Institutional Financial Markets, Inc. (IFMI) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing identifies the registrant as Institutional Financial Markets, Inc.; it describes a financial services business focused on credit-related fixed income markets. Unless noted, financial amounts below are USD millions. The filing’s financial statements are unaudited.
Business context and key metrics
The company operates Capital Markets, Asset Management, and Principal Investing segments. At quarter-end, assets under management were $4.77 billion, 99% in CDOs. The company reported that it began investing in CLO equity it does not manage during Q1 2014.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $14.24 | $13.73 | $27.42 | $27.76 |
| Operating income (loss) | ($1.66) | ($5.90) | ($3.35) | ($12.97) |
| Net income (loss) attributable to IFMI | ($2.12) | ($4.70) | ($4.22) | ($9.20) |
| Basic loss per share | ($0.14) | ($0.40) | ($0.28) | ($0.80) |
| Operating cash flow | Not separately stated | Not separately stated | $1.16 | ($5.28) |
At June 30, cash and cash equivalents were $12.93 million, total assets $214.71 million, total liabilities $159.14 million, and total equity $55.58 million. Debt carrying value was $27.23 million; management-estimated fair value was $40.5 million. Interest expense for the first half was $2.24 million.
Repurchase-agreement liabilities were $36.73 million, alongside $35.98 million of receivables under resale agreements. The company reported $114.13 million in trading investments and $26.45 million in other investments at fair value. JVB and CCFL reported regulatory capital above required minimums; combined net capital or equivalent was $12.78 million versus minimum requirements totaling $2.24 million.
Material changes versus comparable periods
- Q2 revenue rose 4%, but net trading revenue fell 43% to $6.62 million and asset-management revenue fell 19% to $3.39 million. Higher new-issue/advisory revenue and principal transactions and other income offset those declines.
- For the first half, revenue was nearly flat year over year. Net trading revenue declined 45% to $13.55 million; asset-management revenue fell 14% to $7.64 million. Principal transactions and other income improved from a $7.41 million loss to $3.51 million of income, mainly reflecting investment valuation changes, including the prior-year Star Asia loss.
- Operating expenses fell 19% in Q2 and 24% for the first half, principally due to lower compensation and other costs following the January merger of the U.S. broker-dealers JVB and CCPR and workforce reductions of about 20%. Headcount declined from 204 to 121 year over year.
- A $3.12 million goodwill impairment was recorded in Q2, reducing goodwill to $7.99 million. The charge related to Cira SCM.
- Assets under management declined from $5.69 billion at December 31, 2013 to $4.77 billion at June 30, 2014. The company attributed lower asset-management revenue in part to reduced assets, terminated or transferred mandates, and the sale of Star Asia-related businesses.
- Cash decreased $0.23 million in the first half. Investing activities provided $2.66 million, including $19.92 million of net proceeds from the Star Asia Group sale, offset in part by $20.84 million of investment purchases. Financing activities used $4.07 million, including debt repayment and dividends.
Outlook, risks, and contingencies
- Management characterized the business environment as challenging and expected it to remain so for the rest of 2014. No specific financial guidance was provided. The company said it believed cash, its trading portfolio, and related borrowing capacity would meet near-term operating needs, while warning that future financing availability and terms were uncertain.
- The company completed the Star Asia Group sale on February 20, 2014, receiving $20.04 million upfront and potential contingent payments equal to 15% of certain revenues for at least four years. Contingent income is recognized when earned. The reported sale gain was $0.08 million.
- Management identified market weakness, trading volumes and margins, liquidity and securities-financing access, counterparty credit, regulatory capital, and litigation as risks. It highlighted CLO equity investments as highly leveraged, subordinate, potentially illiquid, and at risk of total loss. First-half CLO equity investments were $18.54 million.
- A Pennsylvania tax assessment of $4.68 million, including penalties, was upheld on administrative appeal; the company intended to appeal further and recorded no reserve. The company also faced Northern Rock litigation relating to a CDO investment; it intended to defend the case. The filing does not state a clear estimate of possible loss for these matters.
- The board declared a $0.02-per-share dividend on July 31, 2014, payable August 29. Management cautioned that future dividends may be reduced or discontinued. Disclosure controls were assessed as effective as of June 30, 2014.
Important facts for investors to verify
- Whether the decline in trading revenue and AUM continues, and how the broker-dealer merger affects revenues, costs, and margins.
- Valuation assumptions and realizability of Level 3 assets, particularly $18.79 million of CLO investments valued using discounted cash flow models.
- Cash availability under securities-financing arrangements, collateral and margin-call exposure, and capacity to meet debt and other obligations.
- Potential outcomes and financial effects of the Pennsylvania tax assessment and Northern Rock litigation.
- Performance, distributions, and impairment risk of the new CLO equity portfolio, and whether contingent proceeds from the Star Asia sale materialize.
- The filing’s company-name presentation: the registrant is named Institutional Financial Markets, Inc.; confirm the applicable issuer identity and ticker for any investment analysis.