Stonex Group Inc. quarterly report, Q3 FY2019

Business context and reporting period

INTL FCStone Inc. (the registrant named in this filing; the request identifies the company as StoneX Group Inc.) filed this unaudited Form 10-Q for its fiscal third quarter and nine months ended June 30, 2019. It is a diversified global brokerage and financial-services firm operating across commercial hedging, global payments, securities, physical commodities, and clearing and execution services. Fiscal year-end is September 30.

Financial performance and position

Unless stated otherwise, amounts are in millions of dollars. Reported total revenue includes large gross physical-commodity sales; operating revenue, which deducts physical-commodity cost of sales, and net operating revenue are more informative measures of operating performance.

Quarterly operating revenue rose 9% and net operating revenue rose 7%, but pretax income fell 34% and net income fell 32%. Nine-month operating and net operating revenue increased 12% and 9%, respectively; pretax income declined 5%, while net income increased 45%. The nine-month comparison benefited from a prior-year $20.1 million discrete tax expense related to the Tax Cuts and Jobs Act. Effective tax rates were 25% in the 2019 quarter and nine-month period, versus 27% and 51% in the comparable 2018 periods.

Quarterly total compensation and other expenses rose 16% to $144.0 million. Interest expense increased 92% to $42.5 million, largely reflecting higher financing costs associated with institutional fixed-income and securities-lending activity. The filing reports no conventional consolidated operating-margin measure; net operating revenue was $165.6 million in the quarter. Segment income was $69.6 million, versus $70.4 million a year earlier.

For the quarter, Securities operating revenue increased $24.3 million, led by fixed-income activity and securities lending, while Commercial Hedging and Global Payments also grew. Clearing and Execution Services operating revenue declined $10.0 million, and Physical Commodities was broadly flat. Securities segment income fell 20% to $8.2 million as higher interest expense and launch costs offset revenue growth; Physical Commodities segment income fell to $2.8 million, partly due to a $2.5 million unrealized derivative loss.

Net cash provided by operating activities was $325.6 million for the nine months, compared with $1,044.8 million used in the prior-year period. Investing activities used $38.3 million, including $28.0 million net cash paid for acquisitions; financing activities provided $150.6 million, including $175.0 million of term-loan proceeds. Cash, segregated cash, cash equivalents, and segregated cash equivalents totaled $2,628.6 million at June 30, up $438.5 million from fiscal year-end. This figure includes client and regulatory-segregated balances and should not be read as unrestricted corporate cash.

Total assets were $10,054.9 million and stockholders’ equity was $570.5 million at June 30, 2019. Balance-sheet debt included $337.7 million payable to lenders and a $169.7 million senior secured term loan, net of financing costs. The company reported $507.4 million in total outstanding borrowings across committed and uncommitted facilities and a note payable. It was in compliance with its credit-facility financial covenants. Approximately 98% of assets were described as cash, receivables, marketable instruments, or physical inventory, although much of the balance sheet supports client and counterparty activity.

Material changes, outlook, risks, and unusual items

• Quarterly growth in operating revenue did not translate into higher net income: compensation and other expenses rose, interest expense nearly doubled, and the prior-year quarter included a $2.0 million Sentinel bankruptcy-settlement gain.
• The nine-month 2019 results included a $5.4 million bargain-purchase gain from the GMP Securities acquisition and a $2.4 million recovery related to prior coal liabilities. These items, as well as the prior-year tax-reform charge, affect period comparisons.
• Acquisitions included GMP Securities and online precious-metals businesses CoinInvest GmbH and European Precious Metal Trading GmbH. A further acquisition of Fillmore Advisors was agreed after quarter-end, subject to regulatory approval. Management said acquisitions and new initiatives increased expenses and contributed to a pretax net loss of $3.5 million for the quarter across those investments and initiatives.
• The company had $29.2 million of net receivables from approximately 300 OptionSellers-related client accounts following natural-gas-market losses. It recorded no allowance, is pursuing collection, and is defending client arbitrations. Management said eventual provisions or losses could be material, but did not believe the matter would impair liquidity, capital, or regulatory compliance.
• Management intended to renew or replace committed facilities with $357.5 million scheduled to expire within 12 months of the filing and believed it could do so. This remains a refinancing and liquidity item to monitor. No quantified earnings or revenue guidance was provided.
• Key risks include market volatility, counterparty and client defaults, margin and funding demands, interest-rate and foreign-exchange movements, regulatory requirements, and legal or arbitration outcomes. Management described its forward-looking statements as subject to significant risks and uncertainties.

Important facts for investors to verify

• Confirm the issuer and reporting-period identity: the filing is under INTL FCStone Inc. and covers the quarter ended June 30, 2019.
• Track whether the $29.2 million OptionSellers receivable is collected, and whether arbitration results require an allowance or create additional losses.
• Monitor renewal or replacement of the $357.5 million of committed facilities due to expire within 12 months, as well as covenant compliance and borrowing costs.
• Assess whether Securities growth and acquisition-related expansion can produce sustainable segment earnings given sharply higher interest expense and compensation costs.
• Separate operating performance from gross physical-commodity sales, restricted client cash, acquisition gains, tax effects, and other unusual items when comparing periods.
• Review subsequent regulatory approval and closing of the Fillmore Advisors transaction and completion of purchase-price valuations for acquisitions.