INTL FCStone Inc. (now StoneX Group Inc.) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018; comparative periods ended March 31, 2017. Amounts are in millions except per-share data. The filing identifies the registrant as INTL FCStone Inc.
Business context and financial results
The company is a diversified global financial-services firm providing commodities and securities trading, hedging, clearing, foreign-exchange payments and related services. Its reported total revenue includes gross physical-commodities sales, so operating revenue is a more useful measure of underlying activity.
| Metric | Three months 2018 | Three months 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $6,507.0 | $5,460.8 | $14,425.6 | $11,535.2 |
| Operating revenue | $260.2 | $195.8 | $472.8 | $381.3 |
| Net operating revenue | $154.3 | $123.9 | $284.6 | $238.2 |
| Income before tax | $29.5 | $14.3 | $48.1 | $22.7 |
| Income tax expense | $6.8 | $3.3 | $32.3 | $5.4 |
| Net income | $22.7 | $11.0 | $15.8 | $17.3 |
| Diluted EPS | $1.18 | $0.58 | $0.81 | $0.92 |
- Second-quarter operating revenue rose 33% and net income more than doubled, with management attributing growth to greater market volatility and customer activity, wider spreads, and higher short-term interest rates.
- For the six-month period, operating revenue increased 24% and pretax income more than doubled, but net income declined because of a substantial Tax Reform-related tax charge.
- Second-quarter interest income increased to $27.9 from $17.7; interest expense rose to $19.0 from $10.0. For six months, interest income was $51.9 versus $28.1, while interest expense was $33.3 versus $18.9.
- Net operating revenue increased 25% in the quarter and 19% for six months. Compensation and other expenses rose 14% and 10%, respectively. Variable expenses were 63% of total non-interest expenses in the quarter, up from 57%.
Segments and material changes
- Clearing and Execution Services: Second-quarter operating revenue grew 37% to $88.0 and segment income grew 61% to $12.7, led by 77% growth in exchange-traded futures and options revenue.
- Commercial Hedging: Operating revenue grew 25% to a record $78.3; segment income rose 48% to $27.6, supported by exchange-traded and OTC activity.
- Securities: Operating revenue grew 46% to $55.5, but segment income rose only 9% to $12.8. Higher clearing costs and interest expense offset part of the revenue increase. Six-month segment income declined 3% to $23.8.
- Global Payments: Second-quarter operating revenue rose 9% to $23.4 and segment income rose 15% to $13.5, despite roughly flat payment volume, as average revenue per trade increased.
- Physical Commodities: Second-quarter operating revenue rose 38% to $15.5 and segment income increased 44% to $5.6. Six-month segment income declined 3% to $6.7, reflecting higher interest expense, direct costs and bad-debt expense.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $336.0 at March 31, 2018, up from $314.9 at September 30, 2017. Total assets were $7,203.7 and stockholders’ equity was $466.6.
- Operating activities used $76.4 of cash over six months, compared with $44.6 used in the prior-year period. Investing activities used $6.9; financing activities provided $106.1, including a $110.7 net increase in borrowings from lenders.
- Total indebtedness was $340.5, including $290.9 outstanding on committed facilities, $48.0 on an uncommitted facility and $1.6 of bank note debt. Committed facilities totaled $594.5. The company reported compliance with its financial covenants.
- $362.0 of committed facilities were scheduled to expire within 12 months of the filing. Management intended to renew or replace them and believed it could do so. One facility was amended after quarter-end, increasing its commitment from $170.0 to $232.5 and extending maturity to November 1, 2019.
- Management stated approximately 97% of assets consisted of cash, financing-related balances, receivables, marketable financial instruments and physical commodities inventory. Much of the company’s business is collateral- and margin-intensive; regulated subsidiary assets are restricted from transfer to the parent.
Outlook, risks and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management said cash flows, available cash and borrowing capacity should meet anticipated liquidity needs, and cited volatility and higher short-term rates as contributors to current-period growth.
- Tax Reform: Six-month tax expense included $20.1 of discrete expense related to the Tax Cuts and Jobs Act, including provisional deferred-tax remeasurement and repatriation-tax amounts. The reported six-month effective tax rate was 67%, versus 25.3% excluding Tax Reform impacts. The estimates remained provisional and could change.
- Market and credit risks: Trading and clearing expose the company to market volatility, liquidity conditions, counterparty defaults and customer margin shortfalls. Derivative positions and short securities create potential losses if underlying prices move adversely; the company relies on collateral, limits, monitoring and hedging practices to manage exposures.
- Legal matter: The Supreme Court denied the Sentinel trustee’s petition for review on April 23, 2018. The company received $1.9 on May 1 and expected to recognize it as a gain in the quarter ending June 30, 2018.
- Controls and operations: Management reported remediation of a previously identified material weakness involving risk assessment for new business lines and controls over physical coal trading in Singapore. The company exited the physical coal business and stated disclosure controls were effective as of March 31, 2018.
- The company reported no material change to the risk factors in its prior Form 10-K. Regulatory changes, competition, key-personnel retention, technology changes and trading or counterparty losses remain identified risks.
Most important facts for investors to verify
- Whether operating-revenue growth and segment results persist if volatility, customer activity or short-term interest rates decline.
- How final Tax Reform calculations affect tax expense, deferred taxes and cash taxes; six-month reported earnings were materially affected by provisional tax charges.
- Renewal or replacement of committed credit facilities, covenant headroom, and the availability and cost of short-term funding.
- The drivers of negative operating cash flow and working-capital movements, while distinguishing unrestricted cash from customer and regulated balances.
- Whether higher Securities clearing and funding costs, and Physical Commodities credit and business-exit costs, continue to weigh on segment profitability.