BGC Partners, Inc. — Form 10-Q Summary
Entity and period: The supplied filing is for BGC Partners, Inc. (not BGC Group, Inc.), for the quarter and nine months ended September 30, 2015. The unaudited results cover Financial Services and Real Estate Services; GFI results were consolidated from March 2, 2015.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $685.3 million | $436.2 million | $1,902.0 million | $1,298.2 million |
| Income before income taxes | $83.3 million | $29.9 million | $136.9 million | $56.1 million |
| Consolidated net income | $54.6 million | $11.1 million | $95.8 million | $32.9 million |
| Net income available to common stockholders | $38.4 million | $7.2 million | $61.8 million | $22.8 million |
| Basic / diluted EPS | $0.15 / $0.15 | $0.03 / $0.03 | $0.26 / $0.25 | $0.10 / $0.10 |
- Q3 pretax margin was 12.2% versus 6.9%; nine-month pretax margin was 7.2% versus 4.3%. Compensation and employee benefits were 71.2% of Q3 revenue, compared with 74.1% a year earlier.
- Revenue growth reflected GFI and other acquisitions, as well as organic growth. Q3 brokerage revenue rose 55.5%; Real Estate Services revenue increased 55.1%, and Financial Services revenue rose 61.2%.
- Cash flow, nine months: Operating cash flow was $126.6 million, versus $80.8 million; investing cash outflow was $215.5 million, including $170.8 million for acquisitions; financing cash outflow was $149.6 million. Cash and cash equivalents declined $223.9 million to $424.4 million.
- Liquidity: Management-defined liquidity was $513.9 million at September 30, down from $825.5 million at December 31, 2014. This measure comprises cash, securities owned and eligible marketable securities; it excludes $54.7 million of securities lent.
- Debt: Notes payable and collateralized borrowings were $841.0 million, plus $75.0 million under GFI’s short-term credit agreement at quarter-end. The $75.0 million was repaid October 2. Total liabilities were $3.08 billion; total assets were $4.12 billion.
- Dividends declared and paid were $0.14 per share for Q3 and $0.40 per share for the first nine months. Class A shares outstanding increased to 216.0 million from 185.1 million at year-end, in part due to conversion of $150 million of 8.75% notes into 24.0 million shares.
Material changes and unusual items
- BGC acquired a controlling interest in GFI, reaching approximately 67% ownership, and recorded $436.1 million of GFI-related goodwill. GFI contributed $167.5 million of Q3 revenue and $404.4 million for the period since acquisition.
- Real Estate Services acquisitions included ARA, CFI and Excess Space; nine-month acquisition consideration for that segment was approximately $137.1 million, with $124.2 million of goodwill recorded.
- Other income included significant Nasdaq earn-out valuation effects: Q3 included $52.9 million from recognition of the earn-out and related hedges; nine-month results also included a $29.0 million realized gain on previously held GFI shares. These items make reported earnings less indicative of recurring operating performance.
- Q3 and nine-month fixed-asset impairment charges were $1.1 million and $18.8 million, respectively, largely related to redundant or retired assets identified following the GFI acquisition.
Outlook, risks and contingencies
- Management targeted at least $50 million in annualized Financial Services cost savings by Q1 2016 and a further $40 million by Q1 2017, totaling at least $90 million, excluding Trayport. Management expected a full BGC-GFI merger by the end of January 2016.
- Management forecast NGKF full-year 2015 revenue of at least $1 billion, an increase of at least 41% from 2014. It expected the Trayport sale to close before year-end 2015 and cited more than $700 million of future Nasdaq shares at the October 27 share price; neither prospective amount was reflected as available cash on the balance sheet.
- Management cited low rates and subdued volatility, lower activity in some rates and credit markets, evolving financial regulation, and competitive pressures as business risks. Results also depend on transaction volumes, real-estate market conditions, acquisitions and integration, and the ability to retain brokers and other staff.
- Liquidity and financing risks include acquisition funding needs, restricted capital at regulated subsidiaries, and refinancing costs. Ratings were BBB- with stable outlook from Fitch and S&P. A new $100 million Cantor borrowing was entered into after quarter-end; management expected to replace it with third-party financing.
- GFI shareholder litigation settlement terms contemplated a $10.75 million fund funded by insurance and other parties, with no contribution by BGC or GFI. BGC advanced $10.75 million to JPI under a secured note. The filing says other pending legal matters could not be reliably estimated, but management did not expect them collectively to have a material adverse effect. A separate derivative action was affirmed dismissed on October 13, 2015.
Most important facts for investors to verify
- How much reported earnings growth is recurring, given GFI consolidation, acquisition effects and Nasdaq-related gains?
- Whether the stated $90 million cost-savings plan, Trayport sale and GFI merger milestones were achieved, and on what terms.
- Liquidity after acquisitions, dividends and debt repayment, including the availability of cash held by foreign or regulated subsidiaries.
- Debt maturities, interest costs, refinancing plans and the impact of the GFI note guarantee and subsequent Cantor borrowing.
- Potential dilution from shares issued for the 8.75% note conversion, GFI merger consideration, partnership exchanges and equity awards.
- Whether NGKF’s revenue outlook and the expected value and timing of Nasdaq earn-out shares were realized.