BGC PARTNERS Item 2.02. Results of Operations and Financial Condition.
On
Except as indicated below, the information in this Item 2.02 and Exhibit 99.1 attached to this Current Report on Form 8-K are being furnished under Item 2.02 of Form 8-K. Such information shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, except as expressly set forth by specific reference in such filing and as set forth below.
The press release contains non-GAAP financial measures that differ from the most
directly comparable measures calculated and presented in accordance with
Generally Accepted Accounting Principles in
Adjusted Earnings Defined
BGC uses non-GAAP financial measures, including "Adjusted Earnings before noncontrolling interests and taxes" and "Post-tax Adjusted Earnings to fully diluted shareholders", which are supplemental measures of operating results used by management to evaluate the financial performance of the Company and its consolidated subsidiaries. BGC believes that Adjusted Earnings best reflect the operating earnings generated by the Company on a consolidated basis and are the earnings which management considers when managing its business.
As compared with "Income (loss) from operations before income taxes" and "Net income (loss) for fully diluted shares", both prepared in accordance with GAAP, Adjusted Earnings calculations primarily exclude certain non-cash items and other expenses that generally do not involve the receipt or outlay of cash by the Company and/or which do not dilute existing stockholders. In addition, Adjusted Earnings calculations exclude certain gains and charges that management believes do not best reflect the ordinary results of BGC. Adjusted Earnings is calculated by taking the most comparable GAAP measures and adjusting for certain items with respect to compensation expenses, non-compensation expenses, and other income, as discussed below.
Calculations of Compensation Adjustments for Adjusted Earnings and Adjusted EBITDA
Treatment of Equity-Based Compensation Line Item for Adjusted Earnings and Adjusted EBITDA
The Company's Adjusted Earnings and Adjusted EBITDA measures exclude all GAAP charges included in the line item "Equity-based compensation and allocations of net income to limited partnership units and FPUs" (or "equity-based compensation" for purposes of defining the Company's non-GAAP results) as recorded on the Company's GAAP Consolidated Statements of Operations and GAAP Consolidated Statements of Cash Flows. These GAAP equity-based compensation charges reflect the following items:
* Charges with respect to grants of exchangeability, which reflect the right of
holders of limited partnership units with no capital accounts, such as LPUs
and PSUs, to exchange these units into shares of common stock, or into
partnership units with capital accounts, such as HDUs, as well as cash paid
with respect to taxes withheld or expected to be owed by the unit holder upon
such
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exchange. The withholding taxes related to the exchange of certain
non-exchangeable units without a capital account into either common shares or
units with a capital account may be funded by the redemption of preferred
units such as PPSUs.
* Charges with respect to preferred units. Any preferred units would not be
included in the Company's fully diluted share count because they cannot be
made exchangeable into shares of common stock and are entitled only to a
fixed distribution. Preferred units are granted in connection with the grant
of certain limited partnership units that may be granted exchangeability or
redeemed in connection with the grant of shares of common stock at ratios
designed to cover any withholding taxes expected to be paid. This is an
alternative to the common practice among public companies of issuing the
gross amount of shares to employees, subject to cashless withholding of
shares, to pay applicable withholding taxes.
* GAAP equity-based compensation charges with respect to the grant of an
offsetting amount of common stock or partnership units with capital accounts
in connection with the redemption of non-exchangeable units, including PSUs
and LPUs.
* Charges related to amortization of RSUs and limited partnership units.
* Charges related to grants of equity awards, including common stock or
partnership units with capital accounts.
* Allocations of net income to limited partnership units and FPUs. Such
allocations represent the pro-rata portion of post-tax GAAP earnings
available to such unit holders.
The amounts of certain quarterly equity-based compensation charges are based upon the Company's estimate of such expected charges during the annual period, as described further below under "Methodology for Calculating Adjusted Earnings Taxes."
Virtually all of BGC's key executives and producers have equity or partnership stakes in the Company and its subsidiaries and generally receive deferred equity or limited partnership units as part of their compensation. A significant percentage of BGC's fully diluted shares are owned by its executives, partners and employees. The Company issues limited partnership units as well as other forms of equity-based compensation, including grants of exchangeability into shares of common stock, to provide liquidity to its employees, to align the interests of its employees and management with those of common stockholders, to help motivate and retain key employees, and to encourage a collaborative culture that drives cross-selling and revenue growth.
All share equivalents that are part of the Company's equity-based compensation
program, including REUs, PSUs, LPUs, HDUs, and other units that may be made
exchangeable into common stock, as well as RSUs (which are recorded using the
treasury stock method), are included in the fully diluted share count when
issued or at the beginning of the subsequent quarter after the date of grant.
Generally, limited partnership units other than preferred units are expected to
be paid a pro-rata distribution based on BGC's calculation of Adjusted Earnings
per fully diluted share. However, out of an abundance of caution and in order to
strengthen the Company's balance sheet due the uncertain macroeconomic
conditions with respect to the COVID-19 pandemic,
Compensation charges are also adjusted for certain other cash and non-cash
items, including those related to the amortization of GFI employee forgivable
loans granted prior to the closing of the
Certain Other Compensation-Related Adjustments for Adjusted Earnings
BGC also excludes various other GAAP items that management views as not reflective of the Company's underlying performance in a given period from its calculation of Adjusted Earnings. These may include compensation-related items with respect to cost-saving initiatives, such as severance charges incurred in connection with headcount reductions as part of broad restructuring and/or cost savings plans.
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Calculation of Non-Compensation Adjustments for Adjusted Earnings
Adjusted Earnings calculations may also exclude items such as:
* Non-cash GAAP charges related to the amortization of intangibles with respect
to acquisitions;
* Acquisition related costs;
* Certain rent charges;
* Non-cash GAAP asset impairment charges; and
* Various other GAAP items that management views as not reflective of the
Company's underlying performance in a given period, including
non-compensation-related charges incurred as part of broad restructuring
and/or cost savings plans. Such GAAP items may include charges for exiting
leases and/or other long-term contracts as part of cost-saving initiatives,
as well as non-cash impairment charges related to assets, goodwill and/or
intangibles created from acquisitions.
Calculation of Adjustments for Other (income) losses for Adjusted Earnings
Adjusted Earnings calculations also exclude certain other non-cash, non-dilutive, and/or non-economic items, which may, in some periods, include:
* Gains or losses on divestitures;
* Fair value adjustment of investments;
* Certain other GAAP items, including gains or losses related to BGC's
investments accounted for under the equity method; and
* Any unusual, one-time, non-ordinary, or non-recurring gains or losses.
Methodology for Calculating Adjusted Earnings Taxes
Although Adjusted Earnings are calculated on a pre-tax basis, BGC also reports post-tax Adjusted Earnings to fully diluted shareholders. The Company defines post-tax Adjusted Earnings to fully diluted shareholders as pre-tax Adjusted Earnings reduced by the non-GAAP tax provision described below and net income (loss) attributable to noncontrolling interest for Adjusted Earnings.
The Company calculates its tax provision for post-tax Adjusted Earnings using an annual estimate similar to how it accounts for its income tax provision under GAAP. To calculate the quarterly tax provision under GAAP, BGC estimates its full fiscal year GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries and the expected inclusions and deductions for income tax purposes, including expected equity-based compensation during the annual period. The resulting annualized tax rate is applied to BGC's quarterly GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries. At the end of the annual period, the Company updates its estimate to reflect the actual tax amounts owed for the period.
To determine the non-GAAP tax provision, BGC first adjusts pre-tax Adjusted Earnings by recognizing any, and only, amounts for which a tax deduction applies under applicable law. The amounts include charges with respect to equity-based compensation; certain charges related to employee loan forgiveness; certain net operating loss carryforwards when taken for statutory purposes; and certain charges related to tax goodwill amortization. These adjustments may also reflect timing and measurement differences, including treatment of employee loans; changes in the value of units between the dates of grants of exchangeability and the date of actual unit exchange; variations in the value of certain deferred tax assets; and liabilities and the different timing of permitted deductions for tax under GAAP and statutory tax requirements.
After application of these adjustments, the result is the Company's taxable income for its pre-tax Adjusted Earnings, to which BGC then applies the statutory tax rates to determine its non-GAAP tax provision. BGC views the effective tax rate on pre-tax Adjusted Earnings as equal to the amount of its non-GAAP tax provision divided by the amount of pre-tax Adjusted Earnings.
Generally, the most significant factor affecting this non-GAAP tax provision is the amount of charges
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relating to equity-based compensation. Because the charges relating to equity-based compensation are deductible in accordance with applicable tax laws, increases in such charges have the effect of lowering the Company's non-GAAP effective tax rate and thereby increasing its post-tax Adjusted Earnings.
BGC incurs income tax expenses based on the location, legal structure and
jurisdictional taxing authorities of each of its subsidiaries. Certain of the
Company's entities are taxed as
Calculations of Pre- and Post-Tax Adjusted Earnings per Share
BGC's pre- and post-tax Adjusted Earnings per share calculations assume either that:
* The fully diluted share count includes the shares related to any dilutive
instruments, but excludes the associated expense, net of tax, when the impact
would be dilutive; or
* The fully diluted share count excludes the shares related to these
instruments, but includes the associated expense, net of tax.
The share count for Adjusted Earnings excludes certain shares and share equivalents expected to be issued in future periods but not yet eligible to receive dividends and/or distributions. Each quarter, the dividend payable to BGC's stockholders, if any, is expected to be determined by the Company's Board of Directors with reference to a number of factors, including post-tax Adjusted Earnings per share. BGC may also pay a pro-rata distribution of net income to limited partnership units, as well as to Cantor for its noncontrolling interest. . . .
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
The exhibit index set forth below is incorporated by reference in response to this Item 9.01.
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