INTL FCStone Inc. (historic filing name) — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2014; fiscal year ends September 30. The statements are unaudited. The filing describes a diversified financial-services business spanning commercial hedging, global payments, securities, physical commodities, and clearing and execution. The filing is by INTL FCStone Inc., notwithstanding the StoneX Group Inc. request metadata.
Financial results and position
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Total revenues | $7,005.1m | $9,659.1m | $23,366.7m | $33,565.9m |
| Operating revenues | $118.2m | $123.0m | $360.3m | $356.3m |
| Net operating revenues | $76.0m | $81.3m | $235.3m | $239.7m |
| Income from continuing operations | $3.7m | $5.1m | $13.8m | $16.9m |
| Net income | $3.5m | $3.3m | $13.5m | $18.1m |
| Diluted EPS | $0.18 | $0.17 | $0.69 | $0.93 |
| Net cash from (used in) operations | — | $(60.5)m | $63.4m |
- Revenue interpretation: Total revenues include large gross physical-commodity sales with nearly equivalent cost of sales. Operating revenues, after commodity cost of sales, were down 4% in Q3 and up 1% for nine months.
- Profitability: Q3 continuing-operations income fell 27%; net income rose slightly because the discontinued-operations loss narrowed. Nine-month net income declined 25%, partly because the prior-year period included a $5.8m after-tax gain from LME and KCBT share sales. No formal operating-margin figure is presented.
- Cash and liquidity: Cash and cash equivalents were $97.7m at June 30, down $58.4m from September 30, 2013. Operating cash use was $60.5m, with working-capital movements in exchange deposits, customer receivables/payables, and financial instruments among the drivers. The company cautions that trading-related balances can fluctuate substantially.
- Debt and equity: Total indebtedness was $124.5m: $79.0m of variable-rate bank borrowings and $45.5m of 8.5% senior notes due 2020. Stockholders’ equity was $339.9m. The company reported compliance with credit-facility covenants; $130m of committed facilities were scheduled to expire within 12 months, and management intended to renew or replace them.
- Balance sheet: Total assets were $3,184.1m, up from $2,848.0m at September 30, 2013. Customer payables were $2,332.0m; segregated regulatory assets were $420.8m. These customer and regulatory balances should not be treated as freely available corporate liquidity.
Changes versus comparable periods
- Q3 results were pressured by lower Physical Commodities and Clearing and Execution Services revenues, partly offset by growth in Global Payments and Securities; Commercial Hedging was broadly stable. For nine months, Commercial Hedging, Global Payments, and Securities gains more than offset declines in the other two segments.
- Q3 exchange-traded volume fell 18% overall; Clearing and Execution Services volume fell 23%. Global payment count rose 26% in Q3 and 29% for nine months. Precious-metals ounces traded fell 30% in Q3 and 20% for nine months.
- Net operating revenues were lower while Q3 expenses declined 3%. For nine months, compensation and other expenses were essentially flat; introducing broker commissions rose 24% and interest expense rose 45%, including costs associated with the 8.5% notes.
- The company completed its exit from physical base metals in Q2 FY2014 and reports that activity as discontinued operations. It reorganized reportable segments during the year and recast prior-period segment information.
Outlook, commentary, risks, and unusual items
- Outlook: No numerical earnings or revenue guidance is provided. Management said cash flows, available cash, and credit-facility borrowings should meet anticipated liquidity needs, and expected to renew or replace facilities nearing expiry. Management cited low short-term interest rates as a constraint on customer-deposit interest income.
- Risks: Key exposures include market volatility and liquidity, customer and counterparty defaults or delayed margin payments, and regulatory changes. Dodd-Frank capital and margin requirements were not fully finalized or implemented. Physical-commodity results may be volatile because U.S. GAAP can recognize inventory and related derivative gains or losses in different periods.
- Contingencies: A securities class action filed in January 2014 seeks unspecified damages; the company said loss probability and a reasonably possible range could not be determined. In Sentinel litigation, an appeals court ruled for the company and denied rehearing; a Supreme Court petition deadline was August 18, 2014. If the appellate ruling were reversed, the company estimated a $4m–$6m pretax loss.
- Other notable items: The filing reports an immaterial correction to prior-period statements, including a $0.5m increase in Q3 FY2013 net income; a separate gross-up correction to physical-commodity revenue and cost of sales did not affect operating revenues or net income. The company repurchased 513,800 shares for $9.7m during the nine months. It reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the decline in continuing-operations earnings and Q3 net operating revenues persists, especially given lower clearing volumes and weak Physical Commodities performance.
- Renewal or replacement terms for the $130m of facilities due to expire within 12 months, and continued covenant compliance.
- Operating cash flow and unrestricted liquidity trends, distinguishing corporate cash from segregated/customer funds and trading-related balances.
- Developments in the securities class action and any Supreme Court petition or further proceedings in Sentinel litigation.
- How much future earnings depend on improving market activity, spreads, short-term rates, and growth in Global Payments and Securities.