INTL FCStone Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013. The filing is for INTL FCStone Inc. (the company later identified in the request as StoneX Group); interim results are unaudited.
Business context and financial results
The company provides commodity risk management, trading, clearing, foreign exchange, securities, debt-market and asset-management services. Reported total revenue includes gross physical commodity sales, so operating revenue is a more useful measure of its underlying activity.
- Quarter: Total revenue was $13.11 billion, versus $16.95 billion a year earlier; operating revenue was $117.3 million, down 2%. Net revenues were $114.4 million, down from $116.0 million. Pretax income was $1.4 million versus $3.6 million; net income attributable to common stockholders was $1.5 million, or $0.08 diluted EPS, versus $2.4 million, or $0.12.
- Six months: Total revenue was $25.83 billion versus $34.24 billion; operating revenue rose 13% to $243.0 million and net revenues rose 13% to $236.6 million. Pretax income was $20.2 million versus $2.9 million; net income attributable to common stockholders was $14.8 million versus $2.0 million. Diluted EPS was $0.75 versus $0.10.
- Non-GAAP marked-to-market measures: Management reported adjusted operating revenue of $116.6 million for the quarter, down 4%, and $233.1 million for six months, up 8%. Adjusted net income was $1.1 million for the quarter versus $3.8 million, and $8.6 million for six months versus $1.4 million. These measures adjust for differences in accounting treatment of certain commodity positions and are not GAAP results.
- Cash flow: Six-month operating cash flow was $14.1 million, compared with $149.6 million used in the prior-year period. Investing activities provided $7.1 million and financing activities provided $5.2 million. Cash and cash equivalents increased $25.7 million to $262.0 million.
- Balance sheet and funding: At March 31, total assets were $3.16 billion, total liabilities $2.83 billion and stockholders’ equity $329.2 million. Borrowings under loans were $226.0 million. The four facilities listed at March 31 had aggregate commitments of $395 million; a subsequent April reduction to one facility lowered commitments to $355 million. All facility covenants were met at quarter-end.
- Margins and expenses: Non-interest expenses were $113.0 million for the quarter, up 1%, and $216.4 million for six months, up 4%. The filing does not present a conventional gross margin measure; physical commodity sales and related costs dominate reported total revenue.
Changes versus comparable periods
- Quarterly results weakened mainly because C&RM operating revenue fell 15%, reflecting lower soft-commodity volumes and reduced trading activity. Adjusted C&RM operating revenue declined 19%.
- Six-month GAAP results benefited from a $9.2 million gain on sales of LME shares and Kansas City Board of Trade membership seats. The gain was non-recurring; management’s adjusted six-month net income was $8.6 million, below GAAP net income of $14.8 million.
- Securities revenue grew 55% in the quarter and 43% for six months, helped by Tradewire accounts and stronger Argentina debt trading. Foreign Exchange revenue rose 24% in the quarter; Other revenue rose 36% year to date. CES was approximately flat in the quarter but higher year to date.
- C&RM and CES remain pressured by low interest rates. Although average customer deposits increased, interest income on customer balances declined or grew modestly in several activities.
Outlook, risks and unusual items
- Management expected to complete its exit from the physical base-metals business by fiscal year-end 2013, through a sale or orderly liquidation. It said the exit was not expected to materially affect financial statements, cash flows or liquidity; no exit costs had been incurred by March 31.
- Most committed credit facilities were due to expire during fiscal 2013 or shortly thereafter. Renewal, extension or replacement discussions were ongoing; management believed it could secure arrangements but could not determine future terms or costs.
- The company faced a Sentinel bankruptcy-related judgment against its subsidiary, under appeal. It posted an $8.0 million cash deposit, recorded no provision because management considered a loss not probable, and estimated a $4–$6 million pretax loss if the appeal failed.
- The CFTC had issued a Wells notice concerning a 2008 customer energy-trading account, and the company was in settlement discussions. Two other proposed settlements remained subject to court approval.
- Dodd-Frank rules continued to affect derivatives operations. External business-conduct rules took effect May 1, 2013, while important capital and margin requirements were not yet finalized or fully implemented.
- Trading, counterparty and customer-credit risks are material: the company may need to meet margin obligations before collecting from customers, and market volatility or counterparty default could cause losses. Derivative and short-position values are sensitive to market movements; short financial instruments totaled $237.4 million at fair value.
- Management stated there were no material changes to the risk factors in the prior Form 10-K. Disclosure controls were considered effective as of March 31, 2013.
Important facts for investors to verify
- How much of the six-month GAAP earnings increase is attributable to the $9.2 million exchange-asset disposal gain, and how adjusted results compare with GAAP results.
- Progress and final costs of the physical base-metals exit, including any effect on C&RM results.
- Renewal terms, availability and covenant headroom for facilities approaching expiration, particularly after the April commitment reduction.
- Developments in the Sentinel appeal, the CFTC matter and proposed litigation settlements, including potential cash exposure.
- Whether soft-commodity volumes recover and how low interest rates and Dodd-Frank implementation affect segment revenue and customer activity.