The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Principal Business Activity
MarketAxess Holdings Inc. (the “Company” or “MarketAxess”) was incorporated in the State of Delaware on April 11, 2000.
Through its subsidiaries, MarketAxess operates a leading electronic trading platform that enables fixed-income market participants to efficiently trade corporate bonds and other types of fixed-income instruments using MarketAxess' patented trading technology. Over 1,500 institutional investor and broker-dealer firms are active users of the MarketAxess trading platform, accessing global liquidity in U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, municipal bonds, leveraged loans, credit default swaps and other fixed-income securities. Through its Open Trading™ protocols, MarketAxess executes bond trades between and among institutional investor and broker-dealer clients in an all-to-all anonymous trading environment in which MarketAxess acts as the matched principal counterparty. MarketAxess also offers a number of trading-related products and services, including: Composite+ pricing and other market data to assist clients with trading decisions; auto-execution and other execution services for clients requiring specialized workflow solutions; connectivity solutions that facilitate straight-through processing; and technology services to optimize trading environments. Through its Trax® division, the Company also offers a range of pre- and post-trade services, including trade matching, trade publication, regulatory transaction reporting and market and reference data across a range of fixed-income and other products.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated. These consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The consolidated financial information as of December 31, 2018 has been derived from audited financial statements not included herein. These unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) with respect to Form 10-Q and reflect all adjustments that, in the opinion of management, are normal and recurring, and that are necessary for a fair statement of the results for the interim periods presented. In accordance with such rules and regulations, certain disclosures that are normally included in annual financial statements have been omitted. Interim period operating results may not be indicative of the operating results for a full year.
Accounting Pronouncements, Recently Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”) requiring lessees to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases with lease terms greater than 12 months. The Company adopted ASU 2016-02 effective January 1, 2019 using a modified retrospective transition approach and will not restate comparative periods.
In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which allowed it to carry forward the historical lease classification.
The Company recorded new operating lease right-of-use assets of $79.5 million, eliminated a deferred rent liability of $11.7 million and recorded lease liabilities associated with the future minimum payments required under operating leases of $91.2 million. The adoption of this guidance did not have a material effect on the Company's Consolidated Statements of Operations or Consolidated Statements of Cash Flows.
Accounting Pronouncements, Not Yet Adopted as of March 31, 2019
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other” (“ASU 2017-04”). ASU 2017-04 simplifies the testing for goodwill impairment. The guidance will be effective for the Company beginning January 1, 2020 and early adoption is permitted and should be applied prospectively. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and money market instruments that are primarily maintained at one major global bank. Given this concentration, the Company is exposed to certain credit risk in relation to its deposits at this bank. The Company defines cash equivalents as short-term interest-bearing investments with maturities at the time of purchase of three months or less.
8
Investments
The Company determines the appropriate classification of securities at the time of purchase which are recorded in the Consolidated Statements of Financial Condition on the trade date. Securities are classified as available-for-sale or trading. The Company’s available-for-sale investments are comprised of investment grade corporate debt securities. Available-for-sale investments are carried at fair value with the unrealized gains or losses reported in accumulated other comprehensive loss in the Consolidated Statements of Financial Condition. Trading investments include investment grade corporate debt securities and U.S. Treasuries and are carried at fair value, with realized and unrealized gains or losses included in other income in the Consolidated Statements of Operations.
The Company assesses whether an other-than-temporary impairment loss on the available-for-sale investments has occurred due to declines in fair value or other market conditions. The portion of an other-than-temporary impairment related to credit loss is recorded as a charge in the Consolidated Statements of Operations. The remainder is recognized in accumulated other comprehensive loss if the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security prior to recovery. No charges for other-than-temporary losses were recorded during the three months ended March 31, 2019 and 2018.
Fair Value Financial Instruments
Fair value is defined as “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.” A three-tiered hierarchy for determining fair value has been established that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as Level 1 (unadjusted quoted prices for identical assets or liabilities in active markets), Level 2 (inputs that are observable in the marketplace other than those inputs classified in Level 1) and Level 3 (inputs that are unobservable in the marketplace). The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of its money market funds, securities available-for-sale, trading securities and foreign currency forward contracts. All other financial instruments are short-term in nature and the carrying amount is reported on the Consolidated Statements of Financial Condition at approximate fair value.
Allowance for Doubtful Accounts
All accounts receivable have contractual maturities of less than one year and are derived from trading-related fees and commissions and revenues from products and services. The Company continually monitors collections and payments from its customers and maintains an allowance for doubtful accounts. The allowance for doubtful accounts is based upon the historical collection experience and specific collection issues that have been identified. Additions to the allowance for doubtful accounts are charged to bad debt expense, which is included in general and administrative expense in the Company’s Consolidated Statements of Operations.
Depreciation and Amortization
Fixed assets are carried at cost less accumulated depreciation. The Company uses the straight-line method of depreciation over three to seven years. The Company amortizes leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease.
Software Development Costs
The Company capitalizes certain costs associated with the development of internal use software, including among other items, employee compensation and related benefits and third party consulting costs at the point at which the conceptual formulation, design and testing of possible software project alternatives have been completed. Once the product is ready for its intended use, such costs are amortized on a straight-line basis over three years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable.
Cash Provided as Collateral
Cash is provided as collateral for broker-dealer clearing accounts. Cash provided as collateral is included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition.
9
Foreign Currency Translation and Forward Contracts
Assets and liabilities denominated in foreign currencies are translated using exchange rates at the end of the period; revenues and expenses are translated at average monthly rates. Gains and losses on foreign currency translation are a component of accumulated other comprehensive loss in the Consolidated Statements of Financial Condition. Transaction gains and losses are recorded in other, net in the Consolidated Statements of Operations.
The Company enters into foreign currency forward contracts to hedge its net investment in its U.K. subsidiaries. Gains and losses on these transactions are included in accumulated other comprehensive loss in the Consolidated Statements of Financial Condition.
Revenue Recognition
The Company’s classification of revenues in the Consolidated Statements of Operations represents revenues from contracts with customers disaggregated by type of revenue. The Company has four revenue streams as described below.
Commission Revenue
–
The Company charges its broker-dealer clients variable transaction fees for trades executed on its platform and, under certain plans, distribution fees or monthly minimum fees to use the platform for a particular product area. Variable transaction fees are generally calculated as a percentage of the notional dollar volume of bonds traded on the platform and vary based on the type, size, yield and maturity of the bond traded. Under the Company’s disclosed trading transaction fee plans, bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions. Variable transaction fees, distribution fees and unused monthly fee commitments are invoiced and recorded on a monthly basis.
For trades that the Company executes between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, the Company earns its commission through the difference in price between the two trades. The commission is collected upon settlement of the trade, which typically occurs within one to two trading days after the trade date. The following table presents commission revenue by fee type for the three months ended March 31, 2019 and 2018:
|
Three Months Ended March 31,
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
Commission revenue by fee type
|
|
|
|
|
|
|
|
Variable transaction fees
|
|
|
|
|
|
|
|
Disclosed trading
|
$
|
66,056
|
|
|
$
|
66,253
|
|
Open Trading - matched principal trading
|
|
23,036
|
|
|
|
13,524
|
|
Total variable transaction fees
|
|
89,092
|
|
|
|
79,777
|
|
Distribution fees and unused minimum fees
|
|
23,668
|
|
|
|
22,995
|
|
Total commissions
|
$
|
112,760
|
|
|
$
|
102,772
|
|
|
|
|
|
|
|
|
|
10
Information services –
Information services includes data licensed to the Company’s broker-dealer clients, institutional investor clients and data-only subscribers; professional and consulting services; technology software licenses; and maintenance and support services. The nature and timing of each performance obligation may vary as these contracts are either subscription based services transferred over time or one-time services that are transferred at a point in time. Revenues for services transferred over time are recognized ratably over the contract period as the Company’s performance obligation is met whereas revenues for services transferred at a point in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period. The following table presents information services revenue by timing of recognition for the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
Information services revenue by timing of recognition
|
|
|
|
|
|
|
|
Services transferred over time
|
$
|
7,219
|
|
|
$
|
6,842
|
|
Services transferred at a point in time
|
|
147
|
|
|
|
224
|
|
Total information services revenues
|
$
|
7,366
|
|
|
$
|
7,066
|
|
|
|
|
|
|
|
|
|
Post-trade services –
Post-trade services revenue is generated from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed monthly in arrears and revenue is recognized in the period transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. The Company also generates one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is completed. The following table presents post-trade services revenue by timing of recognition for the three months ended March 31, 2019 and 2018:
|
Three Months Ended March 31,
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
Post-trade services revenue by timing of recognition
|
|
|
|
|
|
|
|
Services transferred over time
|
$
|
4,087
|
|
|
$
|
4,287
|
|
Services transferred at a point in time
|
|
13
|
|
|
|
289
|
|
Total post-trade services revenues
|
$
|
4,100
|
|
|
$
|
4,576
|
|
|
|
|
|
|
|
|
|
Other revenues –
Other revenues primarily includes revenue from telecommunications line charges to broker-dealer clients.
Contract liabilities consist of deferred revenues that the Company records when cash payments are received or due in advance of services to be performed. The revenue recognized from contract liabilities and the remaining balance is shown below:
|
|
December 31, 2018
|
|
|
Payments received in advance of services to be performed
|
|
|
Revenue recognized for services performed during the period
|
|
|
Foreign Currency Translation
|
|
|
March 31, 2019
|
|
|
|
(In thousands)
|
|
Information services
|
|
$
|
1,959
|
|
|
$
|
1,957
|
|
|
$
|
(1,799
|
)
|
|
$
|
—
|
|
|
$
|
2,117
|
|
Post-trade services
|
|
|
851
|
|
|
|
3,709
|
|
|
|
(3,152
|
)
|
|
|
20
|
|
|
|
1,428
|
|
Total deferred revenue
|
|
$
|
2,810
|
|
|
$
|
5,666
|
|
|
$
|
(4,951
|
)
|
|
$
|
20
|
|
|
$
|
3,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The majority of
the Company’s
contracts are short-term in nature with durations of less than one-year. For contracts extending beyon
d one year, the aggregate amount of the transaction price allocated to remaining performance obligations was $
10
.
4
million as of
March
3
1
, 201
9
. The Company expects to recognize revenue associated with the remaining performance obligations over the next
21
months.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all share-based payment awards based on their estimated fair values measured as of the grant date. These costs are recognized as an expense in the Consolidated Statements of Operations over the requisite service period, which is typically the vesting period, with an offsetting increase to additional paid-in capital. Forfeitures are recognized as they occur.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized against deferred tax assets if it is more likely than not that such assets will not be realized in future years. The Company recognizes interest and penalties related to unrecognized tax benefits in general and administrative expenses in the Consolidated Statements of Operations. Effective upon the Company’s adoption of ASU 2016-09,
all tax effects related to share-based payments are recorded through tax expense in the periods during which the awards are exercised or vest.
Business Combinations, Goodwill and Intangible Assets
Business combinations are accounted for under the purchase method of accounting. The total cost of an acquisition is allocated to the underlying net assets based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain assets acquired and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, growth rates and asset lives.
The Company operates as a single reporting unit. Subsequent to an acquisition, goodwill no longer retains its identification with a particular acquisition, but instead becomes identifiable with the entire reporting unit. As a result, all of the fair value of the Company is available to support the value of goodwill. An impairment review of goodwill is performed on an annual basis, at year-end, or more frequently if circumstances change. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized on a straight-line basis over their estimated useful lives, ranging from three to 15 years. Intangible assets are assessed for impairment when events or circumstances indicate the existence of a possible impairment.
Earnings Per Share
Basic earnings per share is computed by dividing the net income attributable to common stock by the weighted-average number of shares of common stock outstanding during the period. For purposes of computing diluted earnings per share, the weighted-average shares outstanding of common stock reflects the dilutive effect that could occur if convertible securities or other contracts to issue common stock were converted into or exercised for common stock.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
12
3. Net Capital Requirements
Certain U.S. subsidiaries of the Company are registered as a broker-dealer or swap execution facility and therefore are subject to the applicable rules and regulations of the SEC and the Commodity Futures Trading Commission (“CFTC”). These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require a significant part of the registrants’ assets be kept in relatively liquid form. Certain of the Company’s foreign subsidiaries are regulated by the Financial Conduct Authority in the U.K. or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of March 31, 2019, each of the Company’s subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of March 31, 2019, the Company’s subsidiaries maintained aggregate net capital and financial resources that was $172.5 million in excess of the required levels of $12.7 million.
Each of the Company’s U.S. and foreign regulated subsidiaries are subject to local regulations which generally prohibit repayment of borrowings from the Company or affiliates, paying cash dividends, making loans to the Company or affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources without prior notification to or approval from such regulated entity’s principal regulator.
4. Fair Value Measurements
The following table summarizes the valuation of the Company’s assets and liabilities measured at fair value as categorized based on the hierarchy described in Note 2.
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
(In thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
155,570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
155,570
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
—
|
|
|
|
133,051
|
|
|
|
—
|
|
|
|
133,051
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
—
|
|
|
|
56,465
|
|
|
|
—
|
|
|
|
56,465
|
|
U.S. Treasuries
|
|
—
|
|
|
|
27,296
|
|
|
|
—
|
|
|
|
27,296
|
|
Mutual funds held in rabbi trust
|
|
—
|
|
|
|
5,646
|
|
|
|
—
|
|
|
|
5,646
|
|
Foreign currency forward position
|
|
—
|
|
|
|
1,096
|
|
|
|
—
|
|
|
|
1,096
|
|
Total
|
$
|
155,570
|
|
|
$
|
223,554
|
|
|
$
|
—
|
|
|
$
|
379,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
112,529
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112,529
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
—
|
|
|
|
146,966
|
|
|
|
—
|
|
|
|
146,966
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
—
|
|
|
|
71,861
|
|
|
|
—
|
|
|
|
71,861
|
|
U.S. Treasuries
|
|
—
|
|
|
|
17,178
|
|
|
|
—
|
|
|
|
17,178
|
|
Mutual funds held in rabbi trust
|
|
—
|
|
|
|
4,100
|
|
|
|
—
|
|
|
|
4,100
|
|
Foreign currency forward position
|
|
—
|
|
|
|
(1,021
|
)
|
|
|
—
|
|
|
|
(1,021
|
)
|
Total
|
$
|
112,529
|
|
|
$
|
239,084
|
|
|
$
|
—
|
|
|
$
|
351,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities classified within Level 2 were valued using a market approach utilizing prices and other relevant information generated by market transactions involving comparable assets. The foreign currency forward contracts are classified within Level 2 as the valuation inputs are based on quoted market prices. The mutual funds held in a rabbi trust represent investments associated with the deferred cash incentive plan (see Note 14). There were no financial assets classified within Level 3 during the three months ended March 31, 2019 and 2018.
13
The Company enters into foreign currency forward contracts to hedge the net investment in the Company’s U.K. subsidiaries. The Company designates each foreign curre
ncy forward contract as a hedge and assesses the risk management objective and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. Th
ese hedges are for a one-month period and are used to limit exposure to foreign currency exchange rate fluctuations. The fair value of the asset is included in prepaid expenses and other assets and the fair value of the liability is included in accounts pa
yable, accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. Gains or losses on foreign currency forward contracts designated as hedges are included in accumulated other comprehensive loss in the Consolidated Stateme
nts of Financial Condition.
A summary of the Company’s foreign currency forward position is as follows:
|
As of
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
(In thousands)
|
|
Notional value
|
$
|
123,263
|
|
|
$
|
106,306
|
|
Fair value of notional
|
|
122,167
|
|
|
|
107,327
|
|
Fair value of the asset (liability)
|
$
|
1,096
|
|
|
$
|
(1,021
|
)
|
|
|
|
|
|
|
|
|
The following is a summary of the Company’s investments:
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair
value
|
|
|
(In thousands)
|
|
As of March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
$
|
133,039
|
|
|
$
|
238
|
|
|
$
|
(226
|
)
|
|
$
|
133,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
56,626
|
|
|
|
2
|
|
|
|
(163
|
)
|
|
|
56,465
|
|
U.S. Treasuries
|
|
26,949
|
|
|
|
347
|
|
|
|
—
|
|
|
|
27,296
|
|
Mutual funds held in rabbi trust
|
|
5,281
|
|
|
|
365
|
|
|
|
—
|
|
|
|
5,646
|
|
Total trading securities
|
|
88,856
|
|
|
|
714
|
|
|
|
(163
|
)
|
|
|
89,407
|
|
Total investments
|
$
|
221,895
|
|
|
$
|
952
|
|
|
$
|
(389
|
)
|
|
$
|
222,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
$
|
147,556
|
|
|
$
|
27
|
|
|
$
|
(617
|
)
|
|
$
|
146,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
72,274
|
|
|
|
8
|
|
|
|
(421
|
)
|
|
|
71,861
|
|
U.S. Treasuries
|
|
16,953
|
|
|
|
225
|
|
|
|
—
|
|
|
|
17,178
|
|
Mutual funds held in rabbi trust
|
|
4,347
|
|
|
|
—
|
|
|
|
(247
|
)
|
|
|
4,100
|
|
Total trading securities
|
|
93,574
|
|
|
|
233
|
|
|
|
(668
|
)
|
|
|
93,139
|
|
Total investments
|
$
|
241,130
|
|
|
$
|
260
|
|
|
$
|
(1,285
|
)
|
|
$
|
240,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the fair value of the investments based upon the contractual maturities:
|
As of
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
(In thousands)
|
|
Less than one year
|
$
|
129,435
|
|
|
$
|
134,255
|
|
Due in 1 - 5 years
|
|
93,023
|
|
|
|
105,850
|
|
Total
|
$
|
222,458
|
|
|
$
|
240,105
|
|
|
|
|
|
|
|
|
|
14
Proceeds from the sales and maturities of investments during the three months ended March 31, 2019 and 2018 were $100.1 million and $67.4 million, respectively.
The following table provides fair values and unrealized losses on investments and by the aging of the securities’ continuous unrealized loss position as of March 31, 2019 and December 31, 2018:
|
Less than Twelve Months
|
|
|
Twelve Months or More
|
|
|
Total
|
|
|
Estimated
fair
value
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair
value
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair
value
|
|
Gross
unrealized
losses
|
|
|
(In thousands)
|
|
As of March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
$
|
27,031
|
|
$
|
(18
|
)
|
|
$
|
82,528
|
|
$
|
(371
|
)
|
|
$
|
109,559
|
|
$
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
$
|
80,282
|
|
$
|
(256
|
)
|
|
$
|
87,028
|
|
$
|
(782
|
)
|
|
$
|
167,310
|
|
$
|
(1,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives was $59.7 million as of both March 31, 2019 and December 31, 2018. Intangible assets that are subject to amortization, including the related accumulated amortization, are comprised of the following:
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
|
(In thousands)
|
|
Technology
|
$
|
5,770
|
|
|
$
|
(5,770
|
)
|
|
$
|
—
|
|
|
$
|
5,770
|
|
|
$
|
(5,770
|
)
|
|
$
|
—
|
|
Customer relationships
|
|
5,639
|
|
|
|
(2,773
|
)
|
|
|
2,866
|
|
|
|
5,634
|
|
|
|
(2,672
|
)
|
|
|
2,962
|
|
Non-competition agreements
|
|
380
|
|
|
|
(380
|
)
|
|
|
—
|
|
|
|
380
|
|
|
|
(380
|
)
|
|
|
—
|
|
Tradenames
|
|
370
|
|
|
|
(370
|
)
|
|
|
—
|
|
|
|
370
|
|
|
|
(370
|
)
|
|
|
—
|
|
Total
|
$
|
12,159
|
|
|
$
|
(9,293
|
)
|
|
$
|
2,866
|
|
|
$
|
12,154
|
|
|
$
|
(9,192
|
)
|
|
$
|
2,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense associated with identifiable intangible assets was $0.1 million for each of the three months ended March 31, 2019 and 2018, respectively. Estimated total amortization expense is $0.4 million for each year from 2019 through 2022 and $0.3 million for 2023.
15
6. Income Taxes
The provision for income taxes consists of the following:
|
Three Months Ended March 31,
|
|
|
2019
|
|
|
2018
|
|
Current:
|
(In thousands)
|
|
Federal
|
$
|
6,524
|
|
|
$
|
7,970
|
|
State and local
|
|
1,393
|
|
|
|
1,919
|
|
Foreign
|
|
2,771
|
|
|
|
1,114
|
|
Total current provision
|
|
10,688
|
|
|
|
11,003
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
1,602
|
|
|
|
846
|
|
State and local
|
|
249
|
|
|
|
130
|
|
Foreign
|
|
159
|
|
|
|
1,094
|
|
Total deferred provision
|
|
2,010
|
|
|
|
2,070
|
|
Provision for income taxes
|
$
|
12,698
|
|
|
$
|
13,073
|
|
|
|
|
|
|
|
|
|
T
he Company recognized excess tax benefits on share-based payments of $
3.0
million and $
1.8
million through the provision for income taxes, for the three months ended March 31, 2019 and 2018, respectively.
The Company or one of its subsidiaries files U.S. federal, state and foreign income tax returns. Income tax returns for U.S. Federal (through 2013), New York City (through 2003) and state (through 2009) and Connecticut state (through 2003) have been audited. An examination of the Company’s New York State income tax returns for 2010 through 2017 is currently underway. The Company cannot estimate when the examination will conclude or the impact such examination will have on the Company’s Consolidated Financial Statements, if any.
All previously undistributed foreign earnings have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company considers its undistributed foreign earnings to be indefinitely reinvested outside of the U.S. and does not expect to incur any significant additional taxes related to such amounts.
7. Stock-Based Compensation Plans
Total stock-based compensation expense was as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Employees
|
|
$
|
4,916
|
|
|
$
|
3,692
|
|
Non-employee directors
|
|
|
280
|
|
|
|
259
|
|
Total stock-based compensation
|
|
$
|
5,196
|
|
|
$
|
3,951
|
|
|
|
|
|
|
|
|
|
|
The Company records stock-based compensation expense for employees in employee compensation and benefits and for non-employee directors in general and administrative expenses in the Consolidated Statements of Operations.
During the three months ended March 31, 2019, the Company granted to employees a total of 82,423 shares of restricted stock or restricted stock units, 82,474 options to purchase shares of common stock and performance-based shares with an expected pay-out at target of 13,225 shares of common stock. The fair value of the restricted stock and performance-based share awards was based on a weighted-average fair value per share at the grant date of $213.62 and $208.84, respectively. Based on the Black-Scholes option pricing model, the weighted-average fair value for each option granted was $38.83 per share.
16
In addition to the grants above, 76,868 stock options and 18,914 performance shares were granted to the Company’s President and Chief
Operating
Officer in January 2019 with an ag
gregate grant date fair value of $5.8 million as determined by an independent third party using a Monte Carlo simulation model. The exercise price is $272.88 for 35,678 of the stock options and $294.71 for the remaining 41,189 stock options, which is equ
al to 125% and 135%, respectively, of the fair market value of the Company’s
common
stock on the grant date. The performance share award provides that the number of shares earned will be based on the Company’s achievement of certain share price levels dur
ing the five-year performance period. The performance level is $272.88 for 8,969 of the performance shares and $294.71 for the remaining 9,945 performance shares, which is equal to 125% and 135%, respectively, of the fair market value of the Company’s
com
mon
stock on the grant date.
Subject to the terms of the award agreements, the
performance shares will vest and options will vest and become exercisable
only upon the grantee’s continued employment with the Company through January 24, 2024
. The options exp
ire on July 22, 2024. Key assumptions used for the Monte Carlo model included a risk free interest rate of 2.6%, a dividend yield of 0.8%
, volatility of 25.8% for the stock options and volatility of 25.9% for the performance shares.
As of March 31, 2019, the total unrecognized compensation cost related to all non-vested awards was $52.2 million. That cost is expected to be recognized over a weighted-average period of 2.5 years.
8. Earnings Per Share
The following table sets forth basic and diluted weighted average shares outstanding used to compute earnings per share:
|
Three Months Ended March 31,
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
Basic weighted average shares outstanding
|
|
37,043
|
|
|
|
36,954
|
|
Dilutive effect of stock options and restricted stock
|
|
789
|
|
|
|
932
|
|
Diluted weighted average shares outstanding
|
|
37,832
|
|
|
|
37,886
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock totaling 346,327 shares and 77,732 shares for the three months ended March 31, 2019 and 2018, respectively, were excluded from the computation of diluted earnings per share because their effect would have been antidilutive. The computation of diluted shares can vary among periods due, in part, to the change in the average price of the Company’s common stock.
9. Credit Agreement
In October 2015, the Company entered into a two-year amended and restated credit agreement (the “Credit Agreement”) that provided for revolving loans and letters of credit up to an aggregate of $100.0 million. The Company amended the Credit Agreement in October 2017 and extended the maturity date to October 2018. The amended Credit Agreement also provided for two additional one-year extension options and modified certain borrowing terms and covenants. In October 2018, the Company exercised its first option to extend the maturity date to October 2019. Subject to satisfaction of certain specified conditions, the Company is permitted to upsize the borrowing capacity under the Credit Agreement by an additional $50.0 million. As of March 31, 2019, the Company had $1.7 million in letters of credit outstanding and $98.3 million in available borrowing capacity under the Credit Agreement.
Borrowings under the Credit Agreement will bear interest at a rate per annum equal to the base rate or adjusted LIBOR plus an applicable margin that varies with the Company’s consolidated total leverage ratio. The Credit Agreement requires that the Company satisfies certain covenants, which includes leverage ratios and minimum earnings before interest, tax, depreciation and amortization (“EBITDA”) requirements. The Company was in compliance with all applicable covenants at March 31, 2019 and December 31, 2018.
The Company’s existing and future domestic subsidiaries (other than any regulated subsidiary) have guaranteed the Company’s obligations under the Credit Agreement. Subject to customary exceptions and exclusions, the Company’s borrowings under the Credit Agreement are collateralized by first priority pledges (subject to permitted liens) of substantially all of the Company’s personal property assets and the personal property assets of the Company’s domestic subsidiaries that have guaranteed the Credit Agreement, including the equity interests of the Company’s domestic subsidiaries and the equity interests of certain of the Company’s foreign subsidiaries (limited, in the case of the voting equity interests of the foreign subsidiaries, to a pledge of 65% of those equity interests).
17
If an event of default occurs, including failure to pay
principal or interest due on the loan balance, a voluntary or involuntary proceeding seeking liquidation, change in control of the Company, or one or more material judgments against the Company in excess of $10.0 million, the lenders would be entitled to a
ccelerate the borrowings under the Credit Agreement and take various other actions, including all actions permitted to be taken by a secured creditor. If certain bankruptcy events of default occur, the borrowings under the Credit Agreement will automatical
ly accelerate.
10. Leases
The Company has operating leases for corporate offices with initial lease terms ranging from one-year to 15 years.
Certain leases contain options to extend the initial term at the Company’s discretion. The Company accounts for the option to extend when it is reasonably certain of being exercised. The Company’s lease agreements do not contain any material residual value guarantees, restrictions or covenants.
The following table presents the components of occupancy expense for the three months ended March 31, 2019:
Lease cost:
|
Classification
|
(In thousands)
|
|
Operating lease cost
|
Occupany
|
$
|
2,745
|
|
Operating lease cost for subleased/assigned properties
|
Other, net
|
|
573
|
|
Variable lease costs
|
Occupany
|
|
124
|
|
Sublease income subleased/assigned properties
|
Other, net
|
|
(573
|
)
|
Net lease cost
|
|
$
|
2,869
|
|
The Company determines whether an arrangement is, or includes, a lease at contract inception. Operating lease right-of-use assets and liabilities are recognized at commencement date and are initially measured based on the present value of lease payments over the defined lease term. As the Company's leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments. The weighted average remaining lease term and weighted average discount rate were 14.2 years and 6.0%, respectively, for operating leases as of March 31, 2019.
The following table presents the maturity of lease liabilities as of March 31, 2019:
|
(In thousands)
|
|
Remainder of 2019
|
$
|
3,768
|
|
2020
|
|
11,185
|
|
2021
|
|
10,125
|
|
2022
|
|
9,092
|
|
2023
|
|
8,762
|
|
2024 and thereafter
|
|
96,287
|
|
Total lease payments
|
|
139,219
|
|
Less: interest
|
|
48,374
|
|
Present value of lease liabilities
|
$
|
90,845
|
|
|
|
|
|
Minimum lease commitments as of December 31, 2018 that had an initial term or remaining lease term in excess of one-year are as follows:
|
(In thousands)
|
|
2019
|
$
|
9,764
|
|
2020
|
|
10,919
|
|
2021
|
|
10,114
|
|
2022
|
|
9,067
|
|
2023
|
|
8,738
|
|
2024 and thereafter
|
|
95,467
|
|
|
$
|
144,069
|
|
18
The Company has entered into agreements that assign the Company’s lease obligations on two properties to third parties and is contingently liable should the third parties default on future lease obligations through the lease termination dates of November 2
020 and February 2022. The aggregate amount of the future lease obligations under these arrangements is $5.4 million as of March 31, 2019
.
11. Commitments and Contingencies
Legal
In the normal course of business, the Company and its subsidiaries included in the consolidated financial statements may be involved in various lawsuits, proceedings and regulatory examinations. The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings, if any, utilizing the latest information available. For matters where it is probable that the Company will incur a material loss and the amount can be reasonably estimated, the Company will establish an accrual for the loss. Once established, the accrual will be adjusted to reflect any relevant developments. When a loss contingency is not both probable and estimable, the Company does not establish an accrual.
Based on currently available information, the outcome of the Company’s outstanding matters is not expected to have a material adverse impact on the Company’s financial position. It is not presently possible to determine the ultimate exposure to these matters and there is no assurance that the resolution of the outstanding matters will not significantly exceed any reserves accrued by the Company.
Other
The Company, through two regulated subsidiaries, executes certain bond transactions between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades which settle through third-party clearing brokers. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. Under securities clearing agreements with third party clearing brokers, the Company maintains collateral deposits with each clearing broker in the form of cash. The amount of the collateral deposits, which are disclosed in the Consolidated Statements of Cash Flows as restricted cash, and included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition was $1.2 million as of both March 31, 2019 and 2018.
The Company may be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is a trade dispute or error relating to a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge the Company for any losses they suffer resulting from a counterparty’s failure on any of the Company’s trades. The Company did not record any liabilities or losses with regard to this right for the three months ended March 31, 2019 and 2018.
In the normal course of business, the Company enters into contracts that contain a variety of representations, warranties and indemnification provisions. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects the risk of loss to be remote.
12. Share Repurchase Program
In September 2017, the Board of Directors authorized a fifteen-month share repurchase program for up to $100.0 million that commenced in October 2017. The expiration date of this program was subsequently extended to March 31, 2019. In January 2019, the Board of Directors authorized a new two-year share repurchase program for up to $100.0 million that commenced in April 2019. For the three months ended March 31, 2019, the Company repurchased 23,365 shares of common stock at a cost of $5.2 million. Shares repurchased under each program will be held in treasury for future use.
13. Segment and Geographic Information
The Company operates an electronic platform for the trading of fixed-income securities and provides related data, analytics, compliance tools and post-trade services. The Company considers its operations to constitute a single business segment because of the highly integrated nature of these product and services, the financial markets in which the Company competes and the Company’s worldwide business activities. The Company believes that results by geographic region or client sector are not necessarily meaningful in understanding its business.
19
For the
three
months ended
March
3
1
, 201
9
and 201
8
, the U.K. was the only individual foreign country in which the Company had a subsidiary that accounted for 10% or more of the total revenues or total long-lived
assets of the Company. Revenues and long-lived assets are attributed to a geographic area based on the location of the particular subsidiary. Long-lived assets are defined as furniture, equipment, leasehold improvements and capitalized software.
Informatio
n regarding revenue for the three
months ended
March
3
1
, 201
9
and 201
8
and long-lived assets as of
March
3
1
, 201
9
and December 31, 201
8
was as follows:
|
Three Months Ended March 31,
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
United States
|
$
|
103,615
|
|
|
$
|
96,451
|
|
United Kingdom
|
|
20,267
|
|
|
|
17,751
|
|
Other
|
|
609
|
|
|
|
512
|
|
Total
|
$
|
124,491
|
|
|
$
|
114,714
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
(In thousands)
|
|
Long-lived assets, as defined
|
|
|
|
|
|
|
|
United States
|
$
|
53,518
|
|
|
$
|
55,200
|
|
United Kingdom
|
|
7,508
|
|
|
|
7,787
|
|
Other
|
|
21
|
|
|
|
23
|
|
Total
|
$
|
61,047
|
|
|
$
|
63,010
|
|
|
|
|
|
|
|
|
|
14. Retirement and Deferred Compensation Plans
The Company offers a non-qualified deferred cash incentive plan to certain officers and other employees. Under the plan, eligible employees may defer up to 100% of their annual cash incentive pay. The Company has elected to fund its deferred compensation obligations through a rabbi trust. The rabbi trust is subject to creditor claims in the event of insolvency but such assets are not available for general corporate purposes. Assets held in the rabbi trust are invested in mutual funds, as selected by the participants, which are designated as trading securities and carried at fair value. As of March 31, 2019 and 2018, the fair value of the mutual fund investments and deferred compensation obligations were $5.6 million and $4.3 million, respectively. Changes in the fair value of securities held in the rabbi trust and offsetting increases or decreases in the deferred compensation obligation are recognized in other, net in the Company’s Consolidated Statements of Operations. For the three months ended March 31, 2019 and 2018, the trading (losses) gains and changes in deferred compensation liability and expense
were immaterial.
20