BGC Partners, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is for BGC Partners, Inc., not BGC Group, Inc.; it also reports quarterly results, including fourth-quarter 2017.
Business context
BGC operated global Financial Services brokerage and technology businesses and Real Estate Services through publicly traded subsidiary Newmark Group. In December 2017, Newmark completed its IPO and BGC transferred substantially all real estate operations, including Berkeley Point, to Newmark. BGC retained approximately 92.3% of Newmark’s voting power at year-end and said it intended to consider a tax-efficient distribution of its Newmark shares; whether and when to proceed remained at BGC’s discretion.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $3.353 billion | $2.908 billion |
| Total expenses | $3.226 billion | $2.702 billion |
| Income before income taxes | $232.0 million | $314.2 million |
| Consolidated net income | $81.7 million | $253.8 million |
| Net income available to common stockholders | $51.5 million | $185.0 million |
| Diluted EPS | $0.17 | $0.65 |
| Cash and cash equivalents at year-end | $634.3 million | $535.6 million |
| Long-term debt and collateralized borrowings | $1.651 billion | $965.8 million |
Revenue increased 15.3%, while expenses rose 19.4%. Pretax margin declined to 6.9% from 10.8%; net income available to common stockholders was about 1.5% of revenue in 2017. The 2017 income tax provision was $150.3 million, including provisional Tax Act-related charges.
Cash flow: Operating cash flow was $1.262 billion, versus cash used of $678.7 million in 2016. Investing cash flow was a use of $231.3 million, and financing cash flow was a use of $935.1 million. Operating cash flow was significantly influenced by mortgage-loan originations and sales; it should not be read as recurring earnings or free cash flow.
Liquidity and funding: BGC’s defined liquidity measure was $673.2 million, down from $790.4 million. It excludes cash segregated under regulatory requirements; the balance sheet separately reported $162.5 million of such cash. Berkeley Point had $360.4 million drawn against $950 million of committed warehouse facilities and an uncommitted $325 million repurchase facility. Total liabilities were $4.271 billion and total equity was $1.140 billion.
Material changes versus the prior year
- Financial Services revenue grew 12.4% to $1.712 billion; pretax income increased 2.1% to $333.3 million. Rates revenue rose 9.0%, while credit fell 2.5% and energy and commodities fell 8.5%. Equities, insurance and other asset classes rose 87.1%, primarily reflecting Sunrise and Besso acquisitions.
- Real Estate Services revenue rose 18.3% to $1.601 billion; pretax income increased 47.8% to $376.2 million. Leasing and other services grew 20.1%, real estate capital markets 18.5%, mortgage banking gains 6.5%, and servicing fees 26.0%.
- Compensation and employee benefits increased 16.3%; allocations and exchangeability charges for partnership units rose 48.6% to $286.6 million. Management cited higher revenue-linked compensation, acquisitions and retention-related exchangeability awards.
- Interest expense increased 43.6% to $102.5 million, primarily reflecting new borrowings. Corporate expenses also rose, including costs associated with the Newmark IPO and acquisitions.
- Newmark’s $295.4 million of IPO net proceeds were used to repay $304.3 million of the term loan. BGC acquired Berkeley Point for $875 million and invested $100 million in Real Estate LP with Cantor.
Fourth-quarter results and unusual items
Fourth-quarter revenue was $894.2 million, compared with $755.8 million in fourth-quarter 2016. BGC reported a $62.5 million pretax loss and a $157.7 million consolidated net loss; net loss available to common stockholders was $119.8 million, or $0.41 per basic share. The quarter included a $95.2 million income tax provision and $124.8 million of allocations and exchangeability charges. The filing attributes the annual tax increase in part to remeasurement of deferred taxes and the one-time transition tax; the full-year provisional transition-tax amount was $36.6 million.
Other notable items include $77.0 million of 2017 Nasdaq earn-out gains, recorded in Real Estate Services beginning in the third quarter; expected future Nasdaq shares were valued at approximately $746 million using the February 2018 share price and were not included on the balance sheet. The Tax Act was expected by management to benefit the effective tax rate and GAAP net income in 2018 and later periods, subject to estimates and further guidance.
Outlook, risks and contingencies
- Management expressed expectations for continued growth from electronic brokerage and Real Estate Services, and cited plans to hire, pursue acquisitions, pay dividends and repurchase shares or units. The supplied filing text does not provide a clear quantified 2018 revenue or earnings forecast.
- BGC declared an $0.18-per-share fourth-quarter dividend and said it expected to maintain an $0.18 quarterly dividend until completion of the proposed Newmark distribution. Future dividends remain subject to board discretion.
- The proposed Newmark distribution was not assured, was subject to conditions and tax considerations, and was within BGC’s discretion. BGC’s Newmark shares were subject to a 180-day lock-up scheduled to expire June 13, 2018.
- Credit ratings were BBB- from both Fitch and S&P, with negative watch/negative CreditWatch implications. Key financial risks include increased debt, refinancing and interest costs, and access to liquidity and capital.
- Other material risks include market and trading-volume sensitivity, regulatory change (including MiFID II and derivatives rules), Brexit uncertainty, competition and broker retention, cybersecurity and operational disruptions, counterparty exposure, and real estate lending risk-sharing and GSE/HUD relationships.
- Related-party arrangements with Cantor include financing, clearing, services, referrals and the Real Estate LP investment. The filing identifies potential conflicts of interest and Cantor’s voting control; Cantor held approximately 60% of BGC’s voting power at year-end.
- The filing discusses legal, employment and regulatory matters, but states management did not expect currently pending matters, taken as a whole, to materially adversely affect the consolidated financial statements. A Newmark trademark dispute remained pending, with trial scheduled for 2019.
Most important facts for investors to verify
- Reconcile the sharp decline in GAAP net income and fourth-quarter loss, including tax remeasurement, transition tax, exchangeability awards and other nonrecurring items.
- Assess cash generation after separating mortgage-loan funding and sale flows from operating cash flow, and confirm liquidity available outside regulated subsidiaries.
- Review debt maturities, floating-rate exposure, credit-rating outlooks and Newmark’s obligations to BGC, including the $412.5 million of BGC Notes and repayment terms.
- Track the Newmark distribution decision, lock-up expiration, tax qualification and resulting ownership, dilution and control structure.
- Evaluate Berkeley Point’s warehouse funding, GSE/HUD approvals, loan servicing portfolio and potential risk-sharing or repurchase obligations.
- Consider related-party terms and governance implications, including Cantor’s control and BGC’s and Newmark’s continuing service, financing and referral arrangements.