BGC Partners, Inc. — Q2 2017 Form 10-Q
Business context and period. Unaudited quarterly filing for the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. BGC Partners operates Financial Services brokerage and technology businesses and commercial Real Estate Services (Newmark Knight Frank). The filing describes the business as transaction-driven and sensitive to market activity.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $737.8 million | $653.8 million | $1,445.2 million | $1,294.4 million |
| Income before taxes | $45.5 million | $29.2 million | $74.3 million | $48.6 million |
| Consolidated net income | $29.0 million | $18.7 million | $51.0 million | $33.2 million |
| Net income available to common stockholders | $21.8 million | $14.5 million | $40.0 million | $27.0 million |
| Basic / fully diluted EPS | $0.08 / $0.07 | $0.05 / $0.05 | $0.14 / $0.14 | $0.10 / $0.10 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $233.0 million | $(483.1) million |
Q2 revenue grew 12.8% year over year; pretax margin was approximately 6.2%, versus 4.5%. For the first half, revenue rose 11.6% and pretax margin was approximately 5.1%, versus 3.8%. The filing does not provide a single consolidated operating-margin measure.
- Q2 by segment: Financial Services revenue was $432.3 million and pretax income $84.8 million; Real Estate Services revenue was $295.3 million and pretax income $33.8 million. Corporate items generated a pretax loss of $73.1 million.
- Revenue mix and changes: Q2 Real Estate Services revenue increased 16.4%, with leasing and other services up 16.2% and real estate capital markets up 18.5%. Financial Services revenue increased 10.1%; rates grew 10.6% and FX 3.7%, while credit fell 8.5% and energy and commodities fell 15.4%. Equities, insurance and other asset classes rose 87.1%, largely reflecting Sunrise Brokers and Besso acquisitions.
- Expenses: Q2 total expenses increased 10.0% to $698.7 million. Compensation and employee benefits, including partnership allocations, totaled $504.3 million, about 68.4% of revenue, compared with 70.6% a year earlier. First-half compensation and benefits totaled $1,005.0 million.
- Cash flow: First-half operating cash flow was $233.0 million versus cash used of $483.1 million in 2016; operating working-capital movements, especially broker/customer receivables and payables, were substantial. Investing cash outflow was $92.0 million and financing cash outflow was $183.7 million. Cash and cash equivalents declined $40.0 million to $462.0 million.
- Liquidity and balance sheet: Management-defined liquidity was $569.7 million at June 30, down from $756.9 million at year-end 2016. Total assets were $5.18 billion versus $3.51 billion, reflecting, among other items, higher brokerage settlement receivables and payables. The company reported $530.7 million of net assets at regulated subsidiaries, with regulatory net capital $284.5 million above aggregate requirements.
- Debt: Notes payable and collateralized borrowings were $1,033.5 million, plus $150.0 million of short-term borrowings, for total reported debt of $1,183.5 million including collateralized borrowings. The balance-sheet line “notes payable and collateralized borrowings” was $990.9 million; the separate debt schedule reports $1,140.9 million including short-term borrowings. The $150.0 million Bank of America facility was fully drawn at 3.22%; senior notes include maturities in 2018, 2019, 2021 and 2042.
- Dividends and shares: Q2 dividend declared and paid was $0.18 per share, up from $0.16. First-half dividends paid to stockholders were $96.5 million. Class A shares outstanding were 251.1 million at June 30; fully diluted weighted-average shares were 451.9 million for Q2.
Management commentary, outlook and material items
- Management attributed growth to real-estate organic growth and productivity, acquisitions, and improved fully electronic rates brokerage. FENICS Q2 net revenue was $57.8 million, up 4.7%; management cited continued investment in electronic trading and expected further growth, but provided no quantified earnings or revenue guidance.
- Management said market conditions remained mixed: low rates and regulation weighed on some fixed-income activity; credit and energy/commodities were weaker, while real-estate activity and selected electronic and equity-related businesses improved. It cited Brexit uncertainty, regulatory changes, competition, market volatility and technology/cybersecurity risks.
- On July 18, 2017, BGC agreed to acquire Berkeley Point for $875 million, subject to adjustment and closing conditions, and planned a separate $100 million investment for about 27% of a commercial-real-estate-related partnership with Cantor. The company expected to fund the transactions with a combination of debt, existing financing and cash, and stated its intention to remain investment grade. The transactions were expected to close in 2017; completion, financing terms and projected synergies are uncertain.
- BGC had confidentially submitted a draft registration statement for a proposed IPO and possible later separation and distribution of Newmark. Timing and terms were undetermined. A July 2017 acquisition of a controlling interest in Spring11 was also disclosed as a subsequent event.
- Related-party and unusual items include a $150 million loan by BGC to a Cantor affiliate under a revolving facility, fully drawn at June 30 at 4.47%; and $95.3 million of securities loaned to Cantor/CF&Co. The filing also identifies $31.2 million remaining on a charitable contribution commitment.
- The company reported $58.4 million of acquisition contingent consideration. It also reported approximately $794 million of anticipated future Nasdaq shares from the Trayport sale, not recorded on the balance sheet, and estimated cash taxes related to that transaction of no more than $64 million. These amounts depend on future conditions and assumptions.
- Credit ratings were BBB- at Fitch with a stable outlook; S&P placed its BBB- ratings on CreditWatch Negative in July 2017. Management reported disclosure controls were effective and no material change in internal control during the quarter. Legal proceedings and regulatory examinations are ongoing; management said currently pending matters were not expected to have a material adverse effect, but could not estimate losses beyond recorded accruals and disclosed amounts.
Important facts for investors to verify
- Reconcile the differing debt presentations in the balance sheet, debt note and MD&A, and assess the 2018 note maturity, drawn credit facility and financing needed for the Berkeley Point transactions.
- Evaluate the quality and sustainability of reported operating cash flow, given large settlement-related working-capital movements, and the decline in management-defined liquidity.
- Separate organic growth from acquisition-related growth, particularly for equities/insurance and Real Estate Services; track segment margins and compensation, including partnership allocations and exchangeability charges.
- Confirm closing conditions, final purchase consideration, funding, credit-rating effects and realized benefits for Berkeley Point and the related Real Estate LP investment; monitor the proposed Newmark IPO/separation.
- Assess related-party exposure and governance, including the Cantor affiliate loan, securities lending, service arrangements, and Cantor’s voting control.
- Verify the assumptions behind future Nasdaq earn-out shares, contingent acquisition payments, tax estimates and legal/regulatory exposures.