Item 1. Financial Statements
INTL FCStone Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
(in millions, except par value and share amounts)
|
June 30,
2017
|
|
September 30,
2016
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
306.1
|
|
|
$
|
316.2
|
|
Cash, securities and other assets segregated under federal and other regulations (including $241.8 and $618.8 at fair value at June 30, 2017 and September 30, 2016, respectively)
|
678.7
|
|
|
1,136.3
|
|
Securities purchased under agreements to resell
|
521.7
|
|
|
609.6
|
|
Securities borrowed
|
119.6
|
|
|
—
|
|
Deposits with and receivables from:
|
|
|
|
Exchange-clearing organizations (including $232.5 and $868.5 at fair value at June 30, 2017 and September 30, 2016, respectively)
|
1,988.6
|
|
|
1,524.4
|
|
Broker-dealers, clearing organizations and counterparties (including $22.5 and $(15.2) at fair value at June 30, 2017 and September 30, 2016, respectively)
|
177.7
|
|
|
237.0
|
|
Receivables from customers, net
|
251.5
|
|
|
194.5
|
|
Notes receivable, net
|
9.1
|
|
|
18.9
|
|
Income taxes receivable
|
1.4
|
|
|
1.1
|
|
Financial instruments owned, at fair value (includes securities pledged as collateral that can be sold or repledged of $171.4 and $47.2 at June 30, 2017 and September 30, 2016, respectively)
|
1,779.1
|
|
|
1,606.1
|
|
Physical commodities inventory (including $84.4 and $71.2 at fair value at June 30, 2017 and September 30, 2016, respectively)
|
172.5
|
|
|
123.8
|
|
Deferred income taxes, net
|
40.4
|
|
|
34.5
|
|
Property and equipment, net
|
33.1
|
|
|
29.4
|
|
Goodwill and intangible assets, net
|
60.5
|
|
|
56.6
|
|
Other assets
|
55.9
|
|
|
61.9
|
|
Total assets
|
$
|
6,195.9
|
|
|
$
|
5,950.3
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Liabilities:
|
|
|
|
Accounts payable and other accrued liabilities (including $0.9 and $0.8 at fair value at June 30, 2017 and September 30, 2016, respectively)
|
$
|
142.5
|
|
|
$
|
161.3
|
|
Payables to:
|
|
|
|
Customers
|
2,799.5
|
|
|
2,854.2
|
|
Broker-dealers, clearing organizations and counterparties (including $3.4 and $3.5 at fair value at June 30, 2017 and September 30, 2016, respectively)
|
182.3
|
|
|
260.1
|
|
Lenders under loans
|
244.7
|
|
|
182.8
|
|
Senior unsecured notes
|
—
|
|
|
44.5
|
|
Income taxes payable
|
8.6
|
|
|
7.1
|
|
Securities sold under agreements to repurchase
|
1,458.3
|
|
|
1,167.1
|
|
Securities loaned
|
148.0
|
|
|
—
|
|
Financial instruments sold, not yet purchased, at fair value
|
742.9
|
|
|
839.4
|
|
Total liabilities
|
5,726.8
|
|
|
5,516.5
|
|
Commitments and contingencies (Note 11)
|
|
|
|
Stockholders' Equity:
|
|
|
|
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 par value. Authorized 30,000,000 shares; 20,825,712 issued and 18,703,755 outstanding at June 30, 2017 and 20,557,175 issued and 18,435,218 outstanding at September 30, 2016
|
0.2
|
|
|
0.2
|
|
Common stock in treasury, at cost - 2,121,957 shares at June 30, 2017 and September 30, 2016
|
(46.3
|
)
|
|
(46.3
|
)
|
Additional paid-in capital
|
256.8
|
|
|
249.4
|
|
Retained earnings
|
285.1
|
|
|
255.1
|
|
Accumulated other comprehensive loss, net
|
(26.7
|
)
|
|
(24.6
|
)
|
Total stockholders' equity
|
469.1
|
|
|
433.8
|
|
Total liabilities and stockholders' equity
|
$
|
6,195.9
|
|
|
$
|
5,950.3
|
|
See accompanying notes to condensed consolidated financial statements.
INTL FCStone Inc.
Condensed Consolidated Income Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions, except share and per share amounts)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
5,317.0
|
|
|
$
|
4,703.2
|
|
|
$
|
16,486.3
|
|
|
$
|
11,503.8
|
|
Trading gains, net
|
79.9
|
|
|
83.4
|
|
|
246.9
|
|
|
243.8
|
|
Commission and clearing fees
|
73.0
|
|
|
58.2
|
|
|
212.5
|
|
|
159.4
|
|
Consulting and management fees
|
16.3
|
|
|
8.0
|
|
|
47.5
|
|
|
27.3
|
|
Interest income
|
19.6
|
|
|
15.6
|
|
|
47.7
|
|
|
42.8
|
|
Other income
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
Total revenues
|
5,505.9
|
|
|
4,868.5
|
|
|
17,041.1
|
|
|
11,977.3
|
|
Cost of sales of physical commodities
|
5,308.3
|
|
|
4,693.5
|
|
|
16,462.2
|
|
|
11,484.9
|
|
Operating revenues
|
197.6
|
|
|
175.0
|
|
|
578.9
|
|
|
492.4
|
|
Transaction-based clearing expenses
|
33.9
|
|
|
35.2
|
|
|
101.2
|
|
|
97.9
|
|
Introducing broker commissions
|
29.2
|
|
|
14.8
|
|
|
86.1
|
|
|
40.8
|
|
Interest expense
|
11.2
|
|
|
7.7
|
|
|
30.1
|
|
|
20.8
|
|
Net operating revenues
|
123.3
|
|
|
117.3
|
|
|
361.5
|
|
|
332.9
|
|
Compensation and other expenses:
|
|
|
|
|
|
|
|
Compensation and benefits
|
75.5
|
|
|
69.4
|
|
|
222.7
|
|
|
197.7
|
|
Communication and data services
|
9.8
|
|
|
7.9
|
|
|
29.6
|
|
|
23.1
|
|
Occupancy and equipment rental
|
3.9
|
|
|
3.2
|
|
|
11.1
|
|
|
9.7
|
|
Professional fees
|
3.7
|
|
|
3.3
|
|
|
11.9
|
|
|
8.9
|
|
Travel and business development
|
3.0
|
|
|
2.9
|
|
|
9.6
|
|
|
8.4
|
|
Depreciation and amortization
|
2.4
|
|
|
2.1
|
|
|
7.2
|
|
|
6.2
|
|
Bad debts
|
0.1
|
|
|
—
|
|
|
3.9
|
|
|
4.6
|
|
Other
|
9.9
|
|
|
7.1
|
|
|
27.8
|
|
|
20.8
|
|
Total compensation and other expenses
|
108.3
|
|
|
95.9
|
|
|
323.8
|
|
|
279.4
|
|
Income before tax
|
15.0
|
|
|
21.4
|
|
|
37.7
|
|
|
53.5
|
|
Income tax expense
|
2.3
|
|
|
6.8
|
|
|
7.7
|
|
|
15.6
|
|
Net income
|
$
|
12.7
|
|
|
$
|
14.6
|
|
|
$
|
30.0
|
|
|
$
|
37.9
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.67
|
|
|
$
|
0.79
|
|
|
$
|
1.59
|
|
|
$
|
2.03
|
|
Diluted
|
$
|
0.66
|
|
|
$
|
0.78
|
|
|
$
|
1.58
|
|
|
$
|
2.00
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
18,447,053
|
|
|
18,138,754
|
|
|
18,365,939
|
|
|
18,461,063
|
|
Diluted
|
18,702,128
|
|
|
18,322,451
|
|
|
18,659,138
|
|
|
18,655,672
|
|
See accompanying notes to condensed consolidated financial statements.
INTL FCStone Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
$
|
12.7
|
|
|
$
|
14.6
|
|
|
$
|
30.0
|
|
|
$
|
37.9
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
(1.9
|
)
|
|
(0.1
|
)
|
|
(2.1
|
)
|
|
(7.0
|
)
|
Pension liabilities adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
Reclassification of adjustments included in net income:
|
|
|
|
|
|
|
|
|
|
|
|
Periodic pension costs (included in compensation and benefits)
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Reclassification adjustment included in net income:
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Other comprehensive loss
|
(1.9
|
)
|
|
(0.1
|
)
|
|
(2.1
|
)
|
|
(6.8
|
)
|
Comprehensive income
|
$
|
10.8
|
|
|
$
|
14.5
|
|
|
$
|
27.9
|
|
|
$
|
31.1
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
INTL FCStone Inc.
Condensed Consolidated Cash Flows Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
30.0
|
|
|
$
|
37.9
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
Depreciation and amortization
|
7.2
|
|
|
5.8
|
|
Bad debts
|
3.9
|
|
|
4.6
|
|
Deferred income taxes
|
(5.8
|
)
|
|
0.9
|
|
Amortization of debt issuance costs and debt discount
|
1.7
|
|
|
0.7
|
|
Amortization of share-based compensation
|
4.6
|
|
|
3.8
|
|
(Gain) loss on sale of property and equipment
|
(0.3
|
)
|
|
0.4
|
|
Changes in operating assets and liabilities, net:
|
|
|
|
Cash, securities and other assets segregated under federal and other regulations
|
458.8
|
|
|
(218.0
|
)
|
Securities purchased under agreements to resell
|
87.9
|
|
|
(301.3
|
)
|
Securities borrowed
|
(112.7
|
)
|
|
—
|
|
Deposits with and receivables from exchange-clearing organizations
|
(462.3
|
)
|
|
51.5
|
|
Deposits with and receivables from broker-dealers, clearing organizations, and counterparties
|
30.2
|
|
|
96.1
|
|
Receivables from customers, net
|
(87.2
|
)
|
|
101.8
|
|
Notes receivable, net
|
9.8
|
|
|
28.5
|
|
Income taxes receivable
|
(0.4
|
)
|
|
1.4
|
|
Financial instruments owned, at fair value
|
(174.6
|
)
|
|
(562.4
|
)
|
Physical commodities inventory
|
(48.9
|
)
|
|
(73.8
|
)
|
Other assets
|
0.5
|
|
|
(7.1
|
)
|
Accounts payable and other accrued liabilities
|
(13.3
|
)
|
|
(2.3
|
)
|
Payables to customers
|
(4.8
|
)
|
|
75.6
|
|
Payables to broker-dealers, clearing organizations and counterparties
|
(65.4
|
)
|
|
(8.9
|
)
|
Income taxes payable
|
1.7
|
|
|
—
|
|
Securities sold under agreements to repurchase
|
291.2
|
|
|
429.0
|
|
Securities loaned
|
130.5
|
|
|
—
|
|
Financial instruments sold, not yet purchased, at fair value
|
(97.2
|
)
|
|
304.0
|
|
Net cash used in operating activities
|
(14.9
|
)
|
|
(31.8
|
)
|
Cash flows from investing activities:
|
|
|
|
Cash paid for acquisitions, net
|
(6.0
|
)
|
|
—
|
|
Purchase of property and equipment
|
(8.6
|
)
|
|
(12.1
|
)
|
Net cash used in investing activities
|
(14.6
|
)
|
|
(12.1
|
)
|
Cash flows from financing activities:
|
|
|
|
Net change in payable to lenders under loans
|
62.5
|
|
|
170.6
|
|
Repayment of senior unsecured notes
|
(45.5
|
)
|
|
—
|
|
Payments of note payable
|
(0.6
|
)
|
|
(0.6
|
)
|
Deferred payments on acquisitions
|
—
|
|
|
(2.7
|
)
|
Debt issuance costs
|
(0.3
|
)
|
|
(1.9
|
)
|
Exercise of stock options
|
3.1
|
|
|
2.3
|
|
Share repurchases
|
—
|
|
|
(19.5
|
)
|
Income tax (shortfall) benefit on stock options and awards
|
(0.2
|
)
|
|
0.7
|
|
Net cash provided by financing activities
|
19.0
|
|
|
148.9
|
|
Effect of exchange rates on cash and cash equivalents
|
0.4
|
|
|
(8.5
|
)
|
Net (decrease) increase in cash and cash equivalents
|
(10.1
|
)
|
|
96.5
|
|
Cash and cash equivalents at beginning of period
|
316.2
|
|
|
268.1
|
|
Cash and cash equivalents at end of period
|
$
|
306.1
|
|
|
$
|
364.6
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Cash paid for interest
|
$
|
27.2
|
|
|
$
|
18.9
|
|
Income taxes paid, net of cash refunds
|
$
|
12.4
|
|
|
$
|
12.4
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
Identified intangible assets from asset acquisitions
|
$
|
6.0
|
|
|
$
|
—
|
|
Additional consideration payable related to acquisitions, net
|
$
|
—
|
|
|
$
|
0.3
|
|
See accompanying notes to condensed consolidated financial statements.
INTL FCStone Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Common
Stock
|
|
Treasury
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss, net
|
|
Total
|
Balances as of September 30, 2016
|
$
|
0.2
|
|
|
$
|
(46.3
|
)
|
|
$
|
249.4
|
|
|
$
|
255.1
|
|
|
$
|
(24.6
|
)
|
|
$
|
433.8
|
|
Net income
|
|
|
|
|
|
|
30.0
|
|
|
|
|
30.0
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
(2.1
|
)
|
Exercise of stock options
|
|
|
|
|
2.8
|
|
|
|
|
|
|
2.8
|
|
Share-based compensation
|
|
|
|
|
4.6
|
|
|
|
|
|
|
4.6
|
|
Balances as of June 30, 2017
|
$
|
0.2
|
|
|
$
|
(46.3
|
)
|
|
$
|
256.8
|
|
|
$
|
285.1
|
|
|
$
|
(26.7
|
)
|
|
$
|
469.1
|
|
See accompanying notes to condensed consolidated financial statements.
INTL FCStone Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1
–
Basis of Presentation and Consolidation and Accounting Standards Adopted
INTL FCStone Inc.
, a Delaware corporation, and its consolidated subsidiaries (collectively “INTL” or “the Company”), is a diversified global financial services organization providing execution, risk management and advisory services, market intelligence, and clearing services across asset classes and markets around the world. The Company’s services include comprehensive risk management advisory services for commercial customers; execution of listed futures and options on futures contracts on all major commodity exchanges; structured over-the-counter (“OTC”) products in a wide range of commodities; physical trading and hedging of precious metals and select other commodities; trading of more than
140
foreign currencies; market-making in international equities; fixed income; debt origination and asset management.
The Company provides these services to a diverse group of more than
20,000
predominantly wholesale organizations located throughout the world, including producers, processors and end-users of nearly all widely-traded physical commodities to manage their risks and enhance margins; to commercial counterparties who are end-users of the Company’s products and services; to governmental and non-governmental organizations; and to commercial banks, brokers, institutional investors and major investment banks.
Basis of Presentation and Consolidation
The accompanying condensed consolidated balance sheet as of
September 30, 2016
, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the condensed consolidated financial statements for the interim periods presented have been reflected as required by Rule 10-01 of Regulation S-X.
Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in the Company’s Form 10-K for the fiscal year ended
September 30, 2016
filed with the SEC.
These condensed consolidated financial statements include the accounts of INTL FCStone Inc. and all other entities in which the Company has a controlling financial interest. All material intercompany transactions and balances have been eliminated in consolidation.
The Company’s fiscal year end is September 30, and the fiscal quarters end on December 31, March 31, June 30 and September 30. Unless otherwise stated, all dates refer to fiscal years and fiscal interim periods.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates and assumptions relate to fair value measurement for financial instruments and investments, revenue recognition, the provision for potential losses from bad debts, valuation of inventories, valuation of goodwill and intangible assets, incomes taxes, and contingencies. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
In the condensed consolidated income statements, the total revenues reported combine gross revenues for the physical commodities business and net revenues for all other businesses. The subtotal ‘operating revenues’ in the condensed consolidated income statements is calculated by deducting physical commodities cost of sales from total revenues. The subtotal ‘net operating revenues’ in the condensed consolidated income statements is calculated as operating revenues less transaction-based clearing expenses, introducing broker commissions and interest expense. Transaction-based clearing expenses represent variable expenses paid to executing brokers, exchanges, clearing organizations and banks in relation to transactional volumes. Introducing broker commissions include commission paid to non-employee third parties that have introduced customers to the Company. Net operating revenues represent revenues available to pay variable compensation to risk management consultants and traders and direct non-variable expenses, as well as variable and non-variable expenses of operational and administrative employees.
During the quarter ended March 31, 2017, the Company’s Securities reportable segment established a securities lending business. Securities borrowed and loaned are accounted for as collateralized financings. Securities borrowed and loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed and loaned are reported on a gross basis as the Company has determined that the right of offset does not exist. Interest income and interest expense are recognized over the life of the arrangements.
Accounting Standards Adopted
In April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In June 2015, the FASB issued ASU 2015-15 as an amendment to this guidance to address the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements. The SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 required retrospective application to all prior periods presented in the consolidated financial statements. This new guidance was effective for the Company in the first quarter of 2017. As a result of adopting this standard on October 1, 2016, deferred financing costs of
$1.0 million
as of September 30, 2016, previously reported within other assets, were reclassified to senior unsecured notes in the consolidated balance sheet. As of December 31, 2016, there were no deferred financing costs as the senior unsecured notes were redeemed during the three months ended December 31, 2016, as discussed in Note 9.
In January 2017, the FASB issued ASU 2017-01, Business Combinations - Clarifying the Definition of a Business, which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company early adopted this guidance effective October 1, 2016, and applied the guidance in determining whether the acquisition discussed in Note 16 is the acquisition of an asset or of a business.
Note 2
–
Earnings per Share
The Company presents basic and diluted earnings per share (“EPS”) using the two-class method which requires all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends and therefore participate in undistributed earnings with common stockholders be included in computing earnings per share. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors contain non-forfeitable rights to dividends at the same rate as common stock, and are considered participating securities. Basic EPS has been computed by dividing net income by the weighted-average number of common shares outstanding.
The following is a reconciliation of the numerator and denominator of the diluted earnings per share computations for the periods presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions, except share amounts)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
12.7
|
|
|
$
|
14.6
|
|
|
$
|
30.0
|
|
|
$
|
37.9
|
|
Less: Allocation to participating securities
|
(0.3
|
)
|
|
(0.3
|
)
|
|
(0.6
|
)
|
|
(0.6
|
)
|
Net income allocated to common stockholders
|
$
|
12.4
|
|
|
$
|
14.3
|
|
|
$
|
29.4
|
|
|
$
|
37.3
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average number of:
|
|
|
|
|
|
|
|
Common shares outstanding
|
18,447,053
|
|
|
18,138,754
|
|
|
18,365,939
|
|
|
18,461,063
|
|
Dilutive potential common shares outstanding:
|
|
|
|
|
|
|
|
Share-based awards
|
255,075
|
|
|
183,697
|
|
|
293,199
|
|
|
194,609
|
|
Diluted weighted-average shares
|
18,702,128
|
|
|
18,322,451
|
|
|
18,659,138
|
|
|
18,655,672
|
|
The dilutive effect of share-based awards is reflected in diluted earnings per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense required under the Compensation – Stock Compensation Topic of the ASC.
Options to purchase
210,543
and
1,009,055
shares of common stock for the
three months ended June 30, 2017 and 2016
, respectively, and options to purchase
242,778
and
933,678
shares of common stock for the
nine months ended June 30, 2017 and 2016
, respectively, were excluded from the calculation of diluted earnings per share as they would have been anti-dilutive.
Note 3
–
Assets and Liabilities, at Fair Value
The Company’s financial and non-financial assets and liabilities reported at fair value on a recurring basis are included in the following captions on the condensed consolidated balance sheets:
|
|
•
|
Cash and cash equivalents
|
|
|
•
|
Cash, securities and other assets segregated under federal and other regulations
|
|
|
•
|
Deposits with and receivables from exchange-clearing organizations
|
|
|
•
|
Deposits with and receivables from broker-dealers, clearing organizations and counterparties
|
|
|
•
|
Financial instruments owned
|
|
|
•
|
Physical commodities inventory
|
|
|
•
|
Accounts payable and other accrued liabilities
|
|
|
•
|
Payables to broker-dealers, clearing organizations and counterparties
|
|
|
•
|
Financial instruments sold, not yet purchased
|
Fair Value Hierarchy
The majority of financial assets and liabilities on the condensed consolidated balance sheets are reported at fair value. Cash is reported at the balance held at financial institutions. Cash equivalents includes money market funds, which are valued at period-end at the net asset value provided by the fund’s administrator, and certificates of deposit, which are stated at cost plus accrued interest, which approximates fair value. Cash, securities and other assets segregated under federal and other regulations include the value of cash collateral as well as the value of other pledged investments, primarily U.S. Treasury bills, obligations issued by government sponsored entities, and commodities warehouse receipts. Deposits with and receivables from exchange-clearing organizations, broker-dealers, clearing organizations and counterparties and payables to broker-dealers, clearing organizations and counterparties include the value of cash collateral as well as the value of money market funds and other pledged investments, primarily U.S. Treasury bills, obligations issued by government sponsored entities, and mortgage-backed and asset-backed securities. These balances also include the fair value of exchange-traded futures and options on futures and exchange-cleared swaps and options determined by prices on the applicable exchange. Financial instruments owned and sold, not yet purchased include the value of common and preferred stock and American Depository Receipts (“ADRs”), exchangeable foreign
ordinary equities and ADRs, U.S. and foreign government obligations, corporate and municipal bonds, derivative financial instruments, exchange stock, commodities warehouse receipts and leases, mutual funds and investments in managed funds. The fair value of exchange common stock is determined by quoted market prices. Physical commodities inventory includes precious metals that are a part of the trading activities of the regulated broker-dealer subsidiary and is recorded at fair value using spot prices. Physical commodities inventory also includes agricultural and energy commodities that are part of the trading activities of a non-broker dealer subsidiary and are also recorded at fair value using spot prices. The carrying value of securities purchased under agreements to resell, securities borrowed, receivables from customers, net, notes receivable, net, securities sold under agreements to repurchase, and securities loaned approximates fair value due to their short-term nature. Payables to lenders under loans carry variable rates of interest and thus approximate fair value.
Deposits with and receivables from broker-dealers, clearing organizations and counterparties include amounts receivable for securities sold but not yet delivered by the Company on settlement date (“fails-to-deliver”) and net receivables arising from unsettled trades. Payables to broker-dealers, clearing organizations and counterparties primarily include amounts payable for securities purchased, but not yet received by the Company on settlement date (“fails-to-receive”), net payables arising from unsettled trades, and bonds loaned transactions. Due to their short-term nature, deposits with and receivables from and payables to broker-dealers, clearing organizations and counterparties approximate fair value.
The fair value estimates presented in the condensed consolidated financial statements are based on pertinent information available to management as of
June 30, 2017 and September 30, 2016
. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented in the condensed consolidated financial statements.
Cash equivalents, securities, selected physical commodities inventory, commodities warehouse receipts, derivative financial instruments, commodities leases, exchange common stock and contingent liabilities are carried at fair value, on a recurring basis, and are classified and disclosed into three levels in the fair value hierarchy.
Precious metals inventory held by subsidiaries that are not broker-dealers are valued at fair value on a non-recurring basis. Except as disclosed in
Note 6
, the Company did not have any fair value adjustments for assets or liabilities measured at fair value on a non-recurring basis as of
June 30, 2017
and
September 30, 2016
.
The three levels of the fair value hierarchy under the Fair Value Measurement Topic of the ASC are:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for identical or similar assets or liabilities in markets that are less active, that is, markets in which there are few transactions for the asset or liability that are observable for substantially the full term; and
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following tables set forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of June 30, 2017 by level in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting and
Collateral
(1)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Unrestricted cash equivalents - certificate of deposits
|
$
|
4.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.9
|
|
Commodities warehouse receipts
|
12.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12.2
|
|
U.S. government obligations
|
—
|
|
|
229.6
|
|
|
—
|
|
|
—
|
|
|
229.6
|
|
Securities and other assets segregated under federal and other regulations
|
12.2
|
|
|
229.6
|
|
|
—
|
|
|
—
|
|
|
241.8
|
|
U.S. government obligations
|
—
|
|
|
295.5
|
|
|
—
|
|
|
—
|
|
|
295.5
|
|
Derivatives
|
1,893.9
|
|
|
—
|
|
|
—
|
|
|
(1,956.9
|
)
|
|
(63.0
|
)
|
Deposits with and receivables from exchange-clearing organizations
|
1,893.9
|
|
|
295.5
|
|
|
—
|
|
|
(1,956.9
|
)
|
|
232.5
|
|
"To be announced" (TBA) and forward settling securities
|
—
|
|
|
6.5
|
|
|
—
|
|
|
—
|
|
|
6.5
|
|
Derivatives
|
—
|
|
|
103.2
|
|
|
—
|
|
|
(87.2
|
)
|
|
16.0
|
|
Deposits with and receivables from broker-dealers, clearing organizations and counterparties
|
—
|
|
|
109.7
|
|
|
—
|
|
|
(87.2
|
)
|
|
22.5
|
|
Common and preferred stock and ADRs
|
24.3
|
|
|
2.5
|
|
|
0.2
|
|
|
—
|
|
|
27.0
|
|
Exchangeable foreign ordinary equities and ADRs
|
10.4
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
10.5
|
|
Corporate and municipal bonds
|
2.2
|
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
4.4
|
|
U.S. government obligations
|
—
|
|
|
524.7
|
|
|
—
|
|
|
—
|
|
|
524.7
|
|
Foreign government obligations
|
—
|
|
|
44.4
|
|
|
—
|
|
|
—
|
|
|
44.4
|
|
Agency mortgage-backed and asset-backed securities
|
—
|
|
|
932.0
|
|
|
—
|
|
|
—
|
|
|
932.0
|
|
Derivatives
|
207.0
|
|
|
2,074.5
|
|
|
—
|
|
|
(2,077.7
|
)
|
|
203.8
|
|
Commodities leases
|
—
|
|
|
122.7
|
|
|
—
|
|
|
(107.2
|
)
|
|
15.5
|
|
Commodities warehouse receipts
|
3.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.5
|
|
Exchange firm common stock
|
7.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.5
|
|
Mutual funds and other
|
5.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.8
|
|
Financial instruments owned
|
260.7
|
|
|
3,703.1
|
|
|
0.2
|
|
|
(2,184.9
|
)
|
|
1,779.1
|
|
Physical commodities inventory
|
84.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84.4
|
|
Total assets at fair value
|
$
|
2,256.1
|
|
|
$
|
4,337.9
|
|
|
$
|
0.2
|
|
|
$
|
(4,229.0
|
)
|
|
$
|
2,365.2
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued liabilities - contingent liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
TBA and forward settling securities
|
—
|
|
|
3.4
|
|
|
—
|
|
|
—
|
|
|
3.4
|
|
Derivatives
|
1,858.5
|
|
|
95.0
|
|
|
—
|
|
|
(1,953.5
|
)
|
|
—
|
|
Payable to broker-dealers, clearing organizations and counterparties
|
1,858.5
|
|
|
98.4
|
|
|
—
|
|
|
(1,953.5
|
)
|
|
3.4
|
|
Common and preferred stock and ADRs
|
40.0
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
40.5
|
|
Exchangeable foreign ordinary equities and ADRs
|
9.7
|
|
|
0.8
|
|
|
—
|
|
|
—
|
|
|
10.5
|
|
U.S. government obligations
|
—
|
|
|
348.8
|
|
|
—
|
|
|
—
|
|
|
348.8
|
|
Foreign government obligations
|
—
|
|
|
11.2
|
|
|
—
|
|
|
—
|
|
|
11.2
|
|
Mortgage-backed securities
|
—
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Derivatives
|
208.6
|
|
|
2,328.6
|
|
|
—
|
|
|
(2,257.2
|
)
|
|
280.0
|
|
Commodities leases
|
—
|
|
|
195.4
|
|
|
—
|
|
|
(143.9
|
)
|
|
51.5
|
|
Financial instruments sold, not yet purchased
|
258.3
|
|
|
2,885.7
|
|
|
—
|
|
|
(2,401.1
|
)
|
|
742.9
|
|
Total liabilities at fair value
|
$
|
2,116.8
|
|
|
$
|
2,984.1
|
|
|
$
|
0.9
|
|
|
$
|
(4,354.6
|
)
|
|
$
|
747.2
|
|
|
|
(1)
|
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.
|
The following table sets forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of September 30, 2016 by level in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting and
Collateral
(1)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Unrestricted cash equivalents - certificates of deposits
|
$
|
7.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.1
|
|
Commodities warehouse receipts
|
23.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23.3
|
|
U.S. government obligations
|
—
|
|
|
595.5
|
|
|
—
|
|
|
—
|
|
|
595.5
|
|
Securities and other assets segregated under federal and other regulations
|
23.3
|
|
|
595.5
|
|
|
—
|
|
|
—
|
|
|
618.8
|
|
Money market funds
|
512.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
512.7
|
|
U.S. government obligations
|
—
|
|
|
472.1
|
|
|
—
|
|
|
—
|
|
|
472.1
|
|
Derivatives
|
2,149.9
|
|
|
—
|
|
|
—
|
|
|
(2,266.2
|
)
|
|
(116.3
|
)
|
Deposits with and receivables from exchange-clearing organizations
|
2,662.6
|
|
|
472.1
|
|
|
—
|
|
|
(2,266.2
|
)
|
|
868.5
|
|
TBA and forward settling securities
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Derivatives
|
—
|
|
|
8.0
|
|
|
—
|
|
|
(23.5
|
)
|
|
(15.5
|
)
|
Deposits with and receivables from broker-dealers, clearing organizations and counterparties
|
—
|
|
|
8.3
|
|
|
—
|
|
|
(23.5
|
)
|
|
(15.2
|
)
|
Common and preferred stock and ADRs
|
34.6
|
|
|
1.7
|
|
|
0.2
|
|
|
—
|
|
|
36.5
|
|
Exchangeable foreign ordinary equities and ADRs
|
25.2
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
25.7
|
|
Corporate and municipal bonds
|
36.9
|
|
|
0.9
|
|
|
3.0
|
|
|
—
|
|
|
40.8
|
|
U.S. government obligations
|
—
|
|
|
514.9
|
|
|
—
|
|
|
—
|
|
|
514.9
|
|
Foreign government obligations
|
—
|
|
|
14.6
|
|
|
—
|
|
|
—
|
|
|
14.6
|
|
Agency mortgage-backed and asset-backed securities
|
—
|
|
|
747.5
|
|
|
—
|
|
|
—
|
|
|
747.5
|
|
Derivatives
|
206.9
|
|
|
1,350.8
|
|
|
—
|
|
|
(1,363.8
|
)
|
|
193.9
|
|
Commodities leases
|
—
|
|
|
137.2
|
|
|
—
|
|
|
(129.1
|
)
|
|
8.1
|
|
Commodities warehouse receipts
|
8.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8.9
|
|
Exchange firm common stock
|
6.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.4
|
|
Mutual funds and other
|
8.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8.8
|
|
Financial instruments owned
|
327.7
|
|
|
2,768.1
|
|
|
3.2
|
|
|
(1,492.9
|
)
|
|
1,606.1
|
|
Physical commodities inventory, net - precious metals
|
71.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
71.2
|
|
Total assets at fair value
|
$
|
3,091.9
|
|
|
$
|
3,844.0
|
|
|
$
|
3.2
|
|
|
$
|
(3,782.6
|
)
|
|
$
|
3,156.5
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued liabilities - contingent liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
TBA and forward settling securities
|
—
|
|
|
2.6
|
|
|
—
|
|
|
0.9
|
|
|
3.5
|
|
Derivatives
|
1,961.7
|
|
|
97.5
|
|
|
—
|
|
|
(2,059.2
|
)
|
|
—
|
|
Payable to broker-dealers, clearing organizations and counterparties
|
1,961.7
|
|
|
100.1
|
|
|
—
|
|
|
(2,058.3
|
)
|
|
3.5
|
|
Common and preferred stock and ADRs
|
23.5
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
23.9
|
|
Exchangeable foreign ordinary equities and ADRs
|
25.3
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
25.8
|
|
U.S. government obligations
|
—
|
|
|
509.8
|
|
|
—
|
|
|
—
|
|
|
509.8
|
|
Corporate and municipal bonds
|
6.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.9
|
|
Derivatives
|
199.4
|
|
|
1,319.3
|
|
|
—
|
|
|
(1,307.8
|
)
|
|
210.9
|
|
Commodities leases
|
—
|
|
|
207.8
|
|
|
—
|
|
|
(145.7
|
)
|
|
62.1
|
|
Financial instruments sold, not yet purchased
|
255.1
|
|
|
2,037.8
|
|
|
—
|
|
|
(1,453.5
|
)
|
|
839.4
|
|
Total liabilities at fair value
|
$
|
2,216.8
|
|
|
$
|
2,137.9
|
|
|
$
|
0.8
|
|
|
$
|
(3,511.8
|
)
|
|
$
|
843.7
|
|
|
|
(1)
|
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.
|
Realized and unrealized gains and losses are included in ‘trading gains, net’ and ‘interest income’ in the condensed consolidated income statements.
Information on Level 3 Financial Assets and Liabilities
The Company’s financial assets at fair value classified in level 3 of the fair value hierarchy as of
June 30, 2017 and September 30, 2016
are summarized below:
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30, 2017
|
|
September 30, 2016
|
Total level 3 assets
|
$
|
0.2
|
|
|
$
|
3.2
|
|
Level 3 assets for which the Company bears economic exposure
|
$
|
0.2
|
|
|
$
|
3.2
|
|
Total assets
|
$
|
6,195.9
|
|
|
$
|
5,950.3
|
|
Total assets at fair value
|
$
|
2,365.2
|
|
|
$
|
3,156.5
|
|
Total level 3 assets as a percentage of total assets
|
—
|
%
|
|
0.1
|
%
|
Level 3 assets for which the Company bears economic exposure as a percentage of total assets
|
—
|
%
|
|
0.1
|
%
|
Total level 3 assets as a percentage of total financial assets at fair value
|
—
|
%
|
|
0.1
|
%
|
The following tables set forth a summary of changes in the fair value of the Company’s level 3 financial assets and liabilities during the
three and nine months ended June 30, 2017 and 2016
, including a summary of unrealized gains (losses) during the respective periods on the Company’s level 3 financial assets and liabilities still held as of
June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Assets and Financial Liabilities For the Three Months Ended June 30, 2017
|
(in millions)
|
Balances at
beginning of
period
|
|
Realized gains
(losses) during
period
|
|
Unrealized
gains (losses)
during period
|
|
Purchases/issuances
|
|
Settlements
|
|
Transfers in
or (out) of
Level 3
|
|
Balances at
end of period
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and ADRs
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balances at
beginning of
period
|
|
Realized (gains)
losses during
period
|
|
Unrealized
(gains) losses
during period
|
|
Purchases/issuances
|
|
Settlements
|
|
Transfers in
or (out) of
Level 3
|
|
Balances at
end of period
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Assets and Financial Liabilities For the Nine Months Ended June 30, 2017
|
(in millions)
|
Balances at
beginning of
period
|
|
Realized gains
(losses) during
period
|
|
Unrealized
gains (losses)
during period
|
|
Purchases/issuances
|
|
Settlements
|
|
Transfers in
or (out) of
Level 3
|
|
Balances at
end of period
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and ADRs
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
Corporate and municipal bonds
|
3.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
|
—
|
|
|
—
|
|
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3.0
|
)
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balances at
beginning of
period
|
|
Realized (gains)
losses during
period
|
|
Unrealized
(gains) losses
during period
|
|
Purchases/issuances
|
|
Settlements
|
|
Transfers in
or (out) of
Level 3
|
|
Balances at
end of period
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Assets and Financial Liabilities For the Three Months Ended June 30, 2016
|
(in millions)
|
Balances at
beginning of
period
|
|
Realized gains
(losses) during
period
|
|
Unrealized
gains (losses)
during period
|
|
Purchases/issuances
|
|
Settlements
|
|
Transfers in
or (out) of
Level 3
|
|
Balances at
end of period
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and ADRs
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
Corporate and municipal bonds
|
3.3
|
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.0
|
|
|
$
|
3.6
|
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balances at
beginning of
period
|
|
Realized (gains)
losses during
period
|
|
Unrealized
(gains) losses
during period
|
|
Purchases/issuances
|
|
Settlements
|
|
Transfers in
or (out) of
Level 3
|
|
Balances at
end of period
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.7
|
)
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Assets and Financial Liabilities For the Nine Months Ended June 30, 2016
|
(in millions)
|
Balances at
beginning of
period
|
|
Realized gains
(losses) during
period
|
|
Unrealized
gains (losses)
during period
|
|
Purchases/issuances
|
|
Settlements
|
|
Transfers in
or (out) of
Level 3
|
|
Balances at
end of period
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and ADRs
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
Corporate and municipal bonds
|
3.2
|
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.0
|
|
|
$
|
3.7
|
|
|
$
|
—
|
|
|
$
|
(0.4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balances at
beginning of
period
|
|
Realized (gains)
losses during
period
|
|
Unrealized
(gains) losses
during period
|
|
Purchases/issuances
|
|
Settlements
|
|
Transfers in
or (out) of
Level 3
|
|
Balances at
end of period
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities
|
$
|
3.3
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
(2.8
|
)
|
|
$
|
—
|
|
|
$
|
0.8
|
|
The Company had debentures issued by a single asset owning company of Suriwongse Hotel located in Chiang Mai, Thailand. As of September 30, 2016, the Company’s investment in the hotel was
$3.0 million
, and was included within the corporate and municipal bonds classification in the level 3 financial assets and financial liabilities tables. In December 2016, the Company sold the debentures and collected an amount approximating their carrying value.
The Company is required to make additional future cash payments based on certain financial performance measures of its acquired businesses. The Company is required to remeasure the fair value of contingent consideration arrangements on a recurring basis in accordance with the guidance in the Business Combinations Topic of the ASC. The Company has classified its liabilities for the contingent consideration within level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include projected cash flows. The estimated fair value of the earn-outs is based upon management-developed forecasts, a level 3 input in the fair value hierarchy. These cash flows are discounted employing present value techniques in arriving at fair value. The discount rate was developed using market participant company data and there have been no significant changes in the interest rate environment. From the dates of acquisition to
June 30, 2017
, certain acquisitions have had changes in the estimates of undiscounted cash flows, based on actual performances fluctuating from estimates. The fair value of the contingent consideration increased by less than
$0.1 million
and
$0.1 million
during the
three months ended June 30, 2017 and 2016
and by less than $0.1 million and
$0.3 million
during the
nine months ended June 30, 2017 and 2016
, respectively, with the corresponding amount classified as ‘other’ in the condensed consolidated income statements.
The Company reports transfers in and out of levels 1, 2 and 3, as applicable, using the fair value of the securities as of the beginning of the reporting period in which the transfer occurred. The Company did not have any transfers in and out of levels 1, 2, and 3 during the
three and nine months ended June 30, 2017 and 2016
.
Note 4
–
Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
The Company is party to certain financial instruments with off-balance sheet risk in the normal course of its business. The Company has sold financial instruments that it does not currently own and will therefore be obliged to purchase such financial instruments at a future date. The Company has recorded these obligations in the condensed consolidated financial statements as of
June 30, 2017
and
September 30, 2016
at the fair values of the related financial instruments. The Company will incur losses if the fair value of the underlying financial instruments increases subsequent to
June 30, 2017
. The total financial instruments sold, not yet purchased of
$742.9 million
and
$839.4 million
as of
June 30, 2017
and
September 30, 2016
, respectively, includes
$280.0 million
and
$210.9 million
for derivative contracts, respectively, which represented a liability to the Company based on their fair values as of
June 30, 2017
and
September 30, 2016
.
Derivatives
The Company utilizes derivative products in its trading capacity as a dealer in order to satisfy customer needs and mitigate risk. The Company manages risks from both derivatives and non-derivative cash instruments on a consolidated basis. The risks of derivatives should not be viewed in isolation, but in aggregate with the Company’s other trading activities. The majority of the Company’s derivative positions are included in the condensed consolidated balance sheets in ‘deposits with and receivables from exchange-clearing organizations’, ‘deposits with and receivables from broker-dealers, clearing organizations and counterparties’, ‘financial instruments owned, at fair value’, ‘financial instruments sold, not yet purchased, at fair value’ and payables to broker-dealers, clearing organizations and counterparties’.
The Company employs an interest rate risk management strategy using derivative financial instruments in the form of interest rate swaps as well as outright purchases of medium-term U.S. Treasury notes to manage a portion of the aggregate interest rate position. The Company’s objective when using interest rate swaps under the strategy, is to invest certain amounts of customer deposits in high quality, short-term investments and swap the resulting variable interest earnings into medium-term interest earnings. When used, the risk mitigation of these interest rate swaps are not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC, and as a result are recorded at fair value, with changes in the fair value of the interest rate swaps recorded within 'trading gains, net' in the condensed consolidated income statements. At
September 30, 2016
, the Company had
$375.0 million
in notional principal of interest rate swaps outstanding with a weighted-average remaining life of
15
months. During the
nine months ended June 30, 2017
, the Company settled these interest rate swaps in advance of their original maturity date.
Listed below are the fair values of the Company’s derivative assets and liabilities as of
June 30, 2017 and September 30, 2016
. Assets represent net unrealized gains and liabilities represent net unrealized losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
September 30, 2016
|
(in millions)
|
Assets
(1)
|
|
Liabilities
(1)
|
|
Assets
(1)
|
|
Liabilities
(1)
|
Derivative contracts not accounted for as hedges:
|
|
|
|
|
|
|
|
Exchange-traded commodity derivatives
|
$
|
1,641.2
|
|
|
$
|
1,719.3
|
|
|
$
|
2,022.1
|
|
|
$
|
1,920.5
|
|
OTC commodity derivatives
|
1,998.3
|
|
|
2,165.0
|
|
|
1,217.0
|
|
|
1,188.9
|
|
Exchange-traded foreign exchange derivatives
|
32.2
|
|
|
23.5
|
|
|
12.2
|
|
|
7.5
|
|
OTC foreign exchange derivatives
|
384.1
|
|
|
371.0
|
|
|
346.5
|
|
|
290.2
|
|
Exchange-traded interest rate derivatives
|
187.4
|
|
|
172.6
|
|
|
78.7
|
|
|
120.5
|
|
Equity index derivatives
|
35.4
|
|
|
39.3
|
|
|
39.1
|
|
|
50.3
|
|
TBA and forward settling securities
|
6.5
|
|
|
3.4
|
|
|
0.3
|
|
|
2.6
|
|
Gross fair value of derivative contracts
|
4,285.1
|
|
|
4,494.1
|
|
|
3,715.9
|
|
|
3,580.5
|
|
Impact of netting and collateral
|
(4,121.8
|
)
|
|
(4,210.7
|
)
|
|
(3,653.5
|
)
|
|
(3,366.1
|
)
|
Total fair value included in ‘Deposits with and receivables from exchange-clearing organizations’
|
$
|
(63.0
|
)
|
|
|
|
$
|
(116.3
|
)
|
|
|
Total fair value included in ‘Deposits with and receivables from broker-dealers, clearing organizations and counterparties’
|
$
|
22.5
|
|
|
|
|
$
|
(15.2
|
)
|
|
|
Total fair value included in ‘Financial instruments owned, at fair value’
|
$
|
203.8
|
|
|
|
|
$
|
193.9
|
|
|
|
Total fair value included in ‘Payables to broker-dealers, clearing organizations and counterparties
|
|
|
$
|
3.4
|
|
|
|
|
$
|
3.5
|
|
Fair value included in ‘Financial instruments sold, not yet purchased, at fair value’
|
|
|
$
|
280.0
|
|
|
|
|
$
|
210.9
|
|
|
|
(1)
|
As of
June 30, 2017 and September 30, 2016
, the Company’s derivative contract volume for open positions were approximately
4.1 million
and
4.0 million
contracts, respectively.
|
The Company’s derivative contracts are principally held in its Commercial Hedging and Clearing and Execution Services segments. The Company assists its Commercial Hedging segment customers in protecting the value of their future production by entering into option or forward agreements with them on an OTC basis. The Company also provides its Commercial Hedging segment customers with option products, including combinations of buying and selling puts and calls. The Company mitigates its risk by offsetting the customer’s transaction simultaneously with one of the Company’s trading counterparties or with a similar but not identical exchange-traded position. The risk mitigation of these offsetting trades is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC. These derivative contracts are traded along with cash transactions because of the integrated nature of the markets for these products. The Company manages the risks associated with derivatives on an aggregate basis along with the risks associated with its proprietary trading and market-making activities in cash instruments as part of its firm-wide risk management policies. In particular, the risks related to derivative positions may be partially offset by inventory, unrealized gains in inventory or cash collateral paid or received.
The Company has derivative instruments, which consist of mortgage-backed TBA securities and forward settling transactions that are used to manage risk exposures in the trading inventory of the Company’s domestic institutional fixed income business. The fair value on these transactions are recorded in deposits with and receivables from or payables to broker-dealers, clearing organizations and counterparties. Realized and unrealized gains and losses on securities and derivative transactions are reflected in ‘trading gains, net’.
The Company enters into TBA securities transactions for the sole purpose of managing risk associated with the purchase of mortgage pass-through securities. TBA securities are included within deposits with and receivables from and payables to broker-dealers, clearing organizations and counterparties. Forward settling securities represent non-regular way securities and are included in financial instruments owned and sold. As of
June 30, 2017 and September 30, 2016
, these transactions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
September 30, 2016
|
(in millions)
|
Gain / (Loss)
|
|
Notional Amounts
|
|
Gain / (Loss)
|
|
Notional Amounts
|
Unrealized gain on TBA securities purchased within receivables from broker-dealers, clearing organizations and counterparties and related notional amounts (1)
|
$
|
—
|
|
|
$
|
16.0
|
|
|
$
|
0.8
|
|
|
$
|
289.8
|
|
Unrealized loss on TBA securities purchased within receivables from broker-dealers, clearing organizations and counterparties and related notional amounts (1)
|
$
|
(2.7
|
)
|
|
$
|
820.6
|
|
|
$
|
(0.8
|
)
|
|
$
|
485.5
|
|
Unrealized gain on TBA securities sold within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
|
$
|
6.0
|
|
|
$
|
(1,549.1
|
)
|
|
$
|
1.3
|
|
|
$
|
(702.3
|
)
|
Unrealized loss on TBA securities sold within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
|
$
|
—
|
|
|
$
|
(19.4
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
(754.3
|
)
|
Unrealized gain on forward settling securities purchased within receivables from broker-dealers, clearing organizations and counterparties and related notional amounts
|
$
|
0.5
|
|
|
$
|
(310.9
|
)
|
|
$
|
0.1
|
|
|
$
|
607.9
|
|
Unrealized (loss) gain on forward settling securities sold within receivables from and payables to broker-dealers, clearing organizations and counterparties and related notional amounts
|
$
|
(0.7
|
)
|
|
$
|
365.3
|
|
|
$
|
0.2
|
|
|
$
|
(470.4
|
)
|
(1) The notional amounts of these instruments reflect the extent of the Company's involvement in TBA and forward settling securities and do not represent risk of loss due to counterparty non-performance.
|
|
|
|
|
|
|
|
The following table sets forth the Company’s gains (losses) related to derivative financial instruments for the
three and nine months ended June 30, 2017 and 2016
in accordance with the Derivatives and Hedging Topic of the ASC. The net gains set forth below are included in ‘trading gains, net’ in the condensed consolidated income statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Commodities
|
$
|
22.0
|
|
|
$
|
5.6
|
|
|
$
|
40.8
|
|
|
$
|
30.6
|
|
Foreign exchange
|
1.7
|
|
|
0.2
|
|
|
3.7
|
|
|
3.8
|
|
Interest rate
|
—
|
|
|
1.0
|
|
|
(1.0
|
)
|
|
2.0
|
|
TBA and forward settling securities
|
(5.4
|
)
|
|
(6.6
|
)
|
|
3.1
|
|
|
(11.6
|
)
|
Net gains from derivative contracts
|
$
|
18.3
|
|
|
$
|
0.2
|
|
|
$
|
46.6
|
|
|
$
|
24.8
|
|
Credit Risk
In the normal course of business, the Company purchases and sells financial instruments, commodities and foreign currencies as either principal or agent on behalf of its customers. If either the customer or counterparty fails to perform, the Company may be required to discharge the obligations of the nonperforming party. In such circumstances, the Company may sustain a loss if the fair value of the financial instrument or foreign currency is different from the contract value of the transaction.
The majority of the Company’s transactions and, consequently, the concentration of its credit exposure are with commodity exchanges, customers, broker-dealers and other financial institutions. These activities primarily involve collateralized and uncollateralized arrangements and may result in credit exposure in the event that a counterparty fails to meet its contractual obligations. The Company’s exposure to credit risk can be directly impacted by volatile financial markets, which may impair the ability of counterparties to satisfy their contractual obligations. The Company seeks to control its credit risk through a variety of reporting and control procedures, including establishing credit and/or position limits based upon a review of the counterparties’ financial condition and credit ratings. The Company monitors collateral levels on a daily basis for compliance with regulatory and internal guidelines and requests changes in collateral levels as appropriate.
The Company is a party to financial instruments in the normal course of its business through customer and proprietary trading accounts in exchange-traded and OTC derivative instruments. These instruments are primarily the result of the execution of orders for commodity futures, options on futures, OTC swaps and options and spot and forward foreign currency contracts on behalf of its customers, substantially all of which are transacted on a margin basis. Such transactions may expose the Company to significant credit risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. The Company controls the risks associated with these transactions by requiring customers to maintain margin deposits in compliance with individual exchange regulations and internal guidelines. The Company monitors required margin levels daily and, therefore, may require customers to deposit additional collateral or reduce positions when necessary. The Company also establishes credit limits for customers, which are monitored daily. The Company evaluates each customer’s creditworthiness on a case by case basis. Clearing, financing, and settlement activities may require the Company to maintain funds with or pledge securities as collateral with other financial institutions. Generally, these exposures to both customers and exchanges are subject to master netting, or customer agreements, which reduce the exposure to the Company by permitting receivables and payables with such customers to be offset in the event of a customer default. Management believes that the margin deposits held as of
June 30, 2017 and September 30, 2016
were adequate to minimize the risk of material loss that could be created by positions held at that time. Additionally, the Company monitors collateral fair value on a daily basis and adjusts collateral levels in the event of excess market exposure. Generally, these exposures to both customers and counterparties are subject to master netting or customer agreements which reduce the exposure to the Company.
Derivative financial instruments involve varying degrees of off-balance sheet market risk whereby changes in the fair values of underlying financial instruments may result in changes in the fair value of the financial instruments in excess of the amounts reflected in the condensed consolidated balance sheets. Exposure to market risk is influenced by a number of factors, including the relationships between the financial instruments and the Company’s positions, as well as the volatility and liquidity in the markets in which the financial instruments are traded. The principal risk components of financial instruments include, among other things, interest rate volatility, the duration of the underlying instruments and changes in foreign exchange rates. The Company attempts to manage its exposure to market risk through various techniques. Aggregate market limits have been established and market risk measures are routinely monitored against these limits.
Note 5
–
Receivables From Customers, Net and Notes Receivable, Net
The allowance for doubtful accounts related to receivables from customers was
$7.6 million
as of
June 30, 2017
and
$9.5 million
as of
September 30, 2016
. The allowance for doubtful accounts related to notes receivable was
$0.0 million
and $
0.2 million
as of
June 30, 2017
and
September 30, 2016
, respectively.
During the nine months ended
June 30, 2017
, the Company recorded bad debt expense of
$3.9 million
, primarily related to
$3.8 million
of LME Metals customer deficits in the Company’s Commercial Hedging segment. During the nine months ended June 30, 2016, the Company recorded bad debt expense of
$4.6 million
, primarily related to
$1.5 million
of customer receivables in the Physical Ag & Energy component of the Physical Commodities segment,
$2.7 million
of customer deficits in the Commercial Hedging segment and
$0.3 million
related to short-term notes receivable origination in the Securities segment.
The Company originates short-term notes receivable from customers with the outstanding balances typically being insured
90%
to
98%
by a third party, including accrued interest, subject to applicable deductible amounts. The total balance outstanding under insured notes receivable was
$2.1 million
and
$5.0 million
as of
June 30, 2017
and
September 30, 2016
, respectively. The Company has sold
$2.1 million
and
$4.6 million
of the insured portion of the notes through non-recourse participation agreements with other third parties as of
June 30, 2017
and
September 30, 2016
, respectively. The Company completed its exit of the majority of this activity during fiscal 2016. The Company believes the run-off of the remaining activity will have a minimal impact on the Company. See discussion of notes receivable related to commodity repurchase agreements in
Note 10
.
Note 6
–
Physical Commodities Inventory
The Company’s inventories consist of finished physical commodities. Inventories by component of the Company’s Physical Commodities segment are shown below.
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2017
|
|
September 30,
2016
|
Physical Ag & Energy
(1)
|
$
|
108.6
|
|
|
$
|
65.9
|
|
Precious metals - held by broker-dealer subsidiary
(2)
|
11.6
|
|
|
5.3
|
|
Precious metals - held by non-broker-dealer subsidiaries
(3)
|
52.3
|
|
|
52.6
|
|
Physical commodities inventory
|
$
|
172.5
|
|
|
$
|
123.8
|
|
(1)
Physical Ag & Energy maintains agricultural and energy commodity inventories, including corn, soybeans, wheat, dried distillers grain, canola, sorghum, coffee, cocoa, coal and others. The agricultural commodity inventories are carried at net realizable value, which approximates fair value less disposal costs, with changes in net realizable value included as a component of ‘cost of sales of physical commodities’ on the condensed consolidated income statements. The agricultural inventories have reliable, readily determinable and realizable market prices, have relatively insignificant costs of disposal and are available for immediate delivery.
(2)
Precious metals held by the Company’s subsidiary, INTL FCStone Ltd, a United Kingdom based broker-dealer subsidiary, is measured at fair value, with changes in fair value included as a component of ‘trading gains, net’ on the condensed consolidated income statements, in accordance with U.S. GAAP accounting requirements for broker-dealers.
(3)
Precious metals inventory held by subsidiaries that are not broker-dealers are valued at the lower of cost or market value.
The Company has recorded lower of cost or market adjustments for certain precious metals inventory of
$0.5 million
and
$0.6 million
as of
June 30, 2017 and September 30, 2016
, respectively. The adjustments are included in ‘cost of sales of physical commodities’ in the condensed consolidated income statements.
Note 7
–
Goodwill
The carrying value of goodwill is allocated to the Company’s operating segments as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2017
|
|
September 30,
2016
|
Commercial Hedging
|
$
|
30.7
|
|
|
$
|
30.7
|
|
Global Payments
|
6.3
|
|
|
6.3
|
|
Physical Commodities
|
2.4
|
|
|
2.4
|
|
Securities
|
8.1
|
|
|
8.1
|
|
Goodwill
|
$
|
47.5
|
|
|
$
|
47.5
|
|
Note 8
–
Intangible Assets
During the
nine months ended June 30, 2017
, the Company recorded additional intangible assets of
$6.0 million
as part of the ICAP acquisition. See Note 16 - Acquisitions for additional discussion.
The gross and net carrying values of intangible assets as of the balance sheet dates, by major intangible asset class are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
September 30, 2016
|
(in millions)
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
$
|
1.1
|
|
|
$
|
(1.0
|
)
|
|
$
|
0.1
|
|
|
$
|
1.1
|
|
|
$
|
(0.6
|
)
|
|
$
|
0.5
|
|
Software programs/platforms
|
2.7
|
|
|
(2.4
|
)
|
|
0.3
|
|
|
2.7
|
|
|
(2.4
|
)
|
|
0.3
|
|
Customer base
|
20.0
|
|
|
(7.4
|
)
|
|
12.6
|
|
|
14.0
|
|
|
(5.7
|
)
|
|
8.3
|
|
Total intangible assets
|
$
|
23.8
|
|
|
$
|
(10.8
|
)
|
|
$
|
13.0
|
|
|
$
|
17.8
|
|
|
$
|
(8.7
|
)
|
|
$
|
9.1
|
|
Amortization expense related to intangible assets was
$2.1 million
and
$1.2 million
for the
nine months ended June 30, 2017 and 2016
, respectively.
As of
June 30, 2017
, the estimated future amortization expense was as follows:
|
|
|
|
|
(in millions)
|
|
Fiscal 2017 (remaining three months)
|
$
|
0.7
|
|
Fiscal 2018
|
2.2
|
|
Fiscal 2019
|
2.2
|
|
Fiscal 2020
|
2.0
|
|
Fiscal 2021 and thereafter
|
5.9
|
|
|
$
|
13.0
|
|
Note 9
–
Credit Facilities
Variable-Rate Credit Facilities
The Company has
four
committed credit facilities under which the Company and its subsidiaries may borrow up to
$532.0 million
, subject to the terms and conditions for these facilities. The amounts outstanding under these credit facilities are short term borrowings and carry variable rates of interest, thus approximating fair value. The Company’s committed credit facilities consist of the following:
|
|
•
|
$262.0 million
facility available to INTL FCStone Inc. for general working capital requirements. In May 2017, the Company executed a fourth amendment to the credit facility increasing the available commitment from $247.0 million to $262.0 million.
|
|
|
•
|
$75.0 million
facility available to the Company’s wholly owned subsidiary, INTL FCStone Financial Inc., for short-term funding of margin to commodity exchanges. The facility is subject to annual review and guaranteed by INTL FCStone Inc.
|
|
|
•
|
$170.0 million
facility available to the Company’s wholly owned subsidiary, FCStone Merchant Services, LLC, for financing traditional commodity financing arrangements and commodity repurchase agreements. The facility is subject to annual review and is guaranteed by INTL FCStone Inc. In May 2017, the Company executed a third amendment to the credit facility increasing the available commitment from $100.0 million to $170.0 million.
|
|
|
•
|
$25.0 million
facility available to the Company’s wholly owned subsidiary, INTL FCStone Ltd, for short-term funding of margin to commodity exchanges. The facility is subject to annual review and is guaranteed by INTL FCStone Inc.
|
The Company also has a secured, uncommitted loan facility, under which the Company’s wholly owned subsidiary, INTL FCStone Financial Inc. may borrow up to
$50.0 million
, collateralized by commodity warehouse receipts, to facilitate U.S. commodity exchange deliveries of its customers, subject to certain terms and conditions of the credit agreement.
The Company also has a secured uncommitted loan facility under which the Company’s wholly owned subsidiary, INTL FCStone Ltd may borrow up to approximately
$25.0 million
, collateralized by commodity warehouse receipts, to facilitate financing of commodities under repurchase agreement services to its customers, subject to certain terms and conditions of the credit agreement.
The Company also has a secured uncommitted loan facility under which the Company’s wholly owned subsidiary Sterne, Agee & Leach, Inc. may borrow for short term funding of firm and customer margin requirements, subject to certain terms and conditions of the agreement. The uncommitted maximum amount available to be borrowed is not specified, and all requests for borrowing are subject to the sole discretion of the lender.
Sterne, Agee & Leach, Inc. also has a secured uncommitted loan facility under which it may borrow up to
$100.0 million
for short term funding of firm and customer margin requirements, subject to certain terms and conditions of the agreement.
Note Payable to Bank
The Company has a loan from a commercial bank, secured by equipment purchased with the proceeds. The note is payable in monthly installments, ending in March 2020. The note bears interest at a rate per annum equal to LIBOR plus 2.00%.
Senior Unsecured Notes
In July 2013, the Company completed an offering of
$45.5 million
aggregate principal amount of the Company’s
8.5%
Senior Notes due 2020 (the “Notes”). The net proceeds of the sale of the Notes were used for general corporate purposes. On September 15, 2016, the Company provided notice, through the trustee of the Notes, to the record holders of the Notes that the Company would redeem the outstanding
$45.5 million
aggregate principal amount of the Notes in full. On October 15, 2016,
the Company redeemed the Notes at a price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to, but not including, the redemption date of October 15, 2016.
The following table sets forth a listing of credit facilities, the committed amounts as of
June 30, 2017
on the facilities, and outstanding borrowings on the facilities as well as indebtedness on a promissory note and on senior notes as of
June 30, 2017 and September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Credit Facilities
|
|
|
|
|
|
Amounts Outstanding
|
|
Borrower
|
Security
|
Renewal / Expiration Date
|
|
Total Commitment
|
|
June 30,
2017
|
|
September 30,
2016
|
|
INTL FCStone Inc.
|
Pledged shares of certain subsidiaries
|
March 18, 2019
|
|
$
|
262.0
|
|
|
$
|
185.0
|
|
|
$
|
136.5
|
|
|
INTL FCStone Financial Inc.
|
None
|
April 5, 2018
|
|
75.0
|
|
|
—
|
|
|
—
|
|
|
INTL FCStone Financial Inc.
|
Commodity warehouse receipts
|
n/a
|
|
—
|
|
|
—
|
|
|
—
|
|
|
FCStone Merchants Services, LLC
|
Certain commodities assets
|
May 1, 2018
|
|
170.0
|
|
|
57.5
|
|
|
43.5
|
|
|
INTL FCStone Ltd
|
None
|
October 27, 2017
|
|
25.0
|
|
|
—
|
|
|
—
|
|
|
INTL FCStone Ltd
|
Commodity warehouse receipts
|
n/a
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Sterne, Agee & Leach, Inc.
|
Certain pledged securities
|
n/a
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
$
|
532.0
|
|
|
242.5
|
|
|
180.0
|
|
Note Payable to Bank
|
|
|
|
|
|
|
|
|
|
Monthly installments, due March 2020 and secured by certain equipment
|
|
|
|
2.2
|
|
|
2.8
|
|
Senior Unsecured Notes
|
|
|
|
|
|
|
|
|
|
8.50% senior notes, due July 30, 2020 (redeemed on October 15, 2016)
|
|
|
|
—
|
|
|
44.5
|
|
Total indebtedness
|
|
|
|
|
|
$
|
244.7
|
|
|
$
|
227.3
|
|
As reflected above,
$270.0 million
of the Company’s committed credit facilities are scheduled to expire within twelve months of this filing. The Company intends to renew or replace this facility when it expires, and based on the Company’s liquidity position and capital structure, the Company believes it will be able to do so.
The Company’s credit facility agreements contain financial covenants relating to financial measures on a consolidated basis, as well as on a certain stand-alone subsidiary basis, including minimum tangible net worth, minimum regulatory capital, minimum net unencumbered liquid assets, maximum net loss, minimum fixed charge coverage ratio and maximum funded debt to net worth ratio. Failure to comply with these covenants could result in the debt becoming payable on demand. As of
June 30, 2017
, the Company was in compliance with all of its financial covenants under its credit facilities.
Note 10
–
Commodity and Other Repurchase Agreements and Collateralized Transactions
Commodity Repurchase Arrangements
The Company’s outstanding notes receivable in connection with sale/repurchase agreements, whereby customers sell certain commodity inventory and agree to repurchase the commodity inventory at a future date at a fixed rate, as of
June 30, 2017 and September 30, 2016
were
$0.6 million
and
$1.5 million
, respectively.
Resale and Repurchase Agreements, Securities Lending and Borrowing Agreements, and Margin Securities
The Company enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions to, among other things, finance financial instruments, acquire securities to cover short positions, acquire securities for settlement, and to accommodate counterparties’ needs. These agreements are recorded at their contractual amounts plus accrued interest. The related interest is recorded in the condensed consolidated income statements as interest income or interest expense, as applicable. In connection with these agreements and transactions, it is the policy of the Company to receive or pledge cash or securities to adequately collateralize such agreements and transactions in accordance with general industry guidelines and practices. The value of the collateral is valued daily and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate. The carrying amounts of these agreements and transactions approximate fair value due to their short-term nature and the level of collateralization.
The Company pledges financial instruments owned to collateralize repurchase agreements and securities loaned agreements. At
June 30, 2017
, financial instruments owned of
$171.4 million
were pledged as collateral under repurchase agreements and securities loaned agreements. The counterparty has the right to repledge the collateral in connection with these transactions. These financial instruments owned have been pledged as collateral and have been parenthetically disclosed on the condensed consolidated balance sheet.
In addition, as of
June 30, 2017
, the Company pledged financial instruments owned of
$1,277.9 million
and securities received under reverse repurchase agreements of which
$183.4 million
is used to cover collateral for tri-party repurchase agreements. For these securities, the counterparty does not have the right to sell or repledge the collateral.
At
June 30, 2017
, the Company has accepted collateral that it is permitted by contract to sell or repledge. This collateral consists primarily of securities received in reverse repurchase agreements, securities borrowed agreements, and margin securities held on behalf of correspondent brokers. The fair value of such collateral at
June 30, 2017
, was
$791.7 million
of which
$345.0 million
was used to cover securities sold short which are recorded in financial instruments sold, not yet purchased on the condensed consolidated balance sheet. In the normal course of business, this collateral is used by the Company to cover financial instruments sold, not yet purchased, to obtain financing in the form of repurchase agreements, and to meet counterparties’ needs under lending arrangements. At
June 30, 2017
, substantially all of the above collateral had been delivered against financial instruments sold, not yet purchased or repledged by the Company to obtain financing.
Note 11
–
Commitments and Contingencies
Legal Proceedings
From time to time and in the ordinary course of business, the Company is involved in various legal actions and proceedings, including tort claims, contractual disputes, employment matters, workers’ compensation claims and collections. The Company carries insurance that provides protection against certain types of claims, up to the policy limits of the insurance.
As of
June 30, 2017 and September 30, 2016
, the condensed consolidated balance sheets include loss contingency accruals recorded prior to these periods then ended, which are not material, individually or in the aggregate, to the Company’s financial position or liquidity. In the opinion of management, possible exposure from loss contingencies in excess of the amounts accrued, is not likely to be material to the Company’s earnings, financial position or liquidity.
There have been no material changes to the legal actions and proceedings as compared to September 30, 2016.
Contractual Commitments
Contingent Liability - Acquisition
Under the terms of the purchase agreement related to the acquisition listed below, the Company has an obligation to pay additional consideration if specific conditions and earnings targets are met. In accordance with the Business Combinations Topic of the ASC, the fair value of the additional consideration is recognized as a contingent liability as of the acquisition date. The contingent liability for these estimated additional purchase price considerations of
$0.9 million
and
$0.8 million
are included in ‘accounts payable and other accrued liabilities’ in the condensed consolidated balance sheets as of
June 30, 2017 and September 30, 2016
. The acquisition date fair value of additional consideration is remeasured to its fair value each reporting period, with changes in fair value recorded in current earnings. The change in fair value during the
nine months ended June 30, 2017 and 2016
were increases of
$0.1 million
and
$0.3 million
, respectively, and are included in ‘other’ in the condensed consolidated income statements.
The Company has a contingent liability relating to the January 2015 acquisition of G.X. Clarke, which may result in the payment of additional purchase price consideration. The contingent consideration in no event shall exceed
$1.5 million
. The estimated total purchase price, including contingent consideration, is
$28.7 million
as of
June 30, 2017
, of which
$0.9 million
remains outstanding and is included in ‘accounts payable and other accrued liabilities’ in the condensed consolidated balance sheet.
Self-Insurance
The Company self-insures its costs related to medical and dental claims. The Company is self-insured, up to a stop loss amount, for eligible participating employees and retirees, and for qualified dependent medical and dental claims, subject to deductibles and limitations. As of
June 30, 2017
, the Company had
$1.0 million
accrued for self-insured medical and dental claims included in ‘accounts payable and other liabilities’ in the condensed consolidated balance sheet.
Note 12
–
Capital and Other Regulatory Requirements
The Company’s activities are subject to significant governmental regulation, both in the United States and overseas. The subsidiaries of the Company were in compliance with all of their regulatory requirements as of
June 30, 2017
, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
As of June 30, 2017
|
Subsidiary
|
Regulatory Authority
|
Jurisdiction
|
|
Requirement Type
|
|
Actual
|
|
Minimum
Requirement
|
INTL FCStone Financial Inc.
|
SEC and Commodity Futures Trading Commission ("CFTC")
|
United States
|
|
Net capital
|
|
$
|
148.3
|
|
|
$
|
77.7
|
|
INTL FCStone Financial Inc.
|
CFTC
|
United States
|
|
Segregated funds
|
|
$
|
2,075.0
|
|
|
$
|
2,024.9
|
|
INTL FCStone Financial Inc.
|
CFTC
|
United States
|
|
Secured funds
|
|
$
|
137.8
|
|
|
$
|
121.9
|
|
Sterne Agee Clearing Inc.
|
SEC
|
United States
|
|
Net capital
|
|
$
|
1.3
|
|
|
$
|
0.1
|
|
Sterne, Agee & Leach, Inc.
|
SEC
|
United States
|
|
Net capital
|
|
$
|
25.3
|
|
|
$
|
2.0
|
|
Sterne Agee Financial Services, Inc.
|
SEC
|
United States
|
|
Net capital
|
|
$
|
4.8
|
|
|
$
|
0.3
|
|
INTL FCStone Ltd
(1)
|
Financial Conduct Authority ("FCA")
|
United Kingdom
|
|
Net capital
|
|
$
|
159.5
|
|
|
$
|
98.6
|
|
INTL FCStone Ltd
|
FCA
|
United Kingdom
|
|
Segregated funds
|
|
$
|
93.1
|
|
|
$
|
90.1
|
|
INTL Netherlands BV
(1)
|
FCA
|
United Kingdom
|
|
Net capital
|
|
$
|
158.8
|
|
|
$
|
98.7
|
|
INTL FCStone DTVM Ltda.
|
Brazilian Central Bank and Securities and Exchange Commission of Brazil
|
Brazil
|
|
Capital adequacy
|
|
$
|
9.4
|
|
|
$
|
0.5
|
|
INTL Gainvest S.A.
|
National Securities Commission ("CNV")
|
Argentina
|
|
Capital adequacy
|
|
$
|
5.3
|
|
|
$
|
0.2
|
|
INTL Gainvest S.A.
|
CNV
|
Argentina
|
|
Net capital
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
INTL CIBSA S.A.
|
CNV
|
Argentina
|
|
Capital adequacy
|
|
$
|
7.4
|
|
|
$
|
1.0
|
|
INTL CIBSA S.A.
|
CNV
|
Argentina
|
|
Net capital
|
|
$
|
4.3
|
|
|
$
|
0.5
|
|
(1)
INTL Netherlands BV is a holding company that includes the ownership equity of INTL FCStone Ltd. The associated net capital amounts and minimum requirements should not be considered in aggregate.
Sterne, Agee & Leach, Inc. is also subject to Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (“Customer Protection Rule”) inclusive of computations for proprietary accounts of broker-dealers (“PABs”).
As of June 30, 2017
, Sterne, Agee & Leach, Inc.
had
$1,000
of cash in a Special Reserve Bank Account (“SRBA”) for the exclusive benefit of customers under the Customer Protection Rule pursuant to SEC Rule 15c3-3,
Computation for Determination of Reserve Requirements
. Also, as of June 30, 2017, Sterne, Agee & Leach, Inc. had
$1.8 million
of cash in a SRBA pursuant to SEC Rule 15c3-3,
Computation for Determination of PAB Reserve Requirements.
As of June 30, 2017
, the amount on deposit in both the customers and the PABs SRBA was less than the reserve requirement and additional funds were deposited timely subsequent to period-end.
Certain other non-U.S. subsidiaries of the Company are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of
June 30, 2017
, these subsidiaries were in compliance with their local capital adequacy requirements.
Note 13
–
Other Expenses
Other expenses for the
three and nine months ended June 30, 2017 and 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Contingent consideration, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
Insurance
|
0.7
|
|
|
0.4
|
|
|
2.0
|
|
|
1.1
|
|
Advertising, meetings and conferences
|
1.0
|
|
|
1.2
|
|
|
3.1
|
|
|
4.2
|
|
Non-trading hardware and software maintenance and software licensing
|
3.2
|
|
|
1.8
|
|
|
8.9
|
|
|
4.6
|
|
Office supplies and printing
|
0.6
|
|
|
0.3
|
|
|
1.7
|
|
|
0.9
|
|
Other clearing related expenses
|
0.9
|
|
|
0.5
|
|
|
1.6
|
|
|
1.0
|
|
Other non-income taxes
|
1.2
|
|
|
1.1
|
|
|
3.5
|
|
|
3.2
|
|
Other
|
2.3
|
|
|
1.8
|
|
|
6.9
|
|
|
5.5
|
|
Total other expenses
|
$
|
9.9
|
|
|
$
|
7.1
|
|
|
$
|
27.8
|
|
|
$
|
20.8
|
|
Note 14
–
Accumulated Other Comprehensive Loss, Net
Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income. Other comprehensive loss includes net actuarial losses from defined benefit pension plans and foreign currency translation adjustments.
The following table summarizes the changes in accumulated other comprehensive loss, net for the
nine months ended June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign Currency Translation Adjustment
|
|
Pension Benefits Adjustment
|
|
Accumulated Other Comprehensive Loss
|
Balances as of September 30, 2016
|
|
$
|
(20.1
|
)
|
|
$
|
(4.5
|
)
|
|
$
|
(24.6
|
)
|
Other comprehensive loss, net of tax
|
|
(2.1
|
)
|
|
—
|
|
|
(2.1
|
)
|
Balances as of June 30, 2017
|
|
$
|
(22.2
|
)
|
|
$
|
(4.5
|
)
|
|
$
|
(26.7
|
)
|
|
|
|
|
|
|
|
Note 15
–
Income Taxes
In determining the quarterly provision for income taxes, management uses an estimated annual effective tax rate which is based on the expected annual income and statutory tax rates in the various jurisdictions in which it operates. The Company’s effective tax rate differs from the U.S. statutory rate primarily due to state and local taxes, and differing statutory tax rates applied to the income of non-U.S. subsidiaries. The Company records the tax effect of certain discrete items, including the effects of changes in tax laws, tax rates and adjustments with respect to valuation allowances or other unusual or nonrecurring tax adjustments, in the interim period in which they occur, as an addition to, or reduction from, the income tax provision, rather than being included in the estimated effective annual income tax rate. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective income tax rate.
The Company is required to assess its deferred tax assets and the need for a valuation allowance at each reporting period. This assessment requires judgment on the part of management with respect to benefits that may be realized. The Company will record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of the deferred tax assets will not be realized.
The valuation allowance for deferred tax assets as of
June 30, 2017
and
September 30, 2016
was
$3.6 million
. The valuation allowances as of
June 30, 2017
and
September 30, 2016
were primarily related to U.S. state and local and foreign net operating loss carryforwards that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company incurred U.S. federal, state, and local taxable income (losses) for the fiscal years ended September 30, 2016, 2015, and 2014 of
$(9.7) million
,
$16.5 million
, and
$(18.4) million
, respectively. There are no significant differences between actual levels of past taxable income and the results of operations, before income taxes in these jurisdictions. When evaluating if U.S. federal, state, and local deferred tax assets are realizable, the Company considered deferred tax liabilities of
$4.5 million
that are scheduled to reverse from 2017 to 2019 and
$1.3 million
of deferred tax liabilities associated with unrealized gains in securities which the Company could sell, if necessary. Furthermore, the Company considered its ability to implement business and tax planning strategies that would allow the remaining U.S. federal, state, and local deferred tax assets, net of valuation allowances, to be realized within approximately 11 years. Based on the tax planning strategies that are prudent and feasible, management believes that it is more likely than not that the Company will realize the tax benefit of the deferred tax assets, net of the existing valuation allowance, in the future. However, the realization of deferred income taxes is dependent on future events, and changes in estimates in future periods could result in adjustments to the valuation allowance.
Income tax expense of
$2.3 million
and
$6.8 million
for the
three months ended June 30, 2017 and 2016
and income tax expense of
$7.7 million
and
$15.6 million
for the
nine months ended June 30, 2017 and 2016
, respectively, reflect estimated federal, foreign, state and local taxes.
For the
three months ended June 30, 2017 and 2016
, the Company’s effective tax rate was
15%
and
32%
, respectively. For the
nine months ended June 30, 2017 and 2016
, the Company’s effective tax rate was
20%
and
29%
, respectively. The effective tax rate during the periods above, after consideration for discrete items, was lower than the U.S. federal statutory rate primarily due to a higher mix of earnings taxed at lower rates in foreign jurisdictions.
The Company and its subsidiaries file income tax returns with the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company has open tax years ranging from September 30, 2008 through September 30, 2016 with U.S. federal and state and local taxing authorities. In the U.K., the Company has open tax years ending September 30, 2015 to
September 30, 2016. In Brazil, the Company has open tax years ranging from December 31, 2011 through December 31, 2016. In Argentina, the Company has open tax years ranging from September 30, 2009 to September 30, 2016.
Note 16
–
Acquisitions
ICAP’s EMEA Oils Broking Business
In September 2016, the Company’s subsidiary, INTL FCStone Ltd (“IFL”), reached an agreement to acquire the London-based EMEA oils business of ICAP Plc. The acquisition was effective on October 1, 2016, after IFL received approval from the U.K. Competition and Markets Authority. The business included over 30 front office employees across the fuel, crude, middle distillates, futures and options desks that have relationships with over 200 commercial and institutional customers throughout Europe, the Middle East and Africa. The terms of the agreement included cash consideration of
$6.0 million
paid directly to ICAP as well as incentive amounts payable to employees acquired based upon their continued employment. The cash consideration paid to ICAP was dependent upon the number of brokers who accepted IFL’s employment offer. The transaction was accounted for as an asset acquisition in accordance with FASB ASC 805-50 and FASB ASC 350. The cash consideration paid was allocated entirely to the intangible asset recognized related to the customer relationships acquired. The intangible asset was assigned to the Clearing and Execution Services segment and will be amortized over a useful life of
5 years
.
Note 17
–
Segment Analysis
The Company reports its operating segments based on services provided to customers. The Company’s business activities are managed as operating segments and organized into reportable segments as follows:
|
|
•
|
Commercial Hedging
(includes components Financial Agricultural (Ag) & Energy and LME Metals)
|
|
|
•
|
Securities
(includes components Equity Market-Making, Debt Trading, Investment Banking, and Asset Management)
|
|
|
•
|
Physical Commodities
(includes components Precious Metals and Physical Ag & Energy)
|
|
|
•
|
Clearing and Execution Services
(includes components Exchange-traded Futures & Options, FX Prime Brokerage, Correspondent Clearing, Independent Wealth Management and Derivative Voice Brokerage)
|
The total revenues reported combine gross revenues for the physical commodities business for subsidiaries that are not broker-dealers and net revenues for all other businesses. In order to reflect the way that the Company’s management views the results, the table below also reflects the segment contribution to ‘operating revenues’, which is shown on the face of the condensed consolidated income statements and which is calculated by deducting physical commodities cost of sales from total revenues.
Segment data includes the profitability measure of net contribution by segment. Net contribution is one of the key measures used by management to assess the performance of each segment and for decisions regarding the allocation of the Company’s resources. Net contribution is calculated as revenue less direct cost of sales, transaction-based clearing expenses, variable compensation, introducing broker commissions, and interest expense. Variable compensation paid to risk management consultants/traders generally represents a fixed percentage of an amount equal to revenues generated, and in some cases, revenues produced less transaction-based clearing charges, base salaries and an overhead allocation.
Segment data also includes segment income which is calculated as net contribution less non-variable direct expenses of the segment. These non-variable direct expenses include trader base compensation and benefits, operational employee compensation and benefits, communication and data services, business development, professional fees, bad debt expense and other direct expenses.
Inter-segment revenues, charges, receivables and payables are eliminated upon consolidation, except revenues and costs related to foreign currency transactions undertaken on an arm’s length basis by the foreign exchange trading business for the securities business.
On a recurring basis, the Company sweeps excess cash from certain U.S. operating segments to a centralized corporate treasury function in exchange for an intercompany receivable asset. The intercompany receivable asset is eliminated during consolidation, and therefore this practice may impact reported total assets between segments.
Information for the reportable segments is shown in accordance with the Segment Reporting Topic of the ASC as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total revenues:
|
|
|
|
|
|
|
|
Commercial Hedging
|
$
|
57.1
|
|
|
$
|
71.9
|
|
|
$
|
177.3
|
|
|
$
|
182.0
|
|
Global Payments
|
22.5
|
|
|
18.4
|
|
|
67.1
|
|
|
54.1
|
|
Securities
|
40.0
|
|
|
41.6
|
|
|
115.3
|
|
|
136.0
|
|
Physical Commodities
|
5,320.3
|
|
|
4,701.2
|
|
|
16,495.2
|
|
|
11,506.4
|
|
Clearing and Execution Services
|
65.4
|
|
|
33.3
|
|
|
193.2
|
|
|
96.4
|
|
Corporate unallocated
|
0.6
|
|
|
2.1
|
|
|
(7.0
|
)
|
|
2.4
|
|
Total
|
$
|
5,505.9
|
|
|
$
|
4,868.5
|
|
|
$
|
17,041.1
|
|
|
$
|
11,977.3
|
|
Operating revenues (loss):
|
|
|
|
|
|
|
|
Commercial Hedging
|
$
|
57.1
|
|
|
$
|
71.9
|
|
|
$
|
177.3
|
|
|
$
|
182.0
|
|
Global Payments
|
22.5
|
|
|
18.4
|
|
|
67.1
|
|
|
54.1
|
|
Securities
|
40.0
|
|
|
41.6
|
|
|
115.3
|
|
|
136.0
|
|
Physical Commodities
|
12.0
|
|
|
7.7
|
|
|
33.0
|
|
|
21.5
|
|
Clearing and Execution Services
|
65.4
|
|
|
33.3
|
|
|
193.2
|
|
|
96.4
|
|
Corporate unallocated
|
0.6
|
|
|
2.1
|
|
|
(7.0
|
)
|
|
2.4
|
|
Total
|
$
|
197.6
|
|
|
$
|
175.0
|
|
|
$
|
578.9
|
|
|
$
|
492.4
|
|
Net operating revenues (loss):
|
|
|
|
|
|
|
|
Commercial Hedging
|
$
|
44.2
|
|
|
$
|
57.7
|
|
|
$
|
140.3
|
|
|
$
|
145.6
|
|
Global Payments
|
20.3
|
|
|
16.4
|
|
|
60.0
|
|
|
48.2
|
|
Securities
|
24.6
|
|
|
27.7
|
|
|
73.8
|
|
|
95.5
|
|
Physical Commodities
|
10.2
|
|
|
6.2
|
|
|
27.3
|
|
|
17.7
|
|
Clearing and Execution Services
|
25.6
|
|
|
10.0
|
|
|
75.1
|
|
|
30.8
|
|
Corporate unallocated
|
(1.6
|
)
|
|
(0.7
|
)
|
|
(15.0
|
)
|
|
(4.9
|
)
|
Total
|
$
|
123.3
|
|
|
$
|
117.3
|
|
|
$
|
361.5
|
|
|
$
|
332.9
|
|
Net contribution:
|
|
|
|
|
|
|
|
(Revenues less cost of sales of physical commodities, transaction-based clearing expenses, variable bonus compensation, introducing broker commissions and interest expense)
|
|
|
|
|
Commercial Hedging
|
$
|
32.6
|
|
|
$
|
41.4
|
|
|
$
|
102.9
|
|
|
$
|
103.6
|
|
Global Payments
|
16.2
|
|
|
13.2
|
|
|
47.9
|
|
|
38.6
|
|
Securities
|
20.2
|
|
|
21.2
|
|
|
58.9
|
|
|
75.7
|
|
Physical Commodities
|
7.6
|
|
|
3.6
|
|
|
19.9
|
|
|
12.3
|
|
Clearing and Execution Services
|
19.1
|
|
|
8.0
|
|
|
56.7
|
|
|
24.1
|
|
Total
|
$
|
95.7
|
|
|
$
|
87.4
|
|
|
$
|
286.3
|
|
|
$
|
254.3
|
|
Segment income:
|
|
|
|
|
|
|
|
(Net contribution less non-variable direct segment costs)
|
|
|
|
|
|
|
|
Commercial Hedging
|
$
|
16.3
|
|
|
$
|
25.4
|
|
|
$
|
50.4
|
|
|
$
|
54.2
|
|
Global Payments
|
12.9
|
|
|
9.9
|
|
|
37.8
|
|
|
29.2
|
|
Securities
|
12.9
|
|
|
14.4
|
|
|
37.5
|
|
|
54.5
|
|
Physical Commodities
|
4.3
|
|
|
1.3
|
|
|
11.2
|
|
|
4.2
|
|
Clearing and Execution Services
|
6.5
|
|
|
3.4
|
|
|
20.1
|
|
|
10.4
|
|
Total
|
$
|
52.9
|
|
|
$
|
54.4
|
|
|
$
|
157.0
|
|
|
$
|
152.5
|
|
Reconciliation of segment income to income before tax:
|
|
|
|
|
Segment income
|
$
|
52.9
|
|
|
$
|
54.4
|
|
|
$
|
157.0
|
|
|
$
|
152.5
|
|
Net costs not allocated to operating segments
|
37.9
|
|
|
33.0
|
|
|
119.3
|
|
|
99.0
|
|
Income before tax
|
$
|
15.0
|
|
|
$
|
21.4
|
|
|
$
|
37.7
|
|
|
$
|
53.5
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
As of June 30, 2017
|
|
As of September 30, 2016
|
Total assets:
|
|
|
|
|
|
|
|
Commercial Hedging
|
|
|
|
|
$
|
1,591.0
|
|
|
$
|
1,637.5
|
|
Global Payments
|
|
|
|
|
257.2
|
|
|
191.4
|
|
Securities
|
|
|
|
|
2,300.7
|
|
|
2,130.7
|
|
Physical Commodities
|
|
|
|
|
304.2
|
|
|
258.0
|
|
Clearing and Execution Services
|
|
|
|
|
1,590.5
|
|
|
1,617.4
|
|
Corporate unallocated
|
|
|
|
|
152.3
|
|
|
115.3
|
|
Total
|
|
|
|
|
$
|
6,195.9
|
|
|
$
|
5,950.3
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Throughout this document, unless the context otherwise requires, the terms “Company”, “we”, “us” and “our” refer to INTL FCStone Inc. and its consolidated subsidiaries. INTL FCStone Inc. is a Delaware corporation.
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the control of INTL FCStone Inc. and its subsidiaries, including adverse changes in economic, political and market conditions, losses from our market-making and trading activities arising from counter-party failures and changes in market conditions, the possible loss of key personnel, the impact of increasing competition, the impact of changes in government regulation, the possibility of liabilities arising from violations of foreign, federal and state securities laws and the impact of changes in technology in the securities and commodities trading industries. Although we believe that our forward-looking statements are based upon reasonable assumptions regarding our business and future market conditions, there can be no assurances that our actual results will not differ materially from any results expressed or implied by our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We caution readers that any forward-looking statements are not guarantees of future performance.
Overview
INTL FCStone Inc. is a diversified global financial services organization providing execution, risk management and advisory services, market intelligence, and clearing services across asset classes and markets around the world. We help our customers
access market liquidity, maximize profits and manage risk.
We are a leader in the development of specialized financial services in commodities, securities, global payments, foreign exchange and other markets. Our revenues are derived primarily from financial products and advisory services intended to fulfill our customers’ real needs and provide bottom-line benefits to their businesses. We work to create added value for our customers by providing access to global financial markets using our industry and financial expertise, deep partner and network relationships, insight and guidance, and integrity and transparency. We believe our customer-first approach differentiates us from large banking institutions, engenders trust, and has enabled us to establish leadership positions in a number of complex fields in financial markets around the world.
Our leadership positions span markets such as commodity risk management advisory services; global payments; market-making in international equities and other securities; fixed income; correspondent securities clearing and independent wealth management; physical trading and hedging of precious metals and select other commodities; execution of listed futures and options on futures contracts on all major commodity exchanges and foreign currency trading, among others. These businesses are supported by
our global infrastructure of regulated operating subsidiaries, advanced technology platform and team of more than 1,600 employees. We currently serve more than 20,000 predominantly wholesale organizations, located in more than 130 countries. Our recent acquisition of the Sterne Agee correspondent clearing and independent wealth management businesses added approximately 50 correspondent clearing relationships with more than 120,000 underlying individual securities accounts, of which 65,000 are related to the independent wealth management business acquired.
Our customers include producers, processors and end-users of nearly all widely traded physical commodities; commercial counterparties who are end-users of our products and services; governmental and non-governmental organizations; and commercial banks, asset managers, introducing broker-dealers, insurance companies, brokers, institutional investors and major investment banks. We believe our customers value us for our focus on their needs, our expertise and flexibility, our global reach, our ability to provide access to hard-to-reach markets and opportunities, and our status as a well-capitalized and regulatory-compliant organization.
We believe we are well positioned to capitalize on key trends impacting the financial services sector. Among others, these trends include the impact of increased regulation on banking institutions and other financial services providers; increased consolidation, especially of smaller sub-scale financial services providers and independent securities clearing firms; the growing importance and complexity of conducting secure cross-border transactions; and the demand among financial institutions to transact with well-capitalized counterparties.
We focus on mitigating exposure to market risk, ensuring adequate liquidity to maintain daily operations and making non-interest expenses variable, to the greatest extent possible.
Executive Summary
We achieved operating revenues growth of 13%, or $22.6 million, in the third quarter compared to the prior year, with increases in our Clearing and Execution Services (“CES”), Global Payments and Physical Commodities segments, partially offset by lower operating revenues in our Commercial Hedging and Securities segments. Our CES segment increased operating revenues by $32.1 million, primarily related to contributions from our recent acquisitions of the correspondent securities clearing and independent wealth management businesses of Sterne Agee and ICAP plc’s London-based EMEA oil voice brokerage business of $25.3 million and $6.9 million, respectively.
Overall, segment income declined 3%, with the Commercial Hedging and Securities segments declining $9.1 million and $1.5 million, respectively. Partially offsetting these declines, the Global Payments and Physical Commodities segments each increased $3.0 versus the prior year period, and segment income increased $3.1 million in our CES segment.
Commercial Hedging segment income declined primarily as a result of an decreases in both exchange-traded and OTC revenues as well as a modest increase in non-variable direct expenses. These declines were partially offset by an increase in interest income, driven by an increase in short term interest rates.
CES segment income increased, primarily as a result of the acquisition of the correspondent securities clearing and independent wealth management businesses of Sterne Agee in the fourth quarter of fiscal 2016 as well as the acquisition of ICAP plc’s London-based EMEA oil voice brokerage business at the beginning of our current year first quarter. The Sterne Agee businesses contributed $3.0 million in segment income in the third quarter while the Derivative Voice Brokerage business contributed $1.2 million. These increases were partially offset by $0.8 million and $0.2 million declines in our Exchange-traded Futures & Options and FX Prime Brokerage businesses, respectively.
The growth in Physical Commodities segment income was driven by $2.8 million and $0.2 million increases in our Precious Metals and Physical Ag & Energy segment incomes, respectively. Finally, the decline in Securities segment income was primarily driven by weaker operating revenues in our Equity Market-Making and Debt Trading business driven by lower market volatility which led to spread compression in these businesses.
On the expense side, we continue to focus on maintaining our variable cost model and limiting the growth of our non-variable expenses. To that end, variable expenses were 57% of total expenses in the current period as compared to 61% in the prior year. Non-variable expenses increased 29%, or $16.8 million year-over-year, primarily as a result of $10.7 million in incremental expenses, including non-variable compensation, trade system costs, equipment and office space rental, professional fees and market information, from the acquisition of the Sterne Agee and ICAP businesses.
Net income declined 13% to $12.7 million in the third quarter as compared to the prior year. While the acquired correspondent securities clearing and independent wealth management business added $3.0 million in incremental segment income, the additional Corporate unallocated expenses in these acquired businesses, resulted in a $0.7 million net loss in the current period. These acquired business were break even in the immediately preceding second quarter and a $0.6 million net loss in the first quarter of fiscal 2017. The acquired oil voice brokerage business, recognized segment income of $1.2 million in the current period with $0.3 million of acquired Corporate unallocated expenses.
Selected Summary Financial Information
Results of Operations
Total revenues reported combine gross revenues for the physical commodities business and net revenues for all other businesses. In order to reflect the way that we view the results, the table below reflects the calculation of the subtotal ‘operating revenues’, which is calculated by deducting physical commodities cost of sales from total revenues. Below is a discussion of the results of our operations, as viewed by management, for the
three and nine months ended June 30, 2017 and 2016
.
Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
%
Change
|
|
2016
|
|
2017
|
|
%
Change
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
5,317.0
|
|
|
13
|
%
|
|
$
|
4,703.2
|
|
|
$
|
16,486.3
|
|
|
43
|
%
|
|
$
|
11,503.8
|
|
Trading gains, net
|
79.9
|
|
|
(4
|
)%
|
|
83.4
|
|
|
246.9
|
|
|
1
|
%
|
|
243.8
|
|
Commission and clearing fees
|
73.0
|
|
|
25
|
%
|
|
58.2
|
|
|
212.5
|
|
|
33
|
%
|
|
159.4
|
|
Consulting and management fees
|
16.3
|
|
|
104
|
%
|
|
8.0
|
|
|
47.5
|
|
|
74
|
%
|
|
27.3
|
|
Interest income
|
19.6
|
|
|
26
|
%
|
|
15.6
|
|
|
47.7
|
|
|
11
|
%
|
|
42.8
|
|
Other income
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.2
|
|
|
—
|
%
|
|
0.2
|
|
Total revenues
|
5,505.9
|
|
|
13
|
%
|
|
4,868.5
|
|
|
17,041.1
|
|
|
42
|
%
|
|
11,977.3
|
|
Cost of sales of physical commodities
|
5,308.3
|
|
|
13
|
%
|
|
4,693.5
|
|
|
16,462.2
|
|
|
43
|
%
|
|
11,484.9
|
|
Operating revenues
|
197.6
|
|
|
13
|
%
|
|
175.0
|
|
|
578.9
|
|
|
18
|
%
|
|
492.4
|
|
Transaction-based clearing expenses
|
33.9
|
|
|
(4
|
)%
|
|
35.2
|
|
|
101.2
|
|
|
3
|
%
|
|
97.9
|
|
Introducing broker commissions
|
29.2
|
|
|
97
|
%
|
|
14.8
|
|
|
86.1
|
|
|
111
|
%
|
|
40.8
|
|
Interest expense
|
11.2
|
|
|
45
|
%
|
|
7.7
|
|
|
30.1
|
|
|
45
|
%
|
|
20.8
|
|
Net operating revenues
|
123.3
|
|
|
5
|
%
|
|
117.3
|
|
|
361.5
|
|
|
9
|
%
|
|
332.9
|
|
Compensation and other expenses
|
108.3
|
|
|
13
|
%
|
|
95.9
|
|
|
323.8
|
|
|
16
|
%
|
|
279.4
|
|
Income before tax
|
15.0
|
|
|
(30
|
)%
|
|
21.4
|
|
|
37.7
|
|
|
(30
|
)%
|
|
53.5
|
|
Income tax expense
|
2.3
|
|
|
(66
|
)%
|
|
6.8
|
|
|
7.7
|
|
|
(51
|
)%
|
|
15.6
|
|
Net income
|
$
|
12.7
|
|
|
(13
|
)%
|
|
$
|
14.6
|
|
|
$
|
30.0
|
|
|
(21
|
)%
|
|
$
|
37.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet information:
|
|
|
|
|
|
|
June 30, 2017
|
|
% Change
|
|
June 30, 2016
|
Total assets
|
|
|
|
|
|
|
$
|
6,195.9
|
|
|
2
|
%
|
|
$
|
6,065.9
|
|
Payables to lenders under loans
|
|
|
|
|
|
|
$
|
244.7
|
|
|
16
|
%
|
|
$
|
211.6
|
|
Senior unsecured notes
|
|
|
|
|
|
|
$
|
—
|
|
|
(100
|
)%
|
|
$
|
45.5
|
|
Stockholders’ equity
|
|
|
|
|
|
|
$
|
469.1
|
|
|
13
|
%
|
|
$
|
415.5
|
|
The selected data table below reflects key operating metrics used by management in evaluating our product lines, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
2017
|
|
% Change
|
|
2016
|
|
2017
|
|
% Change
|
|
2016
|
Volumes and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-traded - futures and options (contracts, 000’s)
|
24,190.3
|
|
|
(8
|
)%
|
|
26,245.5
|
|
|
73,763.0
|
|
|
(4
|
)%
|
|
77,066.8
|
|
OTC (contracts, 000’s)
|
382.8
|
|
|
(17
|
)%
|
|
462.7
|
|
|
1,035.5
|
|
|
(4
|
)%
|
|
1,079.4
|
|
Global Payments (# of payments, 000’s)
|
175.8
|
|
|
54
|
%
|
|
113.8
|
|
|
476.1
|
|
|
53
|
%
|
|
310.6
|
|
Gold equivalent ounces traded (000’s)
|
36,553.6
|
|
|
48
|
%
|
|
24,658.9
|
|
|
88,122.2
|
|
|
26
|
%
|
|
69,798.0
|
|
Equity Market-Making (gross dollar volume, millions)
|
$
|
21,298.1
|
|
|
8
|
%
|
|
$
|
19,717.8
|
|
|
$
|
67,284.8
|
|
|
—
|
%
|
|
$
|
67,277.5
|
|
Debt Trading (gross dollar volume, millions)
|
$
|
32,176.4
|
|
|
5
|
%
|
|
$
|
30,674.5
|
|
|
$
|
102,651.2
|
|
|
30
|
%
|
|
$
|
79,258.1
|
|
FX Prime Brokerage volume (U.S. notional, millions)
|
$
|
145,679.8
|
|
|
(3
|
)%
|
|
$
|
149,593.4
|
|
|
$
|
487,145.5
|
|
|
14
|
%
|
|
$
|
428,253.5
|
|
Average assets under management in Argentina (U.S. dollar, millions)
|
$
|
653.4
|
|
|
21
|
%
|
|
$
|
541.4
|
|
|
$
|
570.7
|
|
|
—
|
%
|
|
$
|
568.4
|
|
Average customer equity - futures and options (millions)
|
$
|
1,938.7
|
|
|
5
|
%
|
|
$
|
1,853.8
|
|
|
$
|
2,010.8
|
|
|
10
|
%
|
|
$
|
1,831.9
|
|
Operating Revenues
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Operating revenues increased 13% to $197.6 million in
the third quarter
compared to $175.0 million in the prior year. Operating revenue growth was driven by a $32.1 million increase in our CES segment, primarily as a result of incremental operating revenues from our recent acquisitions. In addition, Physical Commodity and Global Payments operating revenues, grew $4.3 million and $4.1 million, respectively. Offsetting this revenue growth was a $14.8 million decline in operating revenues within our Commercial Hedging segment and to a lesser extent, a $1.6 million decline in our Securities segment.
Operating revenues for
the third quarter
include a minimal pre-tax unrealized loss on U.S. Treasury notes held as part of our interest rate management strategy. The prior year period included a $2.7 million pre-tax unrealized gain on interest rate swaps and U.S. Treasury notes held as part of our interest rate management strategy. On a segment basis, these unrealized gains and losses are reported in the Corporate unallocated segment, while the amortized earnings on these investments are included in the Commercial Hedging and CES segments. During the first quarter of fiscal 2017, we liquidated all of our interest rate swap positions held as part of the strategy. During the second quarter of fiscal 2017, we sold $865.0 million of U.S. Treasury notes under this strategy, leaving $290.0 million of U.S. Treasury notes outstanding, which will mature in calendar 2017. The U.S. Treasury notes are not designated for hedge accounting treatment, and changes in their fair values, which are volatile and can fluctuate from period to period, are included in operating revenues in the current period.
Operating revenues in our CES segment increased $32.1 million to $65.4 million in
the third quarter
, primarily as a result of the acquisition of the Sterne Agee Correspondent Clearing and Independent Wealth Management businesses at the beginning of the fourth quarter of fiscal 2016, which added $25.3 million in operating revenues in
the third quarter
. Also contributing to the revenue growth was the acquisition of ICAP plc’s London-based EMEA oil voice brokerage business, at the beginning of the first quarter of fiscal 2017, which contributed $6.9 million to third quarter operating revenues. The Exchange-traded Futures & Options and FX Prime Brokerage businesses were relatively flat with the prior year period.
Operating revenues in Commercial Hedging decreased $14.8 million in
the third quarter
to $57.1 million, as exchange-traded revenues declined $4.2 million and OTC revenues declined $11.6 million versus the prior year. Exchange-traded revenues declined primarily as a result of the decrease in average rate per contract, due to the effect of lower volatility in our global grain and LME metals businesses. OTC revenues declined as a result of a 17% decrease in customer OTC volumes combined with a 29% decline in the average rate per contract, primarily in the our global grain, food service and dairy businesses as well as reduced activity in interest rate swaps.
Operating revenues in our Global Payments segment increased 22% in
the third quarter
to $22.5 million, as a result of a 54% increase in the number of global payments made which was partially offset by a narrowing of spreads in this business due to an increase in volume of smaller transactions from financial institutions.
Our Physical Commodity segment operating revenues increased 56% to $12.0 million, primarily as a result of a $3.0 million increase in Precious Metals operating revenues as well as an $1.3 million increase in Physical Ag & Energy operating revenues driven by both increased customer volumes and a widening of spreads.
Operating revenues in our Securities segment declined 4% to $40.0 million in
the third quarter
compared to the prior year. The Equity Market-Making business declined $1.2 million, despite a 8% increase in the gross dollar volume traded as lower volatility drove a narrowing of spreads. Operating revenues in our Debt Trading business declined $0.5 million versus the prior year, with revenue growth in our Latin American and Argentina businesses more than offset by declines in our domestic institutional fixed income business. Investment Banking operating revenues increased $0.3 million and Asset Management operating revenues declined $0.2 million as compared to the prior year period.
Interest income increased $4.0 million to $19.6 million in
the third quarter
compared to prior year as a result of both an increase in short term interest rates and our recent acquisitions. The acquisition of the Sterne Agee Correspondent Clearing business added an incremental $1.2 million in interest income and our domestic institutional fixed income business increased $2.7 million in the third quarter over the prior year. In addition, average customer equity in the Financial Ag & Energy and Exchange-traded Futures & Options components of our Commercial Hedging and CES segments increased 5% to $1.9 billion in
the third quarter
compared to the prior year, which combined with an increase in short-term interest rates resulted in an aggregate $1.6 million increase in interest income in these businesses.
See Segment Information below for additional information on activity in each of the segments.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Operating revenues increased 18% to $578.9 million in
the current nine months ended
compared to $492.4 million in the prior year. Operating revenue growth was driven by a $96.8 million increase in our CES segment, primarily as a result of incremental operating revenues from our recent acquisitions. In addition, Global Payments and Physical Commodities operating revenues increased $13.0 million and $11.5 million, respectively. Offsetting this revenue growth was a $20.7 million decline in operating revenues within our Securities segment and to a lesser extent a $4.7 million decline in Commercial Hedging segment operating revenues.
Operating revenues for
the current nine months ended
include a $5.8 million pre-tax unrealized loss on interest rate swaps and U.S. Treasury notes held as part of our interest rate management strategy. The prior year period included a $2.9 million pre-tax unrealized gain on interest rate swaps and U.S. Treasury notes held as part of our interest rate management strategy. On a segment basis, these unrealized losses are reported in the Corporate unallocated segment, while the amortized earnings on these investments are included in the Commercial Hedging and CES segments. During the first quarter of fiscal 2017, we liquidated all of our interest rate swap positions held as part of the strategy. During the second quarter of fiscal 2017, we sold $865.0 million of U.S. Treasury notes under this strategy, leaving $290.0 million of U.S. Treasury notes outstanding, which will mature in calendar 2017. The U.S. Treasury notes and interest rate swaps are not designated for hedge accounting treatment, and changes in their fair values, which are volatile and can fluctuate from period to period, are included in operating revenues in the current period.
Operating revenues in our CES segment increased 100% to $193.2 million in
the current nine months ended
, primarily as a result of the acquisition of the Sterne Agee Correspondent Clearing and Independent Wealth Management businesses at the beginning of the fourth quarter of fiscal 2016, which added $74.4 million in operating revenues in
the current nine months ended
. Also contributing to the revenue growth was the acquisition of ICAP plc’s London-based EMEA oil voice brokerage business, at the beginning of the first quarter of fiscal 2017, which contributed $19.9 million to
the current nine months ended
operating revenues. The Exchange-traded Futures & Options business added $4.1 million in operating revenues as a result of an increase in the average rate per contract, while the FX Prime Brokerage business declined $1.6 million, despite a 14% increase in customer volumes.
Operating revenues in Commercial Hedging declined 3% in
the current nine months ended
to $177.3 million, as a $2.5 million increase in exchange-traded revenues was more than offset by a $10.7 million decline in OTC revenues. An increase in LME metals revenues drove the increase in exchange-traded revenues, while lower market volatility in global grain, energy and renewable fuels, food service and dairy markets as well as a decline in interest rate swap activity drove the decline in OTC revenues.
Operating revenues in our Global Payments segment increased 24% in
the current nine months ended
to $67.1 million, as a result of a 53% increase in the number of global payments made which was partially offset by a narrowing of spreads in this business due to an increase in volume of smaller transactions from financial institutions.
Our Physical Commodity segment operating revenues increased 53% to $33.0 million, as a result of a $4.7 million increase in Precious Metals operating revenues, while Physical Ag & Energy operating revenues added $6.8 million in operating revenues.
Operating revenues in our Securities segment declined 15% to $115.3 million in
the current nine months ended
compared to the prior year. The Debt Trading and Asset Management businesses declined $8.6 and $6.2 million, respectively, as the prior year period reflected strong performance in our Argentina operations in these businesses following the devaluation of the Argentine Peso in December 2015. In addition, Equity Market-Making operating revenues declined $4.5 million as a result of a narrowing of spreads due to lower market volatility. Investment Banking operating revenues declined $1.4 million due both to weaker results in Argentina and management’s decision to exit our domestic investment banking business.
Interest income increased $4.9 million to $47.7 million in
the current nine months ended
compared to prior year, primarily driven by the acquisition of the Sterne Agee Correspondent Clearing business, which added $3.7 million in interest income. In addition, average customer equity in the Financial Ag & Energy and Exchange-traded Futures & Options components of our Commercial Hedging and CES segments increased 10% to $2.0 billion in
the current nine months ended
compared to the prior year, which combined with an increase in short term interest rates resulted in an aggregate $5.1 million increase in interest income in these businesses. Debt Trading interest income increased $3.7 million as compared to the prior year period. These increases in interest income were partially offset by the $7.5 million decline in the mark-to-market valuation on U.S. Treasury notes.
See Segment Information below for additional information on activity in each of the segments.
Interest and Transactional Expenses
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Transaction-based clearing expenses:
Transaction-based clearing expenses
decrease
d
4%
to
$33.9 million
in
the third quarter
compared to
$35.2 million
in
the prior year
, and were
17%
of operating revenues in
the third quarter
compared to
20%
in
the prior year
. The decrease in expense is related to lower ADR conversion fees in our Equity Market-Making component and lower volumes in our Exchange-Traded Futures & Options component, partially offset by the incremental trading activity from our acquisition of the Sterne Agee Correspondent Clearing and Independent Wealth Management businesses during the fourth quarter of fiscal 2016. The decrease in transaction-based clearing expenses as a percentage of operating revenue is primarily related to the impact of the incremental revenues from these acquired businesses, as well as the acquired oil voice brokerage business.
Introducing broker commissions:
Introducing broker commissions
increase
d
97%
to
$29.2 million
in
the third quarter
compared to
$14.8 million
in
the prior year
, and were
15%
of operating revenues in
the third quarter
compared to
8%
in
the prior year
. The increase in expense is primarily due to incremental activity from our acquisition of the Sterne Agee Independent Wealth Management business and increased expense in our Exchange-Traded Futures & Options component. The increase in introducing broker commissions as a percentage of operating revenue is primarily related to this acquired business and its cost structure.
Interest expense:
Interest expense
increase
d
45%
to
$11.2 million
in
the third quarter
compared to
$7.7 million
in
the prior year
. The
increase
in expense is primarily related to the trading activities of our institutional dealer in fixed income securities, which resulted in higher interest expense of $2.4 million. Also, increased activity and an increase in short-term rates resulted in higher costs in our Exchange-Traded Futures & Options and Equity Market-Making businesses. Additionally, increased credit line capacity and higher average borrowings outstanding on our corporate credit facility, available for working capital needs, and our physical commodity financing facility resulted in increased expense.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Transaction-based clearing expenses:
Transaction-based clearing expenses increased
3%
to
$101.2 million
in
the current nine months ended
compared to
$97.9 million
in the prior year, and were
17%
of operating revenues in
the current nine months ended
compared to
20%
in the prior year. The increase in expense is primarily related to the incremental trading activity from our acquisition of the Sterne Agee Correspondent Clearing and Independent Wealth Management businesses during the fourth quarter of fiscal 2016.
Introducing broker commissions:
Introducing broker commissions increased
111%
to
$86.1 million
in
the current nine months ended
compared to
$40.8 million
in the prior year, and were
15%
of operating revenues in
the current nine months ended
compared to
8%
in the prior year. The increase in expense is primarily due to incremental activity from our acquisition of the Sterne Agee Independent Wealth Management business and increased activity in our Exchange-Traded Futures & Options. The increase in introducing broker commissions as a percentage of operating revenue is primarily related to this acquired business and its cost structure.
Interest expense:
Interest expense increased
45%
to
$30.1 million
in
the current nine months ended
compared to
$20.8 million
in the prior year. The increase in expense is primarily related to the trading activities of our institutional dealer in fixed income securities, which resulted in higher interest expense of $4.7 million. Also, increased activity and an increase in short-term rates resulted in higher costs in our Exchange-Traded Futures & Options and Equity Market-Making businesses, as well as incremental interest expense from our acquisition of the Sterne Agee Correspondent Clearing business. Additionally, increased credit line capacity and higher average borrowings outstanding on our corporate credit facility, available for working capital needs, and our physical commodity financing facility resulted in increased expense.
Net Operating Revenues
Net operating revenues is one of the key measures used by management to assess the performance of our operating segments. Net operating revenue is calculated as operating revenue less transaction-based clearing expenses, introducing broker commissions and interest expense. Transaction-based clearing expenses represent variable expenses paid to executing brokers, exchanges, clearing organizations and banks in relation to our transactional volumes. Introducing broker commissions include commission paid to non-employee third parties that have introduced customers to us. Net operating revenues represent revenues available to pay variable compensation to risk management consultants and traders and direct non-variable expenses, as well as variable and non-variable expenses of operational and administrative employees.
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Net operating revenues
increase
d
$6.0 million
, or
5%
, to
$123.3 million
in
the third quarter
compared to
$117.3 million
in
the prior year
.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Net operating revenues
increase
d
$28.6 million
, or
9%
, to
$361.5 million
in
the current nine months ended
compared to
$332.9 million
in the prior year.
Compensation and Other Expenses
The following table shows a summary of expenses, other than interest and transactional expenses.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
%
Change
|
|
2016
|
|
2017
|
|
%
Change
|
|
2016
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed compensation and benefits
|
$
|
41.5
|
|
|
34
|
%
|
|
$
|
31.0
|
|
|
$
|
118.0
|
|
|
28
|
%
|
|
$
|
92.5
|
|
Variable compensation and benefits
|
34.0
|
|
|
(11
|
)%
|
|
38.4
|
|
|
104.7
|
|
|
—
|
%
|
|
105.2
|
|
|
75.5
|
|
|
9
|
%
|
|
69.4
|
|
|
222.7
|
|
|
13
|
%
|
|
197.7
|
|
Other non-compensation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Communication and data services
|
9.8
|
|
|
24
|
%
|
|
7.9
|
|
|
29.6
|
|
|
28
|
%
|
|
23.1
|
|
Occupancy and equipment rental
|
3.9
|
|
|
22
|
%
|
|
3.2
|
|
|
11.1
|
|
|
14
|
%
|
|
9.7
|
|
Professional fees
|
3.7
|
|
|
12
|
%
|
|
3.3
|
|
|
11.9
|
|
|
34
|
%
|
|
8.9
|
|
Travel and business development
|
3.0
|
|
|
3
|
%
|
|
2.9
|
|
|
9.6
|
|
|
14
|
%
|
|
8.4
|
|
Depreciation and amortization
|
2.4
|
|
|
14
|
%
|
|
2.1
|
|
|
7.2
|
|
|
16
|
%
|
|
6.2
|
|
Bad debts
|
0.1
|
|
|
nm
|
|
|
—
|
|
|
3.9
|
|
|
(15
|
)%
|
|
4.6
|
|
Other expense
|
9.9
|
|
|
39
|
%
|
|
7.1
|
|
|
27.8
|
|
|
34
|
%
|
|
20.8
|
|
|
32.8
|
|
|
24
|
%
|
|
26.5
|
|
|
101.1
|
|
|
24
|
%
|
|
81.7
|
|
Total compensation and other expenses
|
$
|
108.3
|
|
|
13
|
%
|
|
$
|
95.9
|
|
|
$
|
323.8
|
|
|
16
|
%
|
|
$
|
279.4
|
|
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Compensation and Other Expenses:
Compensation and other expenses
increase
d
$12.4 million
, or
13%
, to
$108.3 million
in
the third quarter
compared to
$95.9 million
in
the prior year
.
Compensation and Benefits:
Total compensation and benefits expense
increase
d
9%
to
$75.5 million
in
the third quarter
compared to
$69.4 million
in
the prior year
. Total compensation and benefits were
38%
of operating revenues in
the third quarter
compared to
40%
in
the prior year
. The variable portion of compensation and benefits
decrease
d by
11%
to
$34.0 million
in
the third quarter
compared to
$38.4 million
in
the prior year
. Variable compensation and benefits were
28%
of net operating revenues in
the third quarter
compared to
33%
in the prior year. Administrative, centralized operations and executive incentive compensation was
$4.8 million
in
the third quarter
compared to
$7.8 million
in
the prior year
, primarily due to lower current year performance among certain business lines as well as consolidated results and fewer participants in the executive plan in the current year due to retirement.
The fixed portion of compensation and benefits
increase
d
34%
to
$41.5 million
in
the third quarter
compared to
$31.0 million
in
the prior year
. Non-variable salaries
increase
d
$6.3 million
, or
28%
, primarily due to incremental costs from our acquisition of the Sterne Agee correspondent securities clearing and independent wealth management businesses in the fourth quarter of fiscal 2016 and our acquisition of ICAP plc’s London-based EMEA oil voice brokerage business. Additionally, we increased headcount across several growing business lines as well as in several administrative areas, most notably within our information technology department. Employee benefits, excluding share-based compensation,
increase
d
$2.8 million
in
the third quarter
, primarily related to higher payroll tax and health care costs due to the increased headcount from the acquisitions and internal growth. Share-based compensation is a component of the fixed portion, and includes stock option and restricted stock expense. Share-based compensation was
$2.0 million
in
the third quarter
compared to
$1.2 million
in
the prior year
. The number of employees
increase
d
2%
to
1,609
at the end of
the third quarter
compared to
1,574
at the beginning of
the third quarter
. The number of employees at the end of
the prior year
period was
1,272
.
Other Non-Compensation Expenses:
Other non-compensation expenses
increase
d
24%
to
$32.8 million
in
the third quarter
compared to
$26.5 million
in
the prior year
. Communication and data services expenses
increase
d
$1.9 million
, primarily related to incremental trade systems and market information costs associated with the acquired businesses discussed above. Occupancy and equipment rental increased $0.7 million, primarily as a result of the incremental costs from the leased office space of the acquired Sterne Agee correspondent securities clearing and independent wealth management businesses. Other expenses increased primarily due to $1.8 million of incremental costs of the acquired businesses including non-trading hardware and software, insurance and office expenses.
Provision for Taxes:
The effective income tax rate was
15%
in
the third quarter
compared to
32%
in the prior year. The effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. Our effective income tax rate during both periods was lower than the U.S. federal statutory rate primarily due to a higher mix of earnings taxed at lower rates in foreign jurisdictions.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Compensation and Other Expenses:
Compensation and other expenses
increase
d
$44.4 million
, or
16%
, to
$323.8 million
in
the current nine months ended
compared to
$279.4 million
in the prior year.
Compensation and Benefits:
Total compensation and benefits expense
increase
d
13%
to
$222.7 million
in
the current nine months ended
compared to
$197.7 million
in the prior year. Total compensation and benefits were
38%
of operating revenues in
the current nine months ended
compared to
40%
in the prior year. The variable portion of compensation and benefits
decrease
d modestly to
$104.7 million
in
the current nine months ended
compared to
$105.2 million
in the prior year. Variable compensation and benefits were
29%
of net operating revenues in
the current nine months ended
compared to
32%
in the prior year. Administrative, centralized operations and executive incentive compensation was
$14.5 million
in
the current nine months ended
compared to
$21.7 million
in the prior year, primarily due to lower current year performance and fewer participants in the executive plan in the current year due to retirement.
The fixed portion of compensation and benefits increased
28%
to
$118.0 million
in
the current nine months ended
compared to
$92.5 million
in the prior year. Non-variable salaries
increase
d
$16.6 million
, or
24%
, primarily due to incremental costs from our acquisition of the Sterne Agee correspondent clearing and independent wealth management businesses in the fourth quarter of fiscal 2016 and our acquisition of ICAP plc’s London-based EMEA oil voice brokerage business. Additionally, we increased headcount across several growing business lines as well as in several administrative areas, most notably within our information technology department. Employee benefits, excluding share-based compensation,
increase
d
$6.9 million
in
the current nine months ended
, primarily related to higher payroll tax, health care and retirement costs. Share-based compensation is a component of the fixed portion, and includes stock option and restricted stock expense. Share-based compensation was
$4.6 million
in
the current nine months ended
compared to
$3.7 million
in the prior year. The number of employees
increase
d
10%
to
1,609
at the end of the second quarter compared to
1,464
at the beginning of the first quarter. The number of employees at the end of the prior year period was
1,272
.
Other Non-Compensation Expenses:
Other non-compensation expenses
increase
d
24%
to
$101.1 million
in
the current nine months ended
compared to
$81.7 million
in the prior year. Communication and data services expenses
increase
d
$6.5 million
, primarily related to incremental trade systems and market information costs associated with the acquired businesses discussed above. Professional fees
increase
d
$3.0 million
, primarily related to incremental consulting, accounting and legal services associated with the recent acquisitions and consulting fees within our technology department. Depreciation and amortization
increase
d
$1.0 million
, primarily related to the increase in the amortization of intangible assets identified as part of our recent acquisitions. Other expenses increased primarily due to incremental costs from our acquisitions discussed above, including non-trading hardware and software licensing costs, insurance, and office expenses.
Bad debts
decrease
d
$0.7 million
over the prior year. During
the current nine months ended
, bad debt expense was
$3.9 million
, primarily related to LME Metals customer deficits in our Commercial Hedging segment. Bad debt expense in the prior year was
$4.6 million
, primarily related to $1.5 million of customer receivables in our Physical Commodities segment, $2.7 million of customer deficits in our Commercial Hedging segment and $0.3 million related to short-term notes receivable origination in our Securities segment.
Provision for Taxes:
The effective income tax rate was
20%
in
the current nine months ended
compared to
29%
in the prior year. The effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. Our effective income tax rate during both periods was lower than the U.S. federal statutory rate primarily due to a higher mix of earnings taxed at lower rates in foreign jurisdictions.
Unallocated Costs and Expenses
The following table is a breakout of our unallocated costs and expenses from the total costs and expenses shown above. The unallocated costs and expenses include certain shared services such as information technology, accounting and treasury, credit and risk, legal and compliance, and human resources and other activities.
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|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
%
Change
|
|
2016
|
|
2017
|
|
%
Change
|
|
2016
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed compensation and benefits
|
$
|
16.4
|
|
|
43
|
%
|
|
$
|
11.5
|
|
|
$
|
44.4
|
|
|
33
|
%
|
|
$
|
33.3
|
|
Variable compensation and benefits
|
4.2
|
|
|
(42
|
)%
|
|
7.3
|
|
|
13.0
|
|
|
(35
|
)%
|
|
20.0
|
|
|
20.6
|
|
|
10
|
%
|
|
18.8
|
|
|
57.4
|
|
|
8
|
%
|
|
53.3
|
|
Other non-compensation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Communication and data services
|
1.9
|
|
|
46
|
%
|
|
1.3
|
|
|
5.4
|
|
|
35
|
%
|
|
4.0
|
|
Occupancy and equipment rental
|
3.9
|
|
|
22
|
%
|
|
3.2
|
|
|
11.0
|
|
|
15
|
%
|
|
9.6
|
|
Professional fees
|
2.1
|
|
|
24
|
%
|
|
1.7
|
|
|
7.1
|
|
|
45
|
%
|
|
4.9
|
|
Travel and business development
|
0.7
|
|
|
—
|
%
|
|
0.7
|
|
|
2.4
|
|
|
33
|
%
|
|
1.8
|
|
Depreciation and amortization
|
2.0
|
|
|
11
|
%
|
|
1.8
|
|
|
6.0
|
|
|
18
|
%
|
|
5.1
|
|
Other expense
|
5.1
|
|
|
6
|
%
|
|
4.8
|
|
|
15.0
|
|
|
(3
|
)%
|
|
15.4
|
|
|
15.7
|
|
|
16
|
%
|
|
13.5
|
|
|
46.9
|
|
|
15
|
%
|
|
40.8
|
|
Total compensation and other expenses
|
$
|
36.3
|
|
|
12
|
%
|
|
$
|
32.3
|
|
|
$
|
104.3
|
|
|
11
|
%
|
|
$
|
94.1
|
|
Total unallocated costs and other expenses
increase
d
$4.0 million
to
$36.3 million
in
the third quarter
compared to
$32.3 million
in
the prior year
. Compensation and benefits
increase
d
$1.8 million
, or
10%
to
$20.6 million
in
the third quarter
compared to
$18.8 million
in
the prior year
.
Total unallocated costs and other expenses
increase
d
$10.2 million
to
$104.3 million
in
the current nine months ended
compared to
$94.1 million
in
the current nine months ended
. Compensation and benefits
increase
d
$4.1 million
, or
8%
to
$57.4 million
in the current nine months ended compared to
$53.3 million
in the prior year.
During the current three and nine months ended, the increase in fixed compensation and benefits is primarily related to the incremental unallocated costs from the acquisition of the Sterne Agee correspondent clearing and independent wealth management businesses and increases in several administrative departments, most notably the continued expansion of our information technology department. The decrease in variable compensation and benefits is primarily related to lower management incentives based on current period performance, as well as fewer participants in the executive incentive plan due to retirement. The increase in communication and data services is primarily due to an increase in market information costs utilized by our risk and information technology departments and incremental costs from the recent acquisitions. The increase in professional fees is primarily due to increased consulting services used in our information technology department and incremental costs from the recent acquisitions.
Variable vs. Fixed Expenses
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
% of
Total
|
|
2016
|
|
% of
Total
|
|
2017
|
|
% of
Total
|
|
2016
|
|
% of
Total
|
Variable compensation and benefits
|
$
|
34.0
|
|
|
20
|
%
|
|
$
|
38.4
|
|
|
26
|
%
|
|
$
|
104.7
|
|
|
20
|
%
|
|
$
|
105.2
|
|
|
25
|
%
|
Transaction-based clearing expenses
|
33.9
|
|
|
20
|
%
|
|
35.2
|
|
|
24
|
%
|
|
101.2
|
|
|
20
|
%
|
|
97.9
|
|
|
23
|
%
|
Introducing broker commissions
|
29.2
|
|
|
17
|
%
|
|
14.8
|
|
|
11
|
%
|
|
86.1
|
|
|
17
|
%
|
|
40.8
|
|
|
10
|
%
|
Total variable expenses
|
97.1
|
|
|
57
|
%
|
|
88.4
|
|
|
61
|
%
|
|
292.0
|
|
|
57
|
%
|
|
243.9
|
|
|
58
|
%
|
Fixed compensation and benefits
|
41.5
|
|
|
24
|
%
|
|
31.0
|
|
|
21
|
%
|
|
118.0
|
|
|
23
|
%
|
|
92.5
|
|
|
22
|
%
|
Other fixed expenses
|
32.7
|
|
|
19
|
%
|
|
26.5
|
|
|
18
|
%
|
|
97.2
|
|
|
19
|
%
|
|
77.1
|
|
|
18
|
%
|
Bad debts and impairments
|
0.1
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
3.9
|
|
|
1
|
%
|
|
4.6
|
|
|
2
|
%
|
Total non-variable expenses
|
74.3
|
|
|
43
|
%
|
|
57.5
|
|
|
39
|
%
|
|
219.1
|
|
|
43
|
%
|
|
174.2
|
|
|
42
|
%
|
Total non-interest expenses
|
$
|
171.4
|
|
|
100
|
%
|
|
$
|
145.9
|
|
|
100
|
%
|
|
$
|
511.1
|
|
|
100
|
%
|
|
$
|
418.1
|
|
|
100
|
%
|
We seek to make our non-interest expenses variable to the greatest extent possible, and to keep our fixed costs as low as possible. The table above shows an analysis of our variable expenses and non-variable expenses as a percentage of total non-interest expenses for the
three and nine months ended June 30, 2017 and 2016
, respectively.
Our variable expenses include variable compensation paid to traders and risk management consultants, bonuses paid to operational, administrative, and executive employees, transaction-based clearing expenses and introducing broker commissions. As a percentage of total non-interest expenses, variable expenses were
57%
in
the third quarter
compared to
61%
in
the prior year
. As a percentage of total non-interest expenses, variable expenses were
57%
in
the current nine months ended
compared to
58%
in the prior year.
Segment Information
Our business activities are managed as operating segments and organized into reportable segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTL FCStone Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Hedging
|
|
Global Payments
|
|
Securities
|
|
Physical Commodities
|
|
Clearing and Execution Services (“CES”)
|
Components:
|
|
Component:
|
|
Components:
|
|
Components:
|
|
Components:
|
- Financial Ag
& Energy
|
|
- Global Payments
|
|
- Equity Market-
Making
|
|
- Precious Metals
|
|
- Exchange-traded
Futures & Options
|
- LME Metals
|
|
|
|
- Debt Trading
|
|
- Physical Ag
& Energy
|
|
- FX Prime Brokerage
|
|
|
|
|
- Investment Banking
|
|
|
- Correspondent
Clearing
|
|
|
|
|
- Asset Management
|
|
|
|
- Independent
Wealth Management
|
|
|
|
|
|
|
|
|
- Derivative
Voice Brokerage
|
We report our operating segments based on services provided to customers. Net contribution is one of the key measures used by management to assess the performance of each segment and for decisions regarding the allocation of our resources. Net contribution is calculated as revenue less direct cost of sales, transaction-based clearing expenses, introducing broker commissions, interest expense and variable compensation. Variable compensation paid to risk management consultants and traders generally represents a fixed percentage of an amount equal to revenues generated, and in some cases, revenues generated less transaction-based clearing expenses and related charges, base salaries and an overhead allocation.
Segment income is calculated as net contribution less non-variable direct expenses of the segment. These non-variable direct expenses include trader base compensation and benefits, operational charges, communication and data services, business development, professional fees, bad debt expense, trade errors and direct marketing expenses.
Total Segment Results
The following table shows summary information concerning all of our business segments combined.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
% of Operating Revenues
|
|
2016
|
|
% of Operating Revenues
|
|
2017
|
|
% of Operating Revenues
|
|
2016
|
|
% of Operating Revenues
|
Sales of physical commodities
|
$
|
5,317.0
|
|
|
|
|
$
|
4,703.2
|
|
|
|
|
$
|
16,486.3
|
|
|
|
|
$
|
11,503.8
|
|
|
|
Trading gains, net
|
79.1
|
|
|
|
|
82.3
|
|
|
|
|
246.1
|
|
|
|
|
240.8
|
|
|
|
Commission and clearing fees
|
73.0
|
|
|
|
|
58.2
|
|
|
|
|
212.2
|
|
|
|
|
159.4
|
|
|
|
Consulting and management fees
|
15.9
|
|
|
|
|
7.8
|
|
|
|
|
46.6
|
|
|
|
|
26.5
|
|
|
|
Interest income
|
20.3
|
|
|
|
|
14.9
|
|
|
|
|
56.9
|
|
|
|
|
44.4
|
|
|
|
Other
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
Total revenues
|
5,505.3
|
|
|
|
|
4,866.4
|
|
|
|
|
17,048.1
|
|
|
|
|
11,974.9
|
|
|
|
Cost of sales of physical commodities
|
5,308.3
|
|
|
|
|
4,693.5
|
|
|
|
|
16,462.2
|
|
|
|
|
11,484.9
|
|
|
|
Operating revenues
|
197.0
|
|
|
100%
|
|
172.9
|
|
|
100%
|
|
585.9
|
|
|
100%
|
|
490.0
|
|
|
100%
|
Transaction-based clearing expenses
|
33.5
|
|
|
17%
|
|
34.3
|
|
|
20%
|
|
99.6
|
|
|
17%
|
|
95.9
|
|
|
20%
|
Introducing broker commissions
|
29.1
|
|
|
15%
|
|
14.8
|
|
|
9%
|
|
86.0
|
|
|
15%
|
|
40.8
|
|
|
8%
|
Interest expense
|
9.5
|
|
|
5%
|
|
5.8
|
|
|
3%
|
|
23.8
|
|
|
4%
|
|
15.5
|
|
|
3%
|
Net operating revenues
|
124.9
|
|
|
|
|
118.0
|
|
|
|
|
376.5
|
|
|
|
|
337.8
|
|
|
|
Variable direct compensation and benefits
|
29.2
|
|
|
15%
|
|
30.6
|
|
|
18%
|
|
90.2
|
|
|
15%
|
|
83.5
|
|
|
17%
|
Net contribution
|
95.7
|
|
|
|
|
87.4
|
|
|
|
|
286.3
|
|
|
|
|
254.3
|
|
|
|
Non-variable direct expenses
|
42.8
|
|
|
22%
|
|
33.0
|
|
|
19%
|
|
129.3
|
|
|
22%
|
|
101.8
|
|
|
21%
|
Segment income
|
$
|
52.9
|
|
|
|
|
$
|
54.4
|
|
|
|
|
$
|
157.0
|
|
|
|
|
$
|
152.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Net contribution for all of our business segments
increased
9%
to
$95.7 million
in
the third quarter
compared to
$87.4 million
in
the prior year
. Segment income
decreased
3%
to
$52.9 million
in
the third quarter
compared to
$54.4 million
in
the prior year
.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Net contribution for all of our business segments
increased
13%
to
$286.3 million
in
the current nine months ended
compared to
$254.3 million
in the prior year. Segment income
increased
3%
to
$157.0 million
in
the current nine months ended
compared to
$152.5 million
in the prior year.
Commercial Hedging
We serve our commercial customers through our team of risk management consultants, providing a high-value-added service that we believe differentiates us from our competitors and maximizes the opportunity to retain our customers. Our risk management consulting services are designed to quantify and monitor commercial entities’ exposure to commodity and financial risk. Upon assessing this exposure, we develop a plan to control and hedge these risks with post-trade reporting against specific customer objectives. Our customers are assisted in the execution of their hedging strategies through a wide range of products from listed exchange-traded futures and options, to basic OTC instruments that offer greater flexibility, to structured OTC products designed for customized solutions.
Our services span virtually all traded commodity markets, with the largest concentrations in agricultural and energy commodities (consisting primarily of grains, energy and renewable fuels, coffee, sugar, cotton, and food service) and base metals products listed on the LME. Our base metals business includes a position as a Category One ring dealing member of the LME, providing execution, clearing and advisory services in exchange-traded futures and OTC products. We also provide execution of foreign currency forwards and options and interest rate swaps as well as a wide range of structured product solutions to our commercial customers who are seeking cost-effective hedging strategies. Generally, our customers direct their own trading activity, and our risk management consultants do not have discretionary authority to transact trades on behalf of our customers.
The following table provides the financial performance for Commercial Hedging for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
% Change
|
|
2016
|
|
2017
|
|
% Change
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Trading gains, net
|
24.0
|
|
|
(37)%
|
|
38.0
|
|
|
81.1
|
|
|
(13)%
|
|
92.7
|
|
Commission and clearing fees
|
26.3
|
|
|
(6)%
|
|
28.1
|
|
|
76.3
|
|
|
5%
|
|
72.9
|
|
Consulting and management fees
|
3.5
|
|
|
(3)%
|
|
3.6
|
|
|
10.9
|
|
|
6%
|
|
10.3
|
|
Interest income
|
3.3
|
|
|
50%
|
|
2.2
|
|
|
9.0
|
|
|
48%
|
|
6.1
|
|
Other
|
—
|
|
|
—%
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Total revenues
|
57.1
|
|
|
(21)%
|
|
71.9
|
|
|
177.3
|
|
|
(3)%
|
|
182.0
|
|
Cost of sales of physical commodities
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Operating revenues
|
57.1
|
|
|
(21)%
|
|
71.9
|
|
|
177.3
|
|
|
(3)%
|
|
182.0
|
|
Transaction-based clearing expenses
|
7.7
|
|
|
(3)%
|
|
7.9
|
|
|
21.9
|
|
|
2%
|
|
21.4
|
|
Introducing broker commissions
|
5.0
|
|
|
(19)%
|
|
6.2
|
|
|
14.7
|
|
|
—%
|
|
14.7
|
|
Interest expense
|
0.2
|
|
|
100%
|
|
0.1
|
|
|
0.4
|
|
|
33%
|
|
0.3
|
|
Net operating revenues
|
44.2
|
|
|
(23)%
|
|
57.7
|
|
|
140.3
|
|
|
(4)%
|
|
145.6
|
|
Variable direct compensation and benefits
|
11.6
|
|
|
(29)%
|
|
16.3
|
|
|
37.4
|
|
|
(11)%
|
|
42.0
|
|
Net contribution
|
32.6
|
|
|
(21)%
|
|
41.4
|
|
|
102.9
|
|
|
(1)%
|
|
103.6
|
|
Non-variable direct expenses
|
16.3
|
|
|
2%
|
|
16.0
|
|
|
52.5
|
|
|
6%
|
|
49.4
|
|
Segment income
|
$
|
16.3
|
|
|
(36)%
|
|
$
|
25.4
|
|
|
$
|
50.4
|
|
|
(7)%
|
|
$
|
54.2
|
|
The following tables set forth transactional revenues and selected data for Commercial Hedging for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-traded
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
2017
|
|
% Change
|
|
2016
|
|
2017
|
|
% Change
|
|
2016
|
Transactional revenues (in millions):
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
18.7
|
|
|
(13)%
|
|
$
|
21.4
|
|
|
$
|
53.7
|
|
|
—%
|
|
$
|
53.6
|
|
Energy and renewable fuels
|
1.9
|
|
|
19%
|
|
1.6
|
|
|
4.8
|
|
|
7%
|
|
4.5
|
|
LME metals
|
9.9
|
|
|
(18)%
|
|
12.0
|
|
|
39.0
|
|
|
3%
|
|
37.7
|
|
Other
|
2.2
|
|
|
16%
|
|
1.9
|
|
|
5.9
|
|
|
16%
|
|
5.1
|
|
|
$
|
32.7
|
|
|
(11)%
|
|
$
|
36.9
|
|
|
$
|
103.4
|
|
|
2%
|
|
$
|
100.9
|
|
Selected data:
|
|
|
|
|
|
|
|
|
Futures and options (contracts, 000’s)
|
6,013.8
|
|
|
(1)%
|
|
6,057.3
|
|
|
17,806.6
|
|
|
3%
|
|
17,241.6
|
|
Average rate per contract
|
$
|
5.33
|
|
|
(11)%
|
|
$
|
5.98
|
|
|
$
|
5.71
|
|
|
(1)%
|
|
$
|
5.74
|
|
Average customer equity - futures and options (millions)
|
$
|
922.5
|
|
|
—%
|
|
$
|
924.5
|
|
|
$
|
937.4
|
|
|
5%
|
|
$
|
893.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
2017
|
|
% Change
|
|
2016
|
|
2017
|
|
% Change
|
|
2016
|
Transactional revenues (in millions):
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
12.0
|
|
|
(42)%
|
|
$
|
20.8
|
|
|
$
|
36.0
|
|
|
(11)%
|
|
$
|
40.5
|
|
Energy and renewable fuels
|
3.8
|
|
|
(12)%
|
|
4.3
|
|
|
12.3
|
|
|
(25)%
|
|
16.3
|
|
Other
|
1.8
|
|
|
(56)%
|
|
4.1
|
|
|
5.7
|
|
|
(28)%
|
|
7.9
|
|
|
$
|
17.6
|
|
|
(40)%
|
|
$
|
29.2
|
|
|
$
|
54.0
|
|
|
(17)%
|
|
$
|
64.7
|
|
Selected data:
|
|
|
|
|
|
|
|
|
Volume (contracts, 000’s)
|
382.8
|
|
|
(17)%
|
|
462.7
|
|
|
1,035.5
|
|
|
(4)%
|
|
1,079.4
|
|
Average rate per contract
|
$
|
43.89
|
|
|
(29)%
|
|
$
|
61.43
|
|
|
$
|
49.64
|
|
|
(14)%
|
|
$
|
58.05
|
|
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Operating revenues
decreased
21%
to
$57.1 million
in
the third quarter
compared to
$71.9 million
in the prior year. Exchange-traded revenues decreased
11%
, to
$32.7 million
in
the third quarter
, resulting primarily from declines in agricultural and LME metals customer volumes. The decline in agricultural volumes was primarily a result of the effect of low market volatility in the global grain markets, particularly as compared to a strong prior year. Lower volatility in the global metals markets also led to the decline in the LME metals customer volumes. Energy and renewable fuels experienced strong volume growth from the addition of new institutional customers, albeit this new business was at a lower rate per contract as compared to our agricultural
business, which resulted in modest growth in energy and renewable fuels operating revenues. Overall exchange-traded contract volumes declined
1%
, as the increases in energy and renewable fuels volumes were more than offset by the declines in agricultural and LME metal volumes. The average rate per contract was
$5.33
, an 11% decline versus the prior year quarter.
OTC revenues decreased
40%
, to
$17.6 million
in
the third quarter
with OTC volumes declining
17%
and the average rate per contract decreasing
29%
compared to the prior year. These declines were primarily the result of lower market volatility in the global grain, food service and dairy markets as well as reduced activity in our interest rate swap business.
Consulting and management fees declined $0.1 million versus the prior year, while interest income, increased
50%
, to
$3.3 million
compared to the prior year. The increase in interest income was primarily driven by an increase in short-term rates, as average customer equity was relatively flat with the prior year period.
Segment income
decreased
to
$16.3 million
in
the third quarter
compared to
$25.4 million
in the prior year, primarily as a result of the decline in operating revenues and to a lesser extent a $0.3 million increase in non-variable direct expenses. The increase in non-variable direct expenses was primarily related to non-variable compensation and benefits, trade errors and dues and subscriptions. Variable expenses, excluding interest, expressed as a percentage of operating revenues
increased
to
43%
compared to
42%
in the prior year, primarily as the result of increased transaction-based clearing expenses as a result of product mix.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Operating revenues decreased
3%
to
$177.3 million
in
the current nine months ended
compared to
$182.0 million
in the prior year. Exchange-traded revenues increased
2%
, to
$103.4 million
in
the current nine months ended
, resulting primarily from higher LME metals revenues as agricultural and energy and renewable exchange-traded revenues were relatively flat with the prior year. Overall exchange-traded contract volume increased
3%
and the average rate per contract decreased
1%
to
$5.71
.
OTC revenues declined
17%
, to
$54.0 million
in
the current nine months ended
. These declines were primarily driven by lower market volatility in the global grain, energy and renewable fuels, food service and dairy markets as well as reduced activity in our interest rate swap business. Overall OTC volumes decreased
4%
, while the average rate per contract decreased
14%
compared to the prior year.
Consulting and management fees increased $0.6 million versus the prior year, while interest income, increased
48%
, to
$9.0 million
compared to the prior year. The increase in interest income was primarily driven an increase in short-term rates, as well as a
5%
increase in average customer equity.
Segment income decreased to
$50.4 million
in
the current nine months ended
compared to
$54.2 million
in the prior year, primarily as a result of the decline in operating revenues and a $3.1 million increase in non-variable direct expenses. The increase in non-variable direct expenses was primarily related to non-variable compensation and benefits, bad debt expense and operations charges. Variable expenses, excluding interest, expressed as a percentage of operating revenues
decreased
to
42%
compared to
43%
in the prior year, primarily as the result of a decline in variable compensation due to product mix.
Global Payments
We provide global payment solutions to banks and commercial businesses as well as charities, non-governmental organizations and government organizations. We offer payments services in more than 175 countries and 140 currencies, which we believe is more than any other payments solution provider, and provide competitive and transparent pricing.
Our proprietary FXecute global payments platform is integrated with a financial information exchange (“FIX”) protocol. This FIX protocol is an electronic communication method for the real-time exchange of information, and we believe it represents one of the first FIX offerings for cross-border payments in exotic currencies. FIX functionality allows customers to view real time market rates for various currencies, execute and manage orders in real-time, and view the status of their payments through the easy-to-use portal.
Additionally, as a member of SWIFT (Society for Worldwide Interbank Financial Telecommunication), we are able to offer our services to large money center and global banks seeking more competitive international payment services.
Through this single comprehensive platform and our commitment to customer service, we believe we are able to provide simple and fast execution, ensuring delivery of funds in any of these countries quickly through our global network of approximately 300 correspondent banks. In this business, we primarily act as a principal in buying and selling foreign currencies on a spot basis. We derive revenue from the difference between the purchase and sale prices.
We believe our customers value our ability to provide exchange rates that are significantly more competitive than those offered by large international banks, a competitive advantage that stems from our years of foreign exchange expertise focused on smaller, less liquid currencies.
The following table provides the financial performance and selected data for Global Payments for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
% Change
|
|
2016
|
|
2017
|
|
% Change
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Trading gains, net
|
21.9
|
|
|
22%
|
|
18.0
|
|
|
65.3
|
|
|
25%
|
|
52.4
|
|
Commission and clearing fees
|
0.6
|
|
|
50%
|
|
0.4
|
|
|
1.8
|
|
|
6%
|
|
1.7
|
|
Consulting and management fees
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Interest income
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Other income
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Total revenues
|
22.5
|
|
|
22%
|
|
18.4
|
|
|
67.1
|
|
|
24%
|
|
54.1
|
|
Cost of sales of physical commodities
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Operating revenues
|
22.5
|
|
|
22%
|
|
18.4
|
|
|
67.1
|
|
|
24%
|
|
54.1
|
|
Transaction-based clearing expenses
|
1.2
|
|
|
9%
|
|
1.1
|
|
|
3.5
|
|
|
9%
|
|
3.2
|
|
Introducing broker commissions
|
1.0
|
|
|
25%
|
|
0.8
|
|
|
3.4
|
|
|
31%
|
|
2.6
|
|
Interest expense
|
—
|
|
|
—
|
|
0.1
|
|
|
0.2
|
|
|
—
|
|
0.1
|
|
Net operating revenues
|
20.3
|
|
|
24%
|
|
16.4
|
|
|
60.0
|
|
|
24%
|
|
48.2
|
|
Variable direct compensation and benefits
|
4.1
|
|
|
28%
|
|
3.2
|
|
|
12.1
|
|
|
26%
|
|
9.6
|
|
Net contribution
|
16.2
|
|
|
23%
|
|
13.2
|
|
|
47.9
|
|
|
24%
|
|
38.6
|
|
Non-variable direct expenses
|
3.3
|
|
|
—%
|
|
3.3
|
|
|
10.1
|
|
|
7%
|
|
9.4
|
|
Segment income
|
$
|
12.9
|
|
|
30%
|
|
$
|
9.9
|
|
|
$
|
37.8
|
|
|
29%
|
|
$
|
29.2
|
|
Selected data:
|
|
|
|
|
|
|
|
|
Global Payments (# of payments, 000’s)
|
175.8
|
|
|
54%
|
|
113.8
|
|
|
476.1
|
|
|
53%
|
|
310.6
|
|
Average revenue per trade
|
$
|
127.99
|
|
|
(21)%
|
|
$
|
161.69
|
|
|
$
|
140.94
|
|
|
(19)%
|
|
$
|
174.18
|
|
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Operating revenues
increased
22%
to
$22.5 million
in
the third quarter
compared to
$18.4 million
in the prior year. The volume of payments made increased
54%
as we continued to benefit from an increase in financial institutions and other customers utilizing our electronic transaction order system, however this was partially offset by an
21%
decrease in the average revenue per trade.
Segment income
increased
30%
to
$12.9 million
in
the third quarter
compared to
$9.9 million
in the prior year. This increase primarily resulted from the increase in operating revenues as non-variable direct expenses remained flat with the prior year period. Variable expenses, excluding interest, expressed as a percentage of operating revenues were
unchanged
at
28%
as compared to the prior year.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Operating revenues
increased
24%
to
$67.1 million
in
the current nine months ended
compared to
$54.1 million
in the prior year. The volume of payments made increased
53%
as we continued to benefit from an increase in financial institutions and other customers utilizing our electronic transaction order system, however this was partially offset by a
19%
decrease in the average revenue per trade.
Segment income
increased
29%
to
$37.8 million
in
the current nine months ended
compared to
$29.2 million
in the prior year. This increase primarily resulted from the increase in operating revenues, partially offset by a modest increase in non-variable direct expenses, primarily in compensation and benefits, trade system costs, professional fees and operations charges. Variable expenses, excluding interest, expressed as a percentage of operating revenues were
unchanged
at
28%
as compared the prior year.
Securities
We provide value-added solutions that facilitate cross-border trading and believe our customers value our ability to manage complex transactions, including foreign exchange, utilizing our understanding of local market convention, liquidity and settlement protocols around the world. Our customers include U.S.-based regional and national broker-dealers and institutions investing or executing customer transactions in international markets and foreign institutions seeking access to the U.S. securities markets. We are one of the leading market makers in foreign securities, including unlisted ADRs, Global Depository Receipts (“GDRs”) and foreign ordinary shares. We make markets in over 3,600 ADRs, GDRs and foreign ordinary shares, of which over 2,000 trade in the OTC market. In addition, we will, on request, make prices in more than 10,000 unlisted foreign securities. We are also a broker-dealer in Argentina, where we are active in providing institutional executions in the local capital markets.
We act as an institutional dealer in fixed income securities, including U.S. Treasury, U.S. government agency, agency mortgage-backed and asset-backed securities to a customer base including asset managers, commercial bank trust and investment departments, broker-dealers, and insurance companies.
We originate, structure and place debt instruments in the international and domestic capital markets. These instruments include complex asset-backed securities (primarily in Argentina) and domestic municipal securities. On occasion, we may invest our own capital in debt instruments before selling them. We also actively trade in a variety of international debt instruments as well as operate an asset management business in which we earn fees, commissions and other revenues for management of third party assets and investment gains or losses on our investments in funds and proprietary accounts managed either by our investment managers or by independent investment managers.
The following table provides the financial performance for Securities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2017
|
|
% Change
|
|
2016
|
|
2017
|
|
% Change
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Trading gains, net
|
20.9
|
|
|
(21)%
|
|
26.3
|
|
|
63.9
|
|
|
(24)%
|
|
84.3
|
|
Commission and clearing fees
|
3.3
|
|
|
43%
|
|
2.3
|
|
|
7.8
|
|
|
(8)%
|
|
8.5
|
|
Consulting and management fees
|
3.5
|
|
|
—%
|
|
3.5
|
|
|
10.4
|
|
|
(26)%
|
|
14.1
|
|
Interest income
|
12.3
|
|
|
29%
|
|
9.5
|
|
|
33.2
|
|
|
14%
|
|
29.1
|
|
Other income
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Total revenues
|
40.0
|
|
|
(4)%
|
|
41.6
|
|
|
115.3
|
|
|
(15)%
|
|
136.0
|
|
Cost of sales of physical commodities
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Operating revenues
|
40.0
|
|
|
(4)%
|
|
41.6
|
|
|
115.3
|
|
|
(15)%
|
|
136.0
|
|
Transaction-based clearing expenses
|
6.4
|
|
|
(9)%
|
|
7.0
|
|
|
18.7
|
|
|
(4)%
|
|
19.4
|
|
Introducing broker commissions
|
2.0
|
|
|
(26)%
|
|
2.7
|
|
|
6.3
|
|
|
(35)%
|
|
9.7
|
|
Interest expense
|
7.0
|
|
|
67%
|
|
4.2
|
|
|
16.5
|
|
|
45%
|
|
11.4
|
|
Net operating revenues
|
24.6
|
|
|
(11)%
|
|
27.7
|
|
|
73.8
|
|
|
(23)%
|
|
95.5
|
|
Variable direct compensation and benefits
|
4.4
|
|
|
(32)%
|
|
6.5
|
|
|
14.9
|
|
|
(25)%
|
|
19.8
|
|
Net contribution
|
20.2
|
|
|
(5)%
|
|
21.2
|
|
|
58.9
|
|
|
(22)%
|
|
75.7
|
|
Non-variable direct expenses
|
7.3
|
|
|
7%
|
|
6.8
|
|
|
21.4
|
|
|
1%
|
|
21.2
|
|
Segment income
|
$
|
12.9
|
|
|
(10)%
|
|
$
|
14.4
|
|
|
$
|
37.5
|
|
|
(31)%
|
|
$
|
54.5
|
|
The following table sets forth operating revenues by product line and selected data for Securities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
2017
|
|
% Change
|
|
2016
|
|
2017
|
|
% Change
|
|
2016
|
Operating revenues by product line (in millions):
|
|
|
Equity Market-Making
|
$
|
12.9
|
|
|
(9)%
|
|
$
|
14.1
|
|
|
$
|
43.9
|
|
|
(9)%
|
|
$
|
48.4
|
|
Debt Trading
|
23.1
|
|
|
(2)%
|
|
23.6
|
|
|
60.7
|
|
|
(12)%
|
|
69.3
|
|
Investment Banking
|
0.7
|
|
|
75%
|
|
0.4
|
|
|
1.8
|
|
|
(44)%
|
|
3.2
|
|
Asset Management
|
3.3
|
|
|
(6)%
|
|
3.5
|
|
|
8.9
|
|
|
(41)%
|
|
15.1
|
|
|
$
|
40.0
|
|
|
(4)%
|
|
$
|
41.6
|
|
|
$
|
115.3
|
|
|
(15)%
|
|
$
|
136.0
|
|
Selected data:
|
|
|
Equity Market-Making (gross dollar volume, millions)
|
$
|
21,298.1
|
|
|
8%
|
|
$
|
19,717.8
|
|
|
$
|
67,284.8
|
|
|
—%
|
|
$
|
67,277.5
|
|
Equity Market-Making revenue per $1,000 traded
|
$
|
0.61
|
|
|
(15)%
|
|
$
|
0.72
|
|
|
$
|
0.65
|
|
|
(10)%
|
|
$
|
0.72
|
|
Debt Trading (principal dollar volume, millions)
|
$
|
32,176.4
|
|
|
5%
|
|
$
|
30,674.5
|
|
|
$
|
102,651.2
|
|
|
30%
|
|
$
|
79,258.1
|
|
Debt Trading revenue per $1,000 traded
|
$
|
0.72
|
|
|
(6)%
|
|
$
|
0.77
|
|
|
$
|
0.59
|
|
|
(32)%
|
|
$
|
0.87
|
|
Average assets under management in Argentina (millions)
|
$
|
653.4
|
|
|
21%
|
|
$
|
541.4
|
|
|
$
|
570.7
|
|
|
—%
|
|
$
|
568.4
|
|
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Operating revenues
decreased
4%
to
$40.0 million
in
the third quarter
compared to
$41.6 million
in the prior year.
Operating revenues in our Securities segment are comprised of activities in four product lines, Equity Market-Making, Debt Trading, Investment Banking and Asset Management. Operating revenues in Equity Market-Making decreased
9%
in
the third quarter
compared to the prior year period. Gross dollar volume traded increased
8%
, however more notably, the average revenue per $1,000 traded declined
15%
as current third quarter volatility was relatively low leading to a tightening of spreads.
Equity Market-Making operating revenues include the trading profits we earn before the related expense deduction for ADR conversion fees. These ADR fees are included in the consolidated income statements as ‘transaction-based clearing expenses’.
Operating revenues in Debt Trading declined
2%
in
the third quarter
compared to the prior year, as stronger performance in our Argentina and Latin American businesses, were more than offset by declines in our domestic institutional fixed income business. Operating revenues in Investment Banking increased
75%
, to $0.7 million as compared to the prior year, led by the performance in our Argentina operations. Asset Management operating revenues decreased
6%
in
the third quarter
as compared to the prior year. Assets under management increased
21%
to
$653.4 million
in
the third quarter
compared to
$541.4 million
in the prior year.
Segment income
decreased
10%
to
$12.9 million
in
the third quarter
compared to
$14.4 million
in the prior year, as a result of the decline in operating revenues as well as an increase in interest expense. Variable expenses, excluding interest, expressed as a percentage of operating revenues
decreased
to
32%
in
the third quarter
compared to
39%
in the prior year, primarily as the result of a decline in variable compensation due to product mix.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Operating revenues
decreased
15%
to
$115.3 million
in
the current nine months ended
compared to
$136.0 million
in the prior year.
Operating revenues in our Securities segment are comprised of activities in four product lines, Equity Market-Making, Debt Trading, Investment Banking and Asset Management. Operating revenues in Equity Market-Making declined
9%
in
the current nine months ended
compared to the prior year as a result of a
10%
decline in the average revenue per $1,000 traded as a result of lower market volatility, as the gross dollar volume traded was flat with the prior year to date period. Equity Market-Making operating revenues include the trading profits we earn before the related expense deduction for ADR conversion fees. These ADR fees are included in the consolidated income statements as ‘transaction-based clearing expenses’.
Operating revenues in Debt Trading decreased
12%
in
the current nine months ended
compared to the prior year, primarily as a result of a decline in operating revenue in our Argentina operations compared to the prior year. Our Argentine operations had a strong performance in the prior year as a result of the effect of the devaluation of the Argentine Peso. These declines in Argentina were partially offset by operating revenue growth in our domestic institutional fixed income business. Operating revenues in Investment Banking decreased
44%
compared to the prior year, primarily as a result of management’s decision to exit our domestic investment banking business. Asset Management operating revenues decreased
41%
in
the current nine months ended
as compared to the prior year. Our Asset Management business is conducted solely in Argentina and similar to our Debt Trading business, the Asset Management business in the prior year benefited from the effect of the Peso devaluation. Assets under management were
$570.7 million
in
the current nine months ended
compared to
$568.4 million
in the prior year.
Segment income
decreased
31%
to
$37.5 million
in
the current nine months ended
compared to
$54.5 million
in the prior year, as a result of the decline in operating revenues. Variable expenses, excluding interest, expressed as a percentage of operating revenues
decreased
to
35%
in
the current nine months ended
compared to
36%
in the prior year.
Physical Commodities
This segment consists of our physical Precious Metals trading and Physical Ag & Energy commodity businesses. In Precious Metals, we provide a full range of trading and hedging capabilities, including OTC products, to select producers, consumers, and investors. In our trading activities, we act as a principal, committing our own capital to buy and sell precious metals on a spot and forward basis.
In our Physical Ag & Energy commodity business, we act as a principal to facilitate financing, structured pricing and logistics services to clients across the commodity complex, including energy commodities, grains, oil seeds, cotton, coffee, cocoa, edible oils and feed products. We provide financing to commercial commodity-related companies against physical inventories. We use sale and repurchase agreements to purchase commodities evidenced by warehouse receipts, subject to a simultaneous agreement to sell such commodities back to the original seller at a later date.
Transactions where the sale and repurchase price are fixed upon execution, and meet additional required conditions, are accounted for as product financing arrangements, and accordingly no commodity inventory, purchases or sales are recorded. Transactions where the repurchase price is not fixed at execution do not meet all the criteria to be accounted for as product financing arrangements, and therefore are recorded as commodity inventory, purchases and sales.
Precious metals inventory held by our subsidiaries that are not broker-dealers continues to be valued at the lower of cost or market value. Precious metals sales and cost of sales for subsidiaries that are not broker-dealers continue to be recorded on a gross basis. In our Physical Ag and Energy commodity business, we value our agricultural inventory at net realizable value, which approximates fair value less disposal costs. The agricultural inventories have reliable, readily determinable and
realizable market prices, have relatively insignificant costs of disposal and are available for immediate delivery. Revenues generated from our Physical Ag and Energy commodity business are recorded on a gross basis.
Operating gains and losses from our Precious Metals commodities derivatives activities are included in ‘trading gains, net’ in the consolidated income statements. Operating gains and losses from our Physical Ag and Energy commodities derivatives activities are included in ‘cost of sales of physical commodities’ in the consolidated income statements. We generally mitigate the price risk associated with commodities held in inventory through the use of derivatives. We do not elect hedge accounting under U.S. GAAP in accounting for this price risk mitigation. Management continues to evaluate performance and allocate resources on an operating revenue basis.
The following table provides the financial performance for Physical Commodities for the periods indicated.
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Three Months Ended June 30,
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Nine Months Ended June 30,
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(in millions)
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2017
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% Change
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2016
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2017
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% Change
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2016
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Revenues:
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Sales of physical commodities
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$
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5,317.0
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13%
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$
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4,703.2
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$
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16,486.3
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43%
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$
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11,503.8
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Trading gains (losses), net
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1.4
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n/m
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(4.5
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)
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2.4
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n/m
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(4.5
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)
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Commission and clearing fees
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0.3
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(25)%
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0.4
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0.7
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17%
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0.6
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Consulting and management fees
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0.2
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(33)%
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0.3
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1.0
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11%
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0.9
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Interest income
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1.4
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(22)%
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1.8
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4.8
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(14)%
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5.6
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Other income
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—
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—
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—
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—
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—
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—
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Total revenues
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5,320.3
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13%
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4,701.2
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16,495.2
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43%
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11,506.4
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Cost of sales of physical commodities
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5,308.3
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13%
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4,693.5
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16,462.2
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43%
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11,484.9
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Operating revenues
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12.0
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56%
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7.7
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33.0
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53%
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21.5
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Transaction-based clearing expenses
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0.2
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—%
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0.2
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0.6
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20%
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0.5
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Introducing broker commissions
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—
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(100)%
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0.1
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0.2
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—%
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0.2
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Interest expense
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1.6
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33%
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1.2
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4.9
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58%
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3.1
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Net operating revenues
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10.2
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65%
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6.2
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27.3
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54%
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17.7
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Variable direct compensation and benefits
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2.6
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—%
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2.6
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7.4
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37%
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5.4
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Net contribution
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7.6
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111%
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3.6
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19.9
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62%
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12.3
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Non-variable direct expenses
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3.3
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43%
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2.3
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8.7
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7%
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8.1
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Segment income
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$
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4.3
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231%
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$
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1.3
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$
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11.2
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167%
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$
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4.2
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The following tables set forth operating revenue by product line and selected data for Physical Commodities for the periods indicated.
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Precious Metals
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Three Months Ended June 30,
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Nine Months Ended June 30,
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2017
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% Change
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2016
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2017
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% Change
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2016
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Total revenues
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$
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5,146.4
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13%
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$
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4,572.2
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$
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15,938.6
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42%
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$
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11,211.1
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Cost of sales of physical commodities
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5,139.2
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13%
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4,568.0
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15,920.2
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42%
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11,197.4
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Operating revenues
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$
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7.2
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71%
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$
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4.2
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$
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18.4
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34%
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$
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13.7
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Selected data:
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Gold equivalent ounces traded (000’s)
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36,553.6
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48%
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24,658.9
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88,122.2
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26%
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69,798.0
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Average revenue per ounce traded
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$
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0.20
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18%
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$
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0.17
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$
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0.21
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5%
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$
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0.20
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Physical Ag & Energy
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Three Months Ended June 30,
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Nine Months Ended June 30,
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2017
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% Change
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2016
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2017
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% Change
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2016
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Total revenues
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$
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173.9
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35%
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$
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128.9
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$
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556.6
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89%
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$
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295.2
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Cost of sales of physical commodities
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169.1
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35%
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125.4
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542.0
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89%
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287.4
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Operating revenues
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$
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4.8
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37%
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$
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3.5
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$
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14.6
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87%
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$
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7.8
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