StoneX Group Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022; unaudited. Comparisons are with the corresponding 2021 periods unless noted. StoneX is a global financial services network serving commercial, institutional, retail and global-payments clients. Its reported total revenue includes gross physical-commodity sales; operating revenue, which deducts physical-commodity cost of sales, is a more useful measure of the underlying business.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $544.7 million, up 16% | $995.2 million, up 17% |
| Net operating revenue | $400.3 million, up 20% | $714.1 million, up 21% |
| Income before tax | $87.4 million, up 15% | $139.9 million, up 36% |
| Net income | $64.0 million, up 16% | $105.7 million, up 41% |
| Diluted EPS | $3.11, versus $2.73 | $5.15, versus $3.71 |
| Cash flow from operations | Not presented for the quarter | $2,102.0 million, versus $665.0 million |
- For the quarter, compensation and other expenses rose 24% to $319.3 million. Bad-debt expense increased to $12.3 million from $0.9 million; a $6.4 million settlement gain was nonrecurring.
- At March 31, total assets were $21.20 billion, total liabilities $20.19 billion and stockholders’ equity $1.01 billion. Total assets rose from $18.84 billion at September 30, 2021.
- Cash and cash equivalents were $1.30 billion. Cash, segregated cash, cash equivalents and segregated cash equivalents totaled $8.81 billion, including customer funds and securities; this total should not be treated as freely available corporate cash.
- Borrowings totaled $974.8 million: $471.3 million payable to lenders and $503.5 million of senior secured borrowings, net. The latter included $338.2 million carrying value of 8.625% notes due 2025.
- Cash from operations reflected substantial working-capital and client-balance movements, including a $1.66 billion increase in payables to clients. Investing activities used $24.1 million, including $24.3 million of capital expenditures; financing activities provided $222.2 million.
Material changes and management commentary
- Management cited inflation concerns, rising interest rates and commodity prices, and heightened market volatility following Russia’s invasion of Ukraine. Increased client activity and, in many cases, wider spreads supported results.
- Commercial operating revenue grew 28% in the quarter, led by OTC derivatives; Retail rose 17% and Global Payments 22%. Institutional operating revenue increased 6%, but segment income fell 4% to $50.0 million, as higher costs offset revenue growth.
- Client-balance interest and fee income increased 79% to $10.4 million in the quarter. Average client equity rose 38% to $5.3 billion and average money-market/FDIC sweep balances rose 29% to $1.8 billion.
- Management reported higher non-variable costs, including compensation, professional fees, marketing, technology and travel. Variable expenses were 55% of total expenses in the quarter, versus 60% a year earlier.
- Six-month operating cash flow increased sharply, but management’s cash-flow discussion attributes significant period-to-period movements to client activity, collateral, trading balances and commodities inventory.
Liquidity, outlook and risks
- At March 31, the company had $851.5 million of committed credit facilities, with $515.3 million outstanding. Several facilities were due to expire within twelve months. On April 21, 2022, it amended its senior secured syndicated facility, replacing the prior revolving and term-loan structure with a $475 million revolving facility extended through April 2025. The company said it intended to renew or replace other facilities and believed it could do so.
- The company reported compliance with its financial covenants and subsidiary regulatory-capital requirements at March 31. It stated that operating cash flows, available cash and available borrowing capacity should meet anticipated liquidity needs for the following year; this is not quantified earnings guidance.
- Soybean-facility bankruptcy: StoneX held title to about 2.8 million bushels and recorded a $3.0 million allowance for a potential shortfall. Client receivables included $31.6 million related to the matter. A settlement was approved May 2, 2022, but certain claims remained unresolved and the final recovery and insurance coverage were uncertain.
- OptionSellers matter: Net receivables from affected client accounts were $28.1 million, with an $8.0 million allowance. Arbitrations and collection efforts continued; the company said it intended to defend claims and pursue collections.
- Other risks include client and counterparty defaults, market and collateral volatility, liquidity and margin-call demands, interest-rate and foreign-exchange movements, regulatory requirements and the possibility that hedges or risk controls do not fully offset exposures. Management estimated that an immediate 25-basis-point decrease in short-term rates would reduce annual net income by approximately $5.9 million, assuming a 27.5% tax rate. It reported $1.0 billion notional of interest-rate swaps at March 31.
- No specific full-year revenue or earnings guidance was provided. Management cautioned that interim results may not indicate full-year results and highlighted uncertainty from rapidly changing market and economic conditions.
Important facts for investors to verify
- How much of the $2.10 billion operating cash inflow reflects sustainable business performance versus client-funding, collateral and other working-capital movements.
- Recovery of the soybean-related receivable, outcome of remaining bankruptcy claims, and any insurance proceeds or additional loss.
- Collections on OptionSellers account deficits, future arbitration outcomes and adequacy of the related allowance.
- Renewal or replacement of credit facilities other than the facility amended in April, and continued compliance with borrowing and regulatory-capital requirements.
- Whether revenue and spread gains from exceptional volatility persist, alongside the effects of higher expenses and bad-debt charges.