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KCG Announces Third Quarter 2013 Results
KCG net income of $98.9 million included a one-time deferred tax benefit of $103.5 million related to a change in tax status at the merger close
Pre-tax loss from continuing operations of $8.1 million includes $25.6 million in severance and merger-related expenses

JERSEY CITY, N.J., Oct. 30, 2013 /PRNewswire/ -- KCG Holdings, Inc. (NYSE: KCG) today reported GAAP net income of $98.9 million, or $0.86 per diluted share, for the third quarter of 2013.

The third quarter 2013 GAAP net income includes net income from continuing operations of $99.6 million, or $0.87 per diluted share. Included in the net income from continuing operations is a deferred income tax benefit of $103.5 million, or $0.90 per diluted share. Also included in the net income from continuing operations are pre-tax expenses related to severance, certain professional fees and lease loss accruals totaling $25.6 million. Excluding these expenses, on a non-GAAP basis, third quarter 2013 income from continuing operations before income taxes was $17.5 million. A reconciliation of GAAP to non-GAAP results is included in Exhibit 5.

KCG was formed July 1, 2013 as a result of the merger between Knight Capital Group, Inc. and GETCO Holding Company, LLC. 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


3Q 2013

Revenues ($ thousands)

339,847

   Trading revenues, net

230,471

   Commissions and fees

109,079

GAAP EPS from continuing operations ($)

$0.87

GAAP pre-tax loss from continuing operations ($ thousands)

(8,118)

Non-GAAP pre-tax income from continuing operations ($ thousands)

17,528

Third Quarter Highlights

  • KCG's market making accounted for approximately 14.0% of consolidated U.S. equity share volume*
  • The Market Making segment reported the highest quarterly revenue capture per U.S. equity dollar value traded in the period dating back to the first quarter of 2012 (see Exhibit 1)
  • In aggregate, KCG EMS, Knight Direct and GETAlpha accounted for approximately 4.7% of consolidated U.S. equity share volume**
  • KCG Hotspot accounted for approximately 12.8% of institutional spot FX volume among reporting venues
  • KCG BondPoint accounted for approximately 17.4% of interdealer corporate bond transactions reported to TRACE under 250 bonds
  • KCG announced the sale of subsidiary Urban Financial Group, Inc., which is expected to close in the fourth quarter of 2013

* Consolidated U.S. equity share volume based on Tape A, B and C volume published by BATS Global Markets.
** Consolidated U.S. equity share volume based on Tape A, B and C volume published by BATS Global Markets. KCG EMS, Knight Directand GETAlpha average daily equities share volume includes U.S. exchange-listed shares traded by the execution management system and algorithmic trading strategies.

Daniel Coleman, Chief Executive Officer of KCG, said, "At the start of the third quarter, integration work shifted from planning to execution. KCG's core capabilities encompass market making and trading through agency execution and venues. A priority of the integration is to share new technologies, intellectual capital and infrastructure costs to create advantages and efficiencies that we believe KCG's competitors will have difficulty matching. During the quarter, we made significant progress while delivering positive financial results on an operating basis. I'm pleased with the individual and collective initiative across the new firm."

Market Making
KCG's Market Making segment covers direct market making to clients as well as providing market making liquidity on public markets. During the third quarter, the Market Making segment generated total revenues of $240.1 million and pre-tax income of $47.9 million. Expenses during the quarter included approximately $2.4 million in severance from reductions in headcount and a lease loss accrual. Excluding the severance expense and lease loss accrual, non-GAAP pre-tax earnings from continuing operations was $50.3 million.

KCG market making is an active participant in all major cash and futures markets in the U.S. and Europe across equities, options, fixed income, foreign exchange and commodities. During the quarter, KCG accounted for approximately 14.0% of consolidated U.S. equity share volume and average revenue capture per U.S. equity dollar value traded of 1.01 basis points withstood the expected seasonality as well as the muted volatility. The financial results are due to operational improvements as well as a market-wide increase in retail U.S. equity volume year over year. Related to the integration, the market making team began work to rationalize infrastructure, optimize order routing and realize better volume-based rates.

Select Trade Statistics: U.S. Equity Market Making


3Q 2013

Average daily dollar volume traded ($ millions)

25,365

Average daily trades (thousands)

3,809

Average daily shares traded (millions)

4,148

   NYSE and NASDAQ shares traded

805

   OTC Bulletin Board and OTC Market shares traded

3,343

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

1.01

Global Execution Services
The Global Execution Services segment is comprised of agency execution services and trading venues. During the third quarter, the Global Execution Services segment generated total revenues of $91.4 million and a pre-tax loss of $16.4 million. Expenses during the quarter included approximately $15.1 million in severance from reductions in headcount. Excluding the severance expense, the non-GAAP pre-tax loss from continuing operations was $1.2 million.

KCG is a leading execution-only trading firm, primarily in U.S. equities, providing clients with access to sophisticated algorithms and experienced traders. In addition, KCG operates advanced multi-asset class venues that facilitate trading between market participants. During the quarter, KCG posted record highs for market share in the categories covering algorithmic and EMS U.S. equity execution, institutional spot foreign exchange and interdealer corporate bond transactions. Financial results for the segment in the third quarter, however, were hampered by the reorganization of the ETF team as well as a seasonal, market-wide decline in institutional U.S. equity volume. Related to the integration, the Global Execution Services team combined all capabilities in algorithmic and EMS execution as well as the sales function of KCG ATS' Knight Match and GETMatched.


Select Trade Statistics: Agency Execution and Trading Venues


3Q 2013

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

269.7

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

28.4

Average daily KCG BondPoint fixed income par value traded ($ millions)

129.1

* 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 third quarter, the Corporate and Other segment recorded total revenues of $8.4 million and a pre-tax loss of $39.6 million. Expenses during the quarter included approximately $8.1 million in professional fees related to the merger and Knight's August 1st technology issue, as well as a lease-loss accrual.

The July 1, 2013 merger whereby Knight Capital Group, Inc. and GETCO Holding Company, LLC were combined as part of KCG resulted in GETCO becoming subject to U.S. corporate income taxes. As a result of this change in tax status, KCG recorded a nonrecurring $103.5 million deferred tax benefit and corresponding deferred tax asset relating to existing GETCO tax attributes.

KCG's strategic investments include a 15.2 percent stake in BATS Global Markets Inc. and a 19.9 percent stake in Direct Edge Holdings LLC. During the third quarter, BATS and Direct Edge agreed to merge.

Financial Condition
As of September 30, 2013, KCG had approximately $798.7 million in cash and cash equivalents. Aggregate long- and short-term debt was approximately $970 million. The company had $1.5 billion in stockholders' equity equivalent to a book value of $12.34 per share and tangible book value of $10.63 per share.

KCG's headcount at September 30, 2013 was 1,304 full-time employees, excluding employees affected by the announced sale of Urban Financial Group.

Subsequent Events
Subsequent to the third quarter of 2013:

  • On October 16, Knight Capital Americas LLC reached a settlement with the SEC, without admitting or denying the findings, relating to the Market Access Rule, and Rules 200(g) and 203(b) of Regulation SHO
  • KCG completed a prepayment on October 23 of $200 million on the 5.75% first lien term loan in the amount of $535 million entered into on July 1, 2013
  • KCG disclosed in an 8-K dated October 28 a charge of approximately $9.4 million in severance from reductions in headcount

In addition, KCG today announced the appointment of Charles Haldeman as non-executive Chairman of the Board effective November 1, 2013.

Conference Call
KCG will hold a conference call to discuss third quarter 2013 financial results starting at 9:00 a.m. Eastern Time today, October 30, 2013. To access the call, dial 888-218-8059 (domestic) or 913-312-0964 (international) and enter passcode 1599997. In addition, the call will be webcast at http://investors.kcg.com/phoenix.zhtml?c=105070&p=irol-EventDetails&EventId=5046806. 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 1599997.

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 and nine months ended September 30, 2013 and 2012. KCG believes the presentations provide a meaningful summary of results of operations for the three and nine month periods ended September 30, 2013 and 2012. Reconciliations of GAAP to non-GAAP results are included in the schedules in Exhibit 5.

About KCG
KCG is a leading independent securities firm offering investors 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 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 pending sale of KCG's reverse mortgage origination and securitization business and the departure of the managers of KCG's listed derivatives group; (iv) the ability of KCG's broker-dealer subsidiary to recover all or a portion of the damages that are attributable to the manner in which NASDAQ OMX handled the Facebook IPO; (v) changes in market structure, legislative, regulatory or financial reporting rules, including the continuing legislative and regulatory scrutiny of high-frequency trading; (vi) past or future changes to organizational structure and management; (vii) 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; (viii) KCG's ability to keep up with technological changes; (ix) KCG's ability to effectively identify and manage market risk, operational risk, legal risk, liquidity risk, reputational risk, counterparty risk, international risk, regulatory risk, and compliance risk; (x) the cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative or arbitral rulings or proceedings; and (xi) 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 June 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 August 9, 2013, and in other reports or documents KCG files with, or furnishes to, the SEC from time to time.

 

 

















Exhibit 1

KCG HOLDINGS, INC.















AVERAGE DAILY U.S. EQUITIES MARKET MAKING VOLUME AND AVERAGE REVENUE CAPTURE PER U.S. EQUITY DOLLAR VALUE TRADED*




















Q1 2012(1)


Q2 2012(1)(2)


Q3 2012(1)(3)


Q4 2012(1)


Q1 2013(1)


Q2 2013(1)


Q3 2013

















Market Making















Average daily dollar volume traded ($ millions)


33,891


32,306


25,962


28,659


30,134


29,660


25,365

Average daily trades (thousands) 


5,973


6,048


4,582


4,547


4,625


4,572


3,809

Average daily shares traded (millions) 


3,892


3,744


3,296


3,093


3,996


3,624


4,148


NYSE and NASDAQ shares traded


1,130


1,095


895


929


944


911


805


OTC Bulletin Board and OTC Market shares traded


2,762


2,649


2,401


2,164


3,052


2,713


3,343

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


0.85


0.85


0.88


0.89


0.88


0.96


1.01

















*

In August 2013, KCG modified the reporting to remove certain equity stats of GETCO Holding Company, LLC to align with historical reporting practices.

(1)

Trade volumes and statistics are for KCG Holdings, Inc for Q3 2013. For all other periods presented, trade volumes and statistics are the combination of  Knight Capital Group, Inc. and GETCO Holding Company, LLC.

(2)

Average revenue capture per U.S. equity dollar value traded excludes $26.0 million in trading losses related to the Facebook IPO.

(3)

Average revenue capture per U.S. equity dollar value traded excludes $456.6 million in trading losses related to the August 1, 2012 technology issue.

 


KCG HOLDINGS, INC.








Exhibit 2


CONSOLIDATED STATEMENTS OF OPERATIONS(1)










(Unaudited)











For the three months ended September 30, 


For the nine months ended September 30,




2013



2012



2013



2012



(In thousands, except per share amounts)














Revenues














Trading revenues, net

$

230,471


$

92,556


$

415,495


$

333,737



Commissions and fees


109,079



25,542



164,391



79,487



Interest, net


(177)



(781)



(970)



(1,998)



Investment income (loss) and other, net


474



13,285



(8,765)



14,015




Total revenues


339,847



130,602



570,151



425,241

















Expenses














Employee compensation and benefits


129,631



31,875



229,883



111,395



Execution and clearance fees


81,023



42,267



167,931



144,656



Communications and data processing


44,046



21,681



86,040



67,380



Interest 


23,870



706



26,515



2,002



Depreciation and amortization


20,091



7,574



36,004



27,180



Payments for order flow


16,431



717



17,468



2,128



Professional fees


9,077



2,575



38,928



7,690



Occupancy and equipment rentals


8,898



3,240



15,454



8,865



Business development


2,644



6



2,686



19



Writedown of assets and lease loss accrual


936



-



4,248



-



Other


11,318



5,349



30,028



19,002




Total expenses


347,965



115,990



655,185



390,317

















(Loss) income from continuing operations before income taxes


(8,118)



14,612



(85,034)



34,924


Income tax (benefit) expense 


(107,767)



4,805



(102,478)



10,368


Income from continuing operations, net of tax


99,649



9,807



17,444



24,556


Loss from discontinued operations, net of tax


(784)



-



(784)



-

















Net income

$

98,865


$

9,807


$

16,660


$

24,556
































Basic earnings per share from continuing operations

$

0.87


$

0.21


$

0.25


$

0.49

















Diluted earnings per share from continuing operations

$

0.87


$

0.21


$

0.25


$

0.49

















Basic loss per share from discontinued operations

$

(0.01)


$

-


$

(0.01)


$

-

















Diluted loss per share from discontinued operations

$

(0.01)


$

-


$

(0.01)


$

-

















Basic earnings per share

$

0.87


$

0.21


$

0.24


$

0.49

















Diluted earnings per share

$

0.86


$

0.21


$

0.24


$

0.49

















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


114,113



46,411



68,632



49,619

















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


114,773



46,411



68,855



49,619

















(1)

Third quarter 2013 includes the results of KCG Holdings, Inc . Year to date 2013 includes three months of results of KCG Holdings, Inc. plus six months of GETCO Holding Company, LLC. All of 2012 reflect the results of GETCO Holding Company, LLC.

 

KCG HOLDINGS, INC.




Exhibit 3


CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION





(Unaudited)



















September 30, 2013



December 31, 2012(1)





(In thousands)


ASSETS








   Cash and cash equivalents


$

798,712


$

427,631


   Cash and securities segregated under federal and other regulations



216,442



-


   Financial instruments owned, at fair value:








      Equities



2,156,466



378,933


      Listed equity options



288,227



92,305


      Debt securities



79,284



183,637


      Total financial instruments owned, at fair value



2,523,977



654,875


   Collateralized agreements:








      Securities borrowed 



1,370,921



52,261


   Receivable from brokers, dealers and clearing organizations



1,330,113



142,969


   Fixed assets and leasehold improvements, 







      less accumulated depreciation and amortization


161,865



83,341


   Investments



125,889



248,438


   Goodwill



18,398



4,645


   Intangible assets, less accumulated amortization



192,045



46,123


   Deferred tax asset



169,619



4,180


   Assets of business held for sale



6,056,302



-


   Assets within discontinued operations 



41,997



-


   Other assets



287,015



23,073










   Total assets


$

13,293,295


$

1,687,536










LIABILITIES & EQUITY 








Liabilities








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








      Equities


$

1,848,728


$

423,740


      Listed equity options



229,722



69,757


      Debt securities



79,057



19,056


      Other financial instruments



5,431



-


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



2,162,938



512,553


   Collateralized financings:








      Securities loaned  



543,451



-


      Financial instruments sold under agreements to repurchase



595,029



-


   Total collateralized financings 



1,138,480



-










   Payable to brokers, dealers and clearing organizations



666,178



24,185


   Payable to customers



486,136



-


   Accrued compensation expense



130,158



27,728


   Accrued expenses and other liabilities



220,648



118,068


   Capital lease obligations



12,453



24,191


   Liabilities of business held for sale 



5,987,308



-


   Liabilities within discontinued operations 



18,716



-


   Short-term debt 



235,000



-


   Long-term debt 



722,259



15,000










   Total liabilities



11,780,274



721,725










Equity








      Members' equity



-



965,811


      Class A common stock



1,235



-


      Additional paid-in capital



1,427,879



-


      Retained earnings



98,865



-


      Treasury stock, at cost



(9,811)



-


      Accumulated other comprehensive (loss) income



(5,147)



-


   Total equity



1,513,021



965,811










   Total liabilities and equity


$

13,293,295



1,687,536









(1) GETCO Holding Company, LLC.












 


KCG HOLDINGS, INC.




Exhibit 4

PRE-TAX EARNINGS FROM CONTINUING OPERATIONS BY BUSINESS SEGMENT*




(In thousands)













(Unaudited)




























For the three months ended 

September 30,


For the nine months ended 

September 30,



2013


2012


2013


2012

Market Making













Revenues


$

240,110


$

107,672


$

455,678


$

383,203

Expenses



192,257



99,458



400,070



345,227

Pre-tax earnings



47,853



8,214



55,608



37,976














Global Execution Services













Revenues



91,366



9,258



113,701



27,248

Expenses



107,720



10,378



134,949



31,087

Pre-tax loss



(16,354)



(1,120)



(21,248)



(3,839)














Corporate and Other













Revenues



8,371



13,672



772



14,790

Expenses



47,988



6,154



120,166



14,003

Pre-tax earnings (loss)



(39,617)



7,518



(119,394)



787














Consolidated













Revenues



339,847



130,602



570,151



425,241

Expenses



347,965



115,990



655,185



390,317

Pre-tax (loss) earnings


$

(8,118)


$

14,612


$

(85,034)


$

34,924














*

Totals may not add due to rounding.


Third quarter 2013 includes the results of KCG Holdings, Inc. Year to date 2013 includes three months of results of KCG   Holdings, Inc. plus six months of GETCO Holding Company, LLC. All of 2012 reflect the results of GETCO Holding Company, LLC.

 

 


KCG HOLDINGS, INC.








Exhibit 5

Regulation G Reconciliation of Non-GAAP financial measures (Continuing operations)(1)














(in thousands)


















Three months ended September 30, 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


$              47,853


$            (16,354)


$            (39,617)


$              (8,118)

Compensation and other expenses related to reduction in workforce


2,309


15,132


-


17,441

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


-


-


7,269


7,269

Writedown of assets and lease loss accrual


108


-


828


936

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


$              50,270


$              (1,222)


$            (31,520)


$              17,528




























Nine months ended September 30, 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


$              55,608


$            (21,248)


$          (119,394)


$            (85,034)

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


-


-


44,398


44,398

Compensation and other expenses related to reduction in workforce


6,264


15,997


-


22,261

Unit acceleration due to Mergers


-


-


14,931


14,931

Strategic asset impairment


-


-


9,184


9,184

Writedown of assets and lease loss accrual


108


-


4,525


4,633

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


$              61,980


$              (5,251)


$            (46,356)


$              10,373



















Three months ended September 30, 2012


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


$                8,214


$              (1,120)


$                7,518


$              14,612

Investment gain


-


-


(11,354)


(11,354)

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


$                8,214


$              (1,120)


$              (3,836)


$                3,258




























Nine months ended September 30, 2012


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


$              37,976


$              (3,839)


$                   787


$              34,924

Investment gain


-


-


(11,354)


(11,354)

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


$              37,976


$              (3,839)


$            (10,567)


$              23,570










*

Totals may not add due to rounding

(1)

Third quarter 2013 includes the results of KCG Holdings, Inc. Year to date 2013 includes three months of results of KCG Holdings, Inc. plus six months of GETCO Holding Company, LLC. All of 2012 reflect the results of GETCO Holding Company, LLC.

 

 


 

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

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