INTL FCStone Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 31, 2012; comparative period is the three months ended December 31, 2011. The filing is dated February 7, 2013. Amounts are in U.S. dollars unless otherwise noted.
Business context
INTL FCStone was a financial services group serving commercial commodity customers and institutional markets through risk management, trading, clearing, foreign exchange, securities, debt origination, commodity financing and asset management. It reported more than 20,000 customers, operations in over 100 countries, and 1,095 employees at quarter-end.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Total revenues | $12,719.5 million | $17,290.4 million |
| Operating revenues | $125.7 million | $96.3 million |
| Net revenues | $122.2 million | $94.2 million |
| Income (loss) before tax | $18.8 million | $(0.7) million |
| Net income (loss) attributable to common stockholders | $13.3 million | $(0.4) million |
| Diluted EPS | $0.68 | $(0.02) |
| Operating cash flow | $29.2 million | $33.1 million |
- Total revenue includes physical commodity sales reported gross, alongside related cost of sales. Physical commodity sales were $12,587.9 million versus $17,175.9 million; operating revenues are a more useful measure of underlying activity.
- Operating revenues rose 31%; net revenues increased 30%. Non-interest expenses rose 9% to $103.4 million, including compensation and benefits of $46.7 million and clearing and related expenses of $25.0 million.
- Management’s marked-to-market non-GAAP presentation showed adjusted operating revenues of $116.5 million versus $93.1 million, and adjusted net income of $7.5 million versus a $2.4 million loss. These figures adjust for commodity inventory/derivative accounting differences and should not be treated as GAAP results.
- Cash and cash equivalents were $294.7 million at December 31, up from $236.3 million at September 30, 2012. Investing activities provided $8.9 million, including $10.1 million of proceeds from exchange-share sales; financing activities provided $20.6 million.
- Total assets were $2,939.6 million; total liabilities were $2,614.3 million; stockholders’ equity was $325.3 million. Borrowings under credit facilities were $241.4 million, against $385 million of total commitments. All borrowings carried variable rates.
- The company reported that approximately 92% of assets were cash, exchange/counterparty balances, customer receivables, marketable financial instruments and physical inventory. Significant customer and regulatory balances are not equivalent to unrestricted corporate cash.
Material changes versus the prior comparable period
- Profitability improved from a small prior-year loss to $13.3 million of GAAP net income. A $9.2 million gain from selling London Metal Exchange and Kansas City Board of Trade shares materially contributed to reported operating revenue; the LME-related accumulated OCI gain included in earnings was approximately $6.3 million net of tax.
- Commodity and Risk Management Services (C&RM) operating revenue grew 21% to $60.7 million; its GAAP segment income rose to $22.7 million from $13.1 million. Adjusted C&RM operating revenue grew 10% to $51.4 million.
- Clearing and Execution Services revenue increased 27% to $22.4 million, supported by a 29% increase in exchange-traded volume, including customer accounts transferred after MF Global’s bankruptcy. Segment loss widened to $0.9 million, partly due to a $1.5 million loss-contingency accrual.
- Securities revenue rose 30% to $12.9 million, with stronger South American debt trading and debt origination. Foreign Exchange revenue declined 9% to $16.2 million, reflecting narrower payment spreads and fewer arbitrage opportunities. Other segment revenue increased 55% to $4.8 million; assets under management reached $484 million, up from $369 million a year earlier.
- Interest expense increased to $3.5 million from $2.1 million, mainly because of higher average borrowings supporting base-metals and commodity-financing activities. Low short-term interest rates constrained interest income despite higher customer margin deposits.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management cited ongoing growth in C&RM, clearing, securities and asset management, while noting lower OTC agricultural activity, narrower foreign-exchange spreads, reduced arbitrage opportunities and low short-term rates.
- All four committed credit facilities were scheduled to expire during FY2013 or shortly thereafter. The company was negotiating renewals, extensions or replacements, but stated that terms and costs were not yet determinable and success was not assured. It reported compliance with all facility covenants at December 31, 2012 and believed it could refinance based on its liquidity and capital structure.
- Sentinel litigation: a January 4, 2013 judgment was entered against FCStone, LLC. Enforcement was stayed pending appeal, and the subsidiary posted an $8.0 million cash deposit on January 18, 2013. Management said a loss was not probable; estimated pre-tax loss if the appeal fails was $4 million to $6 million.
- A CFTC Wells notice indicated staff intended to recommend charges relating to a former customer energy trading account. The company had filed a Wells submission and remained in discussions. The SEC had closed its related investigation without enforcement action.
- Two older securities/shareholder matters had settlements in principle, subject to court approval: one expected to cost the company nothing after insurance and the other approximately $250,000 after insurance. The company accrued $1.5 million for loss contingencies in the quarter.
- Acquisition-related contingent consideration liabilities totaled $18.0 million at quarter-end; management estimated $13.1 million of related cash payments during the remainder of FY2013. Dodd-Frank rules remained subject to phased implementation; INTL Hanley LLC registered as a swap dealer on December 31, 2012, and the ultimate effect of pending rules was uncertain.
- Market, credit and liquidity risks include counterparty or customer defaults, margin calls, commodity and securities price volatility, foreign-exchange and interest-rate movements, and exposure from short positions and OTC derivatives. Interest-rate swaps had approximately $625 million notional value and a four-month weighted-average life; fair-value changes are recorded in earnings, not hedge accounting.
Most important facts for investors to verify
- How much of reported profit and operating-revenue growth is repeatable without the $9.2 million exchange-share disposal gain; compare GAAP and marked-to-market non-GAAP results.
- Whether the expiring credit facilities were renewed or replaced, on what terms, and whether covenant or funding conditions changed.
- Progress and final outcome of the Sentinel appeal, including any effect on the posted $8.0 million deposit and the disclosed potential loss.
- Outcome of the CFTC matter and court approval of the proposed securities and shareholder settlements.
- Whether customer-volume growth and the acquired LME metals team can offset weaker OTC activity, lower interest income and higher operating costs.
- Cash-flow quality and available corporate liquidity, distinguishing unrestricted cash from customer, segregated and regulatory balances.