BGC Partners, Inc. — Form 10-Q Summary
Issuer identification: The supplied filing is for BGC Partners, Inc., not BGC Group, Inc. It covers the quarter and six months ended June 30, 2014; statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
BGC Partners operates Financial Services brokerage and related businesses, and Real Estate Services through Newmark Grubb Knight Frank (NGKF). Its activities include brokerage, trading execution and processing, market data and software, and commercial real estate services. The filing compares Q2 and first-half 2014 with the corresponding 2013 periods.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $417.6 | $1,193.2 | $857.9 | $1,638.1 |
| Operating income before tax | $14.9 | $208.3 | $26.2 | $221.9 |
| Consolidated net income | $11.3 | $129.5 | $21.8 | $140.1 |
| Net income available to common stockholders | $7.6 | $34.5 | $15.6 | $41.5 |
| Basic / diluted EPS | $0.03 / $0.03 | $0.20 / $0.18 | $0.07 / $0.07 | $0.25 / $0.24 |
| Operating income before tax as a share of revenue | 3.6% | 17.5% | 3.0% | 13.5% |
- Revenue mix and segments: Q2 Financial Services revenue was $262.1, down 17.1% year over year, with pretax operating income of $40.5, down 28.2%. Real Estate Services revenue was $147.0, up 2.8%, while pretax operating income was $4.7 versus $9.3. First-half Financial Services revenue fell 14.6% to $546.6 and pretax income fell 19.5% to $96.9; Real Estate Services revenue rose 15.8% to $296.2 and pretax income rose to $19.1 from $6.1.
- Cash flow: First-half operating cash flow was $29.2, compared with $60.0 in 2013. Investing used $40.3, versus providing $729.4 in 2013, which included divestiture proceeds. Financing used $147.9, including $52.5 of dividends and $47.7 of share repurchases. Cash and cash equivalents declined to $558.2 from $716.9 at year-end 2013.
- Liquidity: Management-defined cash position—cash and equivalents, marketable securities and unencumbered securities held for liquidity—was $644.2 at June 30, down from $795.0 at the start of the year. The company also reported $15.8 of segregated regulatory cash. It had $145.0 invested in a Cantor-affiliated asset-backed commercial paper program.
- Debt and capital: Notes and collateralized borrowings totaled $409.1 carrying value, including $150.0 of 8.75% convertible notes due April 2015, $150.2 of 4.50% convertible notes due July 2016, and $109.0 of 8.125% senior notes due 2042. An additional $150.0 of related-party notes payable is reported separately on the balance sheet. The secured borrowing balance was repaid during the first half. Credit ratings were BBB- with stable outlook from Fitch and S&P.
- Balance sheet: Total assets were $2,452.4 and total liabilities were $1,750.7 at June 30, 2014. Total equity was $633.7, and redeemable partnership interest was $68.1.
Material changes versus the prior comparable period
- The reported revenue and earnings comparisons are dominated by the 2013 eSpeed sale to NASDAQ OMX: Q2 and first-half 2013 each included a $723.1 gain on divestiture. Excluding that gain, revenue was $470.0 in Q2 2013 and $915.0 for first-half 2013, compared with $417.6 and $857.9 in 2014, respectively. The 2013 first half also included $48.4 of eSpeed revenue before the sale.
- 2013 expenses also included substantial unusual charges: $304.1 of non-cash compensation related to the partnership restructuring, $160.5 to reserve employee/partner loans, and charitable and broker-hiring costs. These items make reported year-over-year profit and expense comparisons less representative of ongoing operations.
- Underlying brokerage remained pressured: Q2 rates revenue fell 24.3%, credit 12.5%, and foreign exchange 18.8%. Management cited weak market activity, historically low volatility, regulatory uncertainty and the loss of eSpeed. Equities and other asset classes rose 7.2%; Real Estate brokerage rose 4.6%.
- Operating cash decreased despite positive operating cash flow, reflecting dividends and distributions, repurchases/redemptions, acquisitions, settlements and working-capital use. Receivables and payables related to brokers and clearing counterparties both increased materially, largely due to unsettled fails; the filing says substantially all open fails and pending trades subsequently settled at contracted amounts.
Outlook, management commentary, risks and unusual items
- Management said it expected to reduce company-wide expenses by at least $100 million annualized by the end of 2014 versus the second-half 2012 run rate, excluding 2014 acquisitions and significant hires. It also said it expected acquired businesses and hires to increase EPS, without providing quantified earnings guidance.
- Management expected Cornish & Carey Commercial, with approximately $135 million of 2013 revenue, to close in August 2014 and contribute to NGKF growth. HEAT Energy Group and Remate Lince were acquired in 2014.
- Management said the $644.2 cash position and expected NASDAQ OMX stock provided resources for acquisitions, debt repayment, repurchases and the regular dividend. The divestiture earn-out is conditional: up to 14,883,705 NASDAQ OMX shares may be delivered over 15 years subject to annual revenue thresholds. The company held $38.3 of NASDAQ OMX shares related to the earn-out at June 30; the stated approximate $600 million expected stock value is management’s estimate, not cash on hand.
- The board declared a $0.12 per-share quarterly dividend on July 30, payable September 5, 2014. Management said it expected to maintain the regular dividend for the foreseeable future, subject to business and capital needs.
- Management described Financial Services conditions as challenging. Low volatility, reduced trading volumes, bank capital requirements and evolving Dodd-Frank/other market rules could constrain activity; it expected derivatives volumes to improve as the regulatory environment becomes clearer. The company reported a 4% year-over-year reduction in Financial Services front-office headcount and lower average revenue per front-office employee.
- The July 2014 FINRA award found BGC entities liable for approximately $13 million and certain desk heads liable for approximately $20 million, which BGC expected to pay on their behalf. Tullett’s punitive-damages and executive claims were denied; BGC said the award would not have a material financial effect. Separate New Jersey litigation remained pending, with trial then scheduled for September 2014.
- Other exposures include regulatory capital restrictions, counterparty and market risk, potential losses on marketable securities, operational and cybersecurity disruptions, legal proceedings, and guarantees. The filing reports $344.7 of net assets held in regulated subsidiaries and $173.3 of aggregate regulatory net capital in excess of requirements.
- Disclosure controls were assessed as effective as of June 30, 2014; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Confirm issuer identity: this is a BGC Partners, Inc. filing, despite the request metadata naming BGC Group, Inc.
- Separate recurring operating performance from the 2013 $723.1 divestiture gain and the restructuring, employee-loan reserve and other unusual charges when comparing periods.
- Track Financial Services volumes, margins and electronic-trading growth against management’s expectation that clearer regulation could improve derivatives activity.
- Verify the timing and outcome of the Cornish & Carey acquisition, integration costs, and the contribution of the 2014 acquisitions to earnings.
- Assess liquidity use, including working-capital and settlement swings, dividends, repurchases, debt maturities and funds restricted at regulated subsidiaries.
- Monitor the conditional NASDAQ OMX earn-out, related-party liquidity investments and transactions, and the resolution and cost of remaining legal matters.