BGC Group, Inc. quarterly report, Q3 FY2013

BGC Partners, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2013. The filing identifies the registrant as BGC Partners, Inc.; this differs from the request metadata’s “BGC Group, Inc.”

Business context

BGC is a global brokerage and financial-services company operating Financial Services and Real Estate Services segments. Its activities include wholesale financial brokerage, trading and related technology, and commercial real estate brokerage and management services.

Financial results

MetricQ3 2013Q3 2012Nine months 2013Nine months 2012
Total revenue$433.3 million$440.3 million$2,071.5 million$1,284.8 million
Operating income before taxes$42.7 million$3.6 million$264.6 million$27.0 million
Consolidated net income$32.0 million$1.0 million$172.1 million$17.1 million
Net income available to common stockholders$25.3 million$(0.5) million$66.8 million$9.7 million
Basic EPS$0.12$0.00$0.36$0.07
Operating income before tax margin9.8%0.8%12.8%2.1%

Nine-month revenue and profit comparisons are dominated by the $723.1 million divestiture gain recorded in 2013. Excluding that gain, the reported totals are not directly comparable on their face. Q3 revenue declined 1.6%; brokerage revenue fell 7.4%, partly offset by real estate growth and $31.9 million of NASDAQ OMX earn-out revenue. Q3 total expenses fell 10.5% to $390.7 million.

Q3 Financial Services revenue decreased 4.1% to $280.6 million, while pretax segment income rose 21.1% to $53.6 million, primarily on lower expenses. Real Estate Services revenue increased 7.0% to $145.8 million and pretax segment income rose 38.6% to $13.6 million. For the nine months, Financial Services revenue decreased 2.7% and pretax income decreased 2.9%; Real Estate Services revenue increased 30.0% and pretax income increased 44.0%.

Cash flow and liquidity: Nine-month operating cash flow was $102.6 million, versus $95.7 million in 2012. Investing activities provided $543.1 million, mainly reflecting $575.3 million of net divestiture proceeds; financing activities used $274.9 million. Cash and cash equivalents were $757.9 million at September 30, versus $388.4 million at year-end 2012. Management’s broader cash-position measure, including marketable securities and unencumbered securities, was $826.9 million.

Debt: Notes payable and collateralized borrowings totaled approximately $423.0 million, including $150.0 million of 8.75% convertible notes payable to Cantor. The $130 million revolving credit agreement had no borrowings outstanding and matured October 23, 2013. Total liabilities were $2.14 billion; the filing does not provide a conventional current ratio or a single summary liquidity ratio.

Margins and distributions: Q3 consolidated net margin was 7.4%, compared with 0.2% a year earlier; nine-month net margin was 8.3%, compared with 1.3%. These reported margins include the effects of significant unusual items. Dividends declared were $0.12 per share in Q3 2013 versus $0.17 in Q3 2012. The board declared a further $0.12 quarterly dividend payable December 2, 2013.

Material changes and unusual items

  • On June 28, 2013, BGC sold its on-the-run electronic benchmark U.S. Treasury platform and related assets to NASDAQ OMX for $750 million cash, subject to adjustments, plus a contingent earn-out of up to 14,883,705 NASDAQ OMX shares over 15 years. The reported pretax gain was $723.1 million. BGC retained other Treasury and financial-market businesses.
  • The earn-out is conditional on NASDAQ OMX meeting an annual revenue threshold. BGC recognized $31.9 million of earn-out-related revenue in Q3 and reported the corresponding shares as marketable securities.
  • The Global Partnership Restructuring Program exchanged or redeemed approximately 77 million partnership units for approximately 45 million Class A shares, including approximately 39 million restricted shares. BGC reported an approximately 32 million reduction in fully diluted share count and approximately $465 million of non-cash compensation charges, including a $160.5 million reserve against employee loans.
  • Class A shares outstanding rose to 178.9 million at September 30 from 123.9 million at December 31, 2012, principally reflecting partnership exchanges; those exchanges did not increase fully diluted shares as described by the company. The Q3 fully diluted weighted-average share count was 355.2 million.
  • At September 30, $200 million was invested in an asset-backed commercial-paper program arranged through Cantor-affiliated entities. The approved program limit was $350 million, creating related-party and investment-counterparty exposure to monitor.

Outlook, commentary and risks

  • Management said it remained on target to reduce overall expenses by at least $50 million annualized by year-end 2013, compared with the second-half 2012 run rate, and expected a further approximately $50 million of annualized cost reductions in 2014 to improve Financial Services profitability. These are management targets, not guaranteed results.
  • Management expected to maintain the regular $0.12 quarterly dividend for the foreseeable future and said divestiture proceeds could be used for debt repayment, acquisitions, organic investment, or share and unit repurchases.
  • Management described Financial Services market conditions as challenging: subdued volatility and trading volumes, quantitative easing, bank capital requirements, and regulatory changes weighed on activity. Real Estate Services benefited from acquisitions and improving commercial-property conditions.
  • BGC began operating its Swap Execution Facility on October 2, 2013. Mandatory compliant execution was not expected to begin until Q1 2014; adoption, liquidity, trading volume and demand remain uncertain.
  • Material litigation includes a FINRA arbitration in which Tullett-related claimants seek at least $779 million in compensatory and $500 million in exemplary damages, plus other relief. Hearings had concluded and post-hearing briefs were filed; closing arguments were scheduled for November 2013. BGC said it had substantial defenses and that current pending matters were not expected to have a material adverse effect, but outcomes cannot be assured.
  • Other key risks include realizing the value of the contingent NASDAQ OMX earn-out, market and counterparty risk, regulatory capital constraints, operational and technology disruption, foreign-exchange exposure, and potential difficulty obtaining acceptable financing. The company reported $330.1 million of net assets held at regulated subsidiaries, which can constrain access to capital.

Important facts for investors to verify

  • How much of reported earnings and cash generation is recurring after separating the divestiture gain, earn-out revenue, restructuring compensation charges and employee-loan reserve.
  • The value and collectability of future NASDAQ OMX earn-out shares, including annual revenue conditions and share-price exposure.
  • Delivery, restrictions and eventual sale potential of restructuring-related shares, and the effect on fully diluted share count and employee retention.
  • Execution of the stated cost-reduction targets, trends in Financial Services trading volumes, and profitability of the expanding Real Estate Services segment.
  • Status and financial exposure of the Tullett-related proceedings and other legal or regulatory matters.
  • Post-maturity replacement of the revolving credit facility, debt repayment plans, and liquidity or credit exposure from the Cantor-affiliated commercial-paper program.