Following this morning’s release of volume figures for July 2014 by Hotspot FX, parent company KCG Holdings, Inc. (NYSE: KCG) has reported its consolidated earnings of $8.9 million, or $0.08 per diluted share, for the second quarter of 2014.
Net income for the second quarter of 2014 included income from continuing operations, net of tax, of $9.0 million, or $0.08 per diluted share. Pre-tax income from continuing operations for the quarter of $14.5 million included $3.1 million in compensation related to a reduction in workforce, a $2.0 million write down of capitalized debt costs related to the principal repayment of debt, and lease loss accruals of $1.9 million. Excluding these items, pre-tax income from continuing operations for the second quarter was $21.5 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.
KCG has made tremendous steps toward recovery since the catastrophic algorithm failure which occurred exactly two years ago, in which a test algorithm was connected to a production server, resulting in gargantuan losses to the company , affecting its share prices and placing it on bankruptcy watch. Since then, KCG’s merger with GETCO has paid off, with the company performing well to the point of closing its $535 million loan which was associated with the acquisition well in advance of the due date.
Second Quarter Highlights
Posted strong revenue capture per U.S. equity dollar value traded in market making despite the deterioration in market conditions Modest market share gains in market making, agency execution and trading venues Added quantitative-based trading strategy and analysis to the client offering Combined the primary U.K. broker dealers into KCG Europe Limited Completed a $50 million principal repayment on the Company’s $535 million first lien term loan and terminated the facility ahead of its December 5, 2017 maturity date Repurchased 4.5 million shares for approximately $52.9 million under the Company’s initial $150 million stock repurchase program.
Daniel Coleman, Chief Executive Officer of KCG, said, “During the second quarter, KCG made further progress in strengthening the firm’s operations, technology and finances. We grew market share in an environment marked by contracting trade volumes and declining volatility across asset classes. We made further headway in rationalizing the client offering as well as reducing headcount from select teams and support functions. In addition, we reached our target debt level and began to return capital to stockholders through share repurchases.”
He added, “While KCG is still in a period of transformation, our financial standing is considerably improved. In the first full year of operation, KCG released $200 million in excess capital from the integration of the predecessor firms and sale of assets. Amid the demands of integration, we generated over $185 million in free cash flow from operating income since the merger close and reduced corporate debt by $793 million.”
Starting 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 the financial results for any period prior to January 1, 2014.
Market Making
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. and Europe. During the second quarter of 2014, the segment generated total revenues of $218.4 million and pre-tax income of $36.0 million, which included a debt interest charge of $5.9 million. In the first quarter of 2014, the segment reported total revenues of $277.3 million and pre-tax income of $76.0 million, which included a debt interest charge of $7.2 million.
The decline in segment revenues was primarily due to a 13 percent decrease in consolidated U.S. equity share volume quarter on quarter and an approximate 20 percent decrease market wide in retail U.S. equity share volume. In addition, realized volatility for the S&P 500 averaged just 9.2 during the quarter. Nonetheless, KCG recorded strong revenue capture and grew market share of both consolidated and retail volume during the quarter. Revenues from market making in global equities, fixed income, currencies and commodities were impacted by broad declines in market volumes and related volatility benchmarks.
For the full announcement by KCG, click here.