Virtu Financial(VIRT) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents the unaudited condensed consolidated financial statements for Q1 2024 and related detailed notes Condensed Consolidated Statements of Financial Condition (Unaudited) Total assets decreased to $12.8 billion while total equity slightly increased to $1.4 billion as of March 31, 2024 Condensed Consolidated Statements of Financial Condition (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total assets | $12,789,715 | $14,466,384 | | Cash and cash equivalents | $399,585 | $820,436 | | Trading assets, at fair value | $6,447,132 | $7,358,611 | | Goodwill | $1,148,926 | $1,148,926 | | Total liabilities | $11,365,638 | $13,061,028 | | Trading liabilities, at fair value | $5,694,997 | $6,071,352 | | Long-term borrowings | $1,726,657 | $1,727,205 | | Total equity | $1,424,077 | $1,405,356 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) Q1 2024 revenue rose to $642.8 million, with net income stable at $111.3 million and diluted EPS increasing to $0.59 Q1 2024 vs Q1 2023 Performance (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Total revenue | $642,839 | $620,380 | | Trading income, net | $408,095 | $412,511 | | Total operating expenses | $503,019 | $485,615 | | Net income | $111,308 | $110,083 | | Net income available for common stockholders | $55,817 | $57,881 | | Basic EPS | $0.59 | $0.56 | | Diluted EPS | $0.59 | $0.56 | Condensed Consolidated Statements of Cash Flows (Unaudited) Net cash used in operating activities increased significantly, resulting in a $426.1 million net decrease in cash Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(395,414) | $(148,382) | | Net cash used in investing activities | $(27,476) | $(35,783) | | Net cash provided by (used in) financing activities | $362 | $(46,544) | | Net decrease in cash and cash equivalents | $(426,054) | $(229,061) | Notes to Condensed Consolidated Financial Statements (Unaudited) Details key accounting policies, segment performance, goodwill, derivatives, debt, and ongoing legal proceedings - The company operates through two main segments: Market Making and Execution Services, with Market Making contributing $127.0 million of pre-tax income in Q1 2024[29][179] - As of March 31, 2024, Goodwill remained unchanged at $1.149 billion, with $755.3 million allocated to Market Making and $393.6 million to Execution Services[47][48] - The company has a $1.73 billion outstanding First Lien Term Loan Facility maturing in 2029 and utilizes interest rate swaps to hedge interest rate risk on $1.525 billion of this principal[70][78] - The company is defending against an SEC action filed in September 2023 alleging violations of information barrier policies and procedures[131] - Subsequent to the quarter end, the Board expanded the share repurchase program by an additional $500 million and declared a quarterly dividend of $0.24 per share[186][187] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2024 revenue grew 3.6% driven by interest income, while Adjusted Net Trading Income slightly decreased Results of Operations Q1 2024 revenues and operating expenses both rose 3.6%, driven primarily by higher interest income and expense Revenue and Expense Comparison (in thousands) | Item | Q1 2024 | Q1 2023 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $642,839 | $620,380 | 3.6% | | Trading income, net | $408,095 | $412,511 | (1.1)% | | Interest and dividends income | $105,992 | $82,244 | 28.9% | | Commissions, net and technology services | $118,611 | $121,444 | (2.3)% | | Total operating expenses | $503,019 | $485,615 | 3.6% | | Brokerage, exchange, clearance fees, net | $139,799 | $145,523 | (3.9)% | | Interest and dividends expense | $126,028 | $97,601 | 29.1% | - The increase in Interest and dividends income was primarily due to higher interest earned on cash collateral from securities borrowing and balances at banks, benefiting from higher interest rates[254] - The decrease in Commissions, net and technology services was driven by slightly lower market volumes and declining institutional engagement[255] Non-GAAP Financial Measures Adjusted Net Trading Income decreased 1.7% to $366.9 million, while Normalized Adjusted EPS rose to $0.76 Non-GAAP Performance Summary (in thousands, except EPS) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Adjusted Net Trading Income | $366,871 | $373,075 | | EBITDA | $195,509 | $192,597 | | Adjusted EBITDA | $202,832 | $207,469 | | Normalized Adjusted Net Income | $124,278 | $127,552 | | Normalized Adjusted EPS | $0.76 | $0.74 | - Management believes these non-GAAP measures provide useful information by excluding certain costs and non-cash items, allowing for better period-to-period comparison of general operating performance[237] Liquidity and Capital Resources The company maintains liquidity through operations and credit facilities while continuing its share repurchase program - Primary sources of liquidity are cash flows from operations, available cash, and borrowings under broker-dealer and prime brokerage credit facilities[273][294] Key Liquidity and Capital Figures (as of March 31, 2024) | Item | Amount (in millions) | | :--- | :--- | | Cash and cash equivalents | $399.6 | | Long-term debt (principal) | $1,750.1 | | Borrowings under prime brokerage facilities | $170.7 | | Borrowings under broker-dealer facilities | $140.0 | - The company repurchased 45.6 million shares for $1.145 billion from the program's inception through March 31, 2024, with $74.6 million remaining capacity[302] - The company is required to make payments under Tax Receivable Agreements, which are expected to range from $0.1 million to $22.0 million per year over the next 15 years[278] Critical Accounting Policies and Estimates Highlights significant management judgments in valuing financial instruments, goodwill, and tax agreements - Valuation of Financial Instruments: Substantially all financial instruments are carried at fair value, with Level 3 instruments requiring significant unobservable inputs and management judgment[306][307] - Revenue Recognition: Trading income is recorded on a trade-date basis, while commissions and technology services revenues are recognized when performance obligations are satisfied[308][310][314] - Goodwill and Intangible Assets: Goodwill of $1.15B is tested for impairment annually or when indicators arise, with the last assessment showing fair value exceeded carrying value[323][326][329] - Tax Receivable Agreements: The company records obligations based on 85% of expected cash tax savings from favorable tax attributes, requiring complex judgments over a 15-year period[322] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details exposure to market, interest rate, and foreign currency risks and the strategies used to manage them - Market risk is managed through proprietary risk management tools that continuously monitor positions and can automatically freeze strategies that exceed preset limits[335] - Interest rate risk on long-term debt is managed using floating-to-fixed interest rate swap agreements to hedge against fluctuations[341] - For Q1 2024, 18.8% of total revenues were denominated in non-U.S. dollar currencies, with a hypothetical 10% adverse change in the USD estimated to decrease revenues by $12.1 million[345] - The company uses derivative financial instruments, including futures, forwards, and options, for both trading activities and to economically hedge other positions[348] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - The CEO and CFO concluded that as of March 31, 2024, the company's disclosure controls and procedures were effective[350] - There were no changes in internal control over financial reporting during Q1 2024 that materially affected or are likely to materially affect the controls[353] PART II - OTHER INFORMATION Item 1. Legal Proceedings Discusses ongoing legal matters, including an SEC action regarding information barriers and related lawsuits - The company is defending an action by the SEC filed in September 2023 regarding information barrier policies and procedures from a period in 2018-2019[131] - Related to the SEC investigation, the company faces a consolidated shareholder class action lawsuit alleging materially false and misleading statements[132] - Management states that they do not believe these matters will have a material adverse impact on the company's financial condition or operating results[138] Item 1A. Risk Factors Confirms no material changes to risk factors previously disclosed in the 2023 Annual Report on Form 10-K - No material changes to the Risk Factors from the 2023 Form 10-K have been reported[357] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the repurchase of 2.9 million shares for $51.8 million during Q1 2024 under its authorized program Share Repurchases for Q1 2024 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | Jan 2024 | 938,440 | $18.99 | 819,942 | | Feb 2024 | 1,543,047 | $16.78 | 720,636 | | Mar 2024 | 423,856 | $19.11 | 418,498 | | Total | 2,905,343 | $17.83 | 1,959,076 | - As of March 31, 2024, the company had approximately $74.6 million remaining capacity for future purchases under its share repurchase program[359]