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KCG Holdings, Inc. Class A (NYSE:KCG) today reported consolidated earnings of $26.1 million, or $0.23 per diluted share, for the fourth quarter of 2014.
The fourth quarter 2014 GAAP net income from continuing operations was $26.0 million, or $0.23 per diluted share. Included in these results is a net tax benefit of approximately $7 million related to the recognition of state deferred tax assets which primarily relate to state tax net operating losses, and a $1.2 million tax benefit related to federal tax credits.
Fourth quarter pre-tax income from continuing operations was $26.5 million and included a $6.1 million lease loss and a $2.1 million gain related to the completion of the sale of KCG’s futures commission merchant (FCM). Excluding these items, on a non-GAAP basis, the fourth quarter 2014 income from continuing operations before taxes was $30.5 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. 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.
Fourth Quarter Highlights
U.S. equity market making grew market share of SEC Rule 605 U.S. equity share volume, whereas algorithmic trading and order routing business activity established a new quarterly record for average daily U.S. equity share volume Released $45 million in excess capital from the consolidation of U.K. broker dealers.
Completion of sale of KCG Hotspot to BATS
Subsequent to the fourth quarter, announced the sale of KCG Hotspot to BATS, Daniel Coleman, Chief Executive Officer of KCG, said, “During the fourth quarter, KCG generated solid financial results due in part to an improved operating environment. The U.S. equity market posted higher average daily share volume, dollar volume and realized volatility on both a sequential and annual basis. Amid the heightened activity, KCG recorded market share gains in U.S. equity market making as well as algorithmic trading and order routing from the third quarter. Also contributing to KCG’s results were increased market volumes and volatility in select segments of the global equities, fixed income, currencies and commodities markets. Finally, during the quarter, management completed a strategic review of KCG Hotspot and initiated a sale process which ultimately proved successful.”
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 based on capital limits and requirements. Historically, debt interest was fully included within the Corporate and Other segment. This change in the measurement of segment profitability, which has no impact to the consolidated results, is reported prospectively and, therefore, is not reflected in the financial results for any period prior to January 1, 2014.
The Market Making segment encompasses direct-to-client and non-client, 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., Europe and Asia. During the fourth quarter of 2014, the segment generated total revenues of $238.7 million and pre-tax income of $42.7 million, which included a debt interest charge of $5.6 million.
During the fourth quarter of 2014, the favorable market conditions drove heightened activity in direct-to-client and non-client, exchange-based market making across several asset classes. KCG’s average daily SEC Rule 605 U.S. equity share volume rose 27.3 percent sequentially due to a rebound in retail trading activity plus steady market share gains amid persistent strong competition. In aggregate, KCG direct-to-client and non-client market making in U.S. equities increased average daily exchange-listed share volume 28.3 percent quarter over quarter. Results from non-U.S. equity market making grew quarter over quarter on improved market conditions in certain classes of global equities, fixed income, currencies and commodities.
In the third quarter of 2014, the segment generated total revenues of $166.6 million and a pre-tax loss of $8.0 million. Excluding compensation related to a reduction in workforce and other employee separations, the pre-tax loss for the quarter was $5.2 million. In the fourth quarter of 2013, the segment reported total revenues of $232.5 million and pre-tax income of $48.0 million. Excluding compensation costs related to a reduction in workforce, the pre-tax earnings for the quarter was $53.2 million.
Mr. Coleman commented, “During the fourth quarter, U.S. equity market volumes picked up with the return of realized volatility to more normative levels over the past five years. KCG’s market share gains in direct-to-client U.S. equity market making were largely attributable to additive order flow from longstanding clients. Also, individual investors continued to express confidence in the market by allocating an estimated $27.7 billion in net inflows to U.S. equities during the quarter, which represented the highest quarterly total during 2014. In non-U.S. equity market making, KCG continued to develop strategic asset classes that demonstrate promise.”
Global Execution Services
The Global Execution Services segment comprises agency execution services and trading venues. During the fourth quarter of 2014, the segment generated total revenues of $93.4 million and pre-tax income of $10.0 million, which included a debt interest charge of $1.2 million. The results also included a gain of $2.1 million related to the completion of the sale of the FCM. Excluding this gain, the Global Execution Services segment’s pre-tax income for the fourth quarter was $7.9 million.
The results for the fourth quarter of 2014 reflect increased trading activity across numerous addressable markets as well as signs of growth from strategic initiatives. In agency execution, algorithmic trading and order routing established a new quarterly high for average daily U.S. equity share volume. Institutional equity sales trading in the U.S. and Europe made a solid contribution while the ETF trading team continued to successfully cultivate existing clients and onboard new ones. Among KCG’s trading venues, KCG Hotspot increased average daily notional FX dollar volume 4.4 percent quarter over quarter while KCG BondPoint grew average daily par value traded by 3.9 percent.
In the third quarter of 2014, the segment generated total revenues of $79.2 million and a pre-tax loss of $1.7 million. Excluding compensation related to a reduction in workforce and other employee separations, the pre-tax results for the segment was earnings of $1.9 million. In the fourth quarter of 2013, the segment reported total revenues of $84.1 million and a pre-tax loss of $4.5 million. Excluding compensation costs related to the reduction in workforce and asset writedowns, the segment’s pre-tax results were earnings of $2.6 million.
Mr. Coleman commented, “Institutional trading activity was especially strong during the fourth quarter, which is reflected in the results from KCG’s agency execution services. Algorithmic trading continued to make steady inroads with a number of leading institutions and the ETF trading team is quickly approaching critical mass after a year of rebuilding.”
Corporate and Other Business Activities
The Corporate and Other segment includes strategic investments and corporate overhead expenses. During the fourth quarter of 2014, the segment recorded total revenues of $14.0 million and a pre-tax loss of $26.1 million, which included lease loss expenses of $6.1 million. The Corporate and Other segment’s pre-tax loss for the fourth quarter was $20.0 million excluding the lease losses.
In the third quarter of 2014, the segment recorded total revenues of $26.5 million and a pre-tax loss of $5.5 million which included a net gain of $15.1 million related to KCG’s investment in tradeMONSTER, in conjunction with tradeMONSTER’s combination with OptionsHouse in the third quarter, compensation related to a reduction in workforce and other employee separations of $4.2 million and a lease loss accrual of $0.3 million. In the fourth quarter of 2013, the segment recorded total revenues of $6.8 million and a pre-tax loss of $60.2 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, 2014, KCG had $578.8 million in cash and cash equivalents. Total outstanding debt was $422.3 million, of which $117.3 million is due in March 2015. The Company had $1.5 billion in stockholders’ equity, equivalent to a book value of $13.03 per share and tangible book value of $11.72 per share based on total shares outstanding of 116.9 million, including restricted stock units.
KCG’s headcount at December 31, 2014 was 1,093 full-time employees as compared to 1,153 full-time employees at September 30, 2014.
During the fourth quarter of 2014, KCG did not repurchase any shares under the Company’s $150.0 million stock repurchase program. As of December 31, 2014, KCG had approximately $55.0 million of remaining capacity available to repurchase additional shares under the program. The Company cautions that there are no assurances that any further repurchases may actually occur.
Announced Sale of KCG Hotspot
On January 28, 2015, KCG announced the sale of spot foreign exchange ECN KCG Hotspot to BATS Global Markets. Under the terms of the agreement, KCG will receive $365 million in cash upon the close of the transaction. In addition, the parties have agreed to share certain tax benefits, which could result in further payments to KCG of up to approximately $70 million in the three-year period following the close. Upon the close, the transaction is expected to increase KCG’s tangible book value by approximately $2.00 per share. The transaction is expected to be completed in the second quarter of 2015.
For the official announcement from KCG, click here.