UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended June 30, 2012
OR
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission file number: 1-35509
TD Ameritrade Holding Corporation
(Exact name of registrant as specified in its charter)
Delaware | 82-0543156 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
4211 South 102nd Street, Omaha, Nebraska, 68127
(Address of principal executive offices) (Zip Code)
(402) 331-7856
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 30, 2012, there were 546,503,934 outstanding shares of the registrants common stock.
TD AMERITRADE HOLDING CORPORATION
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
TD Ameritrade Holding Corporation
We have reviewed the condensed consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries (the Company) as of June 30, 2012, and the related condensed consolidated statements of income for the three-month and nine-month periods ended June 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the nine-month periods ended June 30, 2012 and 2011. These financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries as of September 30, 2011, and the related consolidated statements of income, stockholders equity, and cash flows for the year then ended (not presented herein) and in our report dated November 18, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 8, 2012
3
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
June 30, 2012 |
September 30, 2011 |
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(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 909,766 | $ | 1,031,963 | ||||
Short-term investments |
129,619 | 3,557 | ||||||
Cash and investments segregated in compliance with federal regulations (including reverse repurchase agreements of $2.4 billion at June 30, 2012 and $1.9 billion at September 30, 2011) |
3,546,772 | 2,519,249 | ||||||
Receivable from brokers, dealers and clearing organizations |
1,053,066 | 834,469 | ||||||
Receivable from clients, net |
8,738,710 | 8,059,410 | ||||||
Receivable from affiliates |
81,525 | 92,963 | ||||||
Other receivables, net |
96,898 | 115,316 | ||||||
Securities owned, at fair value |
345,678 | 446,609 | ||||||
Property and equipment at cost, net |
401,366 | 340,690 | ||||||
Goodwill |
2,466,967 | 2,466,978 | ||||||
Acquired intangible assets, net |
955,074 | 1,024,352 | ||||||
Deferred income taxes |
2,197 | 4,642 | ||||||
Other assets |
186,247 | 185,564 | ||||||
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Total assets |
$ | 18,913,885 | $ | 17,125,762 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Payable to brokers, dealers and clearing organizations |
$ | 2,184,238 | $ | 1,709,572 | ||||
Payable to clients |
10,099,387 | 8,979,327 | ||||||
Accounts payable and accrued liabilities |
551,731 | 585,720 | ||||||
Payable to affiliates |
4,288 | 3,912 | ||||||
Deferred revenue |
31,810 | 42,230 | ||||||
Long-term debt |
1,341,644 | 1,336,789 | ||||||
Capitalized lease obligations |
6,719 | 10,784 | ||||||
Deferred income taxes |
353,679 | 341,611 | ||||||
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Total liabilities |
14,573,496 | 13,009,945 | ||||||
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Stockholders equity: |
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Preferred stock, $0.01 par value; 100 million shares authorized, none issued |
| | ||||||
Common stock, $0.01 par value; one billion shares authorized; June 30, 2012 - 631,399,374 shares issued; September 30, 2011 - 631,381,860 shares issued; June 30, 2012 - 546,783,330 outstanding; September 30, 2011 - 554,285,716 outstanding |
6,314 | 6,314 | ||||||
Additional paid-in capital |
1,602,161 | 1,583,327 | ||||||
Retained earnings |
3,989,475 | 3,645,846 | ||||||
Treasury stock, common, at cost - June 30, 2012 - 84,616,044 shares; September 30, 2011 - 77,096,144 shares |
(1,257,917 | ) | (1,119,969 | ) | ||||
Deferred compensation |
141 | 146 | ||||||
Accumulated other comprehensive income |
215 | 153 | ||||||
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Total stockholders equity |
4,340,389 | 4,115,817 | ||||||
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Total liabilities and stockholders equity |
$ | 18,913,885 | $ | 17,125,762 | ||||
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See notes to condensed consolidated financial statements.
4
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues: |
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Transaction-based revenues: |
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Commissions and transaction fees |
$ | 266,078 | $ | 281,591 | $ | 831,516 | $ | 912,607 | ||||||||
Asset-based revenues: |
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Interest revenue |
119,975 | 132,334 | 338,869 | 371,959 | ||||||||||||
Brokerage interest expense |
(1,607 | ) | (1,052 | ) | (4,459 | ) | (3,581 | ) | ||||||||
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Net interest revenue |
118,368 | 131,282 | 334,410 | 368,378 | ||||||||||||
Insured deposit account fees |
206,339 | 196,817 | 620,590 | 562,759 | ||||||||||||
Investment product fees |
54,034 | 43,938 | 143,753 | 125,075 | ||||||||||||
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Total asset-based revenues |
378,741 | 372,037 | 1,098,753 | 1,056,212 | ||||||||||||
Other revenues |
22,446 | 31,154 | 63,530 | 90,382 | ||||||||||||
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Net revenues |
667,265 | 684,782 | 1,993,799 | 2,059,201 | ||||||||||||
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Operating expenses: |
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Employee compensation and benefits |
176,455 | 168,564 | 523,442 | 500,632 | ||||||||||||
Clearing and execution costs |
21,891 | 22,648 | 66,064 | 71,566 | ||||||||||||
Communications |
28,470 | 27,057 | 83,332 | 81,782 | ||||||||||||
Occupancy and equipment costs |
36,342 | 36,318 | 111,317 | 104,663 | ||||||||||||
Depreciation and amortization |
18,334 | 16,914 | 53,015 | 49,629 | ||||||||||||
Amortization of acquired intangible assets |
22,941 | 24,083 | 69,278 | 72,747 | ||||||||||||
Professional services |
39,708 | 42,882 | 128,893 | 123,257 | ||||||||||||
Advertising |
50,248 | 48,109 | 190,419 | 204,092 | ||||||||||||
Other |
18,739 | 35,668 | 66,269 | 71,291 | ||||||||||||
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Total operating expenses |
413,128 | 422,243 | 1,292,029 | 1,279,659 | ||||||||||||
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Operating income |
254,137 | 262,539 | 701,770 | 779,542 | ||||||||||||
Other expense: |
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Interest on borrowings |
7,060 | 6,916 | 21,378 | 25,227 | ||||||||||||
Loss on debt refinancing |
| 1,435 | | 1,435 | ||||||||||||
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Total other expense |
7,060 | 8,351 | 21,378 | 26,662 | ||||||||||||
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Pre-tax income |
247,077 | 254,188 | 680,392 | 752,880 | ||||||||||||
Provision for income taxes |
93,248 | 96,793 | 237,904 | 278,778 | ||||||||||||
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Net income |
$ | 153,829 | $ | 157,395 | $ | 442,488 | $ | 474,102 | ||||||||
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Earnings per share - basic |
$ | 0.28 | $ | 0.28 | $ | 0.81 | $ | 0.83 | ||||||||
Earnings per share - diluted |
$ | 0.28 | $ | 0.27 | $ | 0.80 | $ | 0.82 | ||||||||
Weighted average shares outstanding - basic |
547,682 | 570,287 | 548,673 | 573,034 | ||||||||||||
Weighted average shares outstanding - diluted |
553,043 | 576,784 | 554,237 | 579,168 | ||||||||||||
Dividends declared per share |
$ | 0.06 | $ | 0.05 | $ | 0.18 | $ | 0.15 |
See notes to condensed consolidated financial statements.
5
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except share amounts)
Nine Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 442,488 | $ | 474,102 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
53,015 | 49,629 | ||||||
Amortization of acquired intangible assets |
69,278 | 72,747 | ||||||
Deferred income taxes |
14,513 | 7,394 | ||||||
Loss on disposal of property |
7,445 | 16,720 | ||||||
Loss on debt refinancing |
| 1,435 | ||||||
Stock-based compensation |
34,961 | 25,995 | ||||||
Excess tax benefits on stock-based compensation |
(17,707 | ) | (9,370 | ) | ||||
Other, net |
(1,961 | ) | 185 | |||||
Changes in operating assets and liabilities: |
||||||||
Cash and investments segregated in compliance with federal regulations |
(1,027,523 | ) | 616,766 | |||||
Receivable from brokers, dealers and clearing organizations |
(218,597 | ) | 174,703 | |||||
Receivable from clients, net |
(679,300 | ) | (1,323,229 | ) | ||||
Receivable from/payable to affiliates, net |
12,145 | (7,879 | ) | |||||
Other receivables, net |
18,418 | (23,685 | ) | |||||
Securities owned |
100,931 | 151,900 | ||||||
Other assets |
5,329 | (7,945 | ) | |||||
Payable to brokers, dealers and clearing organizations |
474,666 | 148,699 | ||||||
Payable to clients |
1,120,060 | 458,621 | ||||||
Accounts payable and accrued liabilities |
(16,606 | ) | (2,125 | ) | ||||
Deferred revenue |
(10,420 | ) | (17,224 | ) | ||||
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Net cash provided by operating activities |
381,135 | 807,439 | ||||||
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Cash flows from investing activities: |
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Purchase of property and equipment |
(121,135 | ) | (109,904 | ) | ||||
Cash received in sale of business |
| 5,228 | ||||||
Cash transferred in disposal of subsidiary |
| (3,453 | ) | |||||
Purchase of short-term investments |
(127,540 | ) | (1,045 | ) | ||||
Proceeds from sale and maturity of short-term investments |
1,000 | 1,100 | ||||||
Purchase of investments |
(536 | ) | (5,006 | ) | ||||
Other, net |
1,854 | 550 | ||||||
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Net cash used in investing activities |
(246,357 | ) | (112,530 | ) | ||||
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See notes to condensed consolidated financial statements.
6
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(In thousands, except share amounts)
Nine Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Cash flows from financing activities: |
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Payment of debt issuance costs |
$ | | $ | (1,783 | ) | |||
Principal payments on long-term debt |
| (4,262 | ) | |||||
Principal payments on capital lease obligations |
(4,065 | ) | (8,100 | ) | ||||
Proceeds from exercise of stock options; Nine months ended |
5,061 | 3,204 | ||||||
Purchase of treasury stock; Nine months ended |
(176,848 | ) | (144,245 | ) | ||||
Return of prepayment on structured stock repurchase |
| 118,834 | ||||||
Payment of cash dividends |
(98,859 | ) | (85,936 | ) | ||||
Excess tax benefits on stock-based compensation |
17,707 | 9,370 | ||||||
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Net cash used in financing activities |
(257,004 | ) | (112,918 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents |
29 | 163 | ||||||
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Net increase (decrease) in cash and cash equivalents |
(122,197 | ) | 582,154 | |||||
Cash and cash equivalents at beginning of period |
1,031,963 | 741,492 | ||||||
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Cash and cash equivalents at end of period |
$ | 909,766 | $ | 1,323,646 | ||||
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Supplemental cash flow information: |
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Interest paid |
$ | 25,396 | $ | 35,687 | ||||
Income taxes paid |
$ | 213,831 | $ | 233,713 | ||||
Noncash financing activities: |
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Settlement of structured stock repurchase; 3,159,360 shares |
$ | | $ |
50,366 |
|
See notes to condensed consolidated financial statements.
7
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three-Month and Nine-Month Periods Ended June 30, 2012 and 2011
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of TD Ameritrade Holding Corporation and its wholly-owned subsidiaries (collectively, the Company). Intercompany balances and transactions have been eliminated.
These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, reflect all adjustments, which are all of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys annual report filed on Form 10-K for the fiscal year ended September 30, 2011.
Recently Adopted Accounting Pronouncements
ASU 2011-04 On January 1, 2012, the Company adopted Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in ASU 2011-04 change the wording used to describe many of the requirements in U.S. Generally Accepted Accounting Principles for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify the intent of the Financial Accounting Standards Board (FASB) about the application of existing fair value measurement and disclosure requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The adoption of ASU 2011-04 did not have a material impact on the Companys condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
ASU 2011-11 In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendments in ASU 2011-11 will enhance disclosures by requiring improved information about financial and derivative instruments that are either (1) offset (netting assets and liabilities) in accordance with Section 210-20-45 or Section 815-10-45 of the FASB Accounting Standards Codification or (2) subject to an enforceable master netting arrangement or similar agreement. ASU 2011-11 is effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods, and requires retrospective disclosures for comparative periods presented. Therefore, ASU 2011-11 will be effective for the Companys fiscal year beginning October 1, 2013. Adoption of ASU 2011-11 is not expected to have a material impact on the Companys financial statements.
2. CASH AND CASH EQUIVALENTS
The Companys cash and cash equivalents is summarized in the following table (dollars in thousands):
June 30, 2012 |
September 30, 2011 |
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Corporate |
$ | 424,373 | $ | 259,986 | ||||
Broker-dealer subsidiaries |
386,693 | 656,206 | ||||||
Trust company subsidiary |
74,230 | 108,587 | ||||||
Investment advisory subsidiaries |
24,470 | 7,184 | ||||||
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Total |
$ | 909,766 | $ | 1,031,963 | ||||
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Capital requirements may limit the amount of cash available for dividend from the broker-dealer and trust company subsidiaries to the parent company. Cash and cash equivalents of the investment advisory subsidiaries is generally not available for corporate purposes.
8
3. INCOME TAXES
The Companys effective income tax rate for the nine months ended June 30, 2012 was 35.0%, compared to 37.0% for the nine months ended June 30, 2011. The provision for income taxes for the nine months ended June 30, 2012 was significantly lower than normal primarily due to $18.5 million of favorable resolutions of state income tax matters. This favorably impacted the Companys earnings for the nine months ended June 30, 2012 by approximately three cents per share. The provision for income taxes for the nine months ended June 30, 2011 was somewhat lower than normal due to $5.5 million of favorable resolutions of state income tax matters and $1.2 million of favorable deferred income tax adjustments resulting from state income tax law changes. These items favorably impacted the Companys earnings for the nine months ended June 30, 2011 by approximately one cent per share.
4. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
June 30, 2012 |
Face Value |
Unamortized Discount |
Fair
Value Adjustment (1) |
Net Carrying Value |
||||||||||||
Senior Notes: |
||||||||||||||||
2.950% Senior Notes due 2012 |
$ | 250,000 | $ | (36 | ) | $ | 1,540 | $ | 251,504 | |||||||
4.150% Senior Notes due 2014 |
500,000 | (239 | ) | 27,727 | 527,488 | |||||||||||
5.600% Senior Notes due 2019 |
500,000 | (511 | ) | 63,163 | 562,652 | |||||||||||
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Total long-term debt |
$ | 1,250,000 | $ | (786 | ) | $ | 92,430 | $ | 1,341,644 | |||||||
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September 30, 2011 |
Face Value |
Unamortized Discount |
Fair
Value Adjustment (1) |
Net Carrying Value |
||||||||||||
Senior Notes: |
||||||||||||||||
2.950% Senior Notes due 2012 |
$ | 250,000 | $ | (100 | ) | $ | 4,170 | $ | 254,070 | |||||||
4.150% Senior Notes due 2014 |
500,000 | (313 | ) | 33,223 | 532,910 | |||||||||||
5.600% Senior Notes due 2019 |
500,000 | (562 | ) | 50,371 | 549,809 | |||||||||||
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Total long-term debt |
$ | 1,250,000 | $ | (975 | ) | $ | 87,764 | $ | 1,336,789 | |||||||
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(1) | Fair value adjustments relate to changes in the fair value of the debt while in a fair value hedging relationship. See Interest Rate Swaps below. |
Interest Rate Swaps The Company is exposed to changes in the fair value of its fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge this exposure, on December 30, 2009, the Company entered into fixed-for-variable interest rate swaps on the 2.950% Senior Notes due December 1, 2012 (the 2012 Notes) and the 4.150% Senior Notes due December 1, 2014 (the 2014 Notes) for notional amounts of $250 million and $500 million, respectively, with maturity dates matching the respective maturity dates of the 2012 Notes and 2014 Notes. In addition, on January 7, 2011, the Company entered into a fixed-for-variable interest rate swap on the 5.600% Senior Notes due December 1, 2019 (the 2019 Notes) for a notional amount of $500 million, with a maturity date matching the maturity date of the 2019 Notes. The interest rate swaps effectively change the fixed-rate interest on the Senior Notes to variable-rate interest. Under the terms of the interest rate swap agreements, the Company receives semi-annual fixed-rate interest payments based on the same rates applicable to the Senior Notes, and makes quarterly variable-rate interest payments based on three-month LIBOR plus (a) 0.9693% for the swap on the 2012 Notes, (b) 1.245% for the swap on the 2014 Notes and (c) 2.3745% for the swap on the 2019 Notes. As of June 30, 2012, the weighted-average effective interest rate on the Senior Notes was 2.11%.
The interest rate swaps are accounted for as fair value hedges and qualify for the shortcut method of accounting. Changes in the payment of interest resulting from the interest rate swaps are recorded in interest on borrowings on the Condensed Consolidated Statements of Income. Changes in fair value of the interest rate swaps are completely offset by changes in fair value of the related notes, resulting in no effect on net income. The following table summarizes gains and losses resulting from changes in the fair value of the interest rate swaps and the hedged fixed-rate debt for the periods indicated (dollars in thousands):
9
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Gain (loss) on fair value of interest rate swaps |
$ | 14,902 | $ | 11,294 | $ | 4,666 | $ | (7,729 | ) | |||||||
Gain (loss) on fair value of hedged fixed-rate debt |
(14,902 | ) | (11,294 | ) | (4,666 | ) | 7,729 | |||||||||
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Net gain (loss) recorded in interest on borrowings |
$ | | $ | | $ | | $ | | ||||||||
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The following table summarizes the fair value of outstanding derivatives designated as hedging instruments on the Condensed Consolidated Balance Sheets (dollars in thousands):
June 30, | September 30, | |||||||
2012 | 2011 | |||||||
Derivatives recorded under the caption Other assets: |
||||||||
Interest rate swap assets |
$ | 92,430 | $ | 87,764 |
The interest rate swaps are subject to counterparty credit risk. Credit risk is managed by limiting activity to approved counterparties that meet a minimum credit rating threshold and by entering into credit support agreements. The bilateral credit support agreements related to the interest rate swaps require daily collateral coverage, in the form of cash or U.S. Treasury securities, for the aggregate fair value of the interest rate swaps. As of June 30, 2012, the interest rate swap counterparties for the Senior Notes had pledged $97.3 million of collateral to the Company in the form of cash. As of September 30, 2011, the interest rate swap counterparty for the 2012 Notes and 2014 Notes had pledged $50.1 million of collateral to the Company in the form of U.S. Treasury securities and the interest rate swap counterparty for the 2019 Notes had pledged $57.5 million of collateral in the form of cash. A liability for collateral pledged to the Company in the form of cash is recorded in accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets.
5. CAPITAL REQUIREMENTS
The Companys broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, or the Exchange Act), administered by the SEC and Financial Industry Regulatory Authority (FINRA), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis.
TD Ameritrade Clearing, Inc. (TDAC), the Companys clearing broker-dealer subsidiary, and TD Ameritrade, Inc., the Companys introducing broker-dealer subsidiary, compute net capital under the alternative method as permitted by Rule 15c3-1. TDAC is required to maintain minimum net capital of the greater of $1.5 million, which is based on the type of business conducted by the broker-dealer, or 2% of aggregate debit balances arising from client transactions.
Under Rule 15c3-1, TD Ameritrade, Inc. is required to maintain minimum net capital of the greater of $250,000 or 2% of aggregate debit balances. As a futures commission merchant registered with the Commodity Futures Trading Commission (CFTC), TD Ameritrade, Inc. is also subject to CFTC Regulation 1.17 under the Commodity Exchange Act, administered by the CFTC and the National Futures Association, which requires the maintenance of minimum net capital of the greatest of (a) $1.0 million, (b) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures positions carried by the futures commission merchant in client and nonclient accounts, or (c) its Rule 15c3-1 net capital requirement.
Under the alternative method, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of (a) less than 5% of aggregate debit balances, (b) less than 110% of its risk-based capital requirement under Regulation 1.17, or (c) less than 120% of its minimum dollar requirement. These net capital thresholds, which are specified in Exchange Act Rule 17a-11 and CFTC Regulation 1.12, are typically referred to as early warning net capital thresholds.
10
Net capital and net capital requirements for the Companys broker-dealer subsidiaries are summarized in the following tables (dollars in thousands):
TD Ameritrade Clearing, Inc. |
||||||||||||||||||||
Net Capital | ||||||||||||||||||||
in Excess of | ||||||||||||||||||||
Required | Early Warning | |||||||||||||||||||
Net Capital | Net Capital | Threshold | Ratio of | |||||||||||||||||
(2% of | in Excess of | (5% of | Net Capital | |||||||||||||||||
Aggregate | Required | Aggregate | to Aggregate | |||||||||||||||||
Date |
Net Capital | Debit Balances) | Net Capital | Debit Balances) | Debit Balances | |||||||||||||||
June 30, 2012 |
$ | 1,288,311 | $ | 202,723 | $ | 1,085,588 | $ | 781,503 | 12.71 | % | ||||||||||
September 30, 2011 |
$ | 1,263,535 | $ | 199,308 | $ | 1,064,227 | $ | 765,265 | 12.68 | % | ||||||||||
TD Ameritrade, Inc. |
||||||||||||||||||||
Net Capital | ||||||||||||||||||||
Required | in Excess of | |||||||||||||||||||
Net Capital | Early Warning | |||||||||||||||||||
(8% of Total | Net Capital | Threshold | ||||||||||||||||||
Risk Margin or | in Excess of | (110% or 120% | ||||||||||||||||||
Minimum Dollar | Required | of Required | ||||||||||||||||||
Date |
Net Capital | Requirement) | Net Capital | Net Capital) | ||||||||||||||||
June 30, 2012 |
$ | 218,174 | $ | 5,590 | $ | 212,584 | $ | 212,025 | ||||||||||||
September 30, 2011 |
$ | 374,907 | $ | 1,000 | $ | 373,907 | $ | 373,707 |
The Companys non-depository trust company subsidiary, TD Ameritrade Trust Company (TDATC), is subject to capital requirements established by the State of Maine, which require TDATC to maintain minimum Tier 1 capital, as defined. TDATCs Tier 1 capital was $19.8 million and $18.6 million as of June 30, 2012 and September 30, 2011, respectively, which exceeded the required Tier 1 capital by $9.8 million and $8.6 million, respectively.
6. COMMITMENTS AND CONTINGENCIES
Reserve Fund Matters During September 2008, The Reserve, an independent mutual fund company, announced that the net asset value of the Reserve Yield Plus Fund declined below $1.00 per share. The Yield Plus Fund was not a money market mutual fund, but its stated objective was to maintain a net asset value of $1.00 per share. TD Ameritrade, Inc.s clients continue to hold shares in the Yield Plus Fund (now known as Yield Plus Fund In Liquidation), which is being liquidated. On July 23, 2010, The Reserve announced that through that date it had distributed approximately 94.8% of the Yield Plus Fund assets as of September 15, 2008 and that the Yield Plus Fund had approximately $39.7 million in total remaining assets. The Reserve stated that the funds Board of Trustees has set aside almost the entire amount of the remaining assets to cover potential claims, fees and expenses. The Company estimates that TD Ameritrade, Inc. clients current positions held in the Reserve Yield Plus Fund amount to approximately 79% of the fund.
TD Ameritrade, Inc. has received subpoenas and other requests for documents and information from the SEC and other regulatory authorities regarding TD Ameritrade, Inc.s offering of the Yield Plus Fund to clients. TD Ameritrade, Inc. is cooperating with the investigations and requests. On January 27, 2011, TD Ameritrade, Inc. entered into a settlement with the SEC, agreeing to the entry of an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions (Order). In the Order, the SEC found that TD Ameritrade, Inc. failed reasonably to supervise its registered representatives with a view to preventing their violations of Section 17(a)(2) of the Securities Act of 1933 in connection with their offer and sale of the Yield Plus Fund. TD Ameritrade, Inc. did not admit or deny any of the findings in the Order, and no fine was imposed. Under the settlement agreement, TD Ameritrade, Inc. agreed to pay $0.012 per share to all eligible current or former clients that purchased shares of the Yield Plus Fund and continued to own those shares. Clients who purchased Yield Plus Fund shares through independent registered investment advisors were not eligible for the payment. In February 2011, the Company paid clients approximately $10 million under the settlement agreement.
11
The Pennsylvania Securities Commission has filed an administrative order against TD Ameritrade, Inc. involving the sale of Yield Plus Fund securities to certain Pennsylvania clients. An administrative hearing will be held to determine whether there have been violations of certain provisions of the Pennsylvania Securities Act of 1972 and rules thereunder and to determine what, if any, administrative sanctions should be imposed. TD Ameritrade, Inc. is defending the action.
In November 2008, a purported class action lawsuit was filed with respect to the Yield Plus Fund. The lawsuit is captioned Ross v. Reserve Management Company, Inc. et al. and is pending in the U.S. District Court for the Southern District of New York. The Ross lawsuit is on behalf of persons who purchased shares of Reserve Yield Plus Fund. On November 20, 2009, the plaintiffs filed a first amended complaint naming as defendants the funds advisor, certain of its affiliates and the Company and certain of its directors, officers and shareholders as alleged control persons. The complaint alleges claims of violations of the federal securities laws and other claims based on allegations that false and misleading statements and omissions were made in the Reserve Yield Plus Fund prospectuses and in other statements regarding the fund. The complaint seeks an unspecified amount of compensatory damages including interest, attorneys fees, rescission, exemplary damages and equitable relief. On January 19, 2010, the defendants submitted motions to dismiss the complaint. The motions are pending.
The Company estimates that its clients current aggregate shortfall, based on the original par value of their holdings in the Yield Plus Fund, less the value of fund distributions to date and the value of payments under the Companys SEC settlement, is approximately $37 million. This amount does not take into account any assets remaining in the fund that may become available for future distributions.
The Company is unable to predict the outcome or the timing of the ultimate resolution of the Pennsylvania action and the Ross lawsuit, or the potential loss, if any, that may result from these unresolved matters. However, management believes the outcome of these pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
Other Legal and Regulatory Matters The Company is subject to other lawsuits, arbitrations, claims and other legal proceedings in connection with its business. Some of these legal actions include claims for substantial or unspecified compensatory and/or punitive damages. A substantial adverse judgment or other unfavorable resolution of these matters could have a material adverse effect on the Companys financial condition, results of operations and cash flows or could cause the Company significant reputational harm. Management believes the Company has adequate legal defenses with respect to these legal proceedings to which it is a defendant or respondent and the outcome of these pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential losses, if any, that may result from these matters.
In the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions. Management believes the outcome of any resulting actions will not be material to the Companys financial condition, results of operations or cash flows. However, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential fines, penalties or injunctive or other equitable relief, if any, that may result from these matters.
Income Taxes The Companys federal and state income tax returns are subject to examination by taxing authorities. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in the condensed consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities. The Toronto-Dominion Bank (TD) has agreed to indemnify the Company for tax obligations, if any, pertaining to activities of TD Waterhouse Group, Inc. (TD Waterhouse) prior to the Companys acquisition of TD Waterhouse in January 2006.
General Contingencies In the ordinary course of business, there are various contingencies that are not reflected in the condensed consolidated financial statements. These include the Companys broker-dealer subsidiaries client activities involving the execution, settlement and financing of various client securities, options, futures and foreign exchange transactions. These activities may expose the Company to credit risk in the event the clients are unable to fulfill their contractual obligations.
The Company extends margin credit and leverage to its clients. In margin transactions, the Company extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the clients account. In connection with these activities, the Company also executes and clears client transactions involving the sale of securities not yet purchased (short sales). Such margin-related transactions may expose the Company to credit risk in the event a clients assets are not sufficient to fully cover losses that the client may incur. Leverage involves securing a large
12
potential future obligation with a lesser amount of cash and securities. The risks associated with margin credit and leverage increase during periods of rapid market movements, or in cases where leverage or collateral is concentrated and market movements occur. In the event the client fails to satisfy its obligations, the Company has the authority to purchase or sell financial instruments in the clients account at prevailing market prices in order to fulfill the clients obligations. However, during periods of rapid market movements, clients who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of liquidation. The Company seeks to mitigate the risks associated with its client margin and leverage activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels throughout each trading day and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary.
The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. The Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis and requiring additional cash as collateral when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation (OCC).
The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis and requiring collateral to be returned by the counterparties when necessary, and by participating in a risk-sharing program offered through the OCC.
The Company transacts in reverse repurchase agreements (securities purchased under agreements to resell) in connection with its broker-dealer business. The Companys policy is to take possession or control of securities with a market value in excess of the principal amount loaned, plus accrued interest, in order to collateralize resale agreements. The Company monitors the market value of the underlying securities that collateralize the related receivable on resale agreements on a daily basis and may require additional collateral when deemed appropriate.
As of June 30, 2012, client excess margin securities of approximately $12.2 billion and stock borrowings of approximately $0.8 billion were available to the Company to utilize as collateral on various borrowings or for other purposes. The Company had loaned approximately $2.2 billion and repledged approximately $1.5 billion of that collateral as of June 30, 2012.
Guarantees The Company is a member of and provides guarantees to securities clearinghouses and exchanges. Under related agreements, the Company is generally required to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Companys liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted to the clearinghouse as collateral. However, the potential for the Company to be required to make payments under these agreements is considered remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for these guarantees.
The Company clears its clients futures transactions on an omnibus account basis through an unaffiliated clearing firm. The Company has agreed to indemnify the unaffiliated clearing firm for any loss that it may incur for the client transactions introduced to it by the Company.
See Insured Deposit Account Agreement in Note 10 for a description of a guarantee included in that agreement.
Employment Agreements The Company has entered into employment agreements with several of its key executive officers. These employment agreements generally provide for annual base salary and incentive compensation, as well as stock award acceleration and severance payments in the event of termination of employment under certain defined circumstances or changes in control of the Company. Incentive compensation, a portion of which is awarded in the form of stock-based compensation, is based on the Companys financial performance and other factors.
13
7. FAIR VALUE DISCLOSURES
FASB Accounting Standards Codification (ASC) 820-10, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Companys own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
| Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. This category includes active exchange-traded funds, money market mutual funds, mutual funds and equity securities. |
| Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Such inputs include quoted prices in markets that are not active, quoted prices for similar assets and liabilities in active and inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. This category includes most debt securities and other interest-sensitive financial instruments. |
| Level 3 Unobservable inputs for the asset or liability, where there is little, if any, observable market activity or data for the asset or liability. This category includes assets and liabilities related to money market and other mutual funds managed by The Reserve for which the net asset value has declined below $1.00 per share and the funds are being liquidated. This category also includes auction rate securities for which the periodic auctions have failed. |
14
The following tables present the Companys fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and September 30, 2011 (dollars in thousands):
As of June 30, 2012 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents: |
||||||||||||||||
Money market mutual funds |
$ | 819,811 | $ | | $ | | $ | 819,811 | ||||||||
Short-term investments: |
||||||||||||||||
U.S. government debt securities |
| 128,590 | | 128,590 | ||||||||||||
U.S. government agency debt securities |
| 1,029 | | 1,029 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal - Short-term investments |
| 129,619 | | 129,619 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Investments segregated in compliance with federal regulations: |
||||||||||||||||
U.S. government debt securities |
| 754,232 | | 754,232 | ||||||||||||
Securities owned: |
||||||||||||||||
Auction rate securities |
| | 6,039 | 6,039 | ||||||||||||
Money market and other mutual funds |
| | 1,102 | 1,102 | ||||||||||||
Equity securities |
3,918 | 275 | | 4,193 | ||||||||||||
U.S. government debt securities |
| 332,486 | | 332,486 | ||||||||||||
Municipal debt securities |
| 1,290 | | 1,290 | ||||||||||||
Corporate debt securities |
| 267 | | 267 | ||||||||||||
Other debt securities |
| 301 | | 301 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal - Securities owned |
3,918 | 334,619 | 7,141 | 345,678 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other assets: |
||||||||||||||||
Interest rate swaps(1) |
| 92,430 | | 92,430 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 823,729 | $ | 1,310,900 | $ | 7,141 | $ | 2,141,770 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Accounts payable and accrued liabilities: |
||||||||||||||||
Securities sold, not yet purchased: |
||||||||||||||||
Equity securities |
$ | 9,368 | $ | 14 | $ | | $ | 9,382 | ||||||||
Municipal debt securities |
| 255 | | 255 | ||||||||||||
Corporate debt securities |
| 43 | | 43 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities at fair value |
$ | 9,368 | $ | 312 | $ | | $ | 9,680 | ||||||||
|
|
|
|
|
|
|
|
(1) | See Interest Rate Swaps in Note 4 for details. |
15
As of September 30, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents: |
||||||||||||||||
Money market mutual funds |
$ | 949,804 | $ | | $ | | $ | 949,804 | ||||||||
Short-term investments: |
||||||||||||||||
U.S. government debt securities |
| 2,528 | | 2,528 | ||||||||||||
U.S. government agency debt securities |
| 1,029 | | 1,029 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal - Short-term investments |
| 3,557 | | 3,557 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Securities owned: |
||||||||||||||||
Auction rate securities |
| | 19,609 | 19,609 | ||||||||||||
Money market and other mutual funds |
| | 1,098 | 1,098 | ||||||||||||
Equity securities |
521 | 278 | | 799 | ||||||||||||
U.S. government debt securities |
| 423,010 | | 423,010 | ||||||||||||
Municipal debt securities |
| 972 | | 972 | ||||||||||||
Corporate debt securities |
| 653 | | 653 | ||||||||||||
Other debt securities |
| 468 | | 468 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal - Securities owned |
521 | 425,381 | 20,707 | 446,609 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other assets: |
||||||||||||||||
Interest rate swaps (1) |
| 87,764 | | 87,764 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 950,325 | $ | 516,702 | $ | 20,707 | $ | 1,487,734 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Accounts payable and accrued liabilities: |
||||||||||||||||
Securities sold, not yet purchased: |
||||||||||||||||
Equity securities |
$ | 4,600 | $ | 55 | $ | | $ | 4,655 | ||||||||
Municipal debt securities |
| 178 | | 178 | ||||||||||||
Corporate debt securities |
| 9 | | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities at fair value |
$ | 4,600 | $ | 242 | $ | | $ | 4,842 | ||||||||
|
|
|
|
|
|
|
|
(1) | See Interest Rate Swaps in Note 4 for details. |
There were no transfers between any levels of the fair value hierarchy during the periods presented in the tables below. The following tables present the changes in Level 3 assets measured at fair value on a recurring basis for the three months and nine months ended June 30, 2012 and 2011 (dollars in thousands):
Three Months Ended June 30, 2012 | Nine Months Ended June 30, 2012 | |||||||||||||||
Securities Owned | Securities Owned | |||||||||||||||
Auction Rate Securities |
Money Market and Other Mutual Funds |
Auction Rate Securities |
Money Market and Other Mutual Funds |
|||||||||||||
Balance, beginning of period |
$ | 7,379 | $ | 1,099 | $ | 19,609 | $ | 1,098 | ||||||||
Net gains (losses) included in earnings(1) |
77 | (2 | ) | (88 | ) | (2 | ) | |||||||||
Purchases |
185 | 5 | 625 | 6 | ||||||||||||
Sales |
(562 | ) | | (2,117 | ) | | ||||||||||
Settlements |
(1,040 | ) | | (11,990 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | 6,039 | $ | 1,102 | $ | 6,039 | $ | 1,102 | ||||||||
|
|
|
|
|
|
|
|
(1) | Net gains (losses) on securities owned are recorded in other revenues on the Condensed Consolidated Statements of Income. |
16
Three Months Ended June 30, 2011 | Nine Months Ended June 30, 2011 | |||||||||||||||
Securities Owned | Securities Owned | |||||||||||||||
Auction Rate Securities |
Money Market and Other Mutual Funds |
Auction Rate Securities |
Money Market and Other Mutual Funds |
|||||||||||||
Balance, beginning of period |
$ | 109,385 | $ | 1,026 | $ | 209,288 | $ | 5,404 | ||||||||
Net gains included in earnings(1) |
714 | | 3,685 | | ||||||||||||
Purchases, sales, issuances and settlements, net |
(48,148 | ) | 41 | (151,022 | ) | (4,337 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | 61,951 | $ | 1,067 | $ | 61,951 | $ | 1,067 | ||||||||
|
|
|
|
|
|
|
|
(1) | Net gains on auction rate securities are recorded in other revenues on the Condensed Consolidated Statements of Income. For the nine months ended June 30, 2011, net gains on auction rate securities include $0.4 million of net unrealized gains on assets held as of June 30, 2011. |
There were no nonfinancial assets or liabilities measured at fair value during the three months and nine months ended June 30, 2012 and 2011.
Valuation Techniques
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Companys Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Companys Level 2 assets and liabilities.
Level 2 Measurements:
Debt Securities Fair values for debt securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. The Company validates the vendor pricing by periodically comparing it to pricing from another independent pricing service.
Interest Rate Swaps These derivatives are valued by the counterparties using a model that incorporates interest rate yield curves, which are observable for substantially the full term of the contract. The valuation model is widely accepted in the financial services industry and does not involve significant judgment because most of the inputs are observable in the marketplace. Counterparty credit risk is not an input to the valuation because the Company has possession of collateral, in the form of cash or U.S. Treasury securities, in amounts equal to or exceeding the fair value of the interest rate swaps. The Company validates the counterparty valuations by comparing them to a valuation model provided by another third party service.
Level 3 Measurements:
Money Market and Other Mutual Funds The fair value of positions in money market and other mutual funds managed by The Reserve is estimated by management based on the underlying portfolio holdings data published by The Reserve.
Auction Rate Securities (ARS) ARS are long-term variable rate securities tied to short-term interest rates that are reset through a Dutch auction process, which generally occurs every seven to 35 days. Holders of ARS were previously able to liquidate their holdings to prospective buyers by participating in the auctions. During fiscal 2008, the Dutch auction process failed and holders were no longer able to liquidate their holdings through the auction process. The fair value of Company ARS holdings is primarily estimated based on an internal pricing model. The pricing model takes into consideration the characteristics of the underlying securities, as well as multiple inputs, including counterparty credit quality, expected timing of redemptions and an estimated yield premium that a market participant would require over otherwise comparable securities to compensate for the illiquidity of the ARS. These inputs require significant management judgment.
17
The following table summarizes quantitative information about Level 3 unobservable inputs as of June 30, 2012:
Asset | Valuation Technique |
Unobservable Input |
Range | Weighted Average | ||||
Auction Rate Securities | Discounted cash flow |
Constant prepayment rate (Annual) | 15% - 20% | 18% | ||||
Yield premium for illiquidity | 2% | 2% |
Fair Value of Financial Instruments Not Recorded at Fair Value
Cash and investments segregated in compliance with federal regulations include reverse repurchase agreements (securities purchased under agreements to resell). Reverse repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be resold, plus accrued interest. The Companys reverse repurchase agreements generally have a maturity of seven days and are collateralized by U.S. Treasury securities in amounts exceeding the carrying value of the resale agreements. Accordingly, the carrying value approximates fair value (categorized as Level 2 of the fair value hierarchy).
Senior Notes As of June 30, 2012, the Companys Senior Notes had an aggregate estimated fair value, based on quoted market prices (categorized as Level 1 of the fair value hierarchy), of approximately $1.357 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.342 billion. As of September 30, 2011, the Companys Senior Notes had an aggregate estimated fair value, based on quoted market prices, of approximately $1.340 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.337 billion.
8. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share amounts):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income |
$ | 153,829 | $ | 157,395 | $ | 442,488 | $ | 474,102 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding - basic |
547,682 | 570,287 | 548,673 | 573,034 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Common stock equivalent shares related to stock-based compensation |
5,361 | 6,497 | 5,564 | 6,134 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding - diluted (1) |
553,043 | 576,784 | 554,237 | 579,168 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share - basic |
$ | 0.28 | $ | 0.28 | $ | 0.81 | $ | 0.83 | ||||||||
Earnings per share - diluted |
$ | 0.28 | $ | 0.27 | $ | 0.80 | $ | 0.82 |
(1) | The Company excluded from the calculation of diluted earnings per share 2.5 million and 0.2 million shares underlying stock-based compensation awards for the three months ended June 30, 2012 and 2011, respectively, and 2.5 million and 1.0 million shares underlying stock-based compensation awards for the nine months ended June 30, 2012 and 2011, respectively, because their inclusion would have been antidilutive. |
18
9. COMPREHENSIVE INCOME
Comprehensive income is as follows for the periods indicated (dollars in thousands):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income |
$ | 153,829 | $ | 157,395 | $ | 442,488 | $ | 474,102 | ||||||||
Other comprehensive income: |
||||||||||||||||
Net unrealized investment gains (losses) |
32 | (2 | ) | 36 | (1 | ) | ||||||||||
Foreign currency translation adjustment |
(16 | ) | 21 | 26 | 161 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other comprehensive income |
16 | 19 | 62 | 160 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income |
$ | 153,845 | $ | 157,414 | $ | 442,550 | $ | 474,262 | ||||||||
|
|
|
|
|
|
|
|
10. RELATED PARTY TRANSACTIONS
Transactions with TD and Affiliates
As a result of the acquisition of TD Waterhouse during fiscal 2006, TD became an affiliate of the Company. TD owned approximately 45.2% of the Companys common stock as of June 30, 2012, of which 45% is permitted to be voted under the terms of the Stockholders Agreement among TD, the Company and certain other stockholders. Pursuant to the Stockholders Agreement, TD has the right to designate five of twelve members of the Companys board of directors. The Company transacts business and has extensive relationships with TD and certain of its affiliates. Transactions with TD and its affiliates are discussed and summarized below.
Insured Deposit Account Agreement
The Company is party to an insured deposit account (IDA) agreement with TD Bank USA, N.A. (TD Bank USA), TD Bank, N.A. and TD. Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the Depository Institutions) make available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provides marketing, recordkeeping and support services for the Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the Depository Institutions pay the Company a fee based on the yield earned on the client IDA assets, less the actual interest paid to clients, a flat fee to the Depository Institutions of 25 basis points and the cost of FDIC insurance premiums.
The IDA agreement has a term of five years beginning July 1, 2008, and is automatically renewable for successive five-year terms, provided that it may be terminated by any party upon two years prior written notice. As of June 30, 2012, neither the Company nor TD has exercised its termination rights. The fee earned on the IDA agreement is calculated based on two primary components: (a) the yield on fixed-rate investments, based on prevailing fixed rates for identical balances and maturities in the interest rate swap market (generally LIBOR-based) at the time such investments were added to the IDA portfolio and (b) floating-rate investments, based on the monthly average rate for 30-day LIBOR. The agreement provides that, from time to time, the Company may request amounts and maturity dates for the fixed-rate investments in the IDA portfolio, subject to the approval of the Depository Institutions. As of June 30, 2012, the IDA portfolio was comprised of approximately 92% fixed rate investments and 8% floating rate investments.
In the event the fee computation results in a negative amount, the Company must pay the Depository Institutions the negative amount. This effectively results in the Company guaranteeing the Depository Institutions revenue of 25 basis points on the IDA agreement, plus the reimbursement of FDIC insurance premiums. The fee computation under the IDA agreement is affected by many variables, including the type, duration, credit quality, principal balance and yield of the investment portfolio at the Depository Institutions, the prevailing interest rate environment, the amount of client deposits and the yield paid on client deposits. Because a negative IDA fee computation would arise only if there were extraordinary movements in many of these variables, the maximum potential amount of future payments the Company could be required to make under this arrangement cannot be reasonably estimated. Management believes the potential for the fee calculation to result in a negative amount is remote and the fair value of the guarantee is not material. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for the IDA agreement.
19
In addition, the Company has various other services agreements and transactions with TD and its affiliates. The following tables summarize revenues and expenses resulting from transactions with TD and its affiliates for the periods indicated (dollars in thousands):
Revenues from TD and Affiliates | ||||||||||||||||||
Statement of Income Classification |
Three months
ended June 30, |
Nine months
ended June 30, |
||||||||||||||||
Description |
2012 | 2011 | 2012 | 2011 | ||||||||||||||
Insured Deposit Account Agreement |
Insured deposit account fees | $ | 206,339 | $ | 196,817 | $ | 620,590 | $ | 562,759 | |||||||||
Mutual Fund Agreements |
Investment product fees | 1,136 | 1,418 | 2,785 | 7,290 | |||||||||||||
Referral and Strategic Alliance Agreement |
Various | 2,480 | 1,223 | 5,446 | 2,909 | |||||||||||||
Securities borrowing and lending, net |
Net interest revenue | 694 | 895 | 2,162 | 3,167 | |||||||||||||
TD Waterhouse Canada Order Routing Agreement |
Other revenues | 561 | 574 | 1,896 | 1,989 | |||||||||||||
TD Waterhouse UK Servicing Agreement |
Commissions and transaction fees | 105 | 116 | 331 | 365 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
$ | 211,315 | $ | 201,043 | $ | 633,210 | $ | 578,479 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Expenses to TD and Affiliates | ||||||||||||||||||
Statement of Income Classification |
Three months
ended June 30, |
Nine months
ended June 30, |
||||||||||||||||
Description |
2012 | 2011 | 2012 | 2011 | ||||||||||||||
Canadian Call Center Services Agreement |
Professional services | $ | 4,394 | $ | 4,525 | $ | 13,398 | $ | 13,521 | |||||||||
Certificates of Deposit Brokerage Agreement |
Advertising | | | 1,095 | 1,845 | |||||||||||||
Cash Management Services Agreement |
Clearing and execution costs | 399 | 216 | 1,154 | 644 | |||||||||||||
Referral and Strategic Alliance Agreement |
Various | 138 | 449 | 868 | 1,508 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
$ | 4,931 | $ | 5,190 | $ | 16,515 | $ | 17,518 | ||||||||||
|
|
|
|
|
|
|
|
The following table summarizes the classification and amount of receivables from and payables to TD and its affiliates on the Condensed Consolidated Balance Sheets resulting from related party transactions (dollars in thousands):
June 30, | September 30, | |||||||
2012 | 2011 | |||||||
Assets: |
||||||||
Receivable from brokers, dealers and clearing organizations |
$ | 367 | $ | 206 | ||||
Receivable from affiliates |
81,525 | 92,963 | ||||||
Liabilities: |
||||||||
Payable to brokers, dealers and clearing organizations |
$ | 84,285 | $ | 87,771 | ||||
Payable to affiliates |
4,288 | 3,912 |
Receivables from and payables to TD affiliates resulting from client cash sweep activity are generally settled in cash the next business day. Receivables from and payables to brokers, dealers and clearing organizations primarily relate to securities borrowing and lending activity and are settled in accordance with the contractual terms. Other receivables from and payables to affiliates of TD are generally settled in cash on a monthly basis.
11. SUBSEQUENT EVENT
On August 6, 2012, the Company entered into a securities purchase agreement with Knight Capital Group, Inc. (Knight). Under the agreement, the Company purchased 40,000 shares of Knight 2% convertible preferred stock for $40 million in cash. Each preferred share will be convertible to 666.667 shares of Knight Class A common stock, subject to regulatory approvals and customary anti-dilution adjustments. This conversion ratio equates to an effective price of $1.50 per Knight common share. Assuming the conversion of all Knight convertible preferred stock to common stock, the Company estimates that it would own approximately 7% of Knights common stock following such conversion. The Company has classified its Knight shares as available-for-sale securities.
The Company clears its clients futures transactions on an omnibus account basis through a subsidiary of Knight. The Company also routes certain client orders for equities and other securities to Knight subsidiaries for execution.
20
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Senior Notes are jointly and severally and fully and unconditionally guaranteed by TD Ameritrade Online Holdings Corp. (TDAOH), a wholly-owned subsidiary of the Company. Presented below is condensed consolidating financial information for the Company, its guarantor subsidiary and its non-guarantor subsidiaries for the periods indicated.
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2012
(Unaudited)
(In thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 183,300 | $ | 6,041 | $ | 720,425 | $ | | $ | 909,766 | ||||||||||
Short-term investments |
126,083 | | 3,536 | | 129,619 | |||||||||||||||
Cash and investments segregated in compliance with federal regulations |
| | 3,546,772 | | 3,546,772 | |||||||||||||||
Receivable from brokers, dealers and clearing organizations |
| | 1,053,066 | | 1,053,066 | |||||||||||||||
Receivable from clients, net |
| | 8,738,710 | | 8,738,710 | |||||||||||||||
Investments in subsidiaries |
5,437,038 | 5,226,221 | 548,478 | (11,211,737 | ) | | ||||||||||||||
Receivable from affiliates |
13,521 | 4,084 | 77,488 | (13,568 | ) | 81,525 | ||||||||||||||
Goodwill |
| | 2,466,967 | | 2,466,967 | |||||||||||||||
Acquired intangible assets, net |
| 145,674 | 809,400 | | 955,074 | |||||||||||||||
Other, net |
144,887 | 5,599 | 913,518 | (31,618 | ) | 1,032,386 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 5,904,829 | $ | 5,387,619 | $ | 18,878,360 | $ | (11,256,923 | ) | $ | 18,913,885 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Liabilities: |
||||||||||||||||||||
Payable to brokers, dealers and clearing organizations |
$ | | $ | | $ | 2,184,238 | $ | | $ | 2,184,238 | ||||||||||
Payable to clients |
| | 10,099,387 | | 10,099,387 | |||||||||||||||
Accounts payable and accrued liabilities |
222,781 | | 334,514 | (5,564 | ) | 551,731 | ||||||||||||||
Payable to affiliates |
15 | | 17,841 | (13,568 | ) | 4,288 | ||||||||||||||
Long-term debt |
1,341,644 | | | | 1,341,644 | |||||||||||||||
Other |
| 49,289 | 368,973 | (26,054 | ) | 392,208 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,564,440 | 49,289 | 13,004,953 | (45,186 | ) | 14,573,496 | ||||||||||||||
Stockholders equity |
4,340,389 | 5,338,330 | 5,873,407 | (11,211,737 | ) | 4,340,389 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 5,904,829 | $ | 5,387,619 | $ | 18,878,360 | $ | (11,256,923 | ) | $ | 18,913,885 | |||||||||
|
|
|
|
|
|
|
|
|
|
21
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2011
(Unaudited)
(In thousands)
Parent | Guarantor Subsidiary |
Non-Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 93,469 | $ | 7,170 | $ | 931,324 | $ | | $ | 1,031,963 | ||||||||||
Short-term investments |
| | 3,557 | | 3,557 | |||||||||||||||
Cash and investments segregated in compliance with federal regulations |
| | 2,519,249 | | 2,519,249 | |||||||||||||||
Receivable from brokers, dealers and clearing organizations |
| | 834,469 | | 834,469 | |||||||||||||||
Receivable from clients, net |
| | 8,059,410 | | 8,059,410 | |||||||||||||||
Investments in subsidiaries |
5,431,356 | 5,240,332 | 555,001 | (11,226,689 | ) | | ||||||||||||||
Receivable from affiliates |
6,016 | 3,754 | 89,352 | (6,159 | ) | 92,963 | ||||||||||||||
Goodwill |
| | 2,466,978 | | 2,466,978 | |||||||||||||||
Acquired intangible assets, net |
| 145,674 | 878,678 | | 1,024,352 | |||||||||||||||
Other, net |
148,759 | 5,773 | 969,580 | (31,291 | ) | 1,092,821 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 5,679,600 | $ | 5,402,703 | $ | 17,307,598 | $ | (11,264,139 | ) | $ | 17,125,762 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Liabilities: |
||||||||||||||||||||
Payable to brokers, dealers and clearing organizations |
$ | | $ | | $ | 1,709,572 | $ | | $ | 1,709,572 | ||||||||||
Payable to clients |
| | 8,979,327 | | 8,979,327 | |||||||||||||||
Accounts payable and accrued liabilities |
226,883 | | 364,574 | (5,737 | ) | 585,720 | ||||||||||||||
Payable to affiliates |
111 | 38 | 9,922 | (6,159 | ) | 3,912 | ||||||||||||||
Long-term debt |
1,336,789 | | | | 1,336,789 | |||||||||||||||
Other |
| 49,118 | 371,061 | (25,554 | ) | 394,625 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,563,783 | 49,156 | 11,434,456 | (37,450 | ) | 13,009,945 | ||||||||||||||
Stockholders equity |
4,115,817 | 5,353,547 | 5,873,142 | (11,226,689 | ) | 4,115,817 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 5,679,600 | $ | 5,402,703 | $ | 17,307,598 | $ | (11,264,139 | ) | $ | 17,125,762 | |||||||||
|
|
|
|
|
|
|
|
|
|
22
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2012
(Unaudited)
(In thousands)
Parent | Guarantor Subsidiary |
Non-Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Net revenues |
$ | 14,678 | $ | | $ | 667,225 | $ | (14,638 | ) | $ | 667,265 | |||||||||
Operating expenses |
12,006 | 3 | 415,757 | (14,638 | ) | 413,128 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
2,672 | (3 | ) | 251,468 | | 254,137 | ||||||||||||||
Other expense (income) |
7,414 | | (354 | ) | | 7,060 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes and equity in income of subsidiaries |
(4,742 | ) | (3 | ) | 251,822 | | 247,077 | |||||||||||||
Provision for (benefit from) income taxes |
(1,307 | ) | (1 | ) | 94,556 | | 93,248 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before equity in income of subsidiaries |
(3,435 | ) | (2 | ) | 157,266 | | 153,829 | |||||||||||||
Equity in income of subsidiaries |
157,264 | 148,452 | 8,403 | (314,119 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 153,829 | $ | 148,450 | $ | 165,669 | $ | (314,119 | ) | $ | 153,829 | |||||||||
|
|
|
|
|
|
|
|
|
|
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2011
(Unaudited)
(In thousands)
Parent | Guarantor Subsidiary |
Non-Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Net revenues |
$ | 5,720 | $ | 60 | $ | 684,781 | $ | (5,779 | ) | $ | 684,782 | |||||||||
Operating expenses |
6,178 | 47 | 421,797 | (5,779 | ) | 422,243 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(458 | ) | 13 | 262,984 | | 262,539 | ||||||||||||||
Other expense (income) |
8,426 | | (75 | ) | | 8,351 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes and equity in income of subsidiaries |
(8,884 | ) | 13 | 263,059 | | 254,188 | ||||||||||||||
Provision for (benefit from) income taxes |
(2,746 | ) | 5 | 99,534 | | 96,793 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before equity in income of subsidiaries |
(6,138 | ) | 8 | 163,525 | | 157,395 | ||||||||||||||
Equity in income of subsidiaries |
163,533 | 169,238 | 9,580 | (342,351 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 157,395 | $ | 169,246 | $ | 173,105 | $ | (342,351 | ) | $ | 157,395 | |||||||||
|
|
|
|
|
|
|
|
|
|
23
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED JUNE 30, 2012
(Unaudited)
(In thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net revenues |
$ | 28,193 | $ | 1 | $ | 1,993,760 | $ | (28,155 | ) | $ | 1,993,799 | |||||||||
Operating expenses |
25,345 | 9 | 1,294,830 | (28,155 | ) | 1,292,029 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
2,848 | (8 | ) | 698,930 | | 701,770 | ||||||||||||||
Other expense (income) |
22,133 | | (755 | ) | | 21,378 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes and equity in income of subsidiaries |
(19,285 | ) | (8 | ) | 699,685 | | 680,392 | |||||||||||||
Provision for (benefit from) income taxes |
(17,251 | ) | (902 | ) | 256,057 | | 237,904 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before equity in income of subsidiaries |
(2,034 | ) | 894 | 443,628 | | 442,488 | ||||||||||||||
Equity in income of subsidiaries |
444,522 | 433,889 | 24,610 | (903,021 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 442,488 | $ | 434,783 | $ | 468,238 | $ | (903,021 | ) | $ | 442,488 | |||||||||
|
|
|
|
|
|
|
|
|
|
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED JUNE 30, 2011
(Unaudited)
(In thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net revenues |
$ | 11,014 | $ | 181 | $ | 2,059,175 | $ | (11,169 | ) | $ | 2,059,201 | |||||||||
Operating expenses |
10,617 | 172 | 1,280,039 | (11,169 | ) | 1,279,659 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
397 | 9 | 779,136 | | 779,542 | |||||||||||||||
Other expense |
26,590 | | 72 | | 26,662 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes and equity in income of subsidiaries |
(26,193 | ) | 9 | 779,064 | | 752,880 | ||||||||||||||
Provision for (benefit from) income taxes |
(11,779 | ) | (344 | ) | 290,901 | | 278,778 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before equity in income of subsidiaries |
(14,414 | ) | 353 | 488,163 | | 474,102 | ||||||||||||||
Equity in income of subsidiaries |
488,516 | 501,805 | 28,424 | (1,018,745 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 474,102 | $ | 502,158 | $ | 516,587 | $ | (1,018,745 | ) | $ | 474,102 | |||||||||
|
|
|
|
|
|
|
|
|
|
24
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2012
(Unaudited)
(In thousands)
Guarantor | Non-Guarantor | |||||||||||||||
Parent | Subsidiary | Subsidiaries | Total | |||||||||||||
Net cash provided by operating activities |
$ | 30,408 | $ | 871 | $ | 349,856 | $ | 381,135 | ||||||||
Cash flows from investing activities: |
||||||||||||||||
Purchase of property and equipment |
| | (121,135 | ) | (121,135 | ) | ||||||||||
Purchase of short-term investments |
(126,506 | ) | | (1,034 | ) | (127,540 | ) | |||||||||
Other, net |
| | 2,318 | 2,318 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
(126,506 | ) | | (119,851 | ) | (246,357 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash flows from financing activities: |
||||||||||||||||
Purchase of treasury stock |
(176,848 | ) | | | (176,848 | ) | ||||||||||
Payment of cash dividends |
(98,859 | ) | | | (98,859 | ) | ||||||||||
Other, net |
22,768 | | (4,065 | ) | 18,703 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in financing activities |
(252,939 | ) | | (4,065 | ) | (257,004 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Intercompany investing and financing activities, net |
438,868 | (2,000 | ) | (436,868 | ) | | ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | 29 | 29 | ||||||||||||
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Net increase (decrease) in cash and cash equivalents |
89,831 | (1,129 | ) | (210,899 | ) | (122,197 | ) | |||||||||
Cash and cash equivalents at beginning of period |
93,469 | 7,170 | 931,324 | 1,031,963 | ||||||||||||
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Cash and cash equivalents at end of period |
$ | 183,300 | $ | 6,041 | $ | 720,425 | $ | 909,766 | ||||||||
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TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2011
(Unaudited)
(In thousands)
Guarantor | Non-Guarantor | |||||||||||||||
Parent | Subsidiary | Subsidiaries | Total | |||||||||||||
Net cash provided by operating activities |
$ | 32,904 | $ | 4,426 | $ | 770,109 | $ | 807,439 | ||||||||
Cash flows from investing activities: |
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Purchase of property and equipment |
| | (109,904 | ) | (109,904 | ) | ||||||||||
Other, net |
| | (2,626 | ) | (2,626 | ) | ||||||||||
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Net cash used in investing activities |
| | (112,530) | (112,530) | ||||||||||||
Cash flows from financing activities: |
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Purchase of treasury stock |
(144,245 | ) | | | (144,245 | ) | ||||||||||
Return of prepayment on structured stock repurchase |
118,834 | | | 118,834 | ||||||||||||
Payment of cash dividends |
(85,936 | ) | | | (85,936 | ) | ||||||||||
Other, net |
11,580 | | (13,151 | ) | (1,571 | ) | ||||||||||
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Net cash used in financing activities |
(99,767 | ) | | (13,151 | ) | (112,918 | ) | |||||||||
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Intercompany investing and financing activities, net |
115,944 | (5,000 | ) | (110,944 | ) | | ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | 163 | 163 | ||||||||||||
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Net increase (decrease) in cash and cash equivalents |
49,081 | (574 | ) | 533,647 | 582,154 | |||||||||||
Cash and cash equivalents at beginning of period |
67,033 | 25,058 | 649,401 | 741,492 | ||||||||||||
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Cash and cash equivalents at end of period |
$ | 116,114 | $ | 24,484 | $ | 1,183,048 | $ | 1,323,646 | ||||||||
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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Companys annual report on Form 10-K for the fiscal year ended September 30, 2011, and the Condensed Consolidated Financial Statements and Notes thereto contained in this quarterly report on Form 10-Q.
This discussion contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words may, could, would, should, believe, expect, anticipate, plan, estimate, target, project, intend and similar expressions. In particular, forward-looking statements contained in this discussion include our expectations regarding: the effect of client trading activity on our results of operations; the effect of changes in interest rates on our net interest spread; the average yield earned on insured deposit account assets; our migration of client cash balances into the insured deposit account offering; our effective income tax rate; and our capital and liquidity needs and our plans to finance such needs.
The Companys actual results could differ materially from those anticipated in such forward-looking statements. Important factors that may cause such differences include, but are not limited to: general economic and political conditions and other securities industry risks; fluctuations in interest rates; stock market fluctuations and changes in client trading activity; credit risk with clients and counterparties; increased competition; systems failures, delays and capacity constraints; network security risks; liquidity risk; new laws and regulations affecting our business; regulatory and legal matters and uncertainties and the other risks and uncertainties set forth under Item 1A. Risk Factors of the Companys annual report on Form 10-K for the fiscal year ended September 30, 2011. The forward-looking statements contained in this report speak only as of the date on which the statements were made. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise, except to the extent required by the federal securities laws.
The preparation of our financial statements requires us to make judgments and estimates that may have a significant impact upon our financial results. Note 1 of our Notes to Consolidated Financial Statements for the fiscal year ended September 30, 2011, contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. We believe that the following areas are particularly subject to managements judgments and estimates and could materially affect our results of operations and financial position: valuation of goodwill and acquired intangible assets; valuation of stock-based compensation; estimates of effective income tax rates, deferred income taxes and related valuation allowances; accruals for contingent liabilities; and valuation of guarantees. These areas are discussed in further detail under the heading Critical Accounting Policies and Estimates in Item 7 of our annual report on Form 10-K for the fiscal year ended September 30, 2011.
Unless otherwise indicated, the terms we, us, our or Company in this report refer to TD Ameritrade Holding Corporation and its wholly-owned subsidiaries. The term GAAP refers to U.S. generally accepted accounting principles.
GLOSSARY OF TERMS
In discussing and analyzing our business, we utilize several metrics and other terms that are defined in the following Glossary of Terms. Italics indicate other defined terms that appear elsewhere in the Glossary. The term GAAP refers to U.S. generally accepted accounting principles.
Activity rate funded accounts Average client trades per day during the period divided by the average number of funded accounts during the period.
Asset-based revenues Revenues consisting of (1) net interest revenue, (2) insured deposit account fees and (3) investment product fees. The primary factors driving our asset-based revenues are average balances and average rates. Average balances consist primarily of average client margin balances, average segregated cash balances, average client credit balances, average client insured deposit account balances, average fee-based investment balances and average securities borrowing and securities lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances.
Average client trades per funded account (annualized) Total trades divided by the average number of funded accounts during the period, annualized based on the number of trading days in the fiscal year.
Average client trades per day Total trades divided by the number of trading days in the period. This metric is also known as daily average revenue trades (DARTs).
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Average commissions and transaction fees per trade Total commissions and transaction fee revenues as reported on the Companys Consolidated Statements of Income (excluding revenues from the active trader business acquired from thinkorswim Group Inc. (thinkorswim) and clearing revenues from TD Waterhouse UK) divided by total trades for the period. Commissions and transaction fee revenues primarily consist of trading commissions, revenue-sharing arrangements with market destinations (also referred to as payment for order flow) and markups on riskless principal transactions in fixed-income securities.
Basis point When referring to interest rates, one basis point represents one one-hundredth of one percent.
Beneficiary accounts Brokerage accounts managed by a custodian, guardian, conservator or trustee on behalf of one or more beneficiaries. Examples include accounts maintained under the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), guardianship, conservatorship and trust arrangements and pension or profit plan for small business accounts.
Brokerage accounts Accounts maintained by the Company on behalf of clients for securities brokerage activities. The primary types of brokerage accounts are cash accounts, margin accounts, IRA accounts and beneficiary accounts.
Cash accounts Brokerage accounts that do not have margin account approval.
Client assets The total value of cash and securities in brokerage accounts.
Client cash and money market assets The sum of all client cash balances, including client credit balances and client cash balances swept into insured deposit accounts or money market mutual funds.
Client credit balances Client cash held in brokerage accounts, excluding balances generated by client short sales on which no interest is paid. Interest paid on client credit balances is a reduction of net interest revenue. Client credit balances are included in payable to clients on our Consolidated Balance Sheets.
Client margin balances The total amount of cash loaned to clients in margin accounts. Such loans are secured by client assets. Interest earned on client margin balances is a component of net interest revenue. Client margin balances are included in receivable from clients on our Consolidated Balance Sheets.
Conduit-based assets Deposits paid on securities borrowing associated with our conduit-based securities borrowing/lending business. In our conduit business, we act as an intermediary by borrowing securities from one counterparty and lending the same securities to another counterparty. We generally earn a net interest spread equal to the excess of interest earned on securities borrowing deposits over the interest paid on securities lending deposits.
Daily average revenue trades (DARTs) Total trades divided by the number of trading days in the period. This metric is also known as average client trades per day.
EBITDA EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure. We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our holding companys senior revolving credit facility. EBITDA eliminates the non-cash effect of tangible asset depreciation and amortization and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.
EPS excluding amortization of intangible assets Earnings per share (EPS) excluding amortization of intangible assets is a non-GAAP financial measure. We define EPS excluding amortization of intangible assets as earnings (loss) per share, adjusted to remove the after-tax effect of amortization of acquired intangible assets. We consider EPS excluding amortization of intangible assets an important measure of our financial performance. Amortization of acquired intangible assets is excluded because we believe it is not indicative of underlying business performance. EPS excluding amortization of intangible assets should be considered in addition to, rather than as a substitute for, GAAP earnings per share.
EPS from ongoing operations EPS from ongoing operations is a non-GAAP financial measure. We define EPS from ongoing operations as earnings (loss) per share, adjusted to remove any significant unusual gains or charges. We consider EPS from ongoing operations an important measure of the financial performance of our ongoing business. Unusual gains and charges are excluded because we believe they are not likely to be indicative of the ongoing operations of our business. EPS from ongoing operations should be considered in addition to, rather than as a substitute for, GAAP earnings per share.
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Fee-based investment balances Client assets invested in money market mutual funds, other mutual funds and Company programs such as AdvisorDirect® and Amerivest,TM on which we earn fee revenues. Fee revenues earned on these balances are included in investment product fees on our Consolidated Statements of Income.
Funded accounts All open client accounts with a total liquidation value greater than zero.
Insured deposit account The Company is party to an Insured Deposit Account (IDA) agreement with TD Bank USA, N.A. (TD Bank USA), TD Bank, N.A. and The Toronto-Dominion Bank (TD). Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the Depository Institutions) make available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provides marketing, recordkeeping and support services for the Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the Depository Institutions pay the Company a fee based on the yield earned on the client IDA assets, less the actual interest paid to clients, a flat fee to the Depository Institutions of 25 basis points and the cost of FDIC insurance premiums.
Interest rate-sensitive assets Consist of spread-based assets and client cash invested in money market mutual funds.
Investment product fees Revenues earned on fee-based investment balances. Investment product fees include fees earned on money market mutual funds, other mutual funds and through Company programs such as AdvisorDirect® and AmerivestTM.
IRA accounts (Individual Retirement Arrangements) A personal trust account for the exclusive benefit of a U.S. individual (or his or her beneficiaries) that provides tax advantages in accumulating funds to save for retirement or other qualified purposes. These accounts are subject to numerous restrictions on additions to and withdrawals from the account, as well as prohibitions against certain investments or transactions conducted within the account. The Company offers traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA accounts.
Liquid assets management target Liquid assets management target is a non-GAAP financial measure. We define liquid assets management target as the sum of (a) corporate cash and cash equivalents, (b) corporate short-term investments and (c) regulatory net capital of (i) our clearing broker-dealer subsidiary in excess of 10% of aggregate debit items and (ii) our introducing broker-dealer subsidiaries in excess of a minimum operational target established by management ($50 million in the case of our primary introducing broker-dealer, TD Ameritrade, Inc.). We include the excess capital of our broker-dealer subsidiaries in liquid assets management target, rather than simply including broker-dealer cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the broker-dealer subsidiaries to the parent company. Excess capital, as defined under clause (c) above, is generally available for dividend from the broker-dealer subsidiaries to the parent company. Liquid assets management target is based on more conservative measures of broker-dealer net capital than liquid assets regulatory threshold (defined below) because we prefer to maintain significantly more conservative levels of net capital at the broker-dealer subsidiaries than the regulatory thresholds require. We consider liquid assets management target to be a measure that reflects our liquidity that would be readily available for corporate investing and financing activities under normal operating circumstances. Liquid assets regulatory threshold is a related metric that reflects our liquidity that would be available for corporate investing and financing activities under unusual operating circumstances, such as the need to provide funding for significant strategic business transactions. Our liquid assets metrics should be considered as supplemental measures of liquidity, rather than as substitutes for cash and cash equivalents.
Liquid assets regulatory threshold Liquid assets regulatory threshold is a non-GAAP financial measure. We define liquid assets regulatory threshold as the sum of (a) corporate cash and cash equivalents, (b) corporate short-term investments, (c) regulatory net capital of (i) our clearing broker-dealer subsidiary in excess of 5% of aggregate debit items and (ii) our introducing broker-dealer subsidiaries in excess of the applicable early warning net capital requirement and (d) Tier 1 capital of our trust company in excess of the minimum dollar requirement. We include the excess capital of our broker-dealer and trust company subsidiaries in liquid assets regulatory threshold, rather than simply including broker-dealer and trust company cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the broker-dealer and trust company subsidiaries to the parent company. Excess capital, as defined under clauses (c) and (d) above, is generally available for dividend from the broker-dealer and trust company subsidiaries to the parent company. We consider liquid assets regulatory threshold to be a measure that reflects our liquidity that would be available for corporate investing and financing activities under unusual operating circumstances, such as the need to provide funding for significant strategic business transactions. Liquid assets management target is a related metric that reflects our liquidity that would be readily available for corporate investing and financing activities under normal operating circumstances. Our liquid assets metrics should be considered as supplemental measures of liquidity, rather than as substitutes for cash and cash equivalents.
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Liquidation value The net value of a clients account holdings as of the close of a regular trading session. Liquidation value includes client cash and the value of long security positions, less margin balances and the cost to buy back short security positions.
Margin accounts Brokerage accounts in which clients may borrow from the Company to buy securities or for any other purpose, subject to regulatory and Company-imposed limitations.
Net interest margin (NIM) A measure of the net yield on our average spread-based assets. Net interest margin is calculated for a given period by dividing the annualized sum of net interest revenue (excluding net interest revenue from conduit-based assets) and insured deposit account fees by average spread-based assets.
Net interest revenue Net interest revenue is interest revenues less brokerage interest expense. Interest revenues are generated by charges to clients on margin balances maintained in margin accounts, the investment of cash from operations and segregated cash in short-term marketable securities and interest earned on securities borrowing. Brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in brokerage accounts and interest incurred on securities lending. Brokerage interest expense does not include interest on Company non-brokerage borrowings.
Net new assets Consists of total client asset inflows, less total client asset outflows, excluding activity from business combinations. Client asset inflows include interest and dividend payments and exclude changes in client assets due to market fluctuations. Net new assets are measured based on the market value of the assets as of the date of the inflows and outflows.
Net new asset growth rate (annualized) Annualized net new assets as a percentage of client assets as of the beginning of the period.
New accounts The number of new client accounts (funded and unfunded) opened in a specified period.
Operating expenses excluding advertising Operating expenses excluding advertising is a non-GAAP financial measure. Operating expenses excluding advertising consists of total operating expenses, adjusted to remove advertising expense. We consider operating expenses excluding advertising an important measure of the financial performance of our ongoing business. Advertising spending is excluded because it is largely at the discretion of the Company, can vary significantly from period to period based on market conditions and generally relates to the acquisition of future revenues through new accounts rather than current revenues from existing accounts. Operating expenses excluding advertising should be considered in addition to, rather than as a substitute for, total operating expenses.
Return on client assets (ROCA) Annualized pre-tax income divided by average client assets during the period.
Securities borrowing We borrow securities temporarily from other broker-dealers in connection with our broker-dealer business. We deposit cash as collateral for the securities borrowed, and generally earn interest revenue on the cash deposited with the counterparty.
Securities lending We loan securities temporarily to other broker-dealers in connection with our broker-dealer business. We receive cash as collateral for the securities loaned, and generally incur interest expense on the cash deposited with us.
Segregated cash Client cash and investments segregated in compliance with Rule 15c3-3 of the Securities Exchange Act of 1934 (the Customer Protection Rule) and other regulations. Interest earned on segregated cash is a component of net interest revenue.
Spread-based assets Client and brokerage-related asset balances, including client margin balances, segregated cash, insured deposit account balances, deposits paid on securities borrowing (excluding conduit-based assets) and other cash and interest-earning investment balances. Spread-based assets is used in the calculation of our net interest margin.
Total trades Revenue-generating client securities trades, which are executed by the Companys broker-dealer subsidiaries, excluding trades related to the active trader business acquired from thinkorswim and trades processed for TD Waterhouse UK. Total trades are a significant source of the Companys revenues. Such trades include, but are not limited to, trades in equities, options, futures, foreign exchange, mutual funds and debt instruments. Trades generate revenue from commissions, markups on riskless principal transactions in fixed income securities, transaction fees and/or revenue-sharing arrangements with market destinations (also known as payment for order flow).
Trading days Days in which the U.S. equity markets are open for a full trading session. Reduced exchange trading sessions are treated as half trading days.
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Transaction-based revenues Revenues generated from client trade execution, consisting primarily of commissions, markups on riskless principal transactions in fixed income securities, transaction clearing fees and revenue sharing arrangements with market destinations (also known as payment for order flow).
RESULTS OF OPERATIONS
Conditions in the U.S. equity markets significantly impact the volume of our clients trading activity. There is a direct correlation between the volume of our clients trading activity and our results of operations. We cannot predict future trading volumes in the U.S. equity markets. If client trading activity increases, we expect that it would have a positive impact on our results of operations. If client trading activity declines, we expect that it would have a negative impact on our results of operations.
Changes in average balances, especially client margin, credit, insured deposit account and mutual fund balances, may significantly impact our results of operations. Changes in interest rates also significantly impact our results of operations. We seek to mitigate interest rate risk by aligning the average duration of our interest-earning assets with that of our interest-bearing liabilities. We cannot predict the direction of interest rates or the levels of client balances. If interest rates rise, we generally expect to earn a larger net interest spread. Conversely, a falling interest rate environment generally would result in our earning a smaller net interest spread.
Financial Performance Metrics
Pre-tax income, net income, earnings per share and EBITDA (earnings before interest, taxes, depreciation and amortization) are key metrics we use in evaluating our financial performance. EBITDA is a non-GAAP financial measure.
We consider EBITDA an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our holding companys senior revolving credit facility. EBITDA eliminates the non-cash effect of tangible asset depreciation and amortization and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.
The following table sets forth EBITDA in dollars and as a percentage of net revenues for the periods indicated and provides reconciliations to net income, which is the most directly comparable GAAP measure (dollars in thousands):
Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
% of Net | % of Net | % of Net | % of Net | |||||||||||||||||||||||||||||
$ | Revenue | $ | Revenue | $ | Revenue | $ | Revenue | |||||||||||||||||||||||||
EBITDA | ||||||||||||||||||||||||||||||||
EBITDA |
$ | 295,412 | 44.3 | % | $ | 302,101 | 44.1 | % | $ | 824,063 | 41.3 | % | $ | 900,483 | 43.7 | % | ||||||||||||||||
Less: |
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Depreciation and amortization |
(18,334 | ) | (2.7 | %) | (16,914 | ) | (2.5 | %) | (53,015 | ) | (2.7 | %) | (49,629 | ) | (2.4 | %) | ||||||||||||||||
Amortization of acquired intangible assets |
(22,941 | ) | (3.4 | %) | (24,083 | ) | (3.5 | %) | (69,278 | ) | (3.5 | %) | (72,747 | ) | (3.5 | %) | ||||||||||||||||
Interest on borrowings |
(7,060 | ) | (1.1 | %) | (6,916 | ) | (1.0 | %) | (21,378 | ) | (1.1 | %) | (25,227 | ) | (1.2 | %) | ||||||||||||||||
Provision for income taxes |
(93,248 | ) | (14.0 | %) | (96,793 | ) | (14.1 | %) | (237,904 | ) | (11.9 | %) | (278,778 | ) | (13.5 | %) | ||||||||||||||||
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Net income |
$ | 153,829 | 23.1 | % | $ | 157,395 | 23.0 | % | $ | 442,488 | 22.2 | % | $ | 474,102 | 23.0 | % | ||||||||||||||||
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Our EBITDA decreased 8% for the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011, primarily due to a 3% decrease in net revenues and a 1% increase in operating expenses. The decrease in net revenues was due primarily to a decrease of 33 basis points in net interest margin earned on spread-based balances, a 6% decrease in total client trades and a 3% decrease in average commissions and transaction fees per trade, partially offset by the effects of a 22% increase in average spread-based balances and a 14% increase in other fee-based investment balances. Detailed analysis of net revenues and operating expenses is presented later in this discussion.
Operating Metrics
Our largest sources of revenues are asset-based revenues and transaction-based revenues. For the nine months ended June 30, 2012, asset-based revenues and transaction-based revenues accounted for 55% and 42% of our net revenues, respectively. Asset-based revenues consist of (1) net interest revenue, (2) insured deposit account fees and (3) investment product fees. The primary factors driving our asset-based revenues are average balances and average rates. Average balances consist primarily of
30
average client margin balances, average segregated cash balances, average client credit balances, average client insured deposit account balances, average fee-based investment balances and average securities borrowing and lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances. The primary factors driving our transaction-based revenues are total client trades and average commissions and transaction fees per trade. We also consider client account and client asset metrics, although we believe they are generally of less significance to our results of operations for any particular period than our metrics for asset-based and transaction-based revenues.
Asset-Based Revenue Metrics
We calculate the return on our interest-earning assets (excluding conduit-based assets) and our insured deposit account balances using a measure we refer to as net interest margin. Net interest margin is calculated for a given period by dividing the annualized sum of net interest revenue (excluding net interest revenue from conduit-based assets) and insured deposit account fees by average spread-based assets. Spread-based assets consist of client and brokerage-related asset balances, including client margin balances, segregated cash, insured deposit account balances, deposits paid on securities borrowing (excluding conduit-based assets) and other cash and interest-earning investment balances. The following table sets forth net interest margin and average spread-based assets (dollars in millions):
Three months ended | Nine months ended | |||||||||||||||||||||||
June 30, | Increase/ (Decrease) |
June 30, | Increase/ (Decrease) |
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2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||
Avg. interest-earning assets (excluding conduit business) |
$ | 14,850 | $ | 14,034 | $ | 816 | $ | 14,658 | $ | 13,547 | $ | 1,111 | ||||||||||||
Avg. insured deposit account balances |
58,981 | 48,590 | 10,391 | 58,709 | 46,705 | 12,004 | ||||||||||||||||||
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Avg. spread-based balances |
$ | 73,831 | $ | 62,624 | $ | 11,207 | $ | 73,367 | $ | 60,252 | $ | 13,115 | ||||||||||||
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Net interest revenue (excluding conduit business) |
$ | 118.3 | $ | 131.2 | $ | (12.9 | ) | $ | 334.2 | $ | 368.1 | $ | (33.9 | ) | ||||||||||
Insured deposit account fee revenue |
206.3 | 196.8 | 9.5 | 620.6 | 562.8 | 57.8 | ||||||||||||||||||
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Spread-based revenue |
$ | 324.6 | $ | 328.0 | $ | (3.4 | ) | $ | 954.8 | $ | 930.9 | $ | 23.9 | |||||||||||
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Avg. annualized yield - interest-earning assets (excluding conduit business) |
3.15 | % | 3.70 | % | (0.55 | %) | 3.00 | % | 3.58 | % | (0.58 | %) | ||||||||||||
Avg. annualized yield - insured deposit account fees |
1.38 | % | 1.60 | % | (0.22 | %) | 1.39 | % | 1.59 | % | (0.20 | %) | ||||||||||||
Net interest margin (NIM) |
1.74 | % | 2.07 | % | (0.33 | %) | 1.71 | % | 2.04 | % | (0.33 | %) |
The following tables set forth key metrics that we use in analyzing net interest revenue, which, exclusive of the conduit business, is a component of net interest margin (dollars in millions):
Interest Revenue (Expense) | Interest Revenue (Expense) | |||||||||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||||||||||
June 30, | Increase/ (Decrease) |
June 30, | Increase/ (Decrease) |
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2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||
Segregated cash |
$ | 1.0 | $ | 0.4 | $ | 0.6 | $ | 2.4 | $ | 2.2 | $ | 0.2 | ||||||||||||
Client margin balances |
91.2 | 103.4 | (12.2 | ) | 257.5 | 295.2 | (37.7 | ) | ||||||||||||||||
Securities borrowing (excluding conduit business) |
27.2 | 28.1 | (0.9 | ) | 77.4 | 73.0 | 4.4 | |||||||||||||||||
Other cash and interest-earning investments |
0.3 | 0.1 | 0.2 | 1.0 | 0.8 | 0.2 | ||||||||||||||||||
Client credit balances |
(0.2 | ) | (0.4 | ) | 0.2 | (1.0 | ) | (1.3 | ) | 0.3 | ||||||||||||||
Securities lending (excluding conduit business) |
(1.2 | ) | (0.4 | ) | (0.8 | ) | (3.1 | ) | (1.8 | ) | (1.3 | ) | ||||||||||||
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Net interest revenue (excluding conduit business) |
118.3 | 131.2 | (12.9 | ) | 334.2 | 368.1 | (33.9 | ) | ||||||||||||||||
Securities borrowing - conduit business |
0.3 | 0.3 | | 0.5 | 0.7 | (0.2 | ) | |||||||||||||||||
Securities lending - conduit business |
(0.2 | ) | (0.2 | ) | | (0.3 | ) | (0.4 | ) | 0.1 | ||||||||||||||
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Net interest revenue |
$ | 118.4 | $ | 131.3 | $ | (12.9 | ) | $ | 334.4 | $ | 368.4 | $ | (34.0 | ) | ||||||||||
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31
Average Balance | Average Balance | |||||||||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||||||||||
June 30, | % | June 30, | % | |||||||||||||||||||||
2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
Segregated cash |
$ | 4,037 | $ | 2,871 | 41 | % | $ | 4,577 | $ | 3,046 | 50 | % | ||||||||||||
Client margin balances |
8,731 | 9,469 | (8 | %) | 8,119 | 8,849 | (8 | %) | ||||||||||||||||
Securities borrowing (excluding conduit business) |
510 | 485 | 5 | % | 484 | 500 | (3 | %) | ||||||||||||||||
Other cash and interest-earning investments |
1,572 | 1,209 | 30 | % | 1,478 | 1,152 | 28 | % | ||||||||||||||||
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Interest-earning assets (excluding conduit business) |
14,850 | 14,034 | 6 | % | 14,658 | 13,547 | 8 | % | ||||||||||||||||
Securities borrowing - conduit business |
369 | 329 | 12 | % | 264 | 323 | (18 | %) | ||||||||||||||||
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Interest-earning assets |
$ | 15,219 | $ | 14,363 | 6 | % | $ | 14,922 | $ | 13,870 | 8 | % | ||||||||||||
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Client credit balances |
$ | 9,139 | $ | 8,656 | 6 | % | $ | 9,341 | $ | 8,366 | 12 | % | ||||||||||||
Securities lending (excluding conduit business) |
1,932 | 1,757 | 10 | % | 1,683 | 1,654 | 2 | % | ||||||||||||||||
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Interest-bearing liabilities (excluding conduit business) |
11,071 | 10,413 | 6 | % | 11,024 | 10,020 | 10 | % | ||||||||||||||||
Securities lending - conduit business |
369 | 329 | 12 | % | 264 | 323 | (18 | %) | ||||||||||||||||
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Interest-bearing liabilities |
$ | 11,440 | $ | 10,742 | 6 | % | $ | 11,288 | $ | 10,343 | 9 | % | ||||||||||||
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Avg. Annualized Yield (Cost) | Avg. Annualized Yield (Cost) | |||||||||||||||||||||||
Three months ended | Net Yield | Nine months ended | Net Yield | |||||||||||||||||||||
June 30, | Increase/ | June 30, | Increase/ | |||||||||||||||||||||
2012 | 2011 | (Decrease) | 2012 | 2011 | (Decrease) | |||||||||||||||||||
Segregated cash |
0.10 | % | 0.05 | % | 0.05 | % | 0.07 | % | 0.09 | % | (0.02 | %) | ||||||||||||
Client margin balances |
4.13 | % | 4.32 | % | (0.19 | %) | 4.17 | % | 4.40 | % | (0.23 | %) | ||||||||||||
Other cash and interest-earning investments |
0.06 | % | 0.06 | % | 0.00 | % | 0.09 | % | 0.10 | % | (0.01 | %) | ||||||||||||
Client credit balances |
(0.01 | %) | (0.02 | %) | 0.01 | % | (0.01 | %) | (0.02 | %) | 0.01 | % | ||||||||||||
Net interest revenue (excluding conduit business) |
3.15 | % | 3.70 | % | (0.55 | %) | 3.00 | % | 3.58 | % | (0.58 | %) | ||||||||||||
Securities borrowing - conduit business |
0.30 | % | 0.31 | % | (0.01 | %) | 0.24 | % | 0.28 | % | (0.04 | %) | ||||||||||||
Securities lending - conduit business |
(0.20 | %) | (0.25 | %) | 0.05 | % | (0.14 | %) | (0.18 | %) | 0.04 | % | ||||||||||||
Net interest revenue |
3.08 | % | 3.62 | % | (0.54 | %) | 2.94 | % | 3.50 | % | (0.56 | %) |
The following tables set forth key metrics that we use in analyzing investment product fee revenues (dollars in millions):
Fee Revenue | Fee Revenue | |||||||||||||||||||||||
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June 30, | Increase/ | June 30, | Increase/ | |||||||||||||||||||||
2012 | 2011 | (Decrease) | 2012 | 2011 | (Decrease) | |||||||||||||||||||
Money market mutual fund |
$ | 1.1 | $ | 1.4 | $ | (0.3 | ) | $ | 2.8 | $ | 7.3 | $ | (4.5 | ) | ||||||||||
Other investment product fees |
52.9 | 42.5 | 10.4 | 141.0 | 117.8 | 23.2 | ||||||||||||||||||
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Total investment product fees |
$ | 54.0 | $ | 43.9 | $ | 10.1 | $ | 143.8 | $ | 125.1 | $ | 18.7 | ||||||||||||
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Average Balance | Average Balance | |||||||||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||||||||||
June 30, | % | June 30, | % | |||||||||||||||||||||
2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
Money market mutual fund |
$ | 4,851 | $ | 8,761 | (45 | %) | $ | 5,189 | $ | 8,799 | (41 | %) | ||||||||||||
Other fee-based investment balances |
83,329 | 73,247 | 14 | % | 78,457 | 68,820 | 14 | % | ||||||||||||||||
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Total fee-based investment balances |
$ | 88,180 | $ | 82,008 | 8 | % | $ | 83,646 | $ | 77,619 | 8 | % | ||||||||||||
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Average Annualized Yield | Average Annualized Yield | |||||||||||||||||||||||
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June 30, | Increase/ | June 30, | Increase/ | |||||||||||||||||||||
2012 | 2011 | (Decrease) | 2012 | 2011 | (Decrease) | |||||||||||||||||||
Money market mutual fund |
0.09 | % | 0.06 | % | 0.03 | % | 0.07 | % | 0.11 | % | (0.04 | %) | ||||||||||||
Other investment product fees |
0.25 | % | 0.23 | % | 0.02 | % | 0.24 | % | 0.23 | % | 0.01 | % | ||||||||||||
Total investment product fees |
0.24 | % | 0.21 | % | 0.03 | % | 0.23 | % | 0.21 | % | 0.02 | % |
32
Transaction-Based Revenue Metrics
The following table sets forth several key metrics regarding client trading activity, which we utilize in measuring and evaluating performance and the results of our operations:
Three months ended | Nine months ended | |||||||||||||||||||||||
June 30, | % Change |
June 30, | % Change |
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2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||
Total trades (in millions) |
22.39 | 23.29 | (4 | %) | 69.39 | 74.14 | (6 | %) | ||||||||||||||||
Average commissions and transaction fees per trade (1) |
$ | 11.88 | $ | 12.08 | (2 | %) | $ | 11.98 | $ | 12.30 | (3 | %) | ||||||||||||
Average client trades per day |
355,449 | 369,716 | (4 | %) | 370,081 | 393,297 | (6 | %) | ||||||||||||||||
Average client trades per funded account (annualized) |
15.5 | 16.7 | (7 | %) | 16.3 | 18.0 | (9 | %) | ||||||||||||||||
Activity rate - funded accounts |
6.2 | % | 6.6 | % | (6 | %) | 6.5 | % | 7.1 | % | (8 | %) | ||||||||||||
Trading days |
63.0 | 63.0 | 0 | % | 187.5 | 188.5 | (1 | %) |
(1) | Average commissions and transaction fees per trade excludes the TD Waterhouse UK business. |
Client Account and Client Asset Metrics
The following table sets forth certain metrics regarding client accounts and client assets, which we use to analyze growth and trends in our client base:
Three months ended | Nine months ended | |||||||||||||||||||||||
June 30, | % Change |
June 30, | % Change |
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2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||
New accounts opened |
171,000 | 154,000 | 11 | % | 494,000 | 495,000 | (0 | %) | ||||||||||||||||
Funded accounts (beginning of period) |
5,703,000 | 5,547,000 | 3 | % | 5,617,000 | 5,455,000 | 3 | % | ||||||||||||||||
Funded accounts (end of period) |
5,736,000 | 5,592,000 | 3 | % | 5,736,000 | 5,592,000 |