Business context and reporting period
This summary covers INTL FCStone Inc.’s unaudited fiscal second quarter and first half ended March 31, 2012, compared with the corresponding 2011 periods. The filing identifies the registrant as INTL FCStone Inc.; the request metadata names StoneX Group Inc.
The company provides commodity risk management, trading and clearing, foreign exchange, securities, investment banking, asset management and commodity financing services. Its reported gross revenue includes substantial physical-commodity sales; operating and net revenues better indicate the scale of its retained business.
Key financial metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $16,951.0 million in 2012; $14,583.0 million in 2011 | $34,241.4 million; $30,853.8 million |
| Operating revenue | $119.6 million; $113.0 million | $215.9 million; $209.7 million |
| Net revenue | $116.0 million; $109.7 million | $210.2 million; $202.6 million |
| Income before tax | $3.6 million; $23.3 million | $2.9 million; $29.2 million |
| Net income attributable to common stockholders | $2.4 million; $15.4 million | $2.0 million; $19.4 million |
| Diluted EPS | $0.12; $0.81 | $0.10; $1.03 |
- Quarterly operating revenue rose 6%, but non-interest expense increased 30% to $112.4 million. Pretax income was about 3.1% of net revenue, versus 21.2% in the prior-year quarter.
- First-half operating revenue rose 3%, while non-interest expense increased 20% to $207.3 million. Pretax income was about 1.4% of net revenue, versus 14.4% a year earlier.
- Management’s marked-to-market non-GAAP results were stronger than GAAP in the quarter: adjusted operating revenue was $121.9 million versus $99.0 million, and adjusted net income was $3.8 million versus $6.6 million. For the first half, adjusted operating revenue was $215.0 million versus $207.8 million and adjusted net income was $1.4 million versus $18.2 million. These measures adjust for commodity inventory and derivatives timing differences and are not GAAP measures.
Balance sheet, cash flow and funding
- At March 31, total assets were $2,531.4 million, liabilities $2,229.2 million and total equity $302.2 million, compared with $2,635.7 million, $2,338.1 million and $297.6 million, respectively, at September 30, 2011.
- Cash and cash equivalents were $182.3 million, down from $220.6 million. Cash, securities and other assets segregated under regulations rose to $435.5 million from $119.4 million; these balances include customer-related restricted assets.
- Six-month operating cash flow was a use of $149.6 million, versus cash provided of $152.7 million in 2011. Investing used $6.7 million; financing provided $118.2 million, including a $117.0 million increase in loans and overdrafts. Cash declined by $38.3 million overall.
- Loans and overdrafts payable were $194.4 million, up from $77.4 million. Committed credit facilities totaled $325 million, with $194.4 million outstanding; an additional $50 million uncommitted commodity agreement was available. The company said $140 million of committed facilities were due to expire during the rest of fiscal 2012 and believed it could renew or replace them, but provided no assurance. It was in compliance with facility covenants.
- All outstanding debt carried variable interest rates. Customer and counterparty margin requirements can create significant daily and intraday liquidity needs. The company reported that regulated subsidiaries met applicable capital requirements.
Material changes and management commentary
- Management attributed revenue growth to higher OTC activity in Commodity and Risk Management Services (C&RM), exchange-traded activity in Clearing and Execution Services (CES), and growth in foreign exchange and securities. OTC contract volumes increased 57% in the quarter and 43% year to date; exchange-traded volumes rose 65% in the quarter and 38% year to date.
- More than 2,300 former MF Global customer accounts were opened. The acquired MF Global UK metals team contributed $5.4 million to second-quarter operating revenue. CES revenue grew, but its segment income fell to $0.7 million from $2.2 million as clearing costs, commissions and staffing costs increased; low short-term interest rates also constrained interest income.
- Quarterly C&RM GAAP operating revenue declined 5%, while its marked-to-market adjusted operating revenue rose 23%. For the first half, C&RM operating revenue declined 6%. The first-half segment income for all segments fell to $49.9 million from $64.6 million.
- Compensation and benefits, clearing costs, communications, professional fees and other expenses rose, reflecting higher volumes, acquisitions and business expansion. Headcount was 1,061 at quarter-end, compared with 904 at fiscal year-end 2011.
- Management cited historically low interest rates and lower average customer margin deposits as drags on interest income. It provided no quantified earnings or revenue guidance.
- After quarter-end, the company completed the TRX Futures acquisition on April 30, 2012, for approximately $12.9 million, equal to tangible net asset value; management did not expect an immediate earnings impact. A credit facility was renewed by amendment on April 12, 2012.
Risks, contingencies and unusual items
- Key risks include market-price and liquidity volatility, counterparty and customer defaults, margin funding needs, variable-rate debt, regulatory changes, competition and integration costs. Commodity inventory is carried at the lower of cost or fair value while related derivatives are marked to market, which can make GAAP earnings volatile.
- The company reported $23.3 million of acquisition-related contingent liabilities and estimated $9.3 million of cash payments against them during the remainder of fiscal 2012.
- In the Sentinel bankruptcy litigation, the trustee seeks approximately $15.5 million in transfers and other recoveries. The case was set for trial on October 1, 2012; the company said it would continue to defend the matter.
- A securities class action relating to legacy FCStone disclosures reached an agreement in principle to settle after quarter-end, expected to be at no cost to the company after insurance, subject to court approval. The SEC had closed its related investigation without enforcement action; a CFTC information request concerning the energy-trading matter remained open, with outcome and potential penalties uncertain.
- The company paid $0.2 million in the quarter to settle claims by two former convertible-note holders. A separate shareholder derivative action remained pending.
- The company’s retained investment in debentures tied to a Thailand hotel remained subject to litigation by the former owner, who sought to revoke a share auction. Management expected a judgment in fiscal Q3 2012 and reported no significant change in the investment’s fair value during the period.
- Disclosure controls were assessed as effective as of March 31, 2012, with no reported material change in internal controls over financial reporting during the quarter.
Important facts for investors to verify
- Whether the elevated expense base and acquisition-related staffing and integration costs translate into improved segment profitability.
- Renewal or replacement of credit facilities expiring during the remainder of fiscal 2012, and continued compliance with covenants and regulatory capital requirements.
- Cash-flow trends and the availability of liquidity given customer margin obligations and restricted customer assets.
- Developments in the Sentinel case, the CFTC review, the proposed securities-litigation settlement and the Thailand hotel dispute.
- How results compare on a consistent basis, including the company’s non-GAAP marked-to-market adjustments and the effects of acquisition-related contingent consideration.