Interactive Brokers Group, Inc. — Q1 2012 Form 10-Q
Period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. The company is a holding company owning approximately 11.5% of IBG LLC, which operates its electronic brokerage and market-making businesses. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total net revenues | $303.9 million | $367.9 million | Down 17% |
| Income before income taxes | $149.7 million | $222.0 million | Down 33% |
| Net income | $140.9 million | $203.2 million | Down 31% |
| Net income available to common stockholders | $11.1 million | $16.3 million | Down 32% |
| Diluted EPS | $0.24 | $0.38 | Down 37% |
| Comprehensive income available to common stockholders | $13.7 million | $17.5 million | Down 22% |
| Consolidated pre-tax margin | 49% | 60% | Down 11 percentage points |
- Trading gains fell 31% to $137.3 million; commissions and execution fees fell 8% to $100.9 million. Net interest income increased 16% to $47.4 million, while interest expense was $19.1 million.
- Non-interest expenses rose 6% to $154.2 million. Employee compensation and benefits increased 20% to $62.7 million, primarily due to a special January stock grant and a change in recognition of stock-plan expense.
- Electronic brokerage pre-tax income was $83.4 million, down 7%, with a 52% margin versus 55%. Market-making pre-tax income was $66.0 million, down 51%, with a 46% margin versus 67%.
Balance sheet, cash flow and liquidity
- Total assets were $32.70 billion and total equity was $4.97 billion at March 31. Equity includes $4.37 billion of non-controlling interests; IBG, Inc.’s own stockholders’ equity was $597.0 million.
- Cash and cash equivalents were $1.55 billion, down $144.1 million from year-end. Cash and securities segregated for regulatory purposes were $11.03 billion. Management reported that 98.7% of assets were liquid, predominantly marketable securities, customer cash and collateralized receivables.
- Operating cash flow was negative $53.9 million, compared with negative $36.7 million a year earlier; investing cash flow was negative $10.5 million and financing cash flow was negative $103.1 million. The net cash decrease was $144.1 million.
- Senior notes outstanding were $30.2 million, down from $101.4 million at year-end; short-term borrowings were $14.5 million. No amounts were drawn on the $100 million revolving credit facility. The company planned to discontinue the senior-notes program and redeem notes outstanding by June 2012.
- Aggregate excess regulatory capital was $2.714 billion, and regulated operating companies were reported in compliance with applicable requirements. Management said available cash, operating cash flows and facility availability should cover liquidity needs for more than 12 months.
Material changes and management commentary
- Management attributed most of the pre-tax income decline to an unfavorable currency-translation swing and weaker trading conditions. Market-making trading gains included a $0.9 million translation loss versus a $54.0 million gain in Q1 2011. Lower average volatility and a lower actual-to-implied volatility ratio also weighed on gains.
- Brokerage customer accounts increased 16% to approximately 195,000 and customer equity increased 17% to $28.9 billion. Total customer DARTs rose 1% to approximately 428,000, while commission per cleared DART fell 8% to $4.01.
- The filing reports a prior-period balance-sheet restatement related to accounting for undistributed employee stock awards: at December 31, 2011, liabilities decreased by $125.9 million and equity increased by the same amount. The company said this did not affect compensation expense or results of operations.
- No earnings guidance was provided. Management anticipated 2012 gross capital expenditures at levels consistent with prior years, with longer-term technology infrastructure spending potentially rising; it expected to fund expenditures from operations and cash on hand.
Risks, contingencies and unusual filing matters
- Critical reporting qualification: Deloitte & Touche had not completed the required interim review before filing because the company was seeking SEC guidance on whether non-controlling interests should be classified as permanent or temporary equity. The financial statements were therefore unreviewed; the filing says this may make the 10-Q deficient and untimely. CEO and CFO certifications were omitted, and the company said it intended to file an amendment after SEC guidance and the auditor’s review. The classification issue was stated not to affect reported earnings, EPS, asset or liability classification, or total equity including non-controlling interests, though presentation could change and restatement might be required.
- Management described market, foreign-currency, interest-rate, counterparty and customer margin-credit risks. Customer margin loans were approximately $8.5 billion; losses from margin and short-sale exposures may be significant and are not quantifiable, although the company uses real-time monitoring and liquidation procedures.
- A patent-infringement action brought by Trading Technologies against IBG LLC and Interactive Brokers LLC remained at an early stage. The company intended to defend the case; litigation reserves were not material. The filing also notes clearing-house guarantees and futures-related off-balance-sheet risks.
- The filing states that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. It reports no material changes to previously disclosed risk factors apart from the unreviewed-financial-statements risk.
Important facts for investors to verify
- Whether SEC guidance resolved the non-controlling-interest classification issue, and whether the amended statements received the required independent review and certifications.
- Whether planned redemption of the remaining senior notes by June 2012 occurred and whether the revolving credit facility was renewed or replaced after its May 2012 maturity.
- Whether trading conditions, currency translation and volatility trends improved, and whether brokerage account and customer-equity growth translated into revenue and earnings recovery.
- Developments in the patent litigation, regulatory inquiries and the company’s ability to manage customer margin and clearing-related exposures.