BGC Partners, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The filing is by BGC Partners, Inc. (Nasdaq: BGCP), the global brokerage and financial technology company; the filing does not use the “BGC Group, Inc.” name in its registrant heading.
Business context
BGC provides Voice, Hybrid and electronic brokerage, clearing and post-trade services, market data, software and connectivity across rates, credit, FX, equities, energy and commodities, insurance and other markets. It reports one operating segment. Comparisons with Q2 2020 are affected by unusually high trading activity and volatility at the onset of COVID-19.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $512.5m | $519.1m | $1,080.0m | $1,122.3m |
| Operating income before taxes | $21.7m | $47.9m | $95.7m | $78.9m |
| Consolidated net income | $22.8m | $39.3m | $82.0m | $59.4m |
| Net income available to common stockholders | $18.2m | $27.9m | $61.3m | $41.6m |
| Basic / fully diluted EPS | $0.05 / $0.05 | $0.08 / $0.07 | $0.16 / $0.16 | $0.12 / $0.11 |
| Cash from operating activities | — | $198.3m | $73.0m |
- Q2 pretax margin was 4.2%, versus 9.2% a year earlier; total expenses rose 4.3% to $494.0m despite revenue falling 1.3%. The filing does not present a gross margin measure.
- For the first half, pretax income increased 21.3% as expenses fell 4.4%, more than offsetting the 3.8% revenue decline. Compensation and employee benefits fell $50.0m, while equity-based compensation and partnership allocations rose $21.8m.
- Q2 brokerage revenue declined 2.1%. Credit fell 24.2% to $72.6m, while Rates rose 2.6% to $136.5m, Energy and commodities rose 4.8% to $74.7m, and Insurance rose 18.6% to $54.3m.
- Fenics revenue grew 23.5% to $97.0m in Q2, including Fenics Markets revenue of $86.4m and Fenics Growth Platforms revenue of $10.6m. Fenics represented 21.2% of revenue excluding Insurance, its highest contribution to date. Fenics Markets reported a 29.9% pretax margin.
- At June 30, cash and cash equivalents were $420.3m; company-defined liquidity was $469.9m, down from $652.6m at year-end. Operating cash flow was $198.3m, investing cash use was $25.1m and financing cash use was $265.0m for the first half.
- Notes payable and other borrowings were $1,243.2m, plus $6.0m of short-term borrowings. This included $188.7m drawn on the $350m revolving facility. The $256m principal balance of 5.125% notes was repaid at maturity in May. Fixed-rate debt was $1,243.2m; reported average interest rate on notes payable and other borrowings was 4.23%.
Material changes and notable items
- On May 26, BGC agreed to sell its Insurance brokerage business to The Ardonagh Group for $500m cash, subject to working-capital and other closing adjustments, regulatory approvals and other conditions. At June 30, assets of $1,048.9m and liabilities of $850.1m were classified as held for sale. The sale was not treated as discontinued operations; no impairment was recorded. Management expected closing before December 31, 2021.
- The insurance business contributed $54.3m of Q2 revenue and $106.9m for the first half, but reported pretax losses of $6.7m and $7.1m, respectively.
- Cash declined in part because of the $256m note repayment, share repurchases, working-capital movements and cash classified as held for sale; the company also drew $190m on its revolver. BGC repurchased 17.5m Class A shares for $107.8m in the first half and redeemed partnership units for cash.
- The Board declared a $0.01-per-share Q2 dividend, payable September 7, 2021. Management said it would prioritize share and unit repurchases over dividends and distributions while continuing investment in Fenics; it intended to reassess the dividend with a possible nominal increase toward year-end, not a firm commitment.
- After quarter-end, the company increased its share repurchase and unit redemption authorization to $400m. The previously authorized amount had $114.6m remaining at June 30.
- The purchase of Cantor’s futures exchange and clearinghouse business closed July 30, 2021, for approximately $4.9m plus cash at closing and a profit-based earn-out subject to a cap.
Outlook, risks and controls
- Management expects continued growth from electronic execution, data and post-trade services, and newer Fenics platforms, but said some growth platforms are not yet fully scaled or generating significant revenue. No specific company-wide revenue or earnings guidance is provided.
- Management cited favorable rates conditions, elevated government debt issuance and potential interest-rate volatility as possible tailwinds. Quantitative easing, market-volume changes, regulation, COVID-19 effects and uncertainty around Brexit and U.K.-EU financial-services access could weigh on results.
- Liquidity and funding risks include working-capital demands, regulatory capital restrictions, debt refinancing and reliance on access to credit markets. Much of reported cash was held by foreign subsidiaries, and some assets are subject to regulatory requirements.
- The company reported a material weakness in U.K. controls over vendor wire payments and certain partnership disbursement reconciliations. Remediation steps had been implemented but were still being evaluated and tested; management concluded disclosure controls were not effective as of June 30, 2021.
- BGC disclosed ongoing litigation, including a derivative action concerning the Berkeley Point acquisition and a real-estate investment; summary-judgment motions were pending and a trial was set for October 2021 if the motions were denied. Management said it could not estimate losses beyond existing accruals for specific matters and did not expect pending matters overall to materially affect financial condition, results or cash flows.
Important facts for investors to verify
- Whether the Insurance sale closes on the anticipated terms and timing, and how its disposal affects ongoing revenue, earnings and liquidity.
- Whether operating cash flow and company-defined liquidity remain adequate after debt service, regulatory constraints, repurchases and other capital needs.
- Whether Fenics growth and stated margin potential persist as electronic adoption and newer platforms scale, especially amid volatile brokerage volumes.
- How equity-based compensation, partnership exchanges and share repurchases affect dilution, GAAP earnings and per-share returns.
- Whether remediation controls operate effectively long enough for management to conclude the material weakness is resolved.
- The outcome of the derivative litigation and the extent of any costs or liabilities not quantifiable in the filing.