BGC Partners, Inc. 2011 Form 10-K Summary
Entity note: The supplied filing is for BGC Partners, Inc., not BGC Group, Inc. It covers the fiscal year ended December 31, 2011; the filing was signed March 14, 2012. Amounts below are in U.S. dollars.
Business context and reporting period
BGC Partners is a global wholesale brokerage and financial technology firm, with brokerage across rates, credit, foreign exchange, equities and other products. In October 2011, it acquired Newmark, expanding into U.S. commercial real estate brokerage and property management. The company reported 2,147 brokers and salespeople and approximately $194.1 trillion in notional transactions on its hybrid and fully electronic platforms during 2011.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $1,464.7 million | $1,331.1 million |
| Brokerage revenue | $1,371.3 million | $1,228.7 million |
| Income before income taxes | $54.4 million | $56.9 million |
| Consolidated net income | $38.4 million | $45.4 million |
| Net income available to common stockholders | $20.1 million | $21.2 million |
| Basic and diluted EPS | $0.17 | $0.24 |
| Cash flow from operating activities | $85.3 million | $58.9 million |
| Cash and cash equivalents at year-end | $369.7 million | $364.1 million |
Revenue grew 10.0%, while total expenses rose 10.7% to $1,410.3 million. Pretax margin declined to 3.7% from 4.3%; net income available to common stockholders was 1.4% of revenue, versus 1.6%. Compensation and employee benefits were $916.3 million, or 62.6% of revenue, and included a $108.3 million charge related to granting exchangeability on partnership interests. Interest expense increased to $24.6 million from $14.1 million, primarily reflecting the 2011 convertible-note issuance.
Fourth quarter: Revenue was $355.2 million versus $321.8 million in Q4 2010. Income before taxes was $10.8 million versus $27.0 million, and net income available to common stockholders was $3.8 million versus $11.8 million.
Total assets were $1.405 billion and total liabilities were $904.2 million at year-end. Notes payable and collateralized borrowings were $331.9 million, plus $13.6 million of short-term borrowings; debt principal and carrying values differ for the convertible notes. The company had $150.8 million of regulatory net capital in excess of regulatory requirements. Cash is substantially held within regulated subsidiaries and may not be freely available to the parent.
Operating cash flow increased year over year. Investing activities used $92.6 million, including $46.7 million net of cash acquired for acquisitions, principally Newmark. Financing activities provided $8.6 million; cash increased $5.6 million during the year. The company declared $0.65 per common share in dividends for 2011, including $0.17 in each quarter.
Material changes versus the prior comparable period
- Brokerage revenue increased 11.6%; commission revenue rose 17.1%, while principal-transaction revenue was nearly flat. Fully electronic brokerage revenue grew, and its share of brokerage revenue increased to 9.9% from 8.6%.
- Rates revenue rose to $578.5 million; foreign-exchange revenue to $218.4 million; and equities and other asset-class revenue to $214.5 million. Credit revenue increased slightly to $315.0 million, although management described credit-market activity as soft.
- Newmark contributed $45.0 million of brokerage revenue after its October acquisition. The acquisition’s purchase price was approximately $90.1 million, including contingent stock consideration; the company recorded $59.5 million of preliminary goodwill.
- Compensation expense increased 7.1%, and professional and consulting fees increased 49.8%, reflecting exchangeability charges, higher headcount, legal and regulatory matters, and acquisition costs. The company also recorded a $4.0 million impairment charge on marketable securities.
- Year-end cash was broadly stable, while notes payable and collateralized borrowings increased from $189.3 million to $331.9 million, largely reflecting the $160 million 4.50% convertible-note offering.
Outlook, commentary, risks and unusual items
- Outlook: No formal numerical revenue or earnings guidance is provided. Management expected electronic brokerage growth to continue, cited potential productivity gains from recent hiring and acquisitions, and viewed the U.S. commercial real estate recovery as a possible support for 2012. These expectations are forward-looking and uncertain.
- Capital returns: The stated policy is to pay at least 75% of post-tax distributable earnings per fully diluted share as dividends, if declared; this non-GAAP measure is not equivalent to cash flow or available liquidity. A $0.17-per-share Q4 2011 dividend was declared in February 2012.
- Regulatory matters: The U.K. FSA identified weaknesses in risk, compliance, controls and governance. BGC increased capital and liquidity, undertook remediation, and provided substantial program outputs in December 2011. The FSA relaxed a voluntary limitation on certain acquisitions and new regulated business lines on March 1, 2012, with prior notice still expected; further remediation was scheduled for 2012.
- Litigation: Tullett-related employment and competition proceedings included FINRA claims seeking at least $779 million in compensatory damages and $500 million in exemplary damages, and a New Jersey state action proceeding to discovery. BGC disputes the claims; management said pending matters were not expected, based on information then available, to materially adversely affect financial position, results or cash flows. Outcomes remain uncertain.
- Related-party and financing exposure: Cantor controls the company and provides clearing and other services; Cantor affiliate CF&Co. is also the sales agent for controlled equity offerings. The company disclosed related-party transactions and potential conflicts. A Moody’s outlook was changed to negative in February 2012, citing Cantor profitability, leverage and the close relationship to BGC.
- Other key risks: Results depend heavily on trading volumes and rates products; the top ten customers generated 40.3% of 2011 revenue, and the largest customer 5.1%. Other risks include regulatory change, market and counterparty exposure, competition and broker retention, foreign exchange movements, technology and operational failures, and potential dilution from convertible notes and equity issuance.
- Unusual items: A March 2012 derivative action alleged unfair terms in the 8.75% convertible notes issued to Cantor, controlled equity offerings, and an amendment to the CEO’s change-in-control agreement. The company said it would defend the claims. In February 2012, BGC also agreed, subject to bankruptcy court approval, to acquire substantially all Grubb & Ellis assets and committed debtor-in-possession financing.
Most important facts for investors to verify
- Reconcile GAAP earnings with management’s non-GAAP distributable earnings and assess whether dividends are supported by available cash, not just that measure.
- Review the full debt schedule, interest costs, covenants, maturities, conversion terms and potential dilution from both convertible-note issues; confirm revolving-credit borrowings and availability.
- Assess Newmark integration, contingent stock consideration, acquisition-related costs, and the status and funding of the proposed Grubb & Ellis acquisition.
- Track FSA remediation, any further restrictions or capital requirements, and the status and possible exposure of the Tullett and other legal proceedings.
- Evaluate the extent of Cantor’s control, related-party arrangements, clearing dependence, equity sales through CF&Co., and the resulting dilution and governance risks.