Business context and reporting period
INTL FCStone Inc. (now associated with the StoneX name) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2011. The company provides commodity and risk-management services, foreign exchange, securities, clearing and execution, and other financial services. Unless noted otherwise, amounts below are in millions of dollars.
Results are compared with the three months ended December 31, 2010. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q1 FY2012 | Prior-year quarter |
|---|---|---|
| Total revenues | $17,290.4 | $16,270.8 |
| Operating revenues | $96.3 | $96.7 |
| Net revenues | $94.2 | $92.9 |
| Non-interest expenses | $94.9 | $87.0 |
| Pre-tax income (loss) from continuing operations | $(0.7) | $5.9 |
| Net income (loss) attributable to common stockholders | $(0.4) | $4.0 |
| Diluted EPS | $(0.02) | $0.22 |
| Cash from (used in) operating activities | $33.1 | $(3.1) |
Total revenue is dominated by physical commodity sales reported gross; operating and net revenues better indicate the scale of the company’s remaining revenue after commodity costs and interest expense. Reported net revenues slightly exceeded the prior-year quarter, but expenses rose and the company moved to a pre-tax loss. No standalone margin percentage is provided in the filing.
Management’s marked-to-market non-GAAP presentation showed adjusted operating revenues of $93.1, down 14% from $108.8; adjusted pre-tax loss of $3.9 versus income of $18.0; and adjusted net loss attributable to common stockholders of $2.4 versus income of $11.6. These adjustments reflect commodity inventory and derivative timing differences and are not U.S. GAAP measures.
Operating cash flow was $33.1; investing activities used $3.8 and financing activities provided $38.5, principally from increased borrowings. Cash and cash equivalents ended the quarter at $288.3, up from $220.6 at September 30, 2011. The filing does not provide a conventional current ratio or a single unrestricted-liquidity measure.
At December 31, 2011, total assets were $2,414.8 (down from $2,635.7 at September 30), total liabilities were $2,117.7, and total equity was $297.1. Borrowings from lenders under loans and overdrafts were $115.9, compared with $77.4 at September 30. The company reported $375 of committed credit facilities and an additional uncommitted commodity-forward facility of up to $50; $115.9 was outstanding under the facilities. All outstanding debt carried variable interest rates. The company said it was in compliance with its financial covenants.
Material changes versus the prior period
- Trading conditions weakened in the core Commodity and Risk Management Services (C&RM) segment: low volatility and relatively stable agricultural prices reduced exchange-traded volumes and margins on structured OTC transactions. C&RM operating revenues fell 8% under GAAP; its adjusted operating revenues fell 29%.
- Foreign Exchange and Securities operating revenues increased 23% and 25%, respectively. Clearing and Execution Services revenues rose 4%, but segment income turned to a $0.1 loss from $2.1 income, in part because the prior period included a bad-debt recovery.
- Non-interest expenses increased 9% to $94.9. Fixed compensation and benefits rose 40%, and management attributed higher costs to acquisitions, added personnel, expanded investment banking and technology functions, and global office expansion.
- Interest expense declined to $2.1 from $3.8, partly following conversion of the remaining convertible subordinated debt in September 2011 and lower commodity-financing borrowings.
- Cash flow from operations improved from a $3.1 use to $33.1 provided. Cash flow was affected substantially by movements in segregated assets, clearing balances, customer payables and trading positions.
Outlook, management commentary, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management described low commodity-market volatility, subdued agricultural prices and the MF Global bankruptcy as pressures on trading activity and profitability. It also cited growth opportunities in Foreign Exchange and Securities and expected to integrate the MF Global UK metals team and its customers, which would require additional regulatory capital and personnel costs.
The company reported no material direct exposure to MF Global. It opened more than 2,300 accounts for former MF Global customers and acquired the MF Global UK Metals Division, hiring more than 50 staff. Management said transferred customers’ frozen margin deposits at MF Global and reduced activity affected results. The company also acquired Coffee Network; it entered an agreement to acquire TRX Futures, subject to UK regulatory approval, with an estimated purchase price of approximately $13.0.
Key risks include customer and counterparty defaults, margin and collateral demands, market and interest-rate movements, liquidity and credit conditions, regulatory change (including implementation of Dodd-Frank), and the possibility that expiring credit facilities cannot be renewed. The company said $215 of committed facilities were scheduled to expire during fiscal 2012 and believed renewal or replacement was achievable, but gave no assurance.
Other items to monitor include approximately $22.9 of acquisition-related contingent consideration liabilities, with estimated cash payments of $9.3 during the remainder of fiscal 2012; volatile, non-hedge-accounted interest-rate swaps; and commodity inventory accounting that can create timing differences between inventory and derivative gains or losses. The company had approximately $965 of interest-rate swaps outstanding at quarter-end.
Legal matters include securities litigation and SEC and CFTC inquiries concerning pre-acquisition disclosures and losses associated with an energy trading account; the company said outcomes could not be predicted. A Sentinel bankruptcy trustee seeks approximately $15.5 in recoveries from FCStone, LLC, with motions pending. After quarter-end, the company settled convertible-note-holder claims for $0.2. An ethanol marketing guarantee has no estimable maximum payment amount. Management stated that recorded legal accruals were not material and that excess exposure in those matters was not considered material.
Management reported effective disclosure controls and procedures as of December 31, 2011, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weak C&RM conditions persisted and whether acquisition-related growth translated into sustained revenues and profits.
- How much of reported cash is available to the parent, given customer-segregation and regulatory-capital requirements, and the sources of quarter-end cash growth.
- Renewal or replacement of the $215 of committed facilities due to expire in fiscal 2012, and continued compliance with facility covenants.
- Actual integration costs, required regulatory capital and customer activity from the MF Global UK metals business and transferred accounts.
- Changes in contingent acquisition payments, litigation and regulatory investigations, including developments in the Sentinel matter and the ethanol guarantee.
- The effect of commodity inventory/derivative accounting and interest-rate swap marks when assessing GAAP versus management’s non-GAAP results.