Business context and reporting period
INTL FCStone Inc. (the issuer named in this 10-Q; the request metadata identifies StoneX Group Inc.) reported its fiscal third quarter and nine months ended June 30, 2015. The company provides global commodity, securities, payments, foreign-exchange, and clearing services. Comparisons below are with the corresponding 2014 periods unless noted.
Financial performance and condition
| Metric | Three months | Nine months |
|---|---|---|
| Operating revenues | $151.6 million, up 28% | $445.6 million, up 24% |
| Net operating revenues | $103.4 million, up 36% | $304.5 million, up 29% |
| Income before tax | $17.2 million, versus $4.0 million | $48.9 million, versus $18.2 million |
| Net income | $12.2 million, versus $3.5 million | $34.6 million, versus $13.5 million |
| Diluted EPS | $0.62, versus $0.18 | $1.78, versus $0.69 |
Third-quarter compensation and other expenses rose 20% to $86.2 million; variable expenses were 59% of non-interest expenses versus 55% a year earlier. The nine-month effective tax rate was 29%, versus 24%. No single consolidated operating margin measure is presented; management emphasizes net operating revenues and segment contribution.
For the nine months, operating cash flow was $4.7 million, compared with cash used of $60.5 million in 2014; investing used $15.9 million and financing provided $48.4 million. Cash and cash equivalents were $268.0 million at June 30, versus $231.3 million at September 30, 2014. Total assets were $4.49 billion and equity was $382.4 million.
Reported indebtedness was $120.5 million: $71.2 million drawn on committed facilities, $3.8 million on an equipment-secured bank note, and $45.5 million of 8.5% senior notes due 2020. The balance sheet also included $1.08 billion of repurchase-agreement payables and $523.1 million of financial instruments sold short; these are material financing and trading obligations, distinct from the indebtedness total. Committed credit facilities totaled $280 million, with $71.2 million drawn. The company said it complied with covenants; $140 million of facilities were scheduled to expire within twelve months of the filing and management intended to renew or replace them.
Changes versus the prior period
- All reportable segments increased operating revenues in the quarter. Securities grew 83%, including $10.2 million of incremental quarterly revenue from the January 2015 G.X. Clarke acquisition; Commercial Hedging grew 13%, Global Payments 34%, Physical Commodities 14%, and Clearing and Execution Services 9%.
- G.X. Clarke added fixed-income dealing and materially increased interest income. Consolidated quarterly interest income rose to $10.6 million from $2.1 million; the acquisition contributed $6.5 million.
- Global Payments transaction count rose 67% in the quarter, while average revenue per payment fell 20%. Equity market-making volume increased 57%, and foreign-exchange prime-brokerage volume rose 99%.
- Bad-debt expense was $3.2 million for nine months, versus $0.8 million, primarily associated with OTC and LME customer deficits and notes tied to a former acquisition.
- Total assets increased from $3.04 billion at September 30, 2014, alongside the G.X. Clarke acquisition and increased securities financing and trading balances.
Reported total revenues include gross physical-commodity sales and are not directly comparable as a measure of underlying activity. The company moved part of its precious-metals business to a regulated UK broker-dealer in April; related sales and costs are now presented net within trading gains. Management stated this accounting presentation change did not affect operating revenues, continuing income, or net income.
Outlook, commentary, risks, and unusual items
Management described broad-based growth and said cash flows, available cash, and borrowing capacity should meet anticipated liquidity needs. The filing gives no formal earnings or revenue guidance. Management noted that customer-deposit interest income remains constrained by historically low short-term rates and that physical-commodity earnings can be volatile because U.S. GAAP may recognize inventory and related derivative gains or losses in different periods.
- Principal risks include market-price and liquidity movements, counterparty or customer defaults, and the need to meet exchange and OTC margin calls before collecting from customers. The company relies on collateral, credit limits, and daily monitoring to manage exposures.
- Regulatory uncertainty remained, including unfinished U.S. swap-dealer capital and margin requirements and forthcoming MiFID II/MiFIR requirements. Subsidiaries were reported in compliance with regulatory capital requirements at June 30.
- A purported securities class action was dismissed with prejudice on July 13, 2015. In the separate Sentinel matter, the trustee sought recovery of $14.5 million; management said losses were neither probable nor reasonably possible and intended to defend the case.
- The company recorded a $1.2 million pretax gain on the sale of ICE shares. After quarter-end, a July 1 subsidiary merger led to the transfer of remaining available-for-sale securities to trading; $3.4 million of previously unrecognized unrealized gains, net of tax, was expected to enter fourth-quarter fiscal 2015 earnings.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of earnings growth is recurring segment performance versus G.X. Clarke, market conditions, interest-rate management, and the ICE gain.
- Whether the company renews or replaces the $140 million of facilities approaching expiration, and maintains covenant compliance and adequate liquidity.
- Credit quality and reserve adequacy given higher bad-debt expense and customer/counterparty margin exposures.
- How repurchase financing, short positions, and pledged or repledged collateral affect liquidity and risk; these balances are large relative to equity.
- The final G.X. Clarke purchase accounting and performance-based consideration, and the effect of the subsequent securities reclassification on fourth-quarter earnings.