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Press release from PR Newswire

Knight Capital Group Announces Consolidated Net Loss of $389.9 Million for the Third Quarter 2012

Wednesday, October 17, 2012

Knight Capital Group Announces Consolidated Net Loss of $389.9 Million for the Third Quarter 201206:00 EDT Wednesday, October 17, 2012Consolidated pre-tax results for the third quarter of 2012 negatively impacted by $461.1 million of pre-tax losses related to August 1, 2012 technology issue Third quarter pre-tax results also include $143.0 million non-cash write-down of assets due to impairment As of September 30, 2012, Knight had $420.8 million in cash and cash equivalents as well as more than $250.0 million in excess regulatory capitalJERSEY CITY, N.J., Oct. 17, 2012 /PRNewswire/ -- Knight Capital Group, Inc. (NYSE Euronext: KCG) today reported a consolidated net loss for the third quarter of 2012 of $389.9 million, or $602.9 million before income tax benefits. The results included pre-tax losses of $461.1 million related to the technology issue that occurred on August 1, 2012 and subsequent related costs, as well as a $143.0 million non-cash pre-tax charge due to the write-down of goodwill and intangible assets.The third quarter 2012 GAAP net loss attributable to common stockholders was $764.3 million, or $6.30 per share, which includes a $373.4 million, or $3.08 per share, non-cash deemed dividend resulting from a beneficial conversion feature related to our August 6, 2012 $400.0 million convertible preferred share issuance as well as losses related to the technology issue of $2.46 per share, and the asset impairment charges of $0.76 per share. On a non-GAAP basis, the third quarter 2012 net income attributable to common shareholders was $817,000 or $0.01 per share. A reconciliation of GAAP to non-GAAP results is included below.For the third quarter of 2011, the company reported consolidated earnings of $26.9 million, or $0.29 per diluted share, which included a pre-tax restructuring charge for severance, write-down of assets and related costs of $28.6 million, equivalent to $0.19 per diluted share.Net negative revenues for the third quarter of 2012 were $189.8 million, inclusive of $457.6 million in trading losses related to August 1st, compared to revenues of $397.4 million for the third quarter of 2011.As of September 30, 2012, the company had $420.8 million in cash and cash equivalents. The company had $1.5 billion in aggregate stockholders' equity and preferred shares as of September 30, 2012, equivalent to a book value of $4.05 per share (which includes preferred shares on an as-converted basis). The company had $1.4 billion in stockholders' equity as of September 30, 2011, equivalent to a book value of $14.64 per share. Tangible book value as of September 30, 2012 was $3.26 per share (which includes preferred shares on an as-converted basis) as compared to $10.24 at September 30, 2011."In the aftermath of the technology issue that occurred on August 1, 2012, Knight began the process of effecting a recovery," said Tom Joyce, Chairman and Chief Executive Officer, Knight Capital Group. "The recapitalization restored the firm's liquidity and capital, Knight's market share in U.S. equities substantially rebounded, and we've undertaken measures to enhance processes and controls. Obviously, consolidated financial results were negatively impacted by the trading losses, related expenses and subsequent non-cash write-downs. We are gratified though that, if one backs out these items, we made a small profit on an operating basis. Overall, I believe the recovery to date speaks to the strength of our offering, the dedication of Knight's client teams, and deep client relationships we enjoy."As described more fully in a Form 8-K filing on August 6, 2012, the company raised $400.0 million in equity financing through a convertible preferred share offering. Under the terms of the transaction, Knight issued two percent preferred shares that may be converted into Knight Class A Common Stock at $1.50 per share. The $1.50 conversion price was lower than the market value of Knight's shares on August 6, 2012 which, under GAAP, results in a beneficial conversion feature which is treated as a deemed dividend to the preferred shareholders for purposes of calculating earnings per share attributable to common shareholders."Continuing operations" includes the company's Market Making, Institutional Sales and Trading, Electronic Execution Services, and Corporate and Other segments. Market Making consists of all global market making across equities, fixed income, foreign exchange, futures and options as well as the company's activities as a Designated Market Maker at the NYSE. Institutional Sales and Trading includes full-service institutional research, sales and trading as well as equity and debt capital markets, reverse mortgage origination and securitization, and asset management. Electronic Execution Services includes Knight Direct, Knight Hotspot FX and Knight BondPoint. Corporate and Other includes strategic investments primarily in financial services-related ventures, futures execution and custody services, clearing and settlement activity, corporate overhead expenses and all other income and expenses that are not attributable to the other reporting segments.Q3 2012Q3 2011Revenues ($ thousands)(189,838)397,442Net (loss) income ($ thousands)(389,921)26,936Diluted EPS GAAP basis($)(6.30)0.29Diluted EPS Non-GAAP basis($)0.010.29U.S. equity Market Making statistics:Average daily dollar value traded ($ billions)16.729.3Average daily trades (thousands) 2,507.54,189.6Nasdaq and Listed shares traded (billions)37.960.6FINRA OTC Bulletin Board and Other shares traded (billions)151.2174.6Average revenue capture per U.S. equity dollar value traded (bps) (3.29)1.04Average revenue capture per U.S. equity dollar value traded,                excluding impact of August 1st technology issue (bps) *1.041.04Average daily Knight Direct equity shares (millions)174.8196.7Average daily Knight Hotspot FX notional dollar value traded ($ billions)**24.132.2YTD 2012YTD 2011Revenues ($ thousands)448,4411,063,200Net (loss) income ($ thousands)(353,525)74,999Diluted EPS GAAP basis($)(7.20)0.79Diluted EPS Non-GAAP basis($)0.550.79U.S. equity Market Making statistics:Average daily dollar value traded ($ billions)19.926.0Average daily trades (thousands) 3,050.63,632.7Nasdaq and Listed shares traded (billions)130.9165.5FINRA OTC Bulletin Board and Other shares traded (billions)489.3757.2Average revenue capture per U.S. equity dollar value traded (bps) (0.27)1.00Average revenue capture per U.S. equity dollar value traded, excluding    impact of Facebook IPO and August 1st technology issue (bps) *1.021.00Average daily Knight Direct equity shares (millions)203.1174.9Average daily Knight Hotspot FX notional dollar value traded ($ billions)**26.730.4*Statistic excludes $26.0 million in trading losses related to the Facebook IPO for YTD 2012 and $456.6 million in trading losses related to the August 1st technology issue for Q3 and YTD 2012.**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.Market MakingDuring the third quarter of 2012, the Market Making segment generated total net negative revenues of $341.2 million and a pre-tax loss of $452.0 million. The revenue and pre-tax results include trading losses related to the August 1st technology issue of $457.6 million. Also included in the pre-tax results is a charge of $11.9 million related to the write-down of intangible assets.  In the third quarter of 2011, Market Making reported total revenues of $204.9 million and pre-tax income of $69.2 million, which included a restructuring charge of $547,000."The Market Making segment bore the near full financial impact of the trading loss incurred as a result of the technology issue," said Mr. Joyce. "Contributing to the poor results was a continued decline in retail trading activity and muted market volatility as well as a non-cash write-down of intangibles associated with Knight's designated market making unit. Nevertheless, Knight's work to minimize the client impact caused by the August 1st technology issue was largely successful. Clients of Market Making were among the first to resume trading with Knight following the technology issue which drove the substantial recovery in market share over the ensuing weeks. And we're pleased that revenue capture remained strong at 1.04 basis points, when you exclude the impact of the trading losses, which is a testament to Knight's capabilities."Institutional Sales and TradingDuring the third quarter of 2012, the Institutional Sales and Trading segment generated total revenues of $101.7 million and a pre-tax loss of $140.8 million, which included a charge of $131.1 million primarily related to the write-down of goodwill within our fixed income and Astor businesses. In the third quarter of 2011, Institutional Sales and Trading reported total revenues of $145.4 million and a pre-tax loss of $15.6 million, which included a restructuring charge of $23.9 million."The Institutional Sales and Trading segment felt a subsequent impact from the technology issue," said Mr. Joyce. "A pullback by clients of Institutional Sales and Trading in the immediate aftermath compounded pressure on secondary volumes due to the continued weakness in institutional trading activity. A non-cash write-down for goodwill and intangibles associated with institutional fixed income and asset management further hampered results. We're pleased with the strong return of clients in the intervening period through the determined efforts of the client teams. Also, among the positive developments, Urban rose to second in industry rankings of reverse mortgage origination."Electronic Execution ServicesDuring the third quarter of 2012, the Electronic Execution Services segment generated total revenues of $34.8 million and pre-tax income of $6.3 million. In the third quarter of 2011, Electronic Execution Services reported total revenues of $45.1 million and pre-tax income of $13.8 million, which included a restructuring charge of $392,000."The Electronic Execution Services segment demonstrated incredible resilience amid the adversity," said Mr. Joyce. "Despite the technology issue and a temporary decline in client activity, trade volumes not only held steady for the quarter but outperformed their respective markets. Knight Direct, Knight Hotspot FX and Knight BondPoint all posted market share gains year over year. The respective sales efforts and pace of new account openings continued to demonstrate strong acceptance of the electronic trading products."Corporate and OtherDuring the third quarter of 2012, the Corporate and Other segment reported a pre-tax loss of $16.4 million, which included $3.5 million in professional fees related to the events surrounding the August 1st technology issue. In the third quarter of 2011, the Corporate and Other segment reported a pre-tax loss of $23.0 million, which included a restructuring charge of $3.8 million."During the third quarter of 2012, Knight made tremendous progress toward a recovery," said Mr. Joyce. "Client teams are continuously engaged in getting clients back up to trading at previous levels as well as developing greater opportunities. We're undertaking a simultaneous process to further strengthen controls and processes. And we look forward to reestablishing a clean base of earnings in the quarters to come from which to help rebuild both Knight's valuation and reputation."Headcount at September 30, 2012 was 1,545 full-time employees, compared to 1,391 full-time employees at September 30, 2011.During the third 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 available 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 and nine months ended September 30, 2012. This information includes the effects due to 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 and a gain resulting from a change in the tax status of a strategic investment. We believe these presentations provide meaningful information to shareholders and investors as it provides comparability for our results of operations for the three and nine months ended September 30, 2012 with the results for the periods ended September 30, 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. The company will conduct its third quarter 2012 earnings conference call for analysts, investors and the media at 9:00 a.m. Eastern Time (ET) today, October 17, 2012. To access Knight's earnings conference call, please dial 800-723-6498 for domestic callers or 785-830-7989 for international callers. When prompted, please enter passcode 8976848. A replay of the third quarter 2012 earnings conference call will be available by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. When prompted, please enter passcode 8976848. The conference call will be webcast live at 9:00 a.m. ET for all investors and interested parties on Knight's website. In addition, the company will release its monthly volume statistics for September 2012 on its website at http://www.knight.com/ourfirm/volumestats.asp before the start of trading today.* * *About KnightKnight 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. These "forward-looking statements" are not historical facts and are based on current expectations, estimates and projections about the Company's industry, management's 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 that resulted in the Company sending numerous erroneous orders in NYSE-listed and NYSE Arca securities into the market and the impact to the Company's capital structure and business as well as actions taken in response thereto and consequences thereof, risks associated with the Company'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 the Company's changes to its 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 the Company's reports with the U.S. Securities and Exchange Commission (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 June 30, 2012, and in other reports or documents the Company files with, or furnishes to, the SEC from time to time. This information should also be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto contained 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 June 30, 2012, and in other reports or documents the Company files with, or furnishes to, the SEC from time to time.KNIGHT CAPITAL GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)For the three months endedSeptember 30, For the nine months endedSeptember 30,2012201120122011(In thousands, except per share amounts)RevenuesCommissions and fees$144,217$207,252$501,920$585,324Net trading revenue(343,618)185,981(90,396)463,578Interest, net4,812(1,201)17,8744,205Investment income and other, net4,7515,41019,04310,093Total revenues(189,838)397,442448,4411,063,200ExpensesEmployee compensation and benefits124,638157,201402,770446,290Execution and clearance fees46,73163,589153,179175,775Communications and data processing25,78823,13772,54565,552Payments for order flow20,09922,98561,94266,031Interest 12,33010,82239,76930,242Depreciation and amortization11,92413,74738,71340,480Professional fees8,0665,53018,93315,398Occupancy and equipment rentals7,1277,02620,00721,526Business development4,9835,90916,04016,870Restructuring-28,624-28,624Writedown of assets and lease loss accrual143,0341,333143,0342,278Other8,30213,09525,01430,152Total expenses413,022352,998991,946939,218(Loss) Income from continuing operations before income taxes(602,860)44,444(543,505)123,982Income tax (benefit) expense(212,939)17,449(189,980)48,605(Loss) Income from continuing operations, net of tax(389,921)26,995(353,525)75,377Loss from discontinued operations, net of tax-(59)-(378)Net (loss) income$(389,921)$26,936$(353,525)$74,999Dividend on convertible preferred shares(1,051)-(1,051)-Deemed dividend related to beneficial conversion    feature of convertible preferred shares(373,364)-(373,364)-Net (loss) income attributable to common stockholders$(764,336)$26,936$(727,940)$74,999Basic earnings per share from continuing operations$(6.30)$0.29$(7.20)$0.82Diluted earnings per share from continuing operations$(6.30)$0.29$(7.20)$0.80Basic earnings per share$(6.30)$0.29$(7.20)$0.82Diluted earnings per share$(6.30)$0.29$(7.20)$0.79Shares used in computation of basic earnings per share121,24691,564101,04491,877Shares used in computation of diluted earnings per share121,24693,840101,04494,803KNIGHT CAPITAL GROUP, INC.CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Unaudited)September 30, 2012 December 31, 2011(In thousands)ASSETSCash and cash equivalents$420,808$467,633Cash and securities segregated under federal and other regulations137,79411,010Financial instruments owned, at fair value:Equities1,170,8131,416,090Debt securities248,916134,631Listed equity options132,379280,384Loan inventory151,772206,572Other financial instruments10921,483Securitized HECM loan inventory3,410,6071,722,631Total financial instruments owned, at fair value5,114,5963,781,791Collateralized agreements:Securities borrowed 1,060,0491,494,647Receivable from brokers, dealers and clearing organizations944,239623,897Fixed assets and leasehold improvements,               at cost, less accumulated depreciation and amortization107,947111,464Investments97,62083,231Goodwill218,600337,843Intangible assets, less accumulated amortization68,17092,889Tax receivable173,6389,788Other assets242,393138,758Total assets$8,585,854$7,152,951LIABILITIES & EQUITY LiabilitiesFinancial instruments sold, not yet purchased, at fair value:Equities$1,080,339$1,369,750Listed equity options111,691254,506Debt securities99,67963,073Other financial instruments4,43134,563Total financial instruments sold, not yet purchased, at fair value1,296,1401,721,892         Collateralized financings:Securities loaned  353,953697,998Financial instruments sold under agreements to repurchase471,349420,320Other secured financings115,31159,405Liability to GNMA trusts, at fair value3,383,2401,710,627Total collateralized financings 4,323,8532,888,350Payable to brokers, dealers and clearing organizations303,277322,660Payable to customers460,82623,664Accrued compensation expense131,970188,939Accrued expenses and other liabilities183,611121,083Long-term debt 410,089424,338Total liabilities7,109,7665,690,926Convertible preferred shares259,278-EquityClass A common stock2,5421,664Additional paid-in capital1,367,625850,837Retained earnings705,3801,433,320Treasury stock, at cost(859,109)(823,023)Accumulated other comprehensive income (loss)372(773)Total equity1,216,8101,462,025Total liabilities and equity$8,585,854$7,152,951 KNIGHT CAPITAL GROUP, INC.PRE-TAX EARNINGS BY BUSINESS SEGMENT*(In thousands)(Unaudited)For the three months ended September 30,For the nine months ended September 30,2012201120122011 (1)Market MakingRevenues (2) (4)$(341,154)$204,879$(75,499)$517,105Expenses (3) (6)110,810135,691325,402345,376Pre-tax (loss) earnings (451,964)69,188(400,901)171,729Institutional Sales and TradingRevenues (4)101,719145,440353,654407,697Expenses (3) (6)242,526160,992487,293434,908Pre-tax loss(140,807)(15,552)(133,639)(27,211)Electronic Execution ServicesRevenues34,77845,088122,287127,347Expenses (6)28,51131,25192,40590,340Pre-tax earnings6,26713,83829,88237,007Corporate and OtherRevenues (5)14,8192,03447,99911,051Expenses (3) (6)31,17625,06486,84668,595Pre-tax loss(16,356)(23,030)(38,847)(57,544)ConsolidatedRevenues(189,838)397,442448,4411,063,200Expenses413,022352,998991,946939,218Pre-tax (loss) earnings$(602,860)$44,444$(543,505)$123,982* Totals may not add due to rounding.(1) - Prior period amounts have been recast to conform with current period segment presentation.         Such recast had no effect on previously reported Consolidated Pre-tax earnings.(2) - Included in revenues for the three and nine months ended September 30, 2012 is a trading loss of $457.6        million related to the August 1st technology issue.(3) - Included in expenses for the three and nine months ended September 30, 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 $3.5 million in professional fees related to the         August 1st technology issue.(4) - Included in revenues for the nine months ended September 30, 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.(5) - Included in revenues for the nine months ended September 30, 2012 is a gain on a strategic investment         of $10.0 million.(6) - Included in expenses for the three and nine months ended September 30, 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 $3.8 million for Corporate and Other.KNIGHT CAPITAL GROUP, INC.Regulation G Reconciliation of Non-GAAP financial measures(in thousands)Three months ended September 30, 2012Market MakingInstitutional Sales and TradingElectronic Execution ServicesCorporate and OtherConsolidatedReconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:           GAAP Pre-Tax (Loss) Income$                   (451,964)$                (140,807)$                   6,267$                (16,356)$                (602,860)August 1st trading loss and related costs457,570--3,520461,090Writedown of assets11,917131,117--143,034Non-GAAP Pre-Tax Income (Loss)$                       17,522$                    (9,690)$                   6,267$                (12,836)$                      1,263* Totals may not add due to roundingNine months ended September 30, 2012Market MakingInstitutional Sales and TradingElectronic Execution ServicesCorporate and OtherConsolidatedReconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:              GAAP Pre-Tax (Loss) Income$                   (400,901)$                (133,639)$                 29,882$                (38,847)$                (543,505)August 1st trading loss and related costs457,570--3,520461,090Writedown of assets11,917131,117--143,034Facebook IPO trading losses25,9759,38578-35,438Investment gain---(9,992)(9,992)Non-GAAP Pre-Tax Income (Loss)$                       94,561$                     6,863$                 29,960$                (45,319)$                    86,064* 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 September 30, 2012Nine Months Ended September 30, 2012$EPS$EPSReconciliation of GAAP Net Loss to Non - GAAP Net Income :Net loss attributable to common stockholders - GAAP$                  (764,336)$                        (6.30)$                  (727,940)$                        (7.20)Add back:Deemed dividend related to beneficial conversion feature of convertible preferred shares373,3643.08373,3643.70Dividend on convertible preferred shares1,0510.011,0510.01August 1st trading loss and related costs298,2262.46299,9172.97Writedown of assets92,5120.7693,0370.92Facebook IPO trading losses--23,0510.23Investment gain--(6,499)(0.06)Net income attributable to common stockholders - Non-GAAP$                           817$                          0.01$                      55,981$                          0.55Shares used in computation of earnings per share121,246101,044* Totals may not add due to rounding SOURCE Knight Capital Group, Inc.For further information: Kara Fitzsimmons, Managing Director, Media Relations, +1-201-356-1523, kfitzsimmons@knight.com, or Jonathan Mairs, Director, Corporate Communications & Investor Relations, +1-201-356-1529, jmairs@knight.com