Business context and reporting period
This Form 10-K is for INTL FCStone Inc. (the filing does not identify the registrant as StoneX) for the fiscal year ended September 30, 2011. Filed December 14, 2011, it reports a financial-services group serving more than 20,000 customers in over 100 countries across commodities risk management and trading, foreign exchange, securities, clearing and execution, asset management, and commodity financing.
Year-over-year comparisons reflect the inclusion of FCStone in both 2011 and 2010; FCStone was acquired on September 30, 2009, so the 2009 income statement does not include its operating results.
Financial performance and condition
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Operating revenues | $423.2 million | $269.0 million |
| Net revenues (operating revenues less interest expense) | $411.9 million | $259.1 million |
| Income from continuing operations before tax | $59.5 million | $17.9 million |
| Net income attributable to common stockholders | $37.3 million | $5.4 million |
| Diluted EPS | $1.96 | $0.30 |
| Net cash provided by operating activities | $209.0 million | $113.0 million |
| Cash and cash equivalents at year-end | $220.6 million | $81.9 million |
| Total assets | $2,635.7 million | $2,021.7 million |
| Stockholders’ equity | $296.3 million | $241.3 million |
| Loans and overdrafts outstanding | $77.4 million | $114.9 million |
Operating revenues increased 57%, while non-interest expenses rose 46% to $352.4 million. The filing reports a 37.8% effective tax rate. Net income attributable to common stockholders was about 8.8% of operating revenues. Management’s unaudited marked-to-market non-GAAP measures were adjusted operating revenues of $414.8 million, adjusted pretax income of $51.1 million, and adjusted net income of $32.1 million; these are not U.S. GAAP measures.
Fiscal 2011 operating cash flow was partly offset by $21.5 million used in investing and $48.4 million used in financing. Investing included $10.1 million of capital expenditures and $9.3 million for acquisitions; financing included $37.5 million of net repayments to lenders and $9.4 million of acquisition earn-out payments. Total lender indebtedness was $77.4 million; outstanding debt carried variable rates. The company had $375 million of committed credit facilities and a separate $50 million uncommitted commodity facility. It reported compliance with financial covenants, but received a waiver for fiscal 2011 capital expenditures above a $3.5 million covenant limit. Customer segregated assets were $1.5 billion, with $50.9 million in excess of required U.S. customer segregation.
For the fourth quarter ended September 30, 2011, operating revenues were $108.1 million, pretax income from continuing operations was $13.0 million, net income attributable to common stockholders was $7.5 million, and diluted EPS was $0.39. In the comparable 2010 quarter, operating revenues were $65.9 million and common-stockholder net loss was $4.5 million.
Material changes versus the prior comparable period
- Growth was led by Commodity and Risk Management Services (C&RM), whose operating revenues rose 95% to $252.6 million. OTC contract volumes increased 126%; agricultural commodity volatility, customer growth, geographic expansion, and acquisitions contributed.
- Foreign Exchange revenue rose 25% to $59.3 million, Securities revenue rose 47% to $30.5 million, Clearing and Execution Services revenue rose 7% to $66.1 million, and Other revenue rose 61% to $14.3 million.
- Despite higher Securities revenue, Securities segment income fell 66% to $1.9 million, including a $1.7 million impairment on hotel debentures and costs associated with investment-banking expansion.
- Compensation and benefits increased 69% to $176.6 million, and employees increased 24% to 904, largely reflecting business growth and acquisitions. Bad debts and impairments were $6.2 million, including losses associated with consigned gold and a clearing-customer deficit.
- All $16.7 million of remaining convertible notes and accrued interest converted into 778,703 common shares during 2011; no convertible notes remained at year-end.
- Cash increased by $138.7 million. Year-end customer payables and deposits with exchange-clearing organizations also rose substantially with customer activity; these balances are not equivalent to unrestricted corporate liquidity.
Outlook, management commentary, risks and unusual items
Management described record operating and adjusted operating revenues, expansion into new geographies and products, and plans to continue expanding services and pursue selected acquisitions. It stated that cash flow from operations, available cash, and borrowing capacity were expected to meet future liquidity needs. The filing provides no quantified earnings or revenue guidance.
- Accounting volatility: Commodity inventory is generally carried at lower of cost or fair value, while related derivatives are marked to market; the positions do not generally qualify for hedge accounting. Management’s marked-to-market adjustments may therefore differ materially from GAAP results. A $21.9 million lower-of-cost-or-market inventory adjustment was recorded in 2011.
- Market, credit and liquidity risks: Trading and principal activities expose the company to commodity, currency, interest-rate, counterparty, customer-default, concentration, and market-liquidity risks. Adverse price moves can trigger short-notice margin requirements. Low short-term interest rates constrain interest revenue.
- Regulation and industry events: Dodd-Frank implementation was ongoing, with final rules incomplete and phased in through June 30, 2012. The filing discusses potential compliance costs and business impacts. MF Global’s October 2011 bankruptcy and reported customer-segregation shortfall could affect customer confidence, regulation, and market activity; the company said it had no material exposure to MF Global.
- MF Global follow-on: After year-end, the company arranged to hire more than 50 metals professionals and receive customer-account assignments from MF Global’s UK metals business. The purchase price was described as not material; required capital and customer migration remained uncertain.
- Litigation and contingencies: Pending matters include an SEC investigation and CFTC review concerning pre-acquisition FCStone disclosures and an energy trading account; convertible-note holder litigation expected to go to trial in summer 2012; and Sentinel trustee litigation seeking approximately $15.5 million. Management said recorded loss-contingency accruals were not material and excess possible exposure was not material, but outcomes remained uncertain.
- Other unusual items: The company recorded $5.6 million of bad-debt expense in 2011 related to customer defaults on consigned gold, and a $1.7 million impairment on hotel debentures. Fiscal 2010 included a $7.0 million extraordinary loss tied to FCStone purchase-price adjustments and correction of immaterial errors; fiscal 2009 included an $18.5 million extraordinary gain from the acquisition.
- Controls and audit: Management and KPMG concluded internal control over financial reporting was effective as of September 30, 2011; the financial-statement audit opinion was unqualified. Management’s control assessment excluded the recently acquired Hencorp Futures and Ambrian businesses.
Important facts for investors to verify
- Reconcile GAAP and marked-to-market results, including the $8.4 million downward 2011 adjustment, and assess how commodity inventory and derivatives may affect reported earnings.
- Review cash-flow quality and liquidity, separating corporate cash and borrowing capacity from customer-related balances and regulatory restrictions on subsidiary capital.
- Confirm refinancing or renewal of committed facilities due to expire in fiscal 2012, covenant compliance, and resolution of the capital-expenditure covenant amendment.
- Track recoveries and future credit losses, particularly consigned-gold exposures, customer deficits, and remaining FCStone legacy notes receivable.
- Monitor the outcomes and potential financial exposure from the SEC/CFTC matters, Sentinel litigation, convertible-note litigation, and the hotel-debenture dispute.
- Assess whether acquisitions and the MF Global UK metals-business expansion retain customers and generate returns commensurate with integration costs and additional regulatory capital.