Business context and reporting period
The filing is INTL FCStone Inc.’s Form 10-K for the fiscal year ended September 30, 2016, including the quarter ended that date. The request identifies StoneX Group Inc.; this filing’s registrant is INTL FCStone Inc. The company provides global execution, clearing, risk-management, payments, securities and physical-commodities services.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenues | $14,754.9 million | $34,693.2 million |
| Operating revenues | $671.0 million | $624.3 million |
| Net operating revenues | $443.9 million | $431.8 million |
| Income before tax | $72.7 million | $78.1 million |
| Net income | $54.7 million | $55.7 million |
| Diluted EPS | $2.90 | $2.87 |
| EBITDA (non-GAAP) | $109.2 million | $102.4 million |
Total revenue includes gross physical-commodity sales; the much lower FY 2016 figure chiefly reflects lower reported commodity sales. Operating revenues, a more useful scale measure for this business, increased 7%. Physical-commodity sales fell 59% to $14.1 billion, while related cost of sales fell 59% to $14.1 billion. Compensation and benefits were 39.3% of operating revenues, versus 40.2% a year earlier. The filing reports no conventional operating-margin measure.
Fourth-quarter FY 2016 operating revenues were $178.6 million, compared with $178.7 million in Q4 FY 2015; net income was $16.8 million versus $21.1 million, and diluted EPS was $0.90 versus $1.09.
At September 30, 2016, total assets were $5.95 billion, stockholders’ equity $433.8 million, and consolidated indebtedness $228.3 million. Cash and cash equivalents were $316.2 million. The company had $447.0 million of committed credit facilities, with $180.0 million drawn. Operating cash flow was negative $27.8 million; investing used $35.5 million and financing provided $121.0 million, including $142.0 million of net additional borrowing. Cash increased $48.1 million to $316.2 million.
Material changes versus the prior comparable period
- Net operating revenues grew 3%, but pretax income fell 7% and net income declined about 2%.
- Securities operating revenues rose 35% to $175.2 million and segment income increased 71% to $69.4 million, aided by fixed-income trading, G.X. Clarke and strong Argentine activity.
- Commercial Hedging operating revenues fell 10% to $236.1 million; segment income declined 20% to $68.7 million, primarily as OTC volumes fell 17% and OTC revenues dropped $28.8 million.
- Global Payments revenues declined 5% to $73.2 million despite a 37% increase in payment count, as average revenue per trade fell 31%.
- Physical Commodities revenues rose 58% to $36.6 million and segment income more than doubled to $13.3 million. CES revenues increased 22% to $151.1 million, including $24.1 million of incremental Sterne Agee revenues.
- Compensation and other expenses rose 7% to $377.4 million; interest expense rose 65% to $28.3 million. A $6.2 million bargain-purchase gain from Sterne Agee contributed to FY 2016 results.
Outlook, risks and unusual items
No numerical earnings or revenue guidance is provided. Management said cash flows, available cash and borrowing capacity should meet future liquidity needs, and intended to renew or replace $75 million of facilities scheduled to expire in FY 2017. It reported compliance with financial covenants, but received a lender waiver in December 2016 for exceeding the $15 million annual capital-expenditure covenant.
The Sterne Agee clearing and wealth-management businesses were acquired in July and August 2016 for $45.0 million; the filing records a $6.2 million bargain-purchase gain. The 8.5% senior notes, with $45.5 million principal outstanding at year-end, were redeemed on October 15, 2016. The company also agreed to acquire ICAP’s EMEA oil voice-broking business, effective October 1, 2016, for $6.0 million plus employee-related payments.
Principal risks include volatile market activity and trading positions, customer and counterparty defaults, liquidity and margin-call needs, reliance on financing facilities, regulatory change and compliance costs, low short-term rates, technology and operational failures, and successful integration of acquisitions. Brexit-related uncertainty and new CFTC margin rules were highlighted; CFTC capital rules were not finalized. Earnings may be more volatile because certain precious-metals inventory gains are not recognized while related derivative gains or losses are recorded. The Sentinel litigation remained on appeal; management assessed losses as neither probable nor reasonably possible. The auditor issued an unqualified opinion, and management and the auditor concluded internal control was effective, although the acquired Sterne entities were excluded from the internal-control assessment. No cash dividends were planned, and credit agreements prohibited them; the board authorized repurchases of up to 1.0 million shares for FY 2017.
Important facts for investors to verify
- Reconcile the filing’s executive-summary wording that says net income from continuing operations declined to $72.7 million: the financial statements identify $72.7 million as pretax income and $54.7 million as net income from continuing operations.
- Track operating results excluding the effects of gross physical-commodity sales presentation, acquisition contributions and the bargain-purchase gain.
- Assess integration, retention and profitability of Sterne Agee, and progress on the announced ICAP business acquisition.
- Check renewal or replacement of expiring credit facilities, covenant compliance, borrowing levels and cash generated by operations.
- Monitor OTC volume and spreads, Global Payments revenue per transaction, market and credit exposures, and regulatory margin and capital requirements.