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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 


☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,September 30, 2019

or

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-38860

 

Tradeweb Markets Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

Delaware

83-2456358

(State of other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1177 Avenue of the Americas

New York, New York

 

10036

(Address of principal executive offices)

 

(Zip Code)

 

(646) 430-6000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.00001

TW

Nasdaq Global Select Market

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes x No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

x

Smaller reporting company

o

Emerging growth company

x

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x☒ No No

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.00001

 

TW

Class of Stock

 

Nasdaq Global Select Market

Class of Stock

Shares Outstanding as of May 15,November 1, 2019

Class A Common Stock, par value $0.00001 per share

 

46,000,000

63,674,649

Class B Common Stock, par value $0.00001 per share

 

96,933,192

96,933,192

Class C Common Stock, par value $0.00001 per share

 

10,006,269

8,881,156

Class D Common Stock, par value $0.00001 per share

 

69,282,736

52,947,070

Table of Contents

TRADEWEB MARKETS INC.

TABLE OF CONTENTS

 


Table of Contents

TRADEWEB MARKETS INC.

TABLE OF CONTENTS

Page

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

4

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

4

PART I — FINANCIAL INFORMATION

6

 

 

Item 1.

Financial Statements

6

 

 

 

Item 1.

Financial Statements

7

Consolidated Statements of Financial Condition

7

Consolidated Statements of Income

8

Consolidated Statements of Comprehensive Income

9

Consolidated Statements of Changes in Equity

10

Consolidated Statements of Cash Flows

12

Notes to Consolidated Financial Statements

13

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

39

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

58

73

 

 

 

Item 4.

Controls and Procedures

59

PART II — OTHER INFORMATION

60

Item 1.

Legal Proceedings

60

75

 

 

 

Item 1A.PART II — OTHER INFORMATION

Risk Factors

60

76

 

 

 

Item 2.1.

Unregistered Sales of Equity Securities and Use of ProceedsLegal Proceedings

60

76

 

 

 

Item 3.1A.

Defaults Upon Senior SecuritiesRisk Factors

61

76

 

 

 

Item 4.2.

Mine Safety DisclosuresUnregistered Sales of Equity Securities and Use of Proceeds

61

76

 

 

 

Item 5.3.

Other InformationDefaults Upon Senior Securities

61

76

 

 

 

Item 4.

Mine Safety Disclosures

76

Item 5.

Other Information

76

Item 6.

Exhibits

77

62

Signatures

78

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INTRODUCTORY NOTE

 

The financial statements and other disclosures contained in this report include those of Tradeweb Markets Inc., which is the registrant, and those of its consolidating subsidiaries, including Tradeweb Markets LLC, which became the principal operating subsidiary of Tradeweb Markets Inc. on April 4, 2019 in a series of reorganization transactions that were completed subsequent to March 31, 2019 (the “Reorganization Transactions”) that were completed in connection with Tradeweb Markets Inc.’s initial public offering (“IPO”(the “IPO”), which was completedclosed on April 8, 2019. Accordingly, because Tradeweb Markets Inc. had no business transactions or activities and no substantial assets or liabilities during the periods presented in this Quarterly Report on Form 10-Q and because the Reorganization Transactions had not been completed as of such date, we believe that it is informative to provide the financial statements and various other disclosures of TWM LLC as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018. For more information regarding the transactions described above, see Note 41—Organization to the unaudited financial statements of Tradeweb Markets Inc. and Note 18 to theour unaudited consolidated financial statements of Tradeweb Markets LLC, each containedincluded elsewhere in this Quarterly Report on Form 10-Q.

The financial statements and other disclosures contained in this Quarterly Report on Form 10-Q relate to periods that ended both prior to and after the completion of the Reorganization Transactions and the IPO. As a result of the Reorganization Transactions completed in connection with the IPO, Tradeweb Markets Inc. became a holding company whose only material assets consist of its equity interest in Tradeweb Markets LLC and related deferred tax assets. As the sole manager of Tradeweb Markets LLC, Tradeweb Markets Inc. operates and controls all of the business and affairs of Tradeweb Markets LLC and, through Tradeweb Markets LLC and its subsidiaries, conducts its business. As a result of this control, and because Tradeweb Markets Inc. has a substantial financial interest in Tradeweb Markets LLC, Tradeweb Markets Inc. consolidates the financial results of Tradeweb Markets LLC and its subsidiaries.

The unaudited consolidated financial statements and other financial disclosures included elsewhere in this Quarterly Report on Form 10-Q relating to periods prior to and including March 31, 2019, which we sometimes refer to as the “pre-IPO period,” reflect the results of operations, financial position and cash flows of Tradeweb Markets LLC, the predecessor of Tradeweb Markets Inc. for financial reporting purposes, and its subsidiaries. The unaudited consolidated financial statements and other financial disclosures included elsewhere in this Quarterly Report on Form 10-Q relating to periods beginning on April 1, 2019, and through and including September 30, 2019, which we sometimes refer to as the “post-IPO period,” reflect the results of operations, financial position and cash flows of Tradeweb Markets Inc. and its subsidiaries, including the consolidation of its investment in Tradeweb Markets LLC. As a result, for financial reporting purposes, the pre-IPO period excludes, and the post-IPO period includes, our financial results from April 1, 2019 through April 3, 2019, which are not material. The unaudited consolidated financial statements and other financial disclosures included elsewhere in this Quarterly Report on Form 10-Q do not reflect what the results of operations, financial position or cash flows would have been had the Reorganization Transactions and the IPO taken place at the beginning of the periods presented.

 

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:

 

·                  “We,“We,” “us,” “our,” the “Company,” “Tradeweb” and similar references refer: (i) on or prior to the completion of the Reorganization Transactions including the IPO, to Tradeweb Markets LLC, which we refer to as “TWM LLC,” and, unless otherwise stated or the context otherwise requires, all of its subsidiaries and any predecessor entities, and (ii) following the completion of the Reorganization Transactions including the IPO, to Tradeweb Markets Inc., and, unless otherwise stated or the context otherwise requires, TWM LLC and all of its subsidiaries and any predecessor entities.

·

“Bank Stockholders” refer collectively to entities affiliated with the following clients: Barclays Capital Inc., BofA Securities Inc. (a subsidiary of Bank of America Corporation), Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, RBS Securities Inc., UBS Securities LLC and Wells Fargo Securities, LLC. Following the IPO and the application of the net proceeds therefrom, entities affiliated with BofA Securities, Inc., RBS Securities Inc. and UBS Securities LLC no longer hold LLC Interests and, except as otherwise indicated, are not considered Bank Stockholders for post-IPO periods.

 

·                  “Bank Stockholders” refer collectively to entities affiliated with the following clients: Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated (a subsidiary of Bank of America Corporation), Morgan Stanley & Co. LLC, RBS Securities Inc., UBS Securities LLC and Wells Fargo Securities, LLC.

·                  “Continuing“Continuing LLC Owners” refer collectively to (i) those Original LLC Owners, including an indirect subsidiary of Refinitiv (as defined below), certain of the Bank Stockholders and members of management, that continuedcontinue to own LLC Interests immediately prior toafter the closingcompletion of the IPO whoand Reorganization Transactions, that received shares of our Class C common stock, shares of our Class D common stock or a combination of both, as the case may be, in

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connection with the completion of the Reorganization Transactions.Transactions, and that may redeem or exchange their LLC Interests for shares of our Class A common stock or Class B common stock and (ii) solely with respect to the Tax Receivable Agreement (as defined below), also includes those Original LLC Owners, including certain Bank Stockholders, that disposed of all of their LLC Interests for cash in connection with the IPO.

 

·                  “Investor“Investor Group” refer to certain investment funds affiliated with The Blackstone Group Inc. (f/k/a The Blackstone Group L.P.), an affiliate of Canada Pension Plan Investment Board, an affiliate of GIC Special Investments Pte. Ltd. and certain co-investors, which collectively hold indirectly a 55% ownership interest in Refinitiv (as defined below).

 

·                  “LLC“LLC Interests” refer to the single class of newly issued common membership interests of TWM LLC.LLC issued in connection with the Reorganization Transactions.

 

·                  “Original“LSEG Transaction” refer to the acquisition of the Refinitiv business by London Stock Exchange Group plc in an all share transaction for a total enterprise value of approximately $27 billion.

“Original LLC Owners” refer to the owners of TWM LLC prior to the Reorganization Transactions.

 

·                  “Refinitiv”“Refinitiv” refer to Refinitiv Holdings Limited, and unless otherwise stated or the context otherwise requires, all of its subsidiaries, which owns substantially all of the former financial and risk business of Thomson Reuters (as defined below), including, prior to and following the completion of the Reorganization Transactions, an indirect majority ownership interest in Tradeweb, and is controlled by the Investor Group.

 

·                  “Refinitiv“Refinitiv Transaction” refer to the transaction pursuant to which Refinitiv indirectly acquired on October 1, 2018 substantially all of the financial and risk business of Thomson Reuters and Thomson Reuters indirectly acquired a 45% ownership interest in Refinitiv.

 

·                  “Thomson“Thomson Reuters” refer to Thomson Reuters Corporation, which indirectly holds a 45% ownership interest in Refinitiv.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “will” or “would,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, including our expectations about market trends, our market opportunity and the growth of our various markets, our expansion into new markets, any potential tax savings we may realize as a result of our organizational structure, our expected dividend policy and our expectations, beliefs, plans, strategies, objectives, prospects or assumptions orregarding future events, including the pending LSEG Transaction, our performance or performance,otherwise, contained in this Quarterly Report on Form 10-Q are forward-looking statements.

 

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements, or could affect our share price. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

·                    changes in economic, political, social and market conditions and the impact of these changes on trading volumes;

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·                    our failure to compete successfully;

 

·                    our failure to adapt our business effectively to keep pace with industry changes;

 

·                    consolidation and concentration in the financial services industry;

 

·                    our dependence on dealer clients that are also stockholders;

 

·                    our dependence on third parties for certain market data and certain key functions;

·our inability to maintain and grow the capacity of our trading platforms, systems and infrastructure;

 

·                    design defects, errors, failures or delays with our platforms or solutions;

 

·                    systems failures, interruptions, delays in services, cybersecurity incidents, catastrophic events and any resulting interruptions;

our dependence on third parties for certain market data and certain key functions;

 

·                    our ability to implement our business strategies profitably;

 

·                    our ability to successfully integrate any acquisition or to realize benefits from any strategic alliances, partnerships or joint ventures;

 

·                    our ability to retain the services of certain members of our management;

 

·                    inadequate protection of our intellectual property;

 

·                    extensive regulation of our industry;

 

·                    limitations on operating our business and incurring additional indebtedness as a result of covenant restrictions under theour $500.0 million senior secured revolving credit facility (the “Revolving Credit Facility”) with Citibank, N.A., as administrative agent and collateral agent, and the other lenders party thereto, and certain Refinitiv indebtedness;

 

·                    our dependence on distributions from TWM LLC to fund our expected dividend policypayments and to pay our taxes and expenses, including payments under the tax receivable agreement (the “Tax Receivable Agreement”) entered into in connection with the IPO;

 

·                    our ability to realize any benefit from our organizational structure;

 

·                    Refinitiv’s control of us and our status as a controlled company; and

 

·                    other risks and uncertainties, including those listed under “Risk Factors” in our final prospectus, dated April 3, 2019 (the “IPO Prospectus”), filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule

424(b) under the Securities Act, relating to our IPO,

·

other risks and uncertainties, including those listed under “Risk Factors” in our final prospectus, dated October 17, 2019 (the “October Prospectus”), filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act, relating to our follow-on offering, and in other filings we may make from time to time with the SEC.

 

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance and our actual results of operations, financial condition andor liquidity, and the development of the industry and markets in which we operate, may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition andor liquidity, and events

5

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in the industry and markets in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.

 

Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

 

Investors and others should note that we announce material financial and operational information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. Information about Tradeweb, our business and our results of operations may also be announced by posts on Tradeweb’s accounts on the following social media channels: Instagram, LinkedIn and Twitter. The information that we post through these social media channels may be deemed material. As a result, we encourage investors, the media and others interested in Tradeweb to monitor these social media channels in addition to following our press releases, SEC filings and public conference calls and webcasts. These social media channels may be updated from time to time on our investor relations website.

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PART I — FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

 

ITEM 1. — FINANCIAL STATEMENTS

Financial Statements (Unaudited)

Tradeweb Markets Inc.

Statements of Financial Condition

7

Notes to Statements of Financial Condition

8

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Financial Condition

12

Consolidated Statements of Income

13

Consolidated Statements of Comprehensive Income

14

Consolidated Statements of Changes in Members’ Capital and Accumulated Other Comprehensive Income

15

Consolidated Statements of Cash Flows

16

Notes to Consolidated Financial Statements

18

Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Financial Condition

(in thousands, except share and per share data)

(Unaudited)

 

 

 

March 31, 2019

 

December 31, 2018

 

Assets

 

 

 

 

 

Cash

 

$

100

 

$

100

 

Total assets

 

$

100

 

$

100

 

Stockholder’s Equity

 

 

 

 

 

Common Stock, par value $0.01 per share, 1,000 shares authorized, 100 issued and outstanding

 

$

1

 

$

1

 

Additional paid-in capital (see note 4)

 

99

 

99

 

Total stockholder’s equity

 

$

100

 

$

100

 

 

 

 

 

 

 

 

 

    

Successor

    

Successor

 

 

September 30, 

 

December 31,

 

 

2019

 

2018

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

389,930

 

$

410,104

Restricted cash

 

 

1,200

 

 

1,200

Receivable from brokers and dealers and clearing organizations

 

 

747,660

 

 

174,591

Deposits with clearing organizations

 

 

12,101

 

 

11,427

Accounts receivable, net of allowance

 

 

95,398

 

 

87,192

Furniture, equipment, purchased software and leasehold improvements, net of accumulated depreciation and amortization

 

 

36,879

 

 

38,128

Right-of-use assets

 

 

29,038

 

 

 —

Software development costs, net of accumulated amortization

 

 

173,066

 

 

170,582

Intangible assets, net of accumulated amortization

 

 

1,306,293

 

 

1,380,848

Goodwill

 

 

2,694,797

 

 

2,694,797

Receivable from affiliates

 

 

3,515

 

 

3,243

Deferred tax asset

 

 

103,153

 

 

 —

Other assets

 

 

29,650

 

 

25,027

Total assets

 

$

5,622,680

 

$

4,997,139

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity/Members' Capital

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Securities sold under agreements to repurchase

 

$

24,938

 

$

 —

Payable to brokers and dealers and clearing organizations

 

 

713,020

 

 

171,214

Accrued compensation

 

 

94,652

 

 

120,158

Deferred revenue

 

 

28,557

 

 

27,883

Accounts payable, accrued expenses and other liabilities

 

 

44,650

 

 

42,548

Employee equity compensation payable

 

 

714

 

 

24,187

Lease liability

 

 

33,130

 

 

 —

Payable to affiliates

 

 

3,737

 

 

5,009

Deferred tax liability

 

 

20,620

 

 

19,627

Tax receivable agreement liability

 

 

171,426

 

 

 —

Total liabilities

 

 

1,135,444

 

 

410,626

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

  

 

 

  

 

 

 

 

 

 

 

Mezzanine Capital

 

 

 

 

 

 

Class C Shares and Class P(C) Shares

 

 

 —

 

 

14,179

 

 

 

 

 

 

 

Stockholders' Equity/Members' Capital

 

 

  

 

 

  

Members' capital

 

 

 —

 

 

4,573,200

Preferred stock, $.00001 par value; 250,000,000 shares authorized; none issued or outstanding

 

 

 —

 

 

 —

Class A common stock, $.00001 par value; 1,000,000,000 shares authorized; 46,009,753 shares issued and outstanding as of September 30, 2019

 

 

 —

 

 

 —

Class B common stock, $.00001 par value; 450,000,000 shares authorized; 96,933,192 shares issued and outstanding as of September 30, 2019

 

 

 1

 

 

 —

Class C common stock, $.00001 par value; 350,000,000 shares authorized; 10,006,269 shares issued and outstanding as of September 30, 2019

 

 

 —

 

 

 —

Class D common stock, $.00001 par value; 300,000,000 shares authorized; 69,282,736 shares issued and outstanding as of September 30, 2019

 

 

 1

 

 

 —

Additional paid-in capital

 

 

2,855,885

 

 

 —

Accumulated other comprehensive income (loss)

 

 

(1,854)

 

 

(866)

Retained earnings

 

 

19,570

 

 

 —

Total stockholders' equity attributable to Tradeweb Markets Inc./members' capital

 

 

2,873,603

 

 

4,572,334

Non-controlling interests

 

 

1,613,633

 

 

 —

Total equity

 

 

4,487,236

 

 

4,572,334

Total liabilities and stockholders' equity/members' capital

 

$

5,622,680

 

$

4,997,139

 

The accompanying notes are an integral part of these consolidated financial statements.

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Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Income

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

    

Successor

  

  

Predecessor

  

Predecessor

 

 

Three Months

 

Nine Months

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

2019

 

2019

 

 

2018

 

2018

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

112,746

 

$

319,338

 

 

$

92,582

 

$

273,751

Subscription fees

 

 

35,387

 

 

104,398

 

 

 

33,157

 

 

107,130

Commissions

 

 

37,590

 

 

108,200

 

 

 

24,394

 

 

79,830

Refinitiv market data fees

 

 

13,251

 

 

40,252

 

 

 

12,533

 

 

36,851

Other

 

 

2,007

 

 

6,070

 

 

 

2,587

 

 

8,209

Gross revenue

 

 

200,981

 

 

578,258

 

 

 

165,253

 

 

505,771

Contingent consideration

 

 

 —

 

 

 —

 

 

 

2,537

 

 

(26,830)

Net revenue

 

 

200,981

 

 

578,258

 

 

 

167,790

 

 

478,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

  

 

 

  

 

 

 

  

 

 

  

Employee compensation and benefits

 

 

79,644

 

 

252,912

 

 

 

69,076

 

 

209,053

Depreciation and amortization

 

 

35,133

 

 

102,928

 

 

 

16,362

 

 

48,808

Technology and communications

 

 

9,527

 

 

29,086

 

 

 

9,112

 

 

26,598

General and administrative

 

 

7,507

 

 

25,961

 

 

 

9,386

 

 

23,056

Professional fees

 

 

7,272

 

 

20,981

 

 

 

7,546

 

 

20,360

Occupancy

 

 

3,640

 

 

10,900

 

 

 

3,491

 

 

10,732

Total expenses

 

 

142,723

 

 

442,768

 

 

 

114,973

 

 

338,607

Operating income

 

 

58,258

 

 

135,490

 

 

 

52,817

 

 

140,334

Net interest income

 

 

636

 

 

1,669

 

 

 

673

 

 

1,726

Income before taxes

 

 

58,894

 

 

137,159

 

 

 

53,490

 

 

142,060

Provision for income taxes

 

 

(10,316)

 

 

(21,413)

 

 

 

(7,535)

 

 

(11,900)

Net income

 

$

48,578

 

$

115,746

 

 

$

45,955

 

$

130,160

Less: Pre-IPO net income attributable to Tradeweb Markets LLC

 

 

 —

 

 

42,352

 

 

 

 

 

 

 

Net income attributable to Tradeweb Markets Inc. and non-controlling interests

 

 

48,578

 

 

73,394

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

 

18,966

 

 

30,954

 

 

 

 

 

 

 

Net income attributable to Tradeweb Markets Inc.

 

$

29,612

 

$

42,440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EPS calculations for pre-IPO and post-IPO periods (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

  

 

 

  

 

 

 

 

 

 

 

Basic

 

$

0.21 (b)

 

$

0.19 (a) /
0.30
(b) 

 

 

$

0.21 (a) 

 

$

0.60 (a)

Diluted

 

$

0.20 (b)

 

$

0.19 (a) /
0.28
(b) 

 

 

$

0.21 (a)

 

$

0.60 (a)

Weighted average shares outstanding

 

 

  

 

 

  

 

 

 

 

 

 

 

Basic

 

 

142,935,206 (b)

 

 

222,222,197 (a) /
142,934,221
(b) 

 

 

 

219,165,997 (a)

 

 

215,365,920 (a)

Diluted

 

 

151,362,643 (b)

 

 

223,320,457 (a) /
151,158,760
(b) 

 

 

 

219,165,997 (a)

 

 

215,365,920 (a)

(1)

In April 2019, the Company completed the Reorganization Transactions and the IPO, which, among other things, resulted in Tradeweb Markets Inc. becoming the successor of Tradeweb Markets LLC for financial reporting purposes. As a result, earnings per share information for the pre-IPO period is not comparable to the earnings per share information for the post-IPO period. Therefore, earnings per share information is being presented separately for the pre-IPO and post-IPO periods. See Note 18 – Earnings Per Share for additional information.

a)

Presents information for Tradeweb Markets LLC (pre-IPO period).

b)

Presents information for Tradeweb Markets Inc. (post-IPO period).

The accompanying notes are an integral part of these consolidated financial statements.

8

Table of Contents

Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

    

Successor

  

  

Predecessor

  

Predecessor

 

 

Three Months

 

Nine Months

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

2019

 

2019

 

 

2018

 

2018

Comprehensive income - Pre-IPO attributable to Tradeweb Markets LLC

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-IPO net income attributable to Tradeweb Markets LLC

 

$

 —

 

$

42,352

 

 

$

45,955

 

$

130,160

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments attributable to Tradeweb Markets LLC

 

 

 —

 

 

988

 

 

 

(1,006)

 

 

(3,064)

Pre-IPO comprehensive income attributable to Tradeweb Markets LLC

 

$

 —

 

$

43,340

 

 

$

44,949

 

$

127,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income - Tradeweb Markets Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Tradeweb Markets Inc.

 

$

29,612

 

$

42,440

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments attributable to Tradeweb Markets Inc.

 

 

(1,329)

 

 

(1,976)

 

 

 

 

 

 

 

Comprehensive income attributable to Tradeweb Markets Inc.

 

$

28,283

 

$

40,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income - Non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

$

18,966

 

$

30,954

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments attributable to non-controlling interests

 

 

(737)

 

 

(1,096)

 

 

 

 

 

 

 

Comprehensive income attributable to non-controlling interests

 

$

18,229

 

$

29,858

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

9

Table of Contents

Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Members'
Capital

    

Class A
Common Stock

    

Class B
Common Stock

    

Class C
Common Stock

    

Class D
Common Stock

    

Additional
Paid-In
Capital

    

Accumulated
Other
Comprehensive
Income

    

Retained
Earnings

    

Non-Controlling
Interests

    

Total
Stockholders'
Equity

Successor

 

 

 

 

Shares

   

Amount

 

Shares

   

Amount

 

Shares

   

Amount

 

Shares

   

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

4,573,200

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

$

 —

 

$

(866)

 

$

 —

 

$

 —

 

$

4,572,334

Adjustment to Class C Shares and Class P(C) shares in mezzanine capital

 

 

(2,369)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,369)

Capital distributions

 

 

(20,000)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20,000)

Stock-based compensation

 

 

4,674

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,674

Net income

 

 

42,352

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

42,352

Foreign currency translation adjustments

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

988

 

 

 —

 

 

 —

 

 

988

Balance at March 31, 2019

 

$

4,597,857

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

$

 —

 

$

122

 

$

 —

 

$

 —

 

$

4,597,979

Capital distributions

 

 

(100,000)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(100,000)

Effect of the reorganization transactions

 

 

(4,497,857)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

4,521,132

 

 

 —

 

 

 —

 

 

 —

 

 

23,275

Issuance of common stock, net of offering costs and cancellations

 

 

 —

 

46,000,000

 

 —

 

96,933,192

 

 1

 

10,006,269

 

 —

 

69,282,736

 

 1

 

 

(15,856)

 

 

 —

 

 

 —

 

 

 —

 

 

(15,854)

Tax receivable agreement liability and deferred taxes arising from the reorganization transactions and IPO

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

(78,232)

 

 

 —

 

 

 —

 

 

 —

 

 

(78,232)

Allocation of equity to non-controlling interests

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

(1,607,529)

 

 

 —

 

 

 —

 

 

1,607,529

 

 

 —

Adjustments to non-controlling interests

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Distributions to non-controlling interests

    

 

 —

    

 —

 

 —

    

 —

 

 —

    

 —

 

 —

    

 —

 

 —

    

 

 —

    

 

 —

    

 

 —

    

 

(11,909)

    

 

(11,909)

Dividends ($0.08 per share)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(11,435)

 

 

 —

 

 

(11,435)

Stock-based compensation expense under the PRSU Plan

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

6,763

 

 

 —

 

 

 —

 

 

 —

 

 

6,763

Stock-based compensation expense under the Option Plan

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

20,403

 

 

 —

 

 

 —

 

 

 —

 

 

20,403

Net income

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

12,828

 

 

11,988

 

 

24,816

Foreign currency translation adjustments

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

(647)

 

 

 —

 

 

(359)

 

 

(1,006)

Balance at June 30, 2019

 

$

 —

 

46,000,000

 

 —

 

96,933,192

 

 1

 

10,006,269

 

 —

 

69,282,736

 

 1

 

$

2,846,681

 

$

(525)

 

$

1,393

 

$

1,607,249

 

$

4,454,800

Issuance of common stock from equity incentive plans

 

 

 —

 

9,753

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Adjustments to non-controlling interests

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

73

 

 

 —

 

 

 —

 

 

(73)

 

 

 —

Distributions to non-controlling interests

    

 

 —

    

 —

 

 —

    

 —

 

 —

    

 —

 

 —

    

 —

 

 —

    

 

 —

    

 

 —

    

 

 —

    

 

(11,772)

    

 

(11,772)

Dividends ($0.08 per share)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(11,435)

 

 

 —

 

 

(11,435)

Stock-based compensation expense under the PRSU Plan

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

7,136

 

 

 —

 

 

 —

 

 

 —

 

 

7,136

Stock-based compensation expense under the Option Plan

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

1,995

 

 

 —

 

 

 —

 

 

 —

 

 

1,995

Net income

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

29,612

 

 

18,966

 

 

48,578

Foreign currency translation adjustments

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

(1,329)

 

 

 —

 

 

(737)

 

 

(2,066)

Balance at September 30, 2019

 

$

 —

 

46,009,753

 

 —

 

96,933,192

 

 1

 

10,006,269

 

 —

 

69,282,736

 

 1

 

$

2,855,885

 

$

(1,854)

 

$

19,570

 

$

1,613,633

 

$

4,487,236

The accompanying notes are an integral part of these consolidated financial statements.

10

Table of Contents

Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Changes in Equity – (Continued)

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Accumulated

    

 

 

 

 

 

 

 

Other

 

Total

 

 

Members'

 

Comprehensive

 

Members'

 

 

Capital

 

Loss

 

Capital

Predecessor

 

 

  

 

 

  

 

 

  

Members' capital at December 31, 2017

 

$

999,735

 

$

(13,267)

 

$

986,468

Comprehensive income:

 

 

  

 

 

  

 

 

  

Net income

 

 

45,308

 

 

 —

 

 

45,308

Foreign currency translation adjustments

 

 

 

 

 

1,928

 

 

1,928

Capital distributions

 

 

(25,000)

 

 

  

 

 

(25,000)

Members' capital at March 31, 2018

 

$

1,020,043

 

$

(11,339)

 

$

1,008,704

Comprehensive income:

 

 

  

 

 

  

 

 

  

Net income

 

 

38,897

 

 

 —

 

 

38,897

Foreign currency translation adjustments

 

 

 —

 

 

(3,986)

 

 

(3,986)

Capital distributions

 

 

(55,000)

 

 

 —

 

 

(55,000)

Members' capital at June 30, 2018

 

$

1,003,940

 

$

(15,325)

 

$

988,615

Comprehensive income:

 

 

  

 

 

  

 

 

  

Net income

 

 

45,955

 

 

 

 

 

45,955

Foreign currency translation adjustments

 

 

 —

 

 

(1,006)

 

 

(1,006)

Total comprehensive income

 

 

45,955

 

 

(1,006)

 

 

44,949

Adjustment to Class C Shares and Class P(C) Shares in mezzanine capital

 

 

456

 

 

 —

 

 

456

Vesting of contingent consideration

 

 

150,495

 

 

 —

 

 

150,495

Capital distributions

 

 

(59,350)

 

 

 —

 

 

(59,350)

Members' capital at September 30, 2018

 

$

1,141,496

 

$

(16,331)

 

$

1,125,165

The accompanying notes are an integral part of these consolidated financial statements.

11

Table of Contents

Tradeweb Markets Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

 

 

Nine Months

 

 

Nine Months

 

 

Ended

 

 

Ended

 

 

September 30, 

 

 

September 30, 

 

 

2019

 

 

2018

Cash flows from operating activities

 

 

  

 

 

 

  

Net income

 

$

115,746

 

 

$

130,160

Adjustments to reconcile net income to net cash used in operating activities:

 

 

  

 

 

 

  

Depreciation and amortization

 

 

102,928

 

 

 

48,808

Contingent consideration

 

 

 —

 

 

 

26,830

Vesting of P-1 (C) Shares

 

 

 —

 

 

 

(5,728)

Stock-based compensation expense

 

 

41,092

 

 

 

 —

Deferred taxes

 

 

(9,018)

 

 

 

2,602

(Increase) decrease in operating assets:

 

 

 

 

 

 

 

Receivable from brokers and dealers and clearing organizations

 

 

(573,069)

 

 

 

(318)

Deposits with clearing organizations

 

 

(679)

 

 

 

726

Accounts receivable

 

 

(9,421)

 

 

 

(28,434)

Receivable from affiliates

 

 

(271)

 

 

 

(2,534)

Other assets

 

 

(8,241)

 

 

 

(6,371)

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

 

24,938

 

 

 

 —

Payable to brokers and dealers and clearing organizations

 

 

541,806

 

 

 

(4,322)

Accrued compensation

 

 

(25,142)

 

 

 

(7,568)

Deferred revenue

 

 

682

 

 

 

(1,396)

Accounts payable, accrued expenses and other liabilities

 

 

6,609

 

 

 

8,793

Employee equity compensation payable

 

 

(16,746)

 

 

 

2,896

Payable to affiliates

 

 

(749)

 

 

 

684

Net cash provided by operating activities

 

 

190,465

 

 

 

164,828

Cash flows from investing activities

 

 

  

 

 

 

  

Purchase of furniture, equipment, software and leasehold improvements

 

 

(8,567)

 

 

 

(6,327)

Capitalized software development costs

 

 

(21,200)

 

 

 

(19,523)

Net cash (used in) investing activities

 

 

(29,767)

 

 

 

(25,850)

Cash flows from financing activities

 

 

  

 

 

 

  

Pre-IPO capital distributions

 

 

(120,000)

 

 

 

(139,350)

Proceeds from issuance of Class A common stock in the IPO, net of underwriting discounts

 

 

1,161,270

 

 

 

 —

Purchase of LLC Interests

 

 

(1,161,270)

 

 

 

 —

Offering costs from issuance of Class A common stock in the IPO

 

 

(12,306)

 

 

 

 —

Dividends

 

 

(22,869)

 

 

 

 —

Capital distributions to non-controlling interests

 

 

(23,681)

 

 

 

 —

Net cash (used in) financing activities

 

 

(178,856)

 

 

 

(139,350)

Effect of exchange rate changes on cash and cash equivalents

 

 

(2,016)

 

 

 

(2,043)

Net decrease in cash and cash equivalents

 

 

(20,174)

 

 

 

(2,415)

Cash and cash equivalents and restricted cash

 

 

  

 

 

 

 

Beginning of period

 

 

411,304

 

 

 

353,798

End of period

 

$

391,130

 

 

$

351,383

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

 —

 

 

$

 —

Income taxes paid

 

$

30,287

 

 

$

5,500

 

 

 

 

 

 

 

 

Non-cash financing activities

 

 

 

 

 

 

 

Items arising from the reorganization transactions and IPO:

 

 

 

 

 

 

 

Establishment of liabilities under tax receivable agreement

 

$

171,426

 

 

$

 —

Deferred tax asset

 

$

93,194

 

 

$

 —

Vesting of contingent consideration

 

$

 —

 

 

$

150,495

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash as shown on the statements of financial condition:

 

September 30,
2019

 

 

December 31,
2018

Cash and cash equivalents

 

 

389,930

 

 

 

410,104

Restricted cash

 

 

1,200

 

 

 

1,200

Cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

391,130

 

 

$

411,304

The accompanying notes are an integral part of these consolidated financial statements.

12

Table of Contents

Notes to Statements ofConsolidated Financial ConditionStatements

(Unaudited)

Page

Note 1

Organization

14

Note 2

Significant Accounting Policies

17

Note 3

Pushdown Accounting

22

Note 4

Receivable from and Payable to Brokers and Dealers and Clearing Organizations

22

Note 5

Securities Sold Under Agreements to Repurchase

23

Note 6

Leases

23

Note 7

Intangible Assets and Goodwill

24

Note 8

Deferred Revenue

25

Note 9

Income Taxes

25

Note 10

Tax Receivable Agreement

26

Note 11

Stockholders’ Equity

27

Note 12

Non-Controlling Interests

29

Note 13

Stock-Based Compensation Plans

30

Note 14

Related Party Transactions

32

Note 15

Fair Value of Financial Instruments

33

Note 16

Credit Risk

34

Note 17

Commitments and Contingencies

34

Note 18

Earnings Per Share

35

Note 19

Regulatory Capital Requirements

36

Note 20

Business Segment and Geographic Information

37

Note 21

Subsequent Events

38

 

13

Table of Contents

Tradeweb Markets Inc. and Subsidiaries

1.Notes to Consolidated Financial StatementsOrganization

(Unaudited)

 

1.          Organization

Tradeweb Markets Inc. (the “Corporation”) was formedincorporated as a Delaware corporation on November 7, 2018. The Corporation was formed2018 for the purpose of completing certain reorganization transactions in order to carry on the business of Tradeweb Markets LLC (“TWM LLC”) and conducting an initial public offering (“IPO”). as described below under “—Initial Public Offering” and “—Reorganization Transactions.”

 

On April 8, 2019, the Corporation closed an IPO of 46,000,000 shares of Class A common stock at a public offering price of $27.00, which includes 6,000,000 shares of Class A common stock issued pursuant to the underwriters’ option to purchase additional shares of Class A common stock.  The Corporation received $1,161,270,000is a consolidating subsidiary of BCP York Holdings, (“BCP”) a company owned by certain investment funds affiliated with The Blackstone Group Inc. (f/k/a The Blackstone Group L.P.) (“Blackstone”), through BCP’s majority ownership interest in net proceeds, after deducting underwriting discountsRefinitiv Holdings Limited (the “Parent” and, commissions but before deducting offering expenses, which were used to purchase membership interestsunless otherwise stated or the context otherwise requires, together with all of TWM LLC from certain existing equityholdersits subsidiaries, “Refinitiv”). As of TWM LLC (and cancelledSeptember 30, 2019, Refinitiv owns a majority ownership interest in the corresponding shares of common stock as described below), at a purchase price per interest equal to the public offering price of $27.00, less the underwriting discounts and commissions payable thereon. Subsequent to the Reorganization TransactionsCompany (as defined in note 4) that occurred after March 31, 2019, thebelow).  

The Corporation is the sole managera holding company whose principal asset is LLC Interests (as defined below) of TWM LLC. As the sole manager of TWM LLC, the Corporation operates and controls all of the business and affairs of TWM LLC and, through TWM LLC and its subsidiaries, conducts the Corporation’s business. As a result of this control, and because the Corporation has a substantial financial interest in TWM LLC, the Corporation will consolidateconsolidates the financial results of TWM LLC and reportreports a non-controlling interest in the Corporation’s consolidated financial statements.  As of September 30, 2019, Tradeweb Markets Inc. owns 64.3% of TWM LLC and the Continuing LLC Owners (defined below) own the remaining 35.7% of TWM LLC.

 

2.SummaryUnless the context otherwise requires, references to the “Company” refer to Tradeweb Markets Inc. and its consolidated subsidiaries, including TWM LLC, following the completion of Significant Accounting Policiesthe Reorganization Transactions (as defined below), and TWM LLC and its consolidated subsidiaries prior to the completion of the Reorganization Transactions.

 

BasisThe Company is a leader in building and operating electronic marketplaces for a global network of Accountingclients across the institutional, wholesale and retail client sectors. The Company’s principal subsidiaries include:

·

Tradeweb LLC (“TWL”), a registered broker-dealer under the Securities Exchange Act of 1934, a member of the Financial Industry Regulatory Authority (“FINRA”), a registered independent introducing broker with the Commodities Future Trading Commission (“CFTC”) and a member of the National Futures Association (“NFA”).

Tradeweb Europe Limited (“TEL”), a Multilateral Trading Facility regulated by the Financial Conduct Authority (the “FCA”) in the UK, which maintains branches in Asia which are regulated by certain Asian securities regulators.

 

The statements of financial condition are presented in accordance with accounting principles generally accepted inTW SEF LLC (“TW SEF”), a Swap Execution Facility (“SEF”) regulated by the United States of America.  Separate statements of operations, comprehensive income, changes in stockholder’s equity and cash flows have not been presented in the financial statements because, as of March 31, 2019, there have been no activities in this entity other than the initial capitalization.

3.CFTC.Stockholder’s Equity

As of March 31, 2019, the Corporation was authorized to issue 1,000 shares of Common Stock, par value $0.01 per share.  The Chief Executive Officer of TWM LLC was the sole shareholder of the Corporation and contributed $100 to the Corporation on November 7, 2018 to purchase 100 shares of common stock.  Holders of common stock were entitled to one vote for each share of common stock held on all matters submitted to shareholders for vote, consent or approval.

4.Subsequent Events

 

As noted above, onDW SEF LLC (“DW SEF”), a SEF regulated by the CFTC.

Tradeweb Japan K.K. (“TWJ”), a security house regulated by the Japanese Financial Services Agency (“JFSA”) and the Japan Securities Dealers Association (“JSDA”).

Tradeweb EU B.V. (“TWEU”), a Trading Venue and Approved Publication Arrangement regulated by the Netherlands Authority for the Financial Markets (“AFM”).

14

Table of Contents

The Company, through its subsidiary Tradeweb IDB Markets Inc. (“TWIDB”) (formerly known as Hydrogen Holdings Corporation), owns Dealerweb Inc. (“DW”) (formerly known as Hilliard Farber & Co., Inc.). DW is a registered broker-dealer under the Securities Exchange Act of 1934 and a member of FINRA. DW is also registered as an introducing broker with the CFTC and NFA.

The Company, through its subsidiary BondDesk Group LLC, owns Tradeweb Direct LLC (“TWD”) (formerly known as BondDesk Trading LLC), a registered broker-dealer under the Securities Exchange Act of 1934 and a member of FINRA.

Initial Public Offering

On April 8, 2019, the Corporation closed ancompleted its IPO of 46,000,000 shares of Class A common stock at a public offering price of $27.00, which includesincluded 6,000,000 shares of Class A common stock issued pursuant to the underwriters’ option to purchase additional shares of Class A common stock.  The Corporation received $1,161,270,000$1.2 billion in net proceeds, after deducting underwriting discounts and commissions but before deducting offering expenses, which were used to purchase membership interests of TWM LLC from certain existing equityholders of the Bank Stockholders (as defined below)TWM LLC (and cancel the corresponding shares of common stock)stock were cancelled as described below), at a purchase price per interest equal to the public offering price of $27.00, less the underwriting discounts and commissions payable thereon.

Tradeweb Markets Inc.

Notes to Statements of Financial Condition

(Unaudited)Reorganization Transactions

 

Prior to the closing of the IPO, a series of reorganization transactions (the “Reorganization Transactions”) was completed among the Corporation, TWM LLC and the following parties:

·      The Ownersowners of TWM LLC prior to the Reorganization Transactions including an indirect subsidiary (the “Refinitiv(collectively, the “Original LLC Owner”) of Refinitiv Holdings Limited (“Refinitiv”Owners”), including the following parties:

certain investment and commercial banks (collectively, the “Bank Stockholders”) and members of management, that continued to own LLC Interests (as defined below) immediately prior to the closing of the IPO and who received shares of the Corporation’s Class C common stock, shares of the Corporation’s Class D common stock or a combination of both, as the case may be (collectively, the “Continuing LLC Owners”); and

 

·      An indirect subsidiary (the “Refinitiv Direct Owner” and, together with members of management;

the Refinitiv LLCDirect Owner, the “Refinitiv Owners”)(i) prior to June 28, 2019, a direct subsidiary of Refinitiv that owned interests in an entity that held membership interests of TWM LLC prior to the Reorganization Transactions and contributed such entity to the Corporation (the “Refinitiv Contribution”). in exchange for shares of the Corporation’s Class B common stock in connection with the completion of the Reorganization Transactions and (ii) on and after June 28, 2019, an indirect subsidiary of Refinitiv that owns shares of the Corporation’s Class B common stock which shares were contributed by the direct subsidiary of Refinitiv referred to in the foregoing clause (i); and

an indirect subsidiary (the “Refinitiv LLC Owner” and, together with the Refinitiv Direct Owner, the “Refinitiv Owners”) of Refinitiv.

As used herein, references to “Continuing LLC Owners” refer collectively to (i) those Original LLC Owners, including the Refinitiv LLC Owner, certain Bank Stockholders and members of management, that continue to own LLC Interests (as defined below) after the completion of the IPO and Reorganization Transactions, that received shares of the Corporation’s Class C common stock, shares of the Corporation’s Class D common stock or a combination of both, as the case may be, in connection with the completion of the Reorganization Transactions, and that may redeem or exchange their LLC Interests for shares of the Corporation’s Class A common stock or Class B common stock and (ii) solely with respect to the Tax Receivable Agreement (as defined below), also includes those Original LLC Owners, including certain Bank Stockholders, that disposed of all of their LLC Interests for cash in connection with the IPO.

 

The following Reorganization Transactions occurred:

 

·TWM LLC’s limited liability company agreement (the “TWM LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class of common membership interests in TWM LLC (“LLC Interests”), (ii) exchange all of the then existing membership interests in TWM LLC for

15

Table of TWM LLC’s existing equityholders for Contents

LLC Interests and (iii) appoint the Corporation as the sole manager of TWM LLC.

The TWM LLC Agreement also requires that TWM LLC at all times maintain (i) a one-to-one ratio between the number of shares of Class A common stock and Class B common stock issued by the Corporation and the number of LLC Interests owned by the Corporation and (ii) a one-to-one ratio between the number of shares of Class C common stock and Class D common stock issued by the Corporation and the number of LLC Interests owned by the holders of such Class C common stock and Class D common stock; See Note 11 – Stockholders’ Equity.

 

·The Corporation’s certificate of incorporation was amended and restated to, among other things, provide for Class A common stock, Class B common stock, Class C common stock and Class D common stock. Each share of Class A common stock and Class C common stock entitles its holder to one vote on all matters presented to the Corporation’s stockholders generally. Each share of Class B common stock and Class D common stock entitles its holder to ten votes on all matters presented to the Corporation’s stockholders generally. The holders of Class C common stock and Class D common stock have no economic interests in the Corporation (where “economic interests” means the right to receive any dividends or distributions, whether cash or stock, in connection with common stock). These attributes are summarized in the following table:See Note 11 – Stockholders’ Equity.

 

Class of Common Stock

 

Par Value

 

Votes

 

Economic Rights

Class A common stock

 

$

 0.00001

 

1

 

Yes

Class B common stock

 

$

 0.00001

 

10

 

Yes

Class C common stock

 

$

 0.00001

 

1

 

No

Class D common stock

 

$

 0.00001

 

10

 

No

·

The Corporation issued 20,000,000 shares of Class C common stock and 105,289,005 shares of Class D common stock to the  Original LLC Owners that received LLC Interests on a one-to-one basis with the number of LLC Interests they owned immediately following the amendment and restatement of the TWM LLC Agreement for nominal consideration (and the Corporation subsequently cancelled 9,993,731 shares of such Class C common stock and 36,006,269 shares of such Class D common stock in connection with the Corporation’s purchase of LLC Interests from certain of the Bank Stockholders using the net proceeds of the IPO).

 

Holders of outstanding shares of Class A common stock, Class B common stock, Class C common stock and Class D common stock will vote together as a single class on all matters presented to the Corporation’s stockholders for their vote or approval, except as otherwise required by applicable law.

Tradeweb Markets Inc.

Notes to Statements of Financial Condition

(Unaudited)

Each share of Class B common stock will automatically convert into one share of Class A common stock and each share of Class D common stock will automatically convert into one share of Class C common stock (i) immediately prior to any sale or other transfer of such share by a holder or its permitted transferees to a non-permitted transferee or (ii) once the Refinitiv Owners and their affiliates together no longer beneficially own a number of shares of common stock and LLC Interests that together entitle them to at least 10% of TWM LLC’s economic interest. Holders of LLC Interests that receive shares of Class C common stock upon any such conversion may continue to elect to have their LLC Interests redeemed for newly issued shares of Class A common stock as described below (in which case their shares of Class C common stock will be cancelled on a one-for-one basis upon such issuance).

·

As a result of the Refinitiv Contribution (described above), the Corporation received 96,933,192 LLC Interests and the Refinitiv Direct Owner received 96,933,192 shares of Class B common stock. See Note 11 – Stockholders’ Equity.

 

·      The Corporation assumed sponsorship of an option plan and PRSU plan formerly sponsored by TWM LLC. Accordingly, all options and PRSUs granted under such plans were converted into economically equivalent awards of the Corporation with respect to shares of the Corporation’s Class A common stock;

·The Corporation’s board of directors adopted a new omnibus equity incentive plan, under which equity awards may be made in respect of shares of the Corporation’s Class A common stock;stock. It also assumed sponsorship of an option plan and PRSU plan formerly sponsored by TWM LLC. See Note 13 – Stock-Based Compensation Plans.

 

·      The Corporation issued 20,000,000 shares of Class C common stock and 105,289,005 shares of Class D common stock to the Continuing LLC Owners, on a one-to-one basis with the number of LLC Interests they owned immediately following the amendment and restatement of the TWM LLC Agreement for nominal consideration (the Corporation canceled 9,993,731 shares of such Class C common stock and 36,006,269 shares of such Class D common stock in connection with the Corporation’s purchase of LLC Interests from certain of the Bank Stockholders using the net proceeds of the IPO).

LLC Interests are redeemable, at the election of such holders, for newly issued shares of Class A common stock or Class B common stock, as the case may be, on a one-for-one basis (and such holders’ shares of Class C common stock or Class D common stock, as the case may be, will be cancelled on a one-for-one basis upon any such issuance). The Corporation’s board of directors, which includes directors who hold LLC Interests or are affiliated with holders of LLC Interests and may include such directors in the future, may, at its option, instead of the foregoing redemptions of LLC Interests, cause the Corporation to make a cash payment equal to the volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the TWM LLC Agreement. Holders of Class D common stock may also from time to time exchange all or a portion of their shares of Class D common stock for newly issued shares of Class C common stock on a one-for-one basis (in which case their shares of Class D common stock will be cancelled on a one-for-one basis upon such issuance). In addition, with respect to each Bank Stockholder that holds shares of Class D common stock, immediately prior to the occurrence of any event that would cause the combined voting power held by such Bank Stockholder to exceed 4.9%, the minimum number of shares of Class D common stock of such Bank Stockholder that would need to convert into shares of Class C common stock such that the combined voting power held by such Bank Stockholder would not exceed 4.9% will automatically convert into shares of Class C common stock;

·      As a result of the Refinitiv Contribution, the Corporation received 96,933,192 LLC Interests and the Refinitiv Direct Owner received 96,933,192 shares of Class B common stock. The Refinitiv Direct Owner and other future holders of Class B common stock may from time to time exchange all or a portion of their shares of the Corporation’s Class B common stock for newly issued shares of Class A common stock on a one-for-one basis (in which case their shares of Class B common stock will be cancelled on a one-for-one basis upon any such issuance); and

Tradeweb Markets Inc.

Notes to Statements of Financial Condition

(Unaudited)

·The Corporation entered into a Taxtax receivable agreement (the “Tax Receivable AgreementAgreement”) with TWM LLC and the Continuing LLC Owners that provides for the payment by the Corporation to a Continuing LLC Owner of 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that the Corporation actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of TWM LLC’s assets resulting from (a) the purchase of LLC Interests from such Continuing LLC Owner using the net proceeds of the IPO or any future offering or (b) redemptions or exchanges by such Continuing LLC Owner of LLC Interests for shares of Class A common stock or Class B common stock or for cash, as applicable, and (ii) certain other tax benefits related to the Corporation making payments under theOwners. See Note 10 – Tax Receivable Agreement.

 

Following the completionAcquisition of the Reorganization Transactions, including the IPOParent Company and the applicationPresentation of the proceeds therefrom as described above, the Corporation owns 64.3% of TWM LLC. The Continuing LLC Owners that continue to own LLC Interests own the remaining 35.7% of TWM LLC.Financial Statements

 

On May 8, 2019, the Corporation’s board of directors declared a cash dividend of $0.08 per share of Class A common stock and Class B common stock for the second quarter of 2019. This dividend will be payable on June 15, 2019 to stockholders of record as of June 1, 2019.

There were no other subsequent events requiring adjustment to the financial statements or disclosure.

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Financial Condition

(in thousands)

(Unaudited)

 

 

Successor

 

Successor

 

 

 

March 31,
2019

 

December 31,
2018

 

Assets

 

 

 

 

 

Cash and cash equivalents including cash deposited with related parties of $246,416 and $283,790 at March 31, 2019 and December 31, 2018, respectively

 

$

361,608

 

$

410,104

 

Restricted cash

 

1,200

 

1,200

 

Receivable from brokers and dealers and clearing organizations including receivables from related parties of $199 and $3,332 at March 31, 2019 and December 31, 2018, respectively

 

88,422

 

174,591

 

Deposits with clearing organizations including deposits from related parties of $500 at both March 31, 2019 and December 31, 2018

 

8,872

 

11,427

 

Accounts receivable, net of allowance including receivables from related parties of $46,947 and $40,730 at March 31, 2019 and December 31, 2018, respectively

 

94,284

 

87,192

 

Furniture, equipment, purchased software and leasehold improvements, net of accumulated depreciation and amortization

 

36,790

 

38,128

 

Right-of-use assets

 

32,647

 

 

Software development costs, net of accumulated amortization

 

171,705

 

170,582

 

Intangible assets, net of accumulated amortization

 

1,355,996

 

1,380,848

 

Goodwill

 

2,694,797

 

2,694,797

 

Receivable from affiliates

 

3,026

 

3,243

 

Other assets including other assets from related parties of $0 and $9 at March 31, 2019 and December 31, 2018, respectively

 

32,238

 

25,027

 

Total assets

 

$

4,881,585

 

$

4,997,139

 

Liabilities and Members’ Capital

 

 

 

 

 

Liabilities

 

 

 

 

 

Payable to brokers and dealers and clearing organizations including payables to related parties of $0 and $2,404 at March 31, 2019 and December 31, 2018, respectively

 

$

81,214

 

$

171,214

 

Accrued compensation

 

54,087

 

120,158

 

Deferred revenue including deferred revenue from related parties of $8,556 and $9,151 at March 31, 2019 and December 31, 2018, respectively

 

28,487

 

27,883

 

Accounts payable, accrued expenses and other liabilities including payables to related parties of $387 and $0 at March 31, 2019 and December 31, 2018, respectively

 

33,295

 

42,548

 

Employee equity compensation payable

 

299

 

24,187

 

Lease liability

 

37,310

 

 

Payable to affiliates

 

6,050

 

5,009

 

Deferred tax liability

 

19,589

 

19,627

 

Total liabilities

 

260,331

 

410,626

 

 

 

 

 

 

 

Commitments and contingencies (note 13)

 

 

 

 

 

Mezzanine Capital Class C Shares and Class P(C) Shares

 

23,275

 

14,179

 

Members’ capital

 

 

 

 

 

Members’ capital

 

4,597,857

 

4,573,200

 

Accumulated other comprehensive income

 

122

 

(866

)

Total members’ capital

 

4,597,979

 

4,572,334

 

Total liabilities and members’ capital

 

$

4,881,585

 

$

4,997,139

 

The accompanying notes are an integral part of these consolidated financial statements.

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Income

(in thousands, except share and per share data)

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Three Months
Ended
March 31,
2019

 

 

Three Months
Ended
March 31,
2018

 

Revenues

 

 

 

 

 

 

Transaction fees including from related parties of $59,643 and $52,918 in the three months ended March 31, 2019 and 2018, respectively

 

$

102,640

 

 

$

90,139

 

Subscription fees including from related parties of $5,670 and $5,220 in the three months ended March 31, 2019 and 2018, respectively

 

34,445

 

 

36,326

 

Commissions including from related parties of $16,186 and $11,631 in the three months ended March 31, 2019 and 2018, respectively

 

34,197

 

 

27,883

 

Refinitiv market data fees

 

13,616

 

 

12,237

 

Other

 

1,894

 

 

2,918

 

Gross revenue

 

186,792

 

 

169,503

 

Contingent consideration

 

 

 

(10,070

)

Net revenue

 

186,792

 

 

159,433

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

Employee compensation and benefits

 

77,273

 

 

71,570

 

Depreciation and amortization

 

33,503

 

 

16,268

 

Technology and communications including from related parties of $740 in both the three months ended March 31, 2019 and 2018

 

10,040

 

 

8,463

 

General and administrative including from related parties of $180 in both the three months ended March 31, 2019 and 2018

 

9,089

 

 

6,517

 

Professional fees

 

6,971

 

 

5,538

 

Occupancy including from related parties of $155 in both the three months ended March 31, 2019 and 2018

 

3,639

 

 

3,722

 

Total expenses

 

140,515

 

 

112,078

 

Operating income

 

46,277

 

 

47,355

 

Interest income including from related parties of $208 and $21 in the three months ended March 31, 2019 and 2018, respectively

 

858

 

 

471

 

Income before taxes

 

47,135

 

 

47,826

 

Provision for income taxes

 

(4,783

)

 

(2,518

)

Net income

 

$

42,352

 

 

$

45,308

 

Net income per share

 

 

 

 

 

 

Basic

 

$

0.19

 

 

$

0.21

 

Diluted

 

$

0.19

 

 

$

0.21

 

Weighted average number of shares outstanding (note 14)

 

 

 

 

 

 

Basic

 

222,222,197

 

 

213,435,321

 

Diluted

 

223,320,457

 

 

213,435,321

 

The accompanying notes are an integral part of these consolidated financial statements.

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Three Months

 

 

Three Months

 

 

 

Ended

 

 

Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Net income

 

$

42,352

 

 

$

45,308

 

Foreign currency translation adjustments

 

988

 

 

1,928

 

Comprehensive income

 

$

43,340

 

 

$

47,236

 

The accompanying notes are an integral part of these consolidated financial statements.

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Changes in Members’ Capital and Accumulated Other Comprehensive Income

(in thousands)

(Unaudited)

 

 

Members’
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Total
Members’
Capital

 

Predecessor

 

 

 

 

 

 

 

Members’ capital at December 31, 2017

 

$

999,735

 

$

(13,267

)

$

986,468

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

45,308

 

 

 

45,308

 

Foreign currency translation adjustments

 

 

 

1,928

 

1,928

 

Capital distributions

 

(25,000

)

 

 

(25,000

)

Members’ capital at March 31, 2018

 

$

1 ,020,043

 

$

(11,339

)

$

1 ,008,704

 

 

 

Members’
Capital

 

Accumulated
Other
Comprehensive
Income

 

Total
Members’
Capital

 

Successor

 

 

 

 

 

 

 

Members’ capital at December 31, 2018

 

$

4 ,573,200

 

$

(866

)

$

4 ,572,334

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

42,352

 

 

 

42,352

 

Foreign currency translation adjustments

 

 

 

988

 

988

 

Adjustment to Class C Shares and Class P(C) Shares in mezzanine capital

 

(2,369

)

 

 

(2,369

)

Share-based compensation

 

4,674

 

 

 

4,674

 

Capital distributions

 

(20,000

)

 

 

(20,000

)

Members’ capital at March 31, 2019

 

$

4 ,597,857

 

$

122

 

$

4 ,597,979

 

The accompanying notes are an integral part of these consolidated financial statements.

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Three Months
Ended
March 31, 2019

 

 

Three Months
Ended
March 31, 2018

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

42,352

 

 

$

45,308

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

33,503

 

 

16,268

 

Contingent consideration

 

 

 

10,070

 

Share-based compensation expense

 

4,674

 

 

 

Deferred taxes

 

(39

)

 

452

 

(Increase) decrease in operating assets:

 

 

 

 

 

 

Receivable from brokers and dealers and clearing organizations

 

86,169

 

 

4,324

 

Deposits with clearing organizations

 

2,570

 

 

(950

)

Accounts receivable

 

(6,406

)

 

(29,762

)

Receivable from affiliates

 

217

 

 

(119

)

Other assets

 

(7,152

)

 

903

 

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

Payable to brokers and dealers and clearing organizations

 

(90,000

)

 

(4,322

)

Accrued compensation

 

(66,447

)

 

(59,693

)

Deferred revenue

 

602

 

 

1 ,479

 

Accounts payable, accrued expenses and other liabilities

 

(4,911

)

 

4 ,201

 

Employee equity compensation payable

 

(17,161

)

 

(11,797

)

Payable to affiliates

 

950

 

 

9 ,412

 

Net cash used in operating activities

 

(21,079

)

 

(14,226

)

Cash flows from investing activities

 

 

 

 

 

 

Purchase of furniture, equipment, software and leasehold improvements

 

(1,516

)

 

(1,244

)

Capitalized software development costs

 

(6,767

)

 

(6,198

)

Net cash used in investing activities

 

(8,283

)

 

(7,442

)

Cash flows from financing activities

 

 

 

 

 

 

Capital distributions

 

(20,000

)

 

(25,000

)

Net cash used in financing activities

 

(20,000

)

 

(25,000

)

Effect of exchange rate changes on cash and cash equivalents

 

866

 

 

1 ,813

 

Net decrease in cash and cash equivalents

 

(48,496

)

 

(44,855

)

Cash and cash equivalents and restricted cash

 

 

 

 

 

 

Beginning of period

 

411,304

 

 

353,798

 

End of period

 

$

362,808

 

 

$

308,943

 

The accompanying notes are an integral part of these consolidated financial statements.

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Cash Flows — (Continued)

(in thousands)

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Three Months
Ended

 

 

Three Months
Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Interest paid

 

$

 

 

$

 

Income taxes paid

 

$

7,301

 

 

$

1,784

 

The following table provides a reconciliation of cash and cash equivalents and restricted cash that sum to the amounts shown in the consolidated statements of cash flows:

 

 

Successor

 

 

Predecessor

 

 

 

Three Months
Ended

 

 

Three Months
Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Cash and cash equivalents

 

$

361,608

 

 

$

307,743

 

Restricted cash

 

1,200

 

 

1 ,200

 

Cash and cash equivalents and restricted cash

 

$

362,808

 

 

$

308,943

 

The accompanying notes are an integral part of these consolidated financial statements.

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1.Organization

Tradeweb Markets LLC (the “Company”) is a leader in building and operating electronic marketplaces for a global network of clients across the institutional, wholesale and retail client sectors.

The Company, a Delaware limited liability company, is a consolidating subsidiary of BCP York Holdings (“BCP”), a company owned by certain investment funds affiliated with The Blackstone Group L.P., through BCP’s majority ownership interest in Refinitiv Holdings Limited (“Refinitiv” or the “Parent”).  As of March 31, 2019, Refinitiv owned a majority ownership interest in the Company and a minority ownership interest of the Company was owned by a group of investment and commercial banks (the “Banks”).

A majority interest of Refinitiv (formerly the Thomson Reuters Financial & Risk Business) was acquired by BCP on October 1, 2018 (the “Refinitiv Transaction”) from Thomson Reuters Corporation (“TR”). The accompanying consolidated financial statements are presented for two periods: predecessor and successor, which relate to the periods preceding and succeeding the Refinitiv Transaction, respectively.  The Refinitiv Transaction results in a new basis of accounting beginning on October 1, 2018 and the financial reporting periods are presented as follows:

·

The successor period of the Company, reflecting the Refinitiv Transaction, as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019.

·

The predecessor period of the Company for the three and nine months ended September 30, 2018.

·                  The successor period of the Company, reflecting the Refinitiv Transaction, as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019.See Note 3 – Pushdown Accounting.

 

·                  The predecessor period of the Company for the three months ended March 31, 2018.LSEG Transaction

 

On August 1, 2019, London Stock Exchange Group plc announced that it has agreed to definitive terms with a consortium including certain investment funds affiliated with Blackstone as well as TR to acquire the Refinitiv business in an all share transaction for a total enterprise value of approximately $27 billion (the “LSEG Transaction”). The Company, through its subsidiary Tradeweb Global LLC (“TWG”), owns:LSEG Transaction is subject to customary regulatory approvals and closing conditions, and is expected to close during the second half of 2020. There can be no assurance that the LSEG Transaction will be consummated on the expected timing or at all.

 

·                  Tradeweb LLC (“TWL”), a registered broker-dealer under the Securities Exchange Act

16

Table of 1934, a member of the Financial Industry Regulatory Authority (“FINRA”), a registered independent introducing broker with the Commodities Future Trading Commission (“CFTC”) and a member of the National Futures Association (“NFA”).Contents

·                  Tradeweb Europe Limited (“TEL”), a Multilateral Trading Facility regulated by the Financial Conduct Authority (the “FCA”) in the UK, which maintains branches in Asia which are regulated by certain Asian securities regulators.

·                  TW SEF LLC (“TW SEF”), a Swap Execution Facility (“SEF”) regulated by the CFTC.

·                  DW SEF LLC (“DW SEF”), a SEF regulated by the CFTC.

·                  Tradeweb Japan K.K. (“TWJ”), a security house regulated by the Japanese Financial Services Agency (“JFSA”) and the Japan Securities Dealers Association (“JSDA”).

·                  Tradeweb EU B.V. (“TWEU”), a Trading Venue and Approved Publication Arrangement regulated by the Netherlands Authority for the Financial Markets (“AFM”).

The Company, through its subsidiary Tradeweb IDB Markets Inc. (“TWIDB”) (formerly known as Hydrogen Holdings Corporation), owns Dealerweb Inc. (“DW”) (formerly known as Hilliard Farber & Co., Inc.).  DW is a registered broker-dealer under the Securities Exchange Act of 1934 and a member of FINRA.  DW is also registered as an introducing broker with the CFTC and NFA.

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The Company, through its subsidiary BondDesk Group LLC, owns Tradeweb Direct LLC (“TWD”) (formerly known as BondDesk Trading LLC), a registered broker-dealer under the Securities Exchange Act of 1934 and a member of FINRA.

2.Significant Accounting Policies

The following is a summary of significant accounting policies:

Basis of Accounting

The consolidated financial statements have been presented in conformity with accounting principles generally accepted in the United States of America. All adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented, are normal and recurring in nature. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the difference may be material to the consolidated financial statements.

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Recapitalization

As discussed in note 18, on April 4, 2019, the Company’s limited liability company agreement (“LLC Agreement”) was amended and restated to, among other things, (i) provide forNote 1—Organization, as a new single class of common membership interests in the Company (“LLC Interests”) and (ii) exchange allresult of the existing membership interests ofReorganization Transactions, Tradeweb Markets Inc. consolidates TWM LLC and TWM LLC is considered to be the Company’s existing equityholderspredecessor to Tradeweb Markets Inc. for LLC Interests.  For purposes of calculating net income per share on the consolidated statements of income, the number of outstanding shares have been adjusted retroactively for all periods to reflect the above-mentioned amendment and resulting recapitalization.  Other share amounts and related disclosures in the notes tofinancial reporting purposes. As a result, the consolidated financial statements reflect the share classes and amountsfor periods prior to the recapitalization unless otherwise indicated.Reorganization Transactions have been adjusted to combine the previously separate entities for presentation purposes. However, Tradeweb Markets Inc. had no business transactions or activities and no substantial assets or liabilities prior to the Reorganization Transactions. As such, for periods prior to the completion of the Reorganization Transactions, the consolidated financial statements represent the historical financial condition and results of operations of TWM LLC and its subsidiaries. For periods after the completion of the Reorganization Transactions, the consolidated financial statements represent the financial condition and results of operations of the Company and report a non-controlling interest related to the LLC Interests held by the Continuing LLC Owners.

Cash and Cash Equivalents

Cash and cash equivalents consists of cash and highly liquid investments (such as short-term money market instruments) with original maturities of less than three months.

Allowance for Doubtful Accounts

The Company continually monitors collections and payments from its clients and maintains an allowance for doubtful accounts. The allowance for doubtful accounts is based upon the historical collection experience and specific collection issues that have been identified. Additions, if any, to the allowance for doubtful accounts are charged to bad debt expense, which is included in general and administrative expenses on the consolidated statements of income.

Furniture, Equipment, Purchased Software and Leasehold Improvements

Furniture, equipment, purchased software and leasehold improvements are carried at cost less accumulated depreciation. Depreciation for furniture, equipment and purchased software, including the allocated fair value of assets as a result of pushdown accounting (see note 3)Note 3 – Pushdown Accounting), is computed on a straight-line basis over the estimated useful lives of the related assets, ranging from three to seven years. Leasehold improvements are amortized over the lesser of the estimated useful lives of the leasehold improvements or the remaining term of the lease for office space.

17

Table of Contents

Tradeweb Markets LLC

Furniture, equipment, purchased software and Subsidiariesleasehold improvements are tested for impairment whenever events or changes in circumstances suggest that an asset’s carrying value may not be fully recoverable in accordance with Accounting Standards Codification (“ASC”) 360.

Notes to Consolidated Financial Statements

(Unaudited)

Software Development Costs

The Company capitalizes costs associated with the development of internal use software at the point at which the conceptual formulation, design and testing of possible software project alternatives have been completed, in accordance with Accounting Standards Codification (“ASC”)ASC 350. The Company capitalizes employee compensation and related benefits and third party consulting costs incurred during the application development stage which directly contribute to such development. Once the product is ready for its intended use, suchSuch costs are amortized on a straight-line basis over three years. Costs capitalized as part of the pushdown accounting allocation (see note 3)Note 3 – Pushdown Accounting) are amortized over nine years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable, or that their useful lives are shorter than originally expected. Non-capitalized software costs and routine maintenance costs are expensed as incurred.

Intangible Assets

Intangible assets with a finite life are amortized over the estimated lives, ranging from seven to sixteen years, in accordance with ASC 350. Intangible assets subject to amortization are tested for impairment whenever events or changes in circumstances suggest that an asset’sasset's or asset group’sgroup's carrying value may not be fully recoverable in accordance with ASC 360. Intangible assets with an indefinite useful life are tested for impairment at least annually. An impairment loss is recognized if the sum of the estimated undiscounteddiscounted cash flows relating to the asset or asset group is less than the corresponding fairbook value.  Intangible assets are amortized over their estimated useful lives of seven to sixteen years.

Goodwill

Goodwill

Goodwill is the excess of the fair value of the Company above the fair value accounting basis of the net assets and liabilities of the Company under pushdown accounting. Goodwill is also the cost of acquired companies in excess of the fair value of identifiable net assets at the acquisition date. Goodwill is not amortized, but in accordance with ASC 350, goodwill is tested for impairment annually and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable.  In 2019, the Company changed the annual date on which goodwill is tested for impairment from July 1st to October 1st to align with the annual impairment testing date of the Company’s Parent.  This change did not accelerate, delay, avoid or cause an impairment charge, nor does this change result in adjustments to the Company’s previously issued financial statements. Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. An impairment loss is recognized if the estimated fair value of a reporting unit is less than its net book value. Such loss is calculated as the difference between the estimated fair value of goodwill and its carrying value.

In 2019, the Company changed the annual date on which goodwill is tested for impairment from July 1st to October 1st to align with the annual impairment testing date of the Company’s Parent. This change did not accelerate, delay, avoid or cause an impairment charge, nor did this change result in adjustments to any previously issued financial statements. Goodwill was last assessed on October 1, 2018 in connection with the Refinitiv Transaction and the application of pushdown accounting.  See Note 3 – Pushdown Accounting.

Deferred IPO and Follow-On Offering Costs

In 2018 and the third quarter of 2019, the Company began incurring costs in connection with the filing of a Registration Statement on Form S-1 for an IPO and a Registration Statement on Form S-1 for a follow-on offering, respectively, which are deferred in other assets in accordance with ASC 505-10-25 in the consolidated statements of financial condition. Initial publicIPO and follow-on offering (“IPO”) costs consist of legal, accounting, and other costs directly related to the Company’s efforts to raise capital through an IPO. Thesecapital. As of September 30, 2019, $15.9 million of deferred costs related to the IPO were offset against proceeds receivedreclassified from the offering which closed on April 8, 2019 and will be reclassifiedother assets to additional paid-in capital and $0.7 million of deferred costs related to the follow-on offering were included in other assets, in each case on the consolidated statements of financial condition.  See note 18.Note 11 – Stockholders’ Equity and Note 21 – Subsequent Events.

18

Table of Contents

Translation of Foreign Currency

Revenues and expenses denominated in foreign currencies are translated at the rate of exchange prevailing at the transaction date. Assets and liabilities denominated in foreign currencies are translated at the rate prevailing at the consolidated statements of financial condition date. Foreign currency re-measurement gains or losses on transactions in nonfunctional currencies are recognized in the consolidated statements of income. Gains or losses on translation in the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included as a component of comprehensive income.

Income Tax

The CompanyCorporation is subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and is taxed at prevailing corporate tax rates. TWM LLC is a multiple member limited liability company which is taxed as a partnership.  No federal income tax provision is required on the earnings of the Company as it is a partnership and thereforeaccordingly any taxable income generated by TWM LLC is passed through to and included in the tax effectstaxable income of its activities accrue directly to its partners.  Asmembers, including the Corporation, on a partnership, the Company and certain subsidiaries are subject topro rata basis. Income taxes also include unincorporated business taxes on income earned or losses incurred byfor conducting business in

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

certain state and local jurisdictions, and income taxes on income earned or losses incurred in foreign jurisdictions on certain of their operations.  Additionally, TWIDBoperations and its subsidiary DWfederal and state income taxes on income earned or losses incurred, both current and deferred, on subsidiaries that are C Corporations and therefore incur corporate federal, state and local incometaxed as corporations for U.S. tax expense.  Income taxes are accounted for in accordance with ASC 740.  purposes.

The Company recordedrecords deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company measures deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse. Based on the weight of the positive and negative evidence considered, management believes that it is more likely than not that the Company will be able to realize its deferred tax assets in the future, therefore, no valuation allowance is necessary.

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1)(i) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2)(ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to income taxes within the provision for income taxes in the consolidated statements of income. Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in the consolidated statements of financial condition.

The Company has elected to treat taxes due on future U.S. inclusions in taxable income under the GILTIglobal intangible low-taxed income (“GILTI”) provision of the Tax Cuts and Jobs Act as a current period expense when incurred.

Revenue Recognition

The Company earns transaction fees from transactions executed on the Company’s trading platforms through various fee plans. Transaction fees are generated both on a variable and fixed price basis and vary by geographic region, product type and trade size. For variable transaction fees, the Company charges clients fees based on the mix of products traded and the volume of transactions executed. Transaction fee revenue is recorded at a point in time when the trade occurs and is generally billed monthly.

The Company earns subscription fees from granting access to institutional investors to the Company’sCompany's electronic marketplaces. Subscription fees are recognized into income in the period that access is provided on a monthly basis. Also included in subscription fees on the consolidated statements of income are viewer fees earned monthly from institutional investors accessing fixed income market data. The frequency of subscription fee billings varies from monthly untilto annually, depending on contract terms. Fees received by the Company which are not yet earned are included in deferred revenue on the consolidated statements of financial condition until the revenue recognition criteria has been met.

19

Table of Contents

The Company earns commission revenue from its electronic and voice brokerage services on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy and sell price of the transacted product. Securities transactions and related commission income for brokerage transactions are recognized and recorded on a trade-date basis. This incomeCommission revenue is receivedcollected by the Company when the transactions settletrade settles or is billed monthly.

The Company earns fees from Refinitiv, formerly TR in the predecessor periods, relating to the sale of market data to Refinitiv, which redistributes that data. Included in these fees, which are billed quarterly, are real-time market data fees which are recognized in the period that the data is provided, generally on a monthly basis and historical data sets which are recognized when the historical data set is provided to Refinitiv.

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the measurement or recognition of revenue in any prior reporting periods.  However, subsequent to the adoption,

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

the Company was required to make significant judgements for the Refinitiv market data fees.  Significant judgements used in accounting for this contract include:

·                  The provision of real-time market data feeds and annual historical data sets are distinct performance obligations.

·                  The performance obligations under this contract are recognized over time from the initial delivery of the data feeds or each historical data set until the end of the contract term.

·                  Determining the transaction price for the performance obligations by using a market assessment analysis.  Inputs in this analysis include a consultant study which determined the overall value of the Company’s market data and pricing information for historical data sets provided by other companies.

·

The provision of real-time market data feeds and annual historical data sets are distinct performance obligations.

·

The performance obligations under this contract are recognized over time from the initial delivery of the data feeds or each historical data set until the end of the contract term.

·

Determining the transaction price for the performance obligations by using a market assessment analysis. Inputs in this analysis include a consultant study which determined the overall value of the Company's market data and pricing information for historical data sets provided by other companies.

Some commission and transaction feesrevenues earned by the Company have fixed fee components, such as monthly minimums or fixed monthly fees, and variable components, such as transaction based fees. The breakdown of revenues between fixed and variable revenues, in thousands, for the three and nine months ended March 31,September 30, 2019 and 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

    

Successor

  

  

Predecessor

  

Predecessor

 

Successor

 

 

Predecessor

 

 

Three Months Ended

 

Nine Months Ended

 

 

Three Months Ended

 

Nine Months Ended

 

Three Months Ended
March 31, 2019

 

 

Three Months Ended
March 31, 2018

 

 

September 30, 2019

 

September 30, 2019

 

 

September 30, 2018

 

September 30, 2018

 

(in thousands)

 

 

(in thousands)

 

 

(in thousands)

 

 

(in thousands)

 

Variable

 

Fixed

 

 

Variable

 

Fixed

 

    

Variable

    

Fixed

    

Variable

    

Fixed

   

   

Variable

    

Fixed

   

Variable

    

Fixed

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

78,915

 

$

23,725

 

 

$

69,637

 

$

20,502

 

 

$

87,574

 

$

25,172

 

$

246,066

 

$

73,272

 

 

$

68,855

 

$

23,727

 

$

208,049

 

$

65,702

Subscription Fees including Refinitiv market data fees

 

455

 

47,606

 

 

475

 

48,088

 

 

 

440

 

 

48,198

 

 

1,330

 

 

143,320

 

 

 

405

 

 

45,285

 

 

1,305

 

 

142,676

Commissions

 

24,310

 

9,887

 

 

17,780

 

10,103

 

 

 

27,840

 

 

9,750

 

 

78,785

 

 

29,415

 

 

 

14,241

 

 

10,153

 

 

49,367

 

 

30,463

Other

 

303

 

1,591

 

 

12

 

2,906

 

 

 

87

 

 

1,920

 

 

692

 

 

5,378

 

 

 

14

 

 

2,573

 

 

40

 

 

8,169

Gross revenues

 

$

103,983

 

$

82,809

 

 

$

87,904

 

$

81,599

 

Gross revenue

 

$

115,941

 

$

85,040

 

$

326,873

 

$

251,385

 

 

$

83,515

 

$

81,738

 

$

258,761

 

$

247,010

 

Share-BasedStock-Based Compensation

The Company accounts for share-basedstock-based compensation in accordance with ASC 718. ASC 718 focuses primarily on accounting for a transaction in which an entity obtains employee services in exchange for share-basedstock-based payments. Under ASC 718, the share-basedstock-based payments received by the employees of the Company are accounted for either as equity awards or as liability awards.

20

Table of Contents

As an equity award, the Company measures and recognizes the cost of employee services received in exchange for awards of equity instruments based on their estimated fair values measured as of the grant date. These costs are recognized as an expense over the requisite service period, with an offsetting increase to members’additional paid-in capital.

As a liability award, the cost of employee services received in exchange for an award of equity instruments is generally measured based on the grant-date fair value of the award. The fair value of that award is remeasured subsequently at each reporting date through the settlement in accordance with ASC 505. Changes in the equity instrument’sinstrument's fair value during the requisite service period are recognized as compensation cost over that period.

For periods following the Reorganization Transactions and the IPO, the fair value of new equity instrument grants is determined based on the price of the Company’s Class A common stock on the grant date.

Under ASC 718, the grant-date fair value of share-basedstock-based awards that do not require future service (i.e., vested awards) are expensed immediately. The grant-date fair value of share-based employeestock-based awards that require future service, and are graded-vesting awards, are amortized over the relevant service period on a straight-line basis, with each tranche separately measured. The grant-date fair value of share-based employeestock-based awards that require both future service and the achievement of Company performance-based conditions, are amortized over the relevant service period for the performance-based condition. If in a reporting period it is

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

determined that the achievement of a performance target for a performance-based tranche is not probable, then no expense is recognized for that tranche and any expenses already recognized relating to that tranche in prior reporting periods are reversed in the current reporting period.

Prior to the IPO, the Company awarded options to management and other employees (collectively, the “Special Option Award”) under the Amended and Restated Tradeweb Markets Inc. Option Plan (the “Option Plan”). In accounting for the options issued under the Option Plan, compensation expense is measured and recognized for all awards based on their estimated fair values measured as of the grant date. Costs related to these options are recognized as an expense in the consolidated statements of income over the requisite service period, with an offsetting increase to additional paid-in capital. The non-cash stock-based compensation expense associated with the Special Option Award began being expensed in the second quarter of 2019 and will continue to be expensed over the following three years.

Determining the appropriate fair value model and calculating the fair value of the share-based paymentstock-based awards requires the input of highly subjective assumptions, including the expected life of the share-based paymentstock-based awards and the stock price volatility. The Company uses the Black-Scholes pricing model to value some of its share-basedstock-based awards. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the Company’s consolidated statements of income.

Net IncomeEarnings Per Share

Basic net incomeearnings per share is computed by dividing the net income attributable to the Company’sCompany's shares by the weighted-average number of the Company’sCompany's shares outstanding during the period. For purposes of computing diluted net incomeearnings per share, the weighted-average number of the Company’s shares reflects the dilutive effect that could occur if convertiblesecurities that qualify as participating securities were converted into or exchanged or exercised for TWM LLC’s shares, in the Company’s sharespre-IPO period, and the Corporation’s Class A or Class B common stock, in the post-IPO period, using the treasury stock method.method, as applicable.

Shares of Class C and Class D common stock do not have economic rights in Tradeweb Markets Inc. and, therefore, are not participating securities for purposes of the computation of earnings per share.

Fair Value Measurement

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Instruments that the Company owns (long positions) are marked to bid prices, and instruments that the Company has sold, but not yet purchased (short positions), are marked to offer prices. Fair value measurements do not include transaction costs.

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Table of Contents

The fair value hierarchy under ASC 820 prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Basis of Fair Value Measurement

Level 11:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 22: Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;

Level 33: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’sinstrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Recent Accounting Pronouncements – Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, 2016‑13, Financial Instruments  Credit Losses.Losses. The ASU provides new guidance for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. This ASU is effectiveapplicable for the Company in the fiscal year beginning January 1, 2020.2020 and requires a modified retrospective method of adoption. The Company is currently evaluatingin the impactplanning and analysis phase, which involves documenting in-scope financial assets and understanding and leveraging existing credit loss estimation processes.

The Company does not anticipate the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, 2017‑04, Intangibles  Goodwill and Other.Other. The ASU simplifies the quantitative goodwill impairment test by eliminating the second step of the test. Under this ASU, impairment will be measured by comparing the estimated fair value of the reporting unit with its carrying value. The ASU is applicable for the Company in the fiscal year beginning January 1, 2021.2020. The Company

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

does not anticipate the adoption of this ASU to have a material impact on the Company’sCompany's consolidated financial statements.

 

3.Pushdown Accounting

The Refinitiv Transaction was accounted for by Refinitiv in accordance with the acquisition method of accounting pursuant to ASC 805, and pushdown accounting was applied to Refinitiv to record the fair value of the assets and liabilities of Refinitiv on the date of the Refinitiv Transaction. The Company, as a consolidating subsidiary of Refinitiv, also accounted for the Refinitiv Transaction using pushdown accounting. Under pushdown accounting, the excess of the fair value of the Company above the fair value accounting basis of the net assets and liabilities of the Company was recorded as goodwill. The Company has one year from the date of the Refinitiv TransactionAt September 30, 2019 and December 31, 2018, goodwill amounted to finalize these amounts.

$2.7 billion.

The adjusted valuations resulted in an increase in depreciation and amortization expense, due to the increased carrying value of the Company’s assets and the related increase in depreciation of tangible assets and amortization of intangible assets, and a decrease in occupancy expense as a result of the recognition of a leasehold interest liability.

4.          Receivable from and Payable to Brokers and Dealers and Clearing Organizations

4.LeasesReceivables from and payables to brokers and dealers and clearing organizations consist of proceeds from transactions which failed to settle due to the inability of a transaction party to deliver or receive the transacted security. These securities transactions are generally collateralized by those securities.

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Table of Contents

On October 1, 2019, approximately $698.8 million and $664.3 million, respectively, of the receivable from and payable to balances outstanding at September 30, 2019 were settled.

 

5.          Securities Sold Under Agreements to Repurchase

The Company enters into agreements to repurchase from time to time to facilitate the clearance of securities.

At September 30, 2019, securities sold from agreements to repurchase amounted to $24.9 million and related to an overnight repurchase agreement with a maturity date of October 1, 2019.

The following table provides additional information regarding this agreement to repurchase (in thousands):

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2019

    

2018

Agreements to repurchase:

 

 

 

 

 

 

U.S. Treasury Note

 

$

24,938

 

$

 —

Total agreements to repurchase

 

$

24,938

 

$

 —

Gross amount of recognized liabilities for agreements to repurchase

 

$

24,938

 

$

 —

Securities sold under agreements to repurchase are treated as collateralized financings and are presented on the consolidated statement of financial condition at the amounts of cash received, which approximates fair value.  Receivables and payables arising from these agreements are not offset on the statement of financial condition.

6.          Leases

Effective January 1, 2019, the Company adopted ASC 842.842, Leases. This standard requires the Company to recognize a right-of-use asset and a lease liability for all leases with an initial term in excess of twelve months. The Company accounts for an option to extend a lease when the option is reasonably certain to be exercised. The asset reflects the present value of unpaid lease payments coupled with initial direct costs, prepaid lease payments and lease incentives. The amount of the lease liability is calculated as the present value of unpaid lease payments. The Company adopted ASC 842 using a modified retrospective approach and did not restate comparative periods. The Company elected to take the package of practical expedients allowing the Company to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases.  The Company has elected to account for nonlease components in a contract as part of the single lease component to which they are related.

Significant assumptions and judgements in calculating the right-of-use assets and lease liability include the determination of the applicable borrowing rate for each lease.

On January 1, 2019, upon the adoption of ASC 842, the Company recorded, for office space and data center leases in the USU.S. and UK,U.K., right-of-use assets of $34,760,000,$34.8 million, lease liabilities of $39,635,000$39.6 million and eliminated deferred rent of $4,875,000.$4.9 million. The leases have initial lease terms ranging from 3three to 11 years.

Activity related to the Company’sCompany's leases for the three and nine months ended March 31,September 30, 2019 is as follows (in thousands):

Operating lease expense

$

2 ,589

Cash for amounts included in the measurement of operating liability

2 ,834

Right-of-use assets obtained in exchange for operating liabilities

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2019

Operating lease expense

 

$

2,580

    

$

7,727

Cash for amounts included in the measurement of operating liability

 

$

2,823

 

$

8,460

Right-of-use assets obtained in exchange for operating liabilities

 

$

 —

 

$

 —

 

23

Table of Contents

At March 31,September 30, 2019, the weighted average borrowing rate and weighted average lease term are as follows:

 

Amount

Weighted average borrowing rate

 

2.9

%

Weighted average remaining lease term (years)

 

5.9

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents the maturity of lease liabilities as of March 31,September 30, 2019 (in thousands):

 

 

 

    

Amount

Remainder of 2019

 

$

1,715

 

 

$

2,980

2020

 

1,953

 

 

 

8,322

2021

 

6,873

 

 

 

5,801

2022

 

 

 

 

4,049

2023

 

1,225

 

 

 

3,860

Thereafter

 

29,013

 

 

 

11,121

Total future minimum lease payments

 

40,779

 

 

 

36,133

Less imputed interest

 

(3,469

)

 

 

(3,003)

Lease liability

 

$

37,310

 

 

$

33,130

 

At MarchDecember 31, 2019,2018, the future minimum lease payments arewere as follows (in thousands):

 

Remainder of 2019

 

$

8,511

 

 

 

 

    

Amount

2019

 

$

11,393

2020

 

7,725

 

 

 

7,580

2021

 

5,380

 

 

 

5,317

2022

 

4,081

 

 

 

4,051

2023

 

3,907

 

 

 

3,877

Thereafter

 

11,175

 

 

 

11,156

 

$

40,779

 

Total

 

$

43,374

 

One USU.S. lease is secured by a letter of credit in the amount of $1,200,000,$1.2 million, which is guaranteed by Refinitiv.

 

5.7.          Intangible Assets and Goodwill

Intangible assets and goodwill relate to the allocation of purchase price associated with the Refinitiv Transaction (see note 3)Note 3 – Pushdown Accounting).

The following is a summary of intangible assets which have an indefinite useful life at both March 31,September 30, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

    

Amount

Licenses

 

$

168,800

Tradename

 

 

154,300

Total

 

$

323,100

 

Licenses

 

$

168,800

 

Tradename

 

154,300

 

Total

 

$

323,100

 

24

Intangible assets that are subject to amortization, including the related accumulated amortization, are comprised as follows (in thousands):

 

 

 

Successor

 

Successor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

    

 

    

Successor

    

Successor

 

Amortization
Period

 

Cost

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Cost

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

    

September 30, 2019

    

December 31, 2018

Customer relationships - Refinitiv Transaction

 

12 Years

 

$

928,200

 

$

(38,675

)

$

889,525

 

$

928,200

 

$

(19,338

)

$

908,862

 

 

Amortization

 

 

 

 

Accumulated

 

Net Carrying

 

 

 

 

Accumulated

 

Net Carrying

    

Period

    

Cost

    

Amortization

    

Amount

    

Cost

    

Amortization

    

Amount

Customer relationships

 

12 Years

 

$

928,200

 

$

(77,350)

 

$

850,850

 

$

928,200

 

$

(19,338)

 

$

908,862

Content and data

 

7 Years

 

154,400

 

(11,029

)

143,371

 

154,400

 

(5,514

)

148,886

 

 

7 Years

 

 

154,400

 

 

(22,057)

 

 

132,343

 

 

154,400

 

 

(5,514)

 

 

148,886

 

 

 

$

1,082,600

 

$

(49,704

)

$

1,032,896

 

$

1,082,600

 

$

(24,852

)

$

1,057,748

 

 

 

 

$

1,082,600

 

$

(99,407)

 

$

983,193

 

$

1,082,600

 

$

(24,852)

 

$

1,057,748

 

For the three months ended March 31, 2019 and 2018, amortizationAmortization expense relating to intangible assets was $24,852,000$24.9 million and $6,506,000, respectively.

Tradeweb Markets LLC$74.6 million, respectively, for the three and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

nine months ended September 30, 2019, and $6.5 million and $19.6 million, respectively, for the three and nine months ended September 30, 2018.

The estimated annual future amortization for existing intangibles assets through December 31, 2023 is as follows (in thousands):

 

 

 

    

Amount

Remainder of 2019

 

$

74,556

 

 

$

24,852

2020

 

99,408

 

 

 

99,408

2021

 

99,408

 

 

 

99,408

2022

 

99,408

 

 

 

99,408

2023

 

99,408

 

 

 

99,408

 

6.8.          Deferred Revenue

The Company records deferred revenue when cash payments are received or due in advance of services to be performed. The recognized revenue and remaining balance is shown below (in thousands):

 

 

 

 

 

    

Amount

Deferred revenue balance - December 31, 2018

    

$

27,883

New billings

 

 

84,011

Revenue recognized

 

 

(83,337)

Deferred revenue balance - September 30, 2019

 

$

28,557

 

Deferred revenue balance - December 31, 2018

 

$

27,883

 

New billings

 

29,165

 

Revenue recognized

 

(28,561

)

Deferred revenue balance - March 31, 2019

 

$

28,487

 

7.Income Taxes

 

The provision for income taxes consists of the following (in thousands):

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Current:

 

 

 

 

 

 

Federal

 

$

 

 

$

 

State and Local

 

1,487

 

 

856

 

Foreign

 

3,335

 

 

1,210

 

 

 

4,822

 

 

2,066

 

Deferred - Federal

 

704

 

 

299

 

Deferred - state and local

 

577

 

 

153

 

Deferred - foreign

 

(1,320

)

 

 

Total deferred

 

(39

)

 

452

 

Total

 

$

4,783

 

 

$

2,518

 

9.          Income Taxes

The Company and certain of its subsidiaries are taxed as partnerships for U.S federal income tax purposes. The Company’sCompany's effective tax rate was 10.1%17.5% and 5.3%14.1% for the three months ended March 31,September 30, 2019 and 2018, respectively, and 15.6% and 8.4% for the nine months ended September 30, 2019 and 2018, respectively. The increase in the effective tax rate for the three months and nine months ended September 30, 2019 was primarily due to the Reorganization Transactions. Prior to the Reorganization Transactions, income taxes consisted only of business taxes incurred by TWM LLC and certain subsidiaries for business conducted in certain state, local and foreign jurisdictions as well as federal, state and local taxes for certain subsidiaries that are taxed as corporations for U.S. tax purposes. As a result of the Reorganization Transactions, the Corporation is subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and is taxed at prevailing corporate tax rates. The Company’s actual effective tax rate will be impacted by the Corporation’s ownership share of TWM LLC, which will increase over time as the Continuing LLC Owners redeem or exchange their LLC Interests for shares of Class A common stock or Class B common stock, as applicable, or the Corporation purchases LLC Interests from the Continuing LLC Owners.

25

The Company's consolidated effective tax rate canwill vary from period to period depending on redemptions, exchanges or purchases of LLC Interests as described above, changes in the geographic mix of its earnings and changes in tax legislation and tax rates.

The Company expects to obtain an increase in its share of the tax basis of the assets of TWM LLC when LLC Interests are redeemed or exchanged by the Continuing LLC Owners and in connection with certain other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that the Corporation would otherwise pay in the future to various tax authorities. Pursuant to the Tax Receivable Agreement, the Corporation is required to make cash payments to the Continuing LLC Owners equal to 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that the Corporation actually realizes (or in some circumstances are deemed to realize) as a result of certain future tax benefits to which we may become entitled. The Corporation expects to benefit from the remaining 50% of tax benefits, if any, that the Corporation may actually realize. See Note 10 – Tax Receivable Agreement. As a result of the IPO, the Company assumed a tax benefit of $93.2 million, primarily due to an increase in amortizable tax basis that will be amortized primarily over 15 years pursuant to Section 197 of the Internal Revenue Code of 1986, as amended, offset by other factors. The tax benefit has been recognized in deferred tax asset on the September 30, 2019 consolidated statement of financial condition.

8.SharesAs a result of the Refinitiv Contribution, the Company assumed the tax liabilities of the contributed entity. The contributed entity is under audit by the State of New Jersey for the tax years 2012-2015 and is appealing a tax assessment from an audit by the State of New Jersey for the tax years 2008-2011. At September 30, 2019, the tax liability related to the Refinitiv Contribution is $2.8 million and is included within accounts payable, accrued expenses and other liabilities on the consolidated statement of financial condition.  The Company is indemnified by Refinitiv for tax liabilities that were assumed by the Company as a result of the Refinitiv Contribution. See Note 14 – Related Party Transactions.

 

10.          Tax Receivable Agreement

In connection with the Reorganization Transactions, the Corporation entered into the Tax Receivable Agreement with TWM LLC and the Continuing LLC Owners, which provides for the payment by the Corporation to a Continuing LLC Owner of 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that the Corporation actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of TWM LLC’s assets resulting from (a) the purchase of LLC Interests from such Continuing LLC Owner, including with the net proceeds from the IPO and any future offering or (b) redemptions or exchanges by such Continuing LLC Owner of LLC Interests for shares of Class A common stock or Class B common stock or for cash, as applicable, and (ii) certain other tax benefits related to the Corporation making payments under the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are made annually based on the actual tax savings realized by the Corporation in its previous tax year.

In connection with the IPO, the Company recorded an initial liability of $171.4 million related to its projected obligations under the Tax Receivable Agreement with respect to LLC Interests that were purchased by the Corporation using the net proceeds of the IPO.

The Corporation accounts for the income tax effects resulting from taxable redemptions or exchanges of LLC Interests by the Continuing LLC Owners for shares of Class A common stock or Class B common stock or cash, as the case may be, and purchases by the Corporation of LLC Interests from the Continuing LLC Owners by recognizing an increase in deferred tax assets, based on enacted tax rates at the date of each redemption or exchange, as the case may be. Further, the Corporation evaluates the likelihood that it will realize the benefit represented by the deferred tax asset, and, to the extent that the Corporation estimates that it is more likely than not that it will not realize the benefit, it reduces the carrying amount of the deferred tax asset with a valuation allowance.

The impact of any changes in the projected obligations under the Tax Receivable Agreement as a result of changes in the geographic mix of the Company’s issuedearnings, changes in tax legislation and vested shares astax rates or other factors that may impact the Corporation’s tax savings will be reflected in income before taxes on the consolidated statement of both March 31, 2019 and December 31, 2018 are as follows:income in the period in which the change occurs.

26

 

11.          Stockholders’ Equity

Initial Public Offering

As described in Note 1 – Organization, in April 2019, the Corporation completed its IPO of 46,000,000 shares of Class A common stock at a public offering price of $27.00, which included 6,000,000 shares of Class A common stock issued pursuant to the underwriters’ option to purchase additional shares of Class A common stock.  The Corporation received $1.2 billion in net proceeds, after deducting underwriting discounts and commissions but before deducting offering expenses, which were used to purchase LLC Interests from certain of the Bank Stockholders (and the corresponding shares of common stock were cancelled as described below), at a purchase price per interest equal to the public offering price of $27.00, less the underwriting discounts and commissions payable thereon.

Reorganization Transactions

In connection with the IPO, the Reorganization Transactions described below were completed.

Amendment and Restatement of Certificate of Incorporation

On April 3, 2019, the certificate of incorporation of Tradeweb Markets Inc. was amended and restated to, among other things, provide for the authorization of (i) 250,000,000 shares of preferred stock with a par value of $0.00001 per share (ii) 1,000,000,000 shares of Class A common stock with a par value of $0.00001 per share; (iii) 450,000,000 shares of Class B common stock with a par value of $0.00001 per share; (iv) 350,000,000 shares of Class C common stock with a par value of $0.00001 per share; and (v) 300,000,000 shares of Class D common stock with a par value of $0.00001 per share.

Each share of Class A common stock and Class C common stock entitles its holder to one vote on all matters presented to the Corporation’s stockholders generally. Each share of Class B common stock and Class D common stock entitles its holder to ten votes on all matters presented to the Corporation’s stockholders generally. The holders of Class C common stock and Class D common stock have no economic interests in the Corporation (where “economic interests” means the right to receive any dividends or distributions, whether cash or stock, in connection with common stock). These attributes are summarized in the following table:

 

 

 

 

 

 

 

 

Class of
Common Stock

    

Par
Value

    

Votes

    

Economic
Rights

Class A common stock

 

$

0.00001

 

1

 

Yes

Class B common stock

 

$

0.00001

 

10

 

Yes

Class C common stock

 

$

0.00001

 

1

 

No

Class D common stock

 

$

0.00001

 

10

 

No

Holders of outstanding shares of Class A common stock, Class B common stock, Class C common stock and Class D common stock will vote together as a single class on all matters presented to the Corporation’s stockholders for their vote or approval, except as otherwise required by applicable law.

Holders of Class B common stock may from time to time exchange all or a portion of their shares of Class B common stock for newly issued shares of Class A common stock on a one-for-one basis (in which case their shares of Class B common stock will be cancelled on a one-for-one basis upon any such issuance). The Continuing LLC Owners that hold shares of Class D common stock may also from time to time exchange all or a portion of their shares of Class D common stock for newly issued shares of Class C common stock on a one-for-one basis (in which case their shares of Class D common stock will be cancelled on a one-for-one basis upon such issuance). In addition, with respect to each Bank Stockholder that holds shares of Class D common stock, immediately prior to the occurrence of any event that would cause the combined voting power held by such Bank Stockholder to exceed 4.9%, the minimum number of shares of Class D common stock of such Bank Stockholder that would need to convert into shares of Class C common stock such

27

that the combined voting power held by such Bank Stockholder would not exceed 4.9% will automatically convert into shares of Class C common stock.

Each share of Class B common stock will automatically convert into one share of Class A common stock and each share of Class D common stock will automatically convert into one share of Class C common stock (i) immediately prior to any sale or other transfer of such share by a holder or its permitted transferees to a non-permitted transferee or (ii) once the Refinitiv Owners and their affiliates together no longer beneficially own a number of shares of common stock and LLC Interests that together entitle them to at least 10% of TWM LLC’s economic interest. Holders of LLC Interests that receive shares of Class C common stock upon any such conversion may continue to elect to have their LLC Interests redeemed for newly issued shares of Class A common stock as described below (in which case their shares of Class C common stock will be cancelled on a one-for-one basis upon such issuance).

Recapitalization of Tradeweb Markets LLC

On April 4, 2019, the TWM LLC Agreement was amended and restated to, among other things, (i) provide for the LLC Interests, (ii) exchange all of the then existing membership interests in TWM LLC for LLC Interests and (iii) appoint the Corporation as the sole manager of TWM LLC.

All of the shares of TWM LLC outstanding prior to the Reorganization Transactions were exchanged for 222,222,197 LLC Interests. TWM LLC’s outstanding shares prior to the Reorganization Transactions consisted of the following classes of shares:

Shares

Class A Shares

 

146,333

Class C Shares

 

447

Class P(A) SharesP (A)

 

6,887

Class P(C) SharesP (C)

 

2

Class P-1(A) Shares

 

6,094

Class P-1(C) SharesP-1 (C)

 

232

Tradeweb Markets

The TWM LLC Agreement requires that TWM LLC at all times maintain (i) a one-to-one ratio between the number of shares of Class A common stock and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)Class B common stock issued by the Corporation and the number of LLC Interests owned by the Corporation and (ii) a one-to-one ratio between the number of shares of Class C common stock and Class D common stock issued by the Corporation and the number of LLC Interests owned by the holders of such Class C common stock and Class D common stock.

 

As describedLLC Interests held by the Continuing LLC Owners are redeemable in note 18, on April 4, 2019,accordance with the TWM LLC Agreement, was amendedat the election of such holders, for newly issued shares of Class A common stock or Class B common stock, as the case may be, on a one-for-one basis (and such holders’ shares of Class C common stock or Class D common stock, as the case may be, will be cancelled on a one-for-one basis upon any such issuance). In the event of such election by a Continuing LLC Owner, the Corporation may, at its option, effect a direct exchange of Class A common stock or Class B common stock for such LLC Interests of such Continuing LLC Owner in lieu of such redemption. In addition, the Corporation’s board of directors may, at its option, instead of the foregoing redemptions or exchanges of LLC Interests, cause the Corporation to make a cash payment equal to the volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed or exchanged (subject to customary adjustments, including for stock splits, stock dividends and restated, pursuant to which, among other things,reclassifications) in accordance with the terms of the TWM LLC Agreement.

Issuance and Cancellation of Common Stock

·

As a result of the Refinitiv Contribution, the Corporation received 96,933,192 LLC Interests and the Refinitiv Direct Owner received 96,933,192 shares of Class B common stock.

28

·

The Corporation issued 20,000,000 shares of Class C common stock and 105,289,005 shares of Class D common stock to the Original LLC Owners that received LLC Interests on a one-to-one basis with the number of LLC Interests they owned immediately following the amendment and restatement of the TWM LLC Agreement for nominal consideration (the Corporation subsequently cancelled 9,993,731 shares of such Class C common stock and 36,006,269 shares of such Class D common stock in connection with the Corporation’s purchase of LLC Interests from certain of the Bank Stockholders using the net proceeds of the IPO).

Following the completion of the Reorganization Transactions, including the IPO and the application of the proceeds therefrom as described above, (i) the investors in the IPO collectively owned 46,000,000 shares of Class A common, representing 2.7% of the combined voting power of all of the outstandingCorporation’s common stock and, through the Corporation’s ownership of LLC Interests, 20.7% of the economic interest in TWM LLC; (ii) the Refinitiv Direct Owner owned 96,933,192 shares of Class A Shares,B common stock, representing 56.4% of the combined voting power of all of the Corporation’s common stock and, through the Corporation’s ownership of LLC Interests, 43.6% of the economic interest in TWM LLC; (iii) the Refinitiv LLC Owner owned 22,988,329 shares of Class P(A) Shares, Class P-1(A) Shares,D common stock, representing 13.4% of the combined voting power of all of the Corporation’s common stock, and 22,988,329 LLC Interests, representing 10.3% of the economic interest in TWM LLC, (iv) the Continuing LLC Owners (other than the Refinitiv LLC Owner) collectively owned 10,006,269 shares of Class C Shares,common stock and 46,294,407 shares of Class P(C) Shares and Class P-1(C) SharesD common stock, representing 27.5% of the Company were exchanged for 222,222,197combined voting power of all of the Corporation’s common stock, and 56,300,676 LLC Interests, representing 25.3% of the economic interest in TWM LLC; and (v) the Corporation owned 142,933,192 LLC Interests, representing 64.3% of the economic interest in TWM LLC.

12.          Non-Controlling Interests

In connection with the Reorganization Transactions, Tradeweb Markets Inc. became the sole manager of TWM LLC and, as a result of this control, and because Tradeweb Markets Inc. has a substantial financial interest in TWM LLC, consolidates the financial results of TWM LLC into its consolidated financial statements. The non-controlling interests balance reported on the consolidated statements of financial condition represents the economic interests of TWM LLC held by the holders of LLC Interests other than Tradeweb Markets Inc. Income or loss is attributed to the non-controlling interests based on the relative ownership percentages of LLC Interests held during the period by Tradeweb Markets Inc. and the other holders of LLC Interests.

 

Each formerly outstandingThe following table summarizes the ownership interest in Tradeweb Markets LLC:

 

 

 

 

 

 

 

September 30, 2019

 

 

LLC

 

Ownership

 

    

Interests

    

%

Number of LLC Interests held by Tradeweb Markets Inc.

 

142,942,945

 

64.3%

Number of LLC Interests held by non-controlling interests

 

79,289,005

 

35.7%

Total LLC Interests outstanding

 

222,231,950

 

100%

LLC Interests held by the Continuing LLC Owners are redeemable in accordance with the TWM LLC Agreement at the election of the members for shares of Class A Share,common stock or Class P(A) Share, Class P-1(A) Share, Class C Share, Class P(C) Share and Class P-1(C) Share equally participatedB common stock, on a one-for-one basis or, at the Company's option, a cash payment in accordance with the terms of the TWM LLC Agreement. See Note 11 – Stockholders’ Equity.

29

The following table summarizes the impact on equity due to changes in the earnings of the Company.  All of these shares could not be transferred without approval by the former Board of Managers of the Company, with the exception of transfers to certain related parties.  Most of the Class A and Class P(A) Shareholders had the right to appoint the members of the former Board of Managers.  The Class C Shareholders, Class P(C) Shareholders and Class P-1(C) Shareholders did not have the right to appoint members of the former Board of Managers.Corporation’s ownership interest in Tradeweb Markets LLC (in thousands):

 

 

 

 

 

 

 

 

        

Successor

    

Successor

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

Net Income Attributable to Tradeweb Markets Inc. and Transfers (to) from the Non-Controlling Interests

 

2019

 

2019

Net income attributable to Tradeweb Markets Inc.

 

$

29,612

 

$

42,440

Transfers (to) from non-controlling interests:

 

 

 

 

 

 

Allocation of equity to non-controlling interests arising from the reorganization transactions and IPO

 

 

 —

 

 

(1,607,529)

Change in ownership percentage resulting from issuance of common stock from equity incentive plans

 

 

73

 

 

73

Net transfers (to) from non-controlling interests

 

 

73

 

 

(1,607,456)

Change from net income attributable to Tradeweb Markets Inc. and transfers (to) from non-controlling interests

 

$

29,685

 

$

(1,565,016)

 

9.Share-Based13.          Stock-Based Compensation Plans

As of March 31, 2019, theThe Company maintainedmaintains a share-basedstock-based incentive plan (the “PRSU Plan”) which providedprovides for the grant of performance-based restricted share units (“PRSUs”) to encourage employees of the Company to participate in the long-term success of the Company.

PRSUs generally vest in the third plan year following the year of grant.grant and are equity-settled in shares of Class A common stock (except as described below). The outstanding PRSUs vest on January 1, 2020, 2021 and 2022.  The final number of the PRSUs received upon vestinginitially awarded is determinedsubsequently adjusted (upward or downward) by a performance modifier, which is adjusted as a result ofbased on the financial performance of the Company.Company in the year of the grant.  If an employee’s employment with the Company is terminated, subject to certain exceptions, all unvested PRSUs are forfeited.

The following table reports the activitysummarizes information for equity-settled PRSUs of the Company:Company (in thousands, except weighted average grant date fair value per unit):

 

Successor

 

Number of
PRSUs

 

Weighted
Average
Fair Value
of PRSUs

 

Outstanding at December 31, 2018

 

1,442.2

 

$30,472

 

Granted

 

554.3

 

31,563

 

Outstanding at March 31, 2019

 

1,996.5

 

$34,151

 

 

 

 

 

 

 

 

 

 

Successor

 

Successor

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

Equity-Settled PRSUs

    

2019

    

2019

PRSU compensation expense

 

$

7,136

 

$

18,807

Income tax benefit

 

 

 

 

 

 —

PRSU compensation expense, net of taxes

 

$

7,136

 

$

18,807

Weighted-average grant date fair value per unit

 

$

21.65

 

$

21.65

Total fair value of vested PRSUs

 

$

 —

 

$

 —

 

Subsequent to March 31, 2019, in connection with the reorganization transactions described in note 18, the Corporation’s board of directors adopted and assumed sponsorship of the Amended & Restated Tradeweb Markets Inc. PRSU Plan, including all awardsThe Company previously granted under the predecessor plancash-settled PRSUs, some of the Company. As a result, the equity-settled PRSUswhich are still outstanding at March 31, 2019, converted into equity-settled PRSUs of the Corporation represented by 2,770,334 shares of Class A common stock of the Corporation.

Certain PRSUs are cash-settled and are accounted for as liability awards. The Company measures the cost of employee services received in exchange for the award based on the fair value of the Company and the value of accumulated dividend rights associated with each award. The fair value of that award is remeasured subsequently at each reporting date through to settlement. Changes in the award’saward's fair value during the requisite service period is recognized as compensation cost over that period.

30

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table reports the activitysummarizes information for cash-settled PRSUs of the Company:Company (in thousands, except weighted average fair value per unit):

 

Successor

 

Number of
PRSUs

 

Weighted
Average
Fair Value
of PRSUs

 

Outstanding at December 31, 2018

 

522.5

 

$

34,075

 

Exercised

 

(507.2

)

33,694

 

Outstanding at March 31, 2019

 

15.3

 

$

51,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

    

Successor

 

 

Predecessor

    

Predecessor

 

 

 

Three Months

 

Nine Months

 

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

Cash-Settled PRSUs

    

2019

    

2019

  

  

2018

    

2018

 

PRSU compensation expense

 

$

219

 

$

738

 

 

$

4,794

 

$

15,949

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

PRSU compensation expense, net of taxes

 

$

219

 

$

738

 

 

$

4,794

 

$

15,949

 

Weighted-average grant date fair value per unit

 

$

54,150

 

$

54,150

 

 

$

38,017

 

$

38,017

 

Total fair value of vested PRSUs

 

$

 —

 

$

 —

 

 

$

 —

 

$

 —

 

 

In October 2018,The Company maintains the Option Plan which provides for the grant of stock options. Prior to the IPO, the Company made a special award ofawarded options to management and other employees under an option plan (the “Option Plan”).the Option Plan. Each option vests one half based solely on the passage of time and one half only if the Company achieves certain performance targets. The time vesting portion of the options has a graded vesting schedule with vesting dates of January 1, 2019, 2020, 2021 and 2022.

2022, with accelerated vesting for time-based options with vesting dates of January 1, 2021 and 2022 upon the completion of an initial public offering.

In accounting for the options issued under the Option Plan, the Company measures and recognizes compensation expense for all awards based on their estimated fair values measured as of the grant date. These options are exercisable only any time following the closing of an initial public offering (“IPO”) or during a 15-day15‑day period following a change in control of the Company.Company (and certain other sales of equity by the Company’s shareholders). Costs related to these options will beare recognized as an expense in the consolidated statements of income over the requisite service period, when exercisability is considered probable.  Therefore expense will be recognized only upon the completion of an IPO or a change in control, over the vesting period,probable, with an offsetting increase to members’additional paid-in capital. On April 8, 2019, asAs a result, ofexpense recognition commenced upon the options becoming exercisable because of completion of the Corporation’s IPO, the Companywith $18.9 million recognized $18,883,000 ofas compensation expense related to these options.

The fair valueoptions immediately upon the completion of the options was calculated at the date of grant using the Black-Scholes model.  The significant assumptions used to estimate the fair value of the options as of grant date did not reflect changes that would have occurred to these assumptions as a result of the Corporation’s IPO.  See note 18.  The significant assumptions used to estimate the fair value of the options were as follows:

Weighted Average Expected Life (years)

 

5.7

 

Weighted Average Risk Free Interest Rate

 

2.94

%

Weighted Average Expected Volatility

 

20.0

%

Weighted Average Expected Dividend Yield

 

4.01

%

Share Price

 

$

25,692

 

Exercise Price

 

$

28,601

 

The following table reports the activitysummarizes information for options held by employees of the Company:

Successor

 

Number of
Options

 

Weighted
Average
Fair Value
of Options

 

Intrinsic
Value
(in
thousands)

 

Outstanding at December 31, 2018

 

13,025.8

 

$

2,569

 

 

 

Granted

 

130.4

 

4,132

 

 

 

Forfeited

 

(97.8

)

4,159

 

 

 

Outstanding at March 31, 2019

 

13,058.4

 

$

2,573

 

$

74,421

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Subsequent to March 31, 2019, in connection with the reorganization transactions described in note 18, the Corporation’s board of directors adopted and assumed sponsorship of the Amended and Restated Tradeweb Markets Inc. 2018 Share Option Plan, including all awards previously granted under the predecessor plan of the Company. As a result, the options outstanding at March 31, 2019 converted into 18,137,050 options of the Corporation with respect to shares of the Corporation’s Class A common stock.Company (in thousands, except weighted average fair value per unit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

    

Successor

 

 

Predecessor

    

Predecessor

 

 

Three Months

 

Nine Months

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

Options

    

2019

    

2019

  

  

2018

    

2018

Option compensation expense

 

$

1,995

 

$

22,398

 

 

$

 —

 

$

 —

Income tax benefit

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

Option compensation expense, net of taxes

 

$

1,995

 

$

22,398

 

 

$

 —

 

$

 —

Weighted-average grant date fair value per unit

 

$

1.96

 

$

1.96

 

 

$

 —

 

$

 —

Total fair value of vested options

 

$

16,309

 

$

16,309

 

 

$

 —

 

$

 —

 

As of March 31,September 30, 2019, total unrecognized compensation costexpense related to non-vested share-basedstock-based compensation arrangements and the expected recognition period are as follows:follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Cash-Settled

 

Equity Settled

 

 

 

 

    

PRSUs

    

PRSUs

    

Options

Total unrecognized compensation cost

 

$

1,171

 

$

37,403

 

$

13,273

Weighted-average recognition period

 

 

0.9 years

 

 

1.9 years

 

 

1.7 years

 

 

 

Cash-Settled
PRSUs

 

Equity Settled
PRSUs

 

Options

 

Total unrecognized compensation cost

 

$

390,000

 

$

36,199,000

 

$

33,460,000

 

Weighted average recognition period

 

1.54 years

 

2.02 years

 

0.6 years

 

Certain employees acquired or vested in Class C Shares, Class P(C) Shares and Class P-1(C) Shares of the Company (collectively, the “Employee Shares”).

 

The Employee Shares outstanding at March 31, 2019 and December 31, 2018 are as follows:

Class C
Shares

 

Class P(C)
Shares

 

Class P-1(C)
Shares

 

447

 

2

 

232

 

31

On April 4, 2019, as a result of the amendment to the LLC Agreement described in note 18, the Employee Shares outstanding at March 31, 2019 converted into 946,569 LLC Units.

The Employee Shares were classified as mezzanine capital, as opposed to members’ capital, due to the right of employees to sell the shares back to the Company at fair value upon termination of employment.  Employee Shares that have been outstanding for less than six months were included in employee equity compensation payable.  At December 31, 2018, $6,727,000 of vested Class P-1(C) Shares were included in employee compensation payable with any changes in the value of the shares included in compensation cost on the consolidated statements of income.  There were no vested Class P-1(C) Shares included in employee compensation payable at March 31, 2019.  Changes in the fair value of the Employee Shares included in mezzanine capital were not recognized as compensation cost.

For the three months ended March 31, 2019 and 2018, $4,878,000 and $5,946,000, respectively, has been expensed relating to PRSUs, options and shares and included in employee compensation and benefits in the consolidated statements of income.

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

10.14.          Related Party Transactions

The Company enters into transactions with Refinitiv and its affiliates which are considered to be related party transactions. The Company also enters into transactions with the Bank Stockholders and their respective affiliates. Prior to the Reorganization Transactions, the Bank Stockholders were collectively considered to be related parties of the Company. As a result of the Reorganization Transactions, they are no longer considered to be related parties. As a result, the related party transactions listed below include transactions with affiliates of Refinitiv for all periods presented and only includes transactions with affiliates of the Banks and Refinitiv.  Bank Stockholders for pre-IPO periods.

At March 31,September 30, 2019 and December 31, 2018, the following balances with such affiliates were included in the consolidated statements of financial condition in the following line items (in thousands):

 

 

 

 

 

 

Successor

 

Successor

 

    

Successor

    

Successor

 

March 31, 2019

 

December 31, 2018

 

 

September 30, 2019

 

December 31, 2018

Cash and cash equivalents

 

$

246,416

 

$

283,790

 

 

$

 —

 

$

283,790

Receivables from brokers and dealers and clearing organizations

 

199

 

$

3,332

 

 

 —

 

 

3,332

Deposits with clearing organizations

 

500

 

500

 

 

 —

 

 

500

Accounts receivable

 

46,947

 

40,730

 

 

 —

 

 

40,730

Receivable from affiliates

 

3,026

 

3,243

 

 

3,515

 

 

3,243

Other assets

 

 

9

 

 

 —

 

 

 9

Payable to brokers and dealers and clearing organizations

 

 

2,404

 

 

 —

 

 

2,404

Deferred revenue

 

8,556

 

9,151

 

 

3,983

 

 

9,151

Accounts payable, accrued expenses and other liabilities

 

387

 

 

Payable to affiliates

 

6,050

 

5,009

 

 

3,737

 

 

5,009

 

The Company maintains a shared services agreementfollowing balances with Refinitiv (TR in the predecessor period).  Under the terms of the agreement, Refinitiv provides the Company with certain real estate, payroll, benefits administration, insurance, content, financial reporting and tax support.  For both the three months ended March 31, 2019 and 2018, the Company incurred shared services fees of $1,075,000 relating to this agreement. These fees aresuch affiliates were included in occupancy, technology and communications and general and administrative expenses in the consolidated statements of income.

The Company maintains a market data license agreement with Refinitiv (TRincome in the predecessor period).  Under the agreement, the Company delivers to Refinitiv certain market data feeds which Refinitiv redistributes to its customers.  The Company earns license fees or royalties for these feeds.  For the three months ended March 31, 2019 and 2018, the Company earned $13,616,000 and $12,237,000, respectively,following line items (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

Predecessor

 

 

Three Months

 

Nine Months

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

Ended

 

Ended

 

    

September 30, 2019

    

September 30, 2019

    

September 30, 2018

    

September 30, 2018

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees (1)

 

$

 —

 

$

59,643

 

$

52,796

 

$

159,663

Subscription fees (1)

 

 

 —

 

 

5,670

 

 

5,446

 

 

16,627

Commissions (1)

 

 

 —

 

 

16,186

 

 

11,808

 

 

34,944

Refinitiv market data fees (2)

 

 

13,251

 

 

40,252

 

 

12,533

 

 

36,851

Operating Income:(3)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 —

 

 

858

 

 

 6

 

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Shared Services Fees (4) :

 

 

 

 

 

 

 

 

 

 

 

 

Technology and communications

 

 

740

 

 

2,220

 

 

740

 

 

2,220

General and administrative

 

 

24

 

 

406

 

 

180

 

 

539

Occupancy

 

 

123

 

 

434

 

 

155

 

 

466

(1)

For pre-IPO periods, represents fees and commissions from affiliates of the Bank Stockholders.

(2)

The Company maintains a market data license agreement with Refinitiv (TR in the predecessor period). Under the agreement, the Company delivers to Refinitiv certain market data feeds which Refinitiv redistributes to its customers. The Company earns license fees and royalties for these feeds.

(3)

For pre-IPO periods, represents interest income from money market funds invested with and savings accounts deposited with affiliates of the Bank Stockholders.

32

(4)

The Company maintains a shared services agreement with Refinitiv (TR in the predecessor period). Under the terms of the agreement, Refinitiv provides the Company with certain real estate, payroll, benefits administration, insurance, content, financial reporting and tax support.

The Company reimburses affiliates of RefinitvRefinitiv (TR in the predecessor period) for expenses paid on behalf of the Company for various services including salaries and bonuses, marketing, professional fees, communications, data costs and certain other administrative services. For the three and nine months ended March 31,September 30, 2019, the Company reimbursed such affiliates approximately $1.2 million and $5.5 million, respectively, for these expenses. For the three and nine months ended September 30, 2018, the Company reimbursed such affiliates approximately $1,027,000$0.3 million and $6,258,000,$28.7 million, respectively, for these expenses.

ForThe Company is indemnified by Refinitiv for any tax liabilities that existed in the three months ended March 31, 2019 and 2018, the Company earned approximately $81,499,000 and $69,769,000, respectively, of transaction, subscription and other fees from affiliatesentity contributed by Refinitiv as a result of the Banks.

For the three months ended March 31,Refinitiv Contribution.  At September 30, 2019, and 2018, the Company earned $208,000 and $21,000, respectively, of interest income from money market funds invested with and savings accounts deposited with affiliates of the Banks.  Interest rates earned$2.7 million is included in other assets on the money market and savings accounts are comparableSeptember 30, 2019 consolidated statement of financial condition related to rates offered to third parties.

this indemnification.

During 2014, the Company issued Class A Shares and unvested Class P-1(A) Shares to some of the BanksBank Stockholders as a result of a $120,000,000$120.0 million capital contribution.  In connection with this investment, employees invested $5,266,000$5.3 million in the Company and were issued Class C Shares and unvested Class P-1(C) Shares.  Certain Class P-1(A) Shares and Class P-1(C) Shares vested on July 31, 2018, based on a formula determined by the Company’s new credit platforms’ revenues and any remaining unvested Class P-1(A) Shares and Class P-1(C) Shares were cancelled and as a result  no contingent consideration has been recognized related to these shares subsequent to that date.  The Company recognized contingent consideration for the nine months ended September 30, 2018 of $26.8 million (which included a reversal of contingent consideration of $2.5 million for the three months ended March 31, 2018 of $10,070,000September 30, 2018), relating to these shares, which is included in net revenue on the consolidated statements of income.

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

11.15.          Fair Value of Financial Instruments

Certain financial instruments that are not carried at fair value on the consolidated statements of financial condition are carried at amounts that approximate fair value. These instruments include deposits with clearing organizations and accounts receivable.

Following is a description of the fair value methodologies used for the Company’s instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

The Company’sCompany's money market funds are classified within level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

The Company has no instruments that are classified within level 2 or level 3 of the fair value hierarchy.

The fair value measurements are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

active Markets

 

Significant

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

    

Assets

    

Inputs

    

Inputs

    

 

 

Successor

 

Quoted Prices in
active Markets
for Indentical
Assets
(Level 1)

 

Significant
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

As of March 31, 2019

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

137,502

 

$

 

$

 

$

137,502

 

 

$

175,563

 

$

 —

 

$

 —

 

$

175,563

 

$

137,502

 

$

 

$

 

$

137,502

 

 

$

175,563

 

$

 —

 

$

 —

 

$

175,563

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

127,927

 

$

 

$

 

$

127,927

 

 

$

127,927

 

$

 —

 

$

 —

 

$

127,927

 

$

127,927

 

$

 

$

 

$

127,927

 

 

$

127,927

 

$

 —

 

$

 —

 

$

127,927

 

33

12.16.          Credit Risk

The Company may be exposed to credit risk regarding its receivables, which are primarily receivables from financial institutions, including investment managers and broker/dealers. At March 31,September 30, 2019 and December 31, 2018, the Company established an allowance for doubtful accounts of $1,253,000$1.3 million and $1,169,000,$1.2 million, respectively, with regard to these receivables.

In the normal course of business the Company, as agent, executes transactions with, and on behalf of, other brokers and dealers. If the agency transactions do not settle because of failure to perform by either counterparty, the Company may be obligated to discharge the obligation of the non-performing party and, as a result, may incur a loss if the market value of the security is different from the contract amount of the transaction.

A substantial number of the Company’sCompany's transactions are collateralized and executed with, and on behalf of, a limited number of brokers and dealers. The Company’sCompany's exposure to credit risk associated with the nonperformance of these clients in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the clients’clients' ability to satisfy their obligations to the Company.

From time to time, the Company enters into agreements to repurchase to facilitate the clearance of securities.  Credit exposure related to these agreements to repurchase, including the risk related to a decline in market value of collateral (pledged or received), is managed by entering into agreements to repurchase with overnight or short-term maturity dates and only entering into repurchase transactions with netting members of the Fixed Income Clearing Corporation (“FICC”). The FICC requires dealer netting members to maintain a minimum of $25 million in equity capital and $10 million in excess net capital. The FICC operates a continuous net settlement system, whereby as trades are submitted and compared the FICC becomes the counterparty. The FICC also marks to market collateral on a daily basis, requiring member firms to pay or receive margin amounts as part of their daily funds settlement.

The Company does not expect nonperformance by counterparties in the above situations. However, the Company’sCompany's policy is to monitor its market exposure and counterparty risk. In addition, the Company has a

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

policy of reviewing, as considered necessary, the credit standing of each counterparty with which it conducts business.

 

13.17.          Commitments and Contingencies

In the normal course of business, the Company enters into user agreements with its dealers which provide the dealers with indemnification from third parties in the event that the electronic marketplaces of the Company infringe upon the intellectual property or other proprietary right of a third party. The Company’sCompany's exposure under these user agreements is unknown as this would involve estimating future claims against the Company which have not yet occurred. However, based on its experience, the Company expects the risk of a material loss to be remote.

The Company has been named as a defendant, along with dozens ofother financial institutions, in antitrust class actions (consolidated into two actions) relating to trading practices in United States Treasury securities auctions and, separately, interest rate swaps.auctions. The Company was dismissed fromhas filed a motion to dismiss the interest rate swaps matter andactions, believes it has substantial defenses to the other plaintiff’splaintiff's claims and intends to defend itself vigorously.

Additionally, the Company was dismissed from a class action relating to an interest rate swaps matter in 2017, but that matter continues against the remaining defendant financial institutions.

The Company is a co-defendant in a matter relating to the distribution of financial strength ratings over the Company’sCompany's trading platform to one of its customers. The matter alleges that while certain business units of the client were licensed to receive the data via the Company’sCompany's platform, the data was also distributed without authorization to certain end clients of the customer. The plaintiff claims to have suffered approximately $80,000,000$80 million in damages and also seeks punitive damages, attorneys’attorneys' fees and costs. In September 2019, the Court dismissed some, but not all, of plaintiff’s claims, and rejected plaintiff’s damages theory on which it relied to support its claims for approximately $80 million in damages. The Company intends to continue to vigorously defend what the Company believes to be meritless and excessive claims.

The Company records its best estimate of a loss, including estimated defense costs, when the loss is considered probable and the amount of such loss can be reasonably estimated. Based on its experience, the Company believes that the amount

34

of damages claimed in a legal proceeding is not a meaningful indicator of the potential liability. At this time, the Company cannot reasonably predict the timing or outcomes of, or estimate the amount of loss, or range of loss, if any, related to its pending legal proceedings, including the matters described above, and therefore does not have any contingency reserves established for any of these matters.

Revolving Credit Facility

On April 8, 2019, the Company entered into a five year, $500 million senior secured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility provides additional borrowing capacity to be used to fund ongoing working capital needs, letters of credit and for general corporate purposes, including potential future acquisitions and expansions.

Under the terms of the credit agreement that governs the Credit Facility, borrowings under the Credit Facility bear interest at a rate equal to, at the Company’s option, either (a) a base rate equal to the greatest of (i) the administrative agent’s prime rate, (ii) the federal funds effective rate plus ½ of 1.0% and (iii) one month LIBOR plus 1.0%, in each case plus 0.75%, or (b) LIBOR plus 1.75%, subject to a 0.00% floor. The credit agreement also includes a commitment fee of 0.25% for available but unborrowed amounts and other administrative fees that are payable quarterly. The Credit Facility is available until April 2024, provided the Company is in compliance with all covenants. Financial covenant requirements include maintaining minimum ratios related to interest coverage and leverage.

As of September 30, 2019, there were no amounts outstanding under the Credit Facility.

18.          Earnings Per Share

In April 2019, the Company completed the Reorganization Transactions and the IPO, which, among other things, resulted in the Corporation becoming the successor of TWM LLC for financial reporting purposes. As a result, earnings per share information for the pre-IPO period is not comparable to earnings per share information for the post-IPO period.  Thus, earnings per share information is being presented separately for the pre-IPO and post-IPO periods.

The following table summarizes the basic and diluted earnings per share calculations for Tradeweb Markets LLC and Subsidiaries(pre-IPO period):

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

Nine Months

 

 

Three Months

 

Nine Months

 

 

Ended

 

 

Ended

 

Ended

 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

2019

  

 

2018

    

2018

EPS: Pre-IPO net income attributable to Tradeweb Markets LLC(1)

 

(in thousands, except share and per share amounts)

Numerator:

 

 

 

 

 

 

 

 

 

 

Pre-IPO net income attributable to Tradeweb Markets LLC

 

$

42,352

 

 

$

45,955

 

$

130,160

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

Weighted average LLC Interests outstanding - Basic

 

 

222,222,197

 

 

 

219,165,997

 

 

215,365,920

Dilutive effect of equity-settled PRSUs

 

 

1,098,260

 

 

 

 —

 

 

 —

Weighted average LLC Interests outstanding - Diluted

 

 

223,320,457

 

 

 

219,165,997

 

 

215,365,920

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Basic

 

$

0.19

 

 

$

0.21

 

$

0.60

Earnings per share - Diluted

 

$

0.19

 

 

$

0.21

 

$

0.60


Notes to Consolidated Financial Statements

(Unaudited)

(1)

Earnings per share and weighted average shares outstanding for the pre-IPO periods have been computed to give effect to the Reorganization Transactions, including the amendment and restatement of the TWM LLC Agreement to, among other things, (i) provide for LLC Interests and (ii) exchange all of the then existing membership interests in TWM LLC for LLC interests.

 

14.Net Income Per Share

35

On April 4, 2019, the LLC Agreement was amended and restated to, among other things, (i) provide for LLC Interests and (ii) exchange all of the existing membership interests of the Company’s existing equityholders for LLC Interests.  See note 18.  For purposes of calculating net income per share on the consolidated statements of income, the number of outstanding shares has been adjusted retroactively for all periods presented to reflect the above-mentioned amendment and resulting recapitalization.  The following table sets forthsummarizes the basic and diluted earnings per share calculations for Tradeweb Markets Inc. (post-IPO period):

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Three Months

 

 

Nine Months

 

 

Ended

 

 

Ended

 

 

September 30, 

 

 

September 30, 

 

 

2019

    

 

2019

EPS: Post-IPO net income attributable to Tradeweb Markets Inc.

 

(in thousands, except share and per share amounts)

Numerator:

 

 

 

 

 

 

 

Post-IPO net income attributable to Tradeweb Markets Inc.

 

$

29,612

 

 

$

42,440

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares of Class A and Class B common stock outstanding - Basic

 

 

142,935,206

 

 

 

142,934,221

Dilutive effect of equity-settled PRSUs

 

 

2,492,381

 

 

 

2,355,938

Dilutive effect of options

 

 

5,935,056

 

 

 

5,868,601

Weighted average shares of Class A and Class B common stock outstanding - Diluted

 

 

151,362,643

 

 

 

151,158,760

 

 

 

 

 

 

 

 

Earnings per share - Basic

 

$

0.21

 

 

$

0.30

Earnings per share - Diluted

 

$

0.20

 

 

$

0.28

For the three and nine months ended September 30, 2019, there were approximately 247,491 and 126,667 shares, respectively, underlying equity-settled PRSUs and options that were anti-dilutive and thus excluded from the computation of basicdiluted earnings per share. For the three and diluted net income per share:

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Net Income (in thousands)

 

$

42,352

 

 

$

45,308

 

 

 

 

 

 

 

 

Basic Weighted Average Shares Outstanding

 

222,222,197

 

 

213,435,321

 

Dilutive Effect of equity settled PRSUs

 

1,098,260

 

 

 

Diluted Weighted Average Shares Outstanding

 

223,320,457

 

 

213,435,321

 

 

 

 

 

 

 

 

Basic Net Income Per Share

 

$

0.19

 

 

$

0.21

 

 

 

 

 

 

 

 

Diluted Net Income Per Share

 

$

0.19

 

 

$

0.21

 

Shares fromnine months ended September 30, 2018, there were approximately 2,798,674 and 5,444,566 shares, respectively, related to the contingent consideration payable totaling 5,519,568that were anti-dilutive and thus excluded from the computation of diluted earnings per share.

LLC Interests held by the Continuing LLC Owners are redeemable in accordance with the TWM LLC Agreement, at the election of such holders, for three months ended March 31, 2018shares of Class A or Class B common stock of Tradeweb Markets Inc. After evaluating the potential dilutive effect under the if-converted method, the 79,289,005 LLC Interests for the assumed exchange of non-controlling interests were determined to be anti-dilutive and thus were excluded from the computation of diluted net incomeearnings per share because their effect wouldfor the post-IPO periods.

Shares of Class C and Class D common stock do not have been anti-dilutive.economic rights in Tradeweb Markets Inc. and, therefore, are not participating securities for purposes of the computation of earnings per share.

 

15.19.          Regulatory Capital Requirements

TWL, DW and TWD are subject to the Uniform Net Capital Rule 15c3-115c3‑1 under the Securities Exchange Act of 1934. TEL is subject to certain financial resource requirements with the FCA in the UK, TWJ is subject to certain financial resource requirements with the FCA in Japan and TWEU is subject to certain finance resource requirements with the AFM in the Netherlands.

36

At March 31,September 30, 2019 and December 31, 2018, the regulatory capital requirements and regulatory capital for TWL, DW, TWD, TEL, TWJ and TWEU wereare as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

    

TWL

    

DW

    

TWD

    

TEL

    

TWJ

    

TWEU

Regulatory Capital

 

$

13,091

 

$

47,260

 

$

18,767

 

$

52,499

 

$

9,719

 

$

6,342

Regulatory Capital Requirement

 

 

2,115

 

 

1,907

 

 

459

 

 

20,331

 

 

7,927

 

 

1,652

Excess Regulatory Capital

 

$

10,976

 

$

45,353

 

$

18,308

 

$

32,168

 

$

1,792

 

$

4,690

 

As of March 31, 2019

 

TWL

 

DW

 

TWD

 

TEL

 

TWJ

 

TWEU

 

Regulatory Capital

 

$

13,981

 

$

39,711

 

$

26,695

 

$

46,537

 

$

10,532

 

$

4,034

 

Regulatory Capital Requirement

 

1,398

 

1,133

 

311

 

17,515

 

3,804

 

4,034

 

Excess Regulatory Capital

 

$

12,583

 

$

38,578

 

$

26,384

 

$

29,022

 

$

6,728

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

TWL

 

DW

 

TWD

 

TEL

 

TWJ

 

    

TWL

    

DW

    

TWD

    

TEL

    

TWJ

Regulatory Capital

 

$

18,986

 

$

41,164

 

$

24,042

 

$

46,157

 

$

10,592

 

 

$

18,986

 

$

41,164

 

$

24,042

 

$

46,157

 

$

10,592

Regulatory Capital Requirement

 

2,698

 

1,803

 

599

 

17,493

 

3,413

 

 

 

2,698

 

 

1,803

 

 

599

 

 

17,493

 

 

3,413

Excess Regulatory Capital

 

$

16,288

 

$

39,361

 

$

23,443

 

$

28,664

 

$

7,179

 

 

$

16,288

 

$

39,361

 

$

23,443

 

$

28,664

 

$

7,179

 

As SEFs, TW SEF and DW SEF are required to maintain adequate financial resources and liquid financial assets in accordance with CFTC regulations. The required and maintained financial resources and liquid financial assets at March 31,September 30, 2019 and December 31, 2018 are as follows (in thousands):

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

As of December 31, 2018

 

    

TW SEF

    

DW SEF

    

TW SEF

    

DW SEF

Financial Resources

 

$

24,766

 

$

15,864

 

$

31,232

 

$

17,837

Required Financial Resources

 

 

10,500

 

 

5,479

 

 

10,500

 

 

5,169

Excess Financial Resources

 

$

14,266

 

$

10,385

 

$

20,732

 

$

12,668

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquid Financial Assets

 

$

13,207

 

$

9,631

 

$

16,662

 

$

11,888

Required Liquid Financial Assets

 

 

5,250

 

 

2,740

 

 

5,250

 

 

2,585

Excess Liquid Financial Assets

 

$

7,957

 

$

6,891

 

$

11,412

 

$

9,303

 

 

 

As of March 31, 2019

 

As of December 31, 2018

 

 

 

TW SEF

 

DW SEF

 

TW SEF

 

DW SEF

 

Financial Resources

 

$

28,912

 

$

18,524

 

$

31,232

 

$

17,837

 

Required Financial Resources

 

10,500

 

5,440

 

10,500

 

5,169

 

Excess Financial Resources

 

$

18,412

 

$

13,084

 

$

20,732

 

$

12,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquid Financial Assets

 

$

15,929

 

$

12,517

 

$

16,662

 

$

11,888

 

Required Liquid Financial Assets

 

5,250

 

2,720

 

5,250

 

2,585

 

Excess Liquid Financial Assets

 

$

10,679

 

$

9,797

 

$

11,412

 

$

9,303

 

16.Employees Savings Plan

 

The Company sponsors a 401(k) savings plan for its US employees.  Employees may voluntarily contribute up to 75% of their annual compensation, including bonus.  The Company matches 100% of the employee’s contribution, up to 4% of their annual compensation, not to exceed the maximum tax deferred amount, which vests immediately.  Company’s expense for matching contributions for these plans was $2,436,000 and $2,136,000 for the three months ended March 31, 2019 and 2018, respectively.

The Company has deferred compensation plans for its International employees.  Employer contributions to the plans were $425,000 and $398,000 for the three months ended March 31, 2019 and 2018, respectively.

17.20.          Business Segment and Geographic Information

The Company operates electronic marketplaces for the trading of products across the rates, credit, equities and money markets asset classes and provides related pre-trade pricing and post-trade processing services.  The Company’s operations constitute a single business segment because of the integrated nature of these marketplaces and services.  Information regarding revenue by client sector is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

    

Successor

   

   

Predecessor

   

Predecessor

 

Three Months

 

Nine Months

 

 

Three Months

 

Nine Months

 

Successor

 

 

Predecessor

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

Three Months Ended
March 31, 2019

 

 

Three Months Ended
March 31, 2018

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

2019

 

2019

 

 

2018

 

2018

Net revenue:

 

 

 

 

 

 

 

 

  

 

 

  

 

 

 

  

 

 

  

Institutional

 

$

109,252

 

 

$

102,320

 

 

$

120,858

 

$

341,167

 

 

$

97,503

 

$

301,918

Wholesale

 

39,431

 

 

32,595

 

 

 

43,040

 

 

124,416

 

 

 

34,168

 

 

99,028

Retail

 

21,206

 

 

19,036

 

 

 

20,169

 

 

61,314

 

 

 

17,812

 

 

57,766

Market Data

 

16,903

 

 

15,552

 

 

 

16,914

 

 

51,361

 

 

 

15,770

 

 

47,059

Contingent consideration

 

 

 

(10,070

)

 

 

 —

 

 

 —

 

 

 

2,537

 

 

(26,830)

Net revenue

 

186,792

 

 

159,433

 

 

 

200,981

 

 

578,258

 

 

 

167,790

 

 

478,941

Operating expenses

 

140,515

 

 

112,078

 

 

 

142,723

 

 

442,768

 

 

 

114,973

 

 

338,607

 

 

 

 

 

 

Operating income

 

$

46,277

 

 

$

47,355

 

 

$

58,258

 

$

135,490

 

 

$

52,817

 

$

140,334

 

The Company operates in the U.S. and internationally, primarily in the Europe and Asia.Asia regions. Revenues are attributed to geographic area based on the jurisdiction where the underlying transactions take place. The results by geographic

37

region are not meaningful in understanding the Company’sCompany's business. Long-lived assets are attributed to the geographic area based on the location of the particular subsidiary.  Information regarding

The following table provides a breakdown of revenue by geographic area for the three and nine months ended March 31,September 30, 2019 and 2018 and(in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

    

Successor

  

  

Predecessor

    

Predecessor

 

 

Three Months

 

Nine Months

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

2019

 

2019

 

 

2018

 

2018

Net Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

126,599

 

$

368,689

 

 

$

106,982

 

$

324,304

International

 

 

74,382

 

 

209,569

 

 

 

58,271

 

 

181,467

Gross revenue

 

 

200,981

 

 

578,258

 

 

 

165,253

 

 

505,771

Contingent consideration

 

 

 —

 

 

 —

 

 

 

2,537

 

 

(26,830)

Total

 

$

200,981

 

$

578,258

 

 

$

167,790

 

$

478,941

The following table provides information on the attribution of long-lived assets by geographic area as of March 31,September 30, 2019 and December 31, 2018 is as follows (in thousands):

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

    

Successor

    

Successor

 

 

September 30, 

    

December 31, 

 

 

2019

 

2018

Long-lived assets

 

 

  

 

 

  

U.S.

 

$

4,227,002

 

$

4,276,568

International

 

 

13,070

 

 

7,787

Total

 

$

4,240,072

 

$

4,284,355

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

 

 

 

 

 

Net Revenue:

 

 

 

 

 

 

U.S.

 

$

119,397

 

 

$

107,782

 

International

 

67,395

 

 

61,721

 

Gross revenue

 

186,792

 

 

169,503

 

Contingent consideration

 

 

 

(10,070

)

Total

 

$

186,792

 

 

$

159,433

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

Long-lived assets

 

 

 

 

 

U.S.

 

$

4,277,698

 

$

4,276,568

 

International

 

14,237

 

7,787

 

Total

 

$

4,291,935

 

$

4,284,355

 

18.Subsequent Events

 

On April 3, 2019, the Company paid a $100 million distribution to the then current owners of the Company (the “Original LLC Owners”).

 

Prior to the closing of the Corporation’s IPO on April 8, 2019, the Corporation, the Company and the Original LLC Owners, including 21.          Subsequent Eventsthose Original LLC Owners that continued to own LLC Interests immediately prior to the closing of the IPO and who received shares of the Corporation’s common stock (collectively, the “Continuing LLC Owners”), completed a series of reorganization transactions (the “Reorganization Transactions”).

On April 4,October 22, 2019, in connection with the IPO and the Reorganization Transactions, the LLC Agreement was amended and restated to, among other things, (i) provide for LLC Interests, a new single classTradeweb Markets Inc. completed its follow-on offering of common membership interests in the Company; (ii) exchange all of the existing membership interests of the Company’s existing equityholders for LLC Interests; and (iii) appoint the Corporation as the sole manager of the Company. As the sole manager of the Company, the Corporation operates and controls all of the business and affairs of the Company and, through the Company and its subsidiaries, conducts the Corporation’s business. As a result of this control, and because, following the completion of the Reorganization Transactions, including the IPO and the application of the proceeds therefrom, the Corporation owns 64.3% of the LLC Interests, the Corporation will consolidate the financial results of the Company and report a non-controlling interest in the Corporation’s consolidated financial statements. The LLC Agreement also requires that the Company at all times maintain (i) a one-to one ratio between the number of shares of the Class A common stock and Class B common stock issued by the Corporation and the number of LLC Interests owned by the Corporation and (ii) a one-to-one ratio between the number of17,287,878 shares of Class C commonA Common stock and Class D common stock issued by the Corporation and the numberat a public offering price of LLC Interests owned by the holders of such Class C common stock and Class D common stock.

LLC Interests are redeemable, at the election of such holders, for newly issued$42.00 per share. The underwriters have a 30-day option to purchase up to an additional 2,593,181 shares of Class A common stock or Class Bat the public offering price, less the underwriting discounts and commissions. Tradeweb Markets Inc. received net proceeds of $704.3 million, after deducting underwriting discounts and commissions but before deducting estimated offering expenses, which were used to purchase (i) 17,259,961 issued and outstanding LLC Interests from certain of the Bank Stockholders and certain of our executive officers (and the corresponding shares of common stock as the case may be, on a one-for-one basis (andheld by such holders’holders were cancelled) and (ii) 27,917 issued and outstanding shares of Class C common stock or Class D common stock, as the case may be, will be cancelled on a one-for-one basis upon any such issuance). The Corporation’s board of directors, which includes directors who hold LLC Interests or are affiliated with holders of LLC Interests and may include such directors in the future, may, at its option, instead of the foregoing redemptions of LLC Interests, cause the Corporation to make a cash payment equal to the volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the termsfrom certain of the LLC Agreement.

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

In addition, the Corporation assumed sponsorship of the Option Plan and the PRSU Plan formerly sponsored by the Company. Accordingly, all options and PRSUs granted underour executive officers (and such plans were converted into economically equivalent awards of the Corporation with respect to shares of the Corporation’s Class A common stock.

stock were cancelled), at a purchase price per interest and share equal to the public offering price of $42.00, less the underwriting discounts and commissions payable thereon. As of November 1, 2019, Tradeweb Markets Inc. owns 72.2% of TWM LLC and the Continuing LLC Owners own the remaining 27.8% of TWM LLC.

On April 8,November 6, 2019, the Company entered into a $500 million senior secured revolving credit facility with a five-year term, which includes borrowing capacity available for lettersboard of credit and swingline loans.

On May 8, 2019, the Companydirectors of Tradeweb Markets Inc. declared a cash distribution of $33,378,019 for the second quarter of 2019. This distribution was paid on May 15, 2019 on a pro rata basis to the equityholders of the Company as of May 9, 2019, including the Corporation, for the purpose of funding the Corporation’s cash dividend of $0.08 per share of Class A common stock and Class B common stock for the fourth quarter of 2019. This dividend will be payable on June 15,December 16, 2019 and to fundstockholders of record as of December 2, 2019.

On November 5, 2019, Tradeweb Markets Inc., as the tax liabilitiessole manager, approved a distribution by TWM LLC to its equityholders, including Tradeweb Markets Inc., in an aggregate amount of $45.8 million payable on the equityholders’ allocable shareDecember 13, 2019.

38

There were no other subsequent events requiring adjustment to the consolidated financial statements or disclosure.

ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with theour unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion of our historical financial position and results of operations does not give effect to the completion of our IPO or the Reorganization Transactions, which are described in the notes to unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.10‑Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q.10‑Q.

Overview

We are a leader in building and operating electronic marketplaces for our global network of clients across the financial ecosystem. Our network is comprised of clients across the institutional, wholesale and retail client sectors, including many of the largest global asset managers, hedge funds, insurance companies, central banks, banks and dealers, proprietary trading firms and retail brokerage and financial advisory firms as well as regional dealers. Our marketplaces facilitate trading across a range of asset classes, including rates, credit, equities and money markets and equities.markets. We are a global company serving clients in 62over 65 countries with offices in North America, Europe and Asia. We believe our proprietary technology and culture of collaborative innovation allow us to adapt our offerings to enter new markets, create new platforms and solutions and adjust to regulations quickly and efficiently. We support our clients by providing solutions across the trade lifecycle, including pre-trade, execution, post-trade and data.

Our institutional client sector serves institutional investors in 37over 40 markets across 2425 currencies, and in 62over 65 countries around the globe. We connect institutional investors with pools of liquidity using our flexible order and trading systems. Our clients trust the integrity of our markets and recognize the value they get by trading electronically: enhanced transparency, competitive pricing, efficient trade execution and regulatory compliance.

In our wholesale client sector, we provide a broad range of electronic, voice and hybrid platforms to more than 300 dealers and financial institutions with more than 90 actively trading on our electronic or hybrid markets with our Dealerweb platform. This platform was launched in 2008 following the acquisition of inter-dealer broker Hilliard Farber & Co., Inc. In 2011, we acquired the brokerage assets of Rafferty Capital Markets. Today, Dealerweb actively competes across a range of rates, credit, derivatives and equity markets.

In our retail client sector, we provide advanced trading solutions for financial advisory firms and traders with our Tradeweb Direct platform. We entered the retail sector in 2006 and launched our Tradeweb Direct platform following the 2013 acquisition of BondDesk Group LLC, which was built to bring innovation and efficiency to the wealth management community. Tradeweb Direct has provided financial advisory firms access to live offerings, accurate pricing in the marketplace and fast execution.

Our markets are large and growing. Electronic trading continues to increase across the markets in which we operate as a result of market demand for greater transparency, higher execution quality, operational efficiency and lower costs, as well as regulatory changes. We believe our deep client relationships, asset class breadth, geographic reach, regulatory knowledge and scalable technology position us to continue to be at the forefront of the evolution of electronic trading. Our platforms provide transparent, efficient, cost-effective and compliant trading solutions across multiple products, regions and regulatory regimes. As market participants seek to trade across multiple asset classes, reduce their costs of trading and increase the effectiveness of their trading, including through the use of data and analytics, we believe the demand for our platforms and electronic trading solutions will continue to grow.

39

Trends and Other Factors Impacting Our Performance

Economic Environment

Our business is impacted by the overall market activity and, in particular, trading volumes and market volatility. Lower volatility is correlated to lower liquidity, which may result in lower trading volume for our clients and may negatively impact our operating performance. As a result, our business is sensitive to slow trading environments and the continuity of conservative monetary policies of central banks internationally, which tend to lessen volatility.

While our business is impacted by the overall activity of the market and market volatility, our revenues consist of a mix of fixed and variable fees that partially mitigates this impact. More importantly, we are actively engaged in the further electronification of trading activities, which will help mitigate this impact as we believe secular growth trends can partially offset market volatility risk.

Regulatory Environment

Our business is subject to extensive regulations in the United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in enforcement of new laws and regulations that apply to our business. The current regulatory environment in the United States may be subject to future legislative changes driven by the current presidential administration. The impact of any reform efforts on us and our operations remains uncertain. In addition, as a result of the referendum in favor of the United Kingdom’s withdrawal from the European Union (“Brexit”) in June 2016, which is currently scheduled to occur on OctoberJanuary 31, 2019,2020, we have incurred additional costs to address the potential effects of Brexit, including costs associated with establishing a new regulated subsidiary in the Netherlands. Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. In addition, compliance with regulations may require our clients to dedicate significant financial and operational resources, which may negatively affect their ability to pay our fees and use our platforms and, as a result, our profitability. However, under certain circumstances regulation may increase demand for our platforms and solutions, and we believe we are well positioned to benefit from any potential increased electronification due to regulatory changes as market participants seek platforms that meet regulatory requirements and solutions that help them comply with their regulatory obligations. For example, our 2018 revenue increased due in part to increasedhigher trading volumes as a result of, and the introduction of our new Approved Publication Arrangement (“APA”) service in connection with, the implementation of Markets in Financial Instruments Directive II (“MiFID II”) in January 2018.

Competitive Environment

We and our competitors compete to introduce innovations in market structure and new electronic trading capabilities. While we endeavor to be a leader in innovation, new trading capabilities of our competitors are also adopted by market participants. On the one hand, this increases liquidity and electronification for all participants, but it also puts pressure on us to further invest in our technology and to innovate to ensure the continued growth of our network of clients and continued improvement of liquidity, electronic processing and pricing on our platforms. Our ability to compete is influenced by key factors such as (i) developments in trading platforms and solutions, (ii) the liquidity we provide on transactions, (iii) the transaction costs we incur in providing our solutions, (iv) the efficiency in execution of transactions on our platforms, (v) our ability to hire and retain talent and (vi) our ability to maintain the security of our platforms and solutions. Our competitive position is also influenced by the familiarity and integration of our clients with our electronic, voice and hybrid systems. When either a client wants to trade in a new product or we want to introduce a new product, trading protocol or other solution, we believe we benefit from our clients’ familiarity with our offerings as well as our integration into their order management systems and back offices.

Technology and Cybersecurity Environment

Our business and its success are largely impacted by the introduction of increasingly complex and sophisticated technology sophisticated systems and infrastructures and new business models. Offering specialized trading venues and solutions

40

through

the development of new and enhanced platforms is essential to maintaining our level of competitiveness in the market and attracting new clients seeking platforms that provide advanced automation and better liquidity. We believe we will continue to increase demand for our platforms and solutions and the volume of transactions on our platforms, and thereby enhance our client relationships, by responding to new trading and information requirements by utilizing technological advances and emerging industry standards and practices in an effective and efficient way. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms and solutions to further enhance our market position. We experience cyber-threats and attempted security breaches. If these were successful, these cyber security incidents could impact revenue and operating income and increase costs. We therefore continue to make investments, which may result in increased costs, to strengthen our cybersecurity measures.

Foreign Currency Exchange Rate Environment

We earn revenues, pay expenses, hold assets and incur liabilities in currencies other than the U.S. dollar. During the three months ended March 31, 2019 and 2018, approximately 30.3% and 29.1%, respectively, of our gross revenue and 15.1% and 16.1%, respectively, of our operating expenses were denominated in currencies other than the U.S. dollar, almost entirely the Euro for gross revenue and the British pound sterling for operating expenses. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations from period to period. In particular, fluctuations in exchange rates for non-U.S. dollar currencies may reduce the U.S. dollar value of revenues, earnings and cash flows we receive from non-U.S. markets, increase our operating expenses (as measured in U.S. dollars) in those markets, negatively impact our competitiveness in those markets or otherwise adversely impact our results of operations or financial condition. Future fluctuations of foreign currency exchange rates and their impact on our results of operations and financial condition are inherently uncertain. As we continue to grow the size of our global operations, these fluctuations may be material. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk— Foreign Currency and Derivative Risk” elsewhere in this Quarterly Report on Form 10-Q.10‑Q.

Effect of Pushdown Accounting on our Financial Statements

As a result of the Refinitiv Transaction, and the application of pushdown accounting, our assets and liabilities were adjusted to their estimated fair values as of October 1, 2018, the closing date of the Refinitiv Transaction. These adjusted valuations resulted in an increase in depreciation and amortization expense, due to the increased carrying value of our assets and the related increase in depreciation of tangible assets and amortization of our intangible assets, and a decrease in occupancy expense as a result of the recognition of a leasehold interest liability. Additionally, the excess of the portion of the total purchase price of the Refinitiv Transaction attributable to the purchase of our assets and liabilities over their estimated fair value as of the closing date of the Refinitiv Transaction was allocated to goodwill. Goodwill is subject to annual impairment testing. Amounts allocated to intangible assets with definite lives are subject to amortization over the estimated useful life of the asset. See “Note 3”Note 3 – Pushdown Accounting to theour unaudited consolidated financial statements of Tradeweb Markets LLC included elsewhere in this Quarterly Report on Form 10-Q10‑Q and “— Critical Accounting Policies and Estimates — Pushdown Accounting.”

Due to the change in the basis of accounting resulting from the application of pushdown accounting, the financial information for the period beginning on October 1, 2018, and through and including March 31,September 30, 2019, which we refer to as the “Successor period,” and the financial information for the periods prior to, and including, September 30, 2018, which we refer to as the “Predecessor period,” are not necessarily comparable. As discussed above, the new basis of accounting primarily impacted the values of our long-lived and indefinite-lived intangible assets and resulted in increased depreciation and amortization expense and decreased occupancy expense. However, the change in basis resulting from the Refinitiv Transaction and the application of pushdown accounting did not impact revenues, employee compensation and benefits expense, general and administrative expense, technology and communications expense or professional fees. For all other metrics, to the extent that the change in basis had a material impact on our results, we have disclosed such impact under “—Results of Operations.”

Taxation and Public Company Expenses

BeginningIn connection with the Reorganization Transactions, we became the sole manager of TWM LLC. As a result, beginning with the second quarter of 2019, we will bebecame subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of TWM LLC and will beare taxed at prevailing corporate tax rates. Our actual effective tax rate is impacted by our ownership share of Tradeweb MarketsTWM LLC, which will increase over time as the Continuing LLC Owners redeem or exchange their LLC Interests for shares of Class A common stock or Class B common stock, as applicable.

41

applicable, or we purchase LLC Interests from the Continuing LLC Owners. In addition to tax expenses, we also incur expenses related to our operations. Furthermore, in connection with the IPO, we entered into the Tax Receivable Agreement pursuant to which we will be required to make payments that we expect to be significant. We intend to cause TWM LLC to make distributions in an amount sufficient to allow us to pay our tax obligations, and operating expenses, including payments under the Tax Receivable Agreement.

Historically, Thomson ReutersAgreement, and related entities provided certain servicesour quarterly cash dividends, as and activities to supportwhen declared by our business, including human resources, finance, tax and accounting services, market data services, client services, technology services, sales and customer support services and real estate and facilities support. Refinitiv will continue to provide market data services and insurance and, at least in the near term, office space and related services. We do not anticipate that we will incur any material increased expenses if we transition away from Refinitiv for these services in the future.

board of directors.

In addition, as a public company, we have started to implement additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In particular, we expect our accounting, legal and personnel-related expenses and directors’ and officers’ insurance costs to continue to increase as we establish more comprehensive compliance and governance functions, establish, maintain and review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act and prepare and distribute periodic reports in accordance with SEC rules. OurBeginning in the second quarter of 2019, our  financial statements for future periods will reflect the impact of these expenses.

Components of our Results of Operations

Revenues

Our gross revenue is derived primarily from transaction fees, subscription fees, commissions and market data fees. For the three and nine months ended March 31,September 30, 2018, our gross revenue is offset by contingent consideration recognized as a contra-revenue adjustment related to the achievement of specific revenue earnout milestones, as further described below. This contingent consideration vested on, and has no additional impacts on our results of operations after, July 31, 2018. We believe that gross revenue is the key driver of our operating performance and therefore is the revenue measure we utilize to assess our business on a period by period basis.

Transaction Fees

We earn transaction fees from transactions executed on our trading platforms through various fee plans. Transaction fees are generated on both a variable and fixed price basis and vary by geographic region, product type and trade size. For most of our products, clients pay both fixed minimum monthly transaction fees and variable transaction fees on a per transaction basis in excess of the monthly minimum. For certain of our products, clients also pay a subscription fee in addition to the minimum monthly transaction fee. For other products, instead of a minimum monthly transaction fee, clients pay a subscription fee and variable or fixed transaction fees on a per transaction basis. For variable transaction fees, we charge clients fees based on the mix of products traded and the volume of transactions executed. Transaction volume is determined by using either a measure of the notional volume of the products traded or a count of the number of trades. We typically charge higher fees for products that are less actively traded. In addition, because transaction fees are sometimes subject to fee plans with tiered pricing based on product mix, volume, monthly minimums and monthly maximum fee caps, average transaction fees per million generated for a client may vary each month depending on the mix of products and volume traded. Furthermore, because transaction fees vary by geographic region, product type and trade size, our revenues may not correlate with volume growth.

Subscription Fees

We earn subscription fees primarily for granting clients access to our markets for trading and market data. For a limited number of products, we only charge subscription fees and no transaction fees. Subscription fees are generally generated on a fixed price basis.

For purposes of our discussion of our results of operations, we include Refinitiv (formerly Thomson Reuters) market data fees in subscription fees. We earn fixed license fees from our market data license agreement with Refinitiv. We also earn royalties from Refinitiv for referrals of new Eikon (a Refinitiv data platform) customers based on customer conversion rates. Royalties may fluctuate from period to period depending on the numbers of customer conversions achieved by Refinitiv during the applicable royalty fee earning period, which is typically sevenfive years from the date of the initial referral.

42

Commissions

We earn commission revenue from our electronic and voice brokerage services on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy

and sell price of the transacted product. For TBA-MBS, U.S. Treasurytreasury and repurchase agreement transactions executed by our wholesale clients, we also generate revenue from fixed commissions that are generally invoiced monthly.

Contingent Consideration

In 2014, we issued Class A Shares and unvested Class P1-P1‑(A) Shares to some of the Bank Stockholders as a result of a $120.0 million capital contribution to facilitate our expansion into new credit products. In connection with this investment, certain employees also invested $5.3 million in us and were issued Class C Shares and unvested Class P1-P1‑(C) Shares. The Class P1-P1‑(A) Shares vested on July 31, 2018 upon the achievement of specific revenue earnout milestones related to the growth of specified credit products (the “Credit Initiative Earnout”). Prior to the July 31, 2018 vesting, we recognized contingent consideration with respect to the Credit Initiative Earnout as a contra-revenue adjustment, which partially offset gross revenue for the three and nine months ended March 31,September 30, 2018. See “— Critical Accounting Policies and Estimates — Contingent Consideration” for a discussion of the calculation of contingent consideration. The value of the contingent consideration of $156.2 million was finalized and contributed to members’ capital or employee equity compensation payable on July 31, 2018 and we therefore no longer recognize any contra-revenue adjustments from the Credit Initiative Earnout subsequent to that date. In connection with the Reorganization Transactions, the Class A Shares, Class P1-(A) Shares, Class C Shares and Class P1-(C) Shares were exchanged for LLC Interests.

Operating Expenses

Employee Compensation and Benefits

Employee compensation and benefits expense consists of wages, employee benefits, bonuses, commissions, and stock-based compensation cost.cost and related taxes. Factors that influence employee compensation and benefits expense include revenue and earnings growth, hiring new employees and trading activity which generates broker commissions and, beginning with the second quarter of 2019, the share price of our Class A common stock. As we grow our business, we expect to hire additional employees. As a result, wecommissions. We expect employee compensation and benefits expense to increase as we hire additional employees and as our revenues and earnings grow. As a result, employee compensation and benefits can vary from period to period.

Depreciation and Amortization

Depreciation and amortization expense consists of costs relating to the depreciation and amortization of other intangible assets, acquired and internally developed software, leasehold improvements, furniture and equipment. As discussed in “— Effect of Pushdown Accounting on our Financial Statements,” we applied pushdown accounting as a result of the Refinitiv Transaction and therefore depreciation and amortization expense in Successor reporting periods will differ from amounts reported in Predecessor periods.

General and Administrative

General and administrative expense consists of travel and entertainment, marketing, value-added taxes, state use taxes, foreign currency transaction gains and losses, charitable contributions, other administrative expenses and bad debt expense. We expect general and administrative expense to increase as we expand the number of our employees and product offerings and grow our operations.

Technology and Communications

Technology and communications expense consists of costs relating to software and hardware maintenance, our internal network connections, data center costs, clearance costs and data feeds provided by third-party service providers,

43

including Refinitiv pursuant to a shared services agreement. Factors that influence technology and communications expense include the growth of our client base and product offerings.

Professional Fees

Professional fees consist primarily of accounting, tax and legal fees and fees paid to technology and software consultants to maintain our trading platforms and infrastructure. Accounting, tax and legal fees are expected to grow as a

result of the changes in our structure and operations that we will continue to implement as a public company. Factors that influence technology and software consulting expense include the growth of our client base and product offerings.

Occupancy

Occupancy expense consists of operating lease rent and related costs for office space and data centers leased in the United StatesNorth America, Europe and the United Kingdom.Asia. Fees incurred by us under a shared services agreement with Refinitiv for office space are also included in occupancy expense. We expect occupancy expense to increase as we expand the number of our employees and grow our operations. As discussed in “— Effect of Pushdown Accounting on our Financial Statements,” we applied pushdown accounting as a result of the Refinitiv Transaction and therefore occupancy expense in Successor reporting periods will differ from amounts reported in Predecessor periods.

Net Interest Income (Expense)

Interest income consists of interest earned from our cash deposited with large commercial banks and money market funds. Beginning with the second quarter of 2019, interest expense will consistconsists of commitment fees payable on, and, if applicable, interest payable on any borrowings outstanding under, the Revolving Credit Facility, if any.Facility.

Income Taxes

Beginning with the second quarter of 2019, we became subject to U.S. federal, state and local income taxes with respect to our taxable income, including our allocable share of any taxable income of TWM LLC, and are taxed at prevailing corporate tax rates. TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly any taxable income generated by TWM LLC is not requiredpassed through to maintain anand included in the taxable income tax provisionof its members, including us, on its earnings.a pro rata basis. Income taxes consist ofalso include unincorporated business taxes on income earned or losses incurred byfor conducting business in certain state and local jurisdictions. Income taxes also includesjurisdictions, income taxes on income earned or losses incurred in foreign jurisdictions on certain of our operations as well asand federal and state income taxes on income earned or losses incurred, both current and deferred, fromon subsidiaries that are taxed as corporations for U.S. tax purposes. Beginning with the second quarter

44

Results of Operations

For the Three Months Ended March 31,September 30, 2019 (Successor) and Three Months Ended March 31,September 30, 2018 (Predecessor)

The following table sets forth a summary of our statements of income for the three months ended March 31,September 30, 2019 and 2018:

 

 

 

 

 

 

    

Successor

  

  

Predecessor

  

 

Three

 

 

Three

 

 

Months

 

 

Months

 

 

Ended

 

 

Ended

 

 

Successor

 

 

Predecessor

 

 

September 30, 

 

 

September 30, 

 

 

Three
Months
Ended
March 31,
2019

 

 

Three
Months
Ended
March 31,
2018

 

 

2019

 

 

2018

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Gross revenue

 

$

186,792

 

 

$

169,503

 

 

$

200,981

 

 

$

165,253

 

Contingent consideration

 

 

 

(10,070

)

 

 

 —

 

 

 

2,537

 

Net revenue

 

186,792

 

 

159,433

 

 

 

200,981

 

 

 

167,790

 

Total expenses

 

140,515

 

 

112,078

 

 

 

142,723

 

 

 

114,973

 

Operating income

 

46,277

 

 

47,355

 

 

 

58,258

 

 

 

52,817

 

Net interest income

 

858

 

 

471

 

 

 

636

 

 

 

673

 

Income before taxes

 

47,135

 

 

47,826

 

 

 

58,894

 

 

 

53,490

 

Income taxes

 

(4,783

)

 

(2,518

)

 

 

(10,316)

 

 

 

(7,535)

 

Net income

 

$

42,352

 

 

$

45,308

 

 

$

48,578

 

 

$

45,955

 

Less: Net income attributable to non-controlling interests

 

 

18,966

 

 

 

 

 

Net income attributable to Tradeweb Markets Inc.

 

$

29,612

 

 

 

 

 

 

Overview

During the three months ended March 31,September 30, 2019, our business was impacted by a number of factors, including higher client trading activity, driving revenue increases in rates, credit, equities and money markets trading. Our market data business also grew due to the expansion of our market data license agreement with Refinitiv.

Our expenses were impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting and non-cash stock-based compensation expense related to options.

Gross revenue increased by $17.3$35.7 million or 10.2%21.6% to $186.8$201.0 million for the three months ended March 31,September 30, 2019 from $169.5$165.3 million for the three months ended March 31,September 30, 2018. This increase in gross revenue was mainly due to higher trading volumes resulting in a $12.5$20.2 million increase in transaction fees and a $6.3$13.2 million increase in commissions.commission revenue. Net

revenue increased by $27.4$33.2 million or 17.2%19.8% to $186.8$201.0 million for the three months ended March 31,September 30, 2019 from $159.4$167.8 million for the three months ended March 31,September 30, 2018. Non-cash contingent consideration decreased by $10.1$2.5 million for the three months ended March 31,September 30, 2019 as a result of the vesting of the Credit Initiative Earnout at July 31, 2018.

2018, and the related reduction in the actual consideration versus the estimated consideration.

Total expenses for the three months ended March 31,September 30, 2019 and 2018 were $140.5$142.7 million and $112.1$115.0 million, respectively. Total expenses for the three months ended March 31,September 30, 2019 were impacted by higher employee compensation and benefits expense, higher professional fees and higher general and administrative costs, specifically foreign exchange losses. Total expenses for the three months ended March 31, 2019 were also impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting.

accounting, and higher employee compensation and benefits expense, including the impact of non-cash stock-based compensation expense related to options. Total expenses for the three months ended September 30, 2019 were partially offset by lower general and administrative costs, specifically foreign exchange gains.

Income before taxes for the three months ended March 31,September 30, 2019 and 2018 was $47.1$58.9 million and $47.8$53.5 million, respectively. Net income for the three months ended March 31,September 30, 2019 and 2018 was $42.4$48.6 million and $45.3$46.0 million, respectively. Income before taxes and netNet income attributable to Tradeweb Markets Inc. for the three months ended March 31,September 30, 2019 was $29.6 million. Income before taxes, net income and net income attributable to Tradeweb Markets Inc. for the three

45

months ended September 30, 2019 were negatively impacted by higher net revenue of $33.2 million, partially offset by higher depreciation and amortization expense as a result of the application of pushdown accounting, resulting in a $16.7$18.3 million increase in depreciation and amortization expense, partially offset byand higher revenues.employee compensation and benefits expense of $10.6 million, including $2.0 million of non-cash stock-based compensation expense related to options.

Revenues

Our revenues for the three months ended March 31,September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

Three Months
Ended March 31, 2019

 

 

Three Months
Ended March 31, 2018

 

 

 

 

 

 

 

$

 

% of Gross
Revenue

 

 

$

 

% of Gross
Revenue

 

$ Change

 

% Change

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

102,640

 

54.9

%

 

$

90,139

 

53.2

%

$

12,501

 

13.9

%

Subscription fees(1)

 

48,061

 

25.7

%

 

48,563

 

28.7

%

(502

)

(1.0

)%

Commissions

 

34,197

 

18.3

%

 

27,883

 

16.4

%

6,314

 

22.6

%

Other

 

1,894

 

1.0

%

 

2,918

 

1.7

%

(1,024

)

(35.1

)%

Gross revenue

 

186,792

 

100.0

%

 

169,503

 

100.0

%

17,289

 

10.2

%

Contingent consideration

 

 

 

 

 

(10,070

)

 

 

10,070

 

(100

)%

Net revenue

 

$

186,792

 

 

 

 

$

159,433

 

 

 

$

27,359

 

17.2

%

Components of gross revenue growth:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Constant currency growth(2)

 

 

 

 

 

 

 

 

 

 

 

 

12.6

%

Foreign currency impact

 

 

 

 

 

 

 

 

 

 

 

 

(2.4

)%

Total gross revenue growth

 

 

 

 

 

 

 

 

 

 

 

 

10.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

 

 

 

 

 

    

 

 

    

% of Gross

  

  

 

 

    

% of Gross

    

 

 

    

 

 

 

 

$

 

Revenue

 

    

$

 

Revenue

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

Revenues

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

 

  

Transaction fees

 

$

112,746

 

56.1

%  

  

$

92,582

 

56.0

%  

$

20,164

  

21.8

%

Subscription fees(1)

 

 

48,638

 

24.2

%  

  

 

45,690

 

27.6

%  

 

2,948

  

6.5

%

Commissions

 

 

37,590

 

18.7

%  

  

 

24,394

 

14.8

%  

 

13,196

  

54.1

%

Other

 

 

2,007

 

1.0

%  

  

 

2,587

 

1.6

%  

 

(580)

  

(22.4)

%

Gross revenue

 

 

200,981

 

100.0

%  

  

 

165,253

 

100.0

%  

 

35,728

  

21.6

%

Contingent consideration

 

 

 —

 

  

 

  

 

2,537

 

 

  

 

(2,537)

  

(100.0)

%

Net revenue

 

$

200,981

 

  

 

  

$

167,790

 

 

  

$

33,191

  

19.8

%

Components of gross revenue growth:

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

 

  

Constant currency growth(2)

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

23.4

%

Foreign currency impact

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

(1.8)

%

Total gross revenue growth

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

21.6

%


(1)         Subscription fees for the three months ended March 31, 2019 and 2018 include $13.6 million and $12.2 million, respectively, of Refinitiv market data fees.

(2)         Constant currency growth, which is a non-GAAP financial measure, is defined as gross revenue growth excluding the effects of foreign currency fluctuations. Gross revenue excluding the impact of foreign currency fluctuations is calculated by translating the current period and prior period’s gross revenue using the average exchange rates for 2018. We use constant currency growth as a supplemental metric to evaluate our underlying gross revenue performance between periods by removing the impact of foreign currency fluctuations. We believe that providing constant currency growth provides a useful comparison of our gross revenue performance and trends between periods.

(1)

Subscription fees for the three months ended September 30, 2019 and 2018 include $13.3 million and $12.5 million, respectively, of Refinitiv (formerly Thomson Reuters) market data fees.

(2)

Constant currency growth, which is a non-GAAP financial measure, is defined as gross revenue growth excluding the effects of foreign currency fluctuations. Gross revenue excluding the effects of foreign currency fluctuations is calculated by translating the current period and prior period’s gross revenue using the average exchange rates for 2018. We use constant currency growth as a supplemental metric to evaluate our underlying gross revenue performance between periods by removing the impact of foreign currency fluctuations. We believe that providing constant currency growth provides a useful comparison of our gross revenue performance and trends between periods.

Our variable and fixed revenues by fee type for the three months ended March 31,September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
March 31, 2019

 

 

Three Months Ended
March 31, 2018

 

$ Change

 

% Change

 

 

 

Variable

 

Fixed

 

 

Variable

 

Fixed

 

Variable

 

Fixed

 

Variable

 

Fixed

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

78,915

 

$

23,725

 

 

$

69,637

 

$

20,502

 

$

9,278

 

$

3,223

 

13.3

%

15.7

%

Subscription fees(1)

 

455

 

47,606

 

 

475

 

48,088

 

(20

)

(482

)

(4.2

)%

(1.0

)%

Commissions

 

24,310

 

9,887

 

 

17,780

 

10,103

 

6,530

 

(216

)

36.7

%

(2.1

)%

Other

 

303

 

1,591

 

 

12

 

2,906

 

291

 

(1,315

)

2,421

%

(45.2

)%

Gross revenue

 

$

103,983

 

$

82,809

 

 

$

87,904

 

$

81,599

 

$

16,079

 

$

1,210

 

18.3

%

1.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

$ Change

 

% Change

 

 

    

Variable

    

Fixed

  

  

Variable

    

Fixed

    

Variable

    

Fixed

    

Variable

    

Fixed

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

  

Transaction fees

 

$

87,574

 

$

25,172

 

  

$

68,855

  

$

23,727

  

$

18,719

  

$

1,445

  

27.2

%  

6.1

%

Subscription fees(1)

 

 

440

 

 

48,198

 

  

 

405

  

 

45,285

  

 

35

  

 

2,913

  

8.6

%  

6.4

%

Commissions

 

 

27,840

 

 

9,750

 

  

 

14,241

  

 

10,153

  

 

13,599

  

 

(403)

  

95.5

%  

(4.0)

%

Other

 

 

87

 

 

1,920

 

  

 

14

  

 

2,573

  

 

73

  

 

(653)

  

521.4

%  

(25.4)

%

Gross revenue

 

$

115,941

 

$

85,040

 

  

$

83,515

  

$

81,738

  

$

32,426

  

$

3,302

  

38.8

%  

4.0

%


(1)         Subscription fees for the three months ended March 31, 2019 and 2018 include $13.6 million and $12.2

(1)

Subscription fees for the three months ended September 30, 2019 and 2018 include $13.3 million and $12.5 million, respectively, of Refinitiv (formerly Thomson Reuters) market data fees.

46

Transaction fees. Transaction fees increased by $12.5$20.2 million or 13.9%21.8% to $102.6$112.8 million for the three months ended March 31,September 30, 2019 from $90.1$92.6 million for the three months ended March 31,September 30, 2018 primarily due to increasedhigher trading volumes for U.S and European rates derivatives products U.S. and European ETFs and U.S. credit products.ETFs.

Subscription fees. Subscription fees decreasedincreased by $0.5$2.9 million or (1.0)%6.5% to $48.1 million for the three months ended March 31, 2019 from $48.6 million for the three months ended March 31, 2018 primarily due to lower European government bond fees, and software development fees, partially offset by higher market data fees.

Commissions. Commissions increased by $6.3 million or 22.6% to $34.2September 30, 2019 from $45.7 million for the three months ended March 31, 2019 from $27.9September 30, 2018 primarily due to higher Institutional MBS, retail and market data fees.

Commissions.  Commission revenue increased by $13.2 million or 54.1% to $37.6 million for the three months ended March 31,September 30, 2019 from $24.4 million for the three months ended September 30, 2018 primarily due to higher trading volumes for U.S. corporate bonds and U.S. treasuries.

Other. Other revenue decreased by $1.0$0.6 million or (35.1)(22.4)% to $1.9$2.0 million for the three months ended March 31,September 30, 2019 from $2.9$2.6 million for the three months ended March 31,September 30, 2018 primarily as a result of lower fees from a third party for certain licensing and development in Canada.

Contingent consideration.consideration. There was no contingent consideration for the three months ended March 31,September 30, 2019 due to the vesting of the Credit Initiative Earnout at July 31, 2018. Contingent consideration for the three months ended March 31,September 30, 2018 was $10.1$(2.5) million.

Our gross revenue by client sector for the three months ended March 31,September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

    

 

 

    

 

 

 

Three Months

 

 

Three Months

 

 

 

 

 

 

 

Ended 

 

 

Ended 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

September 30, 

 

 

September 30, 

 

 

 

 

 

 

 

Three Months
Ended March
31, 2019

 

 

Three Months
Ended March
31, 2018

 

$ Change

 

% Change

 

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

(dollars in thousands)

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

  

Institutional

 

$

109,252

 

 

$

102,320

 

$

6,932

 

6.8

%

 

$

120,858

 

 

$

97,503

  

$

23,355

  

24.0

%

Wholesale

 

39,431

 

 

32,595

 

6,836

 

21.0

%

 

 

43,040

 

 

 

34,168

  

 

8,872

  

26.0

%

Retail

 

21,206

 

 

19,036

 

2,170

 

11.4

%

 

 

20,169

 

 

 

17,812

  

 

2,357

  

13.2

%

Market Data

 

16,903

 

 

15,552

 

1,351

 

8.7

%

 

 

16,914

 

 

 

15,770

  

 

1,144

  

7.3

%

Total gross revenue

 

$

186,792

 

 

$

169,503

 

$

17,289

 

10.2

%

 

$

200,981

 

 

$

165,253

  

$

35,728

  

21.6

%

 

Institutional. Revenues from our Institutional client sector increased by $6.9$23.4 million or 6.8%24.0% to $109.3$120.9 million for the three months ended March 31,September 30, 2019 from $102.3$97.5 million for the three months ended March 31,September 30, 2018. The increase was derived primarily from increasedhigher trading volumes for U.S. and European rates derivatives products, mortgages products and ETFs, partially offset by the impact of foreign exchange, mainly the deteriorationweakening of the euro.

Wholesale. Revenues from our Wholesale client sector increased by $6.8$8.9 million or 21.0%26.0% to $39.4$43.0 million for the three months ended March 31,September 30, 2019 from $32.6$34.2 million for the three months ended March 31, 2018. The increase was derived primarily from U.S. session-based trading volumes.

Retail. Revenues from our Retail client sector increased by $2.2 million or 11.4% to $21.2 million for the three months ended March 31, 2019 from $19.0 million for the three months ended March 31,September 30, 2018. The increase was derived primarily from higher trading volumes for U.S. corporatesession-based trading and municipal bonds.U.S. treasuries.

Retail. Revenues from our Retail client sector increased by $2.4 million or 13.2% to $20.2 million for the three months ended September 30, 2019 from $17.8 million for the three months ended September 30, 2018. The increase was primarily due to higher trading volumes for certificates of deposit partially offset by lower revenues for software development and implementation.

Market Data.Data. Revenues from our Market Data client sector increased by $1.4$1.1 million or 8.7%7.3% to $16.9 million for the three months ended March 31,September 30, 2019 from $15.6$15.8 million for the three months ended March 31,September 30, 2018 primarily as a result of increased Refinitiv (formerly Thomson Reuters) license fees due to an increase in the number of market data feeds provided to Refinitiv and increased Gilt closing price revenues.Refinitiv.

47

Our gross revenue by asset class for the three months ended March 31,September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

    

 

 

    

 

 

 

Three Months

 

 

Three Months

 

 

 

 

 

 

 

Ended 

 

 

Ended 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

September 30, 

 

 

September 30, 

 

 

 

 

 

 

 

Three Months
Ended March
31, 2019

 

 

Three Months
Ended March
31, 2018

 

$ Change

 

% Change

 

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

(dollars in thousands)

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

 

  

 

 

  

 

  

Rates

 

$

104,090

 

 

$

93,913

 

$

10,177

 

10.8

%

 

$

115,505

 

  

$

92,592

  

$

22,913

  

24.7

%

Credit

 

39,435

 

 

34,733

 

4,702

 

13.5

%

 

 

39,578

 

  

 

33,642

  

 

5,936

  

17.6

%

Equities

 

11,798

 

 

10,192

 

1,606

 

15.8

%

 

 

12,333

 

  

 

8,484

  

 

3,849

  

45.4

%

Money Markets

 

9,562

 

 

8,114

 

1,448

 

17.8

%

 

 

10,480

 

  

 

8,667

  

 

1,813

  

20.9

%

Market Data

 

16,903

 

 

15,552

 

1,351

 

8.7

%

 

 

16,914

 

  

 

15,770

  

 

1,144

  

7.3

%

Other Fees

 

5,004

 

 

6,999

 

(1,995

)

(28.5

)%

 

 

6,171

 

  

 

6,098

  

 

73

  

1.2

%

Total gross revenue

 

$

186,792

 

 

$

169,503

 

$

17,289

 

10.2

%

 

$

200,981

 

  

$

165,253

  

$

35,728

  

21.6

%

 

Our variable and fixed revenues by asset class for the three months ended March 31,September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
March 31, 2019

 

 

Three Months Ended
March 31, 2018

 

$ Change

 

% Change

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

��

 

September 30, 2019

 

 

September 30, 2018

 

$ Change

 

% Change

 

 

Variable

 

Fixed

 

 

Variable

 

Fixed

 

Variable

 

Fixed

 

Variable

 

Fixed

 

    

Variable

    

Fixed

  

  

Variable

    

Fixed

    

Variable

    

Fixed

    

Variable

    

Fixed

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rates

 

$

53,650

 

$

50,440

 

 

$

45,068

 

$

48,845

 

$

8,582

 

$

1,595

 

19.0

%

3.3

%

 

$

64,885

 

$

50,620

 

 

$

42,808

 

$

49,784

 

$

22,077

 

$

836

 

51.6

%

1.7

%

Credit

 

34,358

 

5,077

 

 

29,613

 

5,120

 

4,745

 

(43

)

16.0

%

(0.8

)%

 

 

34,417

 

 

5,161

 

 

 

28,526

 

 

5,116

 

 

5,891

 

 

45

 

20.7

%

0.9

%

Equities

 

10,152

 

1,646

 

 

8,521

 

1,671

 

1,631

 

(25

)

19.1

%

(1.5

)%

 

 

9,896

 

 

2,437

 

 

 

7,066

 

 

1,418

 

 

2,830

 

 

1,019

 

40.1

%

71.9

%

Money Markets

 

5,823

 

3,739

 

 

4,702

 

3,412

 

1,121

 

327

 

23.8

%

9.6

%

 

 

6,743

 

 

3,737

 

 

 

5,089

 

 

3,578

 

 

1,654

 

 

159

 

32.5

%

4.4

%

Market Data

 

 

16,903

 

 

 

15,552

 

 

1,351

 

 

8.7

%

 

 

 —

 

 

16,914

 

 

 

 —

 

 

15,770

 

 

 —

 

 

1,144

 

n/a

 

7.3

%

Other

 

 

5,004

 

 

 

6,999

 

 

(1,995

)

 

(28.5

)%

 

 

 —

 

 

6,171

 

 

 

26

 

 

6,072

 

 

(26)

 

 

99

 

(100.0)

%

1.6

%

Gross revenue

 

$

103,983

 

$

82,809

 

 

$

87,904

 

$

81,599

 

$

16,079

 

$

1,210

 

18.3

%

1.5

%

 

$

115,941

 

$

85,040

 

 

$

83,515

 

$

81,738

 

$

32,426

 

$

3,302

 

38.8

%

4.0

%

 

Rates. Revenues from our Rates asset class increased by $10.2$22.9 million or 10.8%24.7% to $104.1$115.5 million for the three months ended March 31,September 30, 2019 from $93.9$92.6 million for the three months ended March 31,September 30, 2018 primarily due to increasedhigher trading volumes infor derivatives products, U.S. treasuries and European derivatives and U.S. treasuries.mortgages products.

Credit.Credit. Revenues from our Credit asset class increased by $4.7$5.9 million or 13.5%17.6% to $39.4$39.6 million for the three months ended March 31,September 30, 2019 from $34.7$33.7 million for the three months ended March 31,September 30, 2018 primarily due to increasedhigher trading volumes for U.S. corporate bonds and municipal bonds.credit derivatives products.

Equities. Revenues from our Equities asset class increased by $1.6$3.8 million or 15.8%45.4% to $11.8$12.3 million for the three months ended March 31,September 30, 2019 from $10.2$8.5 million for the three months ended March 31,September 30, 2018 primarily due to increasedhigher trading volumes for U.S.ETFs and European ETFs.equity derivatives products.

Money Markets. Revenues from our Money Markets asset class increased by $1.4$1.8 million or 17.8%20.9% to $9.6$10.5 million for the three months ended March 31,September 30, 2019 from $8.1$8.7 million for the three months ended March 31,September 30, 2018 primarily due to increased volumes for U.S. and European repurchase agreements and certificates of deposit.

Market Data.Data. Revenues from Market Data increased by $1.4$1.1 million or 8.7%7.3% to $16.9 million for the three months ended March 31,September 30, 2019 from $15.6$15.8 million for the three months ended March 31,September 30, 2018 primarily as a result of increased Refinitiv (formerly Thomson Reuters) license fees due to an increase in the number of market data feeds provided to Refinitiv and increased Gilt closing price revenues.Refinitiv.

48

Other Fees. Revenues from Other Fees decreasedincreased by $2.0$0.1 million or (28.5)%1.2% to $5.0$6.2 million for the three months ended March 31,September 30, 2019 from $7.0$6.1 million for the three months ended March 31,September 30, 2018 primarily due to the timing of Retail revenues for software development and implementation partially offset by lower fees from a third party for certain licensing and development in Canada and the timing of Retail fees for software development and implementation.

Canada.

A significant percentage of our revenues are tied directly to overall trading volumes in the rates, credit, equities and money markets asset classes. The average daily volumes and total volumes on our trading platforms by asset class for the three months ended March 31,September 30, 2019 and 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2019

 

March 31, 2018

 

 

 

 

September 30, 2019

 

September 30, 2018

 

ADV 

 

 

ADV

 

Volume

 

ADV

 

Volume

 

ADV Change

 

    

ADV

    

Volume

    

ADV

    

Volume

    

% Change

 

 

(dollars in millions)

 

 

 

 

(dollars in millions)

 

 

 

Rates

 

$

431,380

 

$

26,453,386

 

$

344,740

 

$

21,142,985

 

25.1

%

 

$

563,379

 

$

36,305,114

 

$

342,572

 

$

21,710,832

 

64.5

%

Credit

 

16,383

 

1,009,820

 

14,999

 

926,776

 

9.2

%

 

 

17,199

 

 

1,117,045

 

 

11,885

 

 

760,207

 

44.7

%

Equities

 

7.702

 

475,731

 

9,977

 

612,528

 

(22.8

)%

 

 

7,345

 

 

476,129

 

 

5,746

 

 

366,590

 

27.8

%

Money Markets

 

191,123

 

11,771,688

 

164,517

 

10,071,040

 

16.2

%

 

 

227,125

 

 

14,701,122

 

 

171,509

 

 

10,872,806

 

32.4

%

Total

 

$

815,048

 

$

52,599,410

 

$

531,712

 

$

33,710,435

 

53.3

%

 

We believe the increases in average daily volumes in the three months ended March 31,September 30, 2019 for most asset classes can be attributed to various factors, including increased volatility across our rates, credit and money markets asset classes, further electronification of trading activities across our asset classes, increase in market share, new products, new clients and new clients.

increased volatility. Trading activity in both long and short-tenor interest rate swaps and swaptions, repurchase agreements and mortgages were the leading drivers of our overall volume growth year-over-year. Rates ADV increased mainly due to higher trading activity in both long and short-tenor interest rate swaps and swaptions, as well as mortgages and U.S. treasuries. Credit ADV increased due mainly to higher trading activity in credit derivatives, U.S. high-grade and high-yield credit as well as Chinese bonds. Equities ADV increased due mainly to higher trading activity in institutional ETFs. Money Markets ADV increased due to the continued growth of bilateral electronic trading in repurchase agreements.

The average variable fees per million dollars of volume traded on our trading platforms by asset class for the three months ended MarchSeptember 30, 2019 and 2018 are summarized below. There are four potential drivers of quarterly fluctuations in our average variable fees per million: (1) volume discounts, (2) the mix of cash and derivatives products traded, (3) the mix of protocols underpinning cash and derivatives products and (4) pricing. Average variable fees per million should be reviewed in conjunction with our trading volumes and gross revenue by asset class. Since variable fees are sometimes subject to fee plans with tiered pricing based on product mix and volume, average variable fees per million for a specific asset class may not correlate with volumes or revenue growth. For example, average variable fees per million dollars of volume for our Credit asset class decreased 17.7% for the three months ended September 30, 2019 while gross revenue for our Credit asset class increased 17.6% over the same period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30, 

 

 

 

 

 

 

 

    

2019

    

2018

    

$ Change

    

% Change

 

Rates

 

$

1.79

 

$

1.97

 

$

(0.18)

 

(9.2)

%

Rates - excluding short-tenor swaps (less than 1 year)

 

$

2.32

 

$

2.14

 

$

0.18

 

8.0

%

Credit

 

$

30.81

 

$

37.45

 

$

(6.64)

 

(17.7)

%

Equities

 

$

20.78

 

$

19.27

 

$

1.51

 

7.8

%

Money Markets

 

$

0.46

 

$

0.47

 

$

(0.01)

 

(1.9)

%

Total Fees per Million

 

$

2.20

 

$

2.47

 

$

(0.27)

 

(10.9)

%

Total Fees per Million - excluding short-tenor swaps (less than 1 year)

 

$

2.62

 

$

2.61

 

$

0.01

 

 —

%

Rates average variable fees per million was impacted by the growth of short tenor swap volumes, a product which has a lower variable fee capture as compared to other rates products. Credit average variable fees per million was impacted by a mix shift due to higher growth in credit derivatives volumes, products which have a lower variable fee capture as compared to cash credit products, and a decline in municipals volumes. Equities average variable fees per

49

million was impacted by a mix shift towards Institutional European ETFs and away from Wholesale products. Money Markets average variable fees per million was impacted by a mix shift within repurchase agreements volumes from Wholesale to Institutional.

Our gross revenue by geography (based on client location) for the three months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

    

 

    

 

 

 

 

Three Months

 

 

Three Months

 

 

 

 

 

 

 

Ended 

 

 

Ended 

 

 

 

 

 

 

 

September 30, 

 

 

September 30, 

 

 

 

 

 

 

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

Revenues

 

 

  

 

  

 

 

  

 

  

 

  

U.S.

 

$

126,599

 

  

$

106,982

  

19,617

  

18.3

%

International

 

 

74,382

 

  

 

58,271

  

16,111

  

27.6

%

Total gross revenue

 

$

200,981

 

  

$

165,253

  

35,728

  

21.6

%

U.S. Revenues from U.S. clients increased by $19.6 million or 18.3% to $126.6 million for the three months ended September 30, 2019 from $107.0 million for the three months ended September 30, 2018 primarily due to higher trading volumes for mortgages products, U.S. credit products, U.S. treasuries, U.S. dollar-denominated swaps and U.S. ETFs.

International. Revenues from International clients increased by $16.1 million or 27.6% to $74.4 million for the three months ended September 30, 2019 from $58.3 million for the three months ended September 30, 2018 primarily due to higher trading volumes for European interest rate swaps, European ETFs, U.S. dollar-denominated swaps and European repurchase agreements. Fluctuations in foreign currency rates decreased our International gross revenue by $3.6 million.

Operating Expenses

Our expenses for the three months ended September 30, 2019 and 2018 were as follows:

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

 

 

Three

 

 

Three

 

 

Months

 

 

Months

 

 

Ended

 

 

Ended

 

 

September 30, 

 

 

September 30, 

 

 

2019

 

 

2018

 

 

(in thousands)

Employee compensation and benefits

 

$

79,644

 

 

$

69,076

Depreciation and amortization

 

 

35,133

 

 

 

16,362

Technology and communications

 

 

9,527

 

 

 

9,112

General and administrative

 

 

7,507

 

 

 

9,386

Professional fees

 

 

7,272

 

 

 

7,546

Occupancy

 

 

3,640

 

 

 

3,491

Total Expenses

 

$

142,723

 

 

$

114,973

Employee Compensation and Benefits. Employee compensation and benefits expense increased by $10.6 million or 15.3% to $79.6 million for the three months ended September 30, 2019 from $69.1 million for the three months ended September 30, 2018. The increase was primarily due to a $3.7 million increase in salaries and benefits, due to an increase in employee headcount, a $3.0 million increase in commission related expenses due to higher Wholesale revenues, $2.6 million increase in annual incentive compensation expenses tied to operating performance, and a $2.0 million increase in non-cash stock-based compensation expense related to options. Total employee headcount increased to 926 as of September 30, 2019 from 896 as of September 30, 2018.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2019 was $35.1 million. Depreciation and amortization expense for the three months ended September 30, 2018 was

50

$16.4 million. As a result of the Refinitiv Transaction and the application of pushdown accounting, we adjusted our assets and liabilities to their estimated fair values as of October 1, 2018, which resulted in an increase in depreciation of tangible assets and amortization of our intangible assets. The impact of such adjustments increased depreciation and amortization expense during the three months ended September 30, 2019 by $18.3 million.

Technology and Communications. Technology and communications expense increased by $0.4 million or 4.6% to $9.5 million for the three months ended September 30, 2019 from $9.1 million for the three months ended September 30, 2018. The increase was primarily due to increased clearance fees as a result of higher trading volumes.

General and Administrative. General and administrative expense decreased by $1.9 million or (20.0)% to $7.5 million for the three months ended September 30, 2019 from $9.4 million for the three months ended September 30, 2018. The decrease was primarily a result of an increase in foreign exchange gains of $1.5 million.

Professional Fees. Professional fees decreased by $0.3 million or (3.6)% to $7.3 million for the three months ended September 30, 2019 from $7.6 million for the three months ended September 30, 2018. The decrease was primarily due to fees incurred in 2018 associated with preliminary work related to our IPO.

Occupancy. Occupancy expense for the three months ended September 30, 2019 was $3.6 million.  Occupancy expense for the three months ended September 30, 2018 was $3.5 million. As a result of the Refinitiv Transaction and the application of pushdown accounting, at October 1, 2018, we established a leasehold interest liability, which resulted in a $0.1 million increase in occupancy expense during the three months ended September 30, 2019.

Net Interest Income (Expense)

Net interest income (expense) decreased by $0.1 million to net interest income of $0.6 million for the three months ended September 30, 2019 from net interest income of $0.7 million for the three months ended September 30, 2018 due to higher interest income offset by credit facility fees related to the Revolving Credit Facility.

Income Taxes

Provision for income taxes for the three months ended September 30, 2019 was $10.3 million. Provision for income taxes for the three months ended September 30, 2018 was $7.5 million. The provision for income taxes for the three months ended September 30, 2019 was impacted by the Reorganization Transactions and the IPO, which resulted in Tradeweb Markets Inc. becoming subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and being taxed at prevailing corporate tax rates. Prior to the Reorganization Transactions, income taxes consisted only of business taxes incurred by TWM LLC and certain subsidiaries for business conducted in certain state, local and foreign jurisdictions as well as federal, state and local taxes for certain subsidiaries that are taxed as corporations for U.S. tax purposes.  

51

For the Nine Months Ended September 30, 2019 (Successor) and Nine Months Ended September 30, 2018 (Predecessor)

The following table sets forth a summary of our statements of income for the nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

    

Successor

 

    

Predecessor

  

 

 

Nine

 

 

Nine

 

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

 

September 30, 

 

 

September 30, 

 

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

Gross revenue

 

$

578,258

 

 

$

505,771

 

Contingent consideration

 

 

 —

 

 

 

(26,830)

 

Net revenue

 

 

578,258

 

 

 

478,941

 

Total expenses

 

 

442,768

 

 

 

338,607

 

Operating income

 

 

135,490

 

 

 

140,334

 

Net interest income

 

 

1,669

 

 

 

1,726

 

Income before taxes

 

 

137,159

 

 

 

142,060

 

Income taxes

 

 

(21,413)

 

 

 

(11,900)

 

Net income

 

$

115,746

 

 

$

130,160

 

Less: Pre-IPO net income attributable to Tradeweb Markets LLC

 

 

42,352

 

 

 

 

 

Net income attributable to Tradeweb Markets Inc. and non-controlling interests

 

 

73,394

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

 

30,954

 

 

 

 

 

Net income attributable to Tradeweb Markets Inc.

 

$

42,440

 

 

 

 

 

Overview

During the nine months ended September 30, 2019, our business was impacted by a number of factors, including higher client trading activity, driving revenue increases in rates, credit, equities and money markets trading. Our market data business also grew due to the expansion of our market data license agreement with Refinitiv. Our expenses were impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting and non-cash stock-based compensation expense related to the Special Option Award (as defined below) as a result of the completion of the IPO during the second quarter of 2019, and post-IPO options awarded in the third quarter of 2019.

Gross revenue increased by $72.5 million or 14.3% to $578.3 million for the nine months ended September 30, 2019 from $505.8 million for the nine months ended September 30, 2018. This increase in gross revenue was mainly due to higher trading volumes resulting in a $45.6 million increase in transaction fees and a $28.4 million increase in commissions. Net revenue increased by $99.3 million or 20.7% to $578.3 million for the nine months ended September 30, 2019 from $478.9 million for the nine months ended September 30, 2018. Non-cash contingent consideration decreased by $26.8 million for the nine months ended September 30, 2019 as a result of the vesting of the Credit Initiative Earnout at July 31, 2018.

Total expenses for the nine months ended September 30, 2019 and 2018 were $442.8 million, and $338.6 million, respectively. Total expenses for the nine months ended September 30, 2019 were impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting and higher employee compensation and benefits expense, including the impact of non-cash stock-based compensation expense related to the Special Option Award, which, as a result of the completion of the IPO, we began to expense during the second quarter of 2019, and post-IPO options awarded in the third quarter of 2019.

Income before taxes for the nine months ended September 30, 2019 and 2018 was $137.2 million and $142.1 million, respectively. Net income for the nine months ended September 30, 2019 and 2018 was $115.8 million and $130.2 million, respectively. Net income attributable to Tradeweb Markets Inc. for the nine months ended September 30,

52

2019 was $42.4 million. Income before taxes, net income and net income attributable to Tradeweb Markets Inc. for the nine months ended September 30, 2019 were negatively impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting, resulting in a $52.5 million increase in depreciation and amortization expense and $22.4 million of stock-based compensation expense related to the Special Option Award and post-IPO options awarded in 2019, partially offset by higher revenues.

Revenues

Our revenues for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30, 2019

 

 

Ended September 30, 2018

 

 

 

 

 

 

 

    

 

 

    

% of Gross

  

  

 

 

    

% of Gross

    

 

 

    

 

 

 

 

$

 

Revenue

 

    

$

 

Revenue

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

Revenues

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

 

  

Transaction fees

 

$

319,338

 

55

%  

  

$

273,751

 

54

%  

$

45,587

  

16.7

%

Subscription fees(1)

 

 

144,650

 

25

%  

  

 

143,981

 

28

%  

 

669

  

0.5

%

Commissions

 

 

108,200

 

19

%  

  

 

79,830

 

16

%  

 

28,370

  

35.5

%

Other

 

 

6,070

 

1

%  

  

 

8,209

 

2

%  

 

(2,139)

  

(26.1)

%

Gross revenue

 

 

578,258

 

100

%  

  

 

505,771

 

100

%  

 

72,487

  

14.3

%

Contingent consideration

 

 

 —

 

  

 

  

 

(26,830)

 

 

  

 

26,830

  

(100.0)

%

Net revenue

 

$

578,258

 

  

 

  

$

478,941

 

 

  

$

99,317

  

20.7

%

Components of gross revenue growth:

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

 

  

Constant currency growth(2)

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

16.4

%

Foreign currency impact

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

(2.1)

%

Total gross revenue growth

 

 

 

  

  

 

  

 

 

 

 

  

 

 

  

14.3

%


(1)

Subscription fees for the nine months ended September 30, 2019 and 2018 include $40.3 million and $36.8 million, respectively, of Refinitiv (formerly Thomson Reuters) market data fees.

(2)

Constant currency growth, which is a non-GAAP financial measure, is defined as gross revenue growth excluding the effects of foreign currency fluctuations. Gross revenue excluding the effects of foreign currency fluctuations is calculated by translating the current period and prior period’s gross revenue using the average exchange rates for 2018. We use constant currency growth as a supplemental metric to evaluate our underlying gross revenue performance between periods by removing the impact of foreign currency fluctuations. We believe that providing constant currency growth provides a useful comparison of our gross revenue performance and trends between periods.

Our variable and fixed revenues by fee type for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

$ Change

 

% Change

 

 

    

Variable

    

Fixed

  

  

Variable

    

Fixed

    

Variable

    

Fixed

    

Variable

    

Fixed

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

  

Transaction fees

 

$

246,066

 

$

73,272

 

  

$

208,049

  

$

65,702

  

$

38,017

  

$

7,570

  

18.3

%  

11.5

%

Subscription fees(1)

 

 

1,330

 

 

143,320

 

  

 

1,305

  

 

142,676

  

 

25

  

 

644

  

1.9

%  

0.5

%

Commissions

 

 

78,785

 

 

29,415

 

  

 

49,367

  

 

30,463

  

 

29,418

  

 

(1,048)

  

59.6

%  

(3.4)

%

Other

 

 

692

 

 

5,378

 

  

 

40

  

 

8,169

  

 

652

  

 

(2,791)

  

1,630.0

%  

(34.2)

%

Gross revenue

 

$

326,873

 

$

251,385

 

  

$

258,761

  

$

247,010

  

$

68,112

  

$

4,375

  

26.3

%  

1.8

%


(1)

Subscription fees for the nine months ended September 30, 2019 and 2018 include $40.3 million and $36.8 million, respectively, of Refinitiv (formerly Thomson Reuters) market data fees.

53

Transaction fees. Transaction fees increased by $45.6 million or 16.7% to $319.3 million for the nine months ended September 30, 2019 from $273.8 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for rates derivatives products and ETFs.

Subscription fees. Subscription fees increased by $0.7 million or 0.5% to $144.7 million for the nine months ended September 30, 2019 from $144.0 million for the nine months ended September 30, 2018 primarily due to higher market data and Institutional MBS fees, partially offset by lower Retail fees.

Commissions.  Commission revenue increased by $28.4 million or 35.5% to $108.2 million for the nine months ended September 30, 2019 from $79.8 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for U.S. corporate bonds and U.S. treasuries.

Other. Other revenue decreased by $2.1 million or (26.1)% to $6.1 million for the nine months ended September 30, 2019 from $8.2 million for the nine months ended September 30, 2018 primarily as a result of lower fees from a third party for certain licensing and development in Canada.

Contingent consideration. There was no contingent consideration for the nine months ended September 30, 2019 due to the vesting of the Credit Initiative Earnout at July 31, 2018. Contingent consideration for the nine months ended September 30, 2018 was $26.8 million.

Our gross revenue by client sector for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

    

 

 

    

 

 

 

 

Nine Months

 

 

Nine Months

 

 

 

 

 

 

 

 

Ended 

 

 

Ended 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

 

Revenues

 

 

  

 

 

 

 

  

 

 

  

 

  

Institutional

 

$

341,167

 

 

$

301,918

  

$

39,249

  

13.0

%

Wholesale

 

 

124,416

 

 

 

99,028

  

 

25,388

  

25.6

%

Retail

 

 

61,314

 

 

 

57,766

  

 

3,548

  

6.1

%

Market Data

 

 

51,361

 

 

 

47,059

  

 

4,302

  

9.1

%

Total gross revenue

 

$

578,258

 

 

$

505,771

  

$

72,487

  

14.3

%

Institutional. Revenues from our Institutional client sector increased by $39.2 million or 13.0% to $341.2 million for the nine months ended September 30, 2019 from $301.9 million for the nine months ended September 30, 2018. The increase was derived primarily from higher trading volumes for rates derivatives products, ETFs and mortgages products, partially offset by the impact of foreign exchange, mainly the weakening of the euro.

Wholesale. Revenues from our Wholesale client sector increased by $25.4 million or 25.6% to $124.4 million for the nine months ended September 30, 2019 from $99.0 million for the nine months ended September 30, 2018. The increase was derived primarily from higher trading volumes for U.S. session-based trading and U.S. treasuries.

Retail. Revenues from our Retail client sector increased by $3.5 million or 6.1% to $61.3 million for the nine months ended September 30, 2019 from $57.8 million for the nine months ended September 30, 2018. The increase was derived primarily from higher trading volumes for certificates of deposit, municipal bonds and U.S. treasuries partially offset by lower revenues for software development and implementation.

Market Data. Revenues from our Market Data client sector increased by $4.3 million or 9.1% to $51.4 million for the nine months ended September 30, 2019 from $47.1 million for the nine months ended September 30, 2018 primarily as a result of increased Refinitiv (formerly Thomson Reuters) license fees due to an increase in the number of market data feeds provided to Refinitiv.

54

Our gross revenue by asset class for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

    

 

 

    

 

 

 

 

Nine Months

 

 

Nine Months

 

 

 

 

 

 

 

 

Ended 

 

 

Ended 

 

 

 

 

 

 

 

 

September 30, 

 

 

September 30, 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

 

Revenues

 

 

  

 

  

 

 

  

 

 

  

 

  

Rates

 

$

326,658

 

  

$

281,641

  

$

45,017

  

16.0

%

Credit

 

 

118,612

 

  

 

102,452

  

 

16,160

  

15.8

%

Equities

 

 

35,247

 

  

 

28,347

  

 

6,900

  

24.3

%

Money Markets

 

 

30,364

 

  

 

25,248

  

 

5,116

  

20.3

%

Market Data

 

 

51,361

 

  

 

47,059

  

 

4,302

  

9.1

%

Other Fees

 

 

16,016

 

  

 

21,024

  

 

(5,008)

  

(23.8)

%

Total gross revenue

 

$

578,258

 

  

$

505,771

  

$

72,487

  

14.3

%

Our variable and fixed revenues by asset class for the nine months ended September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

$ Change

 

% Change

 

 

    

Variable

    

Fixed

  

  

Variable

    

Fixed

    

Variable

    

Fixed

    

Variable

    

Fixed

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rates

 

$

175,278

 

$

151,380

 

 

$

133,183

 

$

148,458

 

$

42,095

 

$

2,922

 

31.6

%

2.0

%

Credit

 

 

103,112

 

 

15,500

 

 

 

87,241

 

 

15,211

 

 

15,871

 

 

289

 

18.2

%

1.9

%

Equities

 

 

29,243

 

 

6,004

 

 

 

23,494

 

 

4,853

 

 

5,749

 

 

1,151

 

24.5

%

23.7

%

Money Markets

 

 

19,240

 

 

11,124

 

 

 

14,803

 

 

10,445

 

 

4,437

 

 

679

 

30.0

%

6.5

%

Market Data

 

 

 —

 

 

51,361

 

 

 

 —

 

 

47,059

 

 

 —

 

 

4,302

 

n/a

 

9.1

%

Other

 

 

 —

 

 

16,016

 

 

 

40

 

 

20,984

 

 

(40)

 

 

(4,968)

 

(100.0)

%

(23.7)

%

Gross revenue

 

$

326,873

 

$

251,385

 

 

$

258,761

 

$

247,010

 

$

68,112

 

$

4,375

 

26.3

%

1.8

%

Rates. Revenues from our Rates asset class increased by $45.0 million or 16.0% to $326.7 million for the nine months ended September 30, 2019 from $281.6 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for derivatives products, U.S. treasuries and mortgages products.

Credit. Revenues from our Credit asset class increased by $16.2 million or 15.8% to $118.6 million for the nine months ended September 30, 2019 from $102.5 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for U.S. corporate bonds .

Equities. Revenues from our Equities asset class increased by $6.9 million or 24.3% to $35.2 million for the nine months ended September 30, 2019 from $28.3 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for ETFs.

Money Markets. Revenues from our Money Markets asset class increased by $5.1 million or 20.3% to $30.4 million for the nine months ended September 30, 2019 from $25.3 million for the nine months ended September 30, 2018 primarily due to higher trading volumes for repurchase agreements and certificates of deposit.

Market Data. Revenues from Market Data increased by $4.3 million or 9.1% to $51.4 million for the nine months ended September 30, 2019 from $47.1 million for the nine months ended September 30, 2018 primarily as a result of

55

increased Refinitiv (formerly Thomson Reuters) license fees due to an increase in the number of market data feeds provided to Refinitiv.

Other Fees. Revenues from Other Fees decreased by $5.0 million or (23.8)% to $16.0 million for the nine months ended September 30, 2019 from $21.0 million for the nine months ended September 30, 2018 primarily due lower fees from a third party for certain licensing and development in Canada and lower Retail revenues for software development and implementation.

A significant percentage of our revenues are tied directly to overall trading volumes in the rates, credit, equities and money markets asset classes. The average daily volumes and total volumes on our trading platforms by asset class for the nine months ended September 30, 2019 and 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30, 2019

 

September 30, 2018

 

ADV 

 

 

    

ADV

    

Volume

    

ADV

    

Volume

    

% Change

 

 

 

(dollars in millions)

 

 

 

Rates

 

$

502,303

 

$

94,680,563

 

$

345,759

 

$

65,186,563

 

45.3

%

Credit

 

 

15,295

 

 

2,893,232

 

 

12,871

 

 

2,433,824

 

18.8

%

Equities

 

 

7,385

 

 

1,397,429

 

 

7,543

 

 

1,419,622

 

(2.1)

%

Money Markets

 

 

213,920

 

 

40,495,243

 

 

168,618

 

 

31,773,689

 

26.9

%

Total

 

$

738,903

 

$

139,466,467

 

$

534,791

 

$

100,813,698

 

38.2

%

We believe the increases in average daily volumes in nine months ended September 30, 2019 for most asset classes can be attributed to various factors, including further electronification of trading activities across our asset classes, increase in market share, new products, new clients and increased volatility. Trading activity in both long and short-tenor interest rate swaps and swaptions, mortgages and repurchase agreements were the leading drivers of our overall volume growth year-over-year. Rates ADV increased due mainly to higher trading activity in long and short-tenor interest rate swaps and swaptions, mortgages and U.S. treasuries. Credit ADV increased due mainly to higher trading activity in credit derivatives, U.S. high-grade and high-yield credit as well as Chinese bonds. Equities ADV decreased due mainly to lower trading activity in U.S. ETFs. Money Markets ADV increased due to the continued growth of bilateral electronic trading in repurchase agreements.

The average variable fees per million dollars of volume traded on our trading platforms by asset class for the nine months ended September 30, 2019 and 2018 are summarized below. There are four potential drivers of quarterly fluctuations in our average variable fees per million: (1) volume discounts, (2) the mix of cash and derivatives products traded, (3) the mix of protocols underpinning cash and derivatives products and (4) pricing. Average variable fees per million should be reviewed in conjunction with our trading volumes and gross revenue by asset class. Since variable fees are sometimes subject to fee plans with tiered pricing based on product mix and volume, average variable fees per million for a specific asset class may not correlate with volumes or revenue growth. For example, average variable fees per million dollars of volume for our Rates asset class decreased 5.4%9.3% for the threenine months ended March 31,September 30, 2019 while gross revenue for our Rates asset class increased 10.8%16.0% over the same period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30, 

 

 

 

 

 

 

 

    

2019

    

2018

    

$ Change

    

% Change

 

Rates

 

$

1.85

 

$

2.04

 

$

(0.19)

 

(9.3)

%

Rates - excluding short-tenor swaps (less than 1 year)

 

$

2.20

 

$

2.16

 

$

0.04

 

1.9

%

Credit

 

$

35.64

 

$

35.85

 

$

(0.21)

 

(0.6)

%

Equities

 

$

20.93

 

$

16.55

 

$

4.38

 

26.5

%

Money Markets

 

$

0.48

 

$

0.47

 

$

0.01

 

2.1

%

Total Fees per Million

 

$

2.34

 

$

2.57

 

$

(0.23)

 

(8.9)

%

Total Fees per Million - excluding short-tenor swaps (less than 1 year)

 

$

2.63

 

$

2.66

 

$

(0.03)

 

(1.1)

%

 

 

 

March 31,

 

 

 

 

 

 

 

2019

 

2018

 

$ Change

 

% Change

 

Rates

 

$

2.02

 

$

2.13

 

$

(0.11

)

(5.4

)%

Credit

 

34.03

 

32.03

 

2.00

 

6.2

%

Equities

 

21.36

 

13.91

 

7.45

 

53.4

%

Money Markets

 

0.49

 

0.47

 

0.02

 

5.8

%

56

Rates average variable fees per million was impacted by volume tier discountsgrowth in cashshort tenor swap volumes, a product which has a lower variable fee capture as compared to other rates products. Credit average variable fees per million was impacted by growth in credit derivatives volumes, products which have a shiftlower variable fee capture as compared to cash credit products, and a decline in volumes from derivatives towards cash.municipals volumes. Equities average variable fees per million was impacted by a mix shift in volumes towards institutional ETFs.Institutional ETFs and away from Wholesale products. Money Markets average variable fees per million was impacted by a mix shift in volumes within non-repurchase agreementtowards repurchase agreements and away from other lower variable fee capture Money Markets products.

Our gross revenue by geography (based on client location) for the threenine months ended March 31,September 30, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

    

 

    

 

 

 

Nine Months

 

 

Nine Months

 

 

 

 

 

 

Ended 

 

 

Ended 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

September 30, 

 

 

September 30, 

 

 

 

 

 

 

Three Months
Ended March
31, 2019

 

 

Three Months
Ended March
31, 2018

 

$ Change

 

% Change

 

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

(dollars in thousands)

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

 

  

 

  

 

  

U.S.

 

$

119,397

 

 

$

107,782

 

11,615

 

10.8

%

 

$

368,689

 

  

$

324,304

  

44,385

  

13.7

%

International

 

67,395

 

 

61,721

 

5,674

 

9.2

%

 

 

209,569

 

  

 

181,467

  

28,102

  

15.5

%

Total gross revenue

 

$

186,792

 

 

$

169,503

 

17,289

 

10.2

%

 

$

578,258

 

  

$

505,771

  

72,487

  

14.3

%

 

U.S. Revenues from U.S. clients increased by $11.6$44.4 million or 10.8%13.7% to $119.4$368.7 million for the threenine months ended March 31,September 30, 2019 from $107.8$324.3 million for the threenine months ended March 31,September 30, 2018 primarily due to higher trading volumes from our U.S. credit products, U.S. ETFs, dollartreasuries, mortgages products,  U.S. dollar-denominated swaps, treasuries and municipal bonds.U.S. ETFs.

International. Revenues from International clients increased by $5.7$28.1 million or 9.2%15.5% to $67.4$209.6 million for the threenine months ended March 31,September 30, 2019 from $61.7$181.5 million for the threenine months ended March 31,September 30, 2018 primarily due to increasedhigher trading volumes for European interest rate swaps, ChinaEuropean equities, Chinese bonds and European credit default indexes.repurchase agreements. Fluctuations in foreign currency rates decreased our International gross revenue by $2.3$8.3 million.

Operating Expenses

Our expenses for the threenine months ended March 31,September 30, 2019 and 2018 were as follows:

 

 

 

 

 

    

Successor

  

  

Predecessor

 

Nine

 

 

Nine

 

Months

 

 

Months

 

Ended

 

 

Ended

 

Successor

 

 

Predecessor

 

 

September 30, 

 

 

September 30, 

 

Three
Months
Ended

March 31,
2019

 

 

Three
Months
Ended
March 31,
2018

 

 

2019

 

 

2018

 

(in thousands)

 

 

(in thousands)

Employee compensation and benefits

 

$

77,273

 

 

$

71,570

 

 

$

252,912

 

 

$

209,053

Depreciation and amortization

 

33,503

 

 

16,268

 

 

 

102,928

 

 

 

48,808

Technology and communications

 

 

29,086

 

 

 

26,598

General and administrative

 

9,089

 

 

6,517

 

 

 

25,961

 

 

 

23,056

Technology and communications

 

10,040

 

 

8,463

 

Professional fees

 

6,971

 

 

5,538

 

 

 

20,981

 

 

 

20,360

Occupancy

 

3,639

 

 

3,722

 

 

 

10,900

 

 

 

10,732

 

$

140,515

 

 

$

112,078

 

Total Expenses

 

$

442,768

 

 

$

338,607

 

Employee Compensation and Benefits. Employee compensation and benefits expense increased by $5.7$43.9 million or 8.0%21.0% to $77.3$252.9 million for the threenine months ended March 31,September 30, 2019 from $71.6$209.0 million for the threenine months ended March 31,September 30, 2018. The increase was primarily due to $22.4 million of non-cash stock-based compensation expense related to the Special Option Award, which, as a $4.2result of the completion of the IPO, we began to expense during the second quarter of 2019 (with $18.9 million recognized as compensation expense related to these options immediately

57

upon the completion of the IPO), and post-IPO options awarded in the third quarter of 2019, an $11.7 million increase in salaries and benefits due to an increase in employee headcount and an increase in commissionscommission related expenses of $1.8$7.0 million due to higher Wholesale revenues. Total employee headcount increased to 931 as of March 31, 2019 from 848 as of March 31, 2018.

Depreciation and Amortization. Depreciation and amortization expense for the threenine months ended March 31,September 30, 2019 was $33.5$102.9 million. Depreciation and amortization expense for the threenine months ended March 31,September 30, 2018 was $16.3$48.8 million. As a result of the Refinitiv Transaction and the application of pushdown accounting, we adjusted our assets and liabilities to their estimated fair values as of October 1, 2018, which resulted in an increase in depreciation of tangible assets and amortization of our intangible assets. The impact of such adjustments increased depreciation and amortization expense during the threenine months ended March 31,September 30, 2019 by $16.7$52.5 million.

Technology and Communications. Technology and communications expense increased by $2.5 million or 9.4% to $29.1 million for the nine months ended September 30, 2019 from $26.6 million for the nine months ended September 30, 2018. The increase was primarily due to increased clearance fees as a result of higher trading volumes.

General and Administrative. General and administrative expense increased by $2.6$2.9 million or 39.5%12.6% to $9.1$26.0 million for the threenine months ended March 31,September 30, 2019 from $6.5$23.1 million for the threenine months ended March 31,September 30, 2018. The increase was primarily a result of an increase in foreign exchange losses of $1.9 million which includes aand an increase in insurance costs of $0.9 million loss due to the revaluation of foreign denominated cash, and one-time IPO related fees.

Technology and Communications. Technology and communications expense increased by $1.6 million or 18.6% to $10.0 million for the three months ended March 31, 2019 from $8.5 million for the three months ended March 31, 2018. The increase was primarily due to increases in cybersecurity spend, infrastructure initiatives and increased clearance fees asassociated with being a result of higher trading volumes.public company.

Professional Fees. Professional fees increased by $1.4 million$0.6million or 25.9%3.1% to $7.0$21.0 million for the threenine months ended March 31,September 30, 2019 from $5.5$20.4 million for the threenine months ended March 31,September 30, 2018. The increase was primarily due to tax advisory and audit fees, including fees incurred in preparation forconnection with the IPO.IPO, partially offset by decreased legal and consulting fees.

Occupancy. Occupancy expense for the threenine months ended March 31,September 30, 2019 was $3.6$10.9 million. Occupancy expense for the threenine months ended March 31,September 30, 2018 was $3.7$10.7 million. As a result of the Refinitiv Transaction and the application of pushdown accounting, at October 1, 2018, we established a leasehold interest liability, which resulted in a $0.1$0.3 million decrease in occupancy expense during the threenine months ended March 31,September 30, 2019.

Net Interest Income (Expense)

Net interest income (expense) increased by $0.4 million to interest income of $0.9 million for the threenine months ended March 31,September 30, 2019 from interest income of $0.5and 2018 was $1.7 million. Net interest income for the threenine months ended March 31,September 30, 2019 and 2018 was impacted by higher interest rates.credit facility fees related to the Revolving Credit Facility, which we entered into during the second quarter of 2019.

Income Taxes

Provision for income taxes for the threenine months ended March 31,September 30, 2019 was $4.8$21.4 million. Provision for income taxes for the threenine months ended March 31,September 30, 2018 was $2.5$11.9 million. ProvisionThe provision for income taxes for the threenine months ended March 31,September 30, 2019 was impacted by increased earningsthe Reorganization Transactions and the IPO, which occurred in April 2019 and resulted in Tradeweb Markets Inc. becoming subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and being taxed at prevailing corporate tax rates. Prior to the Reorganization Transactions, income taxes consisted only of business taxes incurred by TWM LLC and certain subsidiaries for business conducted in certain subsidiariesstate, local and foreign jurisdictions which resulted in higheras well as federal, state and local taxes for certain subsidiaries that are taxed as corporations for U.S. tax expense.purposes.

Liquidity and Capital Resources

Overview

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs to meet operating expenses, debt service, acquisitions, other

58

commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and availability under the Revolving Credit Facility and their sufficiency to fund our operating and investing activities.

Historically, we have generated significant cash flows from operations and have funded our business operations through cash on hand and cash flows from operations.

Our primary cash needs are for day to day operations, working capital requirements, capital expenditures, primarily for software and equipment, and our expected dividend payments. In addition, we are obligated to make payments under the Tax Receivable Agreement. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments that we will be required to make under the Tax Receivable Agreement will be significant. Any payments made by us under the Tax Receivable Agreement will generally reduce the amount of overall cash flows that might have otherwise been available to us or to TWM LLC. These payments will offset some of the tax benefits that we expect to realize as a result of the ownership structure of TWM LLC. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us.

We expect to fund our liquidity requirements through cash and cash equivalents and cash flows from operations. While historically we have generated significant and adequate cash flows from operations, in the event of an unexpected event in the future or otherwise, we may fund our liquidity requirements through borrowings under the Revolving Credit Facility.

We believe that our projected cash position, cash flows from operations and, if necessary, borrowings under the Revolving Credit Facility, will be sufficient to fund our liquidity requirements for at least the next 12 months. However, our future liquidity requirements could be higher than we currently expect as a result of various factors. For example, any future investments, acquisitions, joint ventures or other similar transactions may require additional capital. In addition, our

ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, it will take the form of equity or debt financing, or both, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all.

As of March 31,September 30, 2019 and December 31, 2018, we had cash and cash equivalents of approximately $361.6$389.9 million and $410.1 million, respectively. All cash and cash equivalents were held in accounts with banks such that the funds are immediately available or in fixed term deposits with a maximum maturity of three months.

Factors Influencing Our Liquidity and Capital Resources

Dividend Policy

WeSubject to legally available funds, we intend to pay quarterly cash dividends on our Class A common stock and Class B common stock initially equal to $0.08 per share, beginning with the second quarter of 2019. Based on 46,000,000 shares of Class A common stock and 96,933,192 shares of Class B common stock outstanding, this dividend policy implies a quarterly cash requirement of approximately $11.4 million (or an annual cash requirement of approximately $45.7 million).share. As discussed below, our ability to pay these quarterly cash dividends on our Class A common stock and Class B common stock will depend on distributions to us from TWM LLC.

Dividends declared and paid to Class A and B common stockholders during the nine months ended September 30, 2019 amounted to $22.9 million.

The declaration, amount and payment of any dividends will be at the sole discretion of our board of directors and will depend on our and our subsidiaries’ results of operations, capital requirements, financial condition, business prospects, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors deem relevant. Because we are a holding company and all of our business is conducted through our subsidiaries, we expect to pay dividends, if any, only from funds we receive from our subsidiaries. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. As the sole managing membermanager of TWM LLC, we intend to cause, and will rely on, TWM LLC to make distributions in respect of LLC Interests to fund our dividends. If TWM LLC is unable to cause these subsidiaries to make distributions, it may have inadequate funds to distribute to us and we may be unable to fund our dividends. In addition, when TWM LLC makes

59

distributions to us, the Continuingother holders of LLC OwnersInterests will be entitled to receive proportionate distributions based on their economic interests in TWM LLC at the time of such distributions.

Our board of directors will periodically review the cash generated from our business and the capital expenditures required to finance our growth plans and determine whether to modify the amount of regular dividends and/or declare any periodic special dividends. We currently intend to increase the amount of our expected quarterly dividends in line with free cash flow growth, if any, after giving effect to required tax distributions to be paid by TWM LLC; however,LLC. However, any future determination to change the amount of dividends and/or declare special dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions and other factors that our board of directors considers relevant.

Cash Distributions

OnIn March and April 3, 2019, in connection with the IPO, TWM LLC made apre-IPO cash distributiondistributions to the Original LLC Owners in an aggregate amountamounts of $20.0 million and $100.0 million.million, respectively.

OnIn May 15,and September 2019, TWM LLC made quarterly cash distributions to its equityholders, including Tradeweb Markets Inc., in aggregate amounts of $33.4 million and $33.0 million, respectively.

On November 5, 2019, Tradeweb Markets Inc., as the sole manager, approved a cash distribution by TWM LLC to its equityholders, including Tradeweb Markets Inc., in an aggregate amount of $34.4 million.$45.8 million payable on December 13, 2019.

Cash Dividends

TheIn June and September 2019, Tradeweb Markets Inc. paid quarterly cash dividends to the holders of Class A common stock and Class B common stock in aggregate amounts of $11.4 million for each quarter.

On November 6, 2019, our board of directors of Tradeweb Markets Inc. declared a cash dividend of $0.08 per share of Class A common stock and Class B common stock for the secondfourth quarter of 2019. This dividend will be payable on June 15,December 16, 2019 to stockholders of record as of June 1,December 2, 2019.

Indebtedness

As of March 31,September 30, 2019 and December 31, 2018, we had no outstanding indebtedness.

Historically, the Company has only issued debt in connection with significant investment transactions and all debt issued by the Company has been issued to subsidiaries of Thomson Reuters.

Concurrently with the closing of the IPO, weOn April 8, 2019, TWM LLC entered into the Revolving Credit Facility.Facility with a syndicate of banks. The Revolving Credit Facility permits borrowings of up to $500.0 million, and includesprovides borrowing capacity available for letters of credit and

swingline loans. The Revolving Credit Facility will mature on April 8, 2024. We expect that the Revolving Credit Facility willto be used to fund our ongoing working capital needs, letters of credit and for general corporate purposes, including potential future acquisitions and expansions.

 

TWM LLC is the borrower under the Revolving Credit Facility. The Revolving Credit Facility permits borrowings of up to $500.0 million by TWM LLC. Subject to the satisfaction of certain conditions, we will be able to increase the Revolving Credit Facility by $250.0 million with the consent of lenders participating in the increase. The Revolving Credit Facility provides for the issuance of up to $5.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $30.0 million. The Revolving Credit Facility will mature on April 8, 2024.

As of September 30, 2019, there were no amounts outstanding under the Revolving Credit Facility and we had availability of $500.0 million.

60

Under the terms of the credit agreement that governs the Revolving Credit Facility, borrowings under the Revolving Credit Facility bear interest at a rate equal to, at our option, either (a) a base rate equal to the greatest of (i) the administrative agent’s prime rate, (ii) the federal funds effective rate plus ½ of 1.0% and (iii) one month LIBOR plus 1.0%, in each case plus 0.75%, or (b) LIBOR plus 1.75%, subject to a 0.00% floor. The credit agreement also requires that we pay a commitment fee of 0.25% for available but unborrowed amounts.  We are also required to pay customary letter of credit fees and agency fees.

We have the option to voluntarily repay outstanding loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.

There will be no scheduled amortization under the Revolving Credit Facility. The principal amount outstanding will be due and payable in full at maturity.

Obligations under the Revolving Credit Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The Revolving Credit Facility is secured by a first-priority security interest in substantially all of the assets of TWM LLC and the guarantors under the facility, subject to certain exceptions.

The credit agreement that governs the Revolving Credit Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict the ability of TWM LLC and the ability of its restricted subsidiaries to:

·

incur additional indebtedness and guarantee indebtedness;

·

create or incur liens;

·

pay dividends and distributions or repurchase capital stock;

·

make investments, loans and advances; and

·

enter into certain transactions with affiliates.

The Revolving Credit Facility contains a financial covenant requiring compliance with a (i) maximum total net leverage ratio tested on the last day of each fiscal quarter not to exceed 3.5 to 1.0 (increasing to 4.0 to 1.0 for the four-quarter period following a material acquisition and the fiscal quarter in which such material acquisition is consummated) and (ii) minimum cash interest coverage ratio tested on the last day of each fiscal quarter not less than 3.0 to 1.0.

The credit agreement that governs the Revolving Credit Facility also contains certain affirmative covenants and events of default customary for facilities of this type, including relating to a change of control. See Item 5, “Other Information” elsewhere in this Quarterly Report on Form 10 Q. If an event of default occurs, the lenders under the Revolving Credit Facility will be entitled to take various actions, including the acceleration of amounts due under the Revolving Credit Facility and all actions permitted to be taken by secured creditors under applicable law. As of September 30, 2019, we were in compliance with all the covenants set forth in the Revolving Credit Facility.

Capital Requirements

Certain of our U.S. subsidiaries are registered as broker-dealers, SEFs or introducing brokers and are subject to the applicable rules and regulations of the SEC and CFTC. These rules contain minimum net capital or other financial resource requirements, as defined in the applicable regulations. These rules may also require a significant part of the registrants’ assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by the Financial Conduct Authority in the U.K., the Nederlandsche Bank in the Netherlands, the Japanese Financial Services Agency, the Japanese Securities Dealers Association and other foreign regulators, and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of March 31,September 30, 2019 and December 31, 2018, each of our regulated subsidiaries had maintained sufficient net capital or financial resources in excess ofto at least satisfy their minimum requirements which in aggregate was $44.1were $50.4 million and $41.7 million, respectively. We

61

maintain capital balances in these subsidiaries in excess of our minimum requirements in order to satisfy working capital needs and to ensure that we have enough cash on hand to satisfy margin requirements and credit risk, including the excess capital expectations of our clients.

Fails to Deliver/Fails to Receive

At times, transactions executed on our wholesale platform fail to settle due to the inability of a transaction party to deliver or receive the transacted security. Until the failed transaction settles, we will recognize a receivable from (and a matching payable to) brokers and dealers and clearing organizations for the proceeds from the unsettled transaction. The impact on our liquidity and capital resources is minimal as receivables and payables for failed transactions are usually recognized simultaneously and predominantly offset.  See Note 4 – Receivable to and Payable from Brokers and Dealers and Clearing Organizations to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Working Capital

Working capital is defined as current assets minus current liabilities. Current assets consist of cash and cash equivalents, restricted cash, receivable from brokers and dealers and clearing organizations, deposits with clearing organizations, accounts receivable and receivable from affiliates. Current liabilities consist of securities sold under agreements to repurchase, payable to brokers and dealers and clearing organizations, accrued compensation, deferred revenue, accounts payable, accrued expenses and other liabilities, employee equity compensation payable, andlease liability, payable to affiliates.affiliates and tax receivable agreement liability. Changes in working capital, which impact our cash flows provided by operating activities, can vary depending on factors such as delays in the collection of receivables, changes in our operating performance, changes in trading patterns, changes in client billing terms and other changes in the demand for our platforms and solutions. Our working capital as of March 31,September 30, 2019 and December 31, 2018 was as follows:

 

 

March 31,
2019

 

December
31, 2018

 

 

 

(dollars in thousands)

 

Cash and cash equivalents

 

$

361,608

 

$

410,104

 

Restricted cash

 

1,200

 

1,200

 

Receivable from brokers and dealers and clearing organizations

 

88,422

 

174,591

 

Deposits with clearing organizations

 

8,872

 

11,427

 

Accounts receivable

 

94,284

 

87,192

 

Receivable from affiliates

 

3,026

 

3,243

 

Current assets

 

557,412

 

687,757

 

Payable to brokers and dealers and clearing organizations

 

81,214

 

171,214

 

Accrued compensation

 

54,087

 

120,158

 

Deferred revenue

 

28,487

 

27,883

 

Accounts payable, accrued expenses and other liabilities

 

29,885

 

42,548

 

Employee equity compensation payable

 

108

 

24,187

 

Lease liability

 

9,740

 

 

Payable to affiliates

 

6,050

 

5,009

 

Current liabilities

 

209,571

 

390,999

 

Working capital

 

$

347,841

 

$

296,758

 

Current assets

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2019

 

2018

 

 

(dollars in thousands)

Cash and cash equivalents

 

$

389,930

 

$

410,104

Restricted cash

 

 

1,200

 

 

1,200

Receivable from brokers and dealers and clearing organizations

 

 

747,660

 

 

174,591

Deposits with clearing organizations

 

 

12,101

 

 

11,427

Accounts receivable

 

 

95,398

 

 

87,192

Receivable from affiliates

 

 

3,515

 

 

3,243

Current assets

 

 

1,249,804

 

 

687,757

Securities sold under agreements to repurchase

 

 

24,938

 

 

 —

Payable to brokers and dealers and clearing organizations

 

 

713,020

 

 

171,214

Accrued compensation

 

 

94,652

 

 

120,158

Deferred revenue

 

 

28,557

 

 

27,883

Accounts payable, accrued expenses and other liabilities

 

 

41,452

 

 

42,548

Employee equity compensation payable

 

 

295

 

 

24,187

Lease liability

 

 

8,509

 

 

 —

Payable to affiliates

 

 

3,737

 

 

5,009

Tax receivable agreement liability

 

 

7,222

 

 

 

Current liabilities

 

 

922,382

 

 

390,999

Working capital

 

$

327,422

 

$

296,758

 

Current assets decreased

Current assets increased to $557.4 million$1.3 billion as of March 31,September 30, 2019 from $687.8 million as of December 31, 2018 due to payments for annual accrued compensation and employee equity compensation. In addition, there was a decreasean increase in receivable from brokers and dealers and clearing organizations resulting from a lowerhigher number of fails to deliver as a result of lowerincreased unsettled wholesale platform transactions. On October 1, 2019, approximately $698.8 million of the receivable from brokers and dealers and clearing organizations balance at September 30, 2019 was settled.

62

Current liabilities

Current liabilities decreasedincreased to $209.6$922.4 million as of March 31,September 30, 2019 from $391.0 million as of December 31, 2018 due to payments for annual accrued compensation and employee equity compensation. In addition, there was a decreasean increase in payable to brokers and dealers and clearing organizations resulting from a lowerhigher number of fails to receive as a result of lowerincreased unsettled wholesale platform transactions. On October 1, 2019, approximately $664.3 million of the payable from brokers and dealers and clearing organizations balance at September 30, 2019 was settled. In addition, there was a decrease in accrued compensation and employee equity compensation payments as a result of annual payments.

See Note 4 – Receivable to and Payable from Brokers and Dealers and Clearing Organizations to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for more information regarding the fails to deliver/receive and the subsequent settlement.

See “—Liquidity and Capital Resources—Factors Influencing Our Liquidity and Capital Resources—Capital Requirements.”

Cash Flows

Our cash flows for the threenine months ended March 31,September 30, 2019 and 2018 were as follows:

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

Three
Months
Ended
March 31,

2019

 

 

Three
Months
Ended

March 31,
2018

 

 

Successor

 

Predecessor

 

(in thousands)

 

 

Nine

 

Nine

Net cash flows (used in) operating activities

 

$

(21,079

)

 

$

(14,226

)

 

Months

 

Months

 

Ended

 

Ended

 

September 30, 

 

September 30, 

    

2019

    

2018

 

(in thousands)

Net cash flows provided by operating activities

 

$

190,465

 

$

164,828

Net cash flows (used in) investing activities

 

(8,283

)

 

(7,442

)

 

 

(29,767)

 

 

(25,850)

Net cash flows (used in) financing activities

 

(20,000

)

 

(25,000

)

 

 

(178,856)

 

 

(139,350)

Effect of exchange rate changes on cash and cash equivalents

 

866

 

 

1,813

 

 

 

(2,016)

 

 

(2,043)

Net decrease in cash and cash equivalents

 

$

(48,496

)

 

$

(44,855

)

 

$

(20,174)

 

$

(2,415)

 

Operating Activities

Operating activities consist primarily of net income adjusted for noncash items that include depreciation and amortization, stock-based compensation expense and contingent consideration and deferred revenue.consideration. Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for accrued compensation (primarily in the first quarter) and other items impact reported cash flows.

Net cash used inprovided by operating activities for the threenine months ended March 31,September 30, 2019 was $(21.1)$190.5 million, which wasan increase of 15.6% over 2018, and primarily driven by annual payments for accrued compensation and employee equity compensation. Net cash usedan increase in operating activities for the three months ended March 31, 2018 was $(14.2) million, which was primarily driven by annual payments for accrued compensation.gross revenue.

Investing Activities

Investing activities consist of software development costs, investments in technology hardware, purchases of equipment and other tangible assets, business acquisitions and investments.

Net cash used in investing activities was $8.3$29.8 million for the threenine months ended March 31,September 30, 2019, which consisted of $6.8$21.2 million of capitalized software development costs and $1.5$8.6 million of purchases of furniture, equipment, purchased software and leasehold improvements. Net cash used in investing activities was $7.4$25.8 million for the threenine months ended March 31,September 30, 2018, which consisted of $6.2$19.5 million of capitalized software development costs and $1.2$6.3 million of purchases of furniture, equipment, purchased software and leasehold improvements.

63

Financing Activities

Financing activities primarily consist of cash dividends to our Class A and Class B common stockholders and cash distributions from TWM LLC to the Original LLC Owners.

Owners during the pre-IPO period.

Net cash used in financing activities for the threenine months ended March 31,September 30, 2019 was $20.0$178.9 million, which consisted of purchases of LLC Interests of $1,161.3 million from certain of the Bank Stockholders using the net proceeds from the IPO, cash dividends to our Class A and Class B common stockholders of $22.9 million and capital distributions.distributions to the Original LLC Owners of $143.7 million, including a one-time distribution of $100.0 million paid in connection with the IPO. Net cash used in financing activities for the threenine months ended March 31,September 30, 2018 was $25.0$139.4 million, which consisted of capital distributions.distributions to the Original LLC Owners.

Non-GAAP Financial Measures

Free Cash Flow

In addition to cash flow from operating activities presented in accordance with GAAP, we use Free Cash Flow to measure liquidity. Free Cash Flow is defined as cash flow from operating activities less expenditures for capitalized software development costs and furniture, equipment and leasehold improvements.

We present Free Cash Flow because we believe it is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations after expenditures for capitalized software development costs and furniture, equipment and leasehold improvements.

Free Cash Flow has limitations as an analytical tool, and you should not consider Free Cash Flow in isolation or as an alternative to cash flow from operating activities or any other liquidity measure determined in accordance with GAAP. You are encouraged to evaluate each adjustment. In addition, in evaluating Free Cash Flow, you should be aware that in the future, we may incur expenditures similar to the adjustments in the presentation of Free Cash Flow. In addition, Free Cash Flow may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

The table set forth below presents a reconciliation of our cash flow from operating activities to Free Cash Flow for the threenine months ended March 31,September 30, 2019 and 2018:

 

 

 

 

 

 

    

Successor

    

Predecessor

 

Nine

 

Nine

 

Months

 

Months

 

Ended

 

Ended

 

Successor

 

 

Predecessor

 

 

September 30, 

 

September 30, 

 

Three
Months
Ended
March 31,
2019

 

 

Three
Months
Ended
March 31,
2018

 

 

2019

 

2018

 

(in thousands)

 

 

(in thousands)

Cash flow from operating activities

 

$

(21,079

)

 

$

(14,226

)

 

$

190,465

 

$

164,828

Less: Capitalization of software development costs

 

(6,767

)

 

(6,198

)

 

 

(21,200)

 

 

(19,523)

Less: Purchases of furniture, equipment and leasehold improvements

 

(1,516

)

 

(1,244

)

 

 

(8,567)

 

 

(6,327)

Free Cash Flow

 

$

(29,362

)

 

$

(21,668

)

 

$

160,698

 

$

138,978

 

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS

In addition to net income and net income attributable to Tradeweb Markets Inc., each presented in accordance with GAAP, we present Adjusted EBITDA, and Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin as a measuremeasures of our operating performance and Adjusted Net Income and Adjusted Net Income per diluted share (“Adjusted Diluted EPSEPS”) as a measuremeasures of our profitability.

64

Adjusted EBITDA, and Adjusted EBITDA margin,

Adjusted EBIT and Adjusted EBIT margin

Adjusted EBITDA is defined as net income before contingent consideration, net interest income, net, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including certain stock-based compensation expense and gains and losses from outstanding foreign exchange forward contracts and the revaluation of foreign denominated cash. Adjusted EBIT is defined as net income before contingent consideration, net interest income and provision for income taxes, adjusted for the impact of certain other items, including certain stock-based compensation expense, acquisition and Refinitiv Transaction-related depreciation and amortization and gains and losses from outstanding foreign exchange forward contracts and the revaluation of foreign denominated cash. Adjusted EBITDA margin isand Adjusted EBIT margin are defined as Adjusted EBITDA and Adjusted EBIT, respectively, divided by gross revenue for the applicable period. We present Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBITDAEBIT margin because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.  For example, we exclude contingent consideration because it is equity settled and its balance is based on our value at a certain time and may not reflect our actual operating performance. In addition, beginning with the second quarter of 2019, we expect to also exclude non-cash stock-based compensation expense associated with the Special Option Award discussed below under “— Critical Accounting Policies and Estimates — Stock-Based Compensation.Compensation, as well as non-cash stock-based compensation expense associated with options awarded to management and other employees following the IPO during 2019. We believe it will beis useful to exclude stock based

this stock-based compensation expense because the amount of expense associated with the Special Option Award and the post-IPO option awards in 2019 may not directly correlate to the underlying performance of our business and will vary across periods. We do not expect to exclude any non-cash stock-based compensation expense associated with options that may be awarded to management and other employees during 2020. With respect to Adjusted EBIT and Adjusted EBIT margin, we believe it is useful to exclude the depreciation and amortization of acquisition related tangible and intangible assets resulting from certain acquisitions, the Refinitiv Transaction and the application of pushdown accounting in order to facilitate a period-over-period comparison of our financial performance.

Management and our board of directors use Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBITDAEBIT margin to assess our financial performance and believe it is helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA and Adjusted EBITDA margin.

Adjusted Net Income and Adjusted Diluted EPS

We present Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. for post-IPO periods and Tradeweb Markets LLC for pre-IPO periods.  As discussed below, because Adjusted Net Income and Adjusted Diluted EPS give effect to certain tax related adjustments to reflect an assumed effective tax rate for all periods presented and, for post-IPO periods, assumes all LLC Interests held by non-controlling interests are exchanged for shares of Class A or Class B common stock, we believe that Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. and Tradeweb Markets LLC are comparable.

Adjusted Net Income is defined as net income beforeattributable to Tradeweb Markets Inc. assuming the full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A common stock or Class B common stock of Tradeweb Markets Inc., for post-IPO periods, and net income, for pre-IPO periods, in each case adjusted for contingent consideration, certain stock-based compensation expense, acquisition and Refinitiv Transaction related depreciation and amortization and gains and losses from outstanding foreign exchange forward contracts and the revaluation of foreign denominated cash. Adjusted Net Income also gives effect to certain tax related adjustments to reflect an assumed effective tax rate assumingand, for pre-IPO periods, assumes TWM LLC was subject to a corporate tax rate for the periods presented. Adjusted Diluted EPS is defined as Adjusted Net Income divided by the diluted weighted average number of shares of Class A common stock and Class B common stock outstanding for the applicable period. period, assuming the full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A common stock or Class B common stock, for post-IPO periods, and the diluted weighted average number of shares of TWM LLC outstanding for the applicable period, for pre-IPO periods. The diluted weighted average number of shares outstanding

65

for the pre-IPO periods and post-IPO periods give effect to potentially dilutive securities using the treasury stock method.

We use Adjusted Net Income and Adjusted Diluted EPS as supplemental metrics to evaluate our business performance in a way that also considers our ability to generate profit without the impact of certain items. In addition to excludingWe exclude contingent consideration, for the reasons described above, we believe it is useful to exclude the depreciation and amortization of acquisition related tangible and intangible assets resulting from certain acquisitions, the Refinitiv Transaction and the application of pushdown accounting in order to facilitate a period-over-period comparison of our financial performance. Beginning with the second quarter of 2019, we expect to also exclude stock-based compensation expense associated with the Special Option Award and the post-IPO option awards in 2019 and acquisition and Refinitiv Transaction-related depreciation and amortization for the reasons described above. Each of the normal recurring adjustments and other adjustments described in the definition of Adjusted Net Income helps to provide management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses.

In addition to excluding items that are non-recurring or may not be indicative of our ongoing operating performance, by assuming the full exchange of all outstanding LLC Interests held by non-controlling interests, we believe that Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period, because it eliminates the effect of any changes in net income attributable to Tradeweb Markets Inc. driven by increases in our ownership of TWM LLC, which are unrelated to our operating performance.

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS have limitations as analytical tools, and you should not consider these non-GAAP financial measures in isolation or as alternatives to net income attributable to Tradeweb Markets Inc., net income, operating income, gross margin, net incomeearnings per diluted share or any other financial measure derived in accordance with GAAP. You are encouraged to evaluate each adjustment and, as applicable, the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of these non-GAAP financial measures. Our presentation of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

66

The table set forth below presents a reconciliation of net income to Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBITDAEBIT margin for the three and nine months ended March 31,September 30, 2019 and 2018:

 

 

Successor

 

 

Predecessor

 

 

 

Three
Months
Ended
March 31,
2019

 

 

Three
Months
Ended
March 31,
2018

 

 

 

(in thousands)

 

Net income

 

$

42,352

 

 

$

45,308

 

Contingent consideration

 

 

 

10,070

 

Interest income, net

 

(858

)

 

(471

)

Depreciation and amortization

 

33,503

 

 

16,268

 

Provision for income taxes

 

4,783

 

 

2,518

 

Unrealized foreign exchange (gains) / losses

 

(293

)

 

(968

)

(Gain) / loss from revaluation of foreign denominated cash(1)

 

860

 

 

(44

)

Adjusted EBITDA

 

$

80,347

 

 

$

72,681

 

Adjusted EBITDA margin(2)

 

43.0

%

 

42.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

   

 

Predecessor

  

 

 

Three

 

Nine

 

 

Three

 

Nine

 

 

 

Months

 

Months

 

 

Months

 

Months

 

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2019

  

  

2018

    

2018

 

 

 

(in thousands)

 

Net income

 

$

48,578

 

$

115,746

 

 

$

45,955

 

$

130,160

 

Contingent consideration

 

 

 —

 

 

 —

 

 

 

(2,537)

 

 

26,830

 

Interest income, net

 

 

(636)

 

 

(1,669)

 

 

 

(673)

 

 

(1,726)

 

Depreciation and amortization

 

 

35,133

 

 

102,928

 

 

 

16,362

 

 

48,808

 

Stock-based compensation expense(1)

 

 

1,995

 

 

22,398

 

 

 

 —

 

 

 —

 

Provision for income taxes

 

 

10,316

 

 

21,413

 

 

 

7,535

 

 

11,900

 

Unrealized foreign exchange (gains) / losses

 

 

(2,499)

 

 

(1,215)

 

 

 

407

 

 

(960)

 

(Gain) / loss from revaluation of foreign denominated cash(2)

 

 

562

 

 

1,120

 

 

 

(466)

 

 

(921)

 

Adjusted EBITDA

 

$

93,449

 

$

260,721

 

 

$

66,583

 

$

214,091

 

Less: Depreciation and amortization

 

 

(35,133)

 

 

(102,928)

 

 

 

(16,362)

 

 

(48,808)

 

Add: Acquisition and Refinitiv Transaction related D&A(3)

 

 

24,780

 

 

72,122

 

 

 

6,513

 

 

19,576

 

Adjusted EBIT

 

$

83,096

 

$

229,915

 

 

$

56,734

 

$

184,859

 

Adjusted EBITDA margin(4)

 

 

46.5

%

$

45.1

 

$

40.3

%

$

42.3

%

Adjusted EBIT margin(4)

 

 

41.3

%

$

39.8

 

$

34.3

%

$

36.5

%


(1)

Represents non-cash stock-based compensation expense associated with the Special Option Award and post-IPO options awarded in the third quarter of 2019.

(2)

(1)Represents foreign exchange gain or loss from the revaluation of cash denominated in a different currency than the entity’s functional currency.

(3)

Represents acquisition-related intangibles amortization and increased tangible asset and capitalized software depreciation and amortization resulting from the Refinitiv Transaction and the application of pushdown accounting (where all assets were marked to fair value as of the closing date of the Refinitiv Transaction).

(4)

For the three and nine months ended September 30, 2019, Adjusted EBITDA margin increased compared to the prior year period by 620 and 276 basis points, respectively, or 672 and 326 basis points on a constant currency basis. For the three and nine months ended September 30, 2019 and 2018, Adjusted EBIT margin increased compared to the prior year period by 701 basis points and 321 basis points, respectively, or 770 basis points and 386 basis points on a constant currency basis. Changes in Adjusted EBITDA margin and Adjusted EBIT margin on a constant currency basis, which are non-GAAP financial measures, are defined as the changes in Adjusted EBITDA margin and Adjusted EBIT margin excluding the effects of foreign currency fluctuations. Adjusted EBITDA margin and Adjusted EBIT margin excluding the effects of foreign currency fluctuations are calculated by translating the current period and prior period’s results using the average exchange rates for 2018. We use changes in Adjusted EBITDA margin and Adjusted EBIT margin on a constant currency basis as supplemental metrics to evaluate our underlying margin performance between periods by removing the impact of foreign currency fluctuations. We believe that providing changes in Adjusted EBITDA margin and Adjusted EBIT margin on a constant currency basis provide useful comparisons of our Adjusted EBITDA margin and Adjusted EBIT margin and trends between periods.

67

(2)         Adjusted EBITDA margin increased by 14 basis points or 80 basis points on a constant currency basis. Adjusted EBITDA margin growth on a constant currency basis, which is a non-GAAP financial measure, is defined as Adjusted EBITDA margin growth excluding the effects of foreign currency fluctuations. Adjusted EBITDA margin excluding the impact of foreign currency fluctuations is calculated by translating the current period and prior period’s results using the average exchange rates for 2018. We use Adjusted EBITDA margin growth on a constant currency basis as a supplemental metric to evaluate our underlying margin performance between periods by removing the impact of foreign currency fluctuations. We believe that providing Adjusted EBITDA margin growth on a constant currency basis provides a useful comparison of our Adjusted EBITDA margin and trends between periods.

The table set forth below provides a reconciliation of net income attributable to Tradeweb Markets Inc. and net income, as applicable, to Adjusted Net Income and Adjusted Diluted EPS for the three and nine months ended March 31,September 30, 2019 and 2018:

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months
Ended March
31, 2019

 

 

Three Months
Ended March
31, 2018

 

    

Successor

  

  

Predecessor

  

 

(in thousands)

 

 

Three

 

Nine

 

 

Three

 

Nine

 

Net income per diluted share

 

$

0.19

 

 

$

0.21

 

 

Months

 

Months

 

 

Months

 

Months

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

2019

    

2019

 

 

2018

    

2018

 

 

(in thousands except share and per share amounts)

 

Earnings per diluted share(1)

 

$

0.20 (b)

 

$

0.19 (a)  /
0.28
(b) 

 

 

$

0.21 (a)

 

$

0.60 (a)

 

Pre-IPO net income attributable to Tradeweb Markets LLC (1)

 

 

 —

 

 

42,352 (a)

 

 

 

45,955 (a)

 

 

130,160 (a)

 

Add: Net income attributable to Tradeweb Markets Inc.(1)

 

 

29,612 (b)

 

 

42,440 (b)

 

 

 

 —

 

 

 —

 

Add: Net income attributable to non-controlling interests (1)(2)

 

 

18,966 (b)

 

 

30,954 (b)

 

 

 

 —

 

 

 —

 

Net income

 

$

42,352

 

 

$

45,308

 

 

$

48,578 (b)

 

$

115,746 (a)(b)

 

 

$

45,955 (a)

 

$

130,160 (a)

 

Provision for income taxes

 

4,783

 

 

2,518

 

 

 

10,316

 

 

21,413

 

 

 

7,535

 

 

11,900

 

Contingent consideration

 

 

 

10,070

 

 

 

 —

 

 

 —

 

 

 

(2,537)

 

 

26,830

 

Acquisition and Refinitiv Transaction related depreciation and amortization(1)

 

23,209

 

 

6,506

 

Acquisition and Refinitiv Transaction related D&A(3)

 

 

24,780

 

 

72,122

 

 

 

6,513

 

 

19,576

 

Stock-based compensation expense(4)

 

 

1,995

 

 

22,398

 

 

 

 —

 

 

 —

 

Unrealized foreign exchange (gains) / losses

 

(293

)

 

(968

)

 

 

(2,499)

 

 

(1,215)

 

 

 

407

 

 

(960)

 

(Gain) / loss from revaluation of foreign denominated cash(2)

 

860

 

 

(44

)

(Gain) / loss from revaluation of foreign denominated cash(5)

 

 

562

 

 

1,120

 

 

 

(466)

 

 

(921)

 

Adjusted Net Income before income taxes

 

70,911

 

 

63,390

 

 

 

83,732

 

 

231,584

 

 

 

57,407

 

 

186,585

 

Adjusted income taxes(3)

 

(18,721

)

 

(16,735

)

Adjusted income taxes(6)

 

 

(22,105)

 

 

(61,139)

 

 

 

(15,155)

 

 

(49,258)

 

Adjusted Net Income

 

$

52,190

 

 

$

46,655

 

 

$

61,627

 

$

170,445

 

 

$

42,252

 

$

137,327

 

Diluted weighted average number of shares outstanding

 

222,320,457

 

 

213,435,321

 

Adjusted Diluted EPS

 

$

0.23

 

 

$

0.22

 

Adjusted Diluted EPS (1)(7)

 

$

0.27 (b)

 

$

0.23 (a)  /
0.51
(b) 

 

 

$

0.19 (a)

 

$

0.64 (a)

 


 


(1)

In April 2019, we completed the Reorganization Transactions and the IPO.  Therefore, certain earnings information is being presented separately for Tradeweb Markets LLC and Tradeweb Markets Inc.

a)

Presents information for Tradeweb Markets LLC (pre-IPO period).

b)

Presents information for Tradeweb Markets Inc. (post-IPO period).  

(1)         Represents acquisition relatedSee Note 18 – Earnings Per Share to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

(2)

For post-IPO periods, represents the reallocation of net income attributable to non-controlling interests from the assumed exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A or Class B common stock.

(3)

Represents acquisition-related intangibles amortization and increased tangible asset and capitalized software depreciation and amortization resulting from the Refinitiv Transaction and the application of pushdown accounting (where all assets were marked to fair value as of the closing date of the Refinitiv Transaction).

(4)

Represents non-cash stock-based compensation expense associated with the Special Option Award and post-IPO options awarded in the third quarter of 2019.

(5)

Represents foreign exchange gain or loss from the revaluation of cash denominated in a different currency than the entity’s functional currency.

(6)

Represents corporate income taxes at an assumed effective tax rate of 26.4% for all periods presented applied to Adjusted Net Income before income taxes. For pre-IPO periods, this adjustment assumes Tradeweb Markets LLC was subject to a corporate tax rate for the periods presented.

(7)

Due to the Reorganization Transactions and the IPO completed in April 2019, shares outstanding during the nine months ended September 30, 2019 represent shares of TWM LLC (pre-IPO period) and shares of Class A and Class B common stock of Tradeweb Markets Inc. (post-IPO period).

68

The following table summarizes the Refinitiv Transaction and the applicationcalculation of pushdown accounting (where all assets were marked to fair value as of the closing date of the Refinitiv Transaction).

(2)         Represents foreign exchange gain or loss from the revaluation of cash denominated in a different currency than the entity’s functional currency.

(3)         Represents corporate income taxes at an assumed effective tax rate of 26.4%,Adjusted Diluted EPS for the three and nine months ended March 31,September 30, 2019 and 2018 applied to Adjusted Net Income before income taxes.2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-IPO Period

 

Post-IPO Period

 

 

 

 

 

 

 

 

Three

 

Nine

 

Nine

 

Three

 

Nine

 

 

Months

 

Months

 

Months

 

Months

 

Months

 

 

Ended

 

Ended

 

Ended

 

Ended

 

Ended

Reconciliation of Diluted Weighted Average Shares Outstanding to

 

September 30, 

 

September 30, 

 

September 30, 

 

September 30, 

 

September 30, 

Adjusted Diluted Weighted Average Shares Outstanding

   

2019

   

2019

   

2019

   

2018

   

2018

Diluted weighted average TWM LLC shares outstanding

 

 

 —

 

 

223,320,457

 

 

 —

 

 

219,165,997

 

 

215,365,920

Diluted weighted average shares of Class A and Class B common stock outstanding

 

 

151,362,643

 

 

 —

 

 

151,158,760

 

 

 —

 

 

 —

Assumed exchange of LLC interests for shares of Class A or Class B common stock (1)

 

 

79,289,005

 

 

 —

 

 

79,289,005

 

 

 —

 

 

 —

Adjusted diluted weighted average shares outstanding

 

 

230,651,648

 

 

223,320,457

 

 

230,447,765

 

 

219,165,997

 

 

215,365,920

Adjusted Net Income (in thousands)

 

$

61,627

 

$

52,190

 

$

118,255

 

$

42,252

 

$

137,327

Adjusted Diluted EPS

 

$

0.27

 

$

0.23

 

$

0.51

 

$

0.19

 

$

0.64

 

(1)

Assumes the full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A or Class B common stock, resulting in the elimination of the non-controlling interests and recognition of the net income attributable to non-controlling interests.

Off-Balance Sheet Arrangements

As of March 31,September 30, 2019, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP which requires us to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Management evaluates its accounting policies, estimates and judgments on an on-going basis.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following policies are most critical to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective or complex judgments in estimating the effect of inherent uncertainties. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in “NoteNote 2 — Summary of Significant Accounting Policies”Policies to theour unaudited consolidated financial statements of Tradeweb Markets LLC included elsewhere in this Quarterly Report on Form 10-Q.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in our consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Management bases its estimates on historical experience, observance of trends in particular areas, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Information from these sources form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Therefore, actual results could differ materially from those estimates. Such estimates include pushdown accounting, intangible assets, goodwill, software development costs, stock based compensation, contingent consideration payable and current and deferred income taxes.

Pushdown Accounting

The Refinitiv Transaction was accounted for by Refinitiv in accordance with the acquisition method of accounting pursuant to ASC 805 “Business Combinations” and pushdown accounting was applied to Refinitiv to record the fair value of the assets and liabilities of Refinitiv on the date of the Refinitiv Transaction. We, as a consolidating subsidiary of Refinitiv, also accounted for the Refinitiv Transaction using pushdown accounting. Under pushdown accounting, the

69

excess of our fair value above the fair value accounting basis of our net assets and liabilities is recorded as goodwill. The fair value of assets acquired and liabilities assumed was determined based on assumptions that reasonable market participants would use in the principal (or most advantageous) market for the asset or liability.

In determining the fair value of the assets acquired and the liabilities assumed, we considered a report of a third-party valuation expert. Management is responsible for these internal and third-party valuations and appraisals and they are continuing to review the amounts and allocations to finalize these amounts. We have one year from the date of the Refinitiv Transaction to finalize these amounts.appraisals.

Intangible Assets

We amortize our intangible assets over the estimated useful lives and test for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. We test our intangible assets with an indefinite useful life for impairment at least annually. An impairment loss is recognized if the sum of the estimated undiscounteddiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value. Intangible assets are amortized over their estimated useful lives of seven to sixteen years.

Goodwill

Goodwill arises out of pushdown accounting and business combinations and is the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date. We test our goodwill at least annually for impairment and recognize an impairment loss if the estimated fair value of a reporting unit is less than its net book value. The Company is one reporting unit for goodwill impairment testing purposes. The fair value of a reporting unit is calculated using a discounted cash flow or a revenuesbased on the fair market value of the Company’s Class A and earnings multiple approach.B common shares. We calculate such loss as the difference between the

estimated fair value of goodwill and its carrying value. If future events or results differ adversely from the estimates and assumptions made at acquisition or as part of subsequent impairment tests, we may record increased amortization or impairment charges in the future.

Software Development Costs

We capitalize certain costs associated with the development of internal use software at the point at which the conceptual formulation, design and testing of possible software project alternatives have been completed, including among other items, employee compensation and related benefits and third-party consulting costs incurred during the application development stage which directly contribute to such development. Once the product is ready for its intended use, suchSuch costs are amortized on a straight-line basis over three years. Costs capitalized as part of the pushdown accounting allocation are amortized over nine years. We review the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable, or that their useful lives are shorter than originally expected. Due to rapidly changing technology and the uncertainty of the software development process itself, future results could be affected if management’s current assessment of its software projects differs from actual performance.

Revenue Recognition

We earn transaction fees from transactions executed on our trading platforms through various fee plans. Transaction fees are generated on both a variable and fixed price basis and vary by geographic region, product type and trade size. For variable transaction fees, we charge clients fees based on the mix of products traded and the volume of transactions executed.

We earn subscription fees primarily for granting clients access to our markets for trading and market data. Subscription fees are generally generated on a fixed price basis.

We earn commission revenue from our electronic and voice brokerage services on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy and sell price of the transacted product.

We earn fees from Refinitiv relating to the sale of market data to Refinitiv, which redistributes that data. Included in these fees are real-time market data fees which are recognized in the period that the data is provided, generally on a monthly basis, and fees for historical data sets which are recognized when the historical data set is provided to Refinitiv.

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the measurement or timing of recognition of revenue in any prior reporting periods. However, in the current reporting period, we were  We are required to make significant judgements for the Refinitiv market data fees. Significant judgements used in accounting for this contract include:

·

·The provision of real-time market data feeds and annual historical data sets are distinct performance obligations.

·

The performance obligations under this contract are recognized over time from the initial delivery of the data feeds or each historical data set until the end of the contract term.

70

·

Determining the transaction price for the performance obligations by using a market assessment analysis. Inputs in this analysis include a consultant study which determined the overall value of our market data and pricing information for historical data sets provided by other companies.

·                    The performance obligations under this contract are recognized over time from the initial delivery of the data feeds or each historical data set until the end of the contract term.

·                    Determining the transaction price for the performance obligations by using a market assessment analysis. Inputs in this analysis include a consultant study which determined the overall value of our market data and pricing information for historical data sets provided by other companies.

Stock-Based Compensation

The stock-based compensation that our employees receive areis accounted for as equity or liability awards. As a stock-based equity award, the Company measures and recognizes the cost of employee services received in exchange for awards of equity instruments based on their estimated fair values measured as of the grant date. These costs are recognized as an expense over the requisite service period, with an offsetting increase to members’additional paid-in capital.

As a stock-based liability award, the cost of the employee services received in exchange for an award of equity instruments is generally measured based on the grant-date fair value of the award. The fair value of that award is remeasured subsequently at each reporting date through to settlement. Changes in the fair value of the equity instrument are recognized as compensation cost over that period in our consolidated statements of income.

TheFor grants made during the post-IPO period, the fair value of the equity instruments is determined in accordance withbased on the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately Held Company Securities Issued as Compensation. Factors that are considered in determining the fair value include forecasted future cash flows, the weighted average cost of capital, and the performance multiples of comparable companies.

In October 2018, following the closingprice of the Refinitiv Transaction,Company’s Class A common stock on the grant date.

Prior to the IPO, we made a special award ofawarded options to management and other employees (the(collectively, the “Special Option Award”) under ourthe Amended and Restated Tradeweb Markets Inc. Option Plan. In accounting for the options issued under this plan, we measure and recognize compensation expense for all awards based on their estimated fair values measured as of the grant date. Costs related to these options will beare recognized as an expense in our consolidated statements of income over the requisite service period, with an offsetting increase to additional paid-in capital. We expect the non-cash stock-based compensation expense associated with the Special Option Award to be between approximately $33.5 million and $35.7 million, respectively, which is expectedwe started to be expensedexpense beginning in the second quarter of 2019, with a charge of $20.4 million ($18.9 million of which was charged immediately upon the completion of the IPO), and continuingwill continue to expense over the following three years. For more information, please see “Executive Compensation—Narrative Disclosure to Summary Compensation Table—Amended and Restated Tradeweb Markets Inc. 2018 Share Option Plan” in the IPOOctober Prospectus.

We use the Black-Scholes pricing model to value some of our share-based paymentstock-based awards. Determining the appropriate fair value model and calculating the fair value of the share-based paymentstock-based awards requires the input of highly subjective assumptions, including the expected life of the share-based paymentstock-based awards, the number of expected share-based paymentstock-based awards that will be forfeited prior to the completion of the vesting requirements, and the stock price volatility.

Income Taxes

Tradeweb Markets Inc. is subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and is taxed at prevailing corporate tax rates. TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly any taxable income generated by TWM LLC is not requiredpassed through to maintain anand included in the taxable income tax provision on its earnings. Therefore, the remaining tax effects of its activities accrue directly to its partners.members, including us for the post-IPO period, on a pro rata basis. TWM LLC records taxes for conducting business in certain state, local and foreign jurisdictions and records U.S. federal taxes for subsidiaries that are taxed as corporations for U.S, tax purposes. We currently record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measure the deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse. We believe that it is more likely than not that the Company will be able to realize its deferred tax assets in the future,future; therefore, no valuation allowance is necessary. Tradeweb Markets Inc. is subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income of TWM LLC and will be taxed at prevailing corporate tax rates.

We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes in our consolidated statements of income. Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in our consolidated statements of financial condition.

71

We have elected to treat taxes due on future U.S. inclusions in taxable income under the GILTI provision of the Tax Cuts and Jobs Act as a current period expense when incurred.

Tax Receivable Agreement

Tradeweb Markets Inc. entered into a Tax Receivable Agreement with TWM LLC and the Continuing LLC Owners which provides for the payment by Tradeweb Markets Inc. to a Continuing LLC Owner of 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that Tradeweb Markets Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of TWM LLC’s assets resulting from (a) the purchase of LLC Interests from such Continuing LLC Owner, including with the net proceeds from the IPO and any future offering or (b) redemptions or exchanges by such Continuing LLC Owner of LLC Interests for shares of Class A common stock or Class B common stock or for cash, as applicable, and (ii) certain other tax benefits related to Tradeweb Markets Inc. making payments under the Tax Receivable Agreement.

We recorded an initial liability of $171.4 million related to our projected obligations under the Tax Receivable Agreement with respect to LLC Interests that were purchased by us using the net proceeds from the IPO. The impact of any changes in the projected obligations under the Tax Receivable Agreement as a result of changes in the geographic mix of the our earnings, changes in tax legislation and tax rates or other factors that may impact our tax savings will be reflected in income before taxes in the period in which the change occurs.

Contingent Consideration

In 2014, we issued Class A Shares and unvested Class P-1(A)P‑1(A) Shares to some of the Bank Stockholders as a result of a capital contribution to facilitate our expansion into new credit products. The proceeds from the issuance of the shares were included in members’ capital. In connection with the investment, certain employees also invested in the Company and were issued Class C Shares and unvested Class P-1(C)P‑1(C) Shares. The proceeds from the issuance of these shares were included in members’ capital. The Class A Shares and Class C Shares issued in connection with the investment equally participated in the earnings of the Company together with the other Class A Shares, Class P(A) Shares, Class C Shares and Class P(C) Shares of the Company. Most of the holders of Class A shares had the right to appoint members to the board of managers of the Company. The Class P-1(A)P‑1(A) Shares and Class P-1(C)P‑1(C) Shares did not have any earnings participation rights, nor did any of the Class P-1(A)P‑1(A) Shares have the right to appoint members to the former board of managers, until they vested. The Class P-1(A)P‑1(A) Shares and Class P-1(C)P‑1(C) Shares vested in July 2018 upon the achievement of specific revenue earnout milestones related to the growth of our credit products, as defined by the agreement, from August 2014 through the vesting date of July 2018.

Prior to the July 2018 vesting, we recognized contingent consideration with respect to the potential vesting of Class P-1(A)P‑1(A) Shares and Class P-1(C)P‑1(C) Shares as a contra-revenue adjustment in accordance with ASC 605-50-45-2605‑50‑45‑2 because the vesting could be viewed as a sales incentive to participating Bank Stockholders since they are also customers of the Company. The contingent consideration for each reporting period was calculated by estimating the final contingent consideration value using a monte carlo simulation and recognizing that value on a straightline basis over the 48 month

48-month period of the agreement, adjusting at each reporting period for any changes in the final value estimate. The revenue milestones provided that shares would vest only if certain credit revenue milestones would be achieved in the twelve months ended July 2016, 2017 and 2018.

As a result of achieving these milestones, the final earnout amount was calculated based on the credit revenues during the twelve months ended July 31, 2018. On July 31, 2018, members’ capital increased by $150.5 million as a result of the vesting of the Class P-1(A)P‑1(A) Shares and employee equity compensation payable increased by $5.7 million as a result of the vesting of the Class P-1(C)P‑1(C) Shares. The value of the vested Class P-1(C)P‑1(C) Shares was included in employee equity compensation payable because the Class P-1(C)P‑1(C) were owned for less than six months by employees who had the ability to exercise a put option of those shares under certain conditions under their control.

72

Recent Accounting Pronouncements

– Recently Adopted

Effective January 1, 2019, we adopted ASC 842, Leases. This standard requires us to recognize a right-of-use asset and a lease liability for all leases with an initial term in excess of twelve months. The asset reflects the present value of unpaid lease payments coupled with initial direct costs, prepaid lease payments and lease incentives. The amount of the lease liability is calculated as the present value of unpaid lease payments. We adopted ASC 842 prospectively and elected to take the package of practical expedients allowing us not to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases.

On January 1, 2019, upon the adoption of ASC 842, the Companywe recorded right-to-use assets of $34.8 million, lease liabilities of $39.6 million and eliminated deferred rent of $4.9 million.

See “NoteNote 2 — Summary of Significant Accounting Policies”Policies to theour unaudited consolidated financial statements of Tradeweb Markets LLC included elsewhere in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements not yet adopted.

Effects of Inflation

While inflation may impact our revenues and operating expenses, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.

Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Foreign Currency and Derivative Risk

We have global operations and substantial portions of our revenues, expenses, assets and liabilities are generated and denominated in non-U.S. dollar currencies. During

The following table shows the three months ended March 31, 2019 and  2018 approximately 30.3% and 29.1%, respectively,percentage breakdown of our gross revenue and 15.1% and 16.1%, respectively, of our operating expenses were denominated in currencies other than the U.S. dollar almost entirelyfor the Euro for gross revenuethree and the British pound sterling for operating expenses.nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

  

 

 

Three

 

Nine

 

 

Three

 

Nine

 

 

 

Months

 

Months

 

 

Months

 

Months

 

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

 

2019

    

2019

 

 

2018

    

2018

 

% of revenue denominated in foreign currencies (1)

 

 

32

%

 

31

%

 

 

30

%

 

29

%

% of operating expenses denominated in foreign currencies (2)

 

 

16

%

 

15

%

 

 

19

%

 

17

%

(1)

Gross revenue in foreign currencies is primarily denominated in Euros.

(2)

Operating expenses in foreign currencies are primarily denominated in British pounds.

Since our consolidated financial statements are presented in U.S. dollars, we must translate revenues and expenses, as well as assets and liabilities, into U.S. dollars. Accordingly, increases or decreases in the value of the U.S. dollar

73

against the other currencies will affect our net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies. Revenues and expenses denominated in currencies other than the U.S. dollar are translated at the rate of exchange prevailing at the transaction date. Assets and liabilities denominated in foreign currencies are translated at the rate prevailing at the end of the reporting period. Any gain or loss resulting from the translation of assets and liabilities is included as a component of comprehensive income.

FluctuationsThe following table shows the change in gross revenue and operating income caused by fluctuations in foreign currency rates decreased our gross revenue by approximately $2.3 million forduring the three and nine months ended March 31,September 30, 2019 and decreased our operating income by approximately $3.1 million for2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

 

 

Three

 

Nine

 

 

Three

 

Nine

 

 

Months

 

Months

 

 

Months

 

Months

 

 

Ended

 

Ended

 

 

Ended

 

Ended

Impact of Foreign Currency Rate Fluctuations

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

(amounts in thousands)

 

2019

    

2019

 

 

2018

    

2018

Increase (decrease) in gross revenue

 

$

(3,600)

 

$

(8,400)

 

 

$

(500)

 

$

1,600

Increase (decrease) in operating income

 

$

(1,200)

 

$

(6,400)

 

 

$

(300)

 

$

3,000

��

The following table shows the three months ended March 31, 2019. Fluctuations in foreign currency rates increased our gross revenue by approximately $1.5 million

for the three months ended March 31, 2018 and increased our operating income by approximately $1.4 million for the three months ended March 31, 2018. Based on actual results for the three months ended March 31, 2019 and 2018,impact a hypothetical 10% increase or decrease in the U.S. dollar against all other currencies would have decreased or increasedon actual gross revenue by approximately $5.7 million and $4.9 million, respectively, and operating income by approximately $3.6 millionfor the three and $3.1 million, respectively.nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Successor

  

  

Predecessor

 

 

Three

 

Nine

 

 

Three

 

Nine

 

 

Months

 

Months

 

 

Months

 

Months

 

 

Ended

 

Ended

 

 

Ended

 

Ended

Hypothetical 10% Change in Value of U.S. Dollar

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

(amounts in thousands)

 

2019

    

2019

 

 

2018

    

2018

Effect of 10% change on gross revenue

 

+/-

$ 6,500

 

+/-

$ 18,000

 

 

+/-

$ 5,000

 

+/-

$ 14,900

Effect of 10% change on operating income

 

+/-

$ 4,200

 

+/-

$ 11,400

 

 

+/-

$ 2,700

 

+/-

$ 9,000

 

We have derivative risk relating to our foreign currency forward contracts. We enter into foreign currency forward contracts to mitigate our U.S. dollar and British pound sterling versus Euro exposure, generally with a duration of less than fourteentwelve months. We do not use derivative instruments for trading or speculative purposes. As of March 31,September 30, 2019 and December 31, 2018, the notional amount of our foreign currency forward contracts was $58.2$82.5 million and $1.7 million, respectively.

By using derivative instruments to hedge exposures to foreign currency fluctuations, we are exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we are not exposed to the counterparty’s credit risk in those circumstances. We attempt to minimize counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is at least upper-medium investment grade.

Credit Risk

We have credit risk relating to our receivables, which are primarily receivables from financial institutions, including investment managers and brokers and dealers. At March 31,September 30, 2019 and December 31, 2018, we established an allowance for doubtful accounts of $1.3 million and $1.2 million, respectively, with regard to these receivables.

In the normal course of our business we, as an agent, execute transactions with, and on behalf of, other brokers and dealers. If these transactions do not settle because of failure to perform by either counterparty, we may be obligated to discharge the obligation of the non-performing party and, as a result, may incur a loss if the market value of the instrument is different than the contractual amount. This credit risk exposure, can be directly impacted by volatile trading markets, as our clients may be unable to satisfy their contractual obligations during volatile trading markets.

74

Our policy is to monitor our market exposure and counterparty risk. Counterparties are evaluated for creditworthiness and risk assessment prior to our initiating contract activities. The counterparties’ creditworthiness is then monitored on an ongoing basis, and credit levels are reviewed to ensure that there is not an inappropriate concentration of credit outstanding to any particular counterparty.

For additional information, see Note 16 – Credit Risk to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e)‑15(e) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.10‑Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q10‑Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the quarter ended March 31,September 30, 2019 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Except as set forth below, thereThere have been no material changes from the legal proceedings previously disclosed under the heading “Business—Legal Proceedings” in the IPO Prospectus. The legal proceeding described below has been disclosed previously in the IPO Prospectus. The matter is described in this Quarterly Report on Form 10-Q to include certain developments in the case since we filed the IPOOctober Prospectus.

 

IDC Matter

In September 2015, IDC Financial Publishing, Inc. (“IDC”) filed a lawsuit in the United States District Court for the Eastern District of Wisconsin against BondDesk Group LLC and Tradeweb Markets LLC (together, the “Tradeweb Parties”), and Fidelity Global Brokerage Group, Inc., Fidelity Brokerage Services, LLC, and National Financial Services, LLC (collectively, “Fidelity”), captioned IDC Financial Publishing Inc. v. BondDesk Group LLC, et al., Case No. 2:15-cv-01085-PP, relating to the distribution of IDC’s financial strength ratings over Tradeweb’s trading platform to Fidelity, its registered investment advisors and Fidelity’s correspondent banks. IDC alleges that while certain business units of Fidelity were licensed to receive its data via Tradeweb’s platform, the IDC data was also distributed without authorization to Fidelity’s institutional customers for approximately five years. The complaint, as amended, asserts claims for breach of contract and intentional misrepresentation against all of the defendants (as well as a claim of tortious interference with contract against Fidelity). IDC claims to have suffered approximately $80 million in damages and also seeks punitive damages, attorneys’ fees and costs. The defendants answered the complaint denying the claims and asserting various affirmative defenses. The Tradeweb Parties and Fidelity have moved for summary judgment dismissing IDC’s claims and rejecting its damage theory as speculative and contrary to the evidence, and IDC has sought partial summary judgment dismissing several of the Tradeweb Parties’ and Fidelity’s affirmative defenses. Those motions remain pending. The Court has scheduled oral argument on those motions for September 2019. In April 2019, the Court adjourned the scheduled trial date, which had been set for July 2019, until March 2020. We intend to continue to vigorously defend what we believe to be meritless and excessive claims.

ITEM 1A. RISK FACTORS

There have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in the IPOOctober Prospectus, which is accessible on the SEC’s website at www.sec.gov.www.sec.gov.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

Unregistered Sales of Equity Securities

In connection with the Reorganization Transactions, Tradeweb Markets Inc., among other things, issued an aggregate of 96,933,192 shares of Class B common stock to Refinitiv Parent Limited. In addition, in connection with the Reorganization Transactions, Tradeweb Markets Inc. issued 20,000,000 shares of Class C common stock and 105,289,005 shares of Class D common stock to the Continuing LLC Owners. These equityholders also received LLC Interests and an immaterial amount of cash in lieu of the issuance of any fractional interests. Holders of Class B common stock may from time to time exchange all or a portion of their shares of Class B common stock for newly issued shares of Class A common stock on a one-for-one basis. In addition, the LLC Interests are redeemable for newly issued shares of Class A common stock or Class B common stock on a one-for-one basis. For further information, see “Description of Capital Stock” in the IPO Prospectus. The issuances of the Class B common stock, Class C common stock and Class D common stock described in this paragraph were made in reliance on Section 4(a)(2) of the Securities Act. The Company relied on this exemption from registration based in part on the nature of the transactions and the various representations made by the parties thereto.

Use of Proceeds

On April 8, 2019, we completed the IPO by issuing 46,000,000 shares of Class A common stock, which included 6,000,000 shares of Class A common stock issued in connection with the underwriters’ exercise in full of their option to purchase additional shares of Class A common stock. The shares of Class A common stock sold in the offering were registered under the Securities Act pursuant to the Registration Statement on Form S-1 (File No. 333-333-230115), which was declared effective by the SEC on April 3, 2019, and the Registration Statement on Form S-1 (File No. 333-230715), which became effective upon filing with the SEC on April 3, 2019. The shares of Class A common stock are listed on the Nasdaq Global Select Market under the symbol “TW.” The shares of Class A Common Stock were sold at an initial public offering price of $27.00 per share. The offering closed on April 8, 2019, resulting in net proceeds of $1,161.3 million after deducting underwriting discounts and commissions of $80.7 million. We also incurred offering expenses of approximately $12.1 million in connection with the IPO. J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC acted as joint lead book-running managers in the IPO. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., UBS Securities LLC and Wells Fargo Securities, LLC acted as joint book-running managers for the IPO. Jefferies LLC and Sandler O’Neill & Partners, L.P. acted as co-managers for the IPO.

We used the net proceeds from the IPO to purchase 46,000,000 issued and outstanding LLC Interests from certain of the Bank Stockholders (and cancelled 9,993,731 shares of Class C common stock and 36,006,269 shares of Class D common stock), at a purchase price per interest equal to the IPO price per share of Class A common stock, less the underwriting discounts and commissions payable thereon.

There has been no material change in the use of proceeds as described in the IPO Prospectus.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION

We are providing the following disclosure in lieu of filing a Current Report on Form 8-K relating to Item 1.01—Entry into a Material Definitive Agreement of Form 8-K.

None.

ITEM 6. EXHIBITSRevolving Credit Facility Amendment

On November 7, 2019, TWM LLC entered into that certain First Amendment to Credit Agreement (the “First Amendment”) among TWM LLC and the lenders party thereto, which First Amendment amends that certain Credit Agreement (the “Credit Agreement”), dated as of April 8, 2019, among TWM LLC, the lenders party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank and swing line lender. The First Amendment revises the Credit Agreement to permit the LSEG Transaction. The First Amendment does not otherwise impact the  terms of the Credit Agreement and does not impact the amount of borrowings available to TWM LLC under the Credit Agreement.

(a) Exhibits

The following exhibits are filed asFor a partdescription of the LSEG Transaction, see Note 1—Organization to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q:10-Q. For a summary of the material terms of the Credit Agreement, see “Management’s Discussion and Analysis of Financial Condition—Liquidity and Capital Resources—Factors Influencing Our Liquidity and Capital Resources—Indebtedness.”

The foregoing description of the First Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the First Amendment, a copy of which is filed herewith as Exhibit 10.1 and is incorporated herein by reference.

 

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ITEM 6. EXHIBITS

Exhibit Number

Description of Exhibit

3.1

 

Amended and Restated Certificate

Exhibit Number

Description of Incorporation of Tradeweb Markets Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 9, 2019 (File No. 001-38860)).

 

 

 

3.210.1

 

Amended and Restated Bylaws of Tradeweb Markets Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on April 9, 2019 (File No. 001-38860)).

10.1*

Stockholders Agreement,Amendment No.1, dated as of April 8,November 7, 2019, by and among Tradeweb Markets Inc., Refinitiv US PME LLC and Refinitiv Parent Limited.

10.2*

Registration Rights Agreement, dated as of April 8, 2019, by and among Tradeweb Markets Inc., the Refinitiv Holders (as defined therein), the Bank Holders (as defined therein) and the other holders of Registrable Securities (as defined therein) party thereto from time to time.

10.3*

Fifth Amended and Restated LLC Agreement, dated as of April 4, 2019, by and among Tradeweb Markets LLC and its Members (as defined therein).

10.4*

Tax Receivable Agreement, dated as of April 8, 2019, by and among Tradeweb Markets Inc., Tradeweb Markets LLC and the members of Tradeweb Markets LLC from timeeach lender party thereto, relating to time party thereto.

10.5*

Restrictive Covenant Agreement, dated as of April 8, 2019, by and among the Refinitiv Entities (as defined therein), Tradeweb Markets LLC and Tradeweb Markets Inc.

10.6*

Credit Agreement, dated as of April 8, 2019, by and among Tradeweb Markets LLC, as borrower, the lenders party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank and swing line lender, Citigroup Global Markets Inc., JPMorgan Chase Bank, N.A., Morgan Stanley Senior Funding, Inc. and Goldman Sachs Bank USA, as joint lead arrangers and joint bookrunners, JPMorgan Chase Bank, N.A., as syndication agent, and Morgan Stanley Senior Funding, Inc. and Goldman Sachs Bank USA, as documentation agents.lender.

 

 

 

10.7*31.1

 

Security Agreement, dated as of April 8, 2019, among the grantors identified therein and Citibank, N.A., as collateral agent.

10.8†*

Amended and Restated Tradeweb Markets Inc. 2018 Share Option Plan.

10.9†*

Amended & Restated Tradeweb Markets Inc. PRSU Plan.

10.10†*

Tradeweb Markets Inc. 2019 Omnibus Equity Incentive Plan.

10.11†*

Form of Director RSU Agreement under the Tradeweb Markets Inc. 2019 Omnibus Equity Incentive Plan.

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)13a‑14(a) or 15d-14(a)15d‑14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)13a‑14(a) or 15d-14(a)15d‑14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*101.INS

 

XBRL Instance Document.

Exhibit Number

Description of Exhibit

101.SCH*101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL*101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF*101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB*101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE*101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 


*                 Filed herewith.

 

77

                 Indicates a management contract or compensatory plan or arrangement.

SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TRADEWEB MARKETS INC.

 

 

 

 

 

 

May 20,November 8, 2019

/s/ Lee Olesky

 

By:

Lee Olesky

 

 

Chief Executive Officer (Principal Executive Officer)

 

 

 

 

 

 

May 20,November 8, 2019

/s/ Robert Warshaw

 

By:

Robert Warshaw

 

 

Chief Financial Officer (Principal Financial Officer)

 

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