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KBW Inc. Reports Operating Results (10-K)
Posted by: gurufocus (IP Logged)
Date: February 28, 2012 05:19PM
KBW Inc. (KBW) filed Annual Report for the period ended 2011-12-31.
Highlight of Business Operations:We derive a significant portion of our revenues from our sales and trading business. Commissions accounted for approximately 48%, 31% and 37%, respectively, of our revenues in the years ended December 31, 2011, 2010 and 2009. Along with other securities firms, we have experienced intense price competition in this business in recent years. In particular, the ability to execute trades electronically, through the internet and through other alternative trading systems, has increased the pressure on trading commissions and spreads. We expect this trend toward alternative trading systems and pricing pressures in this business to continue. We believe we may experience competitive pressures in these and other as some of our competitors seek to obtain market share by competing on the basis of price. In addition, we face pressure from our larger competitors, which may be better able to offer a broader range of complementary products and services to customers in order to win their trading business. In addition, our sustained commitment to maintaining and improving our comprehensive research coverage in the financial services sector to support our sales and trading business may require us to make substantial investments in our research capabilities, further pressuring our profit margins. If we are unable to compete effectively with our competitors in these areas, the revenues and profitability of our securities business may decline and our business, financial condition and results of operations may be adversely affected.
(a)The adjustment represents the exclusion of the compensation expense related to the amortization of the IPO restricted stock awards, which were granted to employees in November 2006 and fully vested in November 2010. (b)A non-GAAP financial measure that management believes provides the most meaningful comparison between historical, present and future periods. (c)The compensation ratio was calculated by dividing compensation and benefits expense by total revenues for each respective period. (d)The adjustment represents the exclusion of restructuring charges, which includes compensation expense related to the workforce reduction program, certain lease obligations for office space and contract termination costs from actions implemented during the second half of 2011 to reduce costs.
Total revenues increased $38.7 million, or 10.0%, to $425.9 million for the year ended December 31, 2010 compared with $387.2 million for the same period in 2009. This increase was primarily due to higher investment banking revenues of $208.9 million for the year ended December 31, 2010, an increase of $48.5 million, partially offset by decreases in principal transactions, net and commissions revenue of $9.6 million and $8.5 million, respectively, compared with the year ended December 31, 2009.
(a)The adjustment represents the exclusion of the compensation expense related to the amortization of the IPO restricted stock awards, which were granted to employees in November 2006 and fully vested in November 2010. (b)A non-GAAP financial measure that management believes provides the most meaningful comparison between historical, present and future periods. (c)The compensation ratio was calculated by dividing compensation and benefits expense by total revenues for each respective period.
Net income, after adjusting for non-cash expense and revenue items of $46.7 million, provided cash of $70.3 million. The non-cash items consisted of expenses of $36.6 million resulting from the amortization of stock based compensation expenses, $5.2 million related to deferred income tax expense and $4.8 million related to depreciation and amortization expense. Cash of $55.8 million was used as a result of an increase in operating assets, primarily attributable to increases related to financial instruments owned, at fair value of $43.4 million and receivables from clearing brokers of $30.8 million, partially offset by a $32.2 million decline in income taxes receivable. Cash of $5.9 million was provided by an increase in operating liabilities, primarily attributable to increases in financial instruments sold, not yet purchased, at fair value and accrued compensation and benefits of $25.7 million and $8.3 million, respectively, partially offset by a $31.5 million reduction in short-term borrowings.
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