MarketAxess(MKTX) - 2022 Q2 - Quarterly Report

PART I — Financial Information Item 1. Financial Statements The company's total assets increased to $1.57 billion as of June 30, 2022, from $1.53 billion at year-end 2021, while six-month revenues decreased to $368.3 million from $371.8 million, and net income fell to $131.7 million from $147.7 million, with operating cash flow at $69.9 million compared to $73.6 million Consolidated Statements of Financial Condition (Unaudited) | | June 30, 2022 (Millions USD) | December 31, 2021 (Millions USD) | | :--- | :--- | :--- | | Total assets | $1,567.71 | $1,530.45 | | Total liabilities | $566.91 | $489.14 | | Total stockholders' equity | $1,000.80 | $1,041.31 | Consolidated Statements of Operations (Unaudited) | | Three Months Ended June 30, 2022 (Millions USD) | Six Months Ended June 30, 2022 (Millions USD) | | :--- | :--- | :--- | | Total revenues | $182.23 | $368.29 | | Operating income | $84.79 | $172.89 | | Net income | $66.92 | $131.69 | | Diluted EPS | $1.78 | $3.49 | Consolidated Statements of Cash Flows (Unaudited) | | Six Months Ended June 30, 2022 (Millions USD) | Six Months Ended June 30, 2021 (Millions USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $69.91 | $73.57 | | Net cash (used in) investing activities | ($55.64) | ($43.35) | | Net cash (used in) financing activities | ($187.05) | ($92.77) | Notes to Consolidated Financial Statements This section provides detailed accounting policies and supplementary information on financial statement items, including regulatory capital, acquisitions, income taxes, and segment reporting, confirming the company operates as a single business segment - In May 2022, the Company invested $34.4 million to acquire a minority ownership stake in RFQ–hub Holdings LLC, which will be accounted for under the equity method[57] - The effective tax rate for the six months ended June 30, 2022, was 26.8%, up from 21.4% in the prior year period, partly due to a $3.2 million expense for a settlement with New York State tax authorities[61][180] - The company repurchased 280,315 shares of common stock for $87.5 million in the first six months of 2022, following the authorization of a new $150.0 million share repurchase program in January 2022[84] - The company operates as a single business segment, with the Americas contributing the majority of revenues ($299.9 million for the six months ended June 30, 2022), followed by Europe ($58.5 million) and Asia ($9.8 million)[85][86] - As of June 30, 2022, the Company's regulated subsidiaries maintained aggregate net capital and financial resources that were $477.8 million in excess of the required levels of $21.7 million[47] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting key business trends and critical factors, noting Q2 2022 revenue growth from higher trading volumes, but profitability impacts from lower average fees and increased operating expenses, while maintaining a strong liquidity position Critical Factors Affecting Our Industry and Our Company The company's performance is influenced by economic factors like interest rates and credit spreads, geopolitical events, the competitive landscape of electronic trading, an evolving regulatory environment, and the need for continuous technology investment - Operating conditions improved in Q2 2022 with widening credit spreads, increased volatility, and higher U.S. high-grade market volumes, though a rise in corporate bond yields negatively affected average variable transaction fees due to lower bond duration[96] - The SEC has proposed rules to expand Regulation ATS to government securities and amend the definition of an "exchange," which is expected to require the company to operate all its trading protocols in compliance with Regulation ATS[105] - Automated trading volumes grew 39.0% year-over-year to $57.6 billion in Q2 2022, and the use of dealer algorithms also increased, with 5.7 million algorithmic responses, up 22.8% from Q2 2021[110] Results of Operations For Q2 2022, revenues increased 3.3% to $182.2 million, while net income slightly decreased to $66.9 million; for the first six months of 2022, revenues decreased 0.9% to $368.3 million, and net income fell 10.9% to $131.7 million, primarily due to higher operating expenses and a higher effective tax rate Q2 2022 vs Q2 2021 Financial Summary | | Three Months Ended June 30, 2022 (Millions USD) | Three Months Ended June 30, 2021 (Millions USD) | % Change | | :--- | :--- | :--- | :--- | | Revenues | $182.23 | $176.33 | 3.3% | | Operating income | $84.79 | $87.18 | (2.7)% | | Net income | $66.92 | $67.29 | (0.5)% | H1 2022 vs H1 2021 Financial Summary | | Six Months Ended June 30, 2022 (Millions USD) | Six Months Ended June 30, 2021 (Millions USD) | % Change | | :--- | :--- | :--- | :--- | | Revenues | $368.29 | $371.80 | (0.9)% | | Operating income | $172.89 | $190.65 | (9.3)% | | Net income | $131.69 | $147.75 | (10.9)% | - The average variable transaction fee per million for U.S. high-grade bonds decreased 17.7% in Q2 2022 and 16.0% in H1 2022 compared to the same periods in 2021, primarily due to a decrease in the duration of bonds traded on the platforms[148][169] - Total expenses for H1 2022 increased by 7.9% to $195.4 million, driven by higher employee compensation and benefits (+$4.4 million), depreciation and amortization (+$5.5 million), and technology and communications (+$4.1 million)[173] Liquidity and Capital Resources The company maintains a strong liquidity position with $324.8 million in cash and investments as of June 30, 2022, supported by undrawn credit facilities, with significant cash uses including share repurchases, dividends, and strategic investments - As of June 30, 2022, the company had cash, cash equivalents, and investments totaling $324.8 million[181] - The company has a $500.0 million revolving credit facility and a $200.0 million collateralized agreement, both of which were undrawn as of June 30, 2022[182][183] Cash Flow Summary (Six Months Ended June 30) | | 2022 (Millions USD) | 2021 (Millions USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $69.91 | $73.57 | | Net cash (used in) investing activities | $(55.64) | $(43.35) | | Net cash (used in) financing activities | $(187.05) | $(92.77) | - The company's regulated subsidiaries held aggregate excess net capital of $477.8 million over the required levels of $21.7 million[191] Non-GAAP Financial Measures The company utilizes non-GAAP measures such as EBITDA, EBITDA margin, and free cash flow to offer additional perspectives on its operational profitability and cash generation capabilities, with EBITDA at $210.9 million and free cash flow at $96.8 million for the six months ended June 30, 2022 EBITDA Reconciliation (Six Months Ended June 30) | | 2022 (Millions USD) | 2021 (Millions USD) | | :--- | :--- | :--- | | Net income | $131.69 | $147.75 | | Interest expense | 0.51 | 0.36 | | Provision for income taxes | 48.31 | 40.11 | | Depreciation and amortization | 30.41 | 24.88 | | EBITDA | $210.92 | $213.09 | | EBITDA margin | 57.3% | 57.3% | Free Cash Flow Reconciliation (Six Months Ended June 30) | | 2022 (Millions USD) | 2021 (Millions USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $69.91 | $73.57 | | Less: Purchases of furniture, equipment, etc. | $(2.68) | $(9.81) | | Less: Capitalization of software development costs | $(18.56) | $(16.46) | | Exclude: Other items | 48.17 | 72.34 | | Free Cash Flow | $96.83 | $119.64 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to general market risk, interest rate risk on its cash and investments, foreign currency exchange rate risk from international operations, credit risk as a matched principal counterparty, and concentration risk with cash deposits at major global banks - A hypothetical 10% increase or decrease in the U.S. dollar against other currencies would have impacted annual revenue by approximately $11.9 million and operating expenses by approximately $10.8 million over the last twelve months[207] - The company is exposed to credit and performance risk as a matched principal trading counterparty, particularly as the volume of anonymous Open Trading transactions increases[208][209] - Cash and cash equivalents are primarily maintained at three major global banks, creating a concentration of credit risk[211] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that disclosure controls and procedures are effective to ensure timely and accurate reporting as required by the SEC[212] - No material changes in internal control over financial reporting were identified during the quarter ended June 30, 2022[213] PART II — Other Information Item 1. Legal Proceedings In the normal course of business, the company is involved in various lawsuits and regulatory examinations, but management does not expect the outcome of these matters to have a material adverse impact on the company's financial position - The outcome of outstanding legal matters is not expected to have a material adverse impact on the Company's financial position, though the ultimate exposure cannot be determined[216] Item 1A. Risk Factors There have been no material changes in the company's risk factors from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes in risk factors from the most recent Form 10-K have been reported[217] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, the company repurchased 180,145 shares of common stock for an average price of $272.95 per share under a new $150.0 million share repurchase program authorized in January 2022, with approximately $100.0 million remaining available as of June 30, 2022 Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share (USD) | Approximate Dollar Value of Shares That May Yet Be Purchased (Millions USD) | | :--- | :--- | :--- | :--- | | April 2022 | 112,645 | $277.49 | $117.84 | | May 2022 | 67,500 | $265.38 | $100.02 | | June 2022 | — | — | $100.02 | | Total | 180,145 | $272.95 | | - In January 2022, the Board of Directors authorized a new share repurchase program for up to $150.0 million[220] Other Items (Items 3-6) The company reports no defaults upon senior securities, no mine safety disclosures, and no other material information to disclose under Item 5, with Item 6 listing the exhibits filed with the Form 10-Q, including certifications and XBRL data files - The company reported no defaults on senior securities, no mine safety disclosures, and no other information under Item 5[221][222][223]