BGC Partners, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; filed August 5, 2011. The filing identifies the registrant as BGC Partners, Inc. (not BGC Group, Inc.). Dollar figures below are in millions unless stated otherwise.
Business context
BGC Partners is a global wholesale financial-market brokerage and intermediary, offering voice, hybrid and electronic execution, clearing, processing, market data and technology services. It reported one operating segment. Results are transaction- and market-volume-sensitive.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $364.6 | $335.7 | $729.6 | $682.9 |
| Operating expenses | $341.1 | $318.2 | $681.6 | $679.3 |
| Income before taxes | $23.5 | $17.5 | $48.0 | $3.6 |
| Consolidated net income | $17.4 | $12.8 | $34.6 | $1.9 |
| Net income available to common stockholders | $9.7 | $7.4 | $18.3 | $3.2 |
| Basic and fully diluted EPS | $0.09 | $0.09 | $0.17 | $0.04 |
Q2 pretax margin was 6.4% versus 5.2%; for the first half it was 6.6% versus 0.5%. Q2 total revenue rose 8.6% year over year and first-half revenue rose 6.8%. Q2 commission revenue increased 11.8%, while principal-transaction revenue increased 2.4%. For the first half, commissions increased 11.0% and principal transactions declined 1.3%.
- Q2 growth reflected stronger rates, FX, and equities/other-asset-class brokerage, along with increased front-office headcount and electronic trading. Q2 FX revenue rose 18.9% and equities/other asset classes rose 22.7%, according to management.
- Fully electronic brokerage revenue was $40.5 million in Q2, up 28.4%; fully electronic brokerage was 10.1% of brokerage revenue in the detailed table, versus 8.6% a year earlier. Management separately described e-broking as 10.5% of brokerage revenue; the filing does not reconcile these measures clearly.
- Compensation and employee benefits expense increased 5.4% in Q2. First-half compensation expense fell 10.8%, principally because the 2010 comparison included a $41.3 million one-time restructuring charge and higher partnership-unit exchangeability charges.
- Q2 occupancy and equipment expense rose 26.5%, including a $3.6 million sublease-liability adjustment. Professional and consulting fees increased 51.9%, with management citing legal, regulatory and potential-acquisition costs.
Cash flow, balance sheet and capital
Cash and cash equivalents were $286.2 million at June 30, down from $364.1 million at year-end 2010. Total assets were $1.83 billion and total liabilities were $1.38 billion. Notes payable and collateralized borrowings totaled $186.5 million; stockholders’ equity was $278.8 million and total equity, including noncontrolling interests, was $357.2 million.
First-half operating cash flow was a use of $4.1 million, improved from a $30.9 million use in 2010. Investing cash use was $23.4 million and financing cash use was $57.6 million; cash decreased $77.9 million overall. Management attributed working-capital use of $108.8 million primarily to higher accrued commissions receivable and reductions in accrued compensation and accounts payable. Cash flow was also affected by employee loans, capital spending, dividends and partnership distributions.
The company entered a $130 million unsecured revolving credit facility in June, with no borrowings outstanding at quarter-end; it reported $10 million drawn as of July 31. On July 29, it issued $160 million of 4.50% convertible senior notes due 2016, generating approximately $144 million net proceeds after expenses and capped-call costs. The existing $150 million 8.75% convertible notes issued to Cantor mature in 2015. The company declared a $0.17-per-share quarterly dividend payable August 25, 2011.
Regulated subsidiaries held $330.4 million of net assets and had regulatory net capital $221.6 million above aggregate requirements. Some cash and capital are restricted by regulatory requirements. The filing reports $374.2 million of specified contractual obligations, including operating leases, debt and interest.
Material changes, outlook and risks
- Management cited recovering industry volumes, government debt issuance, FX activity, new hires and electronic trading as revenue drivers. It said it expected strong hybrid and electronic trading performance to continue, supported by product rollouts and market conditions; the filing provides no numerical earnings or revenue guidance.
- Front-office headcount was 1,780, up 10.4% year over year. Q2 revenue per broker or salesperson was approximately $200,000, down about 2% year over year; management expected productivity of newer brokers to improve.
- BGC had agreed to acquire Newmark, a real-estate advisory firm with approximately 425 brokers; consideration was to include cash, stock and assumed debt. Completion was not assured. In August, the Audit Committee authorized acquisition of CantorCO2e; the filing expected completion in Q3 2011 and said the purchase price would not materially affect results.
- The UK FSA identified weaknesses in risk, compliance, controls and governance, and required a remediation program. BGC agreed to a six-month voluntary limit on acquisitions of FSA-regulated businesses and new regulated business lines. Higher UK capital and liquidity requirements and further restrictions were possible; management targeted remediation by at least September 30, 2011 and cautioned outcomes could be adverse.
- Legal matters include a FINRA employment-related arbitration in which Tullett entities sought at least $779 million compensatory and $500 million exemplary damages, plus related claims. BGC disputed the claims and intended to defend them. Separate patent litigation with Trading Technologies included a remitted $2.54 million jury award plus interest and costs; an appeal remained pending, and further patent claims had been filed. Management said available information did not indicate a material adverse outcome, but outcomes were uncertain.
- Other risks include market-volume and volatility swings, counterparty and unmatched-principal exposure, operational and foreign-exchange risk, regulatory capital constraints, financing needs, and dependence on Cantor-related services and clearing arrangements. The filing states clearinghouse-member guarantees could exceed posted collateral, although management viewed payment as remote.
- For the July 2011 convertible notes, capped calls may mitigate dilution only within specified limits; conversion, hedging activity, counterparty failure, or a fundamental change could affect share price, liquidity or dilution.
Key facts for investors to verify
- Confirm the issuer identity and corporate-history mapping: this filing is for BGC Partners, Inc., despite the request metadata naming BGC Group, Inc.
- Track whether operating cash generation improves and whether working-capital movements—especially receivables and employee loans—continue to consume cash.
- Review FSA remediation progress, any additional UK capital/liquidity demands, and whether the acquisition restriction is lifted.
- Check the status, terms, financing and integration of Newmark and CantorCO2e, and any related-party advisory arrangements.
- Monitor the material employment and patent disputes, legal reserves and any changes to management’s assessment of potential exposure.
- Assess debt-service capacity, credit-facility covenant headroom, the 2011 convertible-note issuance and dilution/capped-call mechanics, and the sustainability of dividends and partnership distributions.