Business context and reporting period
INTL FCStone Inc. (now associated with the StoneX name) filed this Form 10-Q for its fiscal third quarter ended June 30, 2017, with results also provided for the nine months ended June 30. Comparisons below are with the corresponding 2016 periods. The company is a diversified financial-services firm operating in commercial hedging, global payments, securities, physical commodities, and clearing and execution services. Its reported total revenue includes gross physical-commodities sales; operating revenue, after physical-commodities cost of sales, is more informative for comparing the broader business.
Financial performance and condition
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $5,505.9 million, up 13% from $4,868.5 million | $17,041.1 million, up 42% from $11,977.3 million |
| Operating revenue | $197.6 million, up 13% from $175.0 million | $578.9 million, up 18% from $492.4 million |
| Net operating revenue | $123.3 million, up 5% from $117.3 million | $361.5 million, up 9% from $332.9 million |
| Income before tax | $15.0 million, down 30% from $21.4 million | $37.7 million, down 30% from $53.5 million |
| Net income / diluted EPS | $12.7 million / $0.66, versus $14.6 million / $0.78 | $30.0 million / $1.58, versus $37.9 million / $2.00 |
| Operating cash flow | Cash used of $14.9 million in the nine-month period, versus $31.8 million used in 2016 |
For the nine months, investing activities used $14.6 million, financing activities provided $19.0 million, and cash and cash equivalents declined $10.1 million to $306.1 million. The filing attributes substantial operating-cash-flow movements to changing customer, exchange, collateral, and trading balances; operating cash flow should not be read as a simple proxy for earnings.
At June 30, total assets were $6,195.9 million and stockholders’ equity was $469.1 million. Borrowings under credit facilities were $242.5 million, with a further $2.2 million equipment loan; total indebtedness was $244.7 million. The $45.5 million 8.5% senior notes were redeemed in October 2016. Committed facilities totaled $532.0 million. Cash was $306.1 million, but significant balances support regulated, customer, and counterparty activities and are not necessarily freely available to the parent.
Variable expenses were 57% of total non-interest expenses in both the quarter and nine-month period, versus 61% and 58%, respectively, in 2016. The effective tax rate was 15% for the quarter and 20% year to date, compared with 32% and 29% in 2016.
Material changes versus prior periods
- Quarterly results weakened despite higher operating revenue: net operating revenue rose 5%, but compensation and other expenses increased 13% to $108.3 million, and pretax income fell 30%.
- Clearing and Execution Services revenue rose $32.1 million in the quarter, mainly from the acquired Sterne Agee correspondent-clearing and wealth-management businesses and ICAP’s EMEA oil brokerage business. The segment’s income increased to $6.5 million from $3.4 million.
- Commercial Hedging quarterly revenue declined $14.8 million, with lower exchange-traded and OTC activity/rates amid subdued market volatility. Segment income fell to $16.3 million from $25.4 million.
- Securities quarterly revenue declined 4%; nine-month revenue fell 15%, reflecting lower volatility/spread compression and weaker comparisons in Argentine debt trading and asset management. Nine-month segment income declined 31% to $37.5 million.
- Global Payments and Physical Commodities improved. Quarterly segment income rose to $12.9 million and $4.3 million, respectively, supported by higher payment counts and precious-metals/physical-commodity activity.
- Acquisitions and related activity raised fixed compensation, introducing-broker commissions, technology and other operating costs. Nine-month introducing-broker commissions more than doubled to $86.1 million.
Outlook, commentary, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management said cash flows from operations, available cash, and credit-facility borrowings should meet anticipated liquidity needs, and stated it intended to renew or replace facilities as they expire. It noted that $270 million of committed facilities were due to expire within 12 months of the filing date; its confidence in renewal is management’s assessment, not a commitment from lenders.
Key risks include market volatility and spread compression, counterparty or customer defaults and margin shortfalls, regulatory and capital requirements, and changes in interest rates. At June 30, $242.5 million of debt was variable-rate. Market-making and derivatives can expose the company to losses; short financial instruments not yet purchased totaled $742.9 million at fair value, including $280.0 million of derivative liabilities, with potential losses if prices rise, potentially offset by related positions.
Results included a $5.8 million pretax unrealized loss year to date on interest-rate-management Treasury notes and swaps, versus a $2.9 million gain in the prior-year period. The company had liquidated its swaps and sold $865 million of Treasury notes, retaining $290 million of notes expected to mature during calendar 2017; fair-value changes are not hedge-accounted and can be volatile. The ICAP acquisition included employee-related incentive payments; a $0.9 million quarterly compensation charge was recognized for that business, with charges expected to continue through fiscal 2018.
Other items: the company capitalized $13.8 million for a trade-system conversion; the first phase was implemented August 1, 2017, after quarter-end, and the FX prime-brokerage phase was expected during fiscal 2018. It reported no material change in legal proceedings or risk factors. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting. Certain Sterne Agee reserve-account balances were below requirements at period-end, but additional funds were deposited timely after quarter-end.
Important facts for investors to verify
- Whether the acquired clearing, wealth-management, and brokerage businesses can sustain revenue and absorb their higher commission, compensation, and operating costs.
- Renewal or replacement of the $270 million of facilities scheduled to expire within 12 months, and compliance with facility covenants and regulatory capital requirements.
- How much reported cash and liquid assets is available for corporate use after customer, collateral, segregation, and subsidiary regulatory needs.
- Exposure to volatility, customer/counterparty credit losses, variable-rate borrowings, and the remaining Treasury-note fair-value risk.
- Progress, cost, and operational performance of the trade-system conversion, including the later FX phase.
- Whether lower volatility and spread compression persist in Commercial Hedging and Securities, and whether Global Payments and Physical Commodities growth continues.