Business context and reporting period
INTL FCStone Inc. (the registrant named in the filing) reported its unaudited fiscal first quarter ended December 31, 2013, compared with the three months ended December 31, 2012. The company provides commodity risk management, trading, foreign exchange, securities, clearing, financing and asset-management services. Its reported results reflect substantial gross physical-commodity sales.
Financial performance and position
- Revenue: Total revenues were $7.938 billion, down from $12.553 billion. Physical-commodity sales were $7.830 billion versus $12.421 billion, with nearly offsetting cost of sales. Operating revenues were $113.4 million, down 10%; management’s non-GAAP adjusted operating revenues were $111.3 million versus $116.5 million, down 4%.
- Profit and margins: Net operating revenues were $73.9 million versus $89.2 million; pretax income was $4.0 million versus $18.8 million; net income was $2.5 million versus $13.3 million. Diluted EPS was $0.12 versus $0.68. The effective tax rate was 38%, compared with 29%. Compensation and benefits were 63% of net operating revenues, versus 52% a year earlier. Adjusted non-GAAP pretax income was $1.9 million versus $9.6 million, and adjusted net income was $1.2 million versus $7.5 million.
- Cash flow: Operating activities provided $42.6 million, compared with $29.2 million. Investing activities used $1.3 million and financing activities used $2.2 million. Cash and cash equivalents increased $38.8 million to $194.9 million.
- Balance sheet and debt: Total assets were $2.744 billion, down from $2.848 billion; stockholders’ equity was $337.3 million. Credit-facility borrowings were $60.2 million and senior notes were $45.5 million, for total indebtedness of $105.7 million. The notes bear 8.5% interest and mature in 2020. Four committed credit facilities total $315 million.
- Liquidity: Management said cash, operating cash flows and available borrowings should meet future liquidity needs. $175 million of credit facilities were scheduled to expire within 12 months; management intended to renew or replace them. The company reported compliance with financial covenants and regulatory capital requirements at quarter-end.
Material changes and management commentary
- Lower C&RM results, particularly in OTC hedging and the planned exit from physical base metals, weighed on performance. C&RM operating revenues fell to $48.5 million from $60.7 million; segment income was $13.1 million versus $22.7 million.
- Foreign Exchange operating revenues rose 13% to $18.3 million, led by record global-payments revenue of $13.6 million. Securities revenues increased 36% to $17.6 million, helped by Tradewire account transfers and debt-market activity. Clearing and Execution Services revenues increased 6% to $23.8 million.
- The prior-year comparison benefited from $9.2 million of gains on the sale of LME and Kansas City Board of Trade interests. Management’s marked-to-market non-GAAP adjustments were $(2.1) million this quarter and $(9.2) million in the prior-year quarter; these measures are not U.S. GAAP results.
- The physical base-metals exit was substantially completed in fiscal 2013. Two remaining positions were expected to be fulfilled in fiscal Q2 2014, and the company expected to present the activity as discontinued operations beginning that quarter. Management did not expect a material adverse effect on liquidity or cash flows.
- Low short-term interest rates continued to constrain interest income. Management cited subdued volatility and lingering drought effects in agricultural markets, along with customer uncertainty about Dodd-Frank rules, as factors affecting OTC activity.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expressed confidence in its ability to renew or replace expiring facilities and stated that available liquidity was adequate.
- Controls: Management concluded disclosure controls were ineffective at December 31, 2013 because of a material weakness in accounting for certain principal OTC derivative trading activity. The weakness involved reconciliation of trading-system data to the general ledger and review controls. The company had restated 2012 and 2011 financial statements and was implementing remediation; effectiveness had not yet been validated.
- Legal and regulatory matters: In the Sentinel bankruptcy litigation, a judgment had been entered against FCStone, LLC and was on appeal. Management considered a loss not probable; an unsuccessful appeal could result in a pretax loss of $4 million to $6 million. An $8 million cash deposit had been posted with the court. A shareholder settlement was provisionally approved and, if finalized, was expected to cost $265,000 after anticipated insurance. A January 2014 securities class action sought unspecified damages; the company said it would defend the case. A CFTC settlement required an independent review of certain risk policies and procedures; that review was ongoing.
- Other exposures: Customer and counterparty defaults, margin calls, trading-market volatility, short positions and exchange-member guarantees may expose the company to losses. The company said potential exchange-guarantee payments were remote. Dodd-Frank and newly finalized customer-protection rules could affect operations; the impact of some requirements remained uncertain.
- The prior-year income statement was corrected for an immaterial intercompany physical-sales elimination error, reducing reported revenue and cost of sales by $166.7 million each without changing operating revenues or net income.
Important facts for investors to verify
- Confirm the registrant/entity identity: this filing is for INTL FCStone Inc., although the request metadata names StoneX Group Inc.
- Review the material weakness, restatements and remediation progress, especially controls over OTC derivative trading records.
- Track renewal or replacement of the $175 million of facilities scheduled to expire, covenant compliance and available liquidity.
- Monitor the Sentinel appeal, the $8 million court deposit and the potential $4 million–$6 million loss.
- Distinguish gross physical-commodity sales from operating revenues and assess reported results alongside management’s clearly reconciled non-GAAP marked-to-market measures.
- Assess ongoing effects of low rates, market volatility, customer activity and evolving derivatives regulation on earnings and liquidity.