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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 September 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 October 10, 2017, the Registrant had 33,060,740 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 September 30, 2017 (unaudited) and December 31, 2016

4

 

 

 

 

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

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) Three and Nine Months Ended September 30, 2017 and 2016

6

 

 

 

 

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

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 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

25

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4. 

Controls and Procedures

44

 

 

 

 

PART II. — Other Information

 

 

 

 

Item 1. 

Legal Proceedings

45

 

 

 

Item 1A. 

Risk Factors

45

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3. 

Defaults Upon Senior Securities

46

 

 

 

Item 4. 

Mine Safety Disclosures

46

 

 

 

Item 5. 

Other Information

46

 

 

 

Item 6. 

Exhibits

47

 

 

 

 

Signature

48

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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 the capital and liquidity requirements of our securities businesses and the related 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.

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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)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

    

 

Cash and cash equivalents

 

$

238,793

 

$

277,977

 

Cash restricted or segregated under regulations and other

 

 

13,562

 

 

40,353

 

Deposits with clearing organizations

 

 

81,056

 

 

62,556

 

Securities owned, at fair value

 

 

1,747

 

 

2,557

 

Receivables from brokers, dealers and clearing organizations

 

 

207,598

 

 

152,294

 

Receivables from customers

 

 

93,825

 

 

54,486

 

Premises and equipment, net

 

 

56,698

 

 

59,333

 

Capitalized software, net

 

 

40,641

 

 

38,606

 

Goodwill

 

 

10,962

 

 

10,102

 

Intangibles, net

 

 

14,291

 

 

15,390

 

Income taxes receivable

 

 

2,738

 

 

873

 

Deferred tax assets

 

 

4,663

 

 

38,688

 

Other assets

 

 

27,471

 

 

22,070

 

Total assets

 

$

794,045

 

$

775,285

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

158,931

 

$

174,343

 

Short-term bank loans

 

 

101,996

 

 

72,150

 

Payables to brokers, dealers and clearing organizations

 

 

106,628

 

 

100,188

 

Payables to customers

 

 

44,125

 

 

12,272

 

Securities sold, not yet purchased, at fair value

 

 

42

 

 

249

 

Income taxes payable

 

 

5,211

 

 

4,552

 

Deferred tax liabilities

 

 

2,448

 

 

 —

 

Term debt

 

 

2,404

 

 

6,367

 

Total liabilities

 

 

421,785

 

 

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 September 30, 2017 and December 31, 2016, respectively

 

 

526

 

 

525

 

Additional paid-in capital

 

 

245,669

 

 

248,748

 

Retained earnings

 

 

491,683

 

 

536,350

 

Common stock held in treasury, at cost; 19,546,278 and 19,830,032 shares at September 30, 2017 and December 31, 2016, respectively

 

 

(343,834)

 

 

(346,482)

 

Accumulated other comprehensive loss (net of tax)

 

 

(21,784)

 

 

(33,977)

 

Total stockholders’ equity

 

 

372,260

 

 

405,164

 

Total liabilities and stockholders’ equity

 

$

794,045

 

$

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues:

 

 

    

 

 

    

 

 

    

 

 

    

 

Commissions and fees

 

$

93,475

 

$

83,485

 

$

293,919

 

$

277,141

 

Recurring

 

 

18,930

 

 

19,214

 

 

56,813

 

 

63,220

 

Other

 

 

2,126

 

 

1,486

 

 

6,215

 

 

9,102

 

Total revenues

 

 

114,531

 

 

104,185

 

 

356,947

 

 

349,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

46,755

 

 

45,127

 

 

139,433

 

 

145,906

 

Transaction processing

 

 

23,428

 

 

20,799

 

 

73,766

 

 

65,731

 

Occupancy and equipment

 

 

14,945

 

 

13,849

 

 

45,247

 

 

41,893

 

Telecommunications and data processing services

 

 

12,189

 

 

13,720

 

 

36,345

 

 

43,341

 

Restructuring charges

 

 

 —

 

 

 —

 

 

 —

 

 

4,355

 

Other general and administrative

 

 

18,670

 

 

37,927

 

 

53,684

 

 

87,663

 

Interest expense

 

 

499

 

 

561

 

 

1,529

 

 

1,668

 

Total expenses

 

 

116,486

 

 

131,983

 

 

350,004

 

 

390,557

 

(Loss) income before income tax expense (benefit)

 

 

(1,955)

 

 

(27,798)

 

 

6,943

 

 

(41,094)

 

Income tax expense (benefit)

 

 

45,012

 

 

(3,887)

 

 

43,965

 

 

(9,460)

 

Net loss

 

$

(46,967)

 

$

(23,911)

 

$

(37,022)

 

$

(31,634)

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.42)

 

$

(0.73)

 

$

(1.12)

 

$

(0.96)

 

Diluted

 

$

(1.42)

 

$

(0.73)

 

$

(1.12)

 

$

(0.96)

 

Basic weighted average number of common shares outstanding

 

 

33,105

 

 

32,725

 

 

33,060

 

 

33,006

 

Diluted weighted average number of common shares outstanding

 

 

33,105

 

 

32,725

 

 

33,060

 

 

33,006

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Net loss

 

$

(46,967)

 

$

(23,911)

 

$

(37,022)

 

$

(31,634)

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

5,437

 

 

(3,751)

 

 

12,193

 

 

(8,530)

 

Other comprehensive income (loss) 

 

 

5,437

 

 

(3,751)

 

 

12,193

 

 

(8,530)

 

Comprehensive loss

 

$

(41,530)

 

$

(27,662)

 

$

(24,829)

 

$

(40,164)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

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

Nine Months Ended September 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 loss

 

 

 —

 

 

 —

 

 

 —

 

 

(37,022)

 

 

 —

 

 

 —

 

 

(37,022)

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,193

 

 

12,193

 

Issuance of common stock in connection with restricted stock unit awards (1,279,170 shares)

 

 

 —

 

 

 1

 

 

(20,215)

 

 

 —

 

 

20,463

 

 

 —

 

 

249

 

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

 

 

 —

 

 

 —

 

 

527

 

 

 —

 

 

 —

 

 

 —

 

 

527

 

Shares withheld for net settlements of share-based awards (518,777 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,484)

 

 

 —

 

 

(10,484)

 

Purchase of common stock for treasury (371,704 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,404)

 

 

 —

 

 

(7,404)

 

Dividends declared on common stock

 

 

 —

 

 

 —

 

 

13

 

 

(7,002)

 

 

73

 

 

 —

 

 

(6,916)

 

Share-based compensation

 

 

 —

 

 

 —

 

 

15,730

 

 

 —

 

 

 —

 

 

 —

 

 

15,730

 

Cumulative effect of accounting change

 

 

 —

 

 

 —

 

 

866

 

 

(643)

 

 

 

 

 

 

 

 

223

 

Balance at September 30, 2017

 

$

 —

 

$

526

 

$

245,669

 

$

491,683

 

$

(343,834)

 

$

(21,784)

 

$

372,260

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

 

2017

 

2016

 

Cash Flows from Operating Activities:

    

 

    

    

 

    

 

Net loss

 

$

(37,022)

 

$

(31,634)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

33,687

 

 

32,450

 

Deferred income tax expense (benefit)

 

 

35,182

 

 

(12,426)

 

Provision for doubtful accounts

 

 

451

 

 

108

 

Non-cash share-based compensation

 

 

15,730

 

 

19,409

 

Other intangible asset impairment

 

 

325

 

 

 —

 

Gain on sale of investment research operations

 

 

 —

 

 

(21)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Cash restricted or segregated under regulations and other

 

 

26,949

 

 

91

 

Deposits with clearing organizations

 

 

(15,244)

 

 

(6,742)

 

Securities owned, at fair value

 

 

813

 

 

(2,744)

 

Receivables from brokers, dealers and clearing organizations

 

 

(43,275)

 

 

736,136

 

Receivables from customers

 

 

(33,608)

 

 

(33,777)

 

Accounts payable and accrued expenses

 

 

(18,942)

 

 

1,659

 

Payables to brokers, dealers and clearing organizations

 

 

661

 

 

(784,076)

 

Payables to customers

 

 

29,628

 

 

17,827

 

Securities sold, not yet purchased, at fair value

 

 

(209)

 

 

3,175

 

Income taxes receivable/payable

 

 

2,592

 

 

(9,572)

 

Excess tax benefit from share-based payment arrangements

 

 

 —

 

 

(1,102)

 

Other, net

 

 

(5,685)

 

 

(3,447)

 

Net cash used in operating activities

 

 

(7,967)

 

 

(74,686)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Capital purchases

 

 

(10,228)

 

 

(9,668)

 

Capitalization of software development costs

 

 

(21,014)

 

 

(18,705)

 

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

 

 

 —

 

 

6,125

 

Net cash used in investing activities

 

 

(31,242)

 

 

(22,248)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Repayments of long term debt

 

 

(3,963)

 

 

(4,649)

 

Proceeds from borrowing under short-term bank loans

 

 

29,846

 

 

51,553

 

Debt issuance costs

 

 

(762)

 

 

(810)

 

Excess tax benefit from share-based payment arrangements

 

 

 —

 

 

1,102

 

Common stock issued

 

 

776

 

 

3,111

 

Common stock repurchased

 

 

(7,404)

 

 

(22,112)

 

Dividends paid

 

 

(6,891)

 

 

(6,865)

 

Shares withheld for net settlements of share-based awards

 

 

(10,484)

 

 

(6,617)

 

Net cash provided by financing activities

 

 

1,118

 

 

14,713

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,093)

 

 

12,443

 

Net decrease in cash and cash equivalents

 

 

(39,184)

 

 

(69,778)

 

Cash and cash equivalents—beginning of period

 

 

277,977

 

 

330,653

 

Cash and cash equivalents—end of period

 

$

238,793

 

$

260,875

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

3,412

 

$

3,067

 

Income taxes paid

 

$

7,421

 

$

12,319

 

 

 

 

 

 

 

 

 

 

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 15, 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 nine months ended September 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 nine months ended September 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 nine months ended September 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

$

44

 

$

44

 

$

 —

 

$

 —

 

Mutual funds

 

 

1,703

 

 

1,703

 

 

 —

 

 

 —

 

Total

 

$

1,747

 

$

1,747

 

$

 —

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold, not yet purchased, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

 

42

 

 

42

 

 

 —

 

 

 —

 

Total

 

$

42

 

$

42

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017, substantially all have settled at the contracted amounts.

 

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

 

 

(3) Formation of Derivatives Venture

 

In September 2017, the Company signed a definitive agreement with Option Technology Solutions LLC (“OpTech”) to form Matrix Holdings Group (“Matrix”), a newly established derivatives execution and technology business focused on sell-side clients, professional traders and select hedge funds. The venture is expected to launch by the first quarter of 2018, subject to receipt of required regulatory approvals and satisfaction of other customary closing conditions.

 

The Company will contribute the ITG Derivatives entity, including its broker-dealer license and professional trader client base with revenues of $3.8 million during the nine months ended September 30, 2017, along with certain derivatives-focused software and technology for an initial minority stake of approximately 20%. OpTech will contribute

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the management team, a retail-focused trading and analytics platform and capital.

 

During the three months ended September 30, 2017, the Company deemed the remaining value of a customer intangible asset recorded in ITG Derivatives of $0.3 million fully impaired and incurred legal fees related to the establishment of the Matrix venture of $0.8 million.

 

Upon closing, the Company will reflect the carrying value of the net assets contributed to the Matrix venture, currently estimated at approximately $2 million, as an investment in minority interest and will account for its share of results under the equity method. 

 

The Company determined that the pending contribution of ITG Derivatives does not meet the requirements to be treated as a discontinued operation. As such, the results of ITG Derivatives through the closing date of the venture will be included in continued operations on the Condensed Consolidated Statement of Operations in the U.S. Operations segment.  

 

(4) 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amount

 

Balance at December 31, 2016

 

$

3,157

 

Utilized - cash (primarily severance related)

 

 

(2,950)

 

Accrual adjustment

 

 

(18)

 

Currency translation

 

 

27

 

Balance at September 30, 2017

 

$

216

 

 

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

 

(5) 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.

 

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(6) 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

 

 

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

 

 

2017

 

2016

 

2017

 

2016

 

Corporate stocks - trading securities

    

$

44

    

$

244

    

$

42

    

$

249

 

Mutual funds

 

 

1,703

 

 

2,313

 

 

 —

 

 

 —

 

Total

 

$

1,747

 

$

2,557

 

$

42

 

$

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.

 

(7) Income Taxes

 

Under ASC 740, Income Taxes, the Company regularly assesses the need for a valuation allowance against its deferred taxes. In making that assessment, both positive and negative evidence is considered related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely than not that some or all of its deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company considered its cumulative pre-tax loss in the U.S. jurisdiction over the previous three years as a significant piece of negative evidence. Prevailing accounting guidance limits the ability to consider other subjective evidence to support deferred tax assets, such as projections of future profits, when objective verifiable evidence such as a cumulative loss exists. As a result, the Company recorded a full valuation allowance against its U.S. deferred tax assets, giving rise to an additional non-cash charge of $48.1 million during the three months ended September 30, 2017, which included $42.3 million related to deferred tax assets that existed at June 30, 2017. At September 30, 2017, the net deferred tax assets of $4.7 million related to non-U.S. jurisdictions on the Condensed Consolidated Statement of Financial Condition.

 

The components of the Company’s net deferred tax asset are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

    

2016

 

Deferred tax assets:

 

 

 

 

 

 

 

Compensation and benefits

 

$

7,940

 

$

9,715

 

Net operating loss and capital loss carryover

 

 

30,139

 

 

19,755

 

Share-based compensation

 

 

5,851

 

 

6,824

 

Research and development credits

 

 

6,843

 

 

7,550

 

Foreign tax credits

 

 

14,643

 

 

12,660

 

Tax benefits on uncertain tax positions

 

 

1,315

 

 

1,351

 

Goodwill and definite-lived intangibles

 

 

8,622

 

 

10,347

 

Depreciation

 

 

1,108

 

 

1,167

 

Other

 

 

5,998

 

 

5,259

 

Total deferred tax assets

 

 

82,459

 

 

74,628

 

Less: valuation allowance

 

 

(69,419)

 

 

(20,979)

 

Total deferred tax assets, net of valuation allowance

 

 

13,040

 

 

53,649

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Depreciation

 

 

 —

 

 

 —

 

Capitalized software

 

 

(7,693)

 

 

(12,174)

 

Indefinite-lived intangibles

 

 

(2,448)

 

 

(2,332)

 

Other

 

 

(684)

 

 

(455)

 

Total deferred tax liabilities

 

 

(10,825)

 

 

(14,961)

 

Net deferred tax assets

 

$

2,215

 

$

38,688

 

 

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

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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 $7.9 million at September 30, 2017 and $7.4 million at December 31, 2016. The Company had accrued interest expense related to tax reserves of $1.3 million, net of related tax effects, at both September 30, 2017 and December 31, 2016.

 

(8) 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 nine months ended September 30, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

Total

 

Balance at December 31, 2016

 

$

10,102

 

2017 Activity:

 

 

 

 

   Currency translation adjustment

 

 

860

 

Balance at September 30, 2017

 

$

10,962

 

 

Other Intangible Assets

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

 

 

Gross Carrying

 

Accumulated

 

Gross Carrying

 

Accumulated

 

Useful Lives

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

(Years)

 

Trade name

    

$

8,528

    

$

 —

    

$

8,518

    

$

 —

    

 —

 

Customer-related intangibles

 

 

10,199

 

 

6,072

 

 

10,358

 

 

5,584

 

16.9

 

Proprietary software

 

 

23,306

 

 

22,059

 

 

23,165

 

 

21,456

 

8.4

 

Trading rights

 

 

339

 

 

 —

 

 

339

 

 

 —

 

 —

 

Other

 

 

50

 

 

 —

 

 

50

 

 

 —

 

 —

 

Total

 

$

42,422

 

$

28,131

 

$

42,430

 

$

27,040

 

 

 

 

At September 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 $0.3 million and $1.0 million for the three and nine months ended September 30, 2017, respectively, compared with $0.3 million and $1.5 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 three months ended September 30, 2017, the Company deemed the remaining value of a customer intangible asset recorded in ITG Derivatives of $0.3 million fully impaired.

 

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

 

 

 

 

 

 

 

 

Total

 

Balance at December 31, 2016

 

$

15,390

 

2017 Activity:

 

 

 

 

   Amortization

 

 

(977)

 

   Impairment charge

 

 

(325)

 

   Currency translation adjustment

 

 

203

 

Balance at September 30, 2017

 

$

14,291

 

 

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(9) 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):