with operating cash flow and cash on hand and, as necessary, borrowings under our revolving credit facility or funding from our A/R Securitization. We continually evaluate opportunities to obtain, retire or restructure our debt, credit facilities or financing arrangements for strategic reasons or to obtain additional financing to fund investments, operations and obligations to further strengthen our financial position.
We have historically relied on our operating cash flow to fund our working capital needs and ongoing capital expenditures on an annual basis. Our operating cash flow is seasonal—typically lowest in the first quarter of the year, when revenue is lowest, and greatest in the fourth quarter of the year, when revenue is highest. The seasonal nature of our operating cash flow can result in a mismatch with funding needs, which we manage using available cash on hand and, as necessary, borrowings under our revolving credit facility or funding from our A/R Securitization.
In the absence of a large strategic acquisition or other extraordinary events, we believe our cash on hand, cash flow from operations and availability under our revolving credit facility will be sufficient to meet our anticipated cash requirements for the foreseeable future, and at a minimum for the next 12 months. We may seek to take advantage of opportunities to refinance existing debt instruments, as we have done in the past, with new debt instruments at interest rates, maturities and terms we consider attractive.
As of December 31, 2023, the Company had $1.9 billion of liquidity, consisting of cash and cash equivalents of $0.8 billion and availability on our undrawn revolving credit facility of $1.1 billion.
As of December 31, 2023, the Company’s amounts outstanding under its Term Loans, 2028 Notes and 2031 Notes were $2.2 billion, $0.6 billion and $0.4 billion, respectively. Our level of indebtedness increases the possibility that we may be unable to pay the principal amount of our indebtedness and other obligations when due. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, or joint ventures or for other purposes, subject to the restrictions contained in the agreements governing our indebtedness. If we incur additional indebtedness, the risks associated with our leverage, including our ability to service our debt, would increase. See “Risk Factors” included in Item 1A. Despite our current indebtedness levels, we and our subsidiaries may still be able to incur more debt, which could further exacerbate the risks associated with our leverage. During 2023, the Company extended the maturity date of the majority of our Term Loans to January 2030. Subsequent to these refinancings, $192.9 million of our total borrowings remains due in 2025; all other borrowings are due between 2027 and 2031.
As a professional services firm, funding our operating activities is not capital intensive. Total capital expenditures for the year ended December 31, 2023 were $51.0 million.
Off-Balance Sheet Arrangements
The Company is party to an off-balance sheet revolving accounts receivables securitization program, which we have amended periodically (the “A/R Securitization”), whereby we continuously sell eligible trade receivables to an unaffiliated financial institution. Receivables are derecognized from our balance sheet upon sale, for which we receive cash payment and record a deferred purchase price receivable which is realized after collection of the underlying receivables. This program also provides funding from a committed purchaser against receivables sold into the program with a maximum facility limit of $200.0 million. As of December 31, 2023, the Company had aggregate capital outstanding under this facility of $100.0 million. This amount was repaid in full in January 2024. The A/R Securitization expires on June 19, 2026, unless extended or an earlier termination event occurs. Refer to Note 19: Accounts Receivable Securitization of the Notes to the Consolidated Financial Statements for further information.
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Contractual Obligations and Other Commitments
Debt obligations. As of December 31, 2023, the Company elected to use an annual rate equal to (i) 1-month Term SOFR, plus 0.11% (which sum is subject to a minimum floor of 0.0%), plus 2.75% for the $192.9 million remaining aggregate principal amount of the term loan due August 2025 (the “2025 Tranche”), (ii) 1-month Term SOFR, plus 0.10% (which sum is subject to a minimum floor of 0.50%), plus 3.25% for the $1.0 billion term loan due January 2030 (the “2030 Tranche-1”) and (iii) 1-month Term SOFR (subject to a minimum floor of 0.50%), plus 4.00% for the $1.0 billion term loan due January 2030 (the “2030 Tranche-2”) (the 2025 Tranche, the 2030 Tranche-1, and the 2030 Tranche-2 together make up our current Term Loans). Because the 2018 Credit Agreement bears interest at a variable interest rate, the amount of expected future annual interest payments cannot be determined. Our 2028 Notes bear interest at a rate of 6.75% per annum and expected annual interest payments would be approximately $43.9 million until the notes mature in May 2028. Our 2031 Notes bear interest at a rate of 8.88% per annum and expected annual interest payments would be approximately $35.5 million until the notes mature in September 2031.
The 2018 Credit Agreement requires quarterly principal payments equal to 0.25% of the aggregate principal amount of outstanding borrowings under the 2030 Tranche-1, including any incremental borrowings, which commenced in September 2023. Commencing in March 2024, the 2018 Credit Agreement will require quarterly principal payments equal to 0.25% of the aggregate principal amount of outstanding borrowings under the 2030 Tranche-2, including any incremental borrowings. All required principal payments under the 2025 Tranche have been satisfied until maturity. Refer to Note 10: Long-Term Debt and Other Borrowings and Note 9: Derivative Financial Instruments and Hedging Activities of the Notes to the Consolidated Financial Statements for further discussion.
Lease obligations. Our lease obligations primarily consist of operating leases of office space in various buildings for our own use. As of December 31, 2023, the Company had operating lease obligations of $489.8 million, with $130.4 million due within 12 months. Refer to Note 15: Leases of the Notes to the Consolidated Financial Statements for further discussion.
Defined benefit plan obligations. Benefits to be paid out by our defined benefit plans will be funded from the assets held by these plans. In 2022, the trustees for two of our defined benefit plans in the U.K. purchased a bulk annuity insurance policy, under which the insurer is committed to pay the plans’ cash flows intended to match the benefit payments under those plans. We have historically funded pension costs as actuarially determined and as applicable laws and regulations require. Refer to Note 11: Employee Benefits of the Notes to the Consolidated Financial Statements for further discussion.
Deferred and contingent earn-out obligations. Our material cash requirements require long-term liquidity to facilitate the payment of obligations related to acquisitions. Acquisitions are often structured with deferred and/or contingent payments in future periods that are subject to the passage of time, achievement of certain performance metrics and/or other conditions. As of December 31, 2023, the maximum potential payment for earn-outs was $28.6 million, subject to the achievement of certain performance conditions. The final amount of related payments cannot be determined due to their nature as estimates or outcomes having connection to future events. As of December 31, 2023, we had accrued total deferred consideration and contingent earn-outs payable of $13.8 million in Accounts payable and accrued expenses and $27.0 million in Other non-current liabilities in the accompanying Consolidated Balance Sheets.
Income tax liabilities. As of December 31, 2023, our current and non-current tax liabilities, including interest and penalties, totaled $48.5 million. Of this amount, we can reasonably estimate that $20.8 million will require cash settlement in less than one year. We are unable to reasonably estimate the timing of the effective settlement of tax positions for the remaining $27.7 million.
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Historical Cash Flows
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| Cash Flow Summary | 2023 | 2022 | |||
| Net cash provided by operating activities | $ | 152.2 | $ | 49.1 | |
| Net cash provided by (used in) investing activities | 48.9 | (120.7) | |||
| Net cash used in financing activities | (120.8) | (79.3) | |||
| Effects of exchange rate fluctuations on cash, cash equivalents and restricted cash | 1.9 | (20.4) | |||
| Total change in cash, cash equivalents and restricted cash | $ | 82.2 | $ | (171.3) |
Operating Activities
We generated $152.2 million of cash from operating activities during the year ended December 31, 2023, an increase of $103.1 million compared to the year ended December 31, 2022. For the year ended December 31, 2023, we used net working capital for operations of $124.5 million, a decrease of $414.3 million compared to the year ended December 31, 2022. The reduction in our use of net working capital was principally driven by decreases in trade receivables and contract assets as a result of brokerage revenue declines, offset by lower commission, bonus accruals and accounts payable and accrued expenses.
Investing Activities
We generated $48.9 million in cash for investing activities during the year ended December 31, 2023, which primarily reflects a $100.0 million net draw on the investment limit under our A/R Securitization, offset by capital expenditures of $51.0 million and investments in equity securities of $6.9 million. Cash used in investing activity during the year ended December 31, 2022 primarily reflects our capital expenditures of $50.7 million, acquisitions of $32.8 million and investments in equity securities of $26.4 million.
Financing Activities
We used $120.8 million in cash for financing activities during the year ended December 31, 2023, an increase of $41.5 million from the prior year primarily driven by debt issuance costs of $65.1 million associated with the refinancing of a portion of the borrowings under our 2018 Credit Agreement in both January and August 2023 and higher deferred and contingent consideration payments, partially offset by lower net settlement of equity awards for payment of employee related taxes.