Interactive Brokers Group, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Interactive Brokers is a global electronic broker and market maker. The public company consolidates IBG LLC, although it owned approximately 13.6% of IBG LLC at year-end; Holdings owned the remaining approximately 86.4%.
Financial performance and key metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenues | $1,127.9 million | $1,192.5 million |
| Net revenues | $1,076.2 million | $1,130.5 million |
| Income before income taxes | $451.3 million | $527.0 million |
| Consolidated net income | $417.6 million | $497.0 million |
| Net income attributable to common stockholders | $37.0 million | $40.7 million |
| Diluted EPS | $0.73 | $0.89 |
| Pre-tax margin | 42% | 47% |
| Cash from operating activities | $140.9 million | $709.3 million |
Trading gains fell 44% to $245.2 million, while commissions and execution fees rose 22% to $502.1 million and net interest income increased 20% to $248.0 million. Non-interest expenses increased 4% to $624.9 million, including a sharp rise in general and administrative expense. Fourth-quarter net revenues were $249.9 million, pre-tax income was $38.8 million, and diluted EPS was $0.09.
Segments: Electronic brokerage net revenues rose 21% to $814.0 million and pre-tax income increased 15% to $391.3 million (48% margin). Market-making net revenues fell 40% to $274.5 million and pre-tax income declined 62% to $71.9 million (26% margin).
Balance sheet and liquidity: At year-end, total assets were $37.87 billion and total liabilities were $32.78 billion. Cash and cash equivalents were $1.21 billion; cash, cash equivalents and short-term investments were $15.59 billion. Management classified 98.9% of assets as liquid. Short-term borrowings were $24.6 million; no borrowings were outstanding on the $100 million revolving credit facility. Operating companies had $3.15 billion of excess regulatory capital and were compliant with capital requirements. Customer margin loans were approximately $13.6 billion.
Changes versus 2012
- Net revenues decreased 5%, pre-tax income decreased 14%, and diluted EPS declined from $0.89 to $0.73.
- Brokerage growth reflected higher customer trading activity and balances: accounts increased 14%, customer equity rose 39%, and annual daily average revenue trades increased 18% to approximately 486,000.
- Market-making results weakened amid historically low volatility and unfavorable currency translation. The GLOBAL currency basket’s value declined against the U.S. dollar, and the company recorded an $88.6 million currency translation loss in trading gains versus a $38.5 million loss in 2012.
- Operating cash flow was substantially lower year over year. Management noted that cash flows are affected by trading positions and changes in customer cash and margin balances.
- The company revised prior-period cash classifications and cash-flow presentation for comparability; the filing says the revisions did not materially affect the financial statements.
Outlook, risks, contingencies and unusual items
- Unusual customer loss: In October 2013, customer positions in four Singapore-listed securities lost more than 90% of their value. The company recognized an aggregate loss of approximately $74 million, including customer deficits of $64 million. The stated maximum loss was approximately $84 million if prices fell to zero and no debts were collected; collection efforts were ongoing.
- Outlook: The filing provides no specific earnings or revenue guidance. Management expected 2014 gross capital expenditures to be lower than 2013 as data-center and backup-facility expansion was completed. It intended to continue quarterly dividends of $0.10 per share; the board declared a $0.10 dividend in January 2014.
- Key risks: Results depend on trading volumes, volatility, bid-offer spreads, interest rates and currency movements. Other material risks include market-making and margin-credit losses, competition, technology or system failures, cybersecurity, third-party outages, regulatory changes, and international operations. Management stated that the company did not have fully redundant systems, particularly for non-U.S. operations.
- Legal and regulatory matters: A patent-infringement case brought by Trading Technologies sought unspecified damages and injunctive relief; outcome was uncertain. The company also faced recurring regulatory inquiries and examinations, and said the timing and amount of potential fines could not be predicted. Litigation reserves were not material at year-end.
- Controls and audit: Management reported that a previously disclosed material weakness relating to complex accounting issues was remediated in the fourth quarter of 2013. Management and Deloitte concluded internal control over financial reporting was effective at year-end; Deloitte issued unqualified opinions on the financial statements and controls.
- Ownership and dilution: Founder Thomas Peterffy and affiliates controlled approximately 86.4% of combined voting power. The filing warned that future share issuances associated with Holdings redemptions could be substantial and dilutive.
Most important facts for investors to verify
- Whether the Singapore-related customer debt is recoverable, and the final loss versus the disclosed $84 million maximum.
- Whether brokerage customer, account, trading-volume and margin-balance growth continues, and how low interest rates affect net interest income.
- Whether market-making profits recover as volatility, actual-versus-implied volatility and currency conditions change.
- The sustainability of operating cash flow and the availability of liquidity after customer-related balances, dividends and regulatory capital needs.
- Potential dilution from future IBG LLC interest redemptions, and the ongoing cost of the tax receivable agreement, which had a $287.2 million recorded payable at year-end.
- Developments in the patent litigation, regulatory inquiries, and the effectiveness of remediated accounting controls.