Cowen Group, Inc. Announces 2012 Third Quarter Financial Results

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Cowen Group, Inc. Announces 2012 Third Quarter Financial Results

NEW YORK--(BUSINESS WIRE)-- Cowen Group, Inc. (NAS: COWN) ("Cowen" or "the Company") today announced its operating results for the third quarter ended September 30, 2012.

2012 Third Quarter Highlights(1)

  • Broker-dealer segment revenues increased by 34% in the 2012 third quarter compared to the prior year period(2)
    • Investment banking revenues were $18.7 million, a $7.9 million increase from the prior year period. The increase was driven by our equity underwriting activity in the healthcare sector and debt capital markets product
    • Brokerage revenues were $22.7 million, down $3.0 million compared to the 2011 third quarter
  • Management fees were $13.4 million, down $5.1 million compared to the 2011 third quarter
    • The decrease in management fees was primarily attributable to an increase in management fees in the prior year period for our healthcare royalty funds, as a result of an increase in committed capital that resulted in recognizing cumulative retrospective management fees
  • Assets under management decreased by $1.1 billion during the 2012 third quarter to $10.4 billion at October 1, 2012 due to redemptions in the Company's cash management business
    • Excluding cash management assets, the Company's assets under management at October 1, 2012 were approximately flat during the 2012 third quarter
  • The Company's non-compensation expenses in the 2012 third quarter decreased by $6.1 million compared to the prior year period
  • On September 28th, Cowen announced its entry into a definitive agreement to acquire KDC Securities, a securities lending business. The transaction was completed on November 1st

(1) All financial highlights are presented on an Economic Income basis.

(2) Includes broker-dealer segment's allocation of Investment Income (Loss) and Other Revenue.

2012 Third Quarter GAAP Financial Information and Select Balance Sheet Data

For the third quarter 2012, the Company reported a GAAP net loss of $10.6 million, or $0.09 per share, as compared to a GAAP net loss of $48.2 million, or $0.42 per share, in the third quarter 2011. The third quarter 2011 loss included a $5.1 million net loss from discontinued operations related to exiting the businesses operated by LaBranche subsidiaries. The year-over-year decrease in GAAP net loss from continuing operations was primarily due to an increase in other income, which was impacted in the prior year period by losses on fixed income securities and other investments. Other income increased from a loss of $24.8 million in the third quarter 2011 to a gain of $10.0 million in the third quarter 2012.

The following table summarizes the Company's GAAP financial results for the three months ended September 30, 2012 and 2011, and June 30, 2012; and the nine months ended September 30, 2012 and 2011.

Summary GAAP Financial Information

(Dollar amounts in millions, except per share information) Three Months Ended  Nine Months Ended 
September 30,  June 30, September 30, 
2012 2011%2012%2012 2011 %
 
Revenues$57.6$62.0(7)%$59.5(3)%$174.5$184.9(6)%
Expenses(79.1)(81.0)(2)%(77.4)2%(233.2)(244.5)(5)%
Other income (loss)10.0(24.8)NM7.828%43.421.3NM
Income tax benefit (expense)(0.2)(0.1)NM(0.2)NM(0.5)17.7 NM
Net income (loss) from continuing operations$(11.6)$(43.9)NM$(10.4)NM$(15.8)$(20.6)NM
 
Net income (loss) from discontinued operations, net of tax(5.1)NMNM(5.1)NM
Net income (loss) loss attributable to noncontrolling interests in consolidated subsidiaries(1.0)(0.8)NM(2.4)NM(1.2)2.5 NM
Net income (loss) attributable to Cowen Group, Inc.$(10.6)$(48.2)NM$(7.9)NM$(14.5)$(28.1)NM
 
Earnings (loss) per basic share:
Income (loss) from continuing operations$(0.09)$(0.37)NM$(0.07)NM$(0.13)$(0.26)NM
Income (loss) from discontinued operations$$(0.04)NM$NM$$(0.06)NM

Note: Amounts may not add due to rounding.

The Company's stockholders' equity as of September 30, 2012, was $504.0 million, or book value per share of $4.42, compared to stockholders' equity of $508.5 million, or book value per share of $4.46, as of December 31, 2011. At September 30, 2012, the Company's tangible book value per share was $4.09 compared to $4.23 at December 31, 2011.

Select Balance Sheet Data

(Dollar amounts in millions, except per share information) September 30, June 30, December 31,
201220122011
Stockholders' equity$504.0$511.9$508.5
Tangible stockholders' equity$466.1$473.3$482.7
Common shares outstanding114.0114.2114.0
 
Book value per share$4.42$4.48$4.46
Tangible book value per share$4.09$4.14$4.23
 

Economic Income (Loss)

Throughout the remainder of this press release the Company presents Economic Income financial measures that are not prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for consolidated funds, (ii) excludes equity award expense related to the November 2009 Ramius/Cowen transaction, (iii) excludes certain other acquisition-related and/or reorganization expenses (including the discontinued operations of LaBranche), and (iv) excludes the bargain purchase gain which resulted from the LaBranche acquisition. In addition, Economic Income (Loss) revenues include investment income that represents the income the Company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For US GAAP purposes, these items are included in each of their respective line items. Economic Income revenues also include management fees, incentive income and investment income earned through the Company's investment as a general partner in certain real estate entities and the Company's investment in the Value and Opportunity business. For US GAAP purposes, all of these items are recorded in other income (loss). In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for US GAAP purposes is presented gross as part of revenue.

For a more complete description of Economic Income (Loss) and a reconciliation of GAAP net income (loss) to Economic Income (Loss) for the periods presented and additional information regarding the reconciling adjustments, please see the "Non-GAAP Financial Measures" section of this press release.

The table below summarizes the Company's Economic Income financial results for the three months ended September 30, 2012 and 2011, and June 30, 2012; and the nine months ended September 30, 2012 and 2011.

Summary Economic Income (Loss) Financial Information

(Dollar amounts in millions, except per share information) Three Months Ended  Nine Months Ended 
September 30,  June 30, September 30, 
2012 2011%2012%2012 2011%
 
Revenues$66.0$37.277%$66.2$211.4$199.46%
Expenses(74.6)(77.1)(3)%(71.9)4%(219.5)(229.8)(4)%
Net Economic Income (Loss) before non-controlling interests(8.6)(39.9)NM(5.7)NM(8.1)(30.4)NM
Economic Income (Loss)$(8.9)$(40.7)NM$(6.0)NM$(9.0)$(33.2)NM
 
Economic Income (Loss) per share$(0.08)$(0.35)NM(0.05)NM$(0.08)$(0.37)NM
 
Economic Income (Loss) excluding certain non-cash items$(0.8)$(32.6)NM$2.2 NM$14.0 $(13.2)NM

Note: Amounts may not add due to rounding.

2012 Third Quarter Economic Income Review

Total Economic Income Revenue

Total Economic Income revenue for the third quarter 2012 was $66.0 million, a 77% increase compared to $37.2 million in the third quarter 2011. The increase in Economic Income revenue was primarily the result of an increase in investment income and investment banking fees, partially offset by a decrease in management fees and brokerage revenue.

Economic Income Revenue

Three Months Ended  Nine Months Ended 
September 30,  June 30, September 30, 
(Dollar amounts in millions)2012 2011%2012%2012 2011%
 
Investment banking$18.7$10.873%$16.315%$50.6$39.827%
Brokerage22.725.7(12)%24.6(8)%71.377.9(8)%
Management fees13.418.5(28)%14.6(8)%42.048.1(13)%
Incentive income1.7(0.6)NM2.6(35)%8.310.2(19)%
Investment income9.2(17.0)NM8.311%38.522.968%
Other revenue0.4 (0.1)NM(0.1)NM0.7 0.5 40%
Total Revenues$66.0 $37.2 77%$66.2 $211.4 $199.4 6%

Note: Amounts may not add due to rounding.

Compensation and Benefits Expense

Third quarter 2012 compensation and benefits expense was $46.2 million, a 10% increase compared to $42.2 million in the third quarter 2011. This was primarily attributable to an increase in the amortization of deferred compensation, severance expense and investments in new professionals which was partially offset by lower variable compensation. Average headcount in the third quarter 2012 decreased by 7% compared to the prior year period and was approximately flat compared to the second quarter 2012. Total headcount at the end of the third quarter was 586.

The compensation to Economic Income revenue ratio decreased to 70% in the current quarter from 113% in the prior year period. Compensation and benefits expense for the third quarter 2012 and 2011 included $5.7 million and $5.2 million, respectively, in share-based compensation expense. Compensation and benefits expense excludes equity award expense related to the 2009 Cowen / Ramius business combination of $1.4 million and $1.6 million in the third quarter 2012 and 2011, respectively.

Excluding $1.4 million of expenses associated with activities for which the Company is reimbursed and $4.4 million of severance expense, compensation and benefits expense was 61% of Economic Income revenue in the third quarter 2012. Excluding these same two items, compensation and benefits expense was 111% and 60% of Economic Income revenue in the prior year period and second quarter 2012, respectively.

Fixed Non-Compensation Expenses

Fixed non-compensation expenses in the current quarter decreased by 7% to $24.0 million as compared to $25.8 million in the comparable prior year quarter. This decrease was primarily related to a decrease in service fees and occupancy and equipment expenses related to cost cutting efforts made near the end of 2011 to reduce excess services and space. This decrease was partially offset by an increase in other costs relating to the real estate business and the Value and Opportunity business (subsequent to the restructuring in the second quarter of 2011).

Variable Non-Compensation Expenses

Variable non-compensation expenses were $5.7 million in the third quarter 2012, down 42% compared to $9.9 million in the third quarter 2011. The decrease was primarily due to syndication costs related to a capital raise by an alternative investment asset fund in the third quarter of 2011 and professional fees that were incurred in the prior year quarter relating to the potential acquisitions of Luxembourg reinsurance companies.

Alternative Investment Segment ("Ramius")

Assets Under Management

As of October 1, 2012, the Company had assets under management of $10.4 billion, a 10% decrease compared to assets under management of $11.5 billion as of July 1, 2012. The $1,127 million decrease in assets under management during the third quarter of 2012 included $1,215 million in net redemptions and $88 million of net positive performance.

The decrease in assets under management was primarily attributable to our cash management product, which had net redemptions of $1.1 billion in the 2012 third quarter. Given the current focus of the Company's alternative investment management business and the areas where the Company believes it can achieve long term growth and profitability, as of November 1, 2012, the Company is no longer offering cash management services and is arranging for the transfer of the remaining assets to another asset manager.

Management Fees

Management fees were $13.4 million in the third quarter 2012, a decrease of 27% compared to the third quarter 2011. There was a decline in management fees attributable to our healthcare royalty funds, for which fees decreased from the prior period when cumulative retrospective management fees were recognized due to additional fund

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