BGC Partners, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet figures compare March 31, 2014 with December 31, 2013. Financial amounts below are in U.S. dollars unless stated otherwise. The filing identifies the registrant as BGC Partners, Inc., not BGC Group, Inc.
Business context
BGC operates global Financial Services brokerage and commercial Real Estate Services businesses. The period followed the June 2013 sale of its on-the-run electronic U.S. Treasury platform to NASDAQ OMX. Results therefore reflect a smaller Financial Services business, while real estate brokerage continued to expand.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $440.3 million | $445.0 million | Down 1.1% |
| Total expenses | $429.0 million | $431.3 million | Down 0.5% |
| Operating income before tax | $11.2 million | $13.7 million | Down 17.9%; margin 2.6% vs. 3.1% |
| Consolidated net income | $10.5 million | $10.6 million | Down 0.9% |
| Net income available to common stockholders | $8.0 million | $7.0 million | Up 14.4% |
| Basic and diluted EPS | $0.04 | $0.04 | Unchanged |
| Dividend per common share | $0.12 | $0.12 | Unchanged |
Commissions rose 1.6% to $303.6 million, while principal transactions fell 9.6% to $79.5 million. Real estate management services were $39.8 million. Other revenue increased to $8.2 million from $0.8 million; management attributed the increase primarily to a non-recurring gain, without clearly identifying its amount in the discussion.
Financial Services revenue declined 12.1% to $284.5 million, and segment pre-tax income fell 11.9% to $56.4 million. Real Estate Services revenue increased 32.3% to $149.1 million, and the segment moved from a $3.1 million pre-tax loss to $14.4 million income. Real estate brokerage revenue rose 49%, reflecting acquisitions, hiring and productivity gains.
Cash, liquidity and debt
- Cash and cash equivalents were $639.0 million at quarter-end, down from $716.9 million at year-end. BGC’s broader defined cash position—including cash, marketable securities and unencumbered securities owned—was $717.2 million, down from $795.0 million.
- Operating cash flow was approximately $0.1 million, versus $7.5 million a year earlier. The filing attributes the quarter’s cash-position decrease mainly to working-capital movements, including tax payments, share and unit repurchases, and settlement activity.
- Total assets rose 47.8% to $3.07 billion. Broker-dealer and customer receivables increased to $1.38 billion from $349.9 million, with related payables rising to $1.34 billion from $303.5 million; the filing says substantially all open fails and pending trades subsequently settled at contracted amounts.
- Debt carrying value was approximately $408.0 million: $150 million of 8.75% convertible notes due 2015, approximately $149.0 million of 4.50% convertible notes due 2016, and approximately $108.9 million of 8.125% senior notes due 2042. The remaining secured borrowings were prepaid during the quarter. The 8.75% notes are payable to Cantor, a related party.
- Regulated subsidiaries held $339.7 million of net assets; aggregate regulatory net capital exceeded requirements by $164.4 million. Management said it expected adequate cash generation for normal operations, dividends and debt repayment, while noting financing may be needed for growth or acquisitions.
Material changes and unusual items
- The prior-year comparison included $24.8 million of eSpeed revenue. The divestiture contributed to lower rates, market-data, software-solutions and related-party revenues in Q1 2014. BGC retains other Treasury and electronic brokerage activities.
- Compensation and employee benefits, including partnership allocations and exchangeability charges, rose 3.3% to $306.6 million. The exchangeability-related charge was $29.1 million versus $10.6 million a year earlier.
- Non-compensation expenses declined $12.0 million, or 8.9%, according to management. Q1 also included a $3.2 million fixed-asset/software impairment charge and an occupancy expense increase associated with an onerous lease.
- BGC acquired select assets and liabilities of HEAT Energy Group in February 2014. It announced agreements to acquire Cornish & Carey Commercial and, on May 1, Remate Lince; management expected the acquisitions and hires to contribute positively to EPS by Q3 2014.
- The board declared a $0.12-per-share dividend on April 30, payable June 2, 2014. After quarter-end, the company repurchased approximately 1.1 million shares for $7.9 million.
Outlook, risks and contingencies
Management targeted at least $100 million of annualized company-wide expense reductions by year-end 2014 compared with the second-half 2012 run-rate, excluding the effect of 2014 acquisitions and significant hires. It cited challenging Financial Services conditions, including lower OTC activity, subdued volatility, quantitative easing, bank capital requirements and regulatory transition. Management expected derivatives activity to improve as the regulatory environment becomes clearer and continued investment in electronic trading and real estate expansion to support longer-term growth.
Material risks include market volumes and volatility, competition, regulatory and capital requirements, execution and clearing exposure, liquidity and refinancing, technology and operational disruption, foreign exchange movements, and related-party relationships with Cantor. The filing describes a pending Tullett-related FINRA arbitration seeking at least $779 million in compensatory damages plus at least $500 million in exemplary damages, as well as a separate New Jersey state action. BGC said it intended to defend the matters, but could not assure the outcome; it could not estimate a loss range beyond existing accruals and stated that current matters were not expected to have a material adverse effect overall. A Cantor-related derivative action was dismissed, with an appeal filed in April 2014.
The company’s eSpeed sale earn-out may provide up to 14,883,705 NASDAQ OMX shares over 15 years, subject to revenue conditions; it was not included in the initial divestiture gain. BGC estimated the remaining NASDAQ OMX shares at approximately $511.9 million using the May 2, 2014 share price. The filing also notes guarantees and indemnities, including an ELX technology-services guarantee through December 31, 2014, and $1.7 million of letters of credit for clearing organizations.
Most important facts for investors to verify
- Reconcile the unusually large increase in matched-principal receivables and payables with subsequent settlements and quarter-end cash movements.
- Assess whether real estate segment growth and the stated acquisition contribution to EPS materialize, and whether the $100 million expense-reduction target is achieved.
- Review the composition and repeatability of the Q1 non-recurring gain in other revenue, as the filing discussion does not clearly quantify it.
- Monitor the Tullett litigation and arbitration outcomes, potential exposure, and any changes to legal reserves.
- Evaluate debt maturities, interest costs, related-party financing and transactions with Cantor, as well as dilution from convertible notes, partnership interests and equity awards.
- Confirm the registrant identity and filing details: the supplied filing names BGC Partners, Inc.; its signature-page text gives a 2013 date despite describing the quarter ended March 31, 2014.