Business context and reporting period
INTL FCStone Inc. (the registrant named in the filing; request metadata identifies StoneX Group Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2017, its fiscal second quarter, and the six months then ended. The company provides global financial services across commodities, securities, foreign exchange, payments, clearing and related markets. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Quarter ended March 31, 2017 | Prior-year quarter | Six months ended March 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Total revenues | $5,460.8 | $3,708.9 | $11,535.2 | $7,108.8 |
| Operating revenues | $195.8 | $166.1 | $381.3 | $317.4 |
| Net operating revenues | $123.9 | $112.9 | $238.2 | $215.6 |
| Income before tax | $14.3 | $20.0 | $22.7 | $32.1 |
| Net income | $11.0 | $14.5 | $17.3 | $23.3 |
| Diluted EPS | $0.58 | $0.76 | $0.92 | $1.22 |
- Total revenue growth chiefly reflects higher gross physical-commodity sales; operating revenues, which deduct physical-commodity cost of sales, are a more useful comparison of underlying activity.
- Quarterly operating revenues increased 18% and net operating revenues increased 10%, while net income fell 24%. The calculated net-income-to-operating-revenues ratio was approximately 5.6%, versus 8.7% a year earlier.
- Six-month operating revenues rose 20%, but net income declined 26%. Variable expenses remained 57% of non-interest expenses in both comparative periods; total compensation and other expenses rose 18% in the quarter.
- At March 31, cash and cash equivalents were $296.3, down from $316.2 at September 30, 2016. Total assets were $6,528.6, total liabilities $6,072.9, and stockholders’ equity $455.7.
- Six-month operating cash flow was negative $44.6; investing cash flow was negative $12.1 and financing cash flow positive $37.3. Cash decreased by $19.9 overall. Financing included $81.0 of net additional borrowing and repayment of $45.5 of senior notes.
- Debt included $261.0 outstanding under variable-rate credit facilities and a $2.4 equipment note, for total indebtedness of $263.4. The $45.5 of 8.5% senior notes was redeemed in October 2016. Committed facilities totaled $447.0; the company reported covenant compliance.
Material changes versus prior comparable periods
- Growth was led by Clearing and Execution Services (CES), whose quarterly operating revenues increased $30.9, primarily from the Sterne Agee correspondent-clearing and wealth-management businesses and ICAP’s EMEA oil brokerage business. For the quarter, those acquired businesses contributed $25.4 and $6.5, respectively.
- Commercial Hedging quarterly segment income rose to $18.7 from $13.8, supported by agricultural and OTC activity. Global Payments segment income rose to $11.7 from $9.3, alongside 52% more payments, though average revenue per trade fell 19%.
- Securities quarterly operating revenues fell 17% to $37.9 and segment income fell 36% to $11.7. Lower equity-market-making spreads and weaker Argentina-related investment-banking and asset-management results were important factors.
- Quarterly physical-commodities operating revenues increased 42% to $11.2; segment income rose to $3.9 from $1.9. Physical Ag & Energy inventory increased to $139.5 from $65.9 at September 30.
- Consolidated quarterly operating revenues included a $0.2 unrealized loss on Treasury notes in the interest-rate strategy, compared with a $6.9 unrealized gain on Treasury notes and swaps in the prior-year quarter. For the six months, the related mark-to-market was a $5.8 loss versus a $0.2 gain.
- Introducing-broker commissions rose 114% in the quarter, principally reflecting the acquired independent wealth-management business and higher activity. Interest expense rose 41% to $10.0.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said available cash, operating cash flows and credit-facility borrowings should meet anticipated liquidity needs, and it intends to renew or replace facilities as they expire.
- Management highlighted acquisition-related costs and expansion of non-variable expenses; variable expenses were 57% of total non-interest expenses. The acquired oil brokerage agreement also requires compensation charges through the end of fiscal 2018, based on continued employee service.
- Approximately $200 of committed facilities were scheduled to expire within twelve months of the filing. Management believed renewal or replacement was achievable, but this remains a refinancing dependency.
- Key exposures include market-price and interest-rate volatility, counterparty and customer defaults, margin and liquidity demands, and regulatory and capital requirements. The company also disclosed $1,081.2 of financial instruments sold but not yet purchased; rising values could cause losses, potentially offset in part by related assets.
- As of March 31, certain Sterne Agee customer and proprietary reserve deposits were below requirements; the filing says additional funds were deposited after period-end. Legal proceedings and accrued loss contingencies were described as immaterial, with no material change reported.
- The company established a stock-lending business during the quarter. It also expected to place a capitalized trade-system project into service in the second half of fiscal 2017; $12.5 of direct development costs had been capitalized and depreciation had not begun.
Important facts for investors to verify
- Confirm the issuer identity and applicable security: the filing itself names INTL FCStone Inc., while the request metadata names StoneX Group Inc.
- Track renewals or replacements of the credit facilities, covenant compliance, and the effect of variable-rate borrowing on interest expense and liquidity.
- Assess whether acquired CES businesses sustain revenue and profitability after acquisition-related commissions, compensation and other operating costs.
- Monitor Securities results, especially equity-market-making spreads and performance in Argentina, and the sensitivity of reported earnings to interest-rate mark-to-market changes.
- Review customer and counterparty exposures, margin requirements, regulatory reserve funding, and the composition and risk of short positions and pledged or repledged collateral.