Business context and reporting period
StoneX Group Inc. filed this Form 10-Q for its fiscal third quarter ended June 30, 2022; comparisons below are with the quarter ended June 30, 2021 unless noted. StoneX operates a global financial-services network across Commercial, Institutional, Retail and Global Payments businesses.
Financial performance and condition
| Metric | Quarter | Change |
|---|---|---|
| Total revenues | $18.931 billion | Up 86%; includes gross physical-commodity sales |
| Operating revenues | $528.8 million | Up 23% |
| Net operating revenues | $374.1 million | Up 26% |
| Income before tax | $70.9 million | Up 54% |
| Net income | $49.1 million | Up 44% |
| Diluted EPS | $2.37 | Compared with $1.67 |
Net income was approximately 13.1% of net operating revenues, versus 11.5% a year earlier. The effective tax rate was 31%, compared with 26%. For the nine months ended June 30, operating revenues were $1.524 billion, up 19%; net income was $154.8 million, up 42%; and diluted EPS was $7.52, versus $5.38.
Quarterly operating-revenue growth reflected higher FX/CFD activity, securities volumes, physical contracts, global payments, and interest and fees on client balances. Interest and fee income on client balances rose 207% to $21.5 million. Segment income increased 28% to $171.1 million: Retail rose to $26.3 million from $6.0 million; Commercial to $72.5 million from $60.4 million; Global Payments to $24.6 million from $20.3 million; and Institutional to $47.7 million from $46.5 million.
Expenses also increased: compensation and other expenses rose 19% to $303.2 million, and total interest expense rose 58% to $38.8 million. The company reported a $0.7 million net bad-debt recovery for the quarter, but $11.4 million of net bad-debt expense for the nine-month period.
At June 30, 2022, total assets were $19.409 billion and stockholders’ equity was $1.047 billion. Cash and cash equivalents were $1.364 billion; cash, segregated cash and segregated cash equivalents combined were $6.062 billion, down from $6.510 billion at September 30, 2021. These combined balances include client funds and securities and should not be viewed as wholly available corporate cash.
Total outstanding borrowings were $847.1 million, comprising $508.2 million in loans and $338.9 million in senior secured borrowings, net. The senior secured notes bear 8.625% interest and mature in 2025. The company reported compliance with credit-facility covenants and subsidiary regulatory-capital requirements. It stated that available cash, operating cash flows and credit facilities should meet anticipated liquidity needs for the next year.
Operating cash flow was a $496.0 million use for the nine months, versus $1.379 billion provided in the prior-year period, reflecting substantial movements in brokerage, client, collateral and financing balances. Investing cash use was $37.6 million, mainly capital expenditures; financing provided $91.2 million.
Material changes and management commentary
Management attributed the quarter’s stronger activity to inflationary pressures, sharp increases in short-term interest rates, and volatility across financial and physical markets. It reported record operating revenues in Institutional and Global Payments and growth in the other segments. Higher market activity supported trading volumes and client-balance income, while higher rates and activity also increased interest expense.
Not all segments improved equally: Institutional segment income was nearly flat for the quarter and declined 10% for the nine months, as higher interest, compensation and other costs offset revenue growth. Management also cited higher selling and marketing, professional-fee, technology, travel and business-development expenses. Variable expenses were 57% of total expenses in the quarter, compared with 58% a year earlier.
Outlook, risks, contingencies and unusual items
The filing gives no numerical earnings or revenue guidance. Management said it expects liquidity resources to be adequate for the following year and intends to renew or replace facilities as they expire. A $50 million StoneX Financial Ltd. facility was scheduled to expire in October 2022; the company said it intended to renew or replace expiring facilities. A subsidiary commodity-financing facility was amended after quarter-end, on July 28, 2022, to raise its commitment from $325 million to $400 million and extend maturity to July 2024.
Key risks include volatile markets and interest rates, counterparty and client defaults, collateral and margin demands, regulatory capital and liquidity restrictions, foreign-exchange movements, competition, legal and regulatory exposure, and the continuing effects of COVID-19. Most subsidiary assets are subject to regulatory restrictions on transfers. Management estimated that an immediate 25-basis-point decline in short-term rates would reduce annual net income by approximately $8.0 million, assuming a 27.5% tax rate.
Two contingencies warrant attention. First, a grain-facility bankruptcy settlement generated $30.4 million in proceeds, insufficient to cover the value of StoneX’s soybean receipts; insurance recovery discussions continued, with no assurance of recovery. Second, OptionSellers-related client deficit receivables were $27.4 million, net of collections and other deductions, with a $7.8 million allowance. The company was pursuing collections and defending client arbitrations; it reported favorable arbitration decisions in January and July 2022, but future outcomes and collections remain uncertain.
The nine-month results included a nonrecurring $6.4 million foreign-exchange antitrust class-action settlement gain. The prior-year quarter included a $3.3 million non-taxable acquisition-related gain, contributing to the difference in quarterly tax rates. Cash-flow hedge losses of $25.0 million, net of tax, were recorded in other comprehensive income for the nine months.
Important facts for investors to verify
- Assess underlying growth using operating and net operating revenues rather than gross total revenues, which include large physical-commodity sales and corresponding costs.
- Review the composition and availability of reported cash and segregated client balances, and the drivers of the $496.0 million nine-month operating cash outflow.
- Track debt, variable-rate exposure, facility renewal and covenant headroom, including the scheduled 2022 facility expiry.
- Monitor recovery prospects for the grain-facility shortfall and collection and arbitration outcomes for OptionSellers receivables.
- Evaluate whether elevated trading activity, interest income and segment growth persist, and whether expense increases and Institutional weakness continue.