StoneX Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. Comparisons are with the corresponding 2020 periods. StoneX is a global financial services company serving commercial, institutional, retail and global-payments clients. Results include Gain Capital, acquired effective August 1, 2020, which materially affects year-over-year comparisons, particularly Retail and FX/CFD activity.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenues | $10,192.1 million | $8,243.4 million | $30,687.4 million | $39,854.7 million |
| Operating revenues | $431.5 million | $322.6 million | $1,283.0 million | $966.2 million |
| Net operating revenues | $298.0 million | $227.9 million | $888.3 million | $641.8 million |
| Income before tax | $46.0 million | $49.0 million | $149.2 million | $126.8 million |
| Net income | $34.2 million | $36.6 million | $109.0 million | $92.2 million |
| Diluted EPS | $1.67 | $1.87 | $5.38 | $4.71 |
- Revenue and earnings: Q3 total revenue rose 24%, but this gross-revenue measure includes physical commodity sales and related costs. Operating revenue rose 34% and net operating revenue rose 31%; net income fell 7%. For the nine months, total revenue fell 23%, while operating revenue rose 33%, net operating revenue rose 38%, and net income rose 18%.
- Drivers and expense trends: Q3 growth reflected stronger listed and OTC derivatives, securities volumes, payments, and the acquired Gain retail FX/CFD business. Q3 principal gains, net rose 44% to $232.1 million. Compensation and other expenses increased 43% to $255.6 million, principally reflecting Gain and higher operating costs. Corporate funding interest expense rose to $10.1 million from $3.9 million.
- Margins: Net operating revenues were 69% of operating revenues in Q3, versus 71% a year earlier; for the nine months, the ratio was 69% versus 66%. Variable expenses were 58% of total non-interest expenses in both Q3 and the nine-month period, down from 61% in each prior-year comparison.
- Cash flow: Nine-month operating cash flow was $1,378.6 million; investing used $50.8 million, including $53.5 million of capital expenditures, and financing used $0.6 million. Operating cash flow includes substantial movements in client and trading-related balances and should not be read as ordinary cash earnings. Cash, segregated cash and cash equivalents totaled $5,812.3 million, including significant client and regulatory balances; balance-sheet cash and cash equivalents alone were $1,075.6 million.
- Balance sheet and debt: At June 30, total assets were $16,799.8 million, total liabilities $15,898.4 million, and equity $901.4 million. Outstanding borrowings totaled $782.4 million, including $240.0 million drawn on a committed facility, a $172.5 million term loan, $336.2 million carrying value of senior secured notes, and other borrowings. The 8.625% senior secured notes mature in 2025. The company reported compliance with credit-facility covenants and subsidiary regulatory capital requirements.
Material changes and management commentary
- Q3 operating revenue grew across all segments. Commercial operating revenue increased 46%, Retail 252% (largely Gain-related), Global Payments 28%, and Institutional 2%. Institutional segment income declined 14%, to $46.5 million, as weaker securities spreads and higher variable compensation weighed on results.
- Higher commodity-market volatility supported listed and OTC derivatives. Securities trading volume rose, but lower spreads reduced revenue per million compared with the prior-year period, which benefited from volatility at the onset of COVID-19.
- Historically low short-term interest rates continued to pressure interest and fee income. Q3 client-balance interest and fee income increased 52% to $7.0 million on higher client balances, but the nine-month amount fell 52% to $18.1 million year over year.
- Management said it expects cash flows, available cash and available credit facilities to meet liquidity needs for the following year. Three committed credit facilities were scheduled to expire within twelve months after June 30, 2021; management intended to renew or replace them and believed it could do so.
Risks, contingencies and unusual items
- Market, credit and liquidity risks: Trading and market-making expose StoneX to price, volatility, liquidity, interest-rate, foreign-exchange and counterparty risks. Client margin may not fully cover losses, and the company may need to meet exchange or counterparty margin calls before collecting from clients. Financial instruments sold short were $1,764.2 million at fair value, up from $686.0 million at September 30, 2020.
- OptionSellers matter: The company reported $28.9 million in net receivables from approximately 300 client accounts affected by 2018 natural-gas losses. It continues collection and arbitration proceedings and recorded an $8.2 million allowance adjustment upon adopting CECL. StoneX stated that it considers the related client claims against it without merit and believes a material adverse outcome is remote; outcomes and ultimate collections remain uncertain.
- Other notable items: Q3 included a $3.3 million gain from an adjustment to liabilities assumed in the Gain acquisition, as well as severance costs, principally related to an executive departure. Nine-month results included $5.0 million of losses on currency-hedging derivatives associated with transferring Gain’s U.K. operations, partly offset by a $10.3 million foreign-currency translation increase in accumulated other comprehensive income during the stated period.
- COVID-19 and outlook: Management described the pandemic’s future effects, including variants and changing mitigation measures, as uncertain. The filing provides no quantitative earnings or revenue guidance. Management also cited regulatory changes, competition, technology, key-personnel retention and economic or market conditions as risks.
Investor verification points
- Separate gross physical-commodity sales from operating and net operating revenue when assessing growth and margins.
- Evaluate how much reported year-over-year growth reflects the Gain acquisition versus organic activity, especially in Retail and FX/CFD.
- Review the sustainability of derivative gains and the effects of market volatility, securities spreads and persistently low interest rates.
- Distinguish unrestricted cash from client-segregated and other regulated balances; assess cash-flow swings alongside client and trading-related balance changes.
- Track facility renewals and maturities, covenant compliance, senior secured debt costs, and the company’s ability to fund regulatory and margin requirements.
- Monitor OptionSellers collections, allowance adequacy and arbitration outcomes, as well as market and counterparty exposures tied to short positions and derivatives.