Business context and reporting period
The filing is INTL FCStone Inc.’s unaudited Form 10-Q for the fiscal third quarter ended June 30, 2018, and the nine months then ended. The company is a diversified global financial-services business spanning commercial hedging, global payments, securities, physical commodities, and clearing and execution services. The filing identifies the registrant as INTL FCStone Inc.; the supplied company metadata says StoneX Group Inc.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Total revenues | $7,118.3 million, up 29% | $21,543.9 million, up 26% |
| Operating revenues | $259.8 million, up 31% | $732.6 million, up 27% |
| Net operating revenues | $154.6 million, up 25% | $439.2 million, up 21% |
| Income before tax | $32.9 million, versus $15.0 million | $81.0 million, versus $37.7 million |
| Net income | $24.0 million, up 89%; diluted EPS $1.25 | $39.8 million, up 33%; diluted EPS $2.06 |
Total revenue includes gross physical-commodity sales, which are largely offset by cost of sales; operating revenue is the more informative revenue measure. For the quarter, operating revenue growth reflected higher customer activity and volatility, increased short-term rates, and higher average customer balances. Interest income rose 72% to $33.7 million, while interest expense nearly doubled to $22.1 million. Third-quarter compensation and other expenses increased 14% to $123.7 million.
At June 30, 2018, total assets were $7,284.9 million, liabilities $6,797.2 million, and stockholders’ equity $487.7 million. Cash and cash equivalents were $347.8 million; an additional $1,212.6 million was segregated under regulatory requirements. Payables to lenders under loans were $360.6 million, up from $230.2 million at September 30, 2017. The company had $594.5 million of committed facilities, of which $311.2 million was drawn, plus $48.0 million outstanding under an uncommitted facility and a $1.4 million bank note.
For the nine months, operating activities used $87.1 million of cash, investing activities used $9.3 million, and financing activities provided $126.3 million, principally reflecting a $131.0 million increase in borrowings. Cash increased $32.9 million to $347.8 million. Management reported compliance with credit-facility covenants and subsidiary regulatory-capital requirements.
Material changes versus the prior comparable period
- Quarterly segment income rose 33% to $70.4 million. Clearing and Execution Services income increased to $13.7 million from $6.5 million, and Commercial Hedging income rose to $25.3 million from $16.3 million. Securities income declined to $10.3 million from $12.9 million, despite higher operating revenue, as clearing and interest expenses increased.
- For the quarter, Clearing and Execution Services operating revenue grew 36% to $88.9 million and Commercial Hedging grew 36% to $77.9 million. Global Payments reached a record $26.0 million, up 16%. Physical Commodities operating revenue rose 24% to $14.9 million.
- Higher interest rates and activity increased transactional clearing expenses 45% and interest expense 97% in the quarter. Variable expenses were 63% of non-interest expenses, versus 57% a year earlier.
- Quarterly net income benefited from a $2.0 million Sentinel litigation recovery recorded as other gain. It also included $2.6 million of trading gains from economic hedges related to Argentine-peso depreciation.
Outlook, commentary, risks and unusual items
Management attributed stronger results to market volatility, increased customer activity and wider spreads, alongside higher short-term interest rates and average customer balances. The filing provides no specific earnings or revenue guidance. Management said operating cash flows, available cash and borrowing capacity should meet anticipated liquidity needs, and intends to renew or replace committed facilities with $362.0 million scheduled to expire within twelve months of the filing.
- Tax reform: Nine-month income tax expense was $41.2 million and the effective rate was 51%, including $20.1 million of discrete Tax Cuts and Jobs Act expense. The company reported an $11.3 million provisional transition-tax obligation and said estimates remained subject to refinement.
- Argentina: The peso declined approximately 67% against the U.S. dollar over the nine months. The economy was designated highly inflationary effective July 1, 2018; from the next quarter, peso-denominated monetary balances are to be remeasured using the U.S. dollar as functional currency, with remeasurement effects recorded in earnings.
- Market, credit and liquidity risks: The business is exposed to trading-market volatility, counterparty or customer defaults, margin calls, and interest-rate and foreign-exchange movements. The company uses collateral, position limits and daily monitoring, but notes that margin may not fully cover customer losses. Financial instruments sold short totaled $1,007.2 million at fair value and could generate losses if their value rises.
- Legal and other items: The Sentinel litigation concluded in the company’s favor; it received a $2.0 million reserve payment in May 2018. Management said ordinary-course loss-contingency accruals were not material and excess exposure was not likely to be material. A proposed Carl Kliem S.A. acquisition remained subject to Luxembourg regulatory approval and was not expected to be material.
- Management reported effective disclosure controls as of June 30, 2018, no material change in internal control over financial reporting during the quarter, and no material changes to the risk factors in its latest Form 10-K.
Most important facts for an investor to verify
- Confirm the registrant and issuer identity: this filing is for INTL FCStone Inc., despite the metadata naming StoneX Group Inc.
- Assess the quality and sustainability of operating-revenue growth, including the contribution from higher rates, volatility, Argentine economic hedges and the one-time Sentinel recovery.
- Review the $20.1 million Tax Reform charge, provisional transition-tax estimate and resulting unusually high nine-month effective tax rate.
- Evaluate cash conversion and funding reliance: nine-month operating cash flow was negative $87.1 million, while borrowings rose and committed facilities face upcoming expirations.
- Monitor customer and counterparty credit exposure, especially agricultural OTC deficits, collateral and margin adequacy, and the large short-position and derivative exposures.
- Track the financial impact of Argentina’s highly inflationary accounting treatment and any changes in peso-related earnings volatility.