KNIGHT CAPITAL GROUP INC. 
By JERSEY CITY, N.J., Jan. 24, 2013 /PRNewswire/ -- Knight Capital Group, Inc. (NYSE Euronext: KCG) today reported consolidated earnings of $6.5 million, or $0.01 per diluted share, for the fourth quarter of 2012.
The fourth quarter 2012 GAAP net income attributable to common stockholders was $5.2 million, or $0.01 per diluted share, which includes a $7.4 million, or $0.02 per diluted share, non-cash write-down of a strategic investment as well as professional fees related to the announced merger and August 1st technology issue of $5.0 million, or $0.01 per diluted share, and a $1.2 million dividend on convertible preferred shares. On a non-GAAP basis, the fourth quarter 2012 net income attributable to common stockholders was $18.9 million, or $0.05 per diluted share. A reconciliation of GAAP to non-GAAP results is included below.
For the fourth quarter of 2011, the company reported consolidated earnings of $40.2 million, or $0.43 per diluted share.
Revenues for the fourth quarter of 2012 were $287.7 million, compared to $341.3 million for the fourth quarter of 2011.
At December 31, 2012, the company had $413.9 million in cash and cash equivalents. The company had $1.5 billion in aggregate stockholders' equity and preferred shares as of December 31, 2012, equivalent to a book value of $4.07 per share (which includes preferred shares on an as-converted basis). The company had $1.5 billion in stockholders' equity as of December 31, 2011, equivalent to a book value of $15.13 per share. Tangible book value as of December 31, 2012 was $3.30 per share (which includes preferred shares on an as-converted basis) as compared to $10.67 at December 31, 2011.
"In the fourth quarter of 2012, Knight fully recaptured market share in core product areas and returned to profitability," said Thomas M. Joyce, Chairman and Chief Executive Officer, Knight Capital Group. "The rapid normalization of client trading activity demonstrates Knight's critical role in the markets and commitment to providing superior executions. Nevertheless, the financial results for the quarter were negatively impacted by the steep year over year declines in consolidated U.S. equity volume and market volatility as well as the write-down of an investment and heightened professional fees. As previously disclosed, Knight announced a merger with GETCO LLC during the fourth quarter, which will create a true category leader among market makers and agency brokers. Separately, as part of our continuing efforts to align and focus resources, Knight will consolidate the full service and electronic institutional equities sales teams as well as discontinue correspondent clearing."
"Continuing operations" includes the company's Market Making, Institutional Sales and Trading, Electronic Execution Services, and Corporate and Other segments. Market Making consists of all global market making across equities, fixed income, foreign exchange, futures and options as well as the company's activities as a Designated Market Maker at the NYSE. Institutional Sales and Trading includes full-service institutional research, sales and trading as well as equity and debt capital markets, reverse mortgage origination and securitization, and asset management. Electronic Execution Services includes Knight Direct, Knight Hotspot FX and Knight BondPoint. Corporate and Other includes strategic investments primarily in financial services-related ventures, futures execution and custody services, clearing and settlement activity, corporate overhead expenses and all other income and expenses that are not attributable to the other reporting segments.
Q4 2012 Q4 2011
------- -------
Revenues ($ thousands) 287,651 341,327
Net income ($ thousands) 6,458 40,238
Diluted EPS GAAP basis($) 0.01 0.43
Diluted EPS Non-GAAP basis($) 0.05 0.43
U.S. equity Market Making statistics:
Average daily dollar value traded ($ billions) 20.6 23.2
Average daily trades (thousands) 2,757.8 3,583.8
Nasdaq and Listed shares traded (billions) 41.2 51.0
FINRA OTC Bulletin Board and Other shares traded (billions) 132.0 119.5
Average revenue capture per U.S. equity dollar value traded (bps) 1.04 1.25
Average daily Knight Direct equity shares (millions) 219.5 210.5
Average daily Knight Hotspot FX notional dollar value traded ($ billions)** 21.4 27.0
YTD 2012 YTD 2011
-------- --------
Revenues ($ thousands) 736,091 1,404,527
Net (loss) income ($ thousands) (347,067) 115,237
Diluted EPS GAAP basis($) (6.05) 1.21
Diluted EPS Non-GAAP basis($) 0.62 1.21
U.S. equity Market Making statistics:
Average daily dollar value traded ($ billions) 20.1 25.3
Average daily trades (thousands) 2,978.9 3,620.6
Nasdaq and Listed shares traded (billions) 172.1 216.5
FINRA OTC Bulletin Board and Other shares traded (billions) 621.3 876.7
Average revenue capture per U.S. equity dollar value traded (bps) 0.06 1.06
Average revenue capture per U.S. equity dollar value traded, excluding
impact of Facebook IPO and August 1st technology issue (bps) * 1.03 1.06
Average daily Knight Direct equity shares (millions) 207.1 183.7
Average daily Knight Hotspot FX notional dollar value traded ($ billions)** 25.4 29.6
* Statistic excludes $26.0 million in trading losses related to the Facebook IPO and $456.6
million in trading losses
related to the August 1st technology issue.
** In the second quarter of 2012, Knight modified the reporting of Knight Hotspot FX notional
dollar value traded volume
to count one side of the transaction. The company previously counted total client volume to
include both sides of the
transaction. The company posts Knight Hotspot FX volume statistics each month to its web
site, which has been
updated to show one-sided volume statistics dating back to the beginning of 2010.
"Despite unprecedented challenges, Knight finished the year strong," said Mr. Joyce. "For the full year 2012, Knight ranked first among market makers in retail U.S. equity volume and continued to drive execution quality for individual investors. The firm's electronic trading products gained market share year over year across institutional equities, institutional spot foreign exchange and retail fixed income. Subsidiary Urban Financial Group ranked second in reverse mortgage origination and accounted for nearly a quarter of all HMBS issuance during the year."
Market Making
During the fourth quarter of 2012, the Market Making segment generated total revenues of $136.4 million and pre-tax income of $32.4 million. In the fourth quarter of 2011, Market Making reported total revenues of $187.4 million and pre-tax income of $84.4 million. Market Making had pre-tax margins of 24 percent in the fourth quarter of 2012 compared to pre-tax margins of 45 percent in the fourth quarter of 2011. The results were impacted by an estimated eight percent decrease in overall retail U.S. equity volume year over year as well as an approximate 44 percent decline in market volatility over the same period.
"In Market Making, Knight posted its highest quarterly market share of retail U.S. equity volume in two years," said Mr. Joyce. "The data, I believe, reflect the completeness of Knight's offering in terms of market coverage, deep natural liquidity, execution quality and client service. Despite encouraging signs in retail trading activity, the poor overall market conditions constrained financial results."
Institutional Sales and Trading
During the fourth quarter of 2012, the Institutional Sales and Trading segment generated total revenues of $114.8 million and pre-tax income of $9.4 million. In the fourth quarter of 2011, Institutional Sales and Trading reported total revenues of $103.8 million and a pre-tax loss of $17.1 million.
"In Institutional Sales and Trading, Knight resumed the turnaround effort and recorded a profitable quarter," said Mr. Joyce. "The results are due to a combination of year over year segment revenue growth and expense reductions across the sales and trading desks. Urban made a major contribution from increased origination and securitization compared to a year ago."
Electronic Execution Services
During the fourth quarter of 2012, the Electronic Execution Services segment generated total revenues of $36.8 million and pre-tax income of $7.2 million. In the fourth quarter of 2011, Electronic Execution Services reported total revenues of $40.6 million and pre-tax income of $12.5 million. Electronic Execution Services had pre-tax margins of 20 percent in the fourth quarter of 2012 compared to pre-tax margins of 31 percent in the fourth quarter of 2011. The results were impacted by declines in overall market volumes of U.S. equities, institutional spot foreign exchange and retail U.S. corporate bonds.
"In Electronic Execution Services, Knight continued to outperform the markets and post solid margins," said Mr. Joyce. "Knight Direct, Knight Hotspot FX and Knight BondPoint all increased market share year over year amid weaker overall volumes in their respective categories. The client acceptance underscores the spread of electronic trading and exceptional utility of Knight's platforms."
The combined institutional equities sales team, comprised of staff from Institutional Sales and Trading and Electronic Execution Services, will be jointly led by Head of Institutional Equities Joseph Mazzella and Head of International Albert Maasland. As a result of the consolidation, Head of Electronic Execution Services David Lehmann will leave the firm.
"In David's 10 years at Knight, he made numerous meaningful contributions to our growth. We thank him for his advice and guidance over the years and wish him all the best as he moves forward," said Mr. Joyce.
Corporate and Other
During the fourth quarter of 2012, the Corporate and Other segment reported a pre-tax loss of $42.3 million, which included an $11.4 million non-cash write-down of a strategic investment and approximately $7.7 million in professional fees associated with the announced merger and the August 1st technology issue. In the fourth quarter of 2011, the Corporate and Other segment reported a pre-tax loss of $16.5 million.
Given the discontinuation of correspondent clearing, Head of Correspondent Clearing Steven Sadoff will leave the firm.
"Steven performed tremendous work in leading Knight's technology and operations, and we thank him for his service," said Mr. Joyce.
Headcount at December 31, 2012 was 1,524 full-time employees, compared to 1,423 full-time employees at December 31, 2011. The increase in headcount year over year is primarily due to the acquisition of our futures business as well as the expansion of market making and reverse mortgage origination.
During the fourth quarter of 2012, the company did not repurchase any shares under the company's existing stock repurchase program. To date, the company has repurchased 76.7 million shares for $879.1 million. The company has approximately $120.9 million of availability to repurchase shares under the program. The company cautions that there are no assurances that any further repurchases may actually occur.
Non-GAAP Financial Presentations
The company believes that certain non-GAAP financial presentations, when taken into consideration with the corresponding GAAP financial presentations, are important in understanding the company's operating results. Selected financial information is included in the company's non-GAAP financial presentations for the three months and year ended December 31, 2012. This information includes the effects of the August 1, 2012 technology issue and subsequent related costs, the write-down of goodwill and intangible assets, trading losses related to the Facebook IPO, a gain resulting from a change in the tax status of a strategic investment, the write-down of a strategic investment, professional fees related to the announced merger, and a deemed dividend related to the beneficial conversion feature of convertible preferred shares issued in August 2012. We believe this presentation provides meaningful information to stockholders and investors as it provides comparability for our results of operations for the three months and year ended December 31, 2012 with the results for the three months and year ended December 31, 2011. See schedules below for a full reconciliation of GAAP to non-GAAP financial presentations.
* * *
Copies of this earnings release and other company information can be obtained on Knight's website, http://www.knight.com. In addition, the company will release its monthly volume statistics for December 2012 on its website at http://www.knight.com/ourfirm/volumestats.asp before the start of trading today. Due to the announced merger with GETCO LLC, Knight will not host a conference call on the fourth quarter of 2012.
* * *
About Knight
Knight Capital Group (NYSE Euronext: KCG) is a global financial services firm that provides access to the capital markets across multiple asset classes to a broad network of clients, including broker-dealers, institutions and corporations. Knight is headquartered in Jersey City, N.J. with a global presence across the Americas, Europe, and the Asia Pacific regions. For further information about Knight, please visit www.knight.com.
Certain statements contained herein may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words such as "believe," "expect," "anticipate," "intend," "target," "estimate," "continue," "positions," "prospects" or "potential," by future conditional verbs such as "will," "would," "should," "could" or "may", or by variations of such words or by similar expressions. These "forward-looking statements" are not historical facts and are based on current expectations, estimates and projections about the parties' industry, management beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict including, without limitation, risks associated with the August 1, 2012 technology issue at Knight that resulted in Knight sending numerous erroneous orders in NYSE-listed and NYSE Arca securities into the market and the impact to Knight's capital structure and business as well as actions taken in response thereto and consequences thereof, risks associated with Knight's ability to recover all or a portion of the damages that are attributable to the manner in which NASDAQ OMX handled the Facebook IPO, risks associated with changes in market structure, legislative, regulatory or financial reporting rules, risks associated with past or future changes to organizational structure and management and the costs, integration, performance and operation of businesses previously acquired or developed organically, or that may be acquired or developed organically in the future. Readers should carefully review the risks and uncertainties disclosed in Knight's reports with the SEC, including, without limitation, those detailed under "Certain Factors Affecting Results of Operations" and "Risk Factors" in the Company's Annual Report on Form 10-K for the year-ended December 31, 2011 and in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, and in other reports or documents Knight or the new Knight/GETCO holding company files with, or furnishes to, the SEC from time to time.
In addition to factors previously disclosed in Knight's reports filed with the SEC and those identified elsewhere in this filing, the following factors among others, could cause actual results to differ materially from forward-looking statements or historical performance: ability to obtain regulatory approvals and meet other closing conditions to the mergers, including approval by Knight and GETCO stockholders, on the expected terms and schedule; delay in closing the mergers; difficulties and delays in integrating the Knight and GETCO businesses or fully realizing cost savings and other benefits; business disruption following the mergers; the inability to sustain revenue and earnings growth; customer and client actions; and the inability to realize cost savings or revenues or to implement integration plans and other consequences associated with mergers, acquisitions and divestitures.
KNIGHT CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended December 31, For the year ended December 31,
--------------------------------------- -------------------------------
2012 2011 2012 2011
---- ---- ---- ----
(In thousands, except per share amounts)
Revenues
Commissions and fees $150,901 $164,587 $652,821 $749,911
Net trading revenue 140,478 168,412 50,082 631,989
Interest, net 6,985 443 24,859 4,649
Investment (loss) income and other, net (10,713) 7,885 8,329 17,978
Total revenues 287,651 341,327 736,091 1,404,527
------- ------- ------- ---------
Expenses
Employee compensation and benefits 122,477 137,496 525,247 583,786
Execution and clearance fees 47,183 53,433 200,363 229,209
Communications and data processing 25,145 21,557 97,689 87,109
Payments for order flow 28,666 19,238 90,608 85,269
Interest 13,119 11,827 52,889 42,068
Depreciation and amortization 11,635 13,519 50,348 54,000
Professional fees 13,442 5,907 32,375 21,305
Occupancy and equipment rentals 7,317 6,558 27,324 28,084
Business development 4,633 6,490 20,673 23,360
Writedown of assets and lease loss accrual - 700 143,034 2,978
Restructuring - - - 28,624
Other 7,218 1,455 32,231 31,606
Total expenses 280,835 278,180 1,272,781 1,217,398
------- ------- --------- ---------
Income (loss) from continuing operations before income taxes 6,816 63,147 (536,690) 187,129
Income tax expense (benefit) 358 22,883 (189,623) 71,488
--- ------ -------- ------
Income (loss) from continuing operations, net of tax 6,458 40,264 (347,067) 115,641
Loss from discontinued operations, net of tax - (26) - (404)
--- --- --- ----
Net income (loss) $6,458 $40,238 $(347,067) $115,237
Dividend on convertible preferred shares (1,217) - (2,268) -
Deemed dividend related to beneficial conversion
feature of convertible preferred shares - - (373,364) -
--- --- -------- ---
Net income (loss) attributable to common stockholders $5,241 $40,238 $(722,699) $115,237
====== ======= ========= ========
Basic earnings (loss) per share from continuing operations $0.03 $0.45 $(6.05) $1.26
===== ===== ====== =====
Diluted earnings (loss) per share from continuing operations $0.01 $0.43 $(6.05) $1.22
===== ===== ====== =====
Basic earnings (loss) per share $0.03 $0.44 $(6.05) $1.26
===== ===== ====== =====
Diluted earnings (loss) per share $0.01 $0.43 $(6.05) $1.21
===== ===== ====== =====
Shares used in computation of basic earnings per share 176,907 90,427 119,376 91,490
======= ====== ======= ======
Shares used in computation of diluted earnings per share 358,273 93,141 119,376 95,013
======= ====== ======= ======
KNIGHT CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
December 31, 2012 December 31, 2011
----------------- -----------------
(In thousands)
ASSETS
Cash and cash equivalents $413,926 $467,633
Cash and securities segregated under federal and other
regulations 166,992 11,010
Financial instruments owned, at fair value:
Equities 1,463,916 1,416,090
Debt securities 249,846 134,631
Listed equity options 202,091 280,384
Loan inventory 191,712 206,572
Other financial instruments 237 21,483
Securitized HECM loan inventory 4,054,905 1,722,631
--------- ---------
Total financial instruments owned, at fair value 6,162,707 3,781,791
Collateralized agreements:
Securities borrowed 1,008,720 1,494,647
Receivable from brokers, dealers and clearing organizations 1,149,984 623,897
Fixed assets and leasehold improvements,
at cost, less accumulated depreciation and amortization 108,114 111,464
Investments 78,348 83,231
Goodwill 213,900 337,843
Intangible assets, less accumulated amortization 64,833 92,889
Income taxes receivable 152,576 9,788
Other assets 258,347 138,758
Total assets $9,778,447 $7,152,951
LIABILITIES, CONVERTIBLE PREFERRED STOCK & EQUITY
Liabilities
Financial instruments sold, not yet purchased, at fair value:
Equities $1,164,999 $1,369,750
Debt securities 318,158 63,073
Listed equity options 155,942 254,506
Other financial instruments 5,505 34,563
----- ------
Total financial instruments sold, not yet purchased, at fair
value 1,644,604 1,721,892
Collateralized financings:
Securities loaned 504,082 697,998
Financial instruments sold under agreements to repurchase 466,487 420,320
Other secured financings 146,330 59,405
Liability to GNMA trusts, at fair value 4,002,704 1,710,627
--------- ---------
Total collateralized financings 5,119,603 2,888,350
Payable to brokers, dealers and clearing organizations 388,788 322,660
Payable to customers 402,464 23,664
Accrued compensation expense 153,934 188,939
Accrued expenses and other liabilities 197,761 121,083
Long-term debt 388,753 424,338
Total liabilities 8,295,907 5,690,926
Convertible Preferred Stock 229,857 -
------- ---
Equity
Class A common stock 2,748 1,664
Additional paid-in capital 1,400,317 850,837
Retained earnings 710,621 1,433,320
Treasury stock, at cost (858,907) (823,023)
Accumulated other comprehensive loss (2,096) (773)
------ ----
Total equity 1,252,683 1,462,025
Total liabilities, convertible preferred stock and equity $9,778,447 $7,152,951
KNIGHT CAPITAL GROUP, INC.
PRE-TAX EARNINGS BY BUSINESS SEGMENT*
(In thousands)
(Unaudited)
For the three months ended For the year ended
December 31, December 31,
------------ ------------
2012 2011 2012 2011
---- ---- ---- ----
Market Making
Revenues (1) (3) $136,439 $187,365 $60,940 $704,471
Expenses (2) (5) 104,015 103,014 429,417 448,390
Pre-tax earnings (loss) 32,424 84,351 (368,477) 256,080
------ ------ -------- -------
Institutional Sales and Trading
Revenues (3) 114,789 103,828 468,444 511,525
Expenses (2) (5) 105,355 120,977 592,649 555,885
Pre-tax earnings (loss) 9,434 (17,149) (124,205) (44,360)
----- ------- -------- -------
Electronic Execution Services
Revenues 36,767 40,579 159,054 167,926
Expenses (5) 29,549 28,104 121,954 118,444
Pre-tax earnings 7,218 12,475 37,100 49,482
----- ------ ------ ------
Corporate and Other
Revenues (4) (345) 9,555 47,654 20,606
Expenses (2) (5) 41,915 26,084 128,761 94,679
Pre-tax loss (42,261) (16,529) (81,108) (74,074)
------- ------- ------- -------
Consolidated
Revenues 287,651 341,327 736,091 1,404,527
Expenses 280,835 278,180 1,272,781 1,217,398
Pre-tax earnings (loss) $6,816 $63,147 $(536,690) $187,129
====== ======= ========= ========
* Totals may not add due to rounding.
(1) - Included in revenues for the year ended December 31, 2012 is a trading loss of $457.6 million related
to the August 1st technology issue.
(2) - Included in expenses for the year ended December 31, 2012 is a writedown of assets of $143.0 million
which includes $11.9 million for Market Making and $131.1 million for Institutional Sales and Trading.
Additionally, the Corporate and Other segment includes $7.7 million for the three months ended December 31, 2012
and $11.2 million for the year ended December 31, 2012 in professional fees related to the merger and the August 1st
technology issue.
(3) - Included in revenues for the year ended December 31, 2012 is a Facebook IPO trading loss of
$35.4 million which includes $26.0 million for Market Making and $9.4 million for Institutional Sales and Trading.
(4) - Included in revenues for the three months and year ended December 31, 2012 is an $11.4 million write-down of a
strategic investment. Also included in revenues for the year ended December 31, 2012 is a gain on strategic
investment of $10.0 million.
(5) - Included in expenses for the year ended December 31, 2011 is a Restructuring charge of $28.6 million
which includes $0.5 million for Market Making, $23.9 million for Institutional Sales and Trading,
$0.4 million for Electronic Execution Services, and $3.8 million for Corporate and Other.
KNIGHT CAPITAL GROUP, INC.
Regulation G Reconciliation of Non-GAAP financial measures
(in thousands)
Three months ended December 31, 2012 Market Making Institutional Sales Electronic Corporate Consolidated
and Trading Execution and Other
Services
--------
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:
GAAP Pre-Tax Income (Loss) $32,424 $9,434 $7,218 $(42,261) $6,816
Write-down of strategic investment - - - 11,384 11,384
Professional fees related to merger and August 1st technology issue - - - 7,702 7,702
Non-GAAP Pre-Tax Income (Loss) $32,424 $9,434 $7,218 $(23,175) $25,902
======= ====== ====== ======== =======
Year ended December 31, 2012 Market Making Institutional Sales and Trading Electronic Execution Services Corporate and Other Consolidated
------------- ------------------------------- ----------------------------- ------------------- ------------
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:
GAAP Pre-Tax (Loss) Income $(368,477) $(124,205) $37,100 $(81,108) $(536,690)
August 1st trading loss, related costs and professional fees related to merger 457,570 - - 11,222 468,792
Write-down of assets 11,917 131,117 - - 143,034
Facebook IPO trading losses 25,975 9,385 78 - 35,438
Investment gain - - - (9,992) (9,992)
Write-down of strategic investment - - - 11,384 11,384
Non-GAAP Pre-Tax Income (Loss) $126,985 $16,297 $37,178 $(68,494) $111,966
======== ======= ======= ======== ========
* Totals may not add due to rounding
KNIGHT CAPITAL GROUP, INC.
Regulation G Reconciliation of Non-GAAP financial measures
(in thousands, except per share amounts)
Three Months Ended Year Ended
December 31, 2012 December 31, 2012
----------------- -----------------
$ EPS $ EPS
--- --- --- ---
Reconciliation of GAAP Net Income (Loss) to Non - GAAP Net Income :
Net income (loss) attributable to common stockholders - GAAP $5,241 $0.01 $(722,699) $(6.05)
Add back:
Deemed dividend related to beneficial conversion feature of convertible preferred shares - - 373,364 3.13
Dividend on convertible preferred shares 1,217 0.00 2,268 0.01
August 1st trading loss, related costs and professional fees related to merger 5,006 0.01 304,923 2.55
Write-down of assets - - 93,037 0.78
Facebook IPO trading losses - - 23,051 0.19
Investment gain - - (6,499) (0.05)
Write-down of strategic investment 7,400 0.02 7,400 0.06
Net income attributable to common stockholders - Non-GAAP $18,864 $0.05 $74,846 $0.62
======= ===== ======= =====
Shares used in computation of earnings per share 358,273 119,376
======= =======
* Totals may not add due to rounding
SOURCE Knight Capital Group, Inc.
