Source: Knight Capital
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 aaftermath 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.
During 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 Trading
During 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 Services
During 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 Other
During 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.