BGC Partners, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; filed August 10, 2015. 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 key results
BGC operates Financial Services brokerage and technology businesses and Real Estate Services through Newmark Grubb Knight Frank. Results include GFI from its acquisition in late February 2015; acquisitions also affected real estate results. Comparisons with 2014 are therefore not like-for-like.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $669.1 | $417.2 | $1,216.7 | $862.0 |
| Income before tax | $17.3 | $14.9 | $53.6 | $26.2 |
| Consolidated net income | $15.0 | $11.3 | $41.2 | $21.8 |
| Net income available to common stockholders | $9.3 | $7.6 | $23.4 | $15.6 |
| Basic and fully diluted EPS | $0.04 | $0.03 | $0.10 | $0.07 |
Q2 revenue increased about 60%; six-month revenue rose about 41%. Q2 pre-tax margin was about 2.6% versus 3.6% a year earlier; six-month pre-tax margin was about 4.4% versus 3.0%. Compensation and employee benefits, including partnership allocations, totaled $458.4 million in Q2 (68.5% of revenue) and $842.2 million for the first half (69.2%). Growth in revenue and expenses largely reflected acquisitions and higher brokerage activity.
Segments, cash flow and financial position
- Q2 segment results: Financial Services revenue was $421.7 million and pre-tax income $53.0 million, versus $260.4 million and $40.5 million. Real Estate Services revenue was $238.7 million and pre-tax income $27.0 million, versus $147.0 million and $4.7 million. Corporate items generated a $62.7 million pre-tax loss.
- Cash flow: First-half operating cash flow was negative $6.7 million, compared with positive $29.2 million in 2014. Investing used $183.7 million, including $155.5 million for acquisitions; financing used $114.4 million. Cash and cash equivalents declined to $364.0 million from $648.3 million.
- Liquidity: Management-defined liquidity was $396.5 million at June 30, down from $825.5 million at year-end. This measure includes cash, securities owned and unfinanced marketable securities; the $48.3 million of marketable securities on the balance sheet had been lent and was excluded from the liquidity measure.
- Debt and balance sheet: Total assets were $4.0 billion and total liabilities $2.84 billion. Notes payable and collateralized borrowings were $841.2 million, plus $50.0 million of short-term borrowings. Debt includes acquired GFI 8.375% senior notes, $255.3 million carrying value, and $300 million of 5.375% notes issued in 2014. BGC’s public ratings were BBB- with stable outlooks from Fitch and S&P.
Material changes, outlook and risks
- BGC acquired control of GFI, raising ownership to approximately 67%; GFI contributed $172.5 million of Q2 revenue. BGC also acquired real estate businesses including ARA and CFI. Acquisitions added $539.8 million of goodwill in the first half.
- First-half results included a $29.0 million realized gain from reclassifying the previously held GFI shares upon acquisition. First-half other comprehensive loss was $23.3 million, including foreign currency and available-for-sale securities losses. Fixed-asset and software impairment charges were $17.7 million for the half.
- Management expected at least $50 million in annualized GFI-related cost savings by Q1 2016 and a further $40 million by Q1 2017, excluding Trayport. It targeted at least $1 billion in 2015 Real Estate Services revenue, expected a Trayport sale before year-end 2015, and anticipated completing a full BGC-GFI merger by Q1 2016. These are management expectations, not guarantees.
- Management also expected more than $650 million of additional NASDAQ OMX stock over time; that value was not recorded on the balance sheet. A July 2015 BGC guarantee of GFI’s $240 million senior notes improved ratings and reduced penalty interest effective July 19, but adds contingent credit exposure.
- Key risks include market volumes and volatility, regulatory and capital requirements, integration and execution of acquisitions and cost savings, leverage and refinancing, liquidity needs, counterparty and trading risks, technology and cybersecurity disruptions, foreign exchange exposure, and potential dilution. Legal proceedings and regulatory matters are ongoing; management said it could not estimate losses beyond recorded accruals and did not expect current matters to materially affect the financial statements as a whole.
Important facts for investors to verify
- How much revenue and earnings growth is organic versus attributable to GFI and other acquisitions, and whether integration savings meet the stated timetable.
- Cash generation and liquidity after acquisition spending, distributions, and the reported negative first-half operating cash flow.
- Debt maturities, short-term borrowing renewal, interest costs, and the effects of guaranteeing GFI’s notes.
- Progress and final proceeds from the Trayport sale and timing/value of future NASDAQ OMX share distributions.
- Potential dilution: the 8.75% notes conversion issued 24.0 million Class A shares; 4.50% convertible notes remained outstanding, and Cantor could resell the converted shares.
- Final purchase accounting for acquisitions, impairment assumptions, contingent acquisition payments, and outcomes of legal, regulatory and tax matters.