KCG Announces Fourth Quarter Results
KCG reported a GAAP net loss of $17.4 million; the pre-tax loss from continuing operations of $18.0 million included $36.5 million in certain merger and integration costs
Based on progress to date in the integration, on an annualized run-rate basis, KCG achieved the upper range of the projected $90 to $110 million in annualized cost synergies by the end of 2013
During the quarter, KCG completed $300 million in principal debt repayments; future savings of approximately $17 million in annual pre-tax interest expense will be additive to cost synergies
JERSEY CITY, N.J., Jan. 31, 2014 /PRNewswire/ -- KCG Holdings, Inc. (NYSE: KCG) today reported a GAAP net loss of $17.4 million, or a loss of $0.15 per diluted share, for the fourth quarter of 2013.
The fourth quarter 2013 GAAP net loss includes net loss from continuing operations of $18.3 million, or a loss of $0.16 per diluted share. The fourth quarter pre-tax loss from continuing operations was $18.0 million which includes the writeoff of capitalized debt costs related to principal repayments of debt, costs associated with a reduction in the global workforce and merger-related expenses and writedowns totaling $36.5 million. Excluding these charges, on a non-GAAP basis, fourth quarter 2013 income from continuing operations before income taxes was $18.5 million. A reconciliation of GAAP to non-GAAP results is included in Exhibit 4.
KCG was formed July 1, 2013 as a result of the merger between Knight Capital Group, Inc. and GETCO Holding Company, LLC ("the Merger"). Financial results for the periods prior to the third quarter of 2013 contained herein solely represent the results of GETCO Holding Company, LLC as the accounting acquirer. Within this announcement, descriptions of the comparative financial results for the three months ended December 31, 2013 to the three months ended December 31, 2012, have been excluded as KCG does not believe the information provides for a meaningful comparison.
Select Financial Results
From Continuing Operations ($ in thousands except EPS)
Trading revenues, net
Commissions and fees
Gain on investment in Knight Capital Group, Inc.
GAAP pre-tax (loss) income
GAAP EPS
Non-GAAP pre-tax income
Fourth Quarter Highlights
KCG achieved the upper range of the previously projected $90 to $110 million in annualized cost synergies on an annualized run-rate basis
KCG completed $300 million in principal repayments during the quarter on the Company's $535 million first lien term loan; at the quarter close, cash and cash equivalents exceeded total outstanding debt
KCG completed the sale of its subsidiary Urban Financial of America, LLC as part of a broad refocusing on core market making and trading services
KCG consolidated its U.S. broker dealer subsidiaries into KCG Americas LLC, effective January 1, 2014
Daniel Coleman, Chief Executive Officer of KCG, said, "During the fourth quarter, KCG again delivered positive financial results on an operating basis. We continued efforts to bring the firm's assets and resources into alignment and achieved the projected cost synergies from the merger well ahead of schedule, with additional savings yet to be realized. In addition, we began aggressively paying down debt. We're intent on becoming the leading, independent, global, multi-asset class securities firm. And, while much work remains, we're grateful for all that has been accomplished at such an early stage."
During the fourth quarter, the Market Making segment generated total revenues of $232.5 million and pre-tax income of $48.0 million, which included $5.3 million in compensation costs related to the reduction in force. Excluding these charges, non-GAAP pre-tax earnings from the Market Making segment was $53.2 million.
This segment encompasses direct-to-client and on-exchange market making across multiple asset classes and is an active participant in all major cash, options and futures markets in the U.S. and Europe. During the quarter, KCG was the industry leader in executing retail U.S. equity shares traded among market makers and the sequential rise in overall retail trading activity positively impacted revenue capture per dollar value traded. Weaker market conditions however in certain classes of global equities, fixed income and currencies, in terms of market volumes and related volatility, constrained the results for the quarter.
Select Trade Statistics: U.S. Equity Market Making
Average daily dollar volume traded ($ millions)
Average daily trades (thousands)
Average daily shares traded (millions)
NYSE and NASDAQ shares traded
OTC Bulletin Board and OTC Market shares traded
Average revenue capture per U.S. equity dollar value traded (bps)
Global Execution Services
During the fourth quarter, the Global Execution Services segment generated total revenues of $84.1 million and a pre-tax loss of $4.5 million, which included $7.1 million in compensation costs related to the reduction in force and asset writedown charges. Excluding these items, non-GAAP pre-tax earnings from the Global Execution Services segment was $2.6 million.
The Global Execution Services segment comprises agency execution services and trading venues. During the quarter, the positive turn in financial results was attributable in part to a marked improvement in institutional equity sales in the U.S. and U.K. as well as increased contributions from KCG Hotspot and KCG BondPoint. The results for the quarter were impacted to a degree by the rebuilding underway in KCG's ETF business.
Select Trade Statistics: Agency Execution and Trading Venues
Average daily aggregate KCG EMS, Knight Direct and GETAlpha U.S. equity shares traded ( millions)*
Average daily KCG Hotspot notional foreign exchange dollar value traded ($ billions)
Average daily KCG BondPoint fixed income par value traded ($ millions)
*KCG EMS, Knight Direct and GETAlpha average daily equities share volume includes U.S. exchange listed shares traded by the execution management system and algorithmic trading strategies.
Corporate and Other
The Corporate and Other segment includes strategic investments and corporate overhead expenses. During the fourth quarter, the Corporate and Other segment recorded total revenues of $5.5 million and a pre-tax loss of $61.5 million, which included approximately $24.2 million in writeoff of capitalized debt costs related to pay down of debt, asset writedown and lease losses, professional fees associated with the Merger and Knight's August 1, 2012 technology issue and compensation costs related to a reduction in force.
As of December 31, 2013, KCG had approximately $674.3 million in cash and cash equivalents. Total outstanding debt was approximately $657.0 million. The company had $1.5 billion in stockholders' equity equivalent to a book value of $12.33 per share and tangible book value of $10.67 per share.
KCG's headcount at December 31, 2013 was 1,229 full-time employees as compared to 1,304 full-time employees at September 30, 2013, excluding employees of Urban. As of July 1, 2013 KCG's consolidated headcount was 1,397 full-time employees, excluding employees of Urban.
Integration Update
As a result of the rapid progress to date in the integration, KCG achieved the upper range of the projected cost synergies on an annualized run-rate basis from the merger by the end of 2013 primarily from reductions in compensation expense. KCG previously estimated cost synergies from the merger of $90 to $110 million per year when fully realized within three years of the merger close, which occurred July 1, 2013.
Subsequent Events
Subsequent to the fourth quarter of 2013, BATS Global Markets Inc. and Direct Edge Holdings LLC announced plans to pay certain dividends to shareholders contingent on the completion of their pending merger. As a shareholder in both BATS and Direct Edge, KCG expects to receive approximately $41.0 million from the aggregate dividends paid at the close of the merger, which is expected in the first quarter of 2014.
In addition, on January 22, 2014, KCG completed an additional $100 million principal repayment on the Company's $535 million first lien term loan. KCG has completed a total of $400 million in principal repayments since entering into the loan on July 1, 2013, fully satisfying the amortization payment of $235 million due on July 1, 2014 and leaving a remaining outstanding balance of $135 million.
KCG will hold a conference call to discuss fourth quarter 2013 financial results starting at 9:00 a.m. Eastern Time today, January 31, 2014. To access the call, dial 888-811-5445 (domestic) or 816-581-1703 (international) and enter passcode 3553273. In addition, the call will be webcast at http://investors.kcg.com/phoenix.zhtml?c=105070&p=irol-EventDetails&EventId=5086915. Following the conclusion of the call, a replay will be available by dialing 888-203-1112 (domestic) or 719-457-0820 (international) and entering passcode 3553273.
Additional information for investors can be found at http://investors.kcg.com.
Non-GAAP Financial Presentations
KCG believes that certain non-GAAP financial presentations, when taken into consideration with the corresponding GAAP financial presentations, are important in understanding operating results. Selected financial information is included in the non-GAAP financial presentations for the three months ended September 30, 2013 and three and twelve months ended December 31, 2013 and 2012. KCG believes the presentations provide a meaningful summary of results of operations for the three months ended September 30, 2013 and three and twelve month periods ended December 31, 2013 and 2012. Reconciliations of GAAP to non-GAAP results are included in the schedules in Exhibit 4.
Certain statements contained herein may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. 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 KCG's industry, management beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Any forward-looking statement contained herein speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. 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: (i) the strategic combination of Knight Capital Group, Inc. ("Knight") and GETCO Holding Company, LLC ("GETCO"), including, among other things, (a) difficulties and delays in integrating the Knight and GETCO businesses or fully realizing cost savings and other benefits, (b) the inability to sustain revenue and earnings growth, and (c) customer and client reactions; (ii) the August 1, 2012 technology issue that resulted in Knight's broker-dealer subsidiary 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; (iii) the costs and risks associated with the sale of Knight's institutional fixed income sales and trading business, the sale of KCG's reverse mortgage origination and securitization business and the departure of the managers of KCG's listed derivatives group; (iv) changes in market structure, legislative, regulatory or financial reporting rules, including the continuing legislative and regulatory scrutiny of high-frequency trading; (v) past or future changes to organizational structure and management; (vi) KCG's ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by KCG's customers and potential customers; (vii) KCG's ability to keep up with technological changes; (viii) KCG's ability to effectively identify and manage market risk, operational and technology risk, legal risk, liquidity risk, reputational risk, counterparty and credit risk, international risk, regulatory risk, and compliance risk; (ix) the cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative or arbitral rulings or proceedings; and (x) the effects of increased competition and KCG's ability to maintain and expand market share. The list above is not exhaustive. Readers should carefully review the risks and uncertainties disclosed in KCG's and Knight's reports with the SEC, including, without limitation, those detailed under "Certain Factors Affecting Results of Operations" in KCG's Quarterly Report on Form 10-Q for the period ended September 30, 2013, under "Risk Factors" in Knight's Annual Report on Form 10-K for the year-ended December 31, 2012 and the Current Report on Form 8-K filed by KCG on November 12, 2013, and in other reports or documents KCG files with, or furnishes to, the SEC from time to time.
KCG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(1)
(In thousands, except per share amounts)
Interest, net
Investment (loss) income and other, net
Employee compensation and benefits
Execution and clearance fees
Communications and data processing
Payments for order flow
Occupancy and equipment rentals
Writedown of capitalized debt costs
Writedown of assets and lease loss accrual
(Loss) income from continuing operations before income taxes
(Loss) income from continuing operations, net of tax
Income (loss) from discontinued operations, net of tax
Net (loss) income
Basic (loss) earnings per share from continuing operations
Diluted (loss) earnings per share from continuing operations
Basic earnings (loss) per share from discontinued operations
Diluted earnings (loss) per share from discontinued operations
Basic (loss) earnings per share
Diluted (loss) earnings per share
Shares used in computation of basic (loss) earnings per share
Shares used in computation of diluted (loss) earnings per share
(1)Fourth and third quarter 2013 includes the results of KCG Holdings, Inc
Fourth quarter 2012 reflect solely the results of GETCO Holding Company, LLC.
For the years ended
Investment income and other, net
Income from continuing operations before income taxes
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
Basic earnings per share from discontinued operations
Diluted earnings per share from discontinued operations
Shares used in computation of basic earnings per share
Shares used in computation of diluted earnings per share
(1) Full year 2013 includes six months of results of KCG Holdings, Inc. plus six months of
GETCO Holding Company, LLC. Full year 2012 reflect solely the results of GETCO Holding Company, LLC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2012(1)
Cash and cash equivalents segregated under federal and other regulations
Financial instruments owned, at fair value:
Total financial instruments owned, at fair value
Collateralized agreements:
Securities borrowed
Receivable from brokers, dealers and clearing organizations
Fixed assets and leasehold improvements,
less accumulated depreciation and amortization
Intangible assets, less accumulated amortization
Deferred tax asset
LIABILITIES & EQUITY
Financial instruments sold, not yet purchased, at fair value:
Other financial instruments
Total financial instruments sold, not yet purchased, at fair value
Collateralized financings:
Securities loaned
Financial instruments sold under agreements to repurchase
Total collateralized financings
Payable to brokers, dealers and clearing organizations
Payable to customers
Accrued compensation expense
Accrued expenses and other liabilities
Capital lease obligations
Redeemable preferred member's equity
Members' equity
Class A Common Stock
Treasury stock, at cost
Total liabilities, redeemable preferred member's equity and equity
(1)GETCO Holding Company, LLC.
PRE-TAX EARNINGS FROM CONTINUING OPERATIONS BY BUSINESS SEGMENT*
Pre-tax earnings (loss)
Pre-tax loss
Pre-tax (loss) earnings
* Totals may not add due to rounding.
Fourth and third quarter 2013 includes the results of KCG Holdings, Inc
Pre-tax earnings
Full year 2013 includes six months of results of KCG Holdings, Inc. plus six months of
Regulation G Reconciliation of Non-GAAP financial measures (Continuing operations)(1)
Three months ended December 31, 2013
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:
GAAP Income (Loss) from continuing operations before income taxes
$ (4,491)
$ (61,485)
Compensation and other expenses related to reduction in workforce
Professional and other fees related to Mergers and August 1st technology issue
Gain on strategic asset
Non GAAP Income (Loss) from continuing operations before income taxes
Three months ended September 30, 2013
GAAP Loss from continuing operations before income taxes
Investment gain
Professional and other fees related to Mergers
Non GAAP Loss from continuing operations before income taxes
* Totals may not add due to rounding
Year ended December 31, 2013
Unit based compensation acceleration due to Mergers
Strategic asset impairment
SOURCE KCG Holdings, Inc.
Sophie Sohn, Communications & Marketing, 312-931-2299, media@kcg.com; or Jonathan Mairs, Investor Relations, 201-356-1529, jmairs@kcg.com