ITG Reports Fourth Quarter 2011 Results

INVESTMENT TECHNOLOGY GROUP, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

Three Months Ended

December 31,

Year Ended

December 31,

2011

2010

2011

2010

(unaudited)

(unaudited)

(unaudited)

Revenues:

Commissions and fees

$

97,627

$

110,639

$

445,801

$

469,005

Recurring

28,636

26,542

110,919

93,186

Other

3,660

1,165

15,317

8,563

Total revenues

129,923

138,346

572,037

570,754

Expenses:

Compensation and employee benefits

52,041

57,208

219,307

215,886

Transaction processing

20,632

21,746

91,602

85,387

Occupancy and equipment

15,282

15,316

60,191

59,905

Telecommunications and data processing

  services

13,960

14,108

58,460

53,473

Other general and administrative

22,705

22,516

90,808

88,162

Goodwill and other asset impairment

4,282

—

229,317

11,466

Restructuring charges

6,754

1,812

24,432

4,062

Acquisition related costs

—

2,409

2,523

2,409

Interest expense

625

83

2,025

671

Total expenses

136,281

135,198

778,666

521,421

(Loss) income before income tax expense

(6,358)

3,148

(206,628)

49,333

Income tax (benefit) expense

(2,686)

1,318

(26,839)

25,353

Net (loss) income

$

(3,672)

$

1,830

$

(179,789)

$

23,980

(Loss) earnings per share:

Basic

$

(0.09)

$

0.04

$

(4.42)

$

0.56

Diluted

$

(0.09)

$

0.04

$

(4.42)

$

0.55

Basic weighted average number of common

  shares outstanding

39,624

41,636

40,691

42,767

Diluted weighted average number of common

  shares outstanding

39,624

42,538

40,691

43,496

INVESTMENT TECHNOLOGY GROUP, INC.

Consolidated Statements of Financial Condition

(In thousands, except share amounts)

December 31,

2011

2010

Assets

(unaudited)

Cash and cash equivalents

284,188

$317,010

Cash restricted or segregated under regulations and other

71,496

68,965

Deposits with clearing organizations

25,538

14,235

Securities owned, at fair value

5,277

25,789

Receivables from brokers, dealers and clearing organizations

871,315

865,251

Receivables from customers

472,509

606,256

Premises and equipment, net

43,023

39,373

Capitalized software, net

51,258

57,924

Goodwill

274,292

468,479

Other intangibles, net

39,594

36,784

Income taxes receivable

6,838

5,561

Deferred taxes

16,493

4,902

Other assets

16,248

20,324

Total assets

2,178,069

$2,530,853

Liabilities and Stockholders' Equity

Liabilities:

Accounts payable and accrued expenses

181,224

$195,109

Short-term bank loans

1,606

—

Payables to brokers, dealers and clearing organizations

1,079,773

1,139,958

Payables to customers

207,738

272,027

Securities sold, not yet purchased, at fair value

438

19,362

Income taxes payable

11,460

16,215

Deferred taxes

719

18,114

Term debt

23,997

—

Total liabilities

1,506,955

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;

  51,899,229 and 51,790,608 shares issued at December 31, 2011 and

  2010, respectively

519

518

Additional paid-in capital

249,469

246,085

Retained earnings

653,344

833,133

Common stock held in treasury, at cost; 12,679,948 and 10,524,757

  shares at December 31, 2011 and 2010, respectively

(240,559)

(220,161)

Accumulated other comprehensive income (net of tax)

8,341

10,493

Total stockholders' equity

671,114

870,068

Total liabilities and stockholders' equity

2,178,069

$2,530,853

INVESTMENT TECHNOLOGY GROUP, INC.

Reconciliation of US 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 performance measures, but the Company believes that they are useful to assist investors in gaining an understanding of the trends and operating results for ITG's core businesses. These measures should be viewed in addition to, and not in lieu of, ITG'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 December 31,

Year Ended December 31,

2011

2010

2011

2010

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Total revenues

$

129,923

$

138,346

$

572,037

$

570,754

Total expenses

136,281

135,198

778,665

521,421

  Less:

  Acquisition related costs (1) (2)

—

(2,409)

(2,523)

(2,409)

  Goodwill and other asset impairment (3)(4)(5)(6)

(4,282)

—

(229,317)

(11,466)

  Restructuring charges (7)(8)(9)

(6,755)

(1,812)

(24,432)

(4,062)

Adjusted operating expenses

125,245

130,977

522,393

503,484

(Loss) income before income tax (benefit) expense

(6,358)

3,148

(206,628)

49,333

  Effect of adjustments

11,036

4,221

256,272

17,937

Adjusted pre-tax operating income

4,678

7,369

49,644

67,270

Income tax (benefit) expense

(2,686)

1,318

(26,839)

25,353

  Tax effect of adjustments

4,636

1,318

47,897

3,797

Adjusted operating income tax expense

1,950

2,636

21,058

29,150

Net (loss) income

(3,672)

1,830

(179,789)

23,980

  Net effect of adjustments

6,400

2,903

208,375

14,140

Adjusted operating net income

$

2,728

$

4,733

$

28,586

$

38,120

Diluted (loss) earnings per share

$

(0.09)

$

0.04

$

(4.42)

$

0.55

  Net effect of adjustments

0.16

0.07

5.11

0.33

Adjusted diluted operating earnings per share

$

0.07

$

0.11

$

0.69

$

0.88

U.S.

International

Three Months Ended December 31,

Three Months Ended December 31,

2011

2010

2011

2010

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Total revenues

$

83,119

$

89,555

$

46,804

$

48,791

Total expenses

94,227

92,072

42,054

43,126

  Less:

  Acquisition related costs (2)

—

(2,409)

—

—

  Goodwill and other asset impairment (3)

(4,282)

—

—

—

  Restructuring charges (7)(8)(9)

(7,027)

(2,254)

273

442

Adjusted operating expenses

82,918

87,409

42,327

43,568

(Loss) income before income tax (benefit) expense

(11,108)

(2,517)

4,750

5,665

  Effect of adjustments

11,309

4,663

(273)

(442)

Adjusted pre-tax operating income

201

2,146

4,477

5,223

Income tax(benefit) expense

(4,749)

(1,449)

2,063

2.767

  Tax effect of adjustments

4,636

1,318

—

—

Adjusted operating income tax expense

(113)

(131)

2,063

2,767

Net (loss) income

(6,359)

(1,068)

2,687

2,898

  Net effect of adjustments

6,673

3,345

(273)

(442)

Adjusted operating net income

$

314

$

2,277

$

2,414

$

2,456

Diluted (loss) earnings per share

$

(0.16)

$

(0.03)

$

0.07

$

0.07

  Net effect of adjustments

0.17

0.08

(0.01)

(0.01)

Adjusted diluted operating earnings per share

$

0.01

$

0.05

$

0.06

$

0.06

Notes:

(1)

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 fees, contract settlement costs and other professional fees.

(2)

During the fourth quarter of 2010, ITG acquired Majestic Research Corp., a privately held, independent provider of data-driven equity research for the institutional investment community.  In connection with the acquisition, ITG incurred approximately $2.4 million of acquisition-related costs, including legal fees and other professional fees, accelerated employee equity awards and severance costs.

(3)

During the fourth quarter of 2011, ITG determined that the carrying value of its investment in Disclosure Insight, Inc. was fully impaired, resulting in a write-off of $4.3 million.

(4)

In the second quarter of 2011, goodwill with a carrying value of $470.1 million in the U.S. operating segment was deemed impaired and its fair value was determined to be $245.1 million, resulting in an impairment charge of $225.0 million.

(5)

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

(6)

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.

(7)

In 2011, ITG decided to implement a restructuring plan to improve margins and enhance shareholder returns primarily focused on reducing costs in workforce, consulting and infrastructure in the U.S. and Europe. The cost reduction plan resulted in a restructuring charge totaling $24.4 million, including $6.8 million recorded in the fourth quarter and $17.7 million recorded in the second quarter. These costs included employee separation and related costs of $19.2 million and lease consolidation costs of $5.2 million.

(8)

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

(9)

In the second quarter of 2010, ITG committed to a restructuring plan in the Asia Pacific region to close its on-shore operations in Japan, resulting in lower operating costs and reduced capital requirements.  Restructuring charges primarily included employee severance, contract termination costs and non-cash write-offs of fixed assets and capitalized software.