BGC Partners, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The filing is by BGC Partners, Inc. (Nasdaq: BGCP); it describes a global brokerage and financial technology business. Newmark was spun off in November 2018 and is no longer consolidated.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $519.1 million | $551.2 million | $1,122.3 million | $1,095.9 million |
| Operating income before taxes | $48.2 million | $36.8 million | $77.9 million | $153.8 million |
| Consolidated net income | $39.6 million | $21.8 million | $60.6 million | $108.9 million |
| Net income available to common stockholders | $28.1 million | $13.6 million | $42.4 million | $75.5 million |
| Basic EPS | $0.08 | $0.04 | $0.12 | $0.22 |
| Fully diluted EPS | $0.07 | $0.04 | $0.11 | $0.21 |
| Operating cash flow | Not separately reported | Not separately reported | $73.0 million | $58.3 million |
Q2 pre-tax margin was approximately 9.3%, versus 6.7% a year earlier; first-half pre-tax margin was approximately 6.9%, versus 14.1%. Total expenses were $473.1 million in Q2, down 7.9%, and $1,041.6 million in the first half, up 5.9%.
At June 30, 2020, total assets were $4.50 billion and total liabilities were $3.72 billion. Cash and cash equivalents were $463.6 million, plus $223.4 million of cash segregated for regulatory requirements. The company’s defined liquidity measure was $522.5 million. Notes payable and other borrowings were $1.291 billion, with an additional $3.7 million of short-term borrowings. The $350 million revolving facility had $222.6 million outstanding at quarter-end.
Changes versus comparable periods
- Q2 revenue declined 5.8% year over year, while first-half revenue rose 2.4%. Q2 brokerage revenue fell 6.1%; first-half brokerage revenue increased 2.3%.
- Q2 earnings improved despite lower revenue, as expenses fell $40.6 million. Lower variable compensation and reduced travel and entertainment helped; selling and promotion expense fell $14.9 million.
- First-half pre-tax income fell 49.3%. The prior-year period included an $18.4 million gain on the CSC Commodities sale and approximately $20.4 million in investment fair-value gains; 2020 also included $29.5 million of cost-reduction program compensation charges.
- Product results were mixed in Q2: credit revenue rose 22.5% and insurance revenue rose 10.5%; FX fell 27.0%, rates fell 13.0%, equities fell 5.1%, and energy and commodities fell 3.5%.
- Fully Electronic revenue across brokerage, data, software and post-trade rose 9.4% in Q2. Data, software and post-trade revenue increased 7.5% in Q2 and 7.9% in the first half.
Outlook, risks and notable items
- Management cited COVID-19-related disruption, lower rates and FX activity, quantitative easing, low global interest rates and reduced energy hedging demand as headwinds. It said global debt issuance could support rates and credit over the longer term.
- Management expected 2020 net investment costs for newer standalone Fenics businesses to remain below $40 million and continued to expect those businesses to break even in 2021. It expected the insurance brokerage business to become profitable in 2021.
- A cost-reduction program was expected to lower 2020 compensation expense by more than $35 million; $29.5 million of related charges had been recorded in the first half.
- The quarterly dividend was reduced from $0.14 to $0.01 per share. The Board declared a $0.01 second-quarter dividend, payable September 2, 2020. Management said it expected to announce a capital-return policy the following year that would consider both dividends and repurchases; future dividends remain at the Board’s discretion.
- After quarter-end, BGC issued $300 million of 4.375% notes due 2025, intending to use the proceeds to refinance its $300 million of 5.125% notes due 2021. It repaid the $225 million revolving-credit balance on July 14 and commenced a tender offer for the 2021 notes on August 5. As of June 30, it had not used its separate $50 million debt-repurchase authorization.
- Major risks include pandemic-related market and operational disruption, remote-work and cybersecurity risks, dependence on trading volumes, counterparty and credit exposure, regulatory and capital requirements, Brexit and potential loss of UK-EU market access, LIBOR transition, and refinancing or liquidity risk. The filing also describes a derivative lawsuit challenging the Berkeley Point acquisition and investment in Real Estate L.P.; management disputed the allegations, and the outcome was uncertain.
- Management was exploring a possible conversion to a simpler corporate structure, with tax policy and discussions with regulators, lenders and rating agencies among the considerations. No conversion decision or timetable was stated.
Key investor verification points
- Review the post-quarter refinancing: the final use of the 4.375% notes’ proceeds, the tender-offer result and any redemption premium or additional revolver borrowing.
- Assess cash generation and liquidity alongside working-capital movements, regulatory restrictions on subsidiary assets, and the company’s defined liquidity measure.
- Track whether the stated Fenics investment, 2021 break-even and insurance-profitability expectations are achieved, and whether cost savings offset pandemic-related revenue pressure.
- Monitor dividend and partner-distribution policy, debt levels and maturities, ratings, and potential dilution from partnership units and equity awards.
- Follow COVID-19 and Brexit developments, the derivative litigation, and any material changes in credit-loss reserves or employee-loan collectability.