MarketAxess Holdings, Inc.
MARKETAXESS HOLDINGS INC (Form: 10-Q, Received: 04/28/2016 16:07:07)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

R

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

For the quarterly period ended March 31, 2016

or

¨

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 001-34091

 

MARKETAXESS HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

52-2230784

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

299 Park Avenue, 10th Floor New York, New York

 

10171

(Address of principal executive offices)

 

(Zip Code)

(212) 813-6000

(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   R     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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   R     No   ¨

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

 

Large accelerated filer

 

R

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of April 27, 2016, the number of shares of the Registrant’s voting common stock outstanding was 37,564,015.

 

 

 

 

 


MARKETAXESS HOLDINGS INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016

TABLE OF CONTENTS

 

 

 

  

Page

 

PART I — Financial Information

  

 

Item 1.

Financial Statements (Unaudited)

  

3

 

Consolidated Statements of Financial Condition as of March 31, 2016 and December 31, 2015

  

3

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

  

4

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015

  

5

 

Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2016

  

6

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

  

7

 

Notes to Consolidated Financial Statements

  

8

Item 2.

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

  

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

  

29

Item 4.

Controls and Procedures

  

31

 

PART II — Other Information

  

 

Item 1.

Legal Proceedings

  

32

Item 1A.

Risk Factors

  

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  

32

Item 3.

Defaults Upon Senior Securities

  

32

Item 4.

Mine Safety Disclosures

  

33

Item 5.

Other Information

  

33

Item 6.

Exhibits

  

33

 

 

 

 

2


P ART I — Financial Information

 

Item 1. Financial Statements

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

 

As of

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands, except share and

per share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

137,995

 

 

$

199,728

 

Investments, at fair value

 

 

147,226

 

 

 

84,706

 

Accounts receivable, net of allowance of $119 and $109 as of

   March 31, 2016 and December 31, 2015, respectively

 

 

52,755

 

 

 

40,459

 

Goodwill and intangible assets, net of accumulated amortization

 

 

63,731

 

 

 

64,142

 

Furniture, equipment, leasehold improvements and capitalized

   software, net of accumulated depreciation and amortization

 

 

32,094

 

 

 

30,897

 

Prepaid expenses and other assets

 

 

12,844

 

 

 

9,880

 

Deferred tax assets, net

 

 

5,197

 

 

 

9,229

 

Total assets

 

$

451,842

 

 

$

439,041

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accrued employee compensation

 

$

10,910

 

 

$

29,296

 

Income and other tax liabilities

 

 

10,915

 

 

 

4,463

 

Deferred revenue

 

 

2,602

 

 

 

2,312

 

Accounts payable, accrued expenses and other liabilities

 

 

16,999

 

 

 

12,257

 

Total liabilities

 

 

41,426

 

 

 

48,328

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies  (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 4,855,000 shares authorized,

   no shares issued and outstanding as of March 31, 2016 and

   December 31, 2015

 

 

 

 

 

 

Series A Preferred Stock, $0.001 par value, 110,000 shares

   authorized, no shares issued and outstanding as of

   March 31, 2016 and December 31, 2015

 

 

 

 

 

 

Common stock voting, $0.003 par value, 110,000,000 shares

   authorized, 39,990,272 shares and 39,821,519 shares issued

   and 37,571,415 shares and 37,409,274 shares outstanding

   as of March 31, 2016 and December 31, 2015, respectively

 

 

121

 

 

 

121

 

Common stock non-voting, $0.003 par value, 10,000,000

   shares authorized, no shares issued and outstanding as of

   March 31, 2016 and December 31, 2015

 

 

 

 

 

 

Additional paid-in capital

 

 

324,950

 

 

 

321,215

 

Treasury stock - Common stock voting, at cost, 2,418,857

   and 2,412,245 shares as of March 31, 2016 and December 31,

   2015, respectively

 

 

(94,604

)

 

 

(93,405

)

Retained earnings

 

 

187,228

 

 

 

168,011

 

Accumulated other comprehensive loss

 

 

(7,279

)

 

 

(5,229

)

Total stockholders’ equity

 

 

410,416

 

 

 

390,713

 

Total liabilities and stockholders’ equity

 

$

451,842

 

 

$

439,041

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

3


MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands, except per share amounts)

Revenues

 

 

 

 

 

 

 

 

Commissions

$

79,093

 

 

$

67,018

 

 

Information and post-trade services

 

7,779

 

 

 

7,679

 

 

Investment income

 

418

 

 

 

183

 

 

Other

 

1,283

 

 

 

1,891

 

 

Total revenues

 

88,573

 

 

 

76,771

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

24,527

 

 

 

21,174

 

 

Depreciation and amortization

 

4,681

 

 

 

4,612

 

 

Technology and communications

 

4,304

 

 

 

4,338

 

 

Professional and consulting fees

 

3,862

 

 

 

3,282

 

 

Occupancy

 

1,161

 

 

 

992

 

 

Marketing and advertising

 

1,778

 

 

 

1,192

 

 

General and administrative

 

3,890

 

 

 

2,679

 

 

Total expenses

 

44,203

 

 

 

38,269

 

 

Income before income taxes

 

44,370

 

 

 

38,502

 

 

Provision for income taxes

 

15,407

 

 

 

13,909

 

 

Net income

$

28,963

 

 

$

24,593

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

Basic

$

0.79

 

 

$

0.67

 

 

Diluted

$

0.77

 

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

$

0.26

 

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

36,775

 

 

 

36,706

 

 

Diluted

 

37,671

 

 

 

37,626

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

4


MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2016

 

 

2015

 

 

(In thousands)

 

Net income

$

28,963

 

 

$

24,593

 

Net cumulative translation adjustment and foreign

   currency exchange hedge, net of tax of $2,012

   and $5, respectively

 

(2,237

)

 

 

(49

)

Net unrealized gain on securities available-for-sale,

   net of tax of $115 and $39, respectively

 

187

 

 

 

63

 

Comprehensive Income

$

26,913

 

 

$

24,607

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

5


MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock -

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common

 

 

Additional

 

 

Common

 

 

 

 

 

 

Other

 

 

Total

 

 

Stock

 

 

Paid-In

 

 

Stock

 

 

Retained

 

 

Comprehen-

 

 

Stockholders’

 

 

Voting

 

 

Capital

 

 

Voting

 

 

Earnings

 

 

sive Loss

 

 

Equity

 

 

(In thousands)

 

Balance at December 31, 2015

$

121

 

 

$

321,215

 

 

$

(93,405

)

 

$

168,011

 

 

$

(5,229

)

 

$

390,713

 

Net income

 

 

 

 

 

 

 

 

 

 

28,963

 

 

 

 

 

 

28,963

 

Cumulative translation adjustment and foreign currency

   exchange hedge, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,237

)

 

 

(2,237

)

Unrealized gain on securities available-for-sale,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

187

 

 

 

187

 

Stock-based compensation

 

 

 

 

3,494

 

 

 

 

 

 

 

 

 

 

 

 

3,494

 

Exercise of stock options

 

 

 

 

831

 

 

 

 

 

 

 

 

 

 

 

 

831

 

Withholding tax payments on restricted stock vesting

   and stock option exercises

 

 

 

 

(5,230

)

 

 

 

 

 

 

 

 

 

 

 

(5,230

)

Excess tax benefits from stock-based compensation

 

 

 

 

4,640

 

 

 

 

 

 

 

 

 

 

 

 

4,640

 

Repurchases of common stock

 

 

 

 

 

 

 

(1,199

)

 

 

 

 

 

 

 

 

(1,199

)

Cash dividend on common stock

 

 

 

 

 

 

 

 

 

 

(9,746

)

 

 

 

 

 

(9,746

)

Balance at March 31, 2016

$

121

 

 

$

324,950

 

 

$

(94,604

)

 

$

187,228

 

 

$

(7,279

)

 

$

410,416

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

6


 

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2016

 

 

2015

 

 

(In thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

28,963

 

 

$

24,593

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

4,681

 

 

 

4,612

 

Stock-based compensation expense

 

3,494

 

 

 

3,042

 

Deferred taxes

 

2,331

 

 

 

1,719

 

Other

 

329

 

 

 

429

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) in accounts receivable

 

(12,346

)

 

 

(12,289

)

(Increase) in prepaid expenses and other assets

 

(3,000

)

 

 

(541

)

(Increase) in corporate debt trading investments

 

(73,235

)

 

 

 

(Increase) in mutual funds held in rabbi trust

 

(1,253

)

 

 

 

(Decrease) in accrued employee compensation

 

(18,386

)

 

 

(16,350

)

Increase in income and other tax liabilities

 

6,026

 

 

 

3,710

 

Increase in deferred revenue

 

290

 

 

 

260

 

Increase in accounts payable, accrued expenses and other liabilities

 

4,723

 

 

 

849

 

Net cash (used in) provided by operating activities

 

(57,383

)

 

 

10,034

 

Cash flows from investing activities

 

 

 

 

 

 

 

Available-for-sale investments:

 

 

 

 

 

 

 

Proceeds from maturities

 

12,000

 

 

 

10,515

 

Purchases

 

 

 

 

(8,111

)

Purchases of furniture, equipment and leasehold improvements

 

(2,652

)

 

 

(817

)

Capitalization of software development costs

 

(3,035

)

 

 

(2,654

)

Other

 

26

 

 

 

19

 

Net cash provided by (used in) investing activities

 

6,339

 

 

 

(1,048

)

Cash flows from financing activities

 

 

 

 

 

 

 

Cash dividend on common stock

 

(9,727

)

 

 

(7,517

)

Exercise of stock options

 

831

 

 

 

692

 

Withholding tax payments on restricted stock vesting and stock option exercises

 

(5,230

)

 

 

(4,148

)

Excess tax benefits from stock-based compensation

 

4,640

 

 

 

2,671

 

Repurchases of common stock

 

(1,199

)

 

 

(8,939

)

Net cash (used in) financing activities

 

(10,685

)

 

 

(17,241

)

Effect of exchange rate changes on cash and cash equivalents

 

(4

)

 

 

379

 

Cash and cash equivalents

 

 

 

 

 

 

 

Net (decrease) for the period

 

(61,733

)

 

 

(7,876

)

Beginning of period

 

199,728

 

 

 

168,924

 

End of period

$

137,995

 

 

$

161,048

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

7


 

MARKETAXESS HOLDINGS INC.

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, the Company operates an electronic trading platform for corporate bonds and other types of fixed-income instruments through which the Company’s institutional investor clients can access liquidity provided by its broker-dealer and other institutional clients. The Company’s multi-dealer trading platform allows its institutional investor clients to simultaneously request competitive, executable bids or offers from multiple broker-dealers, and to execute trades with the broker-dealer of their choice. The Company’s trading platform provides access to global liquidity in U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, credit derivatives and other fixed-income securities. The Company also 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 then settle through a third-party clearing broker. The Company provides fixed-income market data, analytics and compliance tools that help its clients make trading decisions. The Company also provides trade matching and regulatory transaction reporting services to the securities markets. In addition, the Company provides technology solutions and professional consulting services to fixed-income industry participants.

 

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, 2015. The consolidated financial information as of December 31, 2015 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.

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.

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 municipal bonds and 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 primarily include investment grade corporate debt securities and are carried at fair value, with 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 other income 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, 2016 and 2015.

 

8


 

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 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.

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 general and administrative expense 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 majority of the Company’s revenues are derived from commissions for trades executed on its platform and distribution fees that are billed to its broker-dealer clients on a monthly basis. The Company also derives revenues from information and post-trade services, investment income and other income.

 

9


 

Commission revenue. Commissions 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 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 lo nger maturities generally command higher commissions. 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 Comp any earns the commission through the difference in price between the two matched principal trades. Fee programs for certain products include distribution fees which are recognized monthly.

Information and post-trade services. The Company generates revenue from information services provided to our broker-dealer clients, institutional investor clients and data-only subscribers. Information services are invoiced monthly, quarterly or annually. When billed in advance, revenues are deferred and recognized monthly on a straight-line basis. The Company also generates revenue from regulatory transaction reporting and trade matching services. Revenue is recognized in the period the services are provided.

Technology products and services. The Company generates revenues from professional consulting services, technology software licenses and maintenance and support services.  Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is considered probable. Technology products and services revenue is reported in other income in the Consolidated Statements of Operations.  

Initial set-up fees. The Company enters into agreements with its broker-dealer clients pursuant to which the Company provides access to its platform through a non-exclusive and non-transferable license. Broker-dealer clients may pay an initial set-up fee, which is typically due and payable upon execution of a dealer agreement. The initial set-up fee, if any, varies by agreement. Revenue is recognized over the initial term of the agreement, which is generally two years. Initial set-up fees are reported in other income in the Consolidated Statements of Operations.

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.

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.

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.

 

10


 

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.

Out-of-Period Adjustments

During the first quarter of 2016, the Company determined that it had incorrectly recorded deferred taxes for the cumulative translation adjustment (“CTA”) that arises from converting the local currency financial statements into U.S. dollars.  Upon making a permanent reinvestment assertion on unremitted earnings from foreign subsidiaries effective January 1, 2013, the Company should have eliminated any deferred tax balances derived from the CTA balance. The Company also determined that gains and losses on the foreign currency forward contracts used to hedge the net investment in certain foreign subsidiaries were not appropriately considered as taxable income or expense in the consolidated tax returns.  The Company assessed these errors and determined that they were not material to previous reporting periods.  Therefore, the Company recorded these items as out-of-period adjustments in the three months ended March 31, 2016 by decreasing deferred tax assets by $3.1 million, decreasing other comprehensive income by $2.1 million and increasing prepaid expenses and other assets by $1.0 million in the Consolidated Statements of Financial Condition.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company beginning January 1, 2017 and early adoption is permitted. The Company is currently in the process of determining the method of adoption and assessing the impact of ASU 2016-09 on the Company's Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The guidance affects the accounting for leases and provides for a lessee model that brings substantially all leases onto the balance sheet . ASU 2016-02 will be effective for the Company beginning January 1, 2019 and early adoption is permitted. The Company is currently in the process of determining the method of adoption and assessing the impact of ASU 2016-02 on the Company's Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”). ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”).  The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. Instead, the amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09. The ASUs will be effective for the Company beginning January 1, 2018 and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of ASU 2016-08 and ASU 2014-09 on the Company’s Consolidated Financial Statements.

 

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. 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 Ontario Securities Commission in Canada and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of March 31, 2016, each of the Company’s subsidiaries that are subject to these

 

11


 

regulations had net capital or financial resources in excess of their minimum requirements. As of Marc h  3 1 , 201 6 , the Company’s subsidiaries maintained aggregate net capital and financial resources that was $ 115.9 million in excess of the required levels of $ 9. 8 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)

 

As of March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

31,973

 

 

$

 

 

$

 

 

$

31,973

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

 

 

 

70,727

 

 

 

 

 

 

70,727

 

Municipal securities

 

 

 

 

2,011

 

 

 

 

 

 

2,011

 

Trading securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

 

 

 

73,235

 

 

 

 

 

 

73,235

 

Mutual funds held in rabbi trust

 

 

 

 

1,253

 

 

 

 

 

 

1,253

 

Foreign currency forward position

 

 

 

 

(1,130

)

 

 

 

 

 

(1,130

)

        Total

$

31,973

 

 

$

146,096

 

 

$

 

 

$

178,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

61,913

 

 

$

 

 

$

 

 

$

61,913

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

 

 

 

82,671

 

 

 

 

 

 

82,671

 

Municipal securities

 

 

 

 

2,035

 

 

 

 

 

 

2,035

 

Foreign currency forward position

 

 

 

 

354

 

 

 

 

 

 

354

 

        Total

$

61,913

 

 

$

85,060

 

 

$

 

 

$

146,973

 

 

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 to these Consolidated Financial Statements for further discussion of the deferred cash incentive plan.  There were no financial assets classified within Level 3 during the three months ended March 31, 2016 and 2015.   

 

12


 

  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 currency forward contract as a hedge and assesses the risk management objective and strategy, inc luding identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. These hedges are for a one-month period and are used to limit exposure to foreign currency exc hange rate fluctuations. The fair value of the asset is included in accounts receivable and the fair value of the liability is included in accounts payable in the Consolidated Statements of Financial Condition. Gains or losses on foreign currency forward c ontracts designated as hedges are included in accumulated other comprehensive loss in the Consolidated Statements of Financial Condition.   A summary of the Company’s foreign currency forward position is as follows:

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(In thousands)

 

Notional value

$

50,587

 

 

$

45,716

 

Fair value of notional

 

51,717

 

 

 

45,362

 

Fair value of the (liability) asset

$

(1,130

)

 

$

354

 

 

The following is a summary of the Company’s investments:

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

Amortized

 

 

 

 

unrealized

 

 

unrealized

 

 

fair

 

 

cost

 

 

 

 

gains

 

 

losses

 

 

value

 

 

(In thousands)

 

As of March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

$

70,690

 

 

 

 

$

92

 

 

$

(55

)

 

$

70,727

 

Municipal securities

 

2,011

 

 

 

 

 

 

 

 

 

 

 

2,011

 

Total securities available-for-sale

 

72,701

 

 

 

 

 

92

 

 

 

(55

)

 

 

72,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

73,098

 

 

 

 

 

156

 

 

 

(19

)

 

 

73,235

 

Mutual funds held in rabbi trust

 

1,167

 

 

 

 

 

86

 

 

 

 

 

 

1,253

 

Total trading securities

 

74,265

 

 

 

 

 

242

 

 

 

(19

)

 

 

74,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments

$

146,966

 

 

 

 

$

334

 

 

$

(74

)

 

$

147,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

$

82,937

 

 

 

 

$

4

 

 

$

(270

)

 

$

82,671

 

Municipal securities

 

2,035

 

 

 

 

 

 

 

 

 

 

 

2,035

 

Total securities available-for-sale

$

84,972

 

 

 

 

$

4

 

 

$

(270

)

 

$

84,706

 

The following table summarizes the fair value of the investments based upon the contractual maturities:

 

 

As of

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(In thousands)

 

Less than one year

$

66,237

 

 

$

37,694

 

Due in 1 - 5 years

 

80,989

 

 

 

47,012

 

Total

$

147,226

 

 

$

84,706

 

Proceeds from the sales and maturities of investments during the three months ended March 31, 2016 and 2015 were $13.3 million and $10.5 million, respectively.

 

13


 

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 , 201 6 and December 31, 2015 :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than Twelve Months

 

 

Twelve Months or More

 

 

Total

 

 

Estimated

 

 

Gross

 

 

Estimated

 

 

Gross

 

 

Estimated

 

 

Gross

 

 

fair

 

 

unrealized

 

 

fair

 

 

unrealized

 

 

fair

 

 

unrealized

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

(In thousands)

 

As of March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

$

38,005

 

 

$

(74

)

 

$

 

 

$

 

 

$

38,005

 

 

$

(74

)

Total

$

38,005

 

 

$

(74

)

 

$

 

 

$

 

 

$

38,005

 

 

$

(74

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

$

70,651

 

 

$

(270

)

 

$

 

 

$

 

 

$

70,651

 

 

$

(270

)

Total

$

70,651

 

 

$

(270