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8-K - FORM 8-K - Virtu KCG Holdings LLCd718824d8k.htm

Exhibit 99.1

KCG ANNOUNCES CONSOLIDATED EARNINGS OF $0.30

PER DILUTED SHARE FOR THE FIRST QUARTER OF 2014

Consolidated revenues of $383.7 million

and pre-tax earnings of $59.4 million during the quarter

KCG Board of Directors authorizes an initial $150 million share repurchase program

JERSEY CITY, New Jersey – May 2, 2014 – KCG Holdings, Inc. (NYSE: KCG) today reported consolidated earnings of $35.7 million, or $0.30 per diluted share, for the first quarter of 2014.

Net income for the first quarter of 2014 included income from continuing operations, net of tax, of $36.9 million, or $0.31 per diluted share. Pre-tax income from continuing operations for the quarter of $59.4 million included income of $1.8 million from investment gains net of asset write down charges. The $1.8 million comprised revenue of $9.6 million recognized by the Company with respect to its investments in BATS Global Markets, Inc. (“BATS”) and Direct Edge Holdings LLC (“Direct Edge”), which merged during the first quarter, a $7.6 million write down of capitalized debt costs related to the principal repayments of debt, and a lease loss accrual. Excluding these items, pre-tax income from continuing operations for the first quarter was $57.6 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.

Select Financial Results

 

From Continuing Operations ($ in thousands except EPS)

   1Q14      4Q13  

Revenues

     383,657         323,374   

Trading revenues, net

     258,297         212,809   

Commissions and fees

     112,257         111,083   

GAAP pre-tax income (loss)

     59,384         (16,699

GAAP EPS

     0.30         (0.15

Non-GAAP pre-tax income

     57,563         19,845   


First Quarter Highlights

 

    Consolidated revenues rose 19% from the fourth quarter of 2013

 

    The Market Making segment grew revenues 19% and pre-tax income 59% from the fourth quarter of 2013

 

    The Global Execution Services segment generated positive financial results

 

    KCG completed $185 million in principal repayments on its first lien term loan; subsequent to the first quarter, KCG repaid the remaining $50 million and terminated the facility

Daniel Coleman, Chief Executive Officer of KCG, said, “During the first quarter, KCG began to demonstrate the potential earnings power of our model. We apply advanced technologies to market making, agency execution and trading venues in order to serve clients, attain scale and drive margin expansion. As integration activities subside, we’re devoting greater attention to organic growth opportunities from core capabilities. The revenue and margin improvement during the first quarter reflects progress to date in enhancing core capabilities as well as reducing the cost structure.”

In the first quarter of 2014, the Company began to charge the Market Making and Global Execution Services segments for the cost of aggregate debt interest. The interest amount charged to each of the segments is determined based on capital limits and requirements. Historically, debt interest was included within the Corporate and Other segment. This change in the measurement of segment profitability has no impact to the consolidated results, will only be reported prospectively and therefore will not be reflected in any prior period financial results.

Market Making

During the first quarter of 2014, the Market Making segment generated total revenues of $277.3 million and pre-tax income of $76.0 million, which included a debt interest charge of $7.2 million. In the fourth quarter of 2013, Market Making reported total revenues of $232.5 million and pre-tax income of $48.0 million.

This segment encompasses direct-to-client and exchange-based 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. The strong performance during the quarter was driven primarily by direct-to-client market making in U.S. equities. Contributing factors include the effectiveness of order execution models, greater efficiencies of scale and improved market conditions, in particular, a quarter-on-quarter rise in overall retail volume. In addition, fixed income market making offering GETDirect, which provides a bilateral market for U.S. Treasuries, recorded strong quarter-on-quarter growth in clients and average daily volume.

Select Trade Statistics: U.S. Equity Market Making

 

     1Q14      4Q13  

Average daily dollar volume traded ($ millions)

     27,321         26,566   

Average daily trades (thousands)

     3,958         3,909   

Average daily shares traded (millions)

     14,907         5,113   

NYSE and NASDAQ shares traded

     862         833   

OTC Bulletin Board and OTC Market shares traded

     14,045         4,280   

Average revenue capture per U.S. equity dollar value traded (bps)

     1.26         0.98   

Global Execution Services

During the first quarter of 2014, the Global Execution Services segment generated total revenues of $87.2 million and pre-tax income of $2.0 million, which included a debt interest charge of $2.4 million. In the fourth quarter of 2013, Global Execution Services reported total revenues of $84.1 million and a pre-tax loss of $4.5 million.


The Global Execution Services segment comprises agency execution services and trading venues. The solid performance of institutional equities during the quarter was the result of closer coordination of sales, adjustments to the cost structure and a modest uptick in institutional trading of global equities. Institutional equity sales trading in the U.S. and U.K. made solid contributions while KCG’s algorithmic and EMS executions set a quarterly record for average daily U.S. equity share volume. Among KCG’s trading venues, KCG Hotspot grew average daily notional FX dollar value traded quarter-on-quarter and KCG BondPoint set a quarterly record for average daily fixed income par value traded.

Select Trade Statistics: Agency Execution and Trading Venues

 

     1Q14      4Q13  

Average daily aggregate KCG EMS, Knight Direct and GETAlpha U.S. equity shares traded ( millions)*

     281.0         256.1   

Average daily KCG Hotspot notional foreign exchange dollar value traded ($ billions)

     32.2         29.0   

Average daily KCG BondPoint fixed income par value traded

($ millions)

     144.2         133.0   

 

* 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 first quarter of 2014, the Corporate and Other segment recorded total revenues of $19.1 million and a pre-tax loss of $18.7 million. Included in the results was revenue of $9.6 million resulting from the merger of BATS and Direct Edge, a $7.6 million write down of capitalized debt costs related to the principal repayment of debt and a lease loss accrual. Excluding these items, the Corporate and Other segment’s pre-tax loss for the first quarter was $20.8 million.

The $9.6 million revenue related to the merger of BATS and Direct Edge comprises a partial realized gain with respect to KCG’s investment in Direct Edge offset, in part, by KCG’s share of expenses incurred by BATS and Direct Edge in connection with the merger. Prior to the merger, KCG accounted for its strategic investment in BATS under the cost method and accounted for its investment in Direct Edge under the equity method. Following the merger, KCG owns 16.7% of the overall equity of BATS and 19.9% of the voting equity and will account for its interest in BATS under the equity method. This change in accounting principle is applied retrospectively and, as such, KCG will present its financial results for all prior periods with BATS accounted for under the equity method.

Financial Condition

As of March 31, 2014, KCG had approximately $651.1 million in cash and cash equivalents. Total outstanding debt was approximately $472.3 million. The company had $1.6 billion in stockholders’ equity equivalent to a book value of $12.46 per share and tangible book value of $10.85 per share.

KCG’s headcount at March 31, 2014 was 1,230 full-time employees as compared to 1,229 full-time employees at December 31, 2013.

Subsequent Events

Subsequent to the first quarter, on May 1, 2014, KCG’s Board of Directors approved an initial program to repurchase up to a total of $150 million in shares of the Company’s outstanding Class A Common Stock (“Common Stock”) and warrants to purchase shares of Common Stock (“Warrants”), subject to compliance with the covenants contained in the Company’s debt indenture. Under the program, the Company may repurchase shares or Warrants from time to


time in open market transactions, accelerated stock buyback programs, tender offers, privately-negotiated transactions or by other means. Repurchases of shares may also be made under a Rule 10b5-1 plan. The timing and amount of repurchase transactions will be based on market conditions, share price, legal requirements and other factors. The program has no expiration date and may be suspended, modified or discontinued at any time without prior notice. There are no assurances that any repurchases of shares of Common Stock or Warrants may actually occur. As of May 1, 2014, the Company had approximately 125.7 million shares of Common Stock outstanding, including restricted stock units (“RSUs”) and 24.3 million outstanding Warrants.

On April 15, 2014, KCG completed an additional $50.0 million principal repayment on the Company’s $535.0 million first lien term loan entered into on July 1, 2013. With this repayment, KCG has fully repaid the loan and terminated the facility ahead of its December 5, 2017 maturity date.

Conference Call

KCG will hold a conference call to discuss first quarter 2014 financial results starting at 9:00 a.m. Eastern Time today, May 2, 2014. To access the call, dial 888-713-3596 (domestic) or 913-312-1507 (international) and enter passcode 1591513. In addition, the call will be webcast at http://www.media-server.com/m/acs/9b2975bbe5e318d76e0c3bd2a11393a2. 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 1591513.

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 March 31, 2014, December 31, 2013 and March 31, 2013. KCG believes the presentations provide a meaningful summary of results of operations for each of the three month periods. Reconciliations of GAAP to non-GAAP results are included in the schedules in Exhibit 4.

About KCG

KCG is a leading independent securities firm offering investors and clients a range of services designed to address trading needs across asset classes, product types and time zones. The firm combines advanced technology with exceptional client service across market making, agency execution and venues. KCG has multiple access points to trade global equities, fixed income, currencies and commodities via voice or automated execution. www.kcg.com

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’s 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. 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 business combination (the “Mergers”) 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 to the Mergers; (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 increased focus by regulators, the New York Attorney General, Congress and the media on market structure issues, and in particular, the scrutiny of high frequency trading, market fragmentation, colocation, access to market data feeds, and remuneration arrangements such as payment for order flow and exchange fee structures; (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 reports with the SEC, including, without limitation, those detailed under “Risk Factors” in KCG’s Annual Report on Form 10-K/A for the year-ended December 31, 2013, and other reports or documents KCG files with, or furnishes to, the SEC from time to time.

CONTACTS

 

Sophie Sohn    Jonathan Mairs
Communications & Marketing    Investor Relations
312-931-2299    201-356-1529
media@kcg.com    jmairs@kcg.com


KCG HOLDINGS, INC.    Exhibit 1
CONSOLIDATED STATEMENTS OF OPERATIONS(1)   
(Unaudited)   

 

     For the three months ended  
     March 31, 2014     December 31, 2013     March 31, 2013  
     (In thousands, except per share amounts)  

Revenues

      

Trading revenues, net

   $ 258,297      $ 212,809      $ 86,765   

Commissions and fees

     112,257        111,083        25,499   

Interest, net

     948        433        (121

Investment income (loss) and other, net

     12,155        (951     2,849   
  

 

 

   

 

 

   

 

 

 

Total revenues

     383,657        323,374        114,992   
  

 

 

   

 

 

   

 

 

 

Expenses

      

Employee compensation and benefits

     122,319        112,209        32,209   

Execution and clearance fees

     75,501        78,483        40,957   

Communications and data processing

     36,796        37,512        20,694   

Payments for order flow

     22,032        18,243        589   

Depreciation and amortization

     20,103        19,566        8,167   

Debt interest expense

     9,524        12,943        473   

Collateralized financing interest

     6,162        5,327        —     

Occupancy and equipment rentals

     8,285        9,358        3,296   

Professional fees

     5,402        7,734        6,725   

Business development

     1,683        1,923        25   

Writedown of capitalized debt costs

     7,557        13,209        —     

Writedown of assets and lease loss accrual, net

     266        10,500        2,238   

Other

     8,643        13,066        4,477   
  

 

 

   

 

 

   

 

 

 

Total expenses

     324,273        340,073        119,850   
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     59,384        (16,699     (4,858

Income tax expense

     22,467        787        1,974   
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, net of tax

     36,917        (17,486     (6,832

(Loss) income from discontinued operations, net of tax

     (1,253     864        —     
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 35,664      $ (16,622   $ (6,832
  

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share from continuing operations

   $ 0.32      $ (0.15   $ (0.15
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share from continuing operations

   $ 0.31      $ (0.15   $ (0.15
  

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share from discontinued operations

   $ (0.01   $ 0.01      $ —     
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share from discontinued operations

   $ (0.01   $ 0.01      $ —     
  

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share

   $ 0.31      $ (0.15   $ (0.15
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ 0.30      $ (0.15   $ (0.15
  

 

 

   

 

 

   

 

 

 

Shares used in computation of basic earnings (loss) per share

     115,569        114,272        45,452   
  

 

 

   

 

 

   

 

 

 

Shares used in computation of diluted earnings (loss) per share

     117,898        114,272        45,452   
  

 

 

   

 

 

   

 

 

 

 

(1)  First quarter 2014 and fourth quarter 2013 includes the results of KCG Holdings, Inc.

First quarter 2013 reflects solely the results of GETCO Holding Company, LLC.


KCG HOLDINGS, INC.    Exhibit 2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION   
(Unaudited)   

 

     March 31, 2014     December 31, 2013  
     (In thousands)  

ASSETS

    

Cash and cash equivalents

   $ 651,096      $ 674,281   

Cash and cash equivalents segregated under federal and other regulations

     208,836        183,082   

Financial instruments owned, at fair value:

    

Equities

     2,205,013        2,298,785   

Listed options

     231,150        339,798   

Debt securities

     153,176        83,256   
  

 

 

   

 

 

 

Total financial instruments owned, at fair value

     2,589,339        2,721,839   

Collateralized agreements:

    

Securities borrowed

     1,367,050        1,357,387   

Receivable from brokers, dealers and clearing organizations

     1,472,860        1,257,251   

Fixed assets and leasehold improvements, less accumulated depreciation and amortization

     140,874        146,668   

Investments

     96,369        125,413   

Goodwill and Intangible assets, less accumulated amortization

     202,280        207,754   

Deferred tax asset, net

     172,156        172,503   

Other assets

     129,416        147,322   
  

 

 

   

 

 

 

Total assets

   $ 7,030,276      $ 6,993,500   
  

 

 

   

 

 

 

LIABILITIES & EQUITY

    

Liabilities

    

Financial instruments sold, not yet purchased, at fair value:

    

Equities

   $ 1,776,702      $ 1,851,006   

Listed options

     193,822        252,282   

Debt securities

     110,903        57,198   

Other financial instruments

     639        5,014   
  

 

 

   

 

 

 

Total financial instruments sold, not yet purchased, at fair value

     2,082,066        2,165,500   

Collateralized financings:

    

Securities loaned

     724,947        733,230   

Financial instruments sold under agreements to repurchase

     864,985        640,950   
  

 

 

   

 

 

 

Total collateralized financings

     1,589,932        1,374,180   

Payable to brokers, dealers and clearing organizations

     517,580        474,108   

Payable to customers

     552,119        481,041   

Accrued compensation expense

     54,591        149,430   

Accrued expenses and other liabilities

     185,440        172,406   

Capital lease obligations

     10,101        10,039   

Debt

     472,259        657,259   
  

 

 

   

 

 

 

Total liabilities

     5,464,088        5,483,963   
  

 

 

   

 

 

 

Equity

    

Class A Common Stock

     1,272        1,233   

Additional paid-in capital

     1,331,988        1,306,549   

Retained earnings

     247,342        211,678   

Treasury stock, at cost

     (15,879     (11,324

Accumulated other comprehensive income

     1,465        1,401   
  

 

 

   

 

 

 

Total equity

     1,566,188        1,509,537   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 7,030,276      $ 6,993,500   
  

 

 

   

 

 

 


KCG HOLDINGS, INC.    Exhibit 3
PRE-TAX EARNINGS (LOSS) FROM CONTINUING OPERATIONS BY BUSINESS SEGMENT*   
(In thousands)   
(Unaudited)   

 

     For the three months ended  
     March 31, 2014     December 31, 2013     March 31, 2013  

Market Making

      

Revenues

   $ 277,346      $ 232,519      $ 102,067   

Expenses

     201,314        184,569        96,180   
  

 

 

   

 

 

   

 

 

 

Pre-tax earnings

     76,032        47,951        5,887   
  

 

 

   

 

 

   

 

 

 

Global Execution Services

      

Revenues

     87,220        84,065        9,274   

Expenses

     85,204        88,557        11,101   
  

 

 

   

 

 

   

 

 

 

Pre-tax earnings (loss)

     2,016        (4,491     (1,827
  

 

 

   

 

 

   

 

 

 

Corporate and Other

      

Revenues

     19,091        6,790        3,651   

Expenses

     37,755        66,949        12,569   
  

 

 

   

 

 

   

 

 

 

Pre-tax loss

     (18,664     (60,159     (8,918
  

 

 

   

 

 

   

 

 

 

Consolidated

      

Revenues

     383,657        323,374        114,992   

Expenses

     324,273        340,075        119,850   
  

 

 

   

 

 

   

 

 

 

Pre-tax earnings (loss)

   $ 59,384      $ (16,699   $ (4,858
  

 

 

   

 

 

   

 

 

 

 

* Totals may not add due to rounding.

First quarter 2014 and fourth quarter 2013 includes the results of KCG Holdings, Inc.

First quarter 2013 reflects solely the results of GETCO Holding Company, LLC.


KCG HOLDINGS, INC.    Exhibit 4
Regulation G Reconciliation of Non-GAAP financial measures (Continuing operations)*(1)   
(in thousands)   

 

Three months ended March 31, 2014    Market Making      Global
Execution
Services
    Corporate and
Other
    Consolidated  

Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:

         

GAAP Income (Loss) from continuing operations before income taxes

   $ 76,032       $ 2,016      $ (18,664   $ 59,384   

Writedown of capitalized debt costs

     —           —          7,557        7,557   

Income resulting from the merger of BATS and Direct Edge, net

     —           —          (9,644     (9,644

Writedown of assets and lease loss accrual, net

     359         —          (93     266   
  

 

 

    

 

 

   

 

 

   

 

 

 

Non GAAP Income (Loss) from continuing operations before income taxes

   $ 76,391       $ 2,016      $ (20,844   $ 57,563   
  

 

 

    

 

 

   

 

 

   

 

 

 
Three months ended December 31, 2013    Market Making      Global
Execution
Services
    Corporate and
Other
    Consolidated  

Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:

         

GAAP Income (Loss) from continuing operations before income taxes

   $ 47,951       $ (4,491   $ (60,159   $ (16,699

Compensation and other expenses related to reduction in workforce

     5,254         5,447        708        11,409   

Professional and other fees related to Mergers and August 1st technology issue

     —           —          2,785        2,785   

Writedown of capitalized debt costs

     —           —          13,209        13,209   

Gain on strategic asset

     —           —          (1,359     (1,359

Writedown of assets and lease loss accrual

     —           1,681        8,819        10,500   
  

 

 

    

 

 

   

 

 

   

 

 

 

Non GAAP Income (Loss) from continuing operations before income taxes

   $ 53,205       $ 2,637      $ (35,997   $ 19,845   
  

 

 

    

 

 

   

 

 

   

 

 

 
Three months ended March 31, 2013    Market Making      Global
Execution
Services
    Corporate and
Other
    Consolidated  

Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax:

         

GAAP Income (Loss) from continuing operations before income taxes

   $ 5,887       $ (1,827   $ (8,918   $ (4,858

Compensation and other expenses related to reduction in workforce

     2,111         530        378        3,019   

Professional and other fees related to Mergers

     —           —          5,576        5,576   

Writedown of assets and lease loss accrual

     —           —          2,238        2,238   
  

 

 

    

 

 

   

 

 

   

 

 

 

Non GAAP Income (Loss) from continuing operations before income taxes

   $ 7,998       $ (1,297   $ (726   $ 5,975   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

* Totals may not add due to rounding
(1)  First quarter 2014 and fourth quarter 2013 includes the results of KCG Holdings, Inc.

First quarter 2013 reflects solely the results of GETCO Holding Company, LLC.