INTL FCStone Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013. The filing is for INTL FCStone Inc. (not a company identified as StoneX Group Inc.). Amounts are in U.S. dollars; financial statements are unaudited.
Business context
INTL FCStone is a financial services group serving commodity, foreign-exchange, securities, and futures-clearing customers. Its reported total revenue includes large gross physical-commodity sales; operating revenue, after physical commodity cost of sales, is a more useful measure of activity.
Financial results and liquidity
| Metric | Three months ended June 30, 2013 | Prior year | Nine months ended June 30, 2013 | Prior year |
|---|---|---|---|---|
| Total revenue | $11,039.5 million | $17,351.1 million | $36,872.1 million | $51,592.5 million |
| Operating revenue | $122.1 million | $123.8 million | $365.1 million | $339.7 million |
| Net revenue | $118.9 million | $121.2 million | $355.5 million | $331.4 million |
| Income before tax | $4.1 million | $5.9 million | $24.3 million | $8.8 million |
| Net income attributable to common stockholders | $2.8 million | $4.7 million | $17.6 million | $6.7 million |
| Diluted EPS | $0.15 | $0.23 | $0.90 | $0.33 |
Quarterly net income was about 2.4% of net revenue, versus about 3.9% a year earlier; nine-month net income was about 5.0%, versus about 2.0%. Interest expense was $3.2 million for the quarter and $9.6 million year to date, up from $2.6 million and $8.3 million, respectively.
- Cash flow: Nine-month operating cash flow was $55.2 million, investing cash flow was $6.3 million, and financing cash outflow was $78.2 million, principally reflecting a $72.6 million reduction in loans. Cash and cash equivalents declined $17.0 million to $219.3 million.
- Balance sheet: At June 30, total assets were $2,907.4 million, liabilities $2,573.4 million, and stockholders’ equity $334.0 million. Bank borrowings were $145.6 million, down from $218.2 million at September 30, 2012. Customer payables were $2,091.2 million.
- Liquidity qualification: Management said approximately 94% of assets were cash, deposits and receivables, marketable financial instruments, and physical inventory. Significant customer and regulatory balances are not necessarily freely available to the parent company.
- Capital: The company reported compliance with its credit-facility covenants and subsidiary regulatory capital requirements at June 30, 2013.
Changes versus the prior comparable periods
- Quarterly operating revenue declined 1%, and attributable net income fell to $2.8 million from $4.7 million. Management cited weaker soft-commodity activity, the planned exit from physical base metals, and added regulatory-compliance costs.
- Year-to-date operating revenue rose 7% and attributable net income increased to $17.6 million from $6.7 million. Results included $9.2 million of gains from sales of London Metal Exchange and Kansas City Board of Trade interests. Adjusted, marked-to-market net income, a non-GAAP measure, was $9.9 million versus $6.7 million.
- Commodity and Risk Management Services (C&RM) was weaker: quarterly segment operating revenue fell 16% to $56.2 million; year-to-date revenue fell 5% to $173.0 million. Soft-commodity OTC volumes and agricultural hedging activity declined.
- Other segments generally grew. Quarterly revenue increased 15% in Foreign Exchange, 60% in Securities, and 58% in Other; Clearing and Execution Services was approximately flat. Securities growth included the Tradewire accounts, while Foreign Exchange global payments reached a quarterly record.
- Physical commodities inventory fell to $58.6 million from $131.6 million, and notes receivable fell to $33.6 million from $104.0 million, reflecting changes in activity and the physical base-metals wind-down.
Outlook, risks, contingencies, and unusual items
- Management expected to complete the physical base-metals business exit by fiscal year-end 2013, while continuing financial base-metals services through the LME. It expected no material adverse effect on liquidity or financial statements and no material additional exit costs. The exit generated a GAAP pre-tax loss of $2.2 million in the quarter; the corresponding adjusted non-GAAP loss was $5.4 million.
- No formal earnings guidance was provided. Management noted historically low interest rates constrained interest income and that Dodd-Frank implementation continued to create costs and uncertainty; capital and margin rules were not fully finalized or implemented.
- Credit facilities totaled $355 million at June 30, with $145.6 million outstanding. After quarter-end, the $100 million INTL Commodities facility expired without renewal and was repaid; a separate facility was increased to $135 million. Management was discussing renewal of that facility but could not determine future duration, rates, or costs for facilities scheduled to expire within twelve months.
- After quarter-end, the company issued $40 million of 8.5% senior notes due 2020 and announced an additional $5.5 million issuance scheduled to close August 9, 2013. Proceeds were intended for general corporate purposes. The company also paid a $10 million acquisition earn-out on July 8.
- Sentinel litigation: An adverse trial judgment is on appeal. The company posted an $8 million cash deposit and recorded no provision, stating a loss was not probable. If the appeal fails, management estimated a pre-tax loss of $4 million to $6 million; the appeal was expected toward the end of calendar 2013.
- Regulatory matter: FCStone settled a CFTC matter for alleged supervisory failures, without admitting or denying the findings. It paid a $1.5 million fine already accrued and must retain an independent reviewer of specified risk controls.
- Acquisition-related contingent liabilities totaled $16.1 million, with estimated payments of $10.5 million over the next twelve months. A separate shareholder derivative settlement was expected to cost the company $250,000 after insurance, subject to court approval.
- Other risks include counterparty and customer defaults, margin calls, trading and market volatility, regulatory changes, and exchange-member guarantees whose potential amount was not estimable. Management said the potential exchange-guarantee payment was remote. Disclosure controls were assessed as effective, with no material control changes reported.
Important facts for investors to verify
- Renewal terms and availability of committed credit facilities, particularly the $135 million facility, and the effect of the new senior notes on funding costs.
- Outcome and timing of the Sentinel appeal, including the potential $4 million–$6 million loss and status of the posted $8 million deposit.
- Completion and final costs of the physical base-metals exit, and whether remaining C&RM weakness persists.
- Underlying segment trends apart from the $9.2 million exchange-interest sale gains and the filing’s non-GAAP marked-to-market adjustments.
- Implementation costs and business effects of Dodd-Frank and other regulatory requirements, including the independent review following the CFTC settlement.