Business context and reporting period
INTL FCStone Inc. (now identified in the request as StoneX Group Inc.) filed this Form 10-Q for the fiscal quarter and six months ended March 31, 2019. The company provides global brokerage, execution, risk-management, clearing, payments, securities and physical-commodities services. Comparisons below are with the corresponding 2018 periods unless noted.
Financial performance and condition
- Second-quarter revenue and earnings: Total revenue was $7.19 billion, up 11%, but includes gross physical-commodity sales. After commodity cost of sales, operating revenue was $271.1 million, up 4%; net operating revenue was $165.2 million, up 7%. Net income was $23.4 million, up 3%, and diluted EPS was $1.21 versus $1.18.
- Six-month results: Total revenue was $13.74 billion, down 5%; operating revenue was $535.8 million, up 13%, and net operating revenue was $314.2 million, up 10%. Net income rose to $41.6 million from $15.8 million, and diluted EPS was $2.15 versus $0.81. The prior-year period included $20.1 million of discrete tax expense related to U.S. tax reform.
- Costs and margins: Second-quarter compensation and other expenses increased 12% to $139.7 million. Interest expense more than doubled to $38.4 million, principally reflecting securities trading and lending activity. Management reported variable costs at 57% of total non-interest expenses versus 63% a year earlier. Net income was approximately 14% of net operating revenue in the quarter (derived from reported figures).
- Cash flow: For six months, operating activities used $136.9 million, investing activities used $15.1 million and financing activities provided $72.0 million. Cash, segregated cash and cash equivalents together declined $79.7 million to $2.11 billion. This aggregate includes client-regulated balances and is not equivalent to freely available corporate cash.
- Balance sheet and debt: At March 31, assets were $9.41 billion, liabilities $8.86 billion and equity $551.8 million, versus $7.82 billion, $7.32 billion and $505.3 million, respectively, at September 30, 2018. Outstanding borrowings totaled $428.6 million, including $256.8 million under loans and a $171.8 million net term-loan balance. The company reported $427.8 million of variable-rate debt and $0.8 million of fixed-rate debt.
- Liquidity and capital: Committed facilities totaled approximately $705 million, with $426.3 million outstanding; $357.5 million of commitments were due to expire within 12 months of the filing. Management intended to renew or replace them and believed it could do so. The company was in compliance with its financial covenants. Regulated subsidiaries generally met capital requirements, although INTL FCStone Ltd had a client-segregated-funds shortfall at quarter-end that was remedied the following week.
Material changes versus the prior period
- Quarterly segment income increased 7% to $77.2 million. Securities operating revenue grew 31% to $72.6 million, while Clearing and Execution Services revenue fell 16% to $73.6 million. Global Payments revenue rose 17%; Physical Commodities operating revenue rose 28%; Commercial Hedging revenue rose 3%.
- Growth in Securities reflected stronger equity and debt capital-markets activity, higher interest income and the GMP acquisition. Higher interest expense and costs associated with the prime-brokerage initiative weighed on segment income, which fell 8% to $11.8 million.
- For the six-month period, operating-revenue growth was led by Securities, up $43.1 million. Global Payments, Clearing and Execution Services, and Physical Commodities also grew; Commercial Hedging was nearly flat. Higher interest income supported results, while interest expense increased sharply.
- On February 22, 2019, the company amended its senior secured facility, extending maturity to February 2022 and creating a $175 million revolver and $175 million term loan. It also acquired GMP Securities LLC in January, adding institutional fixed-income capabilities and clients.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said cash flows, available cash and available credit were expected to meet future liquidity needs, and it intended to renew or replace expiring facilities.
- Management cited higher short-term rates as a driver of interest income, while warning that trading-market volatility, liquidity, counterparty defaults, client margin deficits and changes in commodity, foreign-exchange and interest rates can affect results.
- The OptionSellers matter remained a significant contingency: approximately 300 client accounts incurred deficits after unexpected natural-gas price moves. The company reported a net receivable of $29.4 million, recorded no allowance, and was pursuing collections while defending client arbitrations. Management said potential losses could be material, but did not expect the matter to impair liquidity, capital or regulatory compliance.
- The GMP acquisition generated a $5.4 million bargain-purchase gain. Its acquired business recorded $2.3 million of net operating revenue and a $0.9 million net loss for the post-acquisition period reported. The company also recorded a $2.4 million recovery related to prior coal-contract penalties after paying $8.4 million in settlements.
- Subsequent events included the April 1 acquisition of two European online precious-metals businesses for preliminary cash consideration of approximately $21.8 million, and a planned $5.0 million purchase of a Singapore brokerage and clearing business subject to regulatory approval.
- Management reported effective disclosure controls as of March 31, 2019 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Collectability and ultimate arbitration outcomes for the $29.4 million OptionSellers receivable, and whether any allowance or loss is later recorded.
- Renewal or replacement of the $357.5 million in credit commitments scheduled to expire within 12 months, covenant compliance and borrowing costs.
- Whether higher interest income can continue to offset rising interest expense and weaker activity in selected businesses, particularly exchange-traded clearing.
- Integration, profitability and final purchase accounting for GMP, and completion, cost and regulatory status of the announced acquisitions.
- Effects of market volatility, counterparty credit exposure and the U.K. client-funds shortfall, including confirmation that the shortfall was fully remedied.