BGC Partners, Inc. — Q3 2020 Form 10-Q
Entity note: The supplied filing is for BGC Partners, Inc. (Nasdaq: BGCP), not an issuer identified as BGC Group, Inc. It covers the quarter and nine months ended September 30, 2020; filed November 6, 2020. Figures below are in U.S. dollars unless noted.
Business context and reporting period
BGC is a global brokerage and financial technology company serving institutional financial markets, with brokerage, electronic trading, data, software, post-trade and insurance businesses. It reports as one operating segment. Newmark had been spun off in 2018 and is not consolidated.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $455.0m | $521.1m | $1,577.3m | $1,617.1m |
| Pre-tax income | $28.7m | $8.7m | $106.6m | $162.6m |
| Consolidated net income | $24.9m | $2.6m | $85.5m | $111.5m |
| Net income available to common stockholders | $19.4m | $(3.5)m | $61.8m | $72.0m |
| Basic and diluted EPS | $0.05 | $(0.01) | $0.17 | $0.21 |
Q3 pre-tax margin was approximately 6.3% of revenue, versus 1.7% a year earlier; the nine-month margin was 6.8%, versus 10.1%. Q3 expenses fell 16.2% to $432.6m, more than offsetting lower revenue. Nine-month expenses declined 1.7% to $1,474.2m. Interest expense increased to $19.5m for Q3 and $54.3m for the nine-month period.
- Revenue mix: Q3 brokerage revenue fell 14.0% to $417.2m. Rates declined 23.9%, FX 15.3%, equity derivatives and cash equities 16.8%, energy and commodities 9.8%, and credit 6.0%; insurance grew 9.0%. Data, software and post-trade revenue rose 17.2% to $21.5m.
- Cash flow: Nine-month operating cash flow was $141.5m versus $133.6m. Investing cash outflow was $64.7m; financing cash inflow was $29.8m. Cash and cash equivalents increased by $100.4m, including changes in cash segregated for regulatory requirements.
- Liquidity and balance sheet: Reported liquidity, as defined by the company, was $549.1m at September 30, up from $473.2m at year-end 2019. Cash and cash equivalents were $492.3m; total assets were $4.594bn, liabilities $3.768bn and equity $802.6m. Cash segregated under regulatory requirements was a further $244.2m and is not included in the company’s liquidity measure.
- Debt: Notes payable and other borrowings were $1.318bn, plus $3.5m of short-term borrowings. BGC issued $300m of 4.375% notes due 2025, repaid $225m outstanding on its revolving facility, and repurchased $44m principal of its 5.125% notes due 2021. No revolver borrowings remained at quarter-end; the facility matures in February 2023.
- Other: Employee and partner loans, net, rose to $401.6m from $315.6m at year-end. The quarterly dividend was reduced to $0.01 per share; nine-month dividends paid were $56.8m versus $131.0m a year earlier.
Material changes versus the prior comparable period
Q3 revenue declined 12.7% year over year, reflecting lower brokerage activity across several markets amid COVID-19-related disruption, low interest rates and reduced commodity hedging demand. Lower variable compensation, the cost-reduction program and reduced travel and promotion spending helped lift Q3 pre-tax income. For the nine months, pre-tax income fell 34.4%, including because the 2019 period included an $18.4m gain on the sale of CSC Commodities and $20.4m of investment fair-value gains. Nine-month compensation also included $32.0m of cost-reduction charges.
Fully Electronic brokerage, data, software and post-trade revenue grew 19.0% in Q3. In contrast, total brokerage revenue was down 14.0%. The balance sheet expanded 17.3% from year-end, primarily due to higher broker-dealer and customer receivables and cash.
Outlook, risks and unusual items
- Management outlook: BGC expected newer stand-alone Fenics businesses, including Fenics UST, Fenics GO and Lucera, to improve profitability by $40m and collectively break even in 2021. Management also forecast approximately 20% insurance brokerage top-line growth in the next quarter, to more than $50m, and expected the insurance business to improve its bottom line in 2021 versus 2020. These are forward-looking expectations, not guarantees.
- Other strategic plans: Management continued exploring a conversion to a simpler corporate structure, subject to tax, regulatory, lender and rating-agency considerations. It expected to announce an updated capital-return policy early the following year, considering both dividends and buybacks.
- COVID-19 and markets: Risks include further pandemic disruption, changing trading volumes and market liquidity, remote-work technology and cybersecurity exposure, counterparty credit deterioration, and effects on clients and vendors. Management cited lower Q3 secondary-market volumes and reduced hedging demand, while noting electronic execution and recurring technology revenues as areas of strength.
- Other risks: The filing highlights uncertainty around Brexit and cross-border market access, extensive financial regulation, potential refinancing and credit-rating risks, LIBOR transition, and limits on access to capital held in regulated subsidiaries. At quarter-end, regulated subsidiaries held $682.2m of net assets and regulatory capital exceeded aggregate requirements by $385.2m.
- Unusual and contingent matters: The company recorded a $2.5m Q3 and $32.0m nine-month compensation charge under its $35m cost-reduction program. A $1.4m civil penalty followed a September 2020 SEC settlement concerning alleged non-GAAP disclosure violations for periods in 2015–Q1 2016; BGC neither admitted nor denied the allegations. A derivative suit concerning the Berkeley Point acquisition and Real Estate L.P. investment remained in discovery; the company said it intended to defend the case and could not determine its outcome. Management said it could not estimate losses beyond recorded accruals for pending matters.
Important facts for investors to verify
- Confirm issuer identity: this filing names BGC Partners, Inc., despite the request metadata naming BGC Group, Inc.
- Review the debt maturity and refinancing plan, particularly the remaining 5.125% notes due May 2021 and the company’s cash and liquidity definitions.
- Assess whether brokerage revenue and market volumes recover, and whether the forecast Fenics break-even and insurance growth targets are achieved.
- Examine the quality and collectability of the $401.6m employee and partner loan balance, receivables, and the $2.9m CECL reserve.
- Track dividend and partner-distribution policy, potential dilution from partnership units and equity awards, and progress on any corporate-structure conversion.
- Monitor COVID-19, Brexit, regulatory and litigation developments, including the derivative suit and the SEC settlement.