Knight Capital Group Announces Consolidated Earnings Of $6.5 Million Or $0.01 Per Diluted Share For The Fourth Quarter 2012 Knight increased market share of retail U.S. equity volume both quarter over quarter and year over year among leading market makers

Fourth quarter pre-tax income of $6.8 million included an $11.4 million non-cash write-down of an investment and $7.7 million in professional fees related to the announced merger and August 1st technology issue

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

December 31,


For the year ended

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

and Trading


Electronic

Execution

Services


Corporate

and Other


Consolidated












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.



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