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KKR & Co. L.P. Announces Third Quarter 2012 Results

The declaration and payment of any distributions are subject to the discretion of the board of directors of the general partner of KKR & Co. L.P. and the terms of its limited partnership agreement. There can be no assurance that distributions will be made as intended or at all or that such distributions will be sufficient to pay any particular KKR unit holder’s actual U.S. or non-U.S. tax liability.

KKR Notes to Reportable Segments (Unaudited)

The reportable segments for KKR’s business are presented prior to giving effect to the allocation of income (loss) between KKR & Co. L.P. and KKR Holdings L.P. and as such represent the business in total .

KKR discloses the following financial measures in this earnings release that are calculated and presented using methodologies other than in accordance with GAAP. We believe that providing these performance measures on a supplemental basis to our GAAP results is helpful to investors in assessing the overall performance of KKR’s businesses. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with GAAP. We caution readers that these non-GAAP financial measures may differ from the calculations of other investment managers, and as a result, may not be comparable to similar measures presented by other investment managers. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are included elsewhere within this earnings release.

Fee related earnings (“FRE”) is comprised of segment operating revenues less segment operating expenses and is used by management as an alternative measurement of the operating earnings of KKR and its business segments before investment income. We believe this measure is useful to investors as it provides additional insight into the operating profitability of our fee generating management companies and capital markets businesses. The components of FRE on a segment basis differ from the equivalent GAAP amounts on a consolidated basis as a result of: (i) the inclusion of management fees earned from consolidated funds that were eliminated in consolidation; (ii) the exclusion of fees and expenses of certain consolidated entities; (iii) the exclusion of charges relating to the amortization of intangible assets; (iv) the exclusion of charges relating to carry pool allocations; (v) the exclusion of non-cash equity charges and other non-cash compensation charges borne by KKR Holdings or incurred under the KKR & Co. L.P. 2010 Equity Incentive Plan; (vi) the exclusion of certain reimbursable expenses; and (vii) the exclusion of certain non-recurring items.

Economic net income (loss) (“ENI”) is a measure of profitability for KKR’s reportable segments and is used by management as an alternative measurement of the operating and investment earnings of KKR and its business segments. We believe this measure is useful to investors as it provides additional insight into the overall profitability of KKR’s businesses inclusive of investment income and carried interest. ENI is comprised of: (i) FRE; plus (ii) segment investment income (loss), which is reduced for carry pool allocations and management fee refunds; less (iii) certain economic interests in KKR’s segments held by third parties. ENI differs from net income (loss) on a GAAP basis as a result of: (i) the exclusion of the items referred to in FRE above; (ii) the exclusion of investment income (loss) relating to noncontrolling interests; and (iii) the exclusion of income taxes.

After-tax ENI is used to measure KKR’s implied ENI on a fully diluted basis. We believe this measure is useful to investors as it provides an indication of KKR’s ENI as if all outstanding KKR Holdings units had been exchanged for common units of KKR & Co. L.P. After-tax ENI is calculated by deducting from ENI the implied income tax provision that has been calculated assuming that all income is allocated to KKR & Co. L.P., which would occur following an exchange of all KKR Holdings units for common units of KKR & Co. L.P. The assumptions and methodology used to calculate the implied income tax provision are consistent with those used in calculating the tax provision for KKR & Co. L.P. under GAAP. The implied income tax provision does not give effect to any tax savings or deductions that may result from the exchange of KKR Holdings units.

Total distributable earnings is the sum of (i) FRE, (ii) carry distributions received from KKR’s investment funds which have not been allocated as part of its carry pool and (iii) net realized principal investment income; less (i) applicable local income taxes, if any, and (ii) noncontrolling interests. Net realized principal investment income includes, with respect to KKR’s principal investments (i) realized investment gains and losses, (ii) dividend income and (iii) interest income, net of interest expense, earned from KKR’s principal investments. KKR does not intend to distribute net realized principal investment income other than certain additional distributions that KKR may determine to make, which are intended to cover certain tax liabilities, as calculated by KKR. See “Distribution Policy.” We believe this measure is useful to investors as it provides a supplemental measure to assess performance, excluding the impact of mark-to-market gains (losses), and amounts available for distribution to KKR unitholders, however, total distributable earnings is not a measure that calculates actual distributions under KKR’s current distribution policy.

Assets under management (“AUM”) represent the assets from which KKR is entitled to receive fees or a carried interest and general partner capital. We believe this measure is useful to investors as it provides additional insight into KKR’s capital raising activities and the overall activity in its investment funds and vehicles. KKR calculates the amount of AUM as of any date as the sum of: (i) the fair value of the investments of KKR’s investment funds plus uncalled capital commitments from these funds; (ii) the fair value of investments in KKR’s co-investment vehicles; (iii) the net asset value of certain of KKR's fixed income products; (iv) the value of outstanding structured finance vehicles; and (v) the fair value of other assets managed by KKR. KKR’s definition of AUM is not based on any definition of AUM that may be set forth in the agreements governing the investment funds, vehicles or accounts that it manages or calculated pursuant to any regulatory definitions.

Fee paying AUM (“FPAUM”) represents only those assets under management from which KKR receives fees. We believe this measure is useful to investors as it provides additional insight into the capital base upon which KKR earns management fees. This relates to KKR’s capital raising activities and the overall activity in its investment funds and vehicles, for only those funds and vehicles where KKR receives fees (i.e., excluding vehicles that receive only carried interest or general partner capital). FPAUM is the sum of all of the individual fee bases that are used to calculate KKR’s fees and differs from AUM in the following respects: (i) assets from which KKR does not receive a fee are excluded (i.e., assets with respect to which it receives only carried interest) and (ii) certain assets, primarily in its private equity funds, are reflected based on capital commitments and invested capital as opposed to fair value because fees are not impacted by changes in the fair value of underlying investments.

Committed dollars invested is the aggregate amount of capital commitments that have been invested by KKR’s investment funds and carry-yielding co-investment vehicles and is used as a measure of investment activity for KKR and its business segments during a given period. We believe this measure is useful to investors as it provides additional insight into KKR’s investment of committed capital. Such amounts include: (i) capital invested by fund investors and co-investors with respect to which KKR is entitled to a fee or carried interest and (ii) capital invested by KKR’s investment funds and vehicles.

Syndicated capital is the aggregate amount of debt or equity capital in transactions originated by KKR investment funds and vehicles, which has been distributed to third parties in exchange for a fee. It does not include capital committed to such transactions by carry-yielding co-investment vehicles, which is instead reported in committed dollars invested. Syndicated capital is used as a measure of investment activity for KKR and its business segments during a given period, and we believe that this measure is useful to investors as it provides additional insight into levels of syndication activity in KKR’s Capital Markets and Principal Activities segment and across its investment platform.

Uncalled commitments are used as a measure of unfunded capital commitments that KKR’s investment funds and carry-paying co-investment vehicles have received from partners to contribute capital to fund future investments. We believe this measure is useful to investors as it provides additional insight into the amount of capital that is available to KKR’s investment funds and vehicles to make future investments.

Adjusted units are used as a measure of the total equity ownership of KKR that is held by KKR & Co. L.P. and KKR Holdings and represent the fully diluted unit count using the if-converted method. We believe this measure is useful to investors as it provides an indication of the total equity ownership of KKR as if all outstanding KKR Holdings units had been exchanged for common units of KKR & Co. L.P.

Core interest expense is used by management as an alternative measurement of interest expense incurred by KKR on a segment basis and excludes interest expense related to debt obligations from investment financing arrangements related to certain of KKR’s private equity funds, investment vehicles and principal investments. These financing arrangements are not direct obligations of the general partners of KKR’s private equity funds or its management companies. On a segment basis, interest expense is included in other investment income. We believe this measure is useful to investors as it provides an indication of the amount of interest expense borne by KKR excluding interest expense that is allocated to KKR’s investment funds and vehicles and other noncontrolling interest holders. Additionally, we believe this measure is useful for analyzing KKR’s ability to service its debt obligations.

Book value is a measure of the net assets of KKR’s reportable segments and is used by management primarily in assessing the unrealized value of our investment portfolio, including carried interest, as well as our overall liquidity position. We believe this measure is useful to investors as it provides additional insight into the assets and liabilities of KKR excluding the assets and liabilities that are allocated to noncontrolling interest holders. Book value differs from the equivalent GAAP amounts on a consolidated basis primarily as a result of the exclusion of ownership interests attributable to KKR Holdings L.P.

Fee related EBITDA is comprised of FRE before the impact of depreciation of fixed assets and amortization of intangible assets and is used by management as a measure of the cash earnings of KKR and its business segments before investment income. We believe this measure is useful to investors as it provides additional insight into the amount of cash earnings generated by KKR’s management companies and capital markets businesses.

Cash and short-term investments represent cash and liquid short-term investments in high-grade, short-duration cash management strategies used by KKR to generate additional yield on our excess liquidity and is used by management in evaluating KKR’s liquidity position. We believe this measure is useful to investors as it provides additional insight into KKR’s available liquidity. Cash and short-term investments differ from cash and cash equivalents on a GAAP basis as a result of the inclusion of liquid short-term investments in cash and short-term investments.

     
KKR

EXHIBIT A

RECONCILIATION OF NET INCOME (LOSS) ATTRIBUTABLE TO KKR & CO. L.P. PER COMMON UNIT (GAAP BASIS - UNAUDITED)
TO AFTER TAX ENI PER ADJUSTED UNIT
(Amounts in thousands, except common unit and per common unit amounts)
 
 
Quarter Ended Quarter Ended Quarter Ended
September 30, 2012 June 30, 2012 September 30, 2011
 
Net income (loss) attributable to KKR & Co. L.P. per common unit $ 0.53 $ 0.62   $ (1.09 )
Weighted Average Common Units Outstanding 239,696,358 235,781,983 222,733,648
Net income (loss) attributable to KKR & Co. L.P. 127,411 146,261 (243,402 )
Plus: Net income (loss) attributable to noncontrolling

interests held by KKR Holdings L.P.

249,460 292,833 (484,879 )
Plus: Non-cash equity based charges 122,157 93,540 123,858
Plus: Amortization of intangibles and other, net 1,234 2,388 797
Plus: Income taxes   9,612   11,093     11,535  
Economic net income (loss) 509,874 546,115 (592,091 )
Less: Provision for income taxes   22,548   25,857     29,634  
Economic net income (loss) after taxes 487,326 520,258 (621,725 )
Adjusted units   702,252,548   700,720,686     683,024,625  
Economic net income (loss) after taxes per adjusted unit $ 0.69 $ 0.74   $ (0.91 )
 
Nine Months Ended Nine Months Ended
September 30, 2012 September 30, 2011
 
Net income (loss) attributable to KKR & Co. L.P. per common unit $ 1.98 $ (0.20 )
Weighted Average Common Units Outstanding 234,876,879 218,501,107
Net income (loss) attributable to KKR & Co. L.P. 464,108 (44,216 )
Plus: Net income (loss) attributable to noncontrolling

interests held by KKR Holdings L.P.

946,484 52,051
Plus: Non-cash equity based charges 330,037 386,533
Plus: Amortization of intangibles and other, net 4,785 3,164
Plus: Income taxes   37,777   67,923  
Economic net income (loss) 1,783,191 465,455
Less: Provision for income taxes   91,788   188,094  
Economic net income (loss) after taxes 1,691,403 277,361
Adjusted units   698,371,025   683,016,747  
Economic net income (loss) after taxes per adjusted unit $ 2.42 $ 0.41  
 
             
 
 
RECONCILIATION OF NET INCOME (LOSS) ATTRIBUTABLE TO KKR & CO. L.P. (GAAP BASIS - UNAUDITED)
TO ECONOMIC NET INCOME (LOSS), FEE RELATED EARNINGS AND FEE RELATED EBITDA
(Amounts in thousands)
 
Quarter Ended Quarter Ended Quarter Ended
September 30, 2012 June 30, 2012 September 30, 2011
 
Net income (loss) attributable to KKR & Co. L.P. $ 127,411 $ 146,261 $ (243,402 )
Plus: Net income (loss) attributable to noncontrolling

interests held by KKR Holdings L.P.

249,460 292,833 (484,879 )
Plus: Non-cash equity based charges 122,157 93,540 123,858
Plus: Amortization of intangibles and other, net 1,234 2,388 797
Plus: Income taxes   9,612   11,093     11,535  
Economic net income (loss) 509,874 546,115 (592,091 )
Plus: Income attributable to segment noncontrolling interests 1,310 1,277 1,840
Less: Investment income (loss)   420,480   477,620     (688,493 )
Fee related earnings 90,704 69,772 98,242
Plus: depreciation and amortization   3,273   3,093     2,147  
Fee related EBITDA $ 93,977 $ 72,865   $ 100,389  
 
Nine Months Ended Nine Months Ended
September 30, 2012 September 30, 2011
 
Net income (loss) attributable to KKR & Co. L.P. $ 464,108 $ (44,216 )
Plus: Net income (loss) attributable to noncontrolling

interests held by KKR Holdings L.P.

946,484 52,051
Plus: Non-cash equity based charges 330,037 386,533
Plus: Amortization of intangibles and other, net 4,785 3,164
Plus: Income taxes   37,777   67,923  
Economic net income (loss) 1,783,191 465,455
Plus: Income attributable to segment noncontrolling interests 5,798 4,451
Less: Investment income (loss)   1,555,157   169,328  
Fee related earnings 233,832 300,578
Plus: depreciation and amortization   8,919   7,397  
Fee related EBITDA $ 242,751 $ 307,975  
 

   
KKR

EXHIBIT A (CONTINUED)

RECONCILIATION OF KKR & CO. L.P. PARTNERS' CAPITAL (GAAP BASIS - UNAUDITED)
TO BOOK VALUE AND BOOK VALUE PER ADJUSTED UNIT
(Amounts in thousands, except common unit and per common unit amounts)
 
As of As of
September 30, 2012 December 31, 2011
 
KKR & Co. L.P. partners’ capital $ 1,842,531 $ 1,328,698
 
Plus: Noncontrolling interests held by KKR Holdings L.P. 5,044,473 4,342,157
 
Plus: Equity impact of KKR Management Holdings Corp. and other   7,777   39,729
 
Book value 6,894,781 5,710,584
 
Adjusted units 702,412,853 689,392,861
   
Book value per adjusted unit $ 9.82 $ 8.29
 
         
 
 
RECONCILIATION OF CASH AND CASH EQUIVALENTS (GAAP BASIS - UNAUDITED)
TO CASH AND SHORT-TERM INVESTMENTS (SEGMENT BASIS)
(Amounts in thousands)
 
As of As of
September 30, 2012 December 31, 2011
 
Cash and cash equivalents $ 1,278,354 $ 843,261
 
Plus: Liquid short-term investments 159,951 146,180
   
Cash and short-term investments $ 1,438,305 $ 989,441
 

 
KKR

EXHIBIT B

     
RECONCILIATION OF WEIGHTED AVERAGE GAAP COMMON UNITS OUTSTANDING TO WEIGHTED AVERAGE ADJUSTED UNITS
 
The following table provides a reconciliation of KKR's Weighted Average GAAP Common Units Outstanding to Weighted Average Adjusted Units.
 
Quarter Ended
September 30, 2012 June 30, 2012 September 30, 2011
Weighted Average GAAP Common Units Outstanding - Basic 239,696,358 235,781,983 222,733,648
Weighted Average Unvested Common Units(a) 17,950,264 16,725,819 -
Weighted Average GAAP Common Units Outstanding - Diluted 257,646,622 252,507,802 222,733,648
Adjustments:
Weighted Average KKR Holdings Units(b) 444,605,926 448,212,884 460,290,977
Weighted Average Adjusted Units 702,252,548 700,720,686 683,024,625
 
Nine Months Ended
September 30, 2012 September 30, 2011
Weighted Average GAAP Common Units Outstanding - Basic 234,876,879 218,501,107
Weighted Average Unvested Common Units(a) 14,482,321 -
Weighted Average GAAP Common Units Outstanding - Diluted 249,359,200 218,501,107
Adjustments:
Weighted Average KKR Holdings Units(b) 449,011,825 464,515,640
Weighted Average Adjusted Units 698,371,025 683,016,747
             
 
RECONCILIATION OF GAAP COMMON UNITS OUTSTANDING TO ADJUSTED UNITS
 
The following table provides a reconciliation of KKR's GAAP Common Units Outstanding to Adjusted Units.
 
As of As of
September 30, 2012 December 31, 2011
GAAP Common Units Outstanding - Basic 241,407,805 227,150,182
Unvested Common Units(a) 17,942,542 6,028,444
GAAP Common Units Outstanding - Diluted 259,350,347 233,178,626
Adjustments:
KKR Holdings Units(b) 443,062,506 456,214,235
Adjusted Units 702,412,853 689,392,861
 
             
(a)   Represents equity awards granted under the KKR & Co. L.P. 2010 Equity Incentive Plan. The issuance of common units of KKR & Co. L.P. pursuant to awards under its equity incentive plan dilutes KKR common unitholders and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR business. For the three and nine months ended September 30, 2011, equity awards granted under the KKR & Co. L.P. 2010 Equity Incentive Plan have been excluded from the calculation of diluted earnings per common unit given the awards would have an anti-dilutive effect as a result of the net loss incurred in the respective periods.
(b) Common units that may be issued by KKR & Co. L.P. upon exchange of units in KKR Holdings L.P. for KKR common units.




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