INTL FCStone Inc. 10-K Summary
Entity and period: The supplied filing is for INTL FCStone Inc. (not Stonex Group Inc.), for the fiscal year ended September 30, 2013. It is an annual report, not a standalone fourth-quarter report. The company provides commodity risk management, trading and clearing, foreign exchange, securities, financing and asset management services.
Financial results and liquidity
| Metric | FY 2013 | FY 2012, restated |
|---|---|---|
| Operating revenues | $478.4 million | $454.2 million |
| Net operating revenues | $315.3 million | $306.2 million |
| Adjusted net operating revenues, non-GAAP | $304.2 million | $313.0 million |
| Income before tax | $22.6 million | $15.8 million |
| Net income attributable to common stockholders | $19.3 million | $12.8 million |
| Diluted EPS | $0.97 | $0.64 |
| Operating cash flow | $44.9 million | $(92.1) million |
- Operating revenues increased 5%, but adjusted net operating revenues declined 3%. Net income improved, while adjusted non-GAAP net income declined to $12.4 million from $17.0 million.
- Transaction-based clearing expenses rose 4% to $110.1 million; introducing-broker commissions rose 31% to $40.5 million; interest expense rose 8% to $12.5 million. Total compensation and other expenses were $292.7 million, up 1%.
- Cash and cash equivalents fell $80.2 million to $156.1 million. Cash flows were $44.9 million provided by operations, $5.1 million provided by investing, and $129.7 million used in financing, primarily reflecting repayment of borrowings.
- Total assets were $2.848 billion and stockholders’ equity was $335.4 million. Total debt was $106.5 million: $61.0 million in bank borrowings and $45.5 million in 8.5% senior notes due 2020. The balance sheet includes substantial customer-related assets and obligations; customer funds are not equivalent to unrestricted corporate liquidity.
- Committed bank facilities totaled $290 million, with $61 million outstanding at year-end. The company reported compliance with financial covenants and regulatory capital requirements. It had $1.7 billion in required customer segregated assets, with $23.9 million excess segregated funds and $22.7 million excess secured funds.
- Cash-flow and reported earnings can fluctuate with customer activity, margin balances, commodity prices and accounting timing. Physical commodity sales are reported gross: FY 2013 total revenues were $43.8 billion, while operating revenues after physical commodity cost of sales were $478.4 million.
Material changes and segment performance
- Securities operating revenues grew 53% to $61.1 million, supported by the Tradewire account acquisition and stronger equity market-making and debt capital markets activity. Segment income rose to $13.9 million from $4.5 million.
- Foreign Exchange operating revenues increased 7% to $66.9 million, with growth in global payments and customer hedging. Clearing and Execution Services revenues increased 7% to $100.8 million, but segment income fell to $1.9 million, partly due to the regulatory settlement and higher commissions.
- Commodity and Risk Management Services operating revenues declined 9% to $221.7 million; adjusted operating revenues fell 16% to $208.2 million. Lower soft-commodity volumes, drought-related effects and weaker OTC activity contributed. Adjusted segment income declined to $46.1 million from $72.1 million.
- The Other segment’s operating revenues increased to $20.7 million from $15.6 million, reflecting growth in commodity financing, origination and asset management. Assets under management were approximately $481 million, essentially unchanged.
- The company substantially exited physical base metals trading, liquidating most inventory and positions and allowing its related $100 million facility to expire. Two positions remained through January 2014. Physical base metals generated $1.4 million pretax income under GAAP in FY 2013, but a $10.0 million adjusted non-GAAP pretax loss, including exit costs. The company planned to retain its financial-market LME metals business.
- The company issued $45.5 million of 8.5% senior notes due July 2020, expanded its $140 million syndicated facility, sold its LME and Kansas City exchange interests, and recorded a reported $9.2 million gain associated with those sales.
Restatement, outlook, risks and contingencies
- Restatement and controls: Errors in reconciling INTL FCStone Markets’ accounting records and back-office system led to restatements of FY 2012 and FY 2011, related quarterly data, and selected FY 2010 information. Corrections reduced net income by $5.9 million in aggregate for FY 2012, 2011 and 2010; previously reported FY 2012 and 2011 cash flows were not affected. Separately, a material weakness in controls over OTC derivative trading reconciliations existed at September 30, 2013. Management reported a remediation plan, but the auditor issued an adverse opinion on internal control effectiveness; the financial-statement audit opinion was unqualified.
- Outlook and funding: No quantified earnings or revenue guidance is provided. Management said operating cash flow, available cash and borrowing capacity should meet expected liquidity needs, and intended to renew or replace $150 million of facilities scheduled to expire in FY 2014. The $75 million FCStone, LLC and $75 million FCStone Merchant Services facilities were due to expire in April and May 2014. A $25 million UK subsidiary facility was established after year-end. The company obtained a lender waiver extending the deadline for delivery of FY 2013 audited statements to January 31, 2014.
- Regulation: Dodd-Frank implementation and new CFTC customer-protection rules create compliance, technology, capital and liquidity costs, with some requirements not yet fully implemented. Low short-term interest rates also weighed on interest income despite higher average customer deposits.
- Legal matters: The company paid a $1.5 million CFTC settlement in FY 2013 for failure to diligently supervise certain customer-account risks; an independent review was underway. In Sentinel litigation, an $8 million cash deposit was posted pending appeal. Management did not consider a loss probable; it estimated a $4 million to $6 million pretax loss if the appeal failed. A separate shareholder derivative settlement was expected to cost $265,000 after expected insurance.
- Other key risks include market and counterparty losses, margin calls that may precede customer payments, reliance on clearing brokers and custodians, concentrated customer demand, regulatory capital restrictions, acquisition integration, and earnings volatility from commodity inventory and derivative accounting. Management’s adjusted marked-to-market measures are non-GAAP and differ from U.S. GAAP results.
Important facts for investors to verify
- Confirm the correct issuer: the filing names INTL FCStone Inc.; the request metadata names Stonex Group Inc.
- Review the restated comparative statements and the $5.9 million cumulative earnings reduction, including the quarterly restatements.
- Track whether management remediated the OTC derivative reconciliation weakness and whether subsequent filings report effective controls.
- Verify renewal or replacement of the $150 million facilities due to expire in FY 2014, and monitor covenant compliance and corporate liquidity apart from customer funds.
- Follow the Sentinel appeal, the remaining physical base metals positions and related exit costs, and the effects of regulatory implementation on costs and business volumes.