StoneX Group Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2021; comparisons are to the periods ended March 31, 2020 unless otherwise noted. Dollar amounts are in millions unless stated. StoneX is a global financial services network serving commercial, institutional, retail, and global-payments clients. The filing describes this quarter as a record for operating revenues.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Total revenues | $11,244.8, down 45% | $20,495.3, down 35% |
| Operating revenues | $471.4, up 29% | $851.5, up 32% |
| Net operating revenues | $334.2, up 37% | $590.3, up 43% |
| Income before tax | $76.3, up 36% | $103.2, up 33% |
| Net income | $55.3, up 41% | $74.8, up 35% |
| Diluted EPS | $2.73, versus $2.00 | $3.71, versus $2.84 |
Total revenues fell because the physical commodities business reports large gross sales and associated cost of sales; operating revenues, which deduct those costs, increased. For the quarter, principal gains rose 57% to $265.2, commission and clearing fees rose 11% to $129.8, while interest income fell 44% to $23.4. The effective tax rate was 28% for both the quarter and six-month period, versus 30% and 29%, respectively, in the prior-year periods.
Quarterly segment income increased to $159.0 from $117.3. Retail contributed $32.0 versus $7.0, principally reflecting the Gain acquisition; Commercial was $55.6 versus $41.7; Institutional was $52.0 versus $51.4; and Global Payments was $19.4 versus $17.2. The company reported net operating revenues of $334.2, after transaction-based clearing expenses, introducing-broker commissions, and interest expense.
Cash flow, balance sheet, debt, and liquidity
- Six-month cash from operating activities was $665.0, versus $1,170.0. Investing used $40.4, including $40.0 of property and equipment purchases; financing provided $46.4. Cash flow was affected by substantial movements in client-related and trading assets and liabilities.
- Cash, segregated cash, and cash equivalents totaled $5,152.1 at March 31, 2021, up from $4,468.4 at September 30, 2020. This includes customer funds and securities held for regulatory purposes; the balance-sheet line for cash and cash equivalents alone was $1,001.5.
- Total assets were $15,799.7 and stockholders’ equity was $860.2, compared with $13,474.9 and $767.5 at September 30, 2020.
- Outstanding borrowings totaled $826.9: $455.9 under committed facilities, $25.0 under uncommitted facilities, $8.9 on a bank note, and $337.1 carrying value on senior secured notes. The notes bear 8.625% interest and mature in 2025. The company reported compliance with financial covenants.
- Four committed facilities totaled $771.7, with $455.9 outstanding. Three were scheduled to expire within twelve months after March 31, 2021; management intended to renew or replace them and believed it could do so. Management stated that operating cash flows, available cash, and borrowing capacity should meet liquidity needs for the following year.
Material changes and management commentary
- Gain, acquired in August 2020, materially expanded Retail FX/CFD activity and contributed to higher revenue, expenses, and headcount. Management also reported completing the transfer of most Gain U.K. operations into StoneX Financial Ltd.
- Retail FX/CFD operating revenues were $71.2 for the quarter, versus none in the prior-year comparison. Securities operating revenues grew 20% to $157.8, while physical-contract operating revenues rose 108% to $49.5.
- Management cited heightened customer activity and market volatility, expanded products, and increased market share. It also noted reduced income on client balances from historically low short-term interest rates: client-balance interest and fee income fell 62% for the quarter despite average client equity rising 56% to $3.8 billion.
- Compensation and other expenses increased 38% to $257.9 for the quarter; management attributed much of the increase to acquisitions and higher activity. Variable expenses were 60% of total expenses, down from 63% in the prior-year quarter.
- CECL adoption on October 1, 2020 produced a $6.2 after-tax reduction to opening retained earnings and an $8.2 increase in the allowance related to client deficit accounts.
- Capital expenditures included a corporate airplane purchase, office improvements, IT equipment, and internally developed software. The company authorized repurchases of up to 1.0 million shares through September 30, 2021, but repurchased none during the quarter.
Risks, contingencies, and outlook
- Approximately 300 OptionSellers-related client accounts had aggregate receivables of $28.9 at March 31, 2021. StoneX is pursuing collections and arbitration; it also faces client arbitrations seeking damages. The company said the likelihood of a material adverse outcome was remote, but future collections, proceedings, and credit-loss provisions could affect results.
- Market, counterparty, and liquidity risks arise from trading, derivatives, client margin obligations, and short positions. Financial instruments sold, not yet purchased were $1,118.2, up from $686.0 at September 30, 2020; losses could arise if their fair values increase, although positions may be offset by assets held.
- COVID-19 effects remained uncertain. Management reported continuity measures and said the company was monitoring the pandemic’s impacts. It gave no numerical earnings or revenue guidance.
- Other risks include low interest rates, volatility in commodity, securities, and foreign-exchange markets, regulatory changes and capital requirements, and the renewal of expiring credit facilities. Management reported all subsidiaries in compliance with regulatory capital requirements.
Important facts for investors to verify
- How much of operating-revenue and earnings growth is attributable to Gain, and how integration costs and operating performance develop.
- Whether the three near-term-expiring committed facilities were renewed or replaced on acceptable terms.
- Collections and arbitration outcomes for the $28.9 OptionSellers receivable, and any subsequent changes to its allowance.
- The composition and availability of the $5.15 billion combined cash figure, which includes segregated customer funds, and the company’s liquidity under market stress.
- Whether elevated trading activity and market conditions persist, and how low interest rates continue to affect income earned on client balances.