01—Abstract
Summary
Summary of the 8-K filed November 12, 2003. Cited figures are marked; the original filing is the authoritative source.
CBRE Holding, Inc., parent of CB Richard Ellis Services, reported results for the third quarter and nine months ended September 30, 2003, in this Form 8-K furnishing its earnings press release (Exhibit 99.1).
Results were heavily distorted by the July 23, 2003 acquisition of Insignia Financial Group. Third-quarter revenue rose 48.6% year over year to $423.4 milliona, but the company swung to a net loss of $28.4 million from net income of $1.9 million a year earlier. The loss was driven by $31.3 million of amortization on acquired intangibles (largely purchased revenue backlog, which cannot generate reported net income) and $16.5 million of merger-related charges.
EBITDA fell 24.9% to $20.7 millionb, with EBITDA margin compressing to 4.9% from 9.7%. For the nine months, revenue grew 27.1% to $1.01 billion, while the net loss widened to $24.6 million from net income of $3.6 million. EBITDA declined 3.5% to $69.4 million, with $19.8 million of merger costs weighing on the period.
Balance sheet changes are substantial: total assets rose to $1.96 billionc from $1.34 billion at year-end 2002, goodwill and intangibles climbed to $947 million, and total liabilities reached $1.57 billion. The company also issued $200 million of 9 3/4% senior notes and, on October 14, 2003, combined its Tranche A and B term loans into a single facility with $300 million drawn.
Management stresses that EBITDA is a covenant-relevant and incentive-compensation metric, and that the amortization is non-cash and tied to acquired backlog rather than ongoing operations. Investors should view the headline deterioration as largely a function of acquisition accounting and one-time integration costs, but the higher leverage and bondholder focus make the trajectory of the post-merger EBITDA margin and debt service the key items to monitor.
02—Key points
Key Highlights
- Third-quarter revenue rose 48.6% to $423.4 million (from $284.9 million), reflecting the Insignia Financial Group acquisition effective July 23, 2003.
- Q3 net loss of $28.4 million versus net income of $1.9 million a year earlier, driven by $31.3 million of intangible amortization and $16.5 million of merger-related charges.
- Q3 EBITDA fell 24.9% to $20.7 million; EBITDA margin declined to 4.9% from 9.7%.
- Nine-month revenue increased 27.1% to $1.01 billion; nine-month net loss was $24.6 million versus net income of $3.6 million.
- Total assets grew to $1.96 billion from $1.34 billion at December 31, 2002, with goodwill and intangibles rising to $947.0 million.
- Total liabilities increased to $1.57 billion, including a new $200 million 9 3/4% senior notes issuance.
- On October 14, 2003, Tranche A and B term loans were refinanced into a single facility, with $300.0 million drawn.
03—Questions
Frequently Asked Questions
Why did CBRE report a net loss despite strong revenue growth?
The net loss was driven mainly by non-cash amortization of intangible assets acquired with Insignia, about $31.3 million in Q3, mostly relating to purchased revenue backlog. Merger-related charges of $16.5 million in the quarter added to the loss. Management notes that income cannot be recognized from purchased backlog, so this amortization offsets operating income generated from that backlog.
How did EBITDA perform, and why did it decline?
Q3 EBITDA was $20.7 million, down 24.9% from $27.6 million, and nine-month EBITDA was $69.4 million, down 3.5%. The decline was primarily caused by merger-related charges: $16.5 million in Q3 and $19.8 million for the nine months. EBITDA margin fell to 4.9% in Q3 from 9.7% a year earlier.
What did the Insignia acquisition add to the balance sheet?
Total assets rose to $1.96 billion at September 30, 2003, from $1.34 billion at year-end 2002. Goodwill and other intangible assets increased to $947.0 million from $668.2 million. Liabilities also rose, including $200.0 million of 9 3/4% senior notes issued during the period.
What debt refinancing occurred after the quarter ended?
On October 14, 2003, the company refinanced the amended and restated credit agreement entered into for the Insignia acquisition. The Tranche A and Tranche B facilities were combined into a single term loan facility, of which $300.0 million was drawn on that date.
Why does EBITDA matter for this company's investors?
Management states that EBITDA is used to evaluate line-of-business performance, is a significant component of employee incentive compensation, and is similar to measures underlying many of the company's debt covenants. EBITDA is a non-GAAP measure and is not a substitute for operating income or operating cash flow under GAAP, and the company's calculation may not be comparable to other firms.
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