Goodwill and Intangible Assets

6 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill is assessed for impairment annually or when events indicate that the amounts may not be recoverable. The Company assesses goodwill for impairment at the reporting unit level. The Company’s reporting units are the components of its business segments for which discrete financial information is available and is regularly reviewed by the Company’s management. As part of the assessment for impairment, the Company considers the cash flows of the respective reporting unit and assesses the fair value of the respective reporting unit as well as the overall market value of the Company compared to its net book value. The assessment of fair value of the reporting units is principally performed using a discounted cash flow methodology with a risk-adjusted weighted average cost of capital which the Company believes to be the most reliable indicator of the fair values of its respective reporting units. The Company also assesses the fair value of each reporting unit based upon its estimated market value and assesses the Company’s overall market value based upon the market price of shares of Knight Common Stock.

Intangible assets are assessed for recoverability when events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. The Company assesses intangible assets for impairment at the “asset group” level which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. As part of the assessment for impairment, the Company considers the cash flows of the respective asset group and assesses the fair value of the respective asset group. Step 1 of the impairment assessment for intangibles is performed using undiscounted cash flow models, which indicates whether the future cash flows of the asset group are sufficient to recover the book value of such asset group. When an asset is not considered to be recoverable, step 2 of the impairment assessment is performed using a discounted cash flow methodology with a risk-adjusted weighted average cost of capital to determine the fair value of the intangible asset group. In cases where amortizable intangible assets and goodwill are assessed for impairment at the same time, the amortizable intangibles are assessed for impairment prior to goodwill being assessed.

As noted in Footnote 5 "Business Held for Sale and Discontinued Operations", in 2013 the Company sold its institutional fixed income sales and trading business to Stifel and decided to exit its asset management business. As a result of these events, the Company wrote down intangible assets, primarily relating to customer relationships, resulting in charges of $1.2 million and $9.5 million for the three and six months ended June 2013, respectively. Both writedowns are included within (Loss) income from discontinued operations, net of tax on the Consolidated Statements of Operations.

In the second quarter of 2013, the Company tested for impairment of goodwill as a part of its annual assessment and it was determined that the fair value of the Company's reverse mortgage reporting unit was less than its book value. As a result, the Company calculated and compared the implied fair value of the reverse mortgage reporting unit's goodwill with its carrying value and concluded it was fully impaired. Accordingly, the Company recorded an impairment charge of $17.8 million within the Global Execution Services segment during the second quarter of 2013.

No other events occurred in the three or six months ended June 30, 2013 or 2012 that would indicate that the carrying amounts of the Company’s goodwill or intangible assets may not be recoverable.

The following table summarizes the Company’s Goodwill by segment (in thousands):



	June 30, 2013		December 31, 2012
Market Making	$	24,727	$	24,727
Global Execution Services	171,386		189,173
Total	$	196,113	$	213,900

Intangible assets primarily represent client relationships and are amortized over their estimated remaining useful lives, the majority of which have been determined to range from two to 17 years. The weighted average remaining life of the Company’s intangible assets at June 30, 2013 and December 31, 2012 is approximately 11 years.

The following tables summarize the Company’s Intangible assets, net of accumulated amortization by segment and type (in thousands):



	June 30, 2013		December 31, 2012
Market Making
Trading rights	$	10,605	$	11,381
Other	36		41
Total	10,641		11,422
Global Execution Services
Customer and broker relationships	28,967		33,245
Trade names	6,727		7,004
Other	3,310		3,983
Total	39,004		44,232
Consolidated Total	$	49,645	$	55,654



		June 30, 2013			December 31, 2012
Customer and broker relationships ⁽¹⁾	Gross carrying amount	$	66,100		$	68,500
	Accumulated amortization	(37,133		)	(35,255		)
	Net carrying amount	28,967			33,245
Trading rights ⁽²⁾	Gross carrying amount	15,520			15,520
	Accumulated amortization	(4,915		)	(4,139		)
	Net carrying amount	10,605			11,381
Trade names ⁽³⁾	Gross carrying amount	9,800			9,800
	Accumulated amortization	(3,073		)	(2,796		)
	Net carrying amount	6,727			7,004
Other ⁽⁴⁾	Gross carrying amount	13,860			13,960
	Accumulated amortization	(10,514		)	(9,936		)
	Net carrying amount	3,346			4,024
Total	Gross carrying amount	105,280			107,780
	Accumulated amortization	(55,635		)	(52,126		)
	Net carrying amount	$	49,645		$	55,654

________________________________________

(1)

Customer and broker relationships primarily relate to the Donaldson, Direct Trading, Hotspot, EdgeTrade, Urban and Penson Futures acquisitions. Excluded from December 31, 2012 is $9.2 million related to the Company's institutional fixed income sales and trading business which is recorded within Assets of business held for sale on the Consolidated Statements of Financial Condition. The weighted average remaining life is approximately 14 years as of June 30, 2013 and 13 years as of December 31, 2012. Lives may be reduced depending upon actual retention rates.


(2)	Trading rights provide the Company with the rights to trade on certain exchanges. The weighted average remaining life is approximately 7 years as of June 30, 2013 and December 31, 2012.


(3)	Trade names relate to the acquisitions of Hotspot, EdgeTrade and Urban. The weighted average remaining life is approximately 13 years as of June 30, 2013 and December 31, 2012.


(4)	Other primarily includes technology and non-compete agreements acquired by the Company. The weighted average remaining life is approximately two and three years as of June 30, 2013 and December 31, 2012, respectively.

The following table summarizes the Company’s amortization expense from continuing operations relating to Intangible assets (in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2013		2012		2013		2012
Amortization expense	$	2,326	$	2,920	$	4,652	$	5,837

As of June 30, 2013, the following table summarizes the Company’s estimated amortization expense for future years (in thousands):



	Amortization expense
For the six months ended December 31, 2013	$	2,840
For the year ended December 31, 2014	5,680
For the year ended December 31, 2015	5,380
For the year ended December 31, 2016	4,456
For the year ended December 31, 2017	4,412

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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