Stonex Group Inc. quarterly report, Q2 FY2022

StoneX Group Inc. — Form 10-Q Summary

Reporting period: Fiscal second quarter and six months ended March 31, 2022; unaudited. Comparisons are with the corresponding 2021 periods unless noted. StoneX is a global financial services network serving commercial, institutional, retail and global-payments clients. Its reported total revenue includes gross physical-commodity sales; operating revenue, which deducts physical-commodity cost of sales, is a more useful measure of the underlying business.

Financial performance and position

MetricThree months ended March 31Six months ended March 31
Operating revenue$544.7 million, up 16%$995.2 million, up 17%
Net operating revenue$400.3 million, up 20%$714.1 million, up 21%
Income before tax$87.4 million, up 15%$139.9 million, up 36%
Net income$64.0 million, up 16%$105.7 million, up 41%
Diluted EPS$3.11, versus $2.73$5.15, versus $3.71
Cash flow from operationsNot presented for the quarter$2,102.0 million, versus $665.0 million
  • For the quarter, compensation and other expenses rose 24% to $319.3 million. Bad-debt expense increased to $12.3 million from $0.9 million; a $6.4 million settlement gain was nonrecurring.
  • At March 31, total assets were $21.20 billion, total liabilities $20.19 billion and stockholders’ equity $1.01 billion. Total assets rose from $18.84 billion at September 30, 2021.
  • Cash and cash equivalents were $1.30 billion. Cash, segregated cash, cash equivalents and segregated cash equivalents totaled $8.81 billion, including customer funds and securities; this total should not be treated as freely available corporate cash.
  • Borrowings totaled $974.8 million: $471.3 million payable to lenders and $503.5 million of senior secured borrowings, net. The latter included $338.2 million carrying value of 8.625% notes due 2025.
  • Cash from operations reflected substantial working-capital and client-balance movements, including a $1.66 billion increase in payables to clients. Investing activities used $24.1 million, including $24.3 million of capital expenditures; financing activities provided $222.2 million.

Material changes and management commentary

  • Management cited inflation concerns, rising interest rates and commodity prices, and heightened market volatility following Russia’s invasion of Ukraine. Increased client activity and, in many cases, wider spreads supported results.
  • Commercial operating revenue grew 28% in the quarter, led by OTC derivatives; Retail rose 17% and Global Payments 22%. Institutional operating revenue increased 6%, but segment income fell 4% to $50.0 million, as higher costs offset revenue growth.
  • Client-balance interest and fee income increased 79% to $10.4 million in the quarter. Average client equity rose 38% to $5.3 billion and average money-market/FDIC sweep balances rose 29% to $1.8 billion.
  • Management reported higher non-variable costs, including compensation, professional fees, marketing, technology and travel. Variable expenses were 55% of total expenses in the quarter, versus 60% a year earlier.
  • Six-month operating cash flow increased sharply, but management’s cash-flow discussion attributes significant period-to-period movements to client activity, collateral, trading balances and commodities inventory.

Liquidity, outlook and risks

  • At March 31, the company had $851.5 million of committed credit facilities, with $515.3 million outstanding. Several facilities were due to expire within twelve months. On April 21, 2022, it amended its senior secured syndicated facility, replacing the prior revolving and term-loan structure with a $475 million revolving facility extended through April 2025. The company said it intended to renew or replace other facilities and believed it could do so.
  • The company reported compliance with its financial covenants and subsidiary regulatory-capital requirements at March 31. It stated that operating cash flows, available cash and available borrowing capacity should meet anticipated liquidity needs for the following year; this is not quantified earnings guidance.
  • Soybean-facility bankruptcy: StoneX held title to about 2.8 million bushels and recorded a $3.0 million allowance for a potential shortfall. Client receivables included $31.6 million related to the matter. A settlement was approved May 2, 2022, but certain claims remained unresolved and the final recovery and insurance coverage were uncertain.
  • OptionSellers matter: Net receivables from affected client accounts were $28.1 million, with an $8.0 million allowance. Arbitrations and collection efforts continued; the company said it intended to defend claims and pursue collections.
  • Other risks include client and counterparty defaults, market and collateral volatility, liquidity and margin-call demands, interest-rate and foreign-exchange movements, regulatory requirements and the possibility that hedges or risk controls do not fully offset exposures. Management estimated that an immediate 25-basis-point decrease in short-term rates would reduce annual net income by approximately $5.9 million, assuming a 27.5% tax rate. It reported $1.0 billion notional of interest-rate swaps at March 31.
  • No specific full-year revenue or earnings guidance was provided. Management cautioned that interim results may not indicate full-year results and highlighted uncertainty from rapidly changing market and economic conditions.

Important facts for investors to verify

  • How much of the $2.10 billion operating cash inflow reflects sustainable business performance versus client-funding, collateral and other working-capital movements.
  • Recovery of the soybean-related receivable, outcome of remaining bankruptcy claims, and any insurance proceeds or additional loss.
  • Collections on OptionSellers account deficits, future arbitration outcomes and adequacy of the related allowance.
  • Renewal or replacement of credit facilities other than the facility amended in April, and continued compliance with borrowing and regulatory-capital requirements.
  • Whether revenue and spread gains from exceptional volatility persist, alongside the effects of higher expenses and bad-debt charges.