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 March 31, 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 April 11, 2017, the Registrant had 33,146,699 shares of common stock, $0.01 par value, outstanding.

 

 

 

 


 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I. — Financial Information

 

 

 

 

Item 1.  

Financial Statements

 

 

 

 

 

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

4

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) Three Months Ended March 31, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income and Loss (unaudited) Three Months Ended March 31, 2017 and 2016

6

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) Three Months Ended March 31, 2017

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 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

22

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.  

Controls and Procedures

34

 

 

 

 

PART II. — Other Information

 

 

 

 

Item 1.  

Legal Proceedings

35

 

 

 

Item 1A.  

Risk Factors

35

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

Item 3.  

Defaults Upon Senior Securities

35

 

 

 

Item 4.  

Mine Safety Disclosures

36

 

 

 

Item 5.  

Other Information

36

 

 

 

Item 6.  

Exhibits

37

 

 

 

 

Signature

38

2


 

 

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

 

PRELIMINARY NOTES

 

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

 

FORWARD-LOOKING STATEMENTS

 

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

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

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

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

3


 

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)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

    

 

Cash and cash equivalents

 

$

245,449

 

$

277,977

 

Cash restricted or segregated under regulations and other

 

 

13,487

 

 

40,353

 

Deposits with clearing organizations

 

 

57,418

 

 

62,556

 

Securities owned, at fair value

 

 

2,150

 

 

2,557

 

Receivables from brokers, dealers and clearing organizations

 

 

279,358

 

 

152,294

 

Receivables from customers

 

 

95,131

 

 

54,486

 

Premises and equipment, net

 

 

58,144

 

 

59,333

 

Capitalized software, net

 

 

39,301

 

 

38,606

 

Goodwill

 

 

10,220

 

 

10,102

 

Intangibles, net

 

 

15,075

 

 

15,390

 

Income taxes receivable

 

 

670

 

 

873

 

Deferred taxes

 

 

43,169

 

 

38,688

 

Other assets

 

 

25,084

 

 

22,070

 

Total assets

 

$

884,656

 

$

775,285

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

135,416

 

$

174,343

 

Short-term bank loans

 

 

129,737

 

 

72,150

 

Payables to brokers, dealers and clearing organizations

 

 

184,533

 

 

100,188

 

Payables to customers

 

 

22,660

 

 

12,272

 

Securities sold, not yet purchased, at fair value

 

 

 —

 

 

249

 

Income taxes payable

 

 

4,284

 

 

4,552

 

Term debt

 

 

4,802

 

 

6,367

 

Total liabilities

 

 

481,432

 

 

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; 52,565,272 and 52,456,165 shares issued at March 31, 2017 and December 31, 2016, respectively

 

 

526

 

 

525

 

Additional paid-in capital

 

 

236,995

 

 

248,748

 

Retained earnings

 

 

538,678

 

 

536,350

 

Common stock held in treasury, at cost; 19,420,086 and 19,830,032 shares at March 31, 2017 and December 31, 2016, respectively

 

 

(341,024)

 

 

(346,482)

 

Accumulated other comprehensive loss (net of tax)

 

 

(31,951)

 

 

(33,977)

 

Total stockholders’ equity

 

 

403,224

 

 

405,164

 

Total liabilities and stockholders’ equity

 

$

884,656

 

$

775,285

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Revenues:

 

 

    

 

 

    

 

Commissions and fees

 

$

99,880

 

$

98,960

 

Recurring

 

 

18,950

 

 

22,195

 

Other

 

 

2,005

 

 

3,513

 

Total revenues

 

 

120,835

 

 

124,668

 

Expenses:

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

46,684

 

 

52,464

 

Transaction processing

 

 

24,856

 

 

22,834

 

Occupancy and equipment

 

 

15,622

 

 

13,978

 

Telecommunications and data processing services

 

 

12,027

 

 

14,773

 

Other general and administrative

 

 

17,315

 

 

23,722

 

Interest expense

 

 

520

 

 

535

 

Total expenses

 

 

117,024

 

 

128,306

 

Income (loss) before income tax benefit

 

 

3,811

 

 

(3,638)

 

Income tax benefit

 

 

(1,491)

 

 

(1,132)

 

Net income (loss)

 

$

5,302

 

$

(2,506)

 

Income (loss) per share:

 

 

 

 

 

 

 

Basic

 

$

0.16

 

$

(0.08)

 

Diluted

 

$

0.16

 

$

(0.08)

 

Basic weighted average number of common shares outstanding

 

 

32,949

 

 

33,106

 

Diluted weighted average number of common shares outstanding

 

 

34,130

 

 

33,106

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

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

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Net income (loss)

 

$

5,302

 

$

(2,506)

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Currency translation adjustment

 

 

2,026

 

 

1,819

 

Other comprehensive income

 

 

2,026

 

 

1,819

 

Comprehensive income (loss)

 

$

7,328

 

$

(687)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

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

Three months ended March 31, 2017

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Common

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Stock

 

Other

 

Total

 

 

 

Preferred

 

Common

 

Paid-in

 

Retained

 

Held in

 

Comprehensive

 

Stockholders’

 

 

 

Stock

 

Stock

 

Capital

 

Earnings

 

Treasury

 

Income/(Loss)

 

Equity

 

Balance at January 1, 2017

 

$

 —

 

$

525

 

$

248,748

 

$

536,350

 

$

(346,482)

 

$

(33,977)

 

$

405,164

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

5,302

 

 

 —

 

 

 —

 

 

5,302

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,026

 

 

2,026

 

Issuance of common stock in connection with restricted stock unit awards (1,167,136 shares)

 

 

 —

 

 

 1

 

 

(18,310)

 

 

 —

 

 

18,494

 

 

 —

 

 

185

 

Shares withheld for net settlements of share-based awards (487,789 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,851)

 

 

 —

 

 

(9,851)

 

Purchase of common stock for treasury (161,708 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,210)

 

 

 —

 

 

(3,210)

 

Dividends declared on common stock

 

 

 —

 

 

 —

 

 

 4

 

 

(2,331)

 

 

25

 

 

 —

 

 

(2,302)

 

Share-based compensation

 

 

 —

 

 

 —

 

 

5,687

 

 

 —

 

 

 —

 

 

 —

 

 

5,687

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

866

 

 

(643)

 

 

 

 

 

 

 

 

223

 

Balance at March 31, 2017

 

$

 —

 

$

526

 

$

236,995

 

$

538,678

 

$

(341,024)

 

$

(31,951)

 

$

403,224

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

7


 

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2017

 

2016

 

Cash Flows from Operating Activities:

    

 

    

    

 

    

 

Net income (loss)

 

$

5,302

 

$

(2,506)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,227

 

 

10,781

 

Deferred income tax (benefit) expense

 

 

(4,208)

 

 

9,292

 

Provision for doubtful accounts

 

 

(12)

 

 

132

 

Non-cash share-based compensation

 

 

5,687

 

 

6,641

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Cash restricted or segregated under regulations and other

 

 

26,897

 

 

(229)

 

Deposits with clearing organizations

 

 

5,664

 

 

(9,625)

 

Securities owned, at fair value

 

 

408

 

 

(329)

 

Receivables from brokers, dealers and clearing organizations

 

 

(124,963)

 

 

64,108

 

Receivables from customers

 

 

(39,774)

 

 

(21,797)

 

Accounts payable and accrued expenses

 

 

(39,510)

 

 

(17,929)

 

Payables to brokers, dealers and clearing organizations

 

 

83,338

 

 

(64,063)

 

Payables to customers

 

 

10,314

 

 

10,147

 

Securities sold, not yet purchased, at fair value

 

 

(248)

 

 

1,140

 

Income taxes receivable/payable

 

 

(94)

 

 

(14,299)

 

Excess tax benefit from share-based payment arrangements

 

 

 —

 

 

(868)

 

Other, net

 

 

(2,169)

 

 

(3,205)

 

Net cash used in operating activities

 

 

(62,141)

 

 

(32,609)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Capital purchases

 

 

(3,129)

 

 

(2,782)

 

Capitalization of software development costs

 

 

(7,100)

 

 

(6,346)

 

Net cash (used in) provided by investing activities

 

 

(10,229)

 

 

(9,128)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Repayments of long term debt

 

 

(1,565)

 

 

(1,465)

 

Proceeds from (repayments of) borrowing under short-term bank loans

 

 

57,587

 

 

(114)

 

Debt issuance costs

 

 

(756)

 

 

(807)

 

Excess tax benefit from share-based payment arrangements

 

 

 —

 

 

868

 

Common stock issued

 

 

185

 

 

2,202

 

Common stock repurchased

 

 

(3,210)

 

 

(9,614)

 

Dividends paid

 

 

(2,300)

 

 

(2,297)

 

Shares withheld for net settlements of share-based awards

 

 

(9,851)

 

 

(6,295)

 

Net cash provided by (used in) financing activities

 

 

40,090

 

 

(17,522)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(248)

 

 

2,994

 

Net decrease in cash and cash equivalents

 

 

(32,528)

 

 

(56,265)

 

Cash and cash equivalents—beginning of year

 

 

277,977

 

 

330,653

 

Cash and cash equivalents—end of year

 

$

245,449

 

$

274,388

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

1,133

 

$

1,071

 

Income taxes paid

 

$

2,829

 

$

3,949

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

8


 

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. ITG empowers traders to reduce the end-to-end cost of implementing investments via technology-enabled liquidity, execution, analytics and workflow technology solutions. ITG has offices in Asia Pacific, Europe and North America and offers execution services in more than 50 countries.

 

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

 

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

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

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

 

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

 

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

 

Recently Adopted Accounting Standards

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

9


 

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 taxes 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 $1.1 million during the three months ended March 31, 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 three months ended March 31, 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 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 months ended March 31, 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.

10


 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

 1

 

$

 1

 

$

 —

 

$

 —

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

 

2,150

 

 

2,150

 

 

 —

 

 

 —

 

Total

 

$

2,151

 

$

2,151

 

$

 —

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold, not yet purchased, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks-trading securities

 

$

244

 

$

244

 

$

 —

 

$

 —

 

Mutual funds

 

 

2,313

 

 

2,313

 

 

 —

 

 

 —

 

Total

 

$

2,557

 

$

2,557

 

$

 —

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold, not yet purchased, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate stocks - trading securities

 

 

249

 

 

249

 

 

 —

 

 

 —

 

Total

 

$

249

 

$

249

 

$

 —

 

$

 —

 

 

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

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

Certain of the Company’s assets and liabilities are carried at contracted amounts that approximate fair value. Assets and liabilities that are recorded at contracted amounts approximating fair value consist primarily of receivables from and payables to brokers, dealers, clearing organizations and customers. These receivables and payables to brokers, dealers, clearing organizations and customers are short-term in nature and, following March 31, 2017, substantially all have settled at the contracted amounts.

 

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

 

 

(3) Restructuring Charges

 

2016 Restructuring

 

As part of an end-to-end review of its business, the Company has 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 high-touch 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.

 

11


 

Activity and liability balances recorded as part of the restructuring plan through March 31, 2017 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amount

 

Balance at December 31, 2016

 

$

3,157

 

Utilized - cash (primarily severance related)

 

 

(2,890)

 

Currency translation

 

 

 9

 

Balance at March 31, 2017

 

$

276

 

 

The payment of the remaining accrued costs will continue through June 2017.

 

(4) Cash Restricted or Segregated Under Regulations and Other

 

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

 

(5) Securities Owned and Sold, Not Yet Purchased

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Sold, Not Yet

 

 

 

Securities Owned

 

Purchased

 

 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

 

 

2017

 

2016

 

2017

 

2016

 

Corporate stocks - trading securities

    

$

 —

    

$

244

    

$

 —

    

$

249

 

Mutual funds

 

 

2,150

 

 

2,313

 

 

 —

 

 

 —

 

Total

 

$

2,150

 

$

2,557

 

$

 —

 

$

249

 

 

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

 

(6) Income Taxes

 

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

 

The Company had reserves for unrecognized tax benefits of $7.4 million at March 31, 2017 and December 31, 2016. The Company had accrued interest expense related to tax reserves of $1.4 million and $1.3 million, net of related tax effects, at March 31, 2017 and December 31, 2016, respectively.

 

12


 

(7) Goodwill and Other Intangibles

 

Goodwill

The following table presents the changes in the carrying amount of goodwill by the Company’s European Operations segment for the three months ended March 31, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

Total

 

Balance at December 31, 2016

 

$

10,102

 

2017 Activity:

 

 

 

 

Currency translation adjustment

 

 

118

 

Balance at March 31, 2017

 

$

10,220

 

 

Other Intangible Assets

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

Gross Carrying

 

Accumulated

 

Gross Carrying

 

Accumulated

 

Useful   Lives

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

(Years)

 

Trade name

    

$

8,519

    

$

 —

    

$

8,518

    

$

 —

    

 —

 

Customer-related intangibles

 

 

10,381

 

 

5,740

 

 

10,358

 

 

5,584

 

17.0

 

Proprietary software

 

 

23,184

 

 

21,658

 

 

23,165

 

 

21,456

 

9.4

 

Trading rights

 

 

339

 

 

 —

 

 

339

 

 

 —

 

 —

 

Other

 

 

50

 

 

 —

 

 

50

 

 

 —

 

 —

 

Total

 

$

42,473

 

$

27,398

 

$

42,430

 

$

27,040

 

 

 

 

At March 31, 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 $0.6 million for the three months ended March 31, 2017 and 2016, respectively. These amounts are included in other general and administrative expense in the Condensed Consolidated Statements of Operations.

 

During the three months ended March 31, 2017, no intangibles were deemed impaired, and accordingly, no adjustment was required.

 

The following table represents the changes in the carrying amount of net intangible assets for the three months ended March 31, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

Total

 

Balance at December 31, 2016

 

$

15,390

 

2017 Activity:

 

 

 

 

Amortization

 

 

(343)

 

Currency translation adjustment

 

 

28

 

Balance at March 31, 2017

 

$

15,075

 

 

 

 

13


 

(8) Receivables and Payables

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables from

 

Payables to

 

 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Broker-dealers

 

$

245,645

 

$

147,116

 

$

110,103

 

$

56,894

 

Clearing organizations

 

 

9,242

 

 

5,117

 

 

9,770

 

 

8,096

 

Securities borrowed*

 

 

25,006

 

 

374

 

 

 —

 

 

 —

 

Securities loaned

 

 

 —

 

 

 —

 

 

64,660

 

 

35,198

 

Allowance for doubtful accounts

 

 

(535)

 

 

(313)

 

 

 —

 

 

 —

 

Total

 

$

279,358

 

$

152,294

 

$

184,533

 

$

100,188

 


*

See Securities Borrowed and Loaned below.

 

Receivables from, and Payables to, Customers

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables from

 

Payables to

 

 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Customers

 

$

95,420

 

$

55,006

 

$

22,660

 

$

12,272

 

Allowance for doubtful accounts

 

 

(289)

 

 

(520)

 

 

 —

 

 

 —

 

Net

 

$

95,131

 

$

54,486

 

$

22,660

 

$

12,272

 

 

Securities Borrowed and Loaned

 

In the second quarter 2016, the Company closed its U.S. matched-book securities lending operations.  At March 31, 2017, the balances for securities borrowed and securities loaned relate to customer settlement activities.  

 

The gross amounts of interest earned on cash provided to counterparties as collateral for securities borrowed, and interest incurred on cash received from counterparties as collateral for securities loaned within the U.S. matched-book operations prior to the wind-down of all balances, and the resulting net amount included in other revenue on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

Three Months Ended
March 31,

 

 

    

2016

 

Interest earned

 

$

1,632

 

Interest incurred

 

 

(1,066)

 

Net

 

$

566

 

 

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

 

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

14


 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross Amounts

    

Net Amounts

    

Collateral

    

 

 

 

 

 

 

 

 

Offset in the

 

Presented in the

 

Received or

 

 

 

 

 

 

Gross Amounts of

 

Consolidated

 

Consolidated

 

Pledged

 

 

 

 

 

 

Recognized Assets/

 

Statement of

 

Statement of

 

(including

 

Net

 

 

 

(Liabilities)

 

Financial Condition

 

Financial Condition

 

 Cash)

 

Amount

 

As of March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits paid for securities borrowed

 

$

25,006

 

$

 —

 

$

25,006

 

$

25,006

 

$

 —

 

Deposits received for securities loaned

 

 

(64,660)

 

 

 —

 

 

(64,660)

 

 

(63,782)

 

 

(878)

 

As of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits paid for securities borrowed

 

$

374

 

$

 —

 

$

374

 

$

374

 

$

 —

 

Deposits received for securities loaned

 

 

(35,198)

 

 

 —

 

 

(35,198)

 

 

(34,245)

 

 

(953)

 

 

 

(9) Accounts Payable and Accrued Expenses

 

The following is a summary of accounts payable and accrued expenses (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2017

 

2016

 

Accrued research payables

 

$

53,553

 

$

45,826

 

Accrued compensation and benefits

 

 

12,653

 

 

34,526

 

Accrued settlement costs

 

 

 —

 

 

24,450

 

Accrued rent

 

 

18,988

 

 

19,061

 

Trade payables

 

 

14,869

 

 

14,474

 

Deferred revenue

 

 

6,353

 

 

7,643

 

Deferred compensation

 

 

3,123

 

 

3,262

 

Accrued restructuring

 

 

276

 

 

3,157

 

Accrued transaction processing

 

 

3,955

 

 

3,230

 

Other

 

 

21,646

 

 

18,714

 

Total

 

$

135,416

 

$

174,343

 

 

 

(10) Borrowings

 

Short-term Bank Loans

 

The Company’s international securities clearance and settlement activities are funded with operating cash or with short-term bank loans in the form of overdraft facilities. At March 31, 2017, there was $129.7 million outstanding under these facilities at a weighted average interest rate of approximately 0.4% associated with international settlement activities.

 

In the U.S., securities clearance and settlement activities are funded with operating cash, securities loaned or with short-term bank loans under a committed credit agreement described below.

 

ITG Inc., as borrower, and Investment Technology Group, Inc. (“Parent Company”), as guarantor, maintained a $150 million 364-day revolving credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as Administrative Agent, that matured in January 2017. On January 27, 2017, ITG Inc., as borrower, and Parent Company, as guarantor, entered into a new $150 million 364-day revolving credit agreement (the “Credit Agreement”) with a

15


 

syndicate of banks and JPMorgan Chase Bank, N.A., as Administrative Agent. The agreement expires on January 26, 2018. At March 31, 2017, there were no amounts outstanding under the Credit Agreement.

 

 

Term Debt

 

Term debt is comprised of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2017

    

2016

 

Term loans

 

$

2,926

 

$

3,098

 

Obligations under capital lease

 

 

1,876

 

 

3,269

 

Total

 

$

4,802

 

$

6,367

 

 

On December 30, 2015, the Parent Company entered into a five year, $3.6 million note and security agreement with Hewlett-Packard Financial Services (“H-P Loan”), under which purchases of new server equipment, software license fees, maintenance fees and fees for other services were financed. The loan principal is payable in twenty quarterly installments of $195,000 beginning in April 2016 and accrues interest at 2.95%. At March 31, 2017 and December 31, 2016, there was $2.9 million and $3.1 million, respectively, outstanding under the H-P Loan.

 

On August 10, 2012, the Parent Company entered into a $25.0 million master lease facility with BMO Harris Equipment Finance Company (“BMO”) to finance equipment and construction expenditures related to the build-out of the Company’s new headquarters in lower Manhattan. The original amount borrowed of $21.2 million has a 3.39% fixed-rate term financing structured as a capital lease with a 48-month term that began upon the substantial completion of the build-out, at the end of which Parent Company may purchase the underlying assets for $1.  At March 31, 2017 and December 31, 2016, there was $1.9 million and $3.3 million, respectively, outstanding under the BMO facility.

 

The BMO facility requires compliance with the financial covenants of the Credit Agreement.

 

 

(11) Earnings Per Share

 

The following is a reconciliation of the basic and diluted earnings per share computations (amounts in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

 

 

2017

    

2016

 

Three Months Ended

 

 

 

 

 

 

 

Net income (loss) for basic and diluted earnings per share

    

$

5,302

    

$

(2,506)

 

Shares of common stock and common stock equivalents:

 

 

 

 

 

 

 

Average common shares used in basic computation

 

 

32,949

 

 

33,106

 

Effect of dilutive securities

 

 

1,181

 

 

 —

 

Average common shares used in diluted computation

 

 

34,130

 

 

33,106

 

Income (loss) per share:

 

 

 

 

 

 

 

Basic

 

$

0.16

 

$

(0.08)

 

Diluted

 

$

0.16

 

$

(0.08)

 

 

 

For the three months ended March 31, 2017, there were approximately 0.2 million average shares that were anti-dilutive and thus not included in the computation of diluted EPS. There were no anti-dilutive equity awards for the three month period ended March 31, 2016 due to the fact that the Company recorded a loss .

 

 

 

 

 

 

 

16


 

(12) Accumulated Other Comprehensive Income

 

The components and allocated tax effects of accumulated other comprehensive income for the three month periods ended March 31, 2017 and 2016 are as follows (dollars in thousands):

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

 

 

Balance at December 31, 2016

 

$

(33,977)

 

Other comprehensive income

 

 

2,026

 

Balance at March 31, 2017

 

$

(31,951)

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

 

Balance at December 31, 2015

 

$

(19,495)

 

Other comprehensive income

 

 

1,819

 

Balance at March 31, 2016

 

$

(17,676)

 

Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries or the cumulative translation adjustment related to those investments since there is currently no need to repatriate funds from certain foreign subsidiaries to the U.S. by way of dividends.

 

 

 

 

 

 

 

 

 

 

 

 

(13) Net Capital Requirement

 

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. 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 March 31, 2017 for the U.S. Operations are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

Net Capital

    

Excess

 

U.S. Operations

 

 

 

 

 

 

 

ITG Inc.

 

$

79,820

 

$

78,820

 

AlterNet

 

 

3,239

 

 

3,077

 

ITG Derivatives

 

 

860

 

 

760

 

 

As of March 31, 2017, ITG Inc.   had $8.9 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, Computation for Determination of Reserve Requirements and $2.5 million under PABs.

 

In addition, the Company’s 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 March 31, 2017, is summarized in the following table (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Net   Capital

    

Excess

 

Canadian Operations

 

 

 

 

 

 

 

Canada

 

$

24,984

 

$

24,610

 

European Operations

 

 

 

 

 

 

 

Ireland

 

 

70,313

 

 

33,333

 

U.K.

 

 

1,955

 

 

1,173

 

Asia Pacific Operations

 

 

 

 

 

 

 

Australia

 

 

22,990

 

 

12,466

 

Hong Kong

 

 

2,840

 

 

2,403

 

Singapore

 

 

1,025

 

 

954

 

 

 

 

17


 

During the three months ended March 31, 2017, the Company migrated from self-clearing in Hong Kong to the use of a third-party clearer who settles trades executed in Hong Kong on behalf of ITG Australia Limited.

 

 

 

 

 

 

 

 

 

 

 

 

 

(14) Segment Reporting

 

The Company is organized into four geographic operating segments through which the Company’s chief operating decision maker manages the Company’s business. The U.S., Canadian, European and Asia Pacific Operations segments provide the following categories of products and services:

·

Execution Services — includes (a) liquidity matching through POSIT, (b) self-directed trading using algorithms (including single stocks and portfolio lists) and smart routing, (c) portfolio trading and high-touch trading desks providing execution expertise and (d) futures and options trading

 

·

Workflow Technology  — includes trade order and execution management software applications in addition to network connectivity

 

·

Analytics — includes (a) tools enabling portfolio managers and traders to improve pre-trade, real-time and post-trade execution performance, (b) portfolio construction and optimization decisions and (c) securities valuation

 

The accounting policies of the reportable segments are the same as those described in Note 2, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company allocates resources to, and evaluates the performance of, its reportable segments based on income or loss before income tax expense (benefit). Consistent with the Company’s resource allocation and operating performance evaluation approach, the effects of inter-segment activities are eliminated except in limited circumstances where certain technology related costs are allocated to a segment to support that segment’s revenue producing activities. Commissions and fees revenue for trade executions and commission share revenues are principally attributed to each segment based upon the location of execution of the related transaction except that commissions and fees for trade executions by Canadian clients in the U.S. market are attributed to the Canadian Operations instead of the U.S. Operations. Recurring revenues are principally attributed based upon the location of the client using the respective service.

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.

 

A summary of the segment financial information is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

U.S.

    

Canadian

    

European

    

Asia Pacific

    

 

 

    

 

 

 

 

    

Operations

    

Operations

    

Operations

    

Operations

    

Corporate

    

Consolidated

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

53,393

 

$

16,482

 

$

36,712

 

$

13,943

 

$

305

 

$

120,835

 

Income (loss) before income tax expense (benefit)

 

 

(6,604)

 

 

3,498

 

 

11,201

 

 

1,845

 

 

(6,129)

 

 

3,811

 

Identifiable assets

 

 

412,323

 

 

90,276

 

 

330,309

 

 

51,748

 

 

 —

 

 

884,656

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

66,329

 

$

16,096

 

$

31,139

 

$

10,757

 

$

347

 

$

124,668

 

(Loss) income before income tax (benefit) expense (1) (2)

 

 

2,105

 

 

3,338

 

 

5,679

 

 

(600)

 

 

(14,160)

 

 

(3,638)

 

Identifiable assets

 

 

1,196,340

 

 

100,599

 

 

253,135

 

 

67,149

 

 

 —

 

 

1,617,223

 


The following notes relate to Corporate activity:

 

18


 

(1)

During the three months ended March 31, 2016, the Company expensed $2.8 million for cash and stock awards granted to its current Chief Executive Officer 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.

 

(2)

During the three months ended March 31, 2016, the Company established a reserve of $2.5 million in accordance with ASC 450, Contingencies , for the pending arbitration case with its former Chief Executive Officer and incurred legal fees related to this matter of $0.3 million.

 

The table below details the total revenues for the categories of products and services provided by the Company (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Revenues:

 

 

    

    

 

    

 

Execution Services

 

$

86,287

 

$

89,793

 

Workflow Technology

 

 

23,100

 

 

23,593

 

Analytics

 

 

11,143

 

 

10,935

 

Corporate (non-product)

 

 

305

 

 

347

 

Total Revenues

 

$

120,835

 

$

124,668

 

 

 

 

(15) Dividend Program

 

During the three months ended March 31, 2017, the Board of Directors declared, and the Company paid, a quarterly dividend of $0.07 per share totaling $2.3 million, including less than $0.1 million in stock under the Company’s equity award plans .

 

(16) Off-Balance Sheet Risk and Concentration of Credit Risk

 

The Company is 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 the Company’s membership, the Company 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 clearing house memberships vary, in general, the Company’s obligations would arise only if the exchanges and clearing houses had previously exhausted other remedies. The maximum potential payout under these memberships cannot be estimated. The Company has not recorded any contingent liability in the condensed consolidated financial statements for these agreements and believes that any potential requirement to make payments under these agreements is remote. In the ordinary course of business, the Company guarantees obligations of subsidiaries which may arise from third-party clearing relationships and trading counterparties. The activities of the subsidiaries covered by these guarantees are included in the Company’s condensed consolidated financial statements. The Company is also subject to indemnification provisions within agreements with third-party clearing brokers in certain jurisdictions whereby the Company is obligated to reimburse the clearing broker, without limit, for losses incurred due to a counterparty’s failure to satisfy its contractual obligations.

 

The Company’s customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured financing transactions such as bank loans. In the event the financing counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Company controls this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure.

 

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, securities owned at fair value, receivables from brokers, dealers and clearing organizations and receivables from customers. Cash and cash equivalents and securities owned, at fair value are deposited with high credit quality financial institutions.

 

In connection with customer settlement activities, the Company loans securities temporarily to other brokers. The Company receives cash as collateral for the securities loaned. Increases in security prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these

19


 

transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company controls this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis, and by requiring additional cash as collateral or returning collateral when necessary.

 

The Company also borrows securities temporarily from other brokers in connection with customer settlement activities. The Company deposits cash as collateral for the securities borrowed. Decreases in security prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return collateral, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company controls this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis, and by depositing additional collateral with counterparties or receiving cash when deemed necessary.

 

The Company may at times maintain inventories in equity securities on both a long and short basis. Whereas long inventory positions represent the Company’s ownership of securities, short inventory positions represent obligations of the Company to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to the Company as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked to market daily and are continuously monitored by the Company.

 

(17) Contingencies – Legal Matters

 

On January 12, 2017, the Company reached a final settlement with the SEC to resolve the SEC’s inquiry into ITG Inc.’s activity with respect to pre-released American Depositary Receipts (“ADRs”), substantially all of which related to ITG Inc.’s matched-book operations.  ITG Inc.’s activity in pre-released ADRs was discontinued in the fourth quarter of 2014, with all outstanding transactions completely wound down by the end of 2014.  According to the terms of the settlement, the Company paid an aggregate amount of $24.5 million in January 2017, which includes disgorgement of $15.1 million, prejudgment interest of $1.9 million and a civil monetary penalty of $7.5 million. The Company had fully reserved the $24.5 million as of December 31, 2016.

 

The Company is not a party to any pending legal proceedings other than claims and lawsuits arising in the ordinary course of business, except a putative class action lawsuit and a derivative action have been filed with respect to the Company and certain of its current and former directors and/or executives in connection with the Company’s announcement of the SEC matter described in the following paragraph (and other related actions could be filed).

 

On August 12, 2015, the Company reached a final settlement with the SEC in connection with the SEC’s investigation into a proprietary trading pilot operated within AlterNet for sixteen months in 2010 through mid-2011. The investigation was focused on customer disclosures, Form ATS regulatory filings and customer information controls relating to the pilot’s trading activity, which included (a) crossing against sell-side clients in POSIT and (b) violations of Company policy and procedures by a former employee. These violations principally involved information breaches for a period of several months in 2010 regarding sell-side parent orders flowing into ITG’s algorithms and executions by all customers in non-POSIT markets that were not otherwise available to ITG clients.  According to the terms of the settlement, the Company paid an aggregate amount of $20.3 million, representing a civil penalty of $18 million, disgorgement of approximately $2.1 million in trading revenues and prejudgment interest of approximately $0.25 million. 

 

In connection with the announcement of the SEC investigation regarding AlterNet, two putative class action lawsuits were filed with respect to the Company and certain of its current and former executives and have since been consolidated into a single action captioned In re Investment Technology Group, Inc.   Securities Litigation before the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants made material misrepresentations or omitted to disclose material facts concerning, among other subjects, the matters that were the subject of the SEC settlement regarding AlterNet and the SEC investigation that led to the SEC settlement. The complaint seeks an unspecified amount of damages under the federal securities laws. On April 26, 2017, the court granted in part and denied in part the Company’s motion to dismiss the complaint   and granted the plaintiff leave to file a motion to amend its complaint within 30 days from the date of the court’s opinion .

 

20


 

On November 27, 2015, a purported shareholder of the Company filed a shareholder derivative action captioned Watterson v.   Gasser et al. against eleven current or former officers and directors of the Company in the Supreme Court for the State of New York. The Company is named as a nominal defendant, and the plaintiff purports to seek recovery on its behalf. The complaint generally alleges that the individual defendants breached their fiduciary duties to the Company in connection with the matters that were the subject of the SEC settlement regarding AlterNet.

 

While the Company cannot predict the outcome of these lawsuits, the Company intends to defend them as appropriate. No reserve has been established for these lawsuits since the Company is unable to provide a reasonable estimate of any potential liability given the stage of such proceedings. The Company believes, based on information currently available, that the outcome of these lawsuits, individually or in the aggregate, will not likely have a material adverse effect on its consolidated financial position.  In light of the inherent uncertainties of such proceedings, an adverse outcome of one or more of such proceedings may have a material impact on the results of operations for any particular period.

 

In addition to the above proceedings, the Company’s broker-dealer subsidiaries are subject to, or involved in, investigations and other proceedings by government agencies and self-regulatory organizations, with respect to which the Company is cooperating. Such investigations and other proceedings may result in judgments, settlements, fines, disgorgements, penalties, injunctions or other relief.  Given the inherent uncertainties and the current stage of these inquiries, and the Company’s ongoing reviews, the Company is unable to predict the outcome of these matters at this time.

 

 

21


 

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 technology 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 14, Segment Reporting , to the condensed consolidated financial statements). These four operating segments provide the following categories of products and services:

·

Execution Services — includes (a) liquidity matching through POSIT, (b) self-directed trading using algorithms (including single stocks and portfolio lists) and smart routing, (c) portfolio trading and high-touch trading desks providing execution expertise and (d) futures and options trading

 

·

Workflow Technology  — includes trade order and execution management software applications in addition to network connectivity

 

·

Analytics — includes (a) tools enabling portfolio managers and traders to improve pre-trade, real-time and post-trade execution performance, (b) portfolio construction and optimization decisions and (c) securities valuation

 

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 our global transfer pricing structure, (e) foreign exchange gains or losses and (f) certain non-operating expenses.

 

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 the existence 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.

22


 

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) software and analytical products and services and (iii) maintenance and customer technical support for our OMS. Prior to the divestiture of our remaining investment research operations in May 2016, recurring revenues included subscriptions from these operations.

Other revenues include: (1)  for historical periods up until April 2016, income from principal trading in Canada, including within our arbitrage trading desk, (2) 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, (3) for historical periods up until June 2016, the net interest spread earned on matched-book securities borrowed and loaned transactions, (4) non-recurring consulting services, such as one-time implementation and customer training related activities, (5) investment income from treasury activity, (6) interest income on securities borrowed in connection with customers’ settlement activities, (7) market gains/losses resulting from temporary positions in securities assumed in the normal course of agency trading (including trade errors and client trade accommodations) and (8) non‑recurring gains and losses such as divestitures.

Expenses

Compensation and employee benefits, our largest expense, consist 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 primarily include software amortization, professional (including legal) fees, consulting, business development 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 accounting principles generally accepted in the U.S. (“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 measures is useful to investors for period‑to‑period comparison of results as the items described below reflect certain unique and/or non‑operating items such as acquisitions, divestitures, restructuring charges, write‑offs and impairments, charges associated with litigation or regulatory matters together with related expenses or items outside of management’s control.

Adjusted expenses, adjusted income (loss) before income tax expense (benefit), adjusted income tax expense (benefit) and adjusted net income (loss), together with related per share amounts, are non‑GAAP performance measures

23


 

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 expenses, adjusted income before income tax expense, adjusted income tax expense and adjusted net income to expenses, loss before income tax benefit, income tax benefit and net loss and related per share amounts as determined in accordance with U.S. GAAP for the three months ended March 31, 2016 are provided below (dollars in thousands except per share amounts). There were no such adjustments during the three months ended March 31, 2017.

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2016

 

 

Total expenses

 

$

128,306

 

 

Less:

 

 

 

 

 

Compensation awards for current CEO (1)

 

 

(2,797)

 

 

Arbitration case with former CEO and associated costs (2)

 

 

(2,812)

 

 

Adjusted expenses

 

$

122,697

 

 

 

 

 

 

 

 

Loss before income tax benefit

 

$

(3,638)

 

 

Effect of adjustments

 

 

5,609

 

 

Adjusted income before income tax expense

 

$

1,971

 

 

 

 

 

 

 

 

Income tax benefit

 

$

(1,132)

 

 

Tax effect of adjustments (1) (2)

 

 

1,262

 

 

Adjusted income tax expense

 

$

130

 

 

 

 

 

 

 

 

Net loss

 

$

(2,506)

 

 

Net effect of adjustments

 

 

4,347

 

 

Adjusted net income

 

$

1,841

 

 

 

 

 

 

 

 

Diluted loss per share

 

$

(0.08)

 

 

Net effect of adjustments

 

 

0.13

 

 

Adjusted diluted income per share

 

$

0.05

 

 


(1)

During the three months ended March 31, 2016, we expensed $2.8 million for cash and stock awards granted to our current Chief Executive Officer 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 .

(2)

During the three months ended March 31, 2016, we established a reserve of $2.5 million in accordance with ASC 450, Contingencies , for the pending arbitration case with our former Chief Executive Officer and incurred legal fees related to this matter of $0.3 million.

 

Executive Summary for the Quarter Ended March 31, 2017

 

Consolidated Overview

 

We posted our second consecutive quarter of global profitability in the first quarter of 2017 due to record profitability in Europe and Asia Pacific, driven in part by the growth in block trading through POSIT Alert. In North America we posted continued solid results in Canada and saw a reduction in revenues in the U.S. following the very active fourth quarter of 2016 post the U.S. election. We did, however, continue to grow market share in the U.S. and we took further actions to reduce our cost base through reductions in headcount and office space as we focus on restoring profitability in the U.S. and funding investments in targeted growth initiatives.

 

On a U.S. GAAP basis, we generated revenues of $120.8 million and net income of $5.3 million, or $0.16 per diluted share in the first quarter of 2017 compared to revenues of $124.7 million and a net loss of $2.5 million, or $0.08 per diluted share in the first quarter of 2016.  On an adjusted basis, we generated net income of $1.8 million, or $0.05 per share (see Non-GAAP Financial Measures ) in the first quarter of 2016.  Expenses of $117.0 million in the first quarter of 2017 were down 9% from expenses of $128.3 million and 5% from adjusted expenses of $122.7 million (see Non-GAAP

24


 

Financial Measures ) in the first quarter of 2016, primarily reflecting the divestiture of our remaining investment research operations as well as lower legal costs.

 

We are continuing our focus on growth through the execution of our Strategic Operating Plan, which aims to enhance our global capabilities in liquidity, execution, analytics and workflow technology solutions. We have sharpened our focus around these four key service offerings following the divestitures and closings of non-core operations. As part of this plan we are pursuing significant investments in technology and people to bolster 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

 

Our U.S. average daily volume (“ADV”) for the first quarter of 2017 was 150.9 million shares, up 4% from the fourth quarter of 2016 and down 7% from the very active first quarter of 2016.  While we saw a second consecutive quarter with market share gains in the U.S., there were significant movements within the mix of our volume amongst our client segments that resulted in lower trading revenues and higher execution costs. The reduced trading margin, together with $3.3 million of employee separation and lease abandonment costs, increased our reported pre-tax loss in the U.S. to $6.6 million in the first quarter of 2017 from $1.8 million in the fourth quarter of 2016.

 

Canadian revenues were higher than the first quarter of 2016 despite the closure of the arbitrage trading desk in April 2016.  Trading commissions were 11% higher than the first quarter of 2016 while market volumes were down 7% year-over-year. The stronger results were due to a second consecutive record quarter in MATCHNow as well as growth in POSIT Alert and electronic trading from sell-side clients.

 

In Europe we had record levels of revenue, market share and pre-tax profitability in the first quarter of 2017. The growth in trading from buy-side clients, particularly in POSIT Alert where we saw record activity, more than offset the impact of reduced activity from sell-side clients. The improved mix of business has raised our average commission rate and significantly improved our margins.

 

Our Asia Pacific business achieved its most profitable quarter on record. Our pre-tax profit was $1.8 million, compared with a $0.6 million pre-tax loss in the prior year quarter. Asia Pacific commissions and fees increased 33% over the prior year quarter, significantly outpacing the 10% growth in overall market-wide activity, driven by record activity in POSIT Alert for the fourth consecutive quarter and strong growth in algorithmic trading.

 

Corporate activity in the first quarter of 2017 reduced pre-tax income by $6.1 million compared to a pre-tax reduction of $14.2 million in the first quarter of 2016. The reduction in the pre-tax loss reflects the impact of costs incurred during the prior year period related to the arbitration with ITG’s former CEO and the expensing of upfront cash and stock awards granted to our current CEO, a significant portion of which replaced compensation he forfeited at his former employer. We also saw reductions in legal fees and intangible amortization.

 

Capital Resource Allocation

 

During the first quarter of 2017, we repurchased 161,708 shares under our authorized stock repurchase program for $3.2 million, or an average cost of $19.85 per share, and we maintained our $0.07 quarterly dividend program, paying out $2.3 million in cash.

 

Going forward we expect to use our share repurchase program to offset dilution from the issuance of stock under employee compensation plans. We may repurchase additional shares opportunistically depending on various factors including, among others, market conditions and competing needs for the use of our capital.

 

25


 

Results of Operations — Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

 

U.S. Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

 

 

 

$ in thousands

    

2017

    

2016

    

Change

    

% Change

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and fees

 

$

40,561

 

$

49,453

 

$

(8,892)

 

(18)

%

Recurring

 

 

11,921

 

 

15,522

 

 

(3,601)

 

(23)

%

Other

 

 

911

 

 

1,354

 

 

(443)

 

(33)

%

Total revenues

 

 

53,393

 

 

66,329

 

 

(12,936)

 

(20)

%

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

26,801

 

 

29,399

 

 

(2,598)

 

(9)

%

Transaction processing

 

 

10,948

 

 

10,239

 

 

709

 

 7

%

Other expenses

 

 

22,248

 

 

24,586

 

 

(2,338)

 

(10)

%

Total expenses

 

 

59,997

 

 

64,224

 

 

(4,227)

 

(7)

%

(Loss) income before income tax (benefit) expense

 

$

(6,604)

 

$

2,105

 

$

(8,709)

 

N/A

 

 

Commissions and fees declined 18% compared to the prior year quarter resulting from a 7% reduction in our ADV, which compared favorably to the 20% decrease in total daily U.S. market volumes. Commissions and fees were also negatively impacted by a 14% decline in our overall revenue per share from $0.0043 to $0.0037 driven by significant movements within the mix of our volume amongst our client segments as well as reduced high-touch trading for equities due to the reduction in our high-touch trading organization following the sale of our remaining investment research operations in May 2016. ADV from sell-side accounts represented 56% of our overall ADV compared with 52% in the first quarter of 2016. In addition, lower-rate index rebalance trading made up a greater proportion of our buy-side activity in the first quarter of 2017.

As compared to the preceding fourth quarter of 2016, our ADV grew 4% while total daily U.S. market volumes declined 3%.  This resulted in a second consecutive quarter with market share growth, to 2.20%, up from 2.05% in the fourth quarter of 2016 and 1.75% in the third quarter of 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

 

 

 

U.S. Operations: Key Indicators*

    

2017

    

2016

    

Change

    

% Change

 

Total trading volume (in billions of shares)

 

 

9.4

 

 

9.9

 

 

(0.5)

 

(5)

%

Average trading volume per day (in millions of shares)

 

 

150.9

 

 

161.8

 

 

(10.9)

 

(7)

%

Average revenue per share

 

$

0.0037

 

$

0.0043

 

$

(0.0006)

 

(14)

%

U.S. market trading days

 

 

62

 

 

61

 

 

 1

 

 2

 


* Excludes activity from ITG Net commission share arrangements.

 

Recurring revenues decreased 23% from the first quarter of 2016 primarily from the loss of billed investment research revenue following the divestiture of our remaining investment research operations in May 2016 and the amendment to terminate the initial energy research distribution agreement at the end of 2016. We also experienced lower OMS subscriptions and connectivity revenue due to client attrition, slightly offset by higher billed revenue for our analytics products. 

 

Other revenues decreased 33% from the prior year period due to the closing of our matched-book securities lending operations in the second quarter 2016, partially offset by higher market data tape rebate revenue. 

 

Compensation and employee benefits decreased 9% from the first quarter of 2016 due to the impact of divesting our remaining investment research operations in May 2016, cost savings measures implemented during the second half of 2016 and the impact of the increased use of deferred stock awards in our incentive compensation program to better align employees with the Strategic Operating Plan. These declines were offset in part by $2.5 million of employee separation costs during the first quarter of 2017 associated with headcount reductions and discontinuing our corporate access service.

26


 

 

Transaction processing costs increased 7% from the prior year period, despite the 7% reduction in ADV, due to the growth in market-on-close index rebalance trading from passive accounts and increased routing for sell-side clients where we saw an increase in liquidity taking. As a percentage of commission and fees, transaction processing costs increased to 27.0% in the first quarter of 2017, up from 20.7% in the first quarter of 2016, due to the factors noted above and the impact of the reduction in the average rate per share.

 

Other expenses decreased 10% from the first quarter of 2016 due to the impact of divesting our remaining investment research operations in May 2016 and reduced energy research costs from the amendment to terminate the initial energy research distribution agreement. We also saw lower travel and entertainment, marketing, and recruiting costs. These reductions were partially offset by $0.8 million of lease abandonment costs related to the reduction of our office space in Bo ston.

 

Canadian Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

 

 

 

$ in thousands

    

2017

    

2016

    

Change

    

% Change

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and fees

 

$

14,232

 

$

12,855

 

$

1,377

 

11

%

Recurring

 

 

1,303

 

 

1,283

 

 

20

 

 2

%

Other

 

 

947

 

 

1,958

 

 

(1,011)

 

(52)

%

Total revenues

 

 

16,482

 

 

16,096

 

 

386

 

 2

%

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

4,402

 

 

4,718

 

 

(316)

 

(7)

%

Transaction processing

 

 

2,931

 

 

2,544

 

$

387

 

15

%

Other expenses

 

 

5,651

 

 

5,496

 

 

155

 

 3

%

Total expenses

 

 

12,984

 

 

12,758

 

 

226

 

 2

%

Income before income tax expense

 

$

3,498

 

$

3,338

 

 

160

 

 5

%

 

Currency translation from a stronger Canadian Dollar increased total Canadian revenues and expenses by $0.5 million and $0.3 million, respectively, resulting in an increase of $0.2 million to pre-tax income.

 

Commissions and fees increased 11% compared to the first quarter of 2016, despite a 7% decline in daily market-wide volumes due to strong growth in MATCHNow, which had a second consecutive record quarter, as well as growth in POSIT Alert and electronic trading by sell-side clients.

 

Recurring revenues were comparable to the prior year period and other revenues declined 52% largely from the closure of our arbitrage trading desk in April 2016.

 

Compensation and employee benefits costs decreased 7% compared to the first quarter of 2016 due to the increased use of deferred stock awards in our incentive compensation program to better align employees with the Strategic Operating Plan and cost savings measures implemented during the second half of 2016.

 

Transaction processing costs increased 15% over the prior year period, which was higher than the growth in commission and fees, as a result of an increase in the proportion of our routing activity where we took liquidity and an increase in the trading of lower-priced stocks on the trading desk where we charge a lower commission rate. The impact of these increases was partially offset by the closing of our arbitrage trading desk in April 2016.

 

Other expenses increased 3% from the first quarter of 2016 due to increased costs related to our resiliency efforts, offset in part by reductions in general and administrative expenses, where we saw lower travel and entertainment costs and the discontinuation of research distribution fees.

 

27


 

European Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

 

 

 

$ in thousands

    

2017

    

2016

    

Change

    

% Change

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and fees

 

$

32,781

 

$

27,396

 

$

5,385

 

20

%

Recurring

 

 

3,982

 

 

3,886

 

 

96

 

 2

%

Other

 

 

(51)

 

 

(143)

 

 

92

 

(64)

%

Total revenues

 

 

36,712

 

 

31,139

 

 

5,573

 

18

%

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

9,010

 

 

9,610

 

 

(600)

 

(6)

%

Transaction processing

 

 

8,146

 

 

7,626

 

 

520

 

 7

%

Other expenses

 

 

8,355

 

 

8,224

 

 

131

 

 2

%

Total expenses

 

 

25,511

 

 

25,460

 

 

51

 

 0

%

Income before income tax expense

 

$

11,201

 

$

5,679

 

$

5,522

 

97

%

 

Overall currency rate changes in the European region reduced revenues and expenses by $2.2 million and $1.7 million, respectively, reducing profitability by $0.5 million. This decrease in profitability was primarily driven by a reduction in the euro exchange rate, as revenues and expenses that originate in British pounds largely offset each other.

 

Commissions and fees were 20% higher than the first quarter of 2016 due primarily to record revenue in POSIT Alert from institutional and hedge fund clients, which more than offset the impact of reduced trading from sell-side clients and the weaker British pound. Sell-side accounts made up 53% of our European value traded in the first quarter of 2017 compared to 66% in the prior year quarter. This favorable change in business mix together with the higher concentration of business in POSIT Alert pushed our overall commission rate 22% higher than the first quarter of 2016.

 

Recurring revenues increased 2% from the prior year period due to higher billed revenue for analytics products and higher connectivity fees, partially offset by currency translation. Other revenues were favorable to the prior year period due to a lower impact of trade errors and client trade accommodations .

 

Compensation and employee benefits decreased 6% from the first quarter of 2016 due to the favorable impact of currency translation on costs for employees based in the U.K., the increased use of deferred stock awards in our incentive compensation program to better align employees with the Strategic Operating Plan, and cost savings measures implemented during the second half of 2016.

 

Transaction processing costs increased 7% from the prior year period due to an 8% growth in daily value traded in British pound terms, offset in part by the impact of currency translation. As a percentage of commissions and fees, transaction processing costs declined to 24.8%, compared to 27.8% in the prior year quarter reflecting the increase in our average commission rate noted above.

 

Other expenses increased 2% from the first quarter of 2016 due to higher charges for global research and development costs, client connectivity and market data fees, offset in part by the favorable impact of currency translation on U.K.-based expenses.

28


 

Asia Pacific Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

 

 

 

$ in thousands

    

2017

    

2016

    

Change

    

% Change

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and fees

 

$

12,306

 

$

9,256

 

$

3,050

 

33

%

Recurring

 

 

1,744

 

 

1,504

 

 

240

 

16

%

Other

 

 

(107)

 

 

(3)

 

 

(104)

 

nm

 

Total revenues

 

 

13,943

 

 

10,757

 

 

3,186

 

30

%

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

4,667

 

 

4,503

 

 

164

 

 4

%

Transaction processing

 

 

2,831

 

 

2,425

 

 

406

 

17

%

Other expenses

 

 

4,600

 

 

4,429

 

 

171

 

 4

%

Total expenses

 

 

12,098

 

 

11,357

 

 

741

 

 7

%

Income (loss) before income tax expense (benefit)

 

$

1,845

 

$

(600)

 

$

2,445

 

nm

 


nm – not meaningful

 

Currency translation from a stronger Australian Dollar increased total Asia Pacific revenues and expenses by $0.5 million and $0.2 million, respectively, resulting in an increase of $0.3 million to pre-tax income.

 

Commissions and fees increased 33% over the first quarter of 2016 due to the growth in higher-rate institutional order flow into POSIT Alert and increased algorithmic trading by clients. The growth in POSIT Alert resulted in a fourth consecutive record quarter for the product in the Asia Pacific region in terms of both daily value traded and commissions.

 

Recurring revenues increased 16% over the prior year quarter due to the growth in connectivity revenue, while other revenues decreased due to a larger impact of trade errors and client trade accommodations.  

 

Compensation and employee benefits increased 4% over the first quarter of 2016 due to additional headcount and currency translation. These increases were partially offset by the increased use of deferred stock awards in our incentive compensation program to better align employees with the Strategic Operating Plan and cost savings measures implemented during the second half of 2016.

 

Transaction processing costs increased 17% from the prior year period, exceeding the 12% growth in value executed, due to higher clearing costs in Hong Kong as well as a larger proportion of our trading in markets where costs are higher. As a percentage of commissions and fees, transaction processing costs decreased to 23.0% from 26.2% last year reflecting the impact of a higher average commission rate. 

 

Oth er expenses increased 4% compared to the first quarter of 2016 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, partially offset by lower travel and entertainment expenses.

 

Corporate

Corporate a ctivity includes investment income from treasury activity, certain non-operating revenues and other gains 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.

29


 

In the first quarter of 2017, we incurred a pre-tax loss from Corporate activities of $6.1 million, reflecting $0.3 million of investment income and $6.4 million of costs, compared to a pre-tax loss of $14.2 million in the prior year period, reflecting $0.3 million of investment income and $14.5 million of costs. The decline in costs compared to the first quarter of 2016 primarily reflects the impact of $2.8 million of costs incurred during the prior year period related to the arbitration with ITG’s former CEO and $2.8 million for the amount expensed for upfront cash and stock awards granted to our current CEO, a significant portion of which replaced compensation he forfeited at his former employer. We also saw reductions in legal fees and intangible amortization .   Corporate costs can vary from period to period as we work through litigation, regulatory and other corporate matters.

Consolidated income tax expense

Our effective tax rate was a benefit of 39.1% on our pre-tax income in the first quarter of 2017 compared to a benefit of 31.1% on our pre-tax loss in the first quarter of 2016. The significant benefit, despite the pre-tax income in the first quarter of 2017, reflected the impact of the new accounting pronouncement  resulting in the recognition of excess tax benefits on employee stock vestings (see Note 2, Recently Adopted Accounting Standards , to the condensed consolidated financial statements) , which increased our recorded tax benefit by $1.1 million, together with the combined impact of a higher benefit rate on losses in the U.S., a lower expense rate on earnings in Europe and the lack of tax costs on earnings in Asia Pacific due to the existence of net operating losses that are fully reserved.  Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. In addition, our ability to continue to recognize tax benefits in the U.S. is dependent on our ongoing assessment of future profitability.

 

 

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 March 31, 2017, unrestricted cash and cash equivalents totaled $245.4 million. Included in this amount is $116.5 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 at that time, we currently do not foresee a need to repatriate funds from certain foreign subsidiaries to the U.S. by way of additional 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 March 31, 2017, we had interest‑bearing security deposits totaling $17.8 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. On January 27, 2017, we entered into a new $150 million 364‑day revolving credit agreement (the “Credit Agreement”) in the U.S. with a syndicate of banks and JPMorgan Chase Bank, N.A., as Administrative Agent (see Note 10, Borrowings , to the condensed consolidated financial statements).

 

We also self‑clear equity trades in Australia, maintaining a deposit with clearing organizations of $2.3 million at March 31, 2017. We continue to maintain a $1.6 million clearing deposit in Hong Kong, which is expected to be released in the coming months now that we have migrated to a third-party clearing provider (see discussion in Regulatory Capital below).  In Europe, we maintained $1.4 million in restricted cash related to protected client funds and we had deposits with our clearing and settlement agents of $35.7 million at March 31, 2017.

30


 

Capital Resources

 

Capital resource requirements relate to capital purchases, as well as business investments, and are generally funded from operations. When required, as in the case of a major acquisition, our strong cash generating ability has historically allowed us to access U.S. capital markets.

 

Operating Activities

 

The table below summarizes the effect of the major components of operating cash flow.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(in thousands)

    

2017

    

2016

 

Net income (loss)

 

$

5,302

 

$

(2,506)

 

Non-cash items included in net income (loss)

 

 

12,694

 

 

26,846

 

Effect of changes in receivables/payables from/to customers and brokers

 

 

(71,085)

 

 

(11,605)

 

Effect of changes in other working capital and operating assets and liabilities

 

 

(9,052)

 

 

(45,344)

 

Net cash used in operating activities

 

$

(62,141)

 

$

(32,609)

 

 

Our operating activities typically result in the use of cash in the first quarter of an annual period due to the impact of paying the cash portion of the prior year’s incentive compensation and for increased settlement receivables. The net cash used in operating activities during the three months ended March 31, 2017 was higher than the amount used in the prior year period due to an increase in cash used in settlement activities, which was largely offset by a $57.6 million increase in short-term bank loans reflected in financing activities. The decrease in cash used for other working capital changes as compared to the prior year quarter reflects in part the reduction in restricted cash required in Hong Kong following the migration to a third-party clearing solution (see discussion in Regulatory Capital below) and an increase in accrued research payables under client commission arrangements, partially offset by the payment to the SEC in January 2017 for the settlement of the inquiry into ITG Inc.’s discontinued activity with respect to pre-released American Depository Receipts.

In the normal course of our clearing and settlement activities worldwide, cash is typically used to fund restricted or segregated cash accounts (under regulations and otherwise), broker and customer fails to deliver/receive, securities borrowed, deposits with clearing organizations and net activity related to receivables/payables from/to customers and brokers. The cash requirements vary from day to day depending on value transacted and customer trading patterns.

 

Investing Activities

 

Net cash used in investing activities of $10.2 million during the three months ended 2017 includes investments in software development projects, computer hardware and office space.

 

Financing Activities

 

Net cash provided by financing activities of $40.1 million primarily reflects proceeds from short‑term bank borrowings that are used to support our settlement activities partially offset by repurchases of ITG common stock, our dividend program, shares withheld for net settlements of share‑based awards and repayments of long‑term debt.

During the first three months of 2017, we repurchased approximately 0.6 million shares of our common stock at a cost of $13.1 million, which was funded from our available cash resources. Of these shares, nearly 0.2 million were purchased under our Board of Directors’ authorization for a total cost of $3.2 million (average cost of $19.85 per share). In addition, nearly 0.5 million shares were repurchased for $9.9 million pertaining solely to the satisfaction of minimum statutory withholding tax upon the net settlement of equity awards.  As of March 31, 2017, the total remaining number of shares currently available for repurchase under ITG’s stock repurchase program was 1.3 million. The specific timing and amount of repurchases will vary depending on various factors, including, among others, market conditions and competing needs for the use of our capital. We may elect to conduct future share repurchases through open market purchases, private transactions or automatic share repurchase programs under SEC Rule 10b5-1.

 

31


 

 

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. 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 March 31, 2017 for the U.S. Operations are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

U.S. Operations

    

Net Capital

    

Excess

 

ITG Inc.

 

$

79,820

 

$

78,820

 

AlterNet

 

 

3,239

 

 

3,077

 

ITG Derivatives

 

 

860

 

 

760

 

 

As of March 31, 2017, ITG Inc. had $8.9 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 March 31, 2017, is summarized in the following table (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

Net Capital

    

Excess

 

Canadian Operations

 

 

 

 

 

 

 

Canada

 

$

24,984

 

$

24,610

 

European Operations

 

 

 

 

 

 

 

Ireland

 

 

70,313

 

 

33,333

 

U.K.

 

 

1,955

 

 

1,173

 

Asia Pacific Operations

 

 

 

 

 

 

 

Australia

 

 

22,990

 

 

12,466

 

Hong Kong

 

 

2,840

 

 

2,403

 

Singapore

 

 

1,025

 

 

954

 

 

During the three months ended March 31, 2017, we migrated from self-clearing in Hong Kong to the use of a third-party clearer which settles trades executed in Hong Kong on behalf of ITG Australia Limited. Since capital requirements with respect to unsettled trades are generally lower in Australia than Hong Kong, we expect this migration to reduce our overall peak capital requirements in the Asia Pacific region by at least $10 million.

 

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 the Credit Agreement. However, our ability to borrow additional funds may be impacted 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

32


 

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 March 31, 2017, 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, 2016.

 

New Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017‑04, Intangibles – Goodwill and other (Topic 350): Simplifying the test for goodwill impairment. The amendments in this ASU address concerns over the cost and complexity of the two-step goodwill impairment test and removes the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017‑04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are currently evaluating the new guidance and have not yet determined the impact of adoption on our financial statements.

In November 2016, the FASB issued ASU 2016‑18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU   require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016‑18 is effective for annual reporting periods 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.

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.

In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) , which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard requires a lessee to recognize an asset and lease liability on the balance sheet for all leases with a term longer than 12 months.  Leases will be classified as finance or operating, with classification affecting the pattern of expense recognition in the income statement. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but more significant management judgment will be required. The new standard is effective for us on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the effect of adoption of the new standard and expect that it will have a material effect on our financial statements. We currently believe the most significant changes relate to real estate and office and equipment operating leases. We do not expect a significant change in our leasing activity between now and adoption.

 

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

33


 

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 in the assessment phase of our evaluation of this guidance, where we are identifying and documenting the in-scope revenue streams, facilitating scoping interviews to identify complexity of arrangements and reviewing written customer contracts. We have not yet selected a transition method, nor will we determine the impact of adoption on our financial statements, until we complete the assessment phase.

 

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, 2016.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Please see our Annual Report on Form 10-K (Item 7A) for the year ended December 31, 2016. There has been no material change in this information.

 

Item 4. Controls and Procedures

 

a)

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

 

b)

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

34


 

PART II. — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Information pertaining to legal proceedings can be found in “Item 1. Financial Statements—Note 17. Contingencies—Legal Matters ” and is incorporated herein by reference.

 

Item 1A. Risk Factors

 

There has been no significant change to the risks or uncertainties that may affect our results of operations since December 31, 2016. Please see Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2016 .

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table sets forth our stock repurchase activity during the first three months of 2017, including the total number of shares purchased, the average price paid per share, the number of shares repurchased as part of a publicly-announced plan or program, and the number of shares yet to be purchased under the plan or program.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

    

Maximum Number

 

 

 

 

 

 

 

 

Total Number of

 

of Shares (or Units)

 

 

 

 

 

 

 

 

Shares (or Units)

 

that May Yet

 

 

 

Total Number of

 

Average

 

Purchased as Part of

 

Be Purchased

 

 

 

Shares (or Units)

 

Price Paid per

 

Publicly Announced

 

Under the Plans or

 

Period

 

Purchased (a)

 

Share (or Unit) (a)

 

Plans or Programs (b)

 

Programs (b)

 

From: January 1, 2017

 

 

 

 

 

 

 

 

 

 

To: January 31, 2017

 

86,948

 

$

20.27

 

 —

 

1,446,840

 

From: February 1, 2017

 

 

 

 

 

 

 

 

 

 

To: February 28, 2017

 

486,750

 

 

20.11

 

87,035

 

1,359,805

 

From: March 1, 2017

 

 

 

 

 

 

 

 

 

 

To: March 31, 2017

 

75,799

 

 

19.93

 

74,673

 

1,285,132

 

Total

 

649,497

 

$

20.11

 

161,708

 

 

 


(a)

This column includes the acquisition of 487,789 common shares from employees in order to satisfy minimum statutory withholding tax requirements upon net settlement of equity awards.

(b)

In October 2014, our Board of Directors authorized the repurchase of 4.0 million shares. This authorization has no expiration date. As of December 31, 2016, there were 1.5 million shares remaining available for repurchase under ITG’s stock repurchase program. The specific timing and amount of repurchases will vary depending on various factors including, among others, market conditions and competing needs for the use of our capital.

 

During the first three months of 2017, we repurchased approximately 0.6 million shares of our common stock at a cost of $13.1 million, which was funded from our available cash. Of these shares, 0.2 million were purchased under our Board of Directors’ authorization for a total cost of $3.2 million (average cost of $19.85 per share). An additional 0.5 million shares repurchased for $9.9 million pertained solely to the satisfaction of minimum statutory withholding tax upon the net settlement of equity awards.  As of March 31, 2017, the total remaining number of shares currently available for repurchase under ITG’s stock repurchase program was 1.3 million.

 

During the first quarter of 2017, the Board of Directors declared, and we paid, a quarterly dividend of $0.07 per share, totaling $2.3 million, including less than $0.1 million in stock under the Company’s equity award plans .

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

35


 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

36


 

Item 6. Exhibits

 

 

 

 

10.1* (†)

    

Form of Change in Control Agreement (2017) .

 

 

 

31.1*

 

Rule 13a-14(a) Certification

 

 

 

31.2*

 

Rule 13a-14(a) Certification

 

 

 

32.1**

 

Section 1350 Certification

 

 

 

101*

 

Interactive Data File

 

 

 

 

 

The following furnished materials from Investment Technology Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language), are collectively included herewith as Exhibit 101:

 

 

 

 

 

101. INS XBRL Instance Document.

 

 

101. SCH XBRL Taxonomy Extension Schema.

 

 

101. CAL XBRL Taxonomy Extension Calculation Linkbase.

 

 

101. DEF XBRL Taxonomy Extension Definition Linkbase.

 

 

101. LAB XBRL Taxonomy Extension Label Linkbase.

 

 

101. PRE XBRL Taxonomy Extension Presentation Linkbase.

 


 

 

 

*

 

Filed herewith.

**

 

Furnished herewith.

(†)

 

Management contracts or compensatory plans or arrangements.

 

 

37


 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

INVESTMENT TECHNOLOGY GROUP, INC.

 

 

 

(Registrant)

 

 

 

 

Date: May 8, 2017

 

By:

/s/ STEVEN R. VIGLIOTTI

 

 

 

Steven R. Vigliotti
Chief Financial Officer and Chief Administrative Officer and Duly Authorized Signatory of Registrant

 

 

38


Investment Technology (NYSE:ITG)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Investment Technology Charts.
Investment Technology (NYSE:ITG)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Investment Technology Charts.