Business context and reporting period
The filing is BGC Partners, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012, filed August 8, 2012. The registrant named in the filing is BGC Partners, Inc.; this differs from the request metadata’s “BGC Group, Inc.”
BGC brokers wholesale financial products and provides related services, alongside commercial real estate brokerage and property management. The real estate business expanded through Newmark, acquired in 2011, and Grubb & Ellis, acquired April 13, 2012.
Financial performance and liquidity
Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $449.5 | $364.6 | $844.5 | $729.6 |
| Operating income before taxes | $4.5 | $23.5 | $23.4 | $48.0 |
| Consolidated net income | $4.4 | $17.4 | $16.1 | $34.6 |
| Net income available to common stockholders | $2.0 | $9.7 | $10.1 | $18.3 |
| Basic and diluted EPS | $0.01 | $0.09 | $0.07 | $0.17 |
- Q2 revenue increased 23.3%, but pretax income fell about 81% and common-stockholder income fell about 80%. Total expenses rose to $445.1 million from $341.1 million; compensation expense increased 40.8%, including $38.1 million of expense related to granting exchangeability on partnership units. Pretax margin was approximately 1.0%, versus 6.4% a year earlier.
- For the first half, revenue grew 15.8%, while pretax income declined about 51% and common-stockholder income declined about 45%. Compensation expense included $64.1 million related to partnership-unit exchangeability.
- Revenue growth chiefly reflected the acquired real estate operations. Q2 Real Estate Services revenue was $131.2 million and pretax income was $5.1 million; Financial Services revenue declined 12.3% to $309.2 million, with pretax income down 18.6% to $58.5 million. Corporate items generated a $59.2 million pretax loss.
- Cash from operations was $83.6 million for the first half, versus cash used of $4.1 million a year earlier. Investing activities used $90.1 million, including $25.7 million for acquisitions, $16.8 million for investments in unconsolidated entities, and $22.0 million for notes receivable. Cash and cash equivalents were $367.8 million at June 30, down from $369.7 million at year-end.
- Management-defined cash position, including unencumbered liquidity securities, rose $19.8 million to $405.5 million. The filing attributes the increase in part to $112.5 million of senior notes issued in June and positive working-capital movements; dividends and partnership distributions totaled $95.2 million in the period.
- Total assets were $1.876 billion, versus $1.405 billion at year-end; total liabilities were $1.382 billion, versus $904.2 million. Debt and collateralized borrowings totaled $452.2 million, including $150 million of 8.75% notes payable to Cantor. The $130 million revolving facility had no borrowings outstanding at June 30. The company issued $112.5 million of 8.125% senior notes due 2042; the carrying value was $108.7 million after issuance costs. The filing reports $362.7 million of net assets in regulated subsidiaries and regulatory capital exceeding aggregate requirements by $182.8 million.
- The declared quarterly dividend was $0.17 per share. Basic weighted-average shares rose to 140.4 million from 112.6 million in Q2 2011; potential dilution from partnership interests and other securities is substantial, with fully diluted weighted-average shares of 274.8 million.
Material changes, outlook and risks
- Management said subdued market volumes and volatility pressured Financial Services results; Q2 fully electronic revenue was down 6.6% year over year to $37.9 million, though electronic FX revenue grew about 49%. The company had 2,605 brokers and salespeople, up over 46% year over year, while average Q2 revenue per front-office employee fell approximately 21% to $159,000.
- Management cited long-term potential from high sovereign debt issuance and electronic trading, but near-term headwinds from quantitative easing and weak volumes. It expected electronic trading growth to resume over time and aimed to complete the transfer of remaining Grubb & Ellis brokers, while noting it could not assure all would be hired. No specific financial guidance was provided.
- The filing describes material legal and regulatory exposure. Tullett-related claims include a FINRA arbitration seeking at least $779 million compensatory and $500 million exemplary damages; BGC disputes the claims and says it intends to defend itself. The company states that the ultimate outcomes of pending matters are uncertain, while management does not expect currently pending matters to materially harm financial position, results, or cash flows.
- The U.K. regulator’s prior review identified risk, compliance, control, and governance weaknesses. The FSA relaxed a voluntary undertaking in March 2012, but further remediation and a Skilled Person’s review remained planned for the second half of 2012; the company expected to complete remaining program items during 2012.
- Other risks include changing derivatives regulation, European sovereign-debt uncertainty, transaction-volume sensitivity, counterparty and principal-position risk, operating and technology disruptions, restricted access to regulated-subsidiary capital, and reliance on financing. Moody’s rating engagement was terminated July 5; Moody’s placed the rating on review for possible downgrade July 30. Fitch rated the company BBB and S&P BBB-, both with stable outlooks.
Important facts for investors to verify
- Confirm the registrant identity and ticker relevant to the requested company: this filing is for BGC Partners, Inc., and its new senior notes traded under “BGCA.”
- Separate organic Financial Services performance from acquired real estate revenue, and assess whether real estate profitability improves as integration proceeds.
- Review the drivers and sustainability of operating cash flow, including large matched-trade receivables and payables, working-capital movements, and acquisition-related spending.
- Track debt service, the 8.125% notes’ effective subordination to subsidiary liabilities, credit-rating developments, and any refinancing or liquidity needs.
- Monitor partnership-unit compensation, share issuance and potential dilution, dividend coverage, and related-party dealings with Cantor.
- Follow the Tullett litigation and U.K. regulatory remediation for material changes in exposure, costs, or operating restrictions.