INTL FCStone Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014. The filing is by INTL FCStone Inc. (the company identified in the request as StoneX Group Inc.). Amounts are in U.S. dollars; financial-statement figures are generally in millions unless noted.
Business context and reporting period
INTL FCStone is a diversified global financial-services firm serving commercial, institutional and other clients through Commercial Hedging, Global Payments, Securities, Physical Commodities, and Clearing and Execution Services. Reported total revenue includes gross physical-commodity sales, so operating revenue and net operating revenue are more useful indicators of underlying activity. The company reorganized reportable segments during the quarter and recast prior-period segment data. It also presented its physical base-metals business as discontinued operations after completing its exit.
Financial performance and condition
| Metric | Three months ended Mar. 31, 2014 | Prior-year quarter | Six months ended Mar. 31, 2014 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $8,452.9 | $11,769.3 | $16,361.6 | $23,906.8 |
| Operating revenue | $129.2 | $114.9 | $242.1 | $233.3 |
| Net operating revenue | $85.9 | $75.1 | $159.3 | $158.4 |
| Income from continuing operations before tax | $10.3 | $1.7 | $14.2 | $15.7 |
| Net income | $7.5 | $1.5 | $10.0 | $14.8 |
| Diluted EPS | $0.39 | $0.08 | $0.51 | $0.76 |
Second-quarter operating revenue rose 12% and net operating revenue rose 14% year over year; pretax income and net income also improved substantially. For the six-month period, operating revenue increased 4%, but net income declined. Prior-year six-month results included a $9.2 million gain from sales of LME and KCBT shares. The company’s non-GAAP adjusted net income was $7.2 million for the quarter versus $1.4 million, and $8.4 million for six months versus $13.2 million. These adjusted figures include the company’s marked-to-market adjustments and are not GAAP measures.
Quarterly segment trends: Commercial Hedging revenue increased 23% to $63.8 million, with stronger agricultural, ethanol and LME activity. Global Payments increased 38% to $12.8 million, supported by 22% more payments. Securities revenue fell 4% to $17.2 million, including weaker Argentine debt trading, partly offset by asset management. Clearing and Execution Services revenue was broadly flat at $30.9 million. Physical Commodities revenue declined 9% to $5.1 million; precious-metals ounces traded fell 17%.
Margins and expenses: Compensation and other expenses were $75.6 million in the quarter, up 3%. Compensation and benefits were 61% of net operating revenue, down from 68% a year earlier. Introducing-broker commissions rose 33% to $12.8 million, while interest expense increased to $2.8 million from $1.6 million, primarily reflecting the 8.5% senior notes issued in 2013. Management reported variable expenses at 56% of total non-interest expenses for the quarter versus 54% a year earlier.
Cash flow, balance sheet and debt: Six-month operating cash flow was $44.5 million, investing cash outflow $3.1 million and financing cash outflow $27.1 million. Cash and cash equivalents rose $13.1 million to $169.2 million. Operating cash flow reflected significant movements in segregated assets and customer balances, which can fluctuate with trading and margin activity. At March 31, total assets were $3,015.1 million, total liabilities $2,677.2 million and equity $337.9 million. Bank borrowings were $40.5 million and senior notes were $45.5 million, for total indebtedness of $86.0 million. The notes bear 8.5% interest and mature in 2020. Four committed credit facilities totaled $270 million; $25 million was scheduled to expire within 12 months. The company said it intended to renew or replace the facility and believed it could do so. It reported compliance with financial covenants and regulatory capital requirements.
Management stated that cash flows, available cash and available credit were expected to be adequate for future liquidity needs. It also noted that $133.2 million of cash, cash equivalents and available-for-sale securities was held by foreign subsidiaries; repatriation could incur U.S. taxes, and the company intended to reinvest the funds abroad.
Changes, outlook, risks and unusual items
- Business and reporting changes: The physical base-metals exit was completed in the second quarter of fiscal 2014 and reclassified as discontinued operations. The segment structure was reorganized and prior segment information recast.
- Comparability and accounting: Prior-period statements were corrected for an immaterial intercompany physical-sales elimination error, reducing reported gross revenue and cost of sales by equal amounts; operating revenue and net income were unaffected. Commodity inventory and derivatives can be recognized in different periods under GAAP, creating earnings volatility; management also presents marked-to-market non-GAAP information.
- Legal contingencies: In the Sentinel litigation, an appellate court ruled for FCStone on March 19, 2014, but the trustee sought rehearing. If the ruling is reversed, the company estimated a potential pretax loss of $4 million to $6 million. A separate securities class action filed in January 2014 seeks unspecified damages; the company said it believed the case lacked merit and would defend it. A prior shareholder case settlement was approved in March 2014, with $265,000 legal cost after expected insurance coverage. The CFTC settlement relating to supervision of a customer energy-trading account required an independent review, which the company said was completed.
- Regulatory and operating risks: Management highlighted customer and counterparty default, margin and liquidity demands, market volatility, competition, key-personnel risk and changing regulation. Some Dodd-Frank capital and margin rules remained unfinalized or not fully implemented. Exchange-member guarantee exposure cannot be quantified, though management viewed payment as remote.
- Controls: Management concluded disclosure controls were effective as of March 31, 2014, and said a previously identified material weakness in accounting for certain OTC derivatives was remediated during the six-month period.
- Other notable items: The company repurchased 386,614 shares for $7.2 million during the six months. It began self-insuring eligible medical and dental claims in January 2014 and accrued $0.5 million at quarter-end. No quantified earnings guidance was provided.
Important facts for investors to verify
- Whether the Sentinel trustee’s rehearing petition changes the favorable appellate outcome or creates a $4 million to $6 million pretax exposure.
- Progress and potential financial effects of the securities class action and ongoing regulatory requirements.
- Renewal or replacement of the $25 million facility scheduled to expire within 12 months, and continued covenant and regulatory-capital compliance.
- How much of the reported cash and liquidity is restricted, customer-related, or held overseas, and how trading-related balance fluctuations affect operating cash flow.
- Whether the strong second-quarter Commercial Hedging and Global Payments performance persists, given weaker Securities and Physical Commodities activity and low interest rates.
- How GAAP timing differences for physical commodities and derivatives affect reported results relative to management’s non-GAAP marked-to-market measures.