BGC Partners, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing identifies the registrant as BGC Partners, Inc. (not BGC Group, Inc.). Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
BGC is a global brokerage and financial-services company with two segments: Financial Services and Real Estate Services, which includes Newmark Grubb Knight Frank (NGKF). Its activities include brokerage, transaction execution and clearing, market data and technology, and commercial real estate services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $436.2 | $404.2 | $1,298.2 | $1,323.7 |
| Income before taxes | $29.9 | $42.7 | $56.1 | $264.6 |
| Consolidated net income | $11.1 | $32.0 | $32.9 | $172.1 |
| Net income available to common stockholders | $7.2 | $25.3 | $22.8 | $66.8 |
| Basic / diluted EPS | $0.03 / $0.03 | $0.12 / $0.11 | $0.10 / $0.10 | $0.36 / $0.35 |
| Operating cash flow | Not provided separately for quarter | Not provided separately for quarter | $80.8 | $102.6 |
- Q3 revenue increased 7.9% year over year, while pretax income fell 29.8%; pretax margin was approximately 6.9%, versus 10.6%.
- Nine-month revenue declined 1.9%. Pretax margin was approximately 4.3%, versus 20.0%; the comparison is heavily affected by the $723.1 million eSpeed divestiture gain recorded in 2013.
- Q3 total compensation and employee benefits rose to $323.2 million from $269.0 million, including a $47.3 million expense for granting exchangeability on partnership units. Nine-month total compensation declined to $916.5 million from $1,377.6 million, primarily reflecting prior-year restructuring and employee-loan reserve charges.
- Nine-month operating cash flow was $80.8 million. Investing activities used $135.0 million and financing activities used $249.2 million; cash and cash equivalents fell $305.9 million to $411.1 million.
- At September 30, 2014, total assets were $2,683.8 million and total equity was $640.8 million. Notes payable and collateralized borrowings were $410.3 million, including $150 million of 8.75% convertible notes due April 2015, $160 million principal of 4.50% convertible notes due July 2016, and $112.5 million principal of 8.125% senior notes due 2042.
- Management-defined liquidity—cash, marketable securities and securities owned—was $624.7 million, down from $795.0 million at year-end 2013. The filing attributes the decrease mainly to $128.3 million of repurchases and redemptions and $45.3 million of acquisitions and equity-method investments.
- Cash dividends declared and paid were $0.12 per share in Q3 and $0.36 per share for the nine-month period.
Material changes versus prior comparable periods
- Q3 Financial Services revenue was $250.2 million, nearly flat year over year; Real Estate Services revenue rose 21.1% to $176.7 million. NGKF growth reflected Cornish & Carey, higher broker productivity and favorable real estate market conditions.
- Q3 product results were mixed: rates revenue fell 14.3% to $93.5 million and credit revenue fell 1.6% to $53.5 million; FX rose 18.7% to $56.2 million, while equities and other asset classes rose 24.6% to $43.4 million.
- Nine-month Financial Services revenue declined 10.3% to $797.4 million, partly due to the 2013 eSpeed sale and weaker rates, credit and FX activity. Real Estate Services revenue increased 17.7% to $472.8 million.
- Other income included $45.9 million in Q3 and $45.3 million for nine months from the NASDAQ OMX earn-out and related mark-to-market movements and/or hedging. The comparable 2013 periods included $31.9 million; 2013 nine-month results also included the $723.1 million eSpeed sale gain.
- The 2013 nine-month period also included substantial restructuring-related compensation charges, including a $304.1 million partnership restructuring charge and a $160.5 million reserve on employee loans. These unusual items make year-over-year expense and earnings comparisons less representative of recurring performance.
Outlook, commentary, risks and unusual items
- Management said it expected positive momentum to continue in Q4 2014, citing real estate growth, electronic brokerage gains and expense reduction. It provided no quantified earnings or revenue guidance.
- Management described subdued rates and credit activity as near-term headwinds, associated with low volatility, accommodative central-bank policies and increased bank capital requirements. It expected improved derivatives volumes as regulatory requirements became clearer and highlighted technology-based trading as a potential growth and profitability driver.
- Management reported approximately $624.7 million of liquidity and expected to receive more than $500 million in NASDAQ OMX shares over time. It said funds could support acquisitions, debt repayment, repurchases and the regular dividend.
- On October 22, 2014, BGC commenced a fully financed tender offer for the GFI Group shares it did not own, at $5.25 per share, valuing the offer at approximately $675 million. BGC held about 13.5% of GFI at September 30. The offer was subject to conditions and could increase indebtedness; completion and expected synergies were not assured. A $350 million, 364-day bridge facility commitment was disclosed as a subsequent event.
- Material risks include market-volume and volatility shifts; regulatory, clearing and capital requirements; counterparty, settlement and unmatched-principal exposures; foreign-exchange, investment and liquidity risks; technology and cybersecurity disruptions; acquisition integration and financing; and dependence on Cantor-related arrangements.
- Legal matters include ongoing New Jersey litigation brought by Tullett. A separate 2014 FINRA arbitration resulted in damages that BGC said it had paid and would not have a material financial effect. The filing states that management could not estimate possible losses beyond recorded accruals and disclosed amounts, while believing pending matters would not materially adversely affect the company as a whole.
- The company reported $1.7 million of contingent liability under letters of credit. It also disclosed clearinghouse and exchange guarantees whose potential liability was not quantifiable, although management considered payment remote. Regulated subsidiaries held $333.0 million of net assets, with regulatory net capital $165.7 million above aggregate requirements.
- Disclosure controls and procedures were assessed as effective as of September 30, 2014; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Reconcile reported earnings to recurring results, especially the NASDAQ OMX earn-out gains and the prior-year eSpeed divestiture and restructuring charges.
- Track the GFI tender offer’s outcome, financing, resulting leverage and integration economics; confirm the bridge facility’s terms and any subsequent debt issuance.
- Assess liquidity quality and cash conversion, including the large matched-trade receivables and payables, working-capital movements and declining cash balance.
- Monitor the April 2015 maturity of the $150 million 8.75% convertible notes and the company’s plans for repayment, refinancing or conversion.
- Evaluate whether NGKF and electronic brokerage growth can offset persistent weakness in rates and credit, while accounting for acquisition-related costs and compensation.
- Review the Tullett litigation, regulatory exposures, Cantor-related transactions and contingent guarantees for changes in potential financial impact.