Stonex Group Inc. quarterly report, Q1 FY2022

Business context and reporting period

StoneX Group Inc. filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2021, compared primarily with the three months ended December 31, 2020. StoneX is a global financial-services network serving commercial, institutional, retail and global-payments clients. Reported total revenue includes gross physical-commodity sales, so operating revenue and net operating revenue better reflect the scale of its earnings-generating activity.

Financial performance and key metrics

Net operating revenue was about 69.7% of operating revenue, versus 67.4% a year earlier. The effective tax rate was 21%, down from 28%, reflecting discrete tax benefits related to certain state net operating losses and share-based compensation. Compensation and other expenses increased 14% to $261.3 million; variable expenses remained 57% of total non-interest expenses.

Growth was led by Commercial, where operating revenue rose 45% to $152.6 million and segment income more than doubled to $65.5 million, supported by commodity volatility and stronger OTC derivatives and physical-commodity results. Global Payments operating revenue increased 23% to $42.4 million, a record, while Retail operating revenue grew 18% to $96.4 million. Institutional operating revenue declined 3% to $161.3 million and segment income fell 29% to $31.9 million, primarily as securities spreads narrowed.

Cash flow, balance sheet and liquidity

Cash and cash equivalents were $983.4 million at December 31, 2021, compared with $1,109.6 million at September 30, 2021. Total assets were $19.2 billion and stockholders’ equity was $953.0 million. The cash-flow statement reported $600.2 million of net cash used in operating activities, $7.3 million used in investing activities and $241.5 million provided by financing activities. Cash, segregated cash, cash equivalents and segregated cash equivalents declined $367.5 million to $6.142 billion. Operating cash flows are materially affected by client activity, margin movements and trading-related balances; segregated client funds are not equivalent to unrestricted corporate cash.

Reported borrowings totaled $994.7 million, comprising $489.5 million payable to lenders and $505.2 million of senior secured borrowings, net. The senior secured notes bear 8.625% interest and mature in 2025. Committed credit facilities totaled $828.9 million, of which $523.7 million was outstanding. All committed facilities were scheduled to expire within the following twelve months; management said it intended to renew or replace them and believed it could do so. The company reported compliance with financial covenants and regulatory capital requirements. It stated that cash flows, available cash and borrowing capacity should cover anticipated liquidity needs for the following year.

Material changes, outlook and risks

• Management cited strong client volumes and balances, but noted that historically low short-term rates remained a headwind. Average client equity rose 36% to $4.7 billion; interest and fee income on client balances increased 57% to $8.3 million.
• StoneX entered into $750 million notional interest-rate swaps in December 2021, with a weighted-average life of 24 months, to hedge part of its exposure to variable interest income. Management estimated an immediate 25-basis-point decline in short-term rates would reduce annual net income by about $5.9 million, assuming a 27.5% tax rate.
• Management gave no specific earnings or revenue guidance. It cautioned that results depend on uncertain market and economic conditions, including the continuing effects of COVID-19 and its variants.
• Credit, market and liquidity risks include client or counterparty defaults, margin shortfalls, commodity and securities price volatility, interest-rate and foreign-exchange movements, and reliance on collateralized and short-term financing. A substantial portion of subsidiary assets is subject to regulatory restrictions on transfers.
• A third-party grain operator in Chapter 11 held warehouse receipts for about 2.8 million bushels of StoneX soybeans valued at $34.7 million. The company recorded no estimated loss, expecting to receive the grain or proceeds and citing expected insurance coverage for potential shortfalls.
• StoneX reported a $28.9 million net receivable from approximately 300 OptionSellers-related client accounts and continued collection efforts and arbitrations. After the quarter, it prevailed in one arbitration and entered settlements; accountholders were ordered or agreed to pay $0.7 million in aggregate. Management said the likelihood of a material adverse outcome was remote, but future collections and proceedings remain uncertain.
• The company migrated substantially all remaining entities to a new accounting system during the quarter and generated internal and external reporting from it. Management said disclosure controls were effective and that it monitored controls during the transition.

Important facts for investors to verify

• Whether committed credit facilities expiring in 2022 were renewed or replaced, and on what terms.
• How much of the reported cash and liquidity is unrestricted and available to the parent, versus segregated client funds or assets subject to regulatory limits.
• Whether operating cash outflows reflect temporary trading and margin movements or a sustained change in liquidity needs.
• Collections, allowances and legal outcomes for the OptionSellers-related receivables and arbitrations.
• Recovery of the $34.7 million soybean inventory exposure in the grain operator’s bankruptcy and the scope and collectability of insurance coverage.
• Whether stronger Commercial and Retail performance can be sustained if commodity volatility or market spreads decline, and how Institutional margins and interest-rate sensitivity develop.