BGC Partners, Inc. — Q2 2013 Form 10-Q
Filing identity: The filing is for BGC Partners, Inc. (the company is identified in the request metadata as BGC Group). It covers the quarter and six months ended June 30, 2013; financial statements are unaudited.
Business context and reporting period
BGC operates financial brokerage and technology businesses and a commercial real estate services business, reported as Financial Services and Real Estate Services. The quarter was marked by the June 28 sale of its on-the-run electronic U.S. Treasury platform to NASDAQ OMX and a large partnership restructuring. Comparisons with 2012 also reflect the April 2012 Grubb & Ellis acquisition.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data. Q2 and six-month comparisons are year over year.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $1,193.2 | $449.5 | $1,638.1 | $844.5 |
| Revenue excluding NASDAQ OMX gain | $470.0 | $449.5 | $915.0 | $844.5 |
| Income before taxes | $208.3 | $4.5 | $221.9 | $23.4 |
| Consolidated net income | $129.5 | $4.4 | $140.1 | $16.1 |
| Net income available to common stockholders | $34.5 | $2.0 | $41.5 | $10.1 |
| Basic / diluted EPS | $0.20 / $0.18 | $0.01 / $0.01 | $0.25 / $0.24 | $0.07 / $0.07 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $60.0 | $83.6 |
- The $723.1 million divestiture gain drove the reported revenue and earnings surge. Excluding that gain, revenue increased about 4.6% in Q2 and 8.4% in the first half. These adjusted figures are simple calculations from reported totals, not company-defined non-GAAP measures.
- Q2 Financial Services revenue rose 2.3% to $316.3 million, while pretax segment income fell 3.6% to $56.4 million. Real Estate Services revenue increased 9.1% to $143.1 million and pretax segment income rose to $9.3 million from $5.1 million.
- For the first half, Financial Services revenue declined 2.1% to $640.2 million and pretax segment income declined 10.8% to $120.4 million. Real Estate Services revenue rose 48.2% to $255.8 million, largely reflecting Grubb & Ellis being included for a full six months; pretax segment income was $6.1 million.
- Q2 reported pretax margin was 17.5%, but is not representative of ordinary operations because of the divestiture gain. Compensation expense included $464.6 million of non-cash restructuring charges. Other expenses also included a $25 million charitable contribution commitment.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $1,070.3 million; cash plus unencumbered securities held for liquidity was $1,102.4 million. Cash rose substantially following the NASDAQ OMX sale.
- Six-month operating cash flow was $60.0 million, down from $83.6 million. Investing cash flow was positive $729.4 million, principally reflecting $747.7 million of divestiture proceeds; financing cash flow was negative $105.5 million.
- Total assets were $3,448.3 million and total equity was $758.6 million. Notes and collateralized borrowings totaled $423.8 million, including $150 million of 8.75% convertible notes payable to Cantor; the balance sheet separately presents those related-party notes. The $130 million revolving credit facility had no borrowings outstanding at June 30.
- Management reported approximately $459 million of sale proceeds expected to remain after anticipated taxes and other payments tied to the sale and partnership restructuring. It said proceeds could support debt repayment, acquisitions, organic investment, and/or unit or share repurchases.
- Declared dividends were $0.12 per share for Q2, payable September 6, 2013. Management said it expected to maintain the regular $0.12 quarterly dividend for the foreseeable future.
Material changes, outlook and risks
- NASDAQ OMX sale: BGC received $750 million cash, subject to adjustments, and recorded a $723.1 million pretax gain. Potential additional consideration is up to 14,883,705 NASDAQ OMX shares, paid over 15 years only for years in which NASDAQ OMX meets the specified $25 million gross-revenue threshold. The earn-out was not included in the gain. BGC sold the on-the-run electronic benchmark Treasury platform, but retained other Treasury, brokerage, market-data and software businesses. It agreed to a three-year restriction on certain fully electronic benchmark Treasury brokerage activities.
- Partnership restructuring: BGC redeemed or exchanged 77.4 million partnership units and granted and expected to issue 45.2 million Class A shares, approximately 39.1 million of them restricted. Management said the combined actions reduced fully diluted share count by 32.2 million and were expected to lower future employee/partner share issuance. The filing recognizes $464.6 million in related non-cash compensation charges, including a $160.5 million reserve against employee loans. Restricted shares generally become saleable after five or ten years, subject to conditions.
- Operating environment: Management described financial markets as challenging, with subdued activity and volatility, while citing Q2 revenue growth and market-share gains versus certain interdealer-broker competitors. It identified near-term headwinds from quantitative easing for Rates, mixed Credit and equity-market conditions, and potential longer-term support from government debt issuance. Management expected OTC market regulation to be neutral to positive overall for large intermediaries, while noting continuing implementation of U.S. and international rules.
- Other risks and contingencies: Results depend on transaction volumes, volatility, hiring and retention, and execution of the real estate integration and technology strategy. The filing describes regulatory, counterparty, market, operational, foreign-exchange and liquidity risks. Tullett-related proceedings include claims for at least $779 million compensatory and $500 million exemplary damages in a FINRA arbitration, as well as other litigation; management disputes the claims and says it intends to defend them. Management said currently pending matters were not expected to have a material adverse effect on the company as a whole, but outcomes remain uncertain.
- Ratings and related-party exposure: Fitch downgraded BGC’s long-term rating from BBB to BBB- on June 28, 2013, changing the outlook to stable; S&P rated it BBB- with a stable outlook. BGC reported $500 million of reverse repurchase agreements with Cantor as of July 31, 2013, collateralized by securities with a reported fair value of $510 million. In August, the Audit Committee authorized up to $350 million in a short-term asset-backed commercial paper program involving Cantor entities.
- No numerical full-year earnings or revenue guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of the $750 million sale proceeds remained after actual tax, restructuring and other cash payments, and how management deployed the residual cash.
- Whether the NASDAQ OMX earn-out thresholds are achieved, and the revenue and earnings contribution lost with the divested platform versus retained businesses.
- The recurring compensation, employee-loan reserve and share-count effects of the partnership restructuring, including actual share issuance, restrictions and dilution.
- Underlying segment revenue, profitability and cash generation without the one-time divestiture gain and restructuring charges; also monitor market-volume and electronic-trading trends.
- Debt repayment and refinancing plans, the renewal or replacement of the revolving credit facility, credit-rating developments, and the terms and concentration of related-party cash placements.
- Developments in material litigation and regulatory proceedings, including the Tullett claims and any resulting financial or operating impact.