BGC Partners, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 1, 2021. The filing is for BGC Partners, Inc. (NASDAQ: BGCP), a global brokerage and financial technology company. The company operates through financial brokerage, electronic trading and related technology, data, post-trade, and insurance businesses. Newmark was spun off in 2018 and is reported as discontinued operations for periods through the spin-off.
Financial performance
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $2,056.7 million | $2,104.2 million |
| Income before taxes | $77.9 million | $122.1 million |
| Continuing-operations net income | $56.6 million | $72.3 million |
| Net income available to common stockholders | $48.9 million | $47.6 million |
| Basic / diluted EPS from continuing operations | $0.14 / $0.13 | $0.14 / $0.13 |
| Cash flow from operating activities | $304.3 million | $239.1 million |
| Cash and cash equivalents at year-end | $593.6 million | $415.4 million |
| Company-defined liquidity | $652.6 million | $473.2 million |
| Notes payable and other borrowings | $1,315.9 million | $1,142.7 million |
Revenue declined 2.3% year over year, while pre-tax income fell 36.2%. Total expenses were $1,985.8 million, or 96.6% of revenue; the pre-tax margin was approximately 3.8%, versus 5.8% in 2019. Cash flow from operations increased, but included significant working-capital movements and non-cash adjustments. The company reported a $21.3 million income tax provision.
In Q4 2020, revenue was $479.4 million versus $487.2 million in Q4 2019. The company reported a $19.5 million pre-tax loss, a $12.7 million consolidated net loss, and a $2.3 million loss available to common stockholders (basic and diluted EPS of $(0.01)). Q4 2019 figures were a $29.4 million pre-tax loss and a $20.6 million loss available to common stockholders.
Business mix and changes versus prior year
- Brokerage revenue fell 2.5% to $1,919.3 million. Rates declined 8.5% to $544.1 million and FX declined 14.9% to $315.3 million, reflecting weaker activity in some markets and low rates and quantitative easing.
- Credit rose 7.6% to $329.9 million; insurance rose 17.3% to $182.7 million; energy and commodities rose 1.4% to $292.6 million; and equity derivatives and cash equities rose 1.3% to $254.7 million.
- Fully Electronic brokerage revenue increased to $234.9 million from $204.6 million; its share of brokerage revenue rose to 12.2% from 10.4%. Data, software and post-trade revenue grew 12.0% to $81.9 million. Management cited growth in Fenics, Lucera and the Algomi acquisition.
- Compensation and employee benefits increased 1.4% to $1,315.2 million, including equity-based compensation and allocations. Other expenses declined 9.2% to $670.6 million, notably as selling and promotion costs fell. Interest expense increased 27.2% to $76.6 million.
- Revenue concentration remained material: the ten largest customers accounted for 27.8% of revenue; the largest customer accounted for 4.4%. The U.K. and U.S. generated 42.2% and 25.2% of revenue, respectively.
Liquidity, debt and capital allocation
Year-end cash and cash equivalents were $593.6 million, including $443.5 million held by foreign subsidiaries; an additional $257.0 million was segregated under regulatory requirements. Company-defined liquidity was $652.6 million and is a non-GAAP measure. The revolving credit facility had a $350 million commitment, matured February 2023, and had no borrowings outstanding at year-end after repayment of $225 million in July 2020.
At year-end, notes and collateralized borrowings totaled $1,315.9 million, plus $3.8 million of short-term borrowings. The company issued $300 million of 4.375% notes due 2025, redeemed $44 million principal of its 5.125% notes, and repaid its revolving-credit borrowings. The 5.125% notes mature in May 2021; the filing’s contractual-obligations table lists $300 million of principal due within one year, while the year-end carrying value was $255.6 million. Investors should reconcile the stated principal obligation with the tender and remaining outstanding balance disclosures.
The quarterly dividend was reduced from $0.10 to $0.01 per share beginning in Q1 2020; total dividends declared for 2020 were $0.17 per share. Management said 2021 capital priorities are returning capital and investing in Fenics, with share and unit repurchases prioritized over dividends. The board declared a $0.01-per-share Q4 dividend in February 2021 and management said it would reassess the dividend with an aim to increase it modestly later in 2021. No quantified revenue or earnings guidance is provided in the filing.
Management commentary, risks and unusual items
- Management said COVID-19 and its macroeconomic effects hurt 2020 revenue, particularly Rates and FX. It also highlighted electronic trading, recurring technology revenue, record government and corporate debt issuance, and firmer insurance pricing as potential business tailwinds. These are qualitative expectations, not formal guidance.
- A $35 million cost-reduction program was launched in 2020; $33.5 million of related U.S. GAAP compensation charges were recorded during the year. Management also cited remote-work, productivity, cybersecurity and client-activity risks from the pandemic.
- Management identified a cumulative $35.2 million impact on consolidated net income from theft of U.K. tax-payment-related funds by two individuals associated with the company, over several years through September 2020. Litigation is underway; the company expects to recover most or substantially all of the funds through insurance and litigation. Prior periods were revised; management said the revisions were not material to previously issued periods, but recording the accumulated adjustment only in 2020 would have been material.
- Management identified a material weakness in controls over certain U.K. wire payments and partnership-payment reconciliations. Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation was underway.
- Other notable matters include a $25 million 2019 CFTC and New York Attorney General settlement, with a two-year compliance monitor, and a 2020 SEC settlement involving historical non-GAAP disclosures and a $1.4 million civil penalty. A derivative lawsuit challenging related-party transactions remains pending; the company disputes the allegations.
- Key ongoing risks include market-volume and interest-rate sensitivity, COVID-19 uncertainty, Brexit and financial-services market access, competition and talent retention, regulation and litigation, cybersecurity, indebtedness and refinancing, customer concentration, Cantor’s control and related-party conflicts, and potential dilution from equity issuance.
Most important facts for investors to verify
- Reconcile the $35.2 million U.K. funds theft impact, insurance coverage, litigation recoveries and the related financial-statement revisions.
- Track remediation of the U.K. internal-control material weakness and any subsequent auditor or management conclusions.
- Confirm the actual amount and timing of the 5.125% notes due May 2021, given the tender offer, stated year-end carrying value and contractual-obligations disclosure.
- Assess whether Fenics and insurance growth can offset continued weakness in Rates and FX, and whether newer electronic products reach profitability as management expects.
- Monitor debt, liquidity, the dividend and repurchase policy, and the effects of partnership-unit and share issuance on fully diluted ownership and EPS.