Business context and reporting period
INTL FCStone Inc. (now identified in the request as StoneX Group Inc.) filed this unaudited Form 10-Q for fiscal Q1 2019, the three months ended December 31, 2018. The company provides global brokerage, clearing, execution, risk-management, advisory, payments, securities and physical-commodities services. Unless otherwise stated, amounts are in U.S. dollars.
Key financial metrics
| Metric | Q1 2019 | Prior-year quarter |
|---|---|---|
| Total revenue | $6,552.2 million | $7,918.6 million |
| Operating revenue | $264.7 million | $212.6 million |
| Net operating revenue | $149.0 million | $130.3 million |
| Income before tax | $24.4 million | $18.6 million |
| Income tax expense | $6.2 million | $25.5 million |
| Net income (loss) | $18.2 million | $(6.9) million |
| Diluted EPS | $0.94 | $(0.37) |
| Net cash used in operating activities | $(213.0) million | $(184.9) million |
Operating revenue increased 25%; net operating revenue increased 14%. Total revenue fell 17%, principally reflecting lower gross physical-commodities sales; because commodity cost of sales is deducted, operating revenue is a more informative measure of the company’s other activity. Net income was approximately 6.9% of operating revenue, versus a net loss in the prior-year quarter.
At December 31, 2018, total assets were $8,710.5 million, total liabilities $8,184.5 million, and stockholders’ equity $526.0 million. Payables to lenders under loans were $435.4 million, up from $355.2 million at September 30, 2018. Unrestricted cash and cash equivalents were $358.2 million. The cash-flow statement’s $2,051.8 million ending balance also includes cash and cash equivalents segregated for regulatory/client purposes and should not be read as freely available corporate cash.
Material changes versus the prior comparable period
- Growth was led by Securities, with operating revenue of $69.0 million, up 60%, and Clearing and Execution Services (CES), at $95.2 million, up 32%. Global Payments rose 21% to $29.7 million, and Physical Commodities rose 35% to $14.3 million. Commercial Hedging declined 3% to $59.8 million.
- Segment income rose 23% to $71.5 million. Commercial Hedging segment income fell 37% to $13.3 million, reflecting lower OTC revenue and higher expenses; CES segment income rose 69% to $17.7 million and Securities segment income rose 45% to $16.0 million.
- Interest income increased 88% to $45.0 million, attributed to higher short-term rates, client balances and fixed-income trading. Interest expense rose 131% to $33.0 million, largely reflecting increased securities trading and lending activity and higher rates.
- Compensation and other expenses increased 12% to $124.6 million. Variable expenses were 63% of total expenses versus 58% a year earlier.
- The prior-year quarter included $20.9 million of discrete tax expense related to the Tax Cuts and Jobs Act; the reported effective tax rates were 25% in Q1 2019 and 137% in the prior-year quarter.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management says operating cash flows, available cash and borrowing capacity are expected to meet future liquidity needs and that it expects to renew or replace its committed credit facilities. All $594.5 million of committed facilities were scheduled to expire within 12 months of the filing; $408.5 million was drawn at quarter-end. The company reported compliance with financial covenants.
- Operating cash use was $213.0 million, driven in part by working-capital and client/counterparty balance movements. Financing activities provided $79.6 million, including $80.4 million of net additional lender borrowings. Management notes that cash flows can fluctuate materially with client activity, markets and margin requirements.
- Significant natural-gas price movements in November 2018 caused margin deficits in approximately 300 OptionSellers.com-managed accounts. Net receivables were $30.0 million at December 31 and $29.4 million as of February 5, 2019. The company had not established an allowance, citing insufficient basis to assess collectability, and says any eventual provision or loss could be material. Client arbitrations are pending; outcomes are uncertain.
- A coal-related settlement payment of $8.4 million was below the previously accrued amount, producing a $2.4 million bad-debt recovery; the prior-year quarter included a $1.0 million coal bad-debt expense.
- CES recorded a $2.7 million settlement receipt from the Barclays “last look” class action and $0.7 million of related legal fees. This settlement contributed to FX Prime Brokerage’s reported growth.
- Market, credit and liquidity risks include volatile commodity, securities, interest-rate and foreign-exchange markets; counterparty or client defaults; margin shortfalls; and the potential for losses on short positions and derivatives. Management states that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
- Carl Kliem S.A. was acquired effective November 30, 2018 for $2.4 million cash consideration; its post-acquisition results included a $0.2 million net loss. The subsequent GMP Securities acquisition closed January 15, 2019; $8.2 million was paid initially, with final consideration subject to tangible-book-value adjustment.
Most important facts for investors to verify
- Progress and recoveries on the OptionSellers receivables, any required credit-loss allowance, and the outcome of related arbitrations.
- Renewal or replacement terms for the $594.5 million of committed facilities due to expire within 12 months, and continued covenant and regulatory-capital compliance.
- Whether operating-revenue growth and improved earnings persist without the coal recovery and Barclays settlement, and how OTC performance and interest-rate-sensitive revenues develop.
- Cash-flow quality and the distinction between unrestricted corporate cash and segregated client/regulatory funds.
- Final purchase accounting and financial contribution from GMP Securities, and subsequent performance of Carl Kliem S.A.