BGC Partners, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is by BGC Partners, Inc.; the supplied company metadata says BGC Group, Inc. The filing reports annual results, with fourth-quarter figures included.
Business context
BGC operates global Financial Services brokerage and technology businesses and a commercial Real Estate Services business, Newmark Grubb Knight Frank (NGKF). In January 2016, BGC completed its acquisition of the remaining GFI Group shares and became its 100% owner. The company also completed multiple smaller acquisitions during 2016. In December 2015, it sold Trayport, GFI’s electronic European energy business, to ICE.
Financial highlights
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $2,612.6 million | $2,580.4 million |
| Total expenses | $2,532.5 million | $2,719.9 million |
| Income before income taxes | $188.3 million | $380.6 million |
| Net income available to common stockholders | $102.5 million | $121.3 million |
| Diluted EPS | $0.36 | $0.48 |
| Cash and cash equivalents at year-end | $502.0 million | $462.1 million |
| Liquidity, as defined by BGC | $756.9 million | $1,027.0 million |
| Notes payable and collateralized borrowings | $965.8 million | $840.9 million |
| Dividends declared per share | $0.62 | $0.54 |
Reported pretax margin was 7.2% in 2016 versus 14.8% in 2015; the prior-year figure benefited substantially from the Trayport sale gain. The company recorded $7.0 million of divestiture and investment-sale gains in 2016 versus $394.3 million in 2015, primarily the Trayport gain.
- Cash flow: Operating activities used $24.0 million in 2016, compared with providing $227.1 million in 2015. Investing activities provided $333.8 million, including proceeds from sales of marketable securities; financing activities used $270.0 million. Cash and cash equivalents increased $39.9 million to $502.0 million.
- Segment performance: Financial Services revenue was $1,523.2 million, down 1.6%, while pretax income increased 14.6% to $326.5 million, which management attributed primarily to GFI cost synergies and FENICS growth. Real Estate Services revenue rose 6.0% to $1,058.3 million, while pretax income fell 2.6% to $126.4 million, reflecting investment and hiring costs.
- Revenue mix and trends: Brokerage revenue rose 3.3% to $2,319.7 million. Real estate capital markets brokerage grew 27.9%; leasing and other services fell 4.8%. Financial Services FX revenue declined 6.6%, while credit grew 7.4% and energy and commodities grew 13.6%. FENICS net revenue, excluding Trayport, rose 8.6% to $208.6 million.
- Liquidity and debt: Liquidity fell $270.1 million year over year, mainly due to repayment of $159.9 million of convertible notes, GFI merger cash payments, share and unit repurchases, acquisitions, and working-capital changes. Debt included $240 million of 8.375% notes due 2018, $300 million of 5.375% notes due 2019, $300 million of 5.125% notes due 2021, $112.5 million of 8.125% notes due 2042, and $16.2 million of collateralized borrowings. BGC reported BBB- ratings with stable outlooks from Fitch and S&P.
Material changes and unusual items
- Revenue increased 1.2%, while total expenses declined 6.9%. The reported decrease in pretax income and common-stockholder net income chiefly reflects the absence of the large 2015 Trayport disposal gain, rather than a simple like-for-like decline in operating activity.
- BGC issued $300 million of 5.125% senior notes in May 2016 and repaid the remaining approximately $159.9 million of 4.50% convertible notes in July.
- Marketable securities fell to $164.8 million from $650.4 million, mainly as ICE shares received for Trayport were sold. The filing also reports $78.7 million of 2016 Nasdaq earn-out-related income and associated mark-to-market or hedging items within Financial Services.
- Employee loans, net of reserves, increased to $267.5 million from $158.2 million. Related compensation expense was $55.8 million in 2016; the filing reports $86.7 million in 2015, including a $47.2 million reserve.
Outlook, risks, and contingencies
Management expressed confidence that revenue and earnings would grow over time, citing acquisition integration, increased broker productivity, expansion of higher-margin electronic trading, and NGKF growth. It did not provide a quantified full-year 2017 forecast in the supplied filing text. BGC said it expected to use resources for debt repayment, hiring, acquisitions, dividends, and repurchases while maintaining or improving its investment-grade rating.
On February 9, 2017, BGC announced a confidential draft registration statement for a proposed IPO of NGKF and a possible later pro rata distribution of shares, subject to market and other conditions. Timing, offering size, price range, completion, and tax treatment were not assured. The board declared a $0.16-per-share fourth-quarter dividend, payable March 14, 2017.
Key risks include market volumes and volatility, interest-rate and currency changes, Brexit and regulatory changes, competition and technology execution, integration of acquisitions, liquidity and refinancing needs, market risk in unmatched positions and securities holdings, cybersecurity and operational disruption, employee retention, and related-party conflicts involving Cantor. BGC reported that pending legal matters were not expected, based on currently available information, to have a material adverse effect on the consolidated financial statements taken as a whole. The filing describes certain guarantees and legal exposures as unquantifiable or remote; it does not provide a clear aggregate potential-loss value. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective, while certain 2016 acquisitions were excluded from its controls assessment.
Important facts for investors to verify
- Reconcile operating performance with the 2015 Trayport gain and 2016 Nasdaq earn-out and securities mark-to-market effects; assess results excluding those items.
- Review the drivers of negative 2016 operating cash flow, the decline in defined liquidity, and the availability of cash held in regulated or foreign subsidiaries.
- Check debt maturities, interest costs, refinancing capacity, and the remaining GFI merger cash obligation; the filing states $89.9 million had been paid by year-end and $111.2 million was expected in total.
- Assess the collectability and terms of employee and partner loans, and the potential dilution from equity issuance, partnership exchanges, acquisitions, and compensation awards.
- Track the proposed NGKF IPO and separation, including transaction costs, financing and tax consequences, and whether anticipated benefits materialize.
- Confirm subsequent acquisitions, including Besso, and evaluate integration progress, realized synergies, and any related contingent consideration.