Business context and reporting period
The supplied filing is BGC Partners, Inc.’s Form 10-K for the fiscal year ended December 31, 2015, not a quarterly filing. The filing identifies the registrant as BGC Partners, Inc.; it does not identify the company as BGC Group, Inc. BGC operated financial brokerage and technology businesses and the Newmark Grubb Knight Frank commercial real estate platform. GFI results were consolidated from February 26, 2015; BGC completed the acquisition of the remaining GFI shares on January 12, 2016, after year-end.
Key financial metrics
Unless otherwise stated, amounts are in U.S. dollars. Annual comparisons are 2015 versus 2014.
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $2,575.4 million | $1,787.5 million |
| Total expenses | $2,706.0 million | $1,831.5 million |
| Income (loss) before tax | $388.8 million | $(3.2) million |
| Consolidated net income (loss) | $268.3 million | $(3.8) million |
| Net income attributable to common stockholders | $126.8 million | $4.1 million |
| Basic / diluted EPS | $0.52 / $0.50 | $0.02 / $0.02 |
| Net cash from operating activities | $212.9 million | $183.5 million |
| Cash and cash equivalents, year-end | $461.2 million | $648.3 million |
| Total assets, year-end | $3,991.5 million | $2,751.1 million |
| Notes payable and collateralized borrowings, carrying value | $840.9 million | $556.7 million |
The 2015 pretax margin was 15.1%, compared with a 0.2% pretax loss margin in 2014; however, 2015 results include substantial divestiture and investment gains. Total expenses were 105.1% of revenue. Net cash used in investing activities was $99.3 million and net cash used in financing activities was $291.9 million; cash decreased by $187.1 million during the year.
Management’s defined liquidity measure—cash, marketable securities not financed, and securities owned—was $1,026.1 million at year-end, up from $825.5 million. The balance sheet reported $650.4 million of marketable securities, principally ICE and NASDAQ shares; $117.9 million of marketable securities had been lent and was excluded from management’s liquidity calculation. Debt included $160 million of 4.50% convertible notes due July 2016, $112.5 million of 8.125% notes due 2042, $300 million of 5.375% notes due 2019, $240 million of GFI 8.375% notes due 2018, and $23 million of collateralized borrowings.
Fourth-quarter results
For the quarter ended December 31, 2015, revenue was $673.4 million, income before tax was $251.9 million, consolidated net income was $172.5 million, and net income attributable to common stockholders was $65.0 million. The comparable 2014 quarter had revenue of $489.3 million, a pretax loss of $59.3 million, a consolidated net loss of $36.8 million, and a common-stockholder loss of $18.7 million. The 2015 quarter included a large Trayport sale gain.
Material changes versus the prior comparable period
- Annual revenue increased 44.1%, primarily reflecting GFI consolidation, acquisitions in real estate services, and growth in electronic brokerage and technology revenues. Brokerage revenue rose 43.9% to $2,247.3 million.
- Financial Services revenue rose 47.8% to $1,543.2 million; segment pretax income was $293.8 million, including $68.0 million of NASDAQ earn-out and related market-value/hedging gains. Real Estate Services revenue rose 40.9% to $998.5 million and segment pretax income increased 87.7% to $129.8 million.
- FENICS revenue, excluding Trayport and including intra-company technology services, increased 126.6% to $224.3 million from $99.0 million. Real estate capital markets brokerage revenue increased 115.0% to $269.2 million.
- Total expenses rose 47.8%, including higher compensation and employee benefits, acquisition-related costs, and increased interest expense. Employee-loan compensation expense was $86.7 million, including a $47.2 million reserve.
- Reported pretax income benefited from $394.3 million of gains on divestiture and sale of investments, principally the Trayport transaction, and $123.2 million of other income, which included NASDAQ earn-out/market-value items and the $29.0 million gain on previously held GFI shares. These amounts make reported earnings less representative of recurring operations.
- Year-end cash declined, while marketable securities increased substantially following the receipt of ICE shares. Notes payable and collateralized borrowings increased from $556.7 million to $840.9 million; the 2014 related-party note payable of $150.0 million was no longer outstanding in 2015.
Outlook, commentary, risks and unusual items
- Management expected at least $100 million in annualized cost savings from GFI integration by the end of 2016, after reaching its initial $50 million savings target by the first quarter of 2016. These are targets, not guaranteed outcomes.
- Management projected approximately 20% top-line growth for Real Estate Services in 2016 and cited continued growth from GFI integration, electronic trading, broker productivity, and real estate services. No GAAP earnings or revenue guidance was provided; management said its outlook would use distributable-earnings measures instead.
- Trayport was sold to ICE in December 2015 for consideration represented by 2,527,658 ICE shares, associated with a stated $650 million purchase price subject to adjustment. BGC recorded a $391.0 million pretax gain net of fees, plus $16.3 million of gains on ICE shares. Management estimated cash taxes related to the sale of no more than $64 million.
- Key risks include market-sensitive brokerage and real estate transaction volumes, low rates and muted trading activity, regulatory change and capital requirements, integration and realization of GFI synergies, competition and pricing pressure, counterparty and market risk, cyber and operational disruptions, and foreign-exchange exposure. The company also held sizable marketable equity positions subject to price volatility.
- BGC reported $55.5 million of charitable-contribution liabilities at year-end, including commitments made in 2015. Legal matters included employment and competitor-related disputes and GFI-related litigation; the filing says the company and GFI did not fund the stated $10.75 million Delaware class-action settlement, which was to be funded by insurance and specified other parties.
- Governance and related-party considerations are significant: Cantor controlled the voting majority and provided clearing, administrative, and other services. The 4.50% convertible notes’ July 2016 maturity and potential conversion into approximately 16.3 million shares are relevant to liquidity and dilution.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment and audit excluded CFI and Excess Space, acquired during 2015; together they represented $97.6 million, or 2.5%, of year-end assets and $18.6 million, or 0.7%, of 2015 revenue.
Most important facts for investors to verify
- Reconcile recurring operating performance to GAAP earnings, particularly the Trayport gain, NASDAQ earn-out and securities revaluation gains, acquisition-related costs, and employee-loan reserve.
- Confirm post-year-end GFI merger consideration, integration progress, and whether the $100 million annual savings target is achieved without impairing revenue or broker retention.
- Review cash availability and restrictions at regulated subsidiaries, the treatment and liquidity of ICE/NASDAQ holdings, and debt repayment or refinancing plans for the July 2016 convertible notes.
- Assess potential dilution from convertible notes, acquisition-related share issuance, partnership-unit exchanges, and other equity programs; compare these with repurchases and dividends.
- Check the outcomes of material legal and regulatory matters, acquisition contingencies, and the integration of CFI and Excess Space into the company’s internal-control assessment.