INTL FCStone Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016; comparative period is the three months ended December 31, 2015. Amounts are in U.S. dollars; financial statement amounts are generally in millions. The filing uses the legal name INTL FCStone Inc.
Business context
The company provides execution, risk-management, advisory, clearing, payments, securities and physical-commodity services to predominantly wholesale customers worldwide. Its reported total revenue includes gross physical-commodity sales, so operating revenue and net operating revenue provide more useful context for underlying performance.
Financial results and condition
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Total revenue | $6,074.4 | $3,399.9 |
| Operating revenue | $185.5 | $151.3 |
| Net operating revenue | $114.3 | $102.7 |
| Income before tax | $8.4 | $12.1 |
| Net income | $6.3 | $8.8 |
| Diluted EPS | $0.34 | $0.46 |
| Operating cash flow | $(116.6) | $(83.4) |
Operating revenue increased 23% and net operating revenue rose 11%, but net income fell 28%. Net income as a share of net operating revenue was approximately 5.5%, versus 8.6% a year earlier. Segment income was $50.2 million, down from $51.4 million; net costs not allocated to operating segments increased to $41.8 million from $39.3 million.
Cash and cash equivalents were $278.8 million at quarter-end, down $37.4 million from September 30, 2016. Total assets were $6,290.7 million and stockholders’ equity was $442.6 million. The company reported $312.6 million of total indebtedness, including $310.0 million drawn on committed credit facilities and a $2.6 million bank note; its $45.5 million senior notes were redeemed in October. Committed facilities totaled $447 million. The company said it was covenant-compliant; $100 million of committed facilities were due to expire within 12 months of the filing, and management intended to renew or replace them.
Operating cash use was driven by changes in trading-related assets and liabilities, including increased securities purchased under resale agreements, exchange-clearing balances and inventory. Investing cash use was $9.0 million, including $6.0 million for the ICAP business acquisition; financing provided $86.8 million, including $130.0 million of net borrowing under loans. The filing describes approximately 96% of assets as liquid, while noting that customer and regulatory requirements constrain the use or transfer of certain assets.
Material changes and management commentary
- Clearing and Execution Services operating revenue rose to $63.6 million from $29.8 million, primarily reflecting the Sterne Agee correspondent-clearing and wealth-management businesses and the ICAP EMEA oils brokerage acquisition. The acquisitions contributed $23.6 million and $6.5 million, respectively, to current-quarter operating revenue.
- Global Payments operating revenue increased 26% to $23.1 million; payment volume grew 53%, partly offset by lower average revenue per trade.
- Physical Commodities operating revenue increased 66% to $9.8 million. Commercial Hedging revenue grew 4% to $57.5 million, as exchange-traded growth more than offset weaker OTC activity.
- Securities operating revenue declined 23% to $37.4 million and segment income fell 41% to $12.9 million. Management attributed much of the decline to unusually strong prior-year Argentine debt-trading and asset-management results following the peso devaluation.
- Compensation and other expenses increased 17% to $105.9 million. Management cited acquisition-related costs, including $10.8 million of incremental expenses across acquired businesses, and higher technology, professional-fee and other costs. Variable expenses were 58% of total expenses, versus 57%.
- Cash flow from operations was negative, which management said reflects the volatility of customer activity, commodity prices, margin balances and trading positions; it cautioned that these balances can move substantially between periods.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management stated that cash flows, available cash and borrowing capacity should be adequate for expected liquidity needs, and expressed confidence in renewing or replacing the facilities nearing expiry. These are forward-looking statements, not guarantees.
Key risks include market-price and liquidity volatility; customer or counterparty defaults and margin shortfalls; variable-rate borrowing costs; regulatory and capital requirements; competition and technology changes; and the ability to retain key personnel. The company had $901.5 million of financial instruments sold short at fair value; increases in their value could cause losses, potentially offset in whole or part by related positions. Derivative positions are managed together with related cash positions, and reported fair values may not capture the full extent of market exposure.
Unusual or noteworthy items include the $45.5 million senior-note redemption, settlement of previously outstanding interest-rate swaps, and $5.6 million of unrealized losses on the interest-rate management portfolio in the quarter (compared with $6.7 million in the prior-year quarter). The ICAP acquisition was accounted for as an asset acquisition, with $6.0 million allocated to customer-relationship intangibles. The company disclosed ordinary-course legal matters but no material change in proceedings or material accrued contingencies. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether acquired businesses sustain revenue and improve profitability after the reported integration and incremental costs.
- Whether the Securities segment continues to normalize from the prior-year Argentine performance, and how current results compare on a more representative basis.
- Drivers of negative operating cash flow and the liquidity available after considering regulatory segregation, customer balances and collateral demands.
- Renewal or replacement of the $100 million of committed facilities approaching expiry, and continued compliance with debt covenants.
- Exposure to customer deficits, counterparty default, short positions, derivatives and interest-rate changes; review the filing’s market-risk and collateral disclosures.
- Potential future acquisition earn-out payments, including the disclosed $0.9 million contingent liability and estimated $0.8 million of cash payments over the next 12 months.