Stonex Group Inc. annual report, FY2019

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Business context and reporting period

INTL FCStone Inc. (Nasdaq: INTL), now identified in the filing as StoneX Group Inc. in the request metadata, filed this Form 10-K for the fiscal year ended September 30, 2019. It is a global brokerage and financial services firm providing trading execution, risk management, clearing, payments, advisory, securities, and physical commodities services. The filing reports an annual period, not a standalone 2019 fourth quarter; quarterly results are separately presented.

Financial results and liquidity

Unless stated otherwise, amounts are U.S. dollars. Reported total revenue includes gross physical commodity sales and is not directly comparable to the company’s net revenue measures.

  • Revenue: Total revenue was $32.897 billion, up 19% from $27.623 billion. Operating revenue, after physical commodity cost of sales, was $1.106 billion, up 13%; net operating revenue was $653.2 million, up 12%.
  • Profit: Income before tax was $111.0 million versus $101.5 million. Net income rose 53% to $85.1 million from $55.5 million; diluted EPS was $4.39 versus $2.87. Fiscal 2018 net income was $75.3 million excluding $19.8 million of discrete Tax Reform charges. Fiscal 2019 effective tax rate was 23%, versus 45% in 2018.
  • Cash flow: Operating activities provided $195.6 million, compared with $473.6 million used in 2018. Investing activities used $40.8 million and financing activities provided $9.6 million. Cash, segregated cash, cash equivalents, and segregated cash equivalents totaled $2.451 billion at year-end, up $163.7 million. This measure includes client and regulatory-segregated funds and should not be read as unrestricted corporate cash; balance-sheet cash and cash equivalents were $471.3 million.
  • Debt and liquidity: Year-end borrowings included $202.3 million payable under loans and a $167.6 million senior secured term loan, net of financing costs; total consolidated indebtedness before debt issuance costs was $370.7 million. Committed facilities totaled $743.9 million, with $366.1 million outstanding. Approximately $357.5 million of facilities were scheduled to expire within 12 months of the filing date. Management said it intended to renew or replace them and believed available cash, operating cash flow, and borrowing capacity would meet needs. The company reported compliance with its financial covenants.
  • Balance sheet: Total assets were $9.936 billion versus $7.825 billion; stockholders’ equity was $594.2 million versus $505.3 million.

Material changes versus fiscal 2018

  • Operating revenue grew across all reportable segments except Clearing and Execution Services (CES). Securities revenue increased 51% to $295.3 million, driven by higher equity and debt trading activity and securities-lending income. Physical Commodities revenue rose 30% to $73.8 million; Commercial Hedging rose 5% to $302.4 million; Global Payments rose 14% to $112.8 million. CES declined 2% to $326.1 million, in part because average futures-and-options revenue per contract fell 18%.
  • Segment income increased 17% to $305.7 million. Securities segment income rose 16% to $47.4 million; CES rose 12% to $54.1 million; Physical Commodities rose to $38.0 million from $16.6 million. Management attributed overall growth to higher revenues, with a contribution from physical-coal recoveries.
  • Interest income increased 61% to $198.9 million, while interest expense increased 92% to $154.7 million, reflecting higher financing costs and growth in fixed-income dealing and securities-lending activity.
  • Compensation and other expenses rose 14% to $547.7 million. Non-variable expenses increased with acquisitions, Canadian expansion, and the securities prime brokerage launch. Management said these initiatives produced a combined $10.3 million pretax net loss in fiscal 2019; $5.5 million of acquisition-related bargain purchase gains partly offset costs.

Outlook, commentary, risks, and unusual items

  • Outlook: The filing gives no specific earnings or revenue guidance. Management emphasized diversification, client-service expansion, acquisitions, cost control, and risk and liquidity management. It said it expected to renew or replace facilities coming due, while acknowledging renewal was not assured.
  • Acquisitions and expansion: Fiscal 2019 acquisitions included Carl Kliem, GMP Securities, CoinInvest and European Precious Metal Trading, and Fillmore Advisors. The company launched a securities prime brokerage division and agreed to acquire UOB Bullion and Futures’ Singapore brokerage and clearing business; that transaction closed October 7, 2019. Integration, retention, and execution risks remain.
  • OptionSellers: After sharp natural-gas price movements in November 2018, approximately 300 accounts managed by independent CTA OptionSellers fell below maintenance margin and were liquidated. The company reported $29.2 million of net receivables from those accounts at September 30, 2019 and recorded no allowance, citing its collectability assessment. Clients have brought arbitrations against the clearing subsidiary, and the company is pursuing collection and defending claims. Management said potential losses were not expected to impair liquidity, capital, or regulatory compliance; outcomes remain uncertain.
  • Physical coal: Following a $47.0 million charge in fiscal 2017 and $1.0 million in fiscal 2018, the company exited the coal business. In 2019 it recorded $12.4 million of recoveries, including $10.0 million from insurance and $2.4 million from settlements below accrued liabilities.
  • Other earnings items: The $5.5 million of other gains primarily reflected the GMP bargain purchase. CES results included a settlement related to the Barclays “last look” class action. Precious-metals inventory at non-broker-dealer subsidiaries is not hedge-accounted with related derivatives, which can increase reported earnings volatility.
  • Principal risks: Trading and market-making exposure, client and counterparty defaults, margin calls and reliance on credit facilities, regulatory capital and compliance requirements, interest-rate and foreign-exchange changes, Argentina’s highly inflationary environment, cyber and systems disruptions, litigation, and acquisition integration. The company reported $370.7 million of variable-rate debt and no outstanding fixed-rate long-term debt.
  • Shareholder matters: No cash dividends had been declared, and credit agreements prohibited cash dividends. A repurchase program authorized up to 1.5 million shares through September 30, 2020; 100,000 shares were repurchased in fiscal 2019 for $3.8 million.
  • Audit and controls: KPMG issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting. Management also concluded controls were effective, although certain 2019 acquisitions were excluded from the internal-control assessment.

Important facts for investors to verify

  1. Track collections, arbitration outcomes, and any allowance or loss recognition related to the $29.2 million OptionSellers receivable.
  2. Confirm renewal or replacement of facilities scheduled to expire and monitor borrowing availability, covenants, and short-notice margin-funding needs.
  3. Assess earnings excluding the $12.4 million physical-coal recovery, $5.5 million bargain purchase gain, and Barclays-related settlement, and distinguish recurring performance from those items.
  4. Monitor whether acquisitions and the prime brokerage initiative deliver revenue and segment profitability sufficient to absorb higher fixed costs.
  5. Review the sensitivity of interest income and expense, securities activity, and physical-commodities earnings to rates, market volumes, volatility, and valuation mismatches.