StoneX Group Inc. — Q1 FY2021 10-Q
Reporting period: Three months ended December 31, 2020; comparable period is the three months ended December 31, 2019. Amounts are in U.S. dollars unless noted. StoneX is a global financial services network spanning commercial, institutional, retail and global payments businesses. Its acquisition of Gain Capital, completed in fiscal Q4 2020, expanded its retail and FX/CFD operations.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenues | $9,250.5 million | $11,245.0 million | -18% |
| Operating revenues | $380.1 million | $276.8 million | +37% |
| Net operating revenues | $256.1 million | $170.5 million | +50% |
| Income before tax | $26.9 million | $21.7 million | +24% |
| Net income | $19.5 million | $16.3 million | +20% |
| Diluted EPS | $0.98 | $0.84 | +17% |
Total revenues include large gross physical-commodity sales, which are reported alongside net revenues from other businesses; operating and net operating revenues are more informative measures of underlying activity. Physical-commodity sales fell 19%, while principal gains rose 81% to $203.4 million and commission and clearing fees rose 37% to $119.4 million. Interest income fell 54% to $21.2 million, mainly reflecting lower short-term rates.
Net operating revenues increased across all segments. Segment income was $115.2 million, up from $75.8 million. Institutional segment income grew 77% to $44.8 million, Retail grew to $17.9 million from $2.9 million, Commercial rose 12% to $32.1 million, and Global Payments rose 8% to $20.4 million. Growth in Retail chiefly reflects Gain; securities activity and market volatility supported Institutional results.
Cash flow, balance sheet and liquidity
- Cash from operating activities was negative $118.8 million, compared with positive $667.6 million a year earlier. Investing activities used $22.8 million, including $22.4 million of capital expenditures; financing activities provided $104.5 million.
- Cash, segregated cash, cash equivalents and segregated cash equivalents totaled $4,445.4 million at quarter-end, down $23.0 million from September 30, 2020. This total includes client and regulatory-segregated funds and should not be read as unrestricted corporate cash. Balance-sheet cash and cash equivalents were $1,033.7 million.
- Total assets were $13,974.8 million; stockholders’ equity was $799.5 million. Total liabilities were $13,175.3 million.
- Reported outstanding borrowings totaled $887.4 million, including $373.6 million payable to lenders and $513.8 million of net senior secured borrowings. The latter includes $336.5 million of notes, principally the 8.625% Senior Secured Notes due 2025. Management cited $75.5 million of committed funds available for general working capital.
- StoneX reported compliance with its financial covenants and subsidiary regulatory capital requirements. Management said it believes cash flows, available cash and borrowing capacity will meet liquidity needs for the following year. Some subsidiary assets are restricted by regulatory requirements and may not be freely transferred to the parent.
Material changes, outlook and risks
Results benefited from heightened equity and fixed-income market activity, increased listed-derivatives activity, strong precious-metals demand and Gain’s contribution. The acquisition also increased compensation and other expenses; non-variable expenses, excluding bad debts, rose $49.1 million, with $42.5 million attributed to businesses acquired after December 2019. Corporate funding interest expense rose to $10.5 million from $2.7 million, mainly due to the 2020 notes issuance.
Management provided no specific earnings or revenue guidance. It described continued uncertainty from COVID-19, market conditions and government responses, while noting that volatility and customer activity supported some businesses and lower rates reduced client-balance interest income. Management said it would continue monitoring liquidity and capital needs.
- OptionSellers client deficits: The company reported a $29.0 million net receivable from approximately 300 accounts following 2018 natural-gas trading losses. CECL adoption resulted in an $8.2 million allowance adjustment for these balances and a $6.2 million after-tax cumulative reduction to opening retained earnings. Collection and arbitration proceedings continue; the ultimate outcome is uncertain.
- Inventory loss: A $1.9 million loss on liquidation of certain energy inventories was recorded. StoneX is seeking recovery from its supplier, but said success is substantially uncertain.
- Foreign exchange: Derivatives used to mitigate British-pound exposure in Gain’s U.K. subsidiaries produced a $3.7 million unrealized loss; revaluation produced a further $2.7 million foreign-currency loss. Currency translation contributed $13.9 million of other comprehensive income for the quarter.
- Market and counterparty exposure: Trading, derivatives, client margin and collateral activities expose StoneX to market, liquidity and credit risks. The company says it monitors positions and collateral, but volatile markets or counterparty/client defaults could cause losses. It also noted that $75.0 million of committed facilities were scheduled to expire during fiscal 2021 and management intended to renew or replace them.
The board authorized repurchases of up to 1.0 million shares through September 30, 2021; no shares were repurchased in the quarter. Management reported effective disclosure controls and no material changes to risk factors or material legal proceedings.
Most important facts for investors to verify
- How much of the revenue and segment-income growth is attributable to Gain and other acquisitions versus organic activity, and whether acquired businesses achieve expected returns.
- Whether operating cash flow remains pressured by trading-related working-capital movements, and the amount of liquidity that is unrestricted and available to the parent after regulatory segregation and subsidiary restrictions.
- Trends in client-balance interest income under low-rate conditions and the sensitivity of earnings to market volatility and trading volumes.
- Collections and arbitration outcomes for the $29.0 million OptionSellers receivable, and any resulting changes to credit-loss allowances.
- Whether StoneX recovers the $1.9 million energy-inventory loss and renews or replaces facilities approaching expiration.