Business context and reporting period
INTL FCStone Inc. (the issuer named in the filing) filed this unaudited Form 10-Q for its fiscal third quarter ended June 30, 2016, and the nine months then ended. The company provides global financial services across commodity hedging and trading, payments, securities, and clearing and execution. Dollar amounts below are in millions unless stated otherwise.
Reported total revenue includes physical commodity sales on a gross basis, while most other business revenue is reported net. Operating revenue, which deducts physical commodity cost of sales, is more useful for period comparisons. A change in precious-metals accounting presentation affected reported gross revenue comparability but did not affect operating revenue, pretax income, or net income.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $4,868.5 | $3,995.1 | $11,977.3 | $32,064.8 |
| Operating revenue | $175.0 | $151.6 | $492.4 | $445.6 |
| Net operating revenue | $117.3 | $103.4 | $332.9 | $304.5 |
| Income before tax | $21.4 | $17.2 | $53.5 | $48.9 |
| Net income | $14.6 | $12.2 | $37.9 | $34.6 |
| Diluted EPS | $0.78 | $0.62 | $2.00 | $1.78 |
- Q3 operating revenue rose 15%, net operating revenue 13%, and net income 20%. Nine-month operating revenue rose 11% and net income 10%, while reported total revenue fell 63%, largely reflecting the different gross-versus-net presentation of precious-metals activity.
- Q3 net income was approximately 8.3% of operating revenue, compared with 8.0% a year earlier. The filing does not present a conventional gross margin measure.
- Q3 growth reflected stronger Commercial Hedging, Securities, Clearing and Execution Services (CES), and Physical Commodities results. For the nine months, Securities revenue rose 51%, while Commercial Hedging revenue fell 7%, mainly due to weaker OTC volumes and spreads.
- Cash and cash equivalents were $364.6 at June 30, up from $268.1 at September 30, 2015. Nine-month operating cash flow was negative $31.8, versus positive $4.7 in the prior-year period; investing used $12.1 and financing provided $148.9. Financing included a $170.6 increase in borrowings, while share repurchases used $19.5.
- Total assets were $6,065.9 and stockholders’ equity $415.5. Total indebtedness was $257.1, including $208.6 drawn on committed credit facilities, a $3.0 bank note, and $45.5 of 8.5% senior notes due 2020. The $385.0 of committed facilities had $176.4 undrawn at period end.
- Management said approximately 96% of assets were liquid, but substantial balances relate to customers, counterparties, collateral, or regulatory requirements and should not be equated with freely available corporate cash. All facilities’ financial covenants and subsidiaries’ regulatory capital requirements were met at June 30.
Material changes, outlook, risks, and unusual items
- Q3 operating revenue increased across all segments. Commercial Hedging benefited from improved domestic grain conditions and London activity; Securities from debt trading, including Argentina; and CES from higher exchange volumes and customer equity. Global Payments processed 43% more payments, but average revenue per trade fell 29% as transaction mix shifted toward lower-value payments.
- The interest-rate management strategy generated a $2.7 unrealized pretax gain in Q3 and $2.9 for the nine months. Q3 also included a $3.1 unrealized loss on derivatives held against precious-metals inventory in non-broker-dealer subsidiaries. These fair-value movements are recorded in earnings and can vary between periods.
- Management provided no specific earnings guidance. It said cash flows, available cash, and borrowing capacity should be adequate for future liquidity needs, and intended to renew or replace $165 of facilities scheduled to expire within twelve months of the filing. Renewal is not assured; noncompliance with facility covenants could make debt payable on demand.
- Key risks include market and interest-rate volatility, customer or counterparty defaults and margin shortfalls, liquidity demands, regulatory change, competition, and dependence on key personnel. The filing added uncertainty from the UK’s proposed withdrawal from the EU (Brexit) as a risk to UK and global operations. The company also cited pending implementation of derivatives rules and review of MiFID II/MiFIR requirements.
- The Sentinel litigation remained on appeal: the district court ruled for the company on one post-petition claim but against it regarding reserve-account funds; both sides appealed. Management assessed losses related to the trustee’s appeal as neither probable nor reasonably possible. Ordinary-course legal accruals were described as immaterial.
- After quarter-end, the company completed acquisitions of Sterne Agee legacy brokerage and clearing businesses on July 1, 2016, and its legacy RIA business on August 1, 2016. Cash consideration was based on net tangible book value, estimated at approximately $48.5, subject to finalization.
- Nine-month bad-debt expense rose to $4.6 from $3.2, mainly from customer receivables and deficits. The company also repurchased 349,898 shares in Q3 at an average $26.23 per share.
Important facts for investors to verify
- Confirm the issuer and security identity: this filing is for INTL FCStone Inc., notwithstanding the request metadata naming StoneX Group Inc.
- Assess underlying revenue and earnings trends using operating revenue and segment results, not gross total revenue, given the precious-metals presentation change and the prior-year comparison.
- Review cash-flow volatility and the extent to which reported liquidity is restricted, customer-related, or dependent on collateral and short-term funding.
- Track renewal or replacement of the $165 of near-term-expiring facilities, covenant compliance, and the increase in borrowings.
- Evaluate the sustainability of trading-related earnings and unrealized gains or losses, along with credit exposures, Brexit-related uncertainty, and the outcomes of the Sentinel appeals.
- Confirm the final Sterne Agee purchase price and subsequent integration and financial effects, which are not reflected in the June 30 balance sheet.