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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal period ended June 30, 2017

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the transition period from          to            

 

Commission File Number 001-32722

 

INVESTMENT TECHNOLOGY GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

95 - 2848406

(State or Other Jurisdiction of Incorporation or
Organization)

(I.R.S. Employer Identification No.)

 

 

165 Broadway, New York, New York

10006

(Address of Principal Executive Offices)

(Zip Code)

 

(212) 588 - 4000

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes ☐  No ☒

 

 

At July 11, 2017, the Registrant had 33,125,804 shares of common stock, $0.01 par value, outstanding.

 

 

 

 


 

Table of Contents

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I. — Financial Information

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Financial Condition June 30, 2017 (unaudited) and December 31, 2016

4

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) Three and Six Months Ended June 30, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income and Loss (unaudited) Three and Six Months Ended June 30, 2017 and 2016

6

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) Six Months Ended June 30, 2017

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, 2017 and 2016

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

Item 4. 

Controls and Procedures

39

 

 

 

 

PART II. — Other Information

 

 

 

 

Item 1. 

Legal Proceedings

41

 

 

 

Item 1A. 

Risk Factors

41

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 3. 

Defaults Upon Senior Securities

42

 

 

 

Item 4. 

Mine Safety Disclosures

42

 

 

 

Item 5. 

Other Information

42

 

 

 

Item 6. 

Exhibits

43

 

 

 

 

Signature

44

2


 

Table of Contents

 

Investment Technology Group, ITG, the ITG logo, AlterNet, ITG Net, POSIT, POSIT Alert, RFQ‑hub and Triton are registered trademarks or service marks of the Investment Technology Group, Inc. companies. ITG Derivatives and Single Ticket Clearing are trademarks or service marks of the Investment Technology Group, Inc. companies.

 

PRELIMINARY NOTES

 

When we use the terms “ITG,” the “Company,” “we,” “us” and “our,” we mean Investment Technology Group, Inc. and its consolidated subsidiaries.

 

FORWARD-LOOKING STATEMENTS

 

In addition to the historical information contained throughout this Quarterly Report on Form 10‑Q, there are forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. All statements regarding our expectations related to our future financial position, results of operations, revenues, cash flows, dividends, stock repurchases, financing plans, business and product strategies, competitive positions, as well as the plans and objectives of management for future operations, and all expectations concerning securities markets, client trading and economic trends are forward‑looking statements. In some cases, you can identify these statements by forward‑looking words such as “may,” “might,” “will,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “trend,” “potential” or “continue” and the negative of these terms and other comparable terminology.

Although we believe our expectations reflected in such forward‑looking statements are based on reasonable assumptions and beliefs, and on information currently available to our management, there can be no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward‑looking statements herein include, among others, general economic, business, credit, political and financial market conditions, both internationally and domestically, financial market volatility, fluctuations in market trading volumes, effects of inflation, adverse changes or volatility in interest rates, fluctuations in foreign exchange rates, evolving industry regulations and increased regulatory scrutiny, the outcome of contingencies such as legal proceedings or governmental or regulatory investigations and customer or shareholder reaction to, or further proceedings or sanctions based on, such matters, the volatility of our stock price, changes in tax policy or accounting rules, the ability of the Company to recognize its deferred tax assets, the actions of both current and potential new competitors, changes in commission pricing, rapid changes in technology, errors or malfunctions in our systems or technology, operational risks related to misconduct or errors by our employees or entities with which we do business, cash flows into or redemptions from equity mutual funds, ability to meet liquidity requirements related to the clearing of our customers’ trades, customer trading patterns, the success of our products and service offerings, our ability to continue to innovate and meet the demands of our customers for new or enhanced products, our ability to protect our intellectual property, our ability to execute on strategic initiatives or transactions, our ability to attract and retain talented employees, and our ability to pay dividends or repurchase our common stock in the future.

Certain of these factors, and other factors, are more fully discussed in Item 1A, Risk Factors, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2016, which you are encouraged to read.  Our 2016 Annual Report on Form 10-K is also available through our website at http://investor.itg.com under “SEC Filings.”

We disclaim any duty to update any of these forward‑looking statements after the filing of this report to conform our prior statements to actual results or revised expectations and we do not intend to do so. These forward‑looking statements should not be relied upon as representing our views as of any date subsequent to the filing of this report.

3


 

Table of Contents

PART I. — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

    

 

Cash and cash equivalents

 

$

251,963

 

$

277,977

 

Cash restricted or segregated under regulations and other

 

 

16,982

 

 

40,353

 

Deposits with clearing organizations

 

 

74,114

 

 

62,556

 

Securities owned, at fair value

 

 

1,923

 

 

2,557

 

Receivables from brokers, dealers and clearing organizations

 

 

242,924

 

 

152,294

 

Receivables from customers

 

 

177,185

 

 

54,486

 

Premises and equipment, net

 

 

56,369

 

 

59,333

 

Capitalized software, net

 

 

40,140

 

 

38,606

 

Goodwill

 

 

10,613

 

 

10,102

 

Intangibles, net

 

 

14,823

 

 

15,390

 

Income taxes receivable

 

 

49

 

 

873

 

Deferred taxes

 

 

46,619

 

 

38,688

 

Other assets

 

 

22,972

 

 

22,070

 

Total assets

 

$

956,676

 

$

775,285

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

146,932

 

$

174,343

 

Short-term bank loans

 

 

85,509

 

 

72,150

 

Payables to brokers, dealers and clearing organizations

 

 

196,412

 

 

100,188

 

Payables to customers

 

 

105,539

 

 

12,272

 

Securities sold, not yet purchased, at fair value

 

 

 —

 

 

249

 

Income taxes payable

 

 

5,055

 

 

4,552

 

Term debt

 

 

3,050

 

 

6,367

 

Total liabilities

 

 

542,497

 

 

370,121

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding

 

 

 —

 

 

 —

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 52,605,650 and 52,456,165 shares issued at June 30, 2017 and December 31, 2016, respectively

 

 

526

 

 

525

 

Additional paid-in capital

 

 

242,236

 

 

248,748

 

Retained earnings

 

 

540,986

 

 

536,350

 

Common stock held in treasury, at cost; 19,484,422 and 19,830,032 shares at June 30, 2017 and December 31, 2016, respectively

 

 

(342,348)

 

 

(346,482)

 

Accumulated other comprehensive loss (net of tax)

 

 

(27,221)

 

 

(33,977)

 

Total stockholders’ equity

 

 

414,179

 

 

405,164

 

Total liabilities and stockholders’ equity

 

$

956,676

 

$

775,285

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues:

 

 

    

 

 

    

 

 

    

 

 

    

 

Commissions and fees

 

$

100,564

 

$

94,696

 

$

200,444

 

$

193,656

 

Recurring

 

 

18,933

 

 

21,811

 

 

37,883

 

 

44,006

 

Other

 

 

2,084

 

 

4,103

 

 

4,089

 

 

7,616

 

Total revenues

 

 

121,581

 

 

120,610

 

 

242,416

 

 

245,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

45,994

 

 

48,315

 

 

92,678

 

 

100,779

 

Transaction processing

 

 

25,482

 

 

22,098

 

 

50,338

 

 

44,932

 

Occupancy and equipment

 

 

14,680

 

 

14,066

 

 

30,302

 

 

28,044

 

Telecommunications and data processing services

 

 

12,129

 

 

14,848

 

 

24,156

 

 

29,621

 

Restructuring charges

 

 

 —

 

 

4,355

 

 

 —

 

 

4,355

 

Other general and administrative

 

 

17,699

 

 

26,014

 

 

35,014

 

 

49,736

 

Interest expense

 

 

510

 

 

572

 

 

1,030

 

 

1,107

 

Total expenses

 

 

116,494

 

 

130,268

 

 

233,518

 

 

258,574

 

Income (loss) before income tax expense (benefit)

 

 

5,087

 

 

(9,658)

 

 

8,898

 

 

(13,296)

 

Income tax expense (benefit)

 

 

444

 

 

(4,441)

 

 

(1,047)

 

 

(5,573)

 

Net income (loss)

 

$

4,643

 

$

(5,217)

 

$

9,945

 

$

(7,723)

 

Income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

$

(0.16)

 

$

0.30

 

$

(0.23)

 

Diluted

 

$

0.14

 

$

(0.16)

 

$

0.29

 

$

(0.23)

 

Basic weighted average number of common shares outstanding

 

 

33,125

 

 

33,189

 

 

33,037

 

 

33,147

 

Diluted weighted average number of common shares outstanding

 

 

34,222

 

 

33,189

 

 

34,180

 

 

33,147

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Net income (loss)

 

$

4,643

 

$

(5,217)

 

$

9,945

 

$

(7,723)

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

4,730

 

 

(6,598)

 

 

6,756

 

 

(4,779)

 

Other comprehensive income (loss) 

 

 

4,730

 

 

(6,598)

 

 

6,756

 

 

(4,779)

 

Comprehensive income (loss)

 

$

9,373

 

$

(11,815)

 

$

16,701

 

$

(12,502)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Six Months Ended June 30, 2017

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Common

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Stock

 

Other

 

Total

 

 

 

Preferred

 

Common

 

Paid-in

 

Retained

 

Held in

 

Comprehensive

 

Stockholders’

 

 

 

Stock

 

Stock

 

Capital

 

Earnings

 

Treasury

 

Income/(Loss)

 

Equity

 

Balance at January 1, 2017

 

$

 —

 

$

525

 

$

248,748

 

$

536,350

 

$

(346,482)

 

$

(33,977)

 

$

405,164

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

9,945

 

 

 —

 

 

 —

 

 

9,945

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,756

 

 

6,756

 

Issuance of common stock in connection with restricted stock unit awards (1,193,098 shares)

 

 

 —

 

 

 1

 

 

(18,733)

 

 

 —

 

 

18,950

 

 

 —

 

 

218

 

Issuance of common stock for the employee stock purchase plan (40,378 shares)

 

 

 —

 

 

 —

 

 

527

 

 

 —

 

 

 —

 

 

 —

 

 

527

 

Shares withheld for net settlements of share-based awards (489,193 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,882)

 

 

 —

 

 

(9,882)

 

Purchase of common stock for treasury (251,977 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,983)

 

 

 —

 

 

(4,983)

 

Dividends declared on common stock

 

 

 —

 

 

 —

 

 

10

 

 

(4,666)

 

 

49

 

 

 —

 

 

(4,607)

 

Share-based compensation

 

 

 —

 

 

 —

 

 

10,818

 

 

 —

 

 

 —

 

 

 —

 

 

10,818

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

866

 

 

(643)

 

 

 

 

 

 

 

 

223

 

Balance at June 30, 2017

 

$

 —

 

$

526

 

$

242,236

 

$

540,986

 

$

(342,348)

 

$

(27,221)

 

$

414,179

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

 

2017

 

2016

 

Cash Flows from Operating Activities:

    

 

    

    

 

    

 

Net income (loss)

 

$

9,945

 

$

(7,723)

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

22,437

 

 

21,684

 

Deferred income tax benefit

 

 

(7,407)

 

 

(4,415)

 

Provision for doubtful accounts

 

 

155

 

 

18

 

Non-cash share-based compensation

 

 

10,818

 

 

14,488

 

Gain on sale of investment research operations

 

 

 —

 

 

(21)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Cash restricted or segregated under regulations and other

 

 

23,631

 

 

(428)

 

Deposits with clearing organizations

 

 

(9,673)

 

 

(27,250)

 

Securities owned, at fair value

 

 

634

 

 

1,275

 

Receivables from brokers, dealers and clearing organizations

 

 

(83,582)

 

 

634,175

 

Receivables from customers

 

 

(117,877)

 

 

(136,599)

 

Accounts payable and accrued expenses

 

 

(29,254)

 

 

(5,898)

 

Payables to brokers, dealers and clearing organizations

 

 

90,673

 

 

(690,584)

 

Payables to customers

 

 

91,320

 

 

64,422

 

Securities sold, not yet purchased, at fair value

 

 

(249)

 

 

(1,016)

 

Income taxes receivable/payable

 

 

1,314

 

 

(11,585)

 

Excess tax benefit from share-based payment arrangements

 

 

 —

 

 

(989)

 

Other, net

 

 

290

 

 

(4,320)

 

Net cash provided by (used in) operating activities

 

 

3,175

 

 

(154,766)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Capital purchases

 

 

(5,657)

 

 

(5,493)

 

Capitalization of software development costs

 

 

(14,357)

 

 

(12,670)

 

Proceeds from sale of investment research operations, net of deal costs

 

 

 —

 

 

6,125

 

Net cash used in investing activities

 

 

(20,014)

 

 

(12,038)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Repayments of long term debt

 

 

(3,317)

 

 

(3,109)

 

Proceeds from borrowing under short-term bank loans

 

 

13,359

 

 

84,071

 

Debt issuance costs

 

 

(762)

 

 

(810)

 

Excess tax benefit from share-based payment arrangements

 

 

 —

 

 

989

 

Common stock issued

 

 

745

 

 

3,075

 

Common stock repurchased

 

 

(4,983)

 

 

(14,946)

 

Dividends paid

 

 

(4,595)

 

 

(4,601)

 

Shares withheld for net settlements of share-based awards

 

 

(9,882)

 

 

(6,529)

 

Net cash (used in) provided by financing activities

 

 

(9,435)

 

 

58,140

 

Effect of exchange rate changes on cash and cash equivalents

 

 

260

 

 

15,523

 

Net decrease in cash and cash equivalents

 

 

(26,014)

 

 

(93,141)

 

Cash and cash equivalents—beginning of period

 

 

277,977

 

 

330,653

 

Cash and cash equivalents—end of period

 

$

251,963

 

$

237,512

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

2,326

 

$

2,156

 

Income taxes paid

 

$

4,859

 

$

10,336

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(1) Organization and Basis of Presentation

 

Investment Technology Group, Inc. (the “Company” or “ITG”) was formed as a Delaware corporation on July 22, 1983. Its principal subsidiaries include: (1) ITG Inc., AlterNet Securities, Inc. (“AlterNet”) and ITG Derivatives LLC (“ITG Derivatives”), institutional broker-dealers in the United States (“U.S.”), (2) ITG Canada Corp., an institutional broker-dealer in Canada, (3) Investment Technology Group Limited, an institutional broker-dealer in Europe, (4) ITG Australia Limited, an institutional broker-dealer in Australia, (5) ITG Hong Kong Limited, an institutional broker-dealer in Hong Kong, (6) ITG Software Solutions, Inc., the Company’s intangible property, software development and maintenance subsidiary in the U.S., and (7) ITG Solutions Network, Inc., a holding company for ITG Analytics, Inc., a provider of pre- and post-trade analysis, fair value and trade optimization services, and ITG Platforms Inc., a provider of workflow technology solutions and network connectivity services for the financial community.

 

ITG is a global financial technology company that helps leading brokers and asset managers improve returns for investors around the world. ITG empowers traders to reduce the end-to-end cost of implementing investments via liquidity, execution, analytics and workflow technology solutions. ITG has offices in Asia Pacific, Europe and North America and offers execution services in more than 50 countries.

 

The Company’s business is organized into four reportable operating segments: U.S. Operations, Canadian Operations, European Operations and Asia Pacific Operations (see Note 14, Segment Reporting, to the condensed consolidated financial statements).

 

The four operating segments offer a wide range of solutions for asset managers and broker‑dealers in the areas of execution services, workflow technology and analytics. These offerings include trade execution services and solutions for portfolio management, as well as pre‑trade analytics and post‑trade analytics and processing.

Regional segment results exclude the impact of Corporate activity, which is presented separately and includes investment income from treasury activity, certain non-operating revenues and other gains as well as costs not associated with operating the businesses within the Company’s regional segments.  These costs include, among others, (a) the costs of being a public company, such as certain staff costs, a portion of external audit fees, and reporting, filing and listing costs, (b) intangible asset amortization, (c) interest expense, (d) professional fees associated with the Company's global transfer pricing structure, (e) foreign exchange gains or losses and (f) certain non-operating expenses.

The condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). All material intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for the fair presentation of the financial statements.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with Securities and Exchange Commission (“SEC”) rules and regulations; however, management believes that the disclosures herein are adequate to make the information presented not misleading. This report should be read in conjunction with the audited financial statements and the notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires, among its other provisions, that excess tax benefits (which represent the excess of actual tax benefits received at the date of vesting or settlement over the benefits recognized over the vesting period or upon issuance of share-based payments) and tax deficiencies (which

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represent the amount by which actual tax benefits received at the date of vesting or settlement is lower than the benefits recognized over the vesting period or upon issuance of share-based payments) be recorded in the income statement as an increase or decrease in income tax expense (benefit) when the awards vest or are settled. This is in contrast to the prior requirement that these excess tax benefits be recognized in additional paid-in capital and these tax deficiencies be recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. The new guidance also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows rather than, as previously required, a financing activity. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2016 and as such was implemented on January 1, 2017.

As a result of this adoption, the Company:

·

Recognized net excess tax benefits of $0.1 million and $1.2 million during the three and six months ended June 30, 2017, which is included in income tax benefit in the Condensed Consolidated Statements of Operations.

 

·

Elected to adopt the cash flow presentation of the excess tax benefits prospectively during the six months ended June 30, 2017, where these benefits are classified along with other income tax cash flows as an operating activity in the Condensed Consolidated Statement of Cash Flows.

 

·

Elected to account for forfeitures as they occur rather than under the previous method of estimating the number of stock-based awards expected to vest in order to determine the amount of compensation cost to be recognized in each period. This resulted in an adjustment for the cumulative effect of this accounting change as of January 1, 2017 to reduce retained earnings by $0.6 million and to increase deferred tax assets and additional paid-in capital by $0.3 million and $0.9 million, respectively.

 

·

Did not change its policy on statutory withholding requirements. Amounts paid by the Company to taxing authorities when directly withholding shares associated with employees’ income tax withholding obligations are classified as a financing activity in the Condensed Consolidated Statements of Cash Flows.  

 

·

Excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share for the three and six months ended June 30, 2017.

 

(2) Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, various methods are used including market, income and cost approaches. Based on these approaches, certain assumptions that market participants would use in pricing the asset or liability are used, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market‑corroborated, or generally unobservable firm inputs. Valuation techniques that are used maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, fair value measured financial instruments are categorized according to the fair value hierarchy prescribed by Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

*

Level 1: Fair value measurements using unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities.

*

Level 2: Fair value measurements using correlation with (directly or indirectly) observable market‑based inputs, unobservable inputs that are corroborated by market data, or quoted prices in markets that are not active.

*

Level 3: Fair value measurements using inputs that are significant and not readily observable in the market.

Level 1 consists of financial instruments whose value is based on quoted market prices such as exchange‑traded mutual funds and listed equities.

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Level 2 includes financial instruments that are valued based upon observable market‑based inputs.

Level 3 is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable.

Fair value measurements for those items measured on a recurring basis are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

 1

 

$

 1

 

$

 —

 

$

 —

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

 

1,923

 

 

1,923

 

 

 —

 

 

 —

 

Total

 

$

1,924

 

$

1,924

 

$

 —

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold, not yet purchased, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks-trading securities

 

$

244

 

$

244

 

$

 —

 

$

 —

 

Mutual funds

 

 

2,313

 

 

2,313

 

 

 —

 

 

 —

 

Total

 

$

2,557

 

$

2,557

 

$

 —

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold, not yet purchased, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

 

249

 

 

249

 

 

 —

 

 

 —

 

Total

 

$

249

 

$

249

 

$

 —

 

$

 —

 

 

Cash and cash equivalents other than bank deposits are measured at fair value and primarily include money market mutual funds.

Securities owned, at fair value and securities sold, not yet purchased, at fair value include corporate stocks, equity index mutual funds and bond mutual funds, all of which are exchange traded.

Certain of the Company’s assets and liabilities are carried at contracted amounts that approximate fair value. Assets and liabilities that are recorded at contracted amounts approximating fair value consist primarily of receivables from and payables to brokers, dealers, clearing organizations and customers. These receivables and payables to brokers, dealers, clearing organizations and customers are short-term in nature and, following June 30, 2017, substantially all have settled at the contracted amounts.

 

The Company believes the carrying amounts of its term-debt obligations at June 30, 2017 and December 31, 2016 approximate fair value because the interest rates on these instruments change with, or approximate, market interest rates.

 

 

(3) Restructuring Charges

 

2016 Restructuring

 

As part of an end-to-end review of its business in 2016, the Company determined that its strategy is to increasingly focus its resources on its core capabilities in liquidity, execution, analytics and workflow technology solutions. To that end, in 2016, the Company implemented restructuring plans to (i) reduce headcount in its single stock sales trading and sales organizations, (ii) close its U.S. matched-book securities lending operations and its Canadian arbitrage trading desk and (iii) identify additional annual cost savings from management delayering and the elimination of certain positions.

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Activity and liability balances recorded as part of the restructuring plan through June 30, 2017 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amount

 

Balance at December 31, 2016

 

$

3,157

 

Utilized - cash (primarily severance related)

 

 

(2,925)

 

Accrual adjustment

 

 

(18)

 

Currency translation

 

 

20

 

Balance at June 30, 2017

 

$

234

 

 

The payment of the remaining accrued costs is expected to continue through December 2017.

 

(4) Cash Restricted or Segregated Under Regulations and Other

 

Cash restricted or segregated under regulations and other represents (i) a special reserve bank account for the exclusive benefit of customers (“Special Reserve Bank Account”) maintained by ITG Inc. in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (“Customer Protection Rule”), or agreements for proprietary accounts of broker dealers (“PABs”), (ii) funds on deposit for Canadian and European trade clearing and settlement activity, (iii) segregated balances under a collateral account control agreement for the benefit of certain customers, and (iv) funds relating to the securitization of bank guarantees supporting the Company’s Australian and French leases.

 

(5) Securities Owned and Sold, Not Yet Purchased

 

The following is a summary of securities owned and securities sold, not yet purchased (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Sold, Not Yet

 

 

 

Securities Owned

 

Purchased

 

 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

 

 

2017

 

2016

 

2017

 

2016

 

Corporate stocks - trading securities

    

$

 —

    

$

244

    

$

 —

    

$

249

 

Mutual funds

 

 

1,923

 

 

2,313

 

 

 —

 

 

 —

 

Total

 

$

1,923

 

$

2,557

 

$

 —

 

$

249

 

 

Trading securities owned and sold, not yet purchased primarily consists of temporary positions obtained in the normal course of agency trading activities, including positions held in connection with the creation and redemption of exchange-traded funds on behalf of clients.

 

(6) Income Taxes

 

A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

 

The Company had reserves for unrecognized tax benefits of $7.4 million at June 30, 2017 and December 31, 2016. The Company had accrued interest expense related to tax reserves of $1.5 million and $1.3 million, net of related tax effects, at June 30, 2017 and December 31, 2016, respectively.

 

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(7) Goodwill and Other Intangibles

 

Goodwill

The following table presents the changes in the carrying amount of goodwill by the Company’s European Operations segment for the six months ended June 30, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

Total

 

Balance at December 31, 2016

 

$

10,102

 

2017 Activity:

 

 

 

 

   Currency translation adjustment

 

 

511

 

Balance at June 30, 2017

 

$

10,613

 

 

Other Intangible Assets

Acquired other intangible assets consisted of the following at June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

Gross Carrying

 

Accumulated

 

Gross Carrying

 

Accumulated

 

Useful Lives

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

(Years)

 

Trade name

    

$

8,523

    

$

 —

    

$

8,518

    

$

 —

    

 —

 

Customer-related intangibles

 

 

10,457

 

 

5,908

 

 

10,358

 

 

5,584

 

17.0

 

Proprietary software

 

 

23,249

 

 

21,887

 

 

23,165

 

 

21,456

 

9.3

 

Trading rights

 

 

339

 

 

 —

 

 

339

 

 

 —

 

 —

 

Other

 

 

50

 

 

 —

 

 

50

 

 

 —

 

 —

 

Total

 

$

42,618

 

$

27,795

 

$

42,430

 

$

27,040

 

 

 

 

At June 30, 2017, indefinite-lived intangibles not subject to amortization amounted to $8.9 million, of which $8.4 million related to the POSIT trade name.

 

Amortization expense for definite-lived intangibles was $0.4 million and $0.7 million for the three and six months ended June 30, 2017, respectively, compared with $0.5 million and $1.2 million in the respective prior year periods. These amounts are included in other general and administrative expense in the Condensed Consolidated Statements of Operations.

 

During the six months ended June 30, 2017, no intangibles were deemed impaired, and accordingly, no adjustment was required.

 

The following table represents the changes in the carrying amount of net intangible assets for the six months ended June 30, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

Total

 

Balance at December 31, 2016

 

$

15,390

 

2017 Activity:

 

 

 

 

   Amortization

 

 

(691)

 

   Currency translation adjustment

 

 

124

 

Balance at June 30, 2017

 

$

14,823

 

 

 

 

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(8) Receivables and Payables

 

Receivables from, and Payables to, Brokers, Dealers and Clearing Organizations

 

The following is a summary of receivables from, and payables to, brokers, dealers and clearing organizations (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables from

 

Payables to

 

 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Broker-dealers

 

$

164,024

 

$

147,116

 

$

132,677

 

$

56,894

 

Clearing organizations

 

 

66,598

 

 

5,117

 

 

1,888

 

 

8,096

 

Securities borrowed*

 

 

12,933

 

 

374

 

 

 —

 

 

 —

 

Securities loaned

 

 

 —

 

 

 —

 

 

61,847

 

 

35,198

 

Allowance for doubtful accounts

 

 

(631)

 

 

(313)

 

 

 —

 

 

 —

 

Total

 

$

242,924

 

$

152,294

 

$

196,412

 

$

100,188

 


*

See Securities Borrowed and Loaned below.

 

Receivables from, and Payables to, Customers

 

The following is a summary of receivables from, and payables to, customers (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables from

 

Payables to

 

 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Customers

 

$

177,558

 

$

55,006

 

$

105,539

 

$

12,272

 

Allowance for doubtful accounts

 

 

(373)

 

 

(520)

 

 

 —

 

 

 —

 

Net

 

$

177,185

 

$

54,486

 

$

105,539

 

$

12,272

 

 

Securities Borrowed and Loaned

 

In the second quarter 2016, the Company closed its U.S. matched-book securities lending operations.  At June 30, 2017, the balances for securities borrowed and securities loaned relate to customer settlement activities.  

 

The gross amounts of interest earned on cash provided to counterparties as collateral for securities borrowed, and interest incurred on cash received from counterparties as collateral for securities loaned within the U.S. matched-book operations prior to the wind-down of all balances, and the resulting net amount included in other revenue on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2016

 

Interest earned

 

$

448

 

$

2,080

 

Interest incurred

 

 

(185)

 

 

(1,251)

 

Net

 

$

263

 

$

829

 

 

Deposits paid for securities borrowed and deposits received for securities loaned are recorded at the amount of cash collateral advanced or received. Deposits paid for securities borrowed transactions require the Company to deposit cash with the lender. With respect to deposits received for securities loaned, the Company receives collateral in the form of cash in an amount generally in excess of the market value of the securities loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded, as necessary.

 

The Company’s securities borrowing and lending is generally done under industry standard agreements (“Master Securities Lending Agreements”) that may allow, following an event of default by either party, the prompt

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close-out of all transactions (including the liquidation of securities held) and the offsetting of obligations to return cash or securities, as the case may be, by the non-defaulting party. Events of default under the Master Securities Lending Agreements generally include, subject to certain conditions: (i) failure to timely deliver cash or securities as required under the transaction, (ii) a party’s insolvency, bankruptcy, or similar proceeding, (iii) breach of representation, and (iv) a material breach of the agreement. The counterparty that receives the securities in these transactions generally has unrestricted access in its use of the securities.  For financial statement purposes, the Company does not offset securities borrowed and securities loaned.

 

The following table summarizes the transactions under certain Master Securities Lending Agreements that may be eligible for offsetting if an event of default occurred and a right of offset was legally enforceable (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross Amounts

    

Net Amounts

    

Collateral

    

 

 

 

 

 

 

 

 

Offset in the

 

Presented in the

 

Received or

 

 

 

 

 

 

Gross Amounts of

 

Consolidated

 

Consolidated

 

Pledged

 

 

 

 

 

 

Recognized Assets/

 

Statement of

 

Statement of

 

(including

 

Net

 

 

 

(Liabilities)

 

Financial Condition

 

Financial Condition

 

 Cash)

 

Amount

 

As of June 30, 2017:

 

 

 

 

 

 

 

 

 

 

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