BGC Partners, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The filing was signed November 8, 2021. BGC is a global brokerage and financial technology company operating across Rates, Credit, FX, equities, energy and commodities, insurance, and electronic trading and technology services. The financial statements are unaudited and include the Insurance brokerage business, classified as held for sale at quarter-end.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $473.7 million | $455.0 million | $1,553.8 million | $1,577.3 million |
| Income (loss) before income taxes | $(20.6) million | $17.3 million | $71.8 million | $94.2 million |
| Consolidated net income (loss) | $(13.9) million | $8.7 million | $64.7 million | $66.2 million |
| Net income (loss) available to common stockholders | $(11.4) million | $8.9 million | $47.6 million | $49.1 million |
| Basic EPS | $(0.03) | $0.02 | $0.12 | $0.14 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $306.1 million | $139.6 million |
Q3 expenses were $500.8 million, or 105.8% of revenue; the pretax margin was negative 4.4%. For the first nine months, expenses were $1,498.5 million, or 96.4% of revenue, and the pretax margin was 4.7%. Compensation and employee benefits, including equity-based compensation and partnership allocations, were $336.1 million in Q3, up $58.4 million year over year. The filing’s reported GAAP results do not include a single consolidated operating-margin measure separate from pretax income.
Revenue mix and trends: Q3 brokerage revenue was $441.0 million, up 5.7%. Rates rose 7.7% to $128.5 million; Energy and commodities rose 12.8% to $74.3 million; Equity derivatives and cash equities rose 15.4% to $54.7 million. Credit declined 13.3% to $59.0 million. For the nine months, brokerage revenue fell 1.5% to $1,446.8 million, led by a 15.1% decline in Credit and a 5.3% decline in FX. Fenics revenue rose 18.7% to $95.3 million in Q3 and 28.0% to $299.9 million in the nine-month period. Data, software and post-trade revenue increased 3.3% in Q3 and 7.8% year to date.
Cash flow, liquidity, and debt
- For the first nine months, operating cash flow was $306.1 million; investing cash outflow was $30.7 million and financing cash outflow was $338.1 million. Financing uses included $227.1 million of Class A share repurchases, $79.2 million of partnership-interest redemptions and repurchases, and $11.4 million of dividends.
- Cash and cash equivalents were $450.8 million at September 30, 2021, versus $596.3 million at December 31, 2020. BGC’s defined liquidity measure was $485.6 million, down from $655.2 million. The company cited repurchases, working-capital movements, bonuses, taxes, Fenics investment, and cash reclassified as held for sale as contributing factors.
- Notes payable and other borrowings were $1,352.5 million, including $298.8 million outstanding under the $350 million revolving credit facility; short-term borrowings were $3.7 million. Senior-note carrying value was $1,042.5 million. The remaining $256 million principal of the 5.125% notes was repaid at maturity in May 2021.
- After quarter-end, BGC received $534.9 million in gross proceeds from the November 1 sale of its Insurance brokerage business and repaid the $300 million revolver balance in full. The filing does not provide a post-transaction net-debt figure.
- Regulated subsidiaries held $669.4 million of net assets, excluding amounts classified as held for sale, and had regulatory net capital $360.5 million above requirements.
Material changes, outlook, and notable items
- Profitability weakened despite higher Q3 revenue. Q3 pretax results moved from $17.3 million income to a $20.6 million loss, primarily because total compensation costs increased $58.4 million. Equity-based compensation and partnership allocations rose to $78.5 million from $33.0 million, including higher charges for grants of exchangeability and share issuance. Nine-month pretax income fell 23.8% year over year.
- Insurance sale: The sale to The Ardonagh Group closed November 1, 2021 for $534.9 million gross cash proceeds after closing adjustments, subject to limited post-closing adjustments. The business generated Q3 revenue of $51.6 million and a pretax loss of $6.4 million. It was not presented as discontinued operations. Cantor Fitzgerald & Co. advised on the sale; a $4.4 million fee was payable to Cantor.
- Capital allocation: BGC repurchased 41.9 million Class A shares for $234.6 million during the first nine months, at a weighted-average price of $5.59. Together with cash unit redemptions, total repurchases and redemptions were 46.7 million units/shares for $262.9 million. The company said it prioritizes share and unit repurchases over dividends while continuing to invest in Fenics. A $0.01-per-share Q3 dividend was declared after quarter-end.
- Management outlook: Management cited electronic trading, market data, connectivity, automation and post-trade services as growth opportunities, and expects newer Fenics Growth Platforms to become profitable as they scale; they were not yet generating significant revenue. FMX, the combined U.S. Treasury and futures marketplace, was expected to open for trading in mid-2022. The company continued exploring a possible corporate conversion. No quantified company-wide earnings or revenue guidance is provided in the supplied filing text.
- Market and operating risks: Results depend on transaction volumes, volatility, issuance and client activity; Q3 industry conditions varied by product. Management also highlighted COVID-19 uncertainty, interest-rate and market changes, regulation and capital requirements, Brexit-related access uncertainty, competition, technology and cybersecurity, counterparty and credit risk, and related-party relationships.
- Legal and control matters: A derivative lawsuit concerning the Berkeley Point and Real Estate L.P. transactions proceeded to trial in October 2021; the company disputes the claims and says the outcome cannot be determined with certainty. Management concluded disclosure controls were ineffective at September 30 because of a previously identified material weakness involving U.K. vendor wire-payment validation and certain U.K. partnership disbursement reconciliations. Remediation measures were implemented but had not yet operated long enough to be considered fully remediated.
- Other unusual items: The filing reports a $7.2 million additional expense associated with the Cantor Fitzgerald Relief Fund in September 2021. Q3 tax benefit was $6.7 million; management attributed tax-period variability partly to U.K. tax-rate changes, reversal of prior U.S. tax accruals, and changes in geographic and business earnings mix.
Most important facts for investors to verify
- Whether the insurance-sale proceeds, revolver repayment, and subsequent share repurchases materially change liquidity, leverage, and future interest expense.
- Whether Fenics growth and FMX’s planned launch translate into durable revenue and profitability, particularly as newer platforms scale.
- How much of the Q3 loss reflects recurring compensation economics versus exchangeability and share-related charges, and how those charges affect dilution and cash distributions.
- Whether trading activity and Credit/FX performance recover, and how post-sale revenue and earnings compare after removing the Insurance brokerage business.
- Progress in remediating the material weakness, developments in the derivative suit, and any additional legal, regulatory, or related-party costs.
- Potential dilution and compensation impacts from the proposed Equity Plan amendments, which would increase authorized award shares by 100 million, subject to stockholder approval.