BGC Partners, Inc. — 2013 Form 10-K summary
Reporting period and identity: The filing is BGC Partners, Inc.’s annual report for the fiscal year ended December 31, 2013, filed February 28, 2014. The request identifies BGC Group, Inc. and “2013 Q4”; the filing itself names BGC Partners, Inc. and covers the full year, with unaudited fourth-quarter results included.
Business context
BGC operates Financial Services, a global wholesale brokerage and trading-technology business, and Real Estate Services, the Newmark Grubb Knight Frank commercial real estate platform. On June 28, 2013, BGC sold its fully electronic on-the-run benchmark U.S. Treasury platform and related assets to NASDAQ OMX. BGC received $750 million cash and may earn up to 14.9 million NASDAQ OMX shares over 15 years, subject to revenue conditions.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $2,498.1 million | $1,767.0 million |
| Brokerage revenue | $1,512.2 million | $1,512.2 million |
| Income before taxes | $265.9 million | $55.7 million |
| Consolidated net income | $173.8 million | $35.5 million |
| Net income available to common stockholders | $70.9 million; $0.37 basic EPS, $0.36 diluted | $23.9 million; $0.16 basic and diluted EPS |
| Operating cash flow | $166.4 million | $171.2 million |
| Cash and cash equivalents at year-end | $716.9 million | $388.4 million |
| Cash position (company-defined) | $795.0 million | $420.4 million |
| Notes payable and collateralized borrowings, carrying value | $408.4 million | $451.4 million |
The 2013 revenue and pretax-income increases chiefly reflect the $723.1 million gain on the NASDAQ OMX divestiture; the gain was not recurring operating revenue. Another $39.5 million of earn-out and related hedging revenue was recognized. Total expenses were $2,232.2 million, including approximately $465 million of non-cash compensation charges associated with the Global Partnership Restructuring Program. Annual pretax margin was 10.6%, substantially affected by the divestiture gain.
Fourth quarter: Revenue was $426.6 million versus $482.2 million in Q4 2012. Pretax income was $1.3 million versus $28.8 million; net income available to common stockholders was $4.1 million versus $14.2 million. The filing’s Q4 results are unaudited.
Investing activities provided $526.8 million of cash, primarily reflecting divestiture proceeds; financing activities used $363.3 million, including dividends, distributions, and debt repayments. BGC reported $250 million invested in a Cantor-arranged asset-backed commercial paper program at year-end. Cash available at regulated subsidiaries is subject to regulatory restrictions; regulated subsidiaries held $330.5 million in net assets and had $155.6 million of regulatory capital above requirements.
Changes versus the prior comparable period
- Full-year revenue rose 41.4%, but brokerage revenue was essentially flat. Financial Services revenue declined 4.7% to $1,164.2 million; segment pretax income fell 5.0% to $203.6 million.
- Real Estate Services revenue increased 27.0% to $577.2 million and segment pretax income rose to $45.6 million from $22.9 million, reflecting acquisitions, integration progress, and organic growth.
- Financial brokerage trends were mixed: rates revenue fell 7.6% to $491.7 million, credit fell 14.1% to $244.5 million, FX rose 2.0% to $212.1 million, and equities and other asset classes declined 3.4% to $150.7 million. Real estate brokerage revenue increased 24.8% to $413.0 million.
- Cash and cash equivalents increased by $328.5 million. Carrying value of notes and collateralized borrowings decreased, including after repayment of collateralized borrowings.
- The partnership restructuring redeemed or exchanged approximately 76 million units for approximately 44 million Class A shares, including about 41 million restricted shares. Management said the actions reduced fully diluted share count by approximately 32 million shares.
Outlook, commentary, risks and unusual items
- Management reported challenging Financial Services market conditions, attributing lower industry activity to subdued volatility, central-bank quantitative easing, reduced trading by large banks, and higher capital requirements. It expected improved derivatives volumes as regulations became clearer, while noting early SEF volumes were not yet representative.
- Management said it had reduced annualized non-compensation expenses by approximately $60 million by year-end 2013, against a target of at least $100 million in annualized overall expense reductions by the end of 2014. It anticipated maintaining the $0.12 quarterly dividend for the foreseeable future; future dividends remain at the board’s discretion.
- BGC began operating its Swap Execution Facility in October 2013; mandatory execution requirements were scheduled to phase in during 2014. ELX began compliant swap and swap-futures trading in Q4 2013. The filing describes expected growth, not guaranteed results.
- After year-end, BGC announced an agreement to acquire Cornish & Carey Commercial and completed its acquisition of HEAT Energy Group. These are subsequent events, not 2013 operating results.
- Principal risks include trading-volume and volatility sensitivity, regulatory change and capital requirements, competition and pricing pressure, counterparty and unmatched-principal exposure, cybersecurity and operational disruptions, foreign-exchange movements, and dependence on brokers and key personnel. Cantor’s control, related-party arrangements, clearing relationships, and potential conflicts are also material considerations.
- Litigation includes Tullett-related employment and competition disputes, including a pending FINRA arbitration with claims for substantial damages and a New Jersey state action scheduled for trial in 2014. Management said it could not estimate losses beyond recorded accruals and believed pending matters would not materially affect the company as a whole. A separate patent dispute was settled in February 2014 for a non-material payment.
- The company reported an unqualified audit opinion on its financial statements and internal controls. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2013.
Most important facts for investors to verify
- Separate recurring operating performance from the $723.1 million divestiture gain, the $39.5 million earn-out-related revenue, and the approximately $465 million restructuring compensation charges.
- Review Q4 performance and segment trends, particularly the decline in Financial Services and the growth and margins of Real Estate Services.
- Assess cash availability after regulatory restrictions, the quality and liquidity of the $250 million related-party commercial paper investment, and the company’s intended use of divestiture proceeds.
- Track debt maturities and servicing costs, including the $150 million 8.75% convertible notes due 2015, $160 million 4.50% convertible notes due 2016, and $112.5 million 8.125% senior notes due 2042.
- Monitor share issuance, conversion and dilution exposure, partnership-unit awards and exchanges, repurchases, and Cantor’s voting control.
- Follow the Tullett disputes, regulatory implementation and SEF/ELX activity, and the integration and performance of acquisitions announced or completed after year-end.