Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements, including the notes thereto.
Overview
ITG is a global financial technology company that helps leading brokers and asset managers improve returns for investors. ITG empowers traders to reduce the end-to-end cost of implementing investments via technology-enabled liquidity, execution, analytics and workflow solutions
. ITG has offices in Asia Pacific, Europe and North America and offers execution services in more than 50 countries.
Our 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). Our four operating segments provide the following categories of products and services:
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·
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Execution Services — includes (a) self-directed trading using algorithms, smart routing and matching through POSIT in cash equities (including single stocks and portfolio lists), futures and options and (b) portfolio trading and high-touch trading desks providing execution expertise
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·
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Workflow Technology — includes trade order and execution management software applications in addition to network connectivity
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·
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Analytics — includes (a) tools enabling portfolio managers and traders to improve pre-trade and real-time execution performance, (b) portfolio construction and optimization decisions and (c) securities valuation
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In December 2015 we sold our energy research operations and in May 2016 sold our remaining investment research operations, both of which were within the Research, Sales & Trading (“RS&T”) product group. Beginning in the third quarter 2016, the remaining portfolio trading and high-touch execution offerings, previously grouped within RS&T, were combined with the electronic execution and liquidity solutions, previously grouped within the Electronic Brokerage (“EB”) product group, to form the new Execution Services product group to create an optimal alignment for cross-selling synergies. The entire historic activity of EB and RS&T, including the divested research operations, has been reclassified to the Execution Services product group to conform to the current presentation. For more information on the sale of the remaining investment research operations, see Note 3,
Divestitures,
to the condensed consolidated financial statements. Also, in July 2016 we changed the name of our Platforms product group to Workflow Technology.
Sources of Revenues
Revenues from our products and services are generated from commissions and fees, recurring (subscriptions) and other sources.
Commissions and fees are derived primarily from (i) commissions charged for trade execution services, (ii) income generated on net executions, whereby equity orders are filled at different prices within or at the National Best Bid and Offer (“NBBO”) and (iii) commission sharing arrangements between ITG Net (our private value-added FIX-based financial electronic communications network) and third-party brokers and alternative trading systems whose trading products are made available to our clients on our order management system (“OMS”) and execution management system (“EMS”) applications in addition to commission sharing arrangements for our Single Ticket Clearing Service and our RFQ-hub request-for-quote service. Because commissions are earned on a per-transaction basis, such revenues fluctuate from period to period depending on (a) the volume of securities traded through our services in the U.S. and Canada, (b) the contract value of securities traded in Europe and the Asia Pacific region and (c) our commission rates. Certain factors that affect our volumes and contract values traded include: (i) macro trends in the global equities markets that affect overall institutional equity trading activity, (ii) competitive pressure, including pricing, created by a proliferation of electronic execution competitors and (iii) potential changes in market structure in the U.S. and other regions. In addition to share volume, revenues from net executions are also impacted by the width of spreads within the NBBO. Trade orders are delivered to us from our OMS and EMS products and other vendors’ products, direct computer-to-computer links to customers through ITG Net and third-party networks and phone orders from our customers.
Recurring revenues are derived from the following primary sources: (i) connectivity fees generated through ITG Net for the ability of the sell-side to receive orders from, and send indications of interest to, the buy-side and for the sell-side to receive requests-for-quotes through RFQ-hub, (ii) subscription revenue generated from providing research, (iii) software and analytical products and services and (iv) maintenance and customer technical support for our OMS.
Other revenues include: (i) income from principal trading in Canada, including within our recently closed arbitrage trading desk (for year-to-date and historical periods), (ii) the net spread on foreign exchange transactions executed on a principal basis to facilitate equity trades by clients in different currencies as well as on other foreign exchange transactions unrelated to equity trades, (iii) the net interest spread earned on securities borrowed and loaned on transactions within our recently closed U.S. matched-book securities lending operations (for year-to-date and historical periods), (iv) non-recurring consulting services, such as one-time implementation and customer training related activities, (v) investment and interest income, (vi) interest income on securities borrowed in connection with customers’ settlement activities and (vii) market gains/losses resulting from temporary positions in securities assumed in the normal course of our agency trading business (including errors and accommodations).
Expenses
Compensation and employee benefits, our largest expense, consists of salaries and wages, incentive compensation, employee benefits and taxes. Incentive compensation fluctuates based on revenues, profitability and other measures, taking into account the landscape for key talent. Incentive compensation includes a combination of cash and deferred share-based awards. Only the cash portion of incentive compensation is a variable expense in the current period. As a result, our ratio of compensation expense to revenues may fluctuate from period-to-period based on revenue levels.
Transaction processing expense consists of costs to access various third-party execution destinations and to process, clear and settle transactions. These costs tend to fluctuate with share and trade volumes, the mix of trade execution services used by clients and the rates charged by third parties.
Occupancy and equipment expense consists primarily of rent and utilities related to leased premises, office equipment and depreciation and amortization of fixed assets and leasehold improvements.
Telecommunications and data processing expenses primarily consist of costs for obtaining market data, telecommunications services and systems maintenance.
Other general and administrative expenses includes, among other things, software amortization, consulting, business development, professional fees and intangible asset amortization.
Interest expense consists primarily of costs associated with outstanding debt and credit facilities.
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with U.S. GAAP, management uses certain “non-GAAP financial measures” as such term is defined in Regulation G promulgated by the SEC. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in, or excluded from, the most directly comparable measure calculated and presented in accordance with U.S. GAAP. Management believes the presentation of these measures provides investors with greater transparency and supplemental data relating to our financial condition and results of operations, and therefore a more complete understanding of factors affecting our business than U.S. GAAP measures alone. In addition, management believes the presentation of these matters is useful to investors for period-to-period comparison of results as the items may reflect certain unique and/or non-operating items such as acquisitions, divestitures, restructuring charges, large write-offs, significant changes associated with our regulatory matters together with related expenses or items outside of management’s control.
Adjusted revenues, adjusted expenses, adjusted pretax (loss) income, adjusted income tax (benefit) expense and adjusted net (loss) income, together with related per share amounts, are non-GAAP performance measures that we
believe are useful to assist investors in gaining an understanding of the trends and operating results for our core business. These measures should be viewed in addition to, and not in lieu of, results reported under U.S. GAAP.
Reconciliations of adjusted revenues, adjusted expenses, adjusted pre-tax (loss) income, adjusted income tax (benefit) expense and adjusted net (loss) income to revenues, expenses, (loss) income before income tax (benefit) expense, income tax (benefit) expense and net (loss) income and related per share amounts as determined in accordance with U.S. GAAP for the three and nine months ended September 30, 2016 and September 30, 2015, respectively, are provided below (dollars in thousands except per share amounts).
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|
|
|
|
|
|
|
|
|
|
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Three Months Ended
|
|
Nine Months Ended
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September 30,
|
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September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total revenues
|
|
$
|
104,185
|
|
$
|
120,409
|
|
$
|
349,463
|
|
$
|
410,630
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues - gains (1)
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|
|
—
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|
|
—
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|
|
(2,438)
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|
|
—
|
|
Adjusted revenues
|
|
|
104,185
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|
|
120,409
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|
|
347,025
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|
|
410,630
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|
|
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|
|
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|
|
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|
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Total expenses
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|
$
|
131,983
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|
$
|
117,219
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|
$
|
390,557
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|
$
|
394,049
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Less:
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|
|
|
|
|
|
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|
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Reserve for potential SEC settlement related to ADRs and associated costs (2)
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(23,743)
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—
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(23,743)
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—
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Restructuring (3)
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—
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—
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(4,355)
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|
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—
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Compensation awards for current CEO (4)
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|
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(541)
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|
—
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|
|
(3,857)
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|
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—
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|
Arbitration case with former CEO and associated costs (5)
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|
|
941
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—
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(6,580)
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—
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SEC settlement related to trading pilot and associated costs (6)
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—
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(2,551)
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—
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(25,198)
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Gain from currency translation adjustment (7)
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1,066
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|
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—
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|
|
1,066
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|
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—
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Adjusted expenses
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$
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109,706
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|
$
|
114,668
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$
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353,088
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$
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368,851
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(Loss) income before income tax (benefit) expense
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$
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(27,798)
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$
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3,190
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$
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(41,094)
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$
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16,581
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Effect of adjustments
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22,277
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2,551
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35,031
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25,198
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Adjusted pre-tax (loss) income
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$
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(5,521)
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$
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5,741
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$
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(6,063)
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|
$
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41,779
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Income tax (benefit) expense
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|
$
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(3,887)
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|
$
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480
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$
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(9,460)
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$
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7,348
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Tax effect of adjustments (1) - (6)
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1,125
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1,080
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5,101
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|
|
2,157
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Adjusted income tax (benefit) expense
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|
$
|
(2,762)
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|
$
|
1,560
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|
$
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(4,359)
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$
|
9,505
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Net (loss) income
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|
$
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(23,911)
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$
|
2,710
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|
$
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(31,634)
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$
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9,233
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Net effect of adjustments
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|
|
21,152
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|
|
1,471
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|
|
29,930
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|
|
23,041
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Adjusted net (loss) income
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|
$
|
(2,759)
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|
$
|
4,181
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|
$
|
(1,704)
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$
|
32,274
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Diluted (loss) earnings per share
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|
$
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(0.73)
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|
$
|
0.08
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|
$
|
(0.96)
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|
$
|
0.26
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|
Net effect of adjustments
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|
|
0.65
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|
|
0.04
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|
|
0.91
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|
|
0.66
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Adjusted diluted (loss) earnings per share
|
|
$
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(0.08)
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|
$
|
0.12
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|
$
|
(0.05)
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|
$
|
0.92
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(1)
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In the second quarter of 2016, we received insurance proceeds of $2.4 million from our corporate insurance carrier to settle a claim for lost profits arising from an August 2015 outage in our outsourced primary data center in the U.S. Additionally, we generated a nominal gain on the completion of the sale of our investment research operations in May 2016
.
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(2)
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In the third quarter of 2016, we accrued $22.1 million for a potential settlement with the SEC with respect to an inquiry involving pre-released ADRs and incurred legal fees related to this matter of $1.6 million.
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(3)
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In the second quarter of 2016, we incurred restructuring charges related to (a) the reduction in our high-touch trading and sales organizations and (b) the closing of our U.S. matched-book securities lending operations and our Canadian arbitrage trading desk
.
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(4)
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Our current Chief Executive Officer was granted cash and stock awards upon the commencement of his employment in January 2016, a significant portion of which replaced awards he forfeited at his former employer. Due to U.S. tax regulations, only a small portion of the amount expensed for these awards was eligible for a tax deduction
.
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(5)
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In the first half of 2016, we incurred a charge of $4.8 million, net of an insurance recovery of $0.5 million, to settle an arbitration case with our former CEO and incurred legal fees of $2.7 million. During the three months ended September 30, 2016, we recorded a reimbursement of $0.9 million of these legal fees from our insurance carrier.
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(6)
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In the second quarter of 2015, we reserved $20.3 million for a settlement with the SEC related to an investigation into a proprietary trading pilot (the “2015 SEC Settlement”) and incurred $2.3 million in legal and other related costs associated with the matter. In the third quarter of 2015, we incurred an additional $2.6 million in legal and related costs to finalize the settlement order
.
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(7)
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In the three months ended September 30, 2016, we substantially completed the final liquidation of our investment in an Israel entity that ceased operations in December 2013. During our period of ownership and through December 2013, we had accumulated foreign exchange translation
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gains as a component of equity, which has been reclassified as a gain that reduced other general and administrative expenses in the condensed consolidated statement of operations.
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Executive Summary for the Quarter Ended September 30, 2016
Consolidated Overview
A seasonal decline in market-wide trading activity in North America and Europe as well as a sequential dip in U.S. market share resulted in a wider loss than the second quarter of 2016. On a positive note, we continued to generate solid profitability in Europe and Canada and we posted our third-highest quarterly profit ever in Asia Pacific. A return to profitability in our U.S. business remains a key area of focus for us going forward.
On a U.S. GAAP basis, we generated revenues of $104.2 million in the third quarter of 2016 and incurred a net loss of $23.9 million, or $0.73 per share compared with revenues of $120.4 million and net income of $2.7 million, or $0.08 per share in the third quarter of 2015. We had non-operating items in the third quarter that significantly impacted our GAAP results including a reserve for a potential settlement with the SEC related to an inquiry involving pre-released ADRs of $22.1 million and related legal fees of $1.6 million, for a combined impact of $0.68 per share after-tax. For more information, see Note 18
Contingencies – Legal Matters
. Our GAAP results were also impacted by the continued expensing of upfront inducement and sign-on awards granted to our current CEO totaling $0.5 million, or $0.02 per share after-tax. Offsetting these charges was a gain of $1.1 million, or $0.03 per share after-tax, to recognize into earnings foreign translation gains that were previously recorded directly to equity following the substantial liquidation of our Israel entity as well as the recovery of $0.9 million, or $0.02 per share after-tax, from our insurance carrier for legal fees related to the arbitration case with our former CEO.
On an adjusted basis, we generated a net loss of $2.8 million, or $0.08 per share compared with net income of $4.2 million or $0.12 per share in the third quarter 2015 (see Non-GAAP Financial Measures). Expenses of $132.0 million were 13% higher than the third quarter of 2015 primarily due to the impact of the reserve. On an adjusted basis, excluding the items noted above (see Non-GAAP Financial Measures), expenses of $109.7 million were down 4% from the third quarter of 2015 reflecting lower transaction processing costs as well as lower compensation and other costs from the sale of energy research in December 2015 and our remaining investment research operations in May 2016 (collectively, the “Research Divestitures”).
Under our strategic operating plan, we have determined that our strategy is to increasingly focus our resources on our core capabilities in execution, liquidity, analytics and workflow solutions, which are our four key service offerings that revolve around the trade implementation cycle. We have been positioning ourselves throughout the year to execute on this plan as demonstrated by the Research Divestitures, the closing of certain peripheral businesses and our efforts to put historical issues behind us. As part of our strategic operating plan, we intend to pursue significant investments in technology and people to enhance these key service offerings and sharpen our brand with the expectation that we will meaningfully grow market share, revenues and profitability on a global basis.
Segment Discussions
Regional segment results exclude the impact of Corporate activity. Corporate activity reduced pre-tax income by $26.4 million, including the impact of the above-mentioned items for the settlement reserve and related legal costs, the continued expensing of awards to our current CEO and the gains related to the insurance recovery and the Israel entity liquidation.
Our U.S. average daily volume (“ADV”) was 115.5 million shares, down 24% from the third quarter of 2015, primarily due to the combined impact of a 10% decline in market-wide volumes and reduced sell-side activity. As compared to the second quarter of 2016, ADV was down 12% due to a 9% sequential decline in market-wide volumes and reduced trading from hedge funds, including some that previously traded for investment research.
In Canada, our 3% growth in commissions and fees over the third quarter of 2015 lagged the 10% growth in market-wide ADV as a greater proportion of our volume in the third quarter of 2016 was from lower priced sell-side clients. Commissions and fees in Canada were down 11% compared to second quarter 2016, outperforming the 15% decline in market-wide ADV.
Our European commissions and fees grew 1% compared to the third quarter of 2015 due to improved buy-side trading from the lower levels we experienced in the prior year period following the 2015 SEC Settlement, despite a 5% decline in market-wide trading and the impact of currency translation on trading in the U.K. As compared to the second quarter of 2016, commissions and fees were down 11% due to a 9% decline in market-wide trading and reduced activity from certain sell-side accounts.
Overall revenues in Asia Pacific of $12.5 million were up 21% compared to the third quarter of 2015 as the region returned to profitability, reporting its third most profitable quarter on record. Growth was driven by a 48% increase in our daily value executed, reflecting growth from both buy-side and sell-side clients in an environment where market-wide trading was down 15%. As compared to the second quarter of 2016, Asia Pacific revenues were 11% higher, significantly outpacing the 4% increase in market-wide trading. Daily value executed in POSIT Alert grew by 15% resulting in a second consecutive quarterly record for the product in terms of both value traded and commissions.
Capital Resource Allocation
During the third quarter of 2016, we repurchased 426,450 shares under our authorized repurchase program for $7.2 million, or $16.80 per share, and we maintained our $0.07 quarterly dividend program, paying out $2.3 million in cash. On a year-to-date basis we have repurchased 1.3 million shares under our authorized repurchase program for $22.1 million, or $16.55 per share and we have paid cash dividends of $6.9 million.
We have suspended share repurchases under our program pending the resolution of the ADR matter with the SEC, after which we will re-evaluate our capital return approach.
Results of Operations — Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015
U.S. Operations
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
$ in thousands
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
35,739
|
|
$
|
45,098
|
|
$
|
(9,359)
|
|
(21)
|
%
|
Recurring
|
|
|
12,430
|
|
|
19,547
|
|
|
(7,117)
|
|
(36)
|
%
|
Other
|
|
|
605
|
|
|
1,394
|
|
|
(789)
|
|
(57)
|
%
|
Total revenues
|
|
|
48,774
|
|
|
66,039
|
|
|
(17,265)
|
|
(26)
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
25,527
|
|
|
30,934
|
|
|
(5,407)
|
|
(17)
|
%
|
Transaction processing
|
|
|
8,797
|
|
|
10,513
|
|
|
(1,716)
|
|
(16)
|
%
|
Other expenses
|
|
|
22,978
|
|
|
23,840
|
|
|
(862)
|
|
(4)
|
%
|
Total expenses
|
|
|
57,302
|
|
|
65,287
|
|
|
(7,985)
|
|
(12)
|
%
|
(Loss) income before income tax expense
|
|
$
|
(8,528)
|
|
$
|
752
|
|
$
|
(9,280)
|
|
N/A
|
|
The 21% decline in commissions and fees from the prior year period resulted from a 24% reduction in our ADV, steeper than the 10% decline in total daily U.S. market volumes. The higher drop in our ADV was primarily driven by a reduction in trading from sell-side clients, as buy-side volumes were down just 3% from the third quarter of 2015. The decline in buy-side volumes was better than the decline in market-wide volumes, demonstrating our continued progress in recovering from the 2015 SEC Settlement.
Our overall revenue capture increased slightly from the prior year period to $0.0041, reflecting the lower portion of volume from lower-rate sell-side clients, which decreased to 52% for the three months ended September 30, 2016 from 62% during the prior year period, partially offset by a decline in the average capture rate on sell-side trading.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
U.S. Operations: Key Indicators*
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Total trading volume (in billions of shares)
|
|
|
7.4
|
|
|
9.7
|
|
|
(2)
|
|
(24)
|
%
|
Average trading volume per day (in millions of shares)
|
|
|
115.5
|
|
|
151.9
|
|
|
(36)
|
|
(24)
|
%
|
Average revenue per share
|
|
$
|
0.0041
|
|
$
|
0.0040
|
|
$
|
0.0001
|
|
3
|
%
|
U.S. market trading days
|
|
|
64
|
|
|
64
|
|
|
—
|
|
—
|
|
* Excludes activity from ITG Net commission share arrangements.
Recurring revenues decreased 36% from the prior year period, primarily from the loss of billed investment research revenue following the Research Divestitures and lower billed revenue from analytics products.
Other revenues decreased as compared to the prior year period as a result of closing the matched-book securities lending operations in the second quarter 2016, lower market data tape rebate revenue and lower advisory services revenue due to the Research Divestitures, partially offset by clearing ticket revenue earned.
Compensation and employee benefits decreased 17% from the prior year period primarily due to the impact of the Research Divestitures, representing more than 90% of the total decrease, as well as lower current year incentive-based compensation and lower stock-based compensation on performance awards.
Transaction processing costs decreased 16% from the prior year period, which was lower than the 24% decline in trading volumes due to additional costs to outsource select clearing accounts to a third party and the impact that fixed clearing and settlement costs have on reduced volumes.
Other expenses decreased 4% from the prior year period due to our cost containment efforts as well the impact of the Research Divestitures, however the latter savings were offset in part by a new cost agreed to for 2016 to purchase energy research for distribution to bundled trading clients.
Canadian Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
$ in thousands
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
11,607
|
|
$
|
11,236
|
|
$
|
371
|
|
3
|
%
|
Recurring
|
|
|
1,255
|
|
|
1,373
|
|
|
(118)
|
|
(9)
|
%
|
Other
|
|
|
857
|
|
|
2,290
|
|
|
(1,433)
|
|
(63)
|
%
|
Total revenues
|
|
|
13,719
|
|
|
14,899
|
|
|
(1,180)
|
|
(8)
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
4,466
|
|
|
3,324
|
|
|
1,142
|
|
34
|
%
|
Transaction processing
|
|
|
2,055
|
|
|
2,127
|
|
$
|
(72)
|
|
(3)
|
%
|
Other expenses
|
|
|
5,702
|
|
|
5,853
|
|
|
(151)
|
|
(3)
|
%
|
Total expenses
|
|
|
12,223
|
|
|
11,304
|
|
|
919
|
|
8
|
%
|
Income before income tax expense
|
|
$
|
1,496
|
|
$
|
3,595
|
|
|
(2,099)
|
|
(58)
|
%
|
Currency translation had a negligible effect on revenues and expenses.
Total revenues in our Canadian operations declined 8% compared to the prior year period, largely as a result of lower other revenue from closing the arbitrage trading desk in April 2016. Total revenues were 4% higher than the third quarter of 2015 excluding the impact of the closed arbitrage trading desk.
Commissions and fees increased 3% from the prior year period. This increase was below the 10% increase in market-wide ADV primarily due to a decline in our average rate per share as a larger portion of our volume was from lower-priced sell-side accounts.
Recurring revenues decreased 9% compared to the prior year period primarily due to the sale of energy research in December 2015.
Compensation and employee benefits costs increased 34% from the prior year period primarily due to stock compensation reversals in the prior year period from downward mark-to-market adjustments on awards settled in cash following the reduction in our stock price, as well as the reversal of expense on incentive-based compensation and cancelled stock awards due to executive attrition.
Transaction processing costs declined 3% compared to the prior year period primarily due to the impact of closing the arbitrage trading desk, partially offset by higher sell-side volumes.
Other expenses decreased 3% compared to the prior year period due to lower consulting, travel and entertainment and marketing expenses, partially offset by
increased costs for investments we are making to enhance redundancy and business recovery capabilities
.
European Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
$ in thousands
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
25,062
|
|
$
|
24,882
|
|
$
|
180
|
|
1
|
%
|
Recurring
|
|
|
4,013
|
|
|
4,143
|
|
|
(130)
|
|
(3)
|
%
|
Other
|
|
|
(181)
|
|
|
(126)
|
|
|
(55)
|
|
(44)
|
%
|
Total revenues
|
|
|
28,894
|
|
|
28,899
|
|
|
(5)
|
|
—
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
8,698
|
|
|
8,615
|
|
|
83
|
|
1
|
%
|
Transaction processing
|
|
|
7,284
|
|
|
6,945
|
|
|
339
|
|
5
|
%
|
Other expenses
|
|
|
8,203
|
|
|
8,509
|
|
|
(306)
|
|
(4)
|
%
|
Total expenses
|
|
|
24,185
|
|
|
24,069
|
|
|
116
|
|
—
|
%
|
Income before income tax expense
|
|
$
|
4,709
|
|
$
|
4,830
|
|
$
|
(121)
|
|
(3)
|
%
|
Although the British Pound is the functional currency for our European Operations, we did not see a decline in profitability in the region from the significant reduction in the translation rate for that currency since we have transactions that originate in other currencies in the region including the Euro, Swiss Franc and Swedish Krona. Revenues and expenses on transactions that originate in the U.K largely offset each other and, as a result, the weaker British Pound lowered both revenues and expenses by approximately $1.5 million. There were no material changes to the translation rate of other currencies in the region.
Commissions and fees increased 1% compared to the prior year period due to the recovery in trading from buy-side accounts using POSIT Alert and our high-touch trading offerings, offset in part by the impact of a 5% decline in market-wide trading and the impact of currency translation on trading in the U.K.
Recurring revenues decreased 3% from the prior year period due to lower billed revenue from analytics products.
Other revenues decreased compared to the prior year period primarily due to increased client accommodations.
Compensation and employee benefits increased from the prior year period due to the impact of reducing incentive based compensation accruals in the prior year period, partially offset by a favorable currency impact on the cost for employees based in the U.K.
Transaction processing costs increased 5% compared to the prior year period, which was higher than the growth in commissions and fees primarily due to a lower crossing rate in POSIT, higher transactions costs paid to market makers for executions in exchange-traded-funds (ETFs) and higher financing costs on settlement activities.
Other expenses decreased 4% from the prior year period due primarily to currency translation on U.K.-based expenses and lower travel and entertainment expenses, offset in part by higher software amortization and marketing costs.
Asia Pacific Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
$ in thousands
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
11,075
|
|
$
|
8,718
|
|
$
|
2,357
|
|
27
|
%
|
Recurring
|
|
|
1,516
|
|
|
1,596
|
|
|
(80)
|
|
(5)
|
%
|
Other
|
|
|
(89)
|
|
|
37
|
|
|
(126)
|
|
(341)
|
%
|
Total revenues
|
|
|
12,502
|
|
|
10,351
|
|
|
2,151
|
|
21
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
4,450
|
|
|
4,207
|
|
|
243
|
|
6
|
%
|
Transaction processing
|
|
|
2,663
|
|
|
2,036
|
|
|
627
|
|
31
|
%
|
Other expenses
|
|
|
4,488
|
|
|
4,519
|
|
|
(31)
|
|
(1)
|
%
|
Total expenses
|
|
|
11,601
|
|
|
10,762
|
|
|
839
|
|
8
|
%
|
Income (loss) before income tax expense (benefit)
|
|
$
|
901
|
|
$
|
(411)
|
|
$
|
1,312
|
|
319
|
%
|
Currency translation from a stronger Australian Dollar increased total Asia Pacific revenues and expenses by $0.3 million and $0.1 million, respectively, resulting in an increase of $0.2 million to pre-tax income.
Asia-Pacific generated $0.9 million of pre-tax income during the three months ended September 30, 2016 from the strong growth in client trading activity. Our average daily value executed in the region was 48% higher than the third quarter of 2015 in an environment where market-wide trading was down 15%. A greater proportion of our current year activity was from lower-priced sell-side accounts, which pushed our average commission rate on the increased executed value lower. Commissions and fees increased 27% over the prior year period due to the growth in order flow from both local and U.S. clients to our POSIT Alert and high-touch trading offerings. The growth in POSIT Alert resulted in record levels of value traded and commissions for this product in the region for a second consecutive quarter.
Recurring revenues decreased 5% from the prior year period due to lower billed revenue from analytics products, and other revenues decreased from higher client trading accommodations.
Compensation and employee benefits increased 6% compared to the prior year period primarily due to the impact of reducing incentive-based compensation accruals in the prior year period.
Transaction processing costs increased 31% from the prior year period, less than the 48% growth in value executed, due to a higher proportion of our trading in markets where costs are lower. As a percentage of commissions and fees, transaction processing costs increased slightly to 24.0% from 23.3% for the three months ended September 30, 2015 due to the impact of a higher proportion of value executed for lower-rate, sell-side clients.
Other expenses increased slightly compared to the three months ended September 30, 2015 due to the increase in market data and connectivity to support client growth and higher depreciation expenses associated with
investments we are making to enhance redundancy and business recovery capabilities
.
Corporate
Corporate activity includes investment income from all treasury activity as well as costs not associated with operating the businesses within our 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 our global transfer pricing structure, (e) foreign exchange gains or losses and (f) certain non-operating expenses.
For the third quarter of 2016, we incurred a pre-tax loss from these activities of $26.4 million, reflecting $0.3 million of revenue and $26.7 million of costs. For the third quarter of 2015, we incurred a pre-tax loss of $5.6 million from these activities, reflecting revenue of $0.2 million and costs of $5.8 million. Costs during the three months ended September 30, 2016 included a $22.1 million reserve for a potential settlement with the SEC related to an inquiry involving pre-released ADRs and related legal fees of $1.6 million, as well as $0.5 million of costs for the continued expensing of upfront awards to our current CEO, a significant portion of which replaced awards he forfeited at his former employer. These costs were reduced by a gain of $1.1 million to recognize into earnings foreign translation gains
that were previously recorded directly to equity following the substantial liquidation of our Israel entity and a recovery of $0.9 million from our insurance carrier for legal fees related to the arbitration case with our former CEO. Costs during the three months ended September 30, 2015 included $2.6 million of legal fees and related costs to finalize the 2015 SEC Settlement. Excluding the items described above, Corporate costs increased by $1.1 million compared to the prior year period, reflecting the impact of a $2.1 million reversal in the prior year period of compensation associated with the management changes in August 2015, offset in part by lower intangible amortization expense as a result of the Research Divestitures. We continue to incur significant legal costs related to ongoing legal proceedings and certain other governmental inquiries with respect to which we are cooperating, including the ADR matter. We expect the legal fees related to these ongoing legal proceedings and certain other governmental inquiries will continue until such matters are resolved.
Consolidated income tax expense
In the third quarter of 2016, we reported a tax benefit of $3.9 million, resulting in an effective rate of 14.0% on our pre-tax loss. The low effective rate on our pre-tax loss reflects the impact of the non-deductibility of a substantial portion of the $22.1 million reserve for the ADR matter. This was partially offset by a higher tax benefit generated on the pre-tax losses in our U.S. Operations and from our other Corporate activities (most of which was incurred in the U.S.), the lower expense rate incurred on our pre-tax earnings in Europe and the benefit of pre-tax income in Asia Pacific, where we do not incur tax expense due to cumulative losses. This compares with a low 15% effective tax rate on our pre-tax income during the three months ended September 30, 2015 primarily due to the fact that a lower proportion of our consolidated pre-tax income was earned in the U.S., where tax rates are higher, while a much higher proportion of our consolidated pre-tax income was earned in Europe, where tax rates are lower. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.
Results of Operations — Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
U.S. Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
$ in thousands
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
128,806
|
|
$
|
158,382
|
|
$
|
(29,576)
|
|
(19)
|
%
|
Recurring
|
|
|
42,728
|
|
|
59,005
|
|
|
(16,277)
|
|
(28)
|
%
|
Other
|
|
|
2,143
|
|
|
4,580
|
|
|
(2,437)
|
|
(53)
|
%
|
Total revenues
|
|
|
173,677
|
|
|
221,967
|
|
|
(48,290)
|
|
(22)
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
82,378
|
|
|
97,609
|
|
|
(15,231)
|
|
(16)
|
%
|
Transaction processing
|
|
|
28,918
|
|
|
33,790
|
|
|
(4,872)
|
|
(14)
|
%
|
Other expenses
|
|
|
71,678
|
|
|
73,025
|
|
|
(1,347)
|
|
(2)
|
%
|
Total expenses
|
|
|
182,974
|
|
|
204,424
|
|
|
(21,450)
|
|
(10)
|
%
|
(Loss) income before income tax expense
|
|
$
|
(9,297)
|
|
$
|
17,543
|
|
$
|
(26,840)
|
|
(153)
|
%
|
The 19% decline in commissions and fees compared to the prior year period resulted from a 22% reduction in our ADV as compared to an 8% increase in total daily U.S. market volumes. The decline in our ADV was primarily driven by reduced sell-side activity. Buy-side activity was also lower than the prior year period due to the lingering impact from the 2015 SEC Settlement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
U.S. Operations: Key Indicators*
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Total trading volume (in billions of shares)
|
|
|
25.7
|
|
|
32.9
|
|
|
(7.2)
|
|
(22)
|
%
|
Average trading volume per day (in millions of shares)
|
|
|
135.9
|
|
|
174.9
|
|
|
(39.0)
|
|
(22)
|
%
|
Average revenue per share
|
|
$
|
0.0042
|
|
$
|
0.0042
|
|
$
|
—
|
|
—
|
|
U.S. market trading days
|
|
|
189
|
|
|
188
|
|
|
1
|
|
1
|
%
|
* Excludes activity from ITG Net commission share arrangements.
Recurring revenues decreased 28% from the prior year period, primarily from the loss of billed investment research revenue following the Research Divestitures and lower subscription revenue for our OMS product due to client attrition.
Other revenues decreased 53% compared to the prior year period due to the impact of transaction advisory services revenue earned in 2015 by our former energy research team and client trade accommodations, which reduced other revenues by $1.1 million during the nine months ended September 30, 2016 compared to a reduction of $0.6 million during the nine months ended September 30, 2015. The closing of our matched-book securities lending operations in the second quarter 2016, and lower market data tape rebate revenue also contributed to the decline. These reductions were partially offset by clearing ticket revenue earned.
Compensation and employee benefits decreased 16% from the prior year period due to the Research Divestitures, representing a majority of the total decrease, as well as lower current year incentive-based compensation.
Transaction processing costs decreased 14% as compared to the prior year period, which was lower than the 22% decline in our ADV due to additional costs to outsource select clearing accounts to a third party and the impact that fixed clearing and settlement costs have on reduced volumes.
Other expenses decreased slightly from the prior year period due to our cost containment efforts as well as the impact of the Research Divestitures, however the latter savings were offset in part by a new cost agreed to for 2016 to purchase energy research for distribution to bundled trading clients.
Canadian Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
$ in thousands
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
37,531
|
|
$
|
40,276
|
|
$
|
(2,745)
|
|
(7)
|
%
|
Recurring
|
|
|
3,834
|
|
|
4,248
|
|
|
(414)
|
|
(10)
|
%
|
Other
|
|
|
4,240
|
|
|
5,992
|
|
|
(1,752)
|
|
(29)
|
%
|
Total revenues
|
|
|
45,605
|
|
|
50,516
|
|
|
(4,911)
|
|
(10)
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
13,881
|
|
|
14,964
|
|
|
(1,083)
|
|
(7)
|
%
|
Transaction processing
|
|
|
6,837
|
|
|
6,797
|
|
|
40
|
|
1
|
%
|
Other expenses
|
|
|
17,271
|
|
|
17,791
|
|
|
(520)
|
|
(3)
|
%
|
Total expenses
|
|
|
37,989
|
|
|
39,552
|
|
|
(1,563)
|
|
(4)
|
%
|
Income before income tax expense
|
|
$
|
7,616
|
|
$
|
10,964
|
|
$
|
(3,348)
|
|
(31)
|
%
|
Currency translation from a weaker Canadian Dollar decreased total Canadian revenues and expenses by $1.8 million and $1.3 million, respectively, resulting in a decrease of $0.5 million to pre-tax income.
Commissions and fees declined 7% from the prior year period despite growth in daily market-wide trading in Canada due to the impact of unfavorable currency translation and a greater proportion of our volume in 2016 coming from lower-priced sell-side clients.
Recurring revenues decreased 10% from the prior year period primarily from the sale of energy research at the end of 2015.
Other revenues decreased 29% from the prior year period due to the impact of closing the arbitrage trading desk in April 2016, which was offset in part by higher foreign exchange trading gains.
Compensation and employee benefits costs decreased 7% from the prior year period due to lower incentive-based compensation and the currency reduction.
Transaction processing costs were slightly higher compared to the prior year period despite the decline in commissions and fees due to the impact of processing increased volumes from lower-rate sell-side clients, offset in part by reductions related to closing the arbitrage trading desk and the currency reduction.
Other expenses decreased 3% from the prior year period due to lower consulting, travel and entertainment and marketing costs as well as lower research distribution fees paid to the U.S. Operations.
European Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
$ in thousands
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
80,629
|
|
$
|
86,868
|
|
$
|
(6,239)
|
|
(7)
|
%
|
Recurring
|
|
|
12,173
|
|
|
12,249
|
|
|
(76)
|
|
(1)
|
%
|
Other
|
|
|
(566)
|
|
|
(38)
|
|
|
(528)
|
|
N/A
|
|
Total revenues
|
|
|
92,236
|
|
|
99,079
|
|
|
(6,843)
|
|
(7)
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
27,949
|
|
|
28,493
|
|
|
(544)
|
|
(2)
|
%
|
Transaction processing
|
|
|
22,449
|
|
|
22,615
|
|
|
(166)
|
|
(1)
|
%
|
Other expenses
|
|
|
25,166
|
|
|
24,248
|
|
|
918
|
|
4
|
%
|
Total expenses
|
|
|
75,564
|
|
|
75,356
|
|
|
208
|
|
—
|
%
|
Income before income tax expense
|
|
$
|
16,672
|
|
$
|
23,723
|
|
$
|
(7,051)
|
|
(30)
|
%
|
Currency translation on U.K.-based transactions decreased both total revenues and expenses in Europe by approximately $1.5 million. There was no material impact on our results from the changes in other currency rates in the region.
Commissions and fees decreased 7% compared to the prior year period primarily due to reduced use of our algorithmic trading products by buy-side clients, reduced use of POSIT crossing by certain sell-side clients and a slight reduction in overall market-wide trading. Commissions and fees were also reduced by the impact of currency translation on U.K.-based trading.
Recurring revenues decreased 1% from the prior year period due primarily to lower billed revenue for analytics products, while the change in other revenues primarily reflected the impact of losses during the nine months ended September 30, 2016 to provide price improvement for ETFs in order to generate higher levels of commissions and fees on such trades.
Compensation and employee benefits decreased slightly as compared to the prior year period primarily due to the impact of currency translation on costs for employees based in the U.K., as lower current year incentive-based compensation was offset by higher stock-based compensation.
Transaction processing costs decreased slightly from the prior year period as the impacts of currency reduction on U.K. costs and our negotiation of lower settlement costs in the region more than offset the increase from the growth in our daily executed value. Transaction processing costs increased as a percentage of commissions and fees to 27.8%, compared to 26.0% in the 2015 period, reflecting the higher mix of our value traded from sell-side clients, a lower crossing rate in POSIT, transaction costs for executions in ETFs and higher financing costs.
Other expenses were 4% higher as compared to the prior year period due to investments in lower latency market data feeds and compliance monitoring tools, increased costs for connecting clients and redundant rent in France from the build-out of our new Paris office. These increases were offset in part by the impact of currency translation on U.K.-based expenses and lower travel and entertainment costs.
Asia Pacific Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
$ in thousands
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
30,175
|
|
$
|
34,194
|
|
$
|
(4,019)
|
|
(12)
|
%
|
Recurring
|
|
|
4,485
|
|
|
4,536
|
|
|
(51)
|
|
(1)
|
%
|
Other
|
|
|
(121)
|
|
|
(345)
|
|
|
224
|
|
65
|
%
|
Total revenues
|
|
|
34,539
|
|
|
38,385
|
|
|
(3,846)
|
|
(10)
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
13,466
|
|
|
14,412
|
|
|
(946)
|
|
(7)
|
%
|
Transaction processing
|
|
|
7,527
|
|
|
8,179
|
|
|
(652)
|
|
(8)
|
%
|
Other expenses
|
|
|
13,338
|
|
|
13,496
|
|
|
(158)
|
|
(1)
|
%
|
Total expenses
|
|
|
34,331
|
|
|
36,087
|
|
|
(1,756)
|
|
(5)
|
%
|
Income before income tax expense
|
|
$
|
208
|
|
$
|
2,298
|
|
$
|
(2,090)
|
|
(91)
|
%
|
Currency translation from a weaker Australian Dollar decreased total Asia Pacific revenues and expenses by $0.6 million and $0.3 million, respectively, resulting in a decrease of $0.3 million to pre-tax income.
Asia Pacific experienced a decline in profitability as compared to the prior year period due to the impact of the 2015 SEC Settlement and lower levels of market-wide trading on commissions and fees. Our average daily value executed in the region declined by 3% as compared to the prior year period, which was far less than the 18% decline in daily market-wide trading. A greater proportion of our current year activity was from lower-priced sell-side accounts, which pushed our average commission rate on the increased executed value lower.
Recurring revenues were comparable to the prior year period, while other revenues improved due to a reduced impact of client trade accommodations.
Compensation and employee benefits decreased 7% as compared to the prior year period primarily due to a reduction in salaries resulting from lower headcount and lower incentive-based compensation related to lower revenues.
Transaction processing costs decreased 8% from the prior year period due to the decrease in average daily value executed, a higher proportion of our trading in markets where costs are lower and currency translation. As a percentage of commissions and fees, transaction processing costs increased slightly to 24.9% from 23.9% in 2015 due to the impact of a higher proportion of value traded by lower-rate, sell-side clients.
Other expenses decreased slightly as compared to the prior year period primarily due to lower travel and entertainment costs, recruiting and allocated software development expenses.
Corporate
For the first nine months of 2016, we incurred a pre-tax loss from Corporate activities of $56.3 million, reflecting $3.4 million of revenue and $59.7 million of costs. For the first nine months of 2015, we incurred a pre-tax loss of $37.9 million reflecting $0.7 million of revenue and $38.6 million of costs. The increase in revenue as compared to the prior year period reflects the recognition of $2.4 million of insurance proceeds, net of related expenses, under our business interruption insurance policy for the impact of an outage at our primary outsourced data center in August 2015. Costs in the 2016 period included a $22.1 million reserve for a potential settlement with the SEC related to an inquiry involving pre-released ADRs and related legal fees of $1.6 million. These costs also included $3.8 million for the expensing of upfront awards to our current CEO, a significant portion of which replaced awards he forfeited at his former employer, $4.8 million for the settlement of the arbitration claim by our former CEO, together with related legal fees of $1.8 million, net of a $0.9 million insurance recovery in the third quarter, and $4.4 million of restructuring costs related to (a) the reduction in high-touch sales trading headcount that was previously focused on our research products and (b) the closing of our U.S. matched-book securities lending operations and our Canadian arbitrage trading desk. Costs during the 2016 period were reduced by $1.1 million for the reclassification of an accumulated foreign translation gain now that we have substantially liquidated our Israel entity. Costs in the 2015 period included $20.3 million for the 2015 SEC Settlement and related legal and other fees of $4.9 million. Excluding the items noted above for the 2016 and 2015 periods, Corporate costs increased by $8.8 million compared to the prior year period reflecting the impact of a $2.1 million reversal in the 2015 period of compensation associated with the management changes in August 2015 and
additional legal fees in the current year period related to historical matters, including legal fees related to the ADR matter prior to the third quarter of 2016. These increases were offset in part by lower intangible amortization expense as a result of the Research Divestitures.
Consolidated income tax expense
In the first nine months of 2016, we reported a tax benefit of $9.5 million, resulting in an effective tax rate of 23.0% on our pre-tax loss. This compares to a tax expense of $7.3 million during the nine months ended September 30, 2015 for an effective tax rate of 44.3% on our pre-tax income. The low effective rate on our pre-tax loss in the current year period reflects the impact of the non-deductibility of a substantial portion of the $22.1 million reserve for the ADR matter, offset in part by a higher tax benefit generated on the pre-tax losses in our U.S. Operations and from our other Corporate activities (most of which was incurred in the U.S.), and the lower expense rate incurred on our pre-tax earnings in Europe. Our high effective tax rate in the prior year period was due to non-deductibility of substantially all of the $20.3 million cost for the 2015 SEC Settlement, offset in part by the high portion of our pre-tax income that was generated in Europe where tax rates are lower.
Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.
Liquidity and Capital Resources
Liquidity
Our primary source of liquidity is cash provided by operations. Our liquidity requirements result from our working capital needs, which include clearing and settlement activities, as well as our regulatory capital needs. A substantial portion of our assets is liquid, consisting of cash and cash equivalents or assets readily convertible into cash. Cash is principally invested in money market mutual funds. At September 30, 2016, unrestricted cash and cash equivalents totaled $260.9 million. Included in this amount is $97.3 million of cash and cash equivalents held by subsidiaries outside the United States. Due to the December 2015 amendment to the capital structure of our operations outside of North America, which included a deemed dividend on all cumulative undistributed earnings, we currently do not foresee a need to repatriate funds from certain foreign subsidiaries to the U.S. by way of dividends. Should we need to do so in the future, our effective tax rate may increase.
As a self-clearing broker-dealer in the U.S., we are subject to cash deposit requirements with clearing organizations that may be large in relation to total liquid assets and may fluctuate significantly based upon the nature and size of customers’ trading activity and market volatility. At September 30, 2016, we had interest-bearing security deposits totaling $28.3 million with clearing organizations in the U.S. for the settlement of equity trades. In the normal course of our U.S. settlement activities, we may also need to temporarily finance customer securities positions from short settlements or delivery failures. These financings may be funded from existing cash resources, borrowings under stock loan transactions or short-term bank loans under our committed facility. In January 2016, we entered into a new $150 million 364-day revolving credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as Administrative Agent, to finance these temporary positions and to satisfy temporary spikes in clearing margin requirements. The terms and conditions of the credit agreement are similar to the credit agreement that matured in January 2016 (see Note 11,
Borrowings
), except that the unused commitment fee is 0.75%.
In the Asia Pacific region, we self-clear equity trades in Hong Kong and Australia. At September 30, 2016, we maintained restricted cash deposits in the region of $26.1 million, primarily to support overdraft facilities, and had deposits with clearing organizations of $7.3 million. In Europe, we maintained $1.2 million in restricted cash related to protected client funds and we had deposits with our clearing and settlement agents of $37.2 million at September 30, 2016.
Capital Resources
Capital resource requirements relate to capital purchases, as well as business investments, and are generally funded from operations.
Operating Activities
The table below summarizes the effect of the major components of operating cash flow.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2016
|
|
2015
|
|
Net (loss) income
|
|
$
|
(31,634)
|
|
$
|
9,233
|
|
Gain on sale of investment research operations
|
|
|
(21)
|
|
|
—
|
|
Non-cash items included in net (loss) income
|
|
|
39,541
|
|
|
49,394
|
|
Effect of changes in receivables/payables from/to customers and brokers
|
|
|
(63,890)
|
|
|
(1,722)
|
|
Effect of changes in other working capital and operating assets and liabilities
|
|
|
(18,682)
|
|
|
(71,538)
|
|
Net cash used in operating activities
|
|
$
|
(74,686)
|
|
$
|
(14,633)
|
|
The increase in cash used in operating activities during the first nine months of 2016 as compared to the first nine months of 2015 relates to an increase in cash temporarily tied up in settlement activities, which was partially offset by a $51.6 million increase in short-term debt reflected in financing activities, as well as our net loss in 2016 and an increase in income tax assets.
Investing Activities
Net cash used in investing activities of $22.2 million includes our investments in software development projects and computer hardware and software partially offset by the net cash proceeds from our Research Divestitures.
Financing Activities
The increase in cash provided by financing activities during the first nine months of 2016 as compared to the first nine months of 2015 primarily reflects the increase in short-term bank borrowings to fund our international securities clearance and settlement activities as described above, partially offset by repurchases of ITG common stock and repayments of long-term debt.
During the first nine months of 2016, we remained active with our share buyback program repurchasing approximately 1.7 million shares of our common stock at a cost of $28.7 million, while also maintaining our $0.07 per share quarterly dividend program, both of which were funded from our available cash resources. Of the shares repurchased, 1.3 million were acquired under our Board of Directors’ authorization for a total cost of $22.1 million (average cost of $16.55 per share). An additional 0.4 million shares repurchased for $6.6 million pertained solely to the satisfaction of minimum statutory withholding tax upon the net settlement of equity awards. As of September 30, 2016, the total remaining number of shares currently available for repurchase under ITG’s stock repurchase program was 1.4 million. The specific timing and amount of repurchases will vary based on market conditions and other factors. We may elect to conduct future share repurchases through open market purchases, private transactions or automatic share repurchase programs under SEC Rule 10b5-1. We have suspended share repurchases under our program pending the resolution of the ADR matter with the SEC, after which we will re-evaluate our capital return approach.
Regulatory Capital
ITG Inc., AlterNet and ITG Derivatives are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. ITG Inc. has elected to use the alternative method permitted by Rule 15c3-1, which requires that ITG Inc. maintain minimum net capital equal to the greater of $1.0 million or 2% of aggregate debit balances arising from customer transactions, as defined. AlterNet and ITG Derivatives have elected to use the basic method permitted by Rule 15c3-1, which requires that they each maintain minimum net capital equal to the greater of 6
2
/
3
% of aggregate indebtedness or $100,000 and $1.0 million, respectively. Dividends or withdrawals of capital cannot be made if capital is needed to comply with regulatory requirements.
Net capital balances and the amounts in excess of required net capital at September 30, 2016 for the U.S. Operations are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
U.S. Operations
|
|
Net Capital
|
|
Excess
|
|
ITG Inc.
|
|
$
|
51,493
|
|
$
|
50,493
|
|
AlterNet
|
|
|
3,859
|
|
|
3,759
|
|
ITG Derivatives
|
|
|
1,356
|
|
|
1,256
|
|
As of September 30, 2016, ITG Inc. had $7.3 million of cash in a special reserve bank account for the benefit of customers under the Customer Protection Rule pursuant to SEC Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and $2.5 million under proprietary accounts of broker dealers.
In addition, our Canadian, European and Asia Pacific Operations have subsidiaries with regulatory capital requirements. The regulatory net capital balances and amount of regulatory capital in excess of the minimum requirements applicable to each business at September 30, 2016, is summarized in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
Canadian Operations
|
|
Net Capital
|
|
Excess
|
|
Canada
|
|
$
|
23,239
|
|
$
|
22,859
|
|
European Operations
|
|
|
|
|
|
|
|
Ireland
|
|
|
55,382
|
|
|
14,925
|
|
U.K.
|
|
|
2,030
|
|
|
1,214
|
|
Asia Pacific Operations
|
|
|
|
|
|
|
|
Australia
|
|
|
12,140
|
|
|
8,438
|
|
Hong Kong
|
|
|
26,449
|
|
|
7,767
|
|
Singapore
|
|
|
992
|
|
|
918
|
|
Liquidity and Capital Resource Outlook
Historically, our working capital, stock repurchase, dividend program and investment activity requirements have been funded from cash from operations and short-term loans, with the exception of strategic acquisitions, which at times have required long-term financing. We believe that our cash flow from operations, existing cash balances and our available credit facilities will be sufficient to meet our ongoing operating cash and regulatory capital needs, while also complying with the terms of our Credit Agreement.
However, our ability to borrow additional funds may be inhibited by financial lending institutions’ ability or willingness to lend to us on commercially acceptable terms.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We are a member of various U.S. and non-U.S. exchanges and clearing houses that trade and clear, respectively, equities and/or derivative contracts. Associated with our membership, we may be required to pay a proportionate share of financial obligations of another member who may default on its obligations to the exchanges or the clearing house. While the rules governing different exchange or clearinghouse memberships vary, in general, our guarantee obligations would arise only if the exchange had previously exhausted its resources. The maximum potential payout under these memberships cannot be estimated. We have not recorded any contingent liability in the condensed consolidated financial statements for these agreements and believe that any potential requirement to make payments under these agreements is remote.
As of September 30, 2016, our other contractual obligations and commercial commitments consisted principally of fixed charges, including minimum future rentals under non-cancelable operating leases, minimum future purchases under non-cancelable purchase agreements and compensation under employment agreements.
There has been no significant change to such arrangements and obligations since December 31, 2015.
New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The new guidance requires excess tax benefits and tax deficiencies to be recorded on the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity on the statement of cash flows. The standard also allows withholding up to the maximum statutory amount for taxes on employee share-based compensation, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows and provides an accounting policy election to account for forfeitures as they occur. The new standard is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. We are currently assessing the impact ASU 2016-09 will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
ASU No. 2016-02 includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of greater than 12 months while leases with terms of less than 12 months are exempt from the new standard. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a financing or operating lease. The standard requires disclosures enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The disclosures also require both qualitative and quantitative information to supplement the amounts recorded in the financial statements. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. We are currently evaluating the new guidance and have not yet determined the impact of adoption on our financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. The standard provides companies with a single five step revenue recognition model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The standard will also require significant additional qualitative and quantitative disclosures describing the nature, amount, timing, and uncertainty of revenues. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The original standard was effective for fiscal years beginning after December 15, 2016, however, in April 2015, the FASB proposed a one-year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. We are currently evaluating the new guidance and have not yet selected a transition method nor have we determined the impact of adoption on our financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments
. The amendments in this ASU provide specific guidance for eight specific cash flow classification issues, with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230,
Statement of Cash Flows
. These amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the new guidance and have not yet determined the impact of adoption on our financial statements.
Critical Accounting Estimates
There has been no significant change to our critical accounting estimates, which are more fully described in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, in our Annual Report on Form 10-K for the year ended December 31, 2015.