Investment Technology Group Reports Second Quarter 2011 Results

GAAP Results Include Previously Announced Charges for Goodwill Impairment, Restructuring and Acquisition Costs

International Profitability Improves Over Prior Year

Aug 04, 2011, 08:00 ET from Investment Technology Group, Inc.

NEW YORK, Aug. 4, 2011 /PRNewswire/ -- Investment Technology Group, Inc. (NYSE: ITG), a leading agency research broker and financial technology firm, today reported results for the quarter ended June 30, 2011.

Second quarter 2011 highlights included:

  • A GAAP net loss of $196.1 million, or $4.77 per diluted share compared to GAAP net income of $7.5 million, or $0.17 per diluted share in the second quarter of 2010.  The GAAP net loss for the second quarter of 2011 included (i) a non-cash goodwill impairment charge attributable to ITG's U.S. business of $225.0 million, or $4.61 per diluted share after taxes; (ii) a restructuring charge associated with a cost reduction plan of $17.7 million, or $0.27 per diluted share after taxes; and (iii) costs related to the acquisition of the Ross Smith Energy Group (RSEG) of $2.5 million, or $0.04 per diluted share after taxes. GAAP net income for the second quarter of 2010 included (i) restructuring charges primarily associated with the closing of ITG's on-shore Japanese operations of $2.3 million, or $0.06 per diluted share after taxes; and (ii) a non-cash goodwill impairment charge attributable to ITG's Australian operations of $5.4 million, or $0.12 per diluted share after taxes.
  • Adjusted net income of $5.8 million, or $0.14 per diluted share, compared to adjusted net income of $15.3 million, or $0.35 per diluted share in the second quarter of 2010.
  • Revenues of $142.6 million, compared to $155.3 million in the second quarter of 2010.
  • Expenses of $377.2 million compared to expenses of $136.0 million in the second quarter of 2010.
  • Adjusted expenses of $132.0 million compared to adjusted expenses of $128.2 million in the second quarter of 2010. Second quarter 2011 adjusted expenses included $8.1 million of costs from ITG Investment Research (including post-acquisition operating expenses for RSEG) and an increase from the second quarter of 2010 of $3.4 million from foreign currency translations.
  • Average daily trading volume in the U.S. of 191 million shares, down 4% from the second quarter of 2010.  POSIT average daily U.S. volume was 82.7 million shares, up 20% from the second quarter of 2010.
  • The expansion of ITG's data-driven research platform with the acquisition of RSEG, a Calgary-based independent provider of research on the oil and gas industry for more than 200 clients in North America and Europe.
  • The repurchase of 340,000 shares of common stock under the Company's authorized share repurchase program for a total of $5.2 million.  

ITG's U.S. revenues were $93.9 million in the second quarter of 2011, compared to U.S. revenues of $108.1 million in the second quarter of 2010. ITG's U.S. operations incurred a GAAP net loss of $196.3 million and generated adjusted net income of $3.7 million in the second quarter of 2011, compared to GAAP net income of $14.3 million in the second quarter of 2010. There were no adjustments to GAAP net income in the U.S. during the second quarter of 2010.

ITG's International revenues were $48.7 million in the second quarter of 2011, compared to $47.2 million in the second quarter of 2010. ITG's International operations generated GAAP net income of $0.1 million and adjusted net income of $2.2 million in the second quarter of 2011, compared to a GAAP net loss of $6.8 million and adjusted net income of $1.1 million in the second quarter of 2010.

As previously announced on July 12, 2011, ITG initiated a cost reduction plan to improve margins and enhance stockholder returns primarily focused on employment, consulting, and infrastructure costs in the U.S. and Europe. This plan is expected to generate pre-tax cost savings in 2012 of more than $20 million, or approximately $0.30 per diluted share after taxes. The cost savings will begin to take effect during the third quarter of 2011.

"Record revenues and a narrowing loss in the Asia Pacific region helped drive improvement in our international operations," said Bob Gasser, ITG's Chief Executive Officer and President.  "With the lack of institutional trading activity negatively impacting our overall results, we are taking the necessary steps to position the firm for future growth by lowering the cost base of our core execution platform while we continue to build out our research offering."

Year-to-Date Results

For the six months ended June 30, 2011, revenues were $292.7 million, GAAP net loss was $186.6 million, or $4.52 per diluted share, and adjusted net income was $15.4 million, or $0.37 per diluted share. For the first six months of 2010, revenues were $302.0 million, GAAP net income was $15.9 million, or $0.36 per diluted share, and adjusted net income was $27.2 million, or $0.62 per diluted share.

The discussion above includes adjusted expenses and adjusted net income and related per share amounts, which are non-GAAP financial measures that are described in the attached tables along with a reconciliation of these non-GAAP financial measures.

Conference Call

ITG has scheduled a conference call today at 11:00 a.m. ET to discuss second quarter results.  Those wishing to listen to the call should dial 1-866-831-6162 (1-617-213-8852 outside the US) and enter the passcode 57736819 at least 10 minutes prior to the start of the call to ensure connection.  The webcast and accompanying slideshow presentation can be downloaded from ITG's web site at www.itg.com.  For those unable to listen to the live broadcast of the call, a replay will be available for one week by dialing 888-286-8010 (1-617-801-6888 outside the US) and entering the passcode 88829104. The replay will be available starting approximately two hours after the completion of the conference call.

About ITG

Investment Technology Group, Inc. is an independent agency research broker that partners with asset managers globally to improve performance throughout the investment process. A leader in electronic trading since launching the POSIT® crossing network in 1987, ITG takes a consultative approach in delivering the highest quality institutional liquidity, execution services, analytical tools, and proprietary research insights grounded in data. Asset managers rely on ITG's independence, experience, and intellectual capital to help mitigate risk, improve performance, and navigate increasingly complex markets. The firm is headquartered in New York with offices in North America, Europe, and the Asia Pacific region. For more information on ITG, please visit www.itg.com.

In addition to historical information, this press release may contain "forward-looking" statements that reflect management's expectations for the future. A variety of important factors could cause results to differ materially from such statements. These factors are noted throughout ITG's 2010 Annual Report on Form 10-K, and its Form 10-Qs and include, but are not limited to, the actions of both current and potential new competitors, fluctuations in market trading volumes, financial market volatility, changes in commission pricing, potential impairment charges related to goodwill and other long-lived assets, evolving industry regulations, errors or malfunctions in ITG's systems or technology, rapid changes in technology, cash flows into or redemptions from equity funds, effects of inflation, ability to meet liquidity requirements related to the clearing of customers' trades, customer trading patterns, the success of ITG's products and service offerings, ITG's ability to continue to innovate and meet the demands of customers for new or enhanced products, ITG's ability to successfully integrate acquired  companies, changes in tax policy or accounting rules, fluctuations in foreign exchange rates, adverse changes or volatility in interest rates, ITG's ability to attract and retain talented employees, general economic, business, credit and financial market conditions, internationally or nationally, as well as ITG's ability to achieve cost savings from its cost reduction plan. The forward-looking statements included herein represent ITG's views as of the date of this release. ITG undertakes no obligation to revise or update publicly any forward-looking statement for any reason unless required by law.

ITG Media/Investor Contact: J.T. Farley (212) 444-6259 corpcomm@itg.com

INVESTMENT TECHNOLOGY GROUP, INC.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

2011

2010

2011

2010

Revenues:

Commissions and fees

$

111,850

$

130,500

$

230,526

$

252,418

Recurring

26,514

22,761

53,735

44,732

Other

4,253

2,061

8,434

4,862

Total revenues

142,617

155,322

292,695

302,012

Expenses:

Compensation and employee benefits

55,679

54,587

113,157

108,051

Transaction processing

23,104

23,581

46,130

44,240

Occupancy and equipment

15,063

14,969

30,005

30,166

Telecommunications and data processing services

14,870

12,971

29,941

26,606

Other general and administrative

22,762

21,928

44,922

50,085

Goodwill impairment

225,035

5,375

225,035

5,375

Restructuring charges

17,678

2,337

17,678

2,250

Acquisition related costs

2,523

2,523

Interest expense

494

206

764

430

Total expenses

377,208

135,954

510,155

267,203

(Loss) income before income tax (benefit) expense

(234,591)

19,368

(217,460)

34,809

Income tax (benefit) expense

(38,448)

11,860

(30,866)

18,869

Net (loss) income

$

(196,143)

$

7,508

$

(186,594)

$

15,940

(Loss) earnings per share:

Basic

$

(4.77)

$

0.17

$

(4.52)

$

0.37

Diluted

$

(4.77)

$

0.17

$

(4.52)

$

0.36

Basic weighted average number of common shares outstanding

41,112

43,226

41,272

43,525

Diluted weighted average number of common shares outstanding

41,112

43,704

41,272

44,129

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(In thousands, except share amounts)

June 30, 2011

December 31, 2010

(unaudited)

Assets

Cash and cash equivalents

$

268,832

$

317,010

Cash restricted or segregated under regulations and other

68,495

68,965

Deposits with clearing organizations

19,567

14,235

Securities owned, at fair value

8,481

25,789

Receivables from brokers, dealers and clearing organizations

1,834,343

865,251

Receivables from customers

1,140,878

606,256

Premises and equipment, net

36,977

34,790

Capitalized software, net

63,264

62,507

Goodwill

274,289

468,479

Other intangibles, net

41,770

36,784

Income taxes receivable

7,583

5,561

Deferred taxes

12,795

4,902

Other assets

25,307

20,324

Total assets

$

3,802,581

$

2,530,853

Liabilities and Stockholders' Equity

Liabilities:

Accounts payable and accrued expenses

$

176,874

$

195,109

Short-term bank loan

19,874

Payables to brokers, dealers and clearing organizations

1,407,236

1,139,958

Payables to customers

1,478,360

272,027

Securities sold, not yet purchased, at fair value

3,305

19,362

Income taxes payable

12,350

16,215

Deferred taxes

356

18,114

Term loan

25,469

Total liabilities

3,123,824

1,660,785

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; 51,835,395 and 51,790,608 shares issued at June 30, 2011 and December 31, 2010, respectively

518

518

Additional paid-in capital

240,860

246,085

Retained earnings

646,539

833,133

Common stock held in treasury, at cost; 10,892,939 and 10,524,757 shares at June 30, 2011 and December 31, 2010, respectively

(223,709)

(220,161)

Accumulated other comprehensive income (net of tax)

14,549

10,493

Total stockholders' equity

678,757

870,068

Total liabilities and stockholders' equity

$

3,802,581

$

2,530,853

INVESTMENT TECHNOLOGY GROUP, INC.

Reconciliation of U.S. GAAP Results to Adjusted Results

In evaluating ITG's financial performance, management reviews results from operations which excludes non-operating or one-time charges.  Adjusted expenses and adjusted net income and related per share amounts are non-GAAP (generally accepted accounting principles) performance measures, but the Company believes that they are useful to assist investors in gaining an understanding of the trends and operating results for the Company's core businesses. These measures should be viewed in addition to, and not in lieu of, the Company's reported results under GAAP.

The following is a reconciliation of GAAP results to adjusted results for the periods presented (in thousands except per share amounts):

Three Months Ended June 30,

Six Months Ended June 30,

2011

2010

20011

2010

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Total revenues

$

142,617

$

155,322

$

292,695

$

302,012

Total expenses

377,208

135,954

510,155

267,203

  Less:

  Goodwill impairment (1)(2)

(225,035)

(5,375)

(225,035)

(5,375)

  Acquisition related costs (3)

(2,523)

(2,523)

  Software Write-Off (4)

(6,091)

  Restructuring charges (5)(6)

(17,678)

(2,337)

(17,678)

(2,250)

Adjusted expenses

131,972

128,242

264,919

253,487

(Loss) income before income tax (benefit) expense

(234,591)

19,368

(217,460)

34,809

 Effect of adjustments

245,236

7,712

245,236

13,716

Adjusted pre-tax income

10,645

27,080

27,776

48,525

Income tax (benefit) expense

(38,448)

11,860

(30,866)

18,869

  Tax effect of adjustments

43,260

(72)

43,260

2,482

Adjusted income tax expense

4,812

11,788

12,394

21,351

Net (loss) income

(196,143)

7,508

(186,594)

15,940

   Net effect of adjustments

201,976

7,784

201,976

11,234

Adjusted net income

$

5,833

$

15,292

$

15,382

$

27,174

Diluted (loss) earnings per share

$

(4.77)

$

0.17

$

(4.52)

$

0.36

 Net effect of adjustments

4.91

0.18

4.89

0.26

Adjusted diluted earnings per share

$

0.14

$

0.35

$

0.37

$

0.62

U.S.

International

Three Months Ended June 30, 2011

Three Months Ended June 30, 2011

Three Months Ended June 30,

2010

(unaudited)

(unaudited)

(unaudited)

Total revenues

$

93,893

$

48,724

$

47,233

Total expenses

330,143

47,065

52,038

  Less:

  Goodwill impairment (1)(2)

(225,035)

(5,375)

  Acquisition related costs (3)

(2,523)

  Restructuring charges (5)(6)

(15,444)

(2,234)

(2,502)

Adjusted expenses

87,141

44,831

44,161

(Loss) income before income tax (benefit) expense

(236,250)

1,659

(4,805)

 Effect of adjustments

243,002

2,234

7,877

Adjusted pre-tax income

6,752

3,893

3,072

Income tax (benefit) expense

(39,966)

1,518

2,013

  Tax effect of adjustments

43,041

219

(6)

Adjusted income tax expense

3,075

1,737

2,007

Net (loss) income

(196,284)

141

(6,818)

   Net effect of adjustments

199,961

2,015

7,883

Adjusted net income

$

3,677

$

2,156

$

1,065

Diluted (loss) earnings per share

$

(4.77)

$

$

(0.16)

 Net effect of adjustments

4.86

0.05

0.18

Adjusted diluted earnings per share

$

0.09

$

0.05

$

0.02

Notes:

(1) In the second quarter of 2011, goodwill with a carrying value of $470.1 million relating to ITG's U.S. operations was deemed impaired and its fair value was determined to be $245.1 million, resulting in an impairment charge of $225.0 million.

(2) In 2010, goodwill with a carrying value of $5.4 million in the Asia Pacific operating segment relating to ITG's Australian operations was deemed impaired and its fair value was determined to be zero, resulting in an impairment charge of $5.4 million.

(3) During the second quarter of 2011, ITG acquired Ross Smith Energy Group Ltd, a Calgary-based independent provider of research on the oil and gas industry.  In connection with the acquisition, ITG incurred approximately $2.5 million of acquisition related costs, including legal and other professional fees and contract termination costs.

(4)  As part of the fourth quarter 2009 restructuring, ITG made certain changes to its product priorities and wrote off $2.4 million of capitalized development initiatives that were not yet deployed. As ITG's product development plan continued to evolve in the first quarter of 2010, it was determined that additional amounts capitalized in 2009 were not likely to be used and a further $6.1 million write-off was recorded.

(5) In the second quarter of 2011, ITG established a plan to improve margins and enhance stockholder returns primarily focused on reducing workforce, consulting and infrastructure costs in the U.S. and Europe.  The cost reduction plan resulted in a restructuring charge of $17.7 million, consisting of employee separation and related costs ($17.4 million) and lease consolidation costs ($0.3 million).  

(6) During the fourth quarter 2010, in connection with the integration of Majestic Research Corp., ITG closed its Westchester, NY office and relocated the staff, primarily sales traders and support, to its midtown Manhattan office and incurred a restructuring charge of $2.3 million.

SOURCE Investment Technology Group, Inc.



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