INTL FCStone Inc. (StoneX Group Inc.) — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020. The filing names the registrant as INTL FCStone Inc. The company is a global brokerage and financial-services firm serving commercial, institutional and retail clients. Fiscal Q2 coincided with substantial COVID-19-related market volatility.
Financial results and condition
Quarterly results: Total revenues were $20.37 billion, up 183% year over year, but include gross physical-commodity sales. After physical-commodity cost of sales, operating revenues were $366.8 million, up 35%; net operating revenues were $243.4 million, up 47%. Net income was $39.3 million versus $23.4 million, and diluted EPS was $2.00 versus $1.21. Pretax income was $56.1 million; the effective tax rate was 30% versus 24%.
Six-month results: Operating revenues were $643.6 million, up 20%; net operating revenues were $413.9 million, up 32%. Net income was $55.6 million versus $41.6 million, and diluted EPS was $2.84 versus $2.15. Pretax income was $77.8 million, up 41%.
Segment performance: In Q2, Securities segment income rose to $38.4 million from $11.8 million, reflecting higher equity-market activity and wider fixed-income spreads. Commercial Hedging segment income increased 19% to $35.8 million, and Clearing and Execution Services income increased 41% to $16.3 million. Global Payments income was $17.2 million, up 9%; Physical Commodities income was $9.6 million, up 23%.
Expenses and margins: Q2 compensation and other expenses increased 34% to $187.3 million. Compensation and benefits rose 40% to $136.7 million, including higher variable compensation. Bad-debt expense was $4.4 million versus $0.7 million, primarily from OTC client deficits. Variable expenses were 63% of total non-interest expenses, compared with 57% a year earlier. Lower short-term rates reduced interest income, partly offset by lower interest expense.
Balance sheet and liquidity: At March 31, total assets were $10.87 billion, compared with $9.94 billion at September 30, 2019; stockholders’ equity was $648.6 million, versus $594.2 million. Cash and cash equivalents were $519.5 million. Total cash, segregated cash and cash equivalents reported in the cash-flow statement were $3.69 billion, including substantial client and regulatory balances. Borrowings totaled $459.3 million, comprising $275.0 million payable to lenders and a $184.3 million net senior secured term loan. The company reported $96.5 million of committed funds available for general working capital and stated it believed liquidity was sufficient. It was in compliance with credit-facility covenants.
Cash flow: For the six months, operating activities provided $1.17 billion, investing activities used $12.3 million and financing activities provided $84.1 million. The operating cash inflow included significant movements in client, segregated and financing balances and should not be read as ordinary free cash flow. The company repurchased 200,000 shares for $7.5 million during the period.
Changes, outlook and material items
- COVID-19 volatility materially increased customer activity in securities, exchange-traded futures and options, FX prime brokerage, commercial hedging and precious metals. Management said extreme volatility could also hinder effective offsetting of trading positions.
- On April 20, 2020, after quarter-end, the U.S. oil benchmark briefly entered negative territory. Management said it did not then believe the event impaired its ability to meet liquidity, capital or regulatory requirements.
- The company agreed to acquire Gain Capital for $6.00 per share, approximately $236.3 million in equity value. Closing was expected in the second half of calendar 2020, subject to approvals and other conditions; up to $350 million of debt financing commitments had been obtained. This was a pending transaction at the filing date.
- Tellimer’s Exotix Partners acquisition closed April 1, 2020 for $4.7 million; the Tellimer Capital transaction remained subject to conditions. GIROXX closed in May 2020 after regulatory approval. Acquisition purchase-price allocations were incomplete for certain transactions.
- The company signed a lease for a new New York headquarters; $80.9 million of legally binding lease payments were excluded from the recorded lease-liability maturity table because the lease had not commenced.
- No numerical earnings guidance was provided. Management cautioned that the pandemic’s effects were uncertain and could adversely affect results, liquidity and operations. Risks cited include market dislocation, counterparty and client defaults, inability to recover client deficits, cybersecurity and operational risks from remote work, and sustained low interest rates.
Contingencies and other risks
- OptionSellers: Net receivables from affected client accounts were $29.0 million at March 31, 2020, with no allowance recorded. The company was pursuing collections and arbitration; clients also brought arbitrations against the clearing subsidiary. Management considered a material adverse outcome from those claims remote, but said eventual bad-debt provisions or losses could be material.
- Regulatory reserve: The filing reported a $33.1 million customer reserve balance against a $66.1 million requirement at March 31. The company deposited an additional $38.1 million on April 2, 2020 to meet customer segregation requirements.
- Near-term facilities: $125 million of committed facilities were scheduled to expire within 12 months of the filing. Management intended to renew or replace them and believed it could do so.
Investor verification priorities
- Confirm that the filing’s unusually large gross revenue figures are distinguished from operating revenues and net operating revenues.
- Track the composition and sustainability of the $1.17 billion operating cash inflow, given the substantial client-balance movements.
- Monitor collection and arbitration outcomes for the $29.0 million OptionSellers receivable and whether an allowance becomes necessary.
- Verify renewal or replacement of facilities approaching expiry, ongoing covenant compliance, and liquidity after the additional customer-reserve deposit.
- Check closing, financing, integration costs and final purchase-price allocations for Gain Capital and other acquisitions, and assess the uncommenced headquarters lease commitment.