BGC Group, Inc. annual report, FY2014

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Business context and reporting period

The filing is BGC Partners, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, filed March 2, 2015. Although the request identifies BGC Group, Inc. and 2014 Q4, the filing names BGC Partners, Inc. and reports full-year results, with unaudited fourth-quarter data. The company operates Financial Services brokerage and technology businesses and Real Estate Services through Newmark Grubb Knight Frank.

Financial performance and position

  • Full-year revenue: $1.787 billion, up 2.4% from $1.745 billion in 2013. Brokerage revenue was $1.562 billion, up 3.3%.
  • Profit: GAAP pretax loss was $3.2 million versus pretax income of $265.9 million in 2013; 2013 included a $723.1 million gain on the eSpeed divestiture. Consolidated net loss was $3.8 million, while net income available to common stockholders was $4.1 million, or $0.02 per diluted share. Segment pretax income was $233.3 million in Financial Services and $69.1 million in Real Estate Services; corporate items recorded a $305.6 million pretax loss.
  • Fourth quarter: Revenue was $489.3 million versus $421.3 million in Q4 2013. The quarter recorded a $59.3 million pretax loss and an $18.7 million net loss available to common stockholders, compared with respective income of $1.3 million and $4.1 million a year earlier.
  • Cash flow: Operating cash flow was $183.5 million, investing cash outflow was $194.3 million, and financing cash outflow was $53.2 million. Cash and cash equivalents declined $68.6 million to $648.3 million.
  • Liquidity and debt: Management-defined liquidity—cash, marketable securities and securities owned—was $825.5 million, up from $795.0 million. Debt carrying value was $706.7 million, including $150 million of related-party notes; fixed-rate debt outstanding was also reported as $706.7 million. The company reported BBB- ratings with stable outlooks from Fitch and S&P.
  • Margins and business mix: Total expenses were 102.7% of revenue, compared with 127.9% in 2013. Financial Services generated $1.044 billion of revenue, down 7.1%, while Real Estate Services generated $708.8 million, up 22.8%. Full-year brokerage revenue from fully electronic trading was $89.5 million, down from $105.1 million; electronic, market-data and software revenue excluding eSpeed was reported separately at $99.0 million, up 22.7%.
  • Distributions and capital returns: The company declared $0.48 per share in dividends for 2014. It repurchased 13.6 million Class A shares for $100.3 million and redeemed or repurchased partnership interests as part of total share and unit activity costing approximately $139.9 million.

Material changes versus the prior comparable period

  • Revenue growth was modest overall, but segment results diverged: Financial Services weakened amid lower rates and credit activity, while Real Estate Services expanded through acquisitions and brokerage growth.
  • Rates brokerage revenue fell 18.3% to $401.6 million; credit fell 7.6% to $225.9 million. Foreign exchange rose 1.4% to $215.2 million, and equities and other asset classes rose 17.0% to $176.3 million.
  • Real Estate brokerage revenue increased 31.7%; reported segment growth also reflected Cornish & Carey and other acquisitions. Management services revenue was essentially flat at $163.2 million.
  • Expenses fell $397.3 million year over year, principally because 2013 included approximately $465 million of charges related to the Global Partnership Restructuring Program. In 2014, other expenses rose $50.0 million, including broker-hiring and litigation-related costs.
  • Debt increased from $408.4 million to $706.7 million after issuance of $300 million of 5.375% senior notes in December 2014. The company said the issuance was in anticipation of the GFI acquisition.

Outlook, commentary, risks and unusual items

  • GFI acquisition: After year-end, BGC completed its tender offer for approximately 54.6 million GFI shares at $6.10 each. Together with shares already owned, BGC held approximately 56.3% of GFI; payment of about $332.8 million was expected March 3, 2015. Management projected at least $50 million in annual savings by the end of the first year, with further savings thereafter. These are forward-looking expectations, not reported results.
  • Other growth plans: Management cited planned integration and investment, acquisitions, hiring, and expansion of electronic trading. It expected to receive roughly $625 million in NASDAQ OMX shares over approximately 13 years, subject to transaction terms and conditions. No specific GAAP earnings or revenue guidance is provided; management says its outlook focuses on distributable-earnings measures.
  • Unusual and legal items: The company accrued a $100 million settlement with Tullett resolving ten disputes; it expected to pay the amount from existing cash. A one-year reciprocal restriction on hiring senior employees also applies. The filing says other legal matters and regulatory proceedings remain, and management could not estimate possible losses beyond recorded accruals.
  • Market and regulatory risks: Management attributed weak rates and credit activity to low volatility and interest rates, central-bank policies and bank capital rules. Risks also include market-volume and real-estate cycles, competition and pricing pressure, regulatory capital and liquidity constraints, counterparty and unmatched-principal exposure, cybersecurity and operational disruptions, and foreign-exchange movements.
  • Governance and funding: Cantor controlled approximately 65.6% of voting power at year-end. BGC is a holding company dependent on subsidiary distributions, which may be restricted by regulation or agreements. The 8.75% convertible notes, with $150 million principal, matured April 15, 2015, creating a near-term refinancing or repayment consideration.
  • Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Cornish & Carey was excluded from management’s 2014 control assessment and the auditor’s control audit; it represented 2.6% of year-end assets and 3.5% of 2014 revenue.

Most important facts for investors to verify

  1. Reconcile the $4.1 million available to common stockholders with the $3.8 million consolidated net loss, including noncontrolling-interest allocations and the diluted EPS calculation.
  2. Assess recurring earnings and cash generation apart from the NASDAQ OMX earn-out, litigation settlement, acquisition effects and partnership-restructuring charges; review management’s non-GAAP distributable-earnings definitions.
  3. Confirm the funding and completed payment for GFI, post-acquisition debt and liquidity, actual integration costs, and whether projected savings and revenue benefits are achieved.
  4. Review the maturity and resolution of the $150 million 8.75% convertible notes due April 2015, as well as remaining debt service and refinancing needs.
  5. Evaluate liquidity quality and availability: the $825.5 million measure includes marketable securities and securities owned, and the company reported $93.1 million of GFI shares and $47.2 million of NASDAQ OMX shares within marketable securities.
  6. Track the Tullett settlement payments, remaining litigation and regulatory remediation, and any impacts on cash, hiring or operations.