BGC Partners, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is for BGC Partners, Inc. (ticker BGCP). On November 30, 2018, the company spun off Newmark Group, Inc.; Newmark is presented as discontinued operations for all periods shown. After the spin-off, BGC operated as a single Financial Services segment. Accordingly, continuing-operations results primarily reflect financial brokerage and technology businesses.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Total revenue, continuing operations | $1,937.8 million | $1,751.0 million | Up 10.7% |
| Brokerage revenue | $1,823.4 million | $1,651.2 million | Up 10.4% |
| Data, software and post-trade revenue | $65.2 million | $54.6 million | Up 19.5% |
| Expenses | $1,815.8 million | $1,777.9 million | Up 2.1%; 93.7% of revenue versus 101.6% |
| Pre-tax income from continuing operations | $179.8 million | $4.1 million | Pre-tax margin was 9.3% versus 0.2%; includes other income |
| Net income from continuing operations | $103.7 million | $(88.6) million | Returned to profit |
| Net income available to common stockholders | $197.5 million | $51.5 million | Includes discontinued operations |
| Basic and diluted EPS from continuing operations | $0.23 | $(0.43) | Reported EPS from discontinued operations was $0.37 in 2018 |
| Net cash from operating activities, continuing operations | $(67.3) million | $392.8 million | Cash flow declined despite improved earnings |
| Liquidity, as defined by the company | $410.9 million | $552.1 million | Down $141.3 million |
| Cash and cash equivalents | $336.5 million | $513.3 million | Includes $199.1 million held by foreign subsidiaries |
| Total debt and borrowings | $768.7 million | $581.1 million | Includes $763.5 million of notes and collateralized borrowings and $5.2 million of short-term borrowings |
Brokerage revenue by product increased in rates to $570.2 million (11.6%), foreign exchange to $375.9 million (15.9%), energy and commodities to $228.2 million (11.9%), and equities, insurance and other asset classes to $357.0 million (9.0%). Credit revenue rose 2.7% to $292.2 million. Fully electronic brokerage revenue grew 16.4%; it represented 10.7% of brokerage revenue, while voice and hybrid brokerage remained the majority.
In the fourth quarter, revenue was $466.4 million versus $432.0 million a year earlier. Continuing-operations pre-tax loss was $23.9 million, compared with a $71.2 million loss in fourth-quarter 2017; continuing-operations net loss was $40.9 million. The filing notes that financial-services revenue is typically weakest in the fourth quarter.
Material changes and notable items
- The Newmark spin-off ended BGC’s ownership and consolidation of the real-estate business. Reported total assets fell 36.8% year over year to $3.43 billion, largely reflecting the removal of Newmark assets and liabilities. Comparisons should therefore use continuing-operations figures.
- Interest expense fell to $41.7 million from $77.0 million, partly because debt was assumed or repaid by Newmark and BGC repaid $240 million of 8.375% notes at maturity in July. BGC issued $450 million of 5.375% senior notes due 2023 in July.
- Operating cash flow was negative as receivables and employee and partner loans increased, among other working-capital movements. Net employee loans, after reserves, were $216.3 million, up from $125.4 million.
- Other income included a $37.6 million fair-value gain on an investment. Other revenue included a $2.5 million settlement and revenue following the November acquisition of Poten & Partners.
- During 2018, BGC sold 33.8 million Class A shares under sales agreements for $447.8 million gross proceeds, and issued shares in connection with partnership-interest exchanges and acquisitions. The filing also reports 0.8 million share repurchases for $10.4 million. Share issuance and compensation-related equity awards are relevant to dilution.
Outlook, risks and contingencies
Management expects earnings to grow as it expands higher-margin electronic brokerage, data, software and post-trade services. It also cited resources for dividends, repurchases, hiring and acquisitions while aiming to maintain or improve its investment-grade rating. The filing provides no specific quantified revenue or earnings guidance. The board declared a $0.14 per-share fourth-quarter dividend in February 2019.
Key risks include sensitivity to trading volumes, market volatility and spreads; competition and customer concentration (the ten largest Financial Services customers accounted for 34.6% of consolidated revenue); regulatory and capital requirements; Brexit uncertainty; cyber and operational disruptions; foreign-exchange exposure; and dependence on key brokers and technology. The company reported $768.7 million of debt and BBB- ratings with stable outlooks from Fitch and S&P. It also described potential conflicts and reliance on Cantor, which controls approximately 61% of BGC’s voting power at year-end.
A putative derivative lawsuit challenges the 2017 Berkeley Point acquisition and related investment, alleging unfair price and process. Defendants moved to dismiss; plaintiffs sought leave to amend in February 2019. BGC said it believes the allegations lack merit and intends to defend the case; the outcome is uncertain. The spin-off’s intended tax-free treatment also depends on stated facts and conditions. Management and the auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Reconcile continuing-operations earnings, discontinued-operations income and common-stockholder earnings, and assess the impact of the Newmark spin-off on comparability.
- Review the operating cash outflow, the decline in company-defined liquidity, and the growth and collectability of employee and partner loans.
- Assess debt maturities, refinancing capacity, fixed versus variable-rate exposures and restrictions on cash transfers from regulated subsidiaries.
- Evaluate the sustainability of revenue growth and the reported investment fair-value gain, including the continued pace of electronic-business expansion.
- Examine share issuance, partnership-unit exchanges, related-party arrangements and Cantor’s voting control for dilution and governance implications.
- Monitor the Berkeley Point litigation, Brexit and regulatory changes, and the terms and conditions required to preserve the spin-off’s intended tax treatment.