Business context and reporting period
This is INTL FCStone Inc.’s unaudited Form 10-Q for the fiscal quarter and nine months ended June 30, 2011. The filing describes a financial services group serving commodity, foreign-exchange, securities, clearing and asset-management customers. The registrant reported changing its name from International Assets Holding Corporation to INTL FCStone Inc. during the quarter ended March 31, 2011.
Financial performance and condition
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenues | $105.4 million, up 35% from $78.2 million | $315.1 million, up 55% from $203.1 million |
| Net revenues | $103.4 million, up from $75.5 million | $306.0 million, up from $195.6 million |
| Income from continuing operations before tax | $17.3 million, versus $13.4 million | $46.5 million, versus $22.6 million |
| Net income attributable to common stockholders | $10.4 million, versus $6.7 million | $29.8 million, versus $9.9 million |
| Diluted earnings per share | $0.55, versus $0.38 | $1.57, versus $0.55 |
Physical commodity sales were $20.5 billion in the quarter and $51.2 billion year to date, but are reported gross; operating revenues after physical commodity costs were $105.4 million and $315.1 million, respectively. The effective tax rate was 40% for the quarter and 37% year to date.
Non-interest expenses rose 39% to $86.1 million in the quarter and 50% to $259.5 million year to date. Compensation and benefits increased 70% and 78%, respectively, reflecting higher activity and acquisitions; employee count was 872 at quarter-end, versus 641 a year earlier. Management’s non-GAAP marked-to-market adjusted net income was $9.2 million for the quarter and $27.4 million year to date, compared with $3.2 million and $6.9 million. These measures are not GAAP results.
Cash and cash equivalents were $144.1 million at June 30, 2011, up from $81.9 million at September 30, 2010. Nine-month operating cash flow was $79.6 million, versus $148.2 million a year earlier; investing used $22.6 million and financing provided $5.2 million. Total assets were $2.83 billion, versus $2.02 billion; total equity was $284.3 million, versus $242.9 million.
Bank borrowings were $120.5 million against $365.0 million of committed facilities. The company also had $9.0 million of 7.625% convertible subordinated notes due September 2011. It reported compliance with facility covenants and regulatory capital requirements. A $140 million facility was scheduled to expire September 21, 2011; management expected renewal but gave no assurance.
Material changes and management commentary
- Commodity and Risk Management Services (C&RM) was the principal growth driver: quarterly operating revenues rose 53%, and nine-month revenues rose 90%. Management cited greater commodity volatility, higher prices, increased OTC activity, geographic expansion and acquisitions, including Hanley, RMI and Hencorp Futures.
- Foreign Exchange operating revenues increased 21% for the quarter and 17% year to date, supported by global payments and customer hedging activity, particularly in Brazil. Securities revenues increased 31% and 59%, respectively, benefiting from equity-market activity and the Provident acquisition.
- Clearing and Execution Services (CES) revenues declined 6% in the quarter but rose 8% year to date. Management said low short-term interest rates continued to constrain the segment.
- Acquisitions contributed to higher expenses and contingent purchase obligations. The company agreed to acquire Ambrian Commodities for estimated net asset value of approximately $17 million; completion was expected August 31, 2011, and management did not expect an immediate earnings impact.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management cited expansion opportunities but cautioned that growth requires funding.
- Management highlighted market, liquidity, counterparty and customer-margin risks. Commodity price limit moves required model-based valuation of certain exchange-traded derivatives at June 30; resulting customer margin receivables were subsequently collected.
- Bad-debt expense, net of recoveries, was $1.2 million for the quarter and $4.0 million year to date. A $2.7 million charge related to a gold-consignment customer followed unsuccessful settlement efforts and legal proceedings. Year-to-date provisions also included another gold customer and a clearing-customer deficit.
- The company recorded a $1.7 million year-to-date impairment on its investment in debentures financing a hotel in Thailand. The hotel owner had defaulted on a March 2011 interest payment; renovation delays and restructuring discussions remained ongoing.
- Pending matters include securities and derivative litigation relating to legacy FCStone disclosures and losses, an SEC investigation of those matters, and Sentinel bankruptcy litigation. Separately, convertible-note investors alleged entitlement to a 15% redemption premium and penalty interest; the company’s motion to dismiss was denied. One plaintiff later sold its notes and released its claims, while $9.0 million of notes remained outstanding at June 30.
- The Dodd-Frank Act was expected to bring new registration, reporting, capital, margin and conduct requirements; the company said the impact remained uncertain. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $140 million credit facility was renewed and how the September 2011 convertible notes were repaid, converted or otherwise resolved.
- Subsequent developments and potential financial exposure from the FCStone-related litigation, SEC investigation, Sentinel proceedings and noteholder dispute.
- Collection outcomes for customer receivables and gold-consignment losses, and any further deterioration or recovery in the Thailand hotel investment.
- How much reported growth reflects acquisitions and market volatility versus underlying organic activity, and whether expense growth and low interest rates affect profitability.
- Final Ambrian purchase price and completion, and the cash requirements from acquisition earnouts and other commitments.